FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2003.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission file number 1-11889
CEL-SCI CORPORATION
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(Exact name of registrant as specified in its charter)
COLORADO 84-0916344
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
8229 Boone Blvd., Suite 802
Vienna, Virginia 22182
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 506-9460
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the common stock on March
31, 2003, as quoted on the American Stock Exchange, was approximately
$10,730,000. Shares of common stock held by each officer, director and principal
shareholder have been excluded in that such persons may be deemed to be
affiliates of the Registrant.
Documents Incorporated by Reference: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-25 of the Act). [ ] Yes [X] No
As of December 1, 2003, the Registrant had 65,121,384 issued and
outstanding shares of Common Stock.
PART I
ITEM 1. BUSINESS
CEL-SCI Corporation (the "Company") was formed as a Colorado corporation in
1983. CEL-SCI is involved in the research and development of the drugs and
vaccines described below.
MULTIKINE
CEL-SCI's first, and main, product, MULTIKINE(R), manufactured using
CEL-SCI's proprietary cell culture technologies, is a combination, or
"cocktail", of natural human interleukin-2 ("IL-2") and certain lymphokines and
cytokines. MULTIKINE is being tested to determine if it is effective in
improving the immune response of cancer patients. MULTIKINE has been shown to
induce both an anti-cancer immune response and to significantly increase the
susceptibility of the tumor cells to radiation therapy.
MULTIKINE has been tested in over 220 patients in clinical trials conducted
in the U.S., Canada, Europe and Israel. Most of these patients were head and
neck cancer patients, but some studies were also conducted in prostate cancer
patients, HIV-infected patients and HIV-infected women with Human Papilloma
Virus ("HPV")-induced cervical dysplasia, the precursor stage before the
development of cervical cancer. The safety profile was found to be very good and
CEL-SCI believes that the clinical data suggests that further studies are
warranted.
The function of the immunological system is to protect the body against
infectious agents, including viruses, bacteria, parasites and malignant (cancer)
cells. An individual's ability to respond to infectious agents and to other
substances (antigens) recognized as foreign by the body's immune system is
critical to health and survival. When the immune response is adequate, infection
is usually combated effectively and recovery follows. Severe infection can occur
when the immune response is inadequate. Such immune deficiency can be present
from birth but, in adult life, it is frequently acquired as a result of intense
sickness or as a result of the administration of chemotherapeutic drugs and/or
radiation. It is also recognized that, as people reach middle age and
thereafter, the immune system grows weaker.
Two classes of white blood cells, macrophages and lymphocytes, are believed
to be primarily responsible for immunity. Macrophages are large cells whose
principal immune activity is to digest and destroy infectious agents.
Lymphocytes are divided into two sub-classes. One sub-class of lymphocytes,
B-cells, produces antibodies in response to antigens. Antibodies have unique
combining sites (specificities) that recognize the shape of particular antigens
and bind with them. The combination of an antibody with an antigen sets in
motion a chain of events which may neutralize the effects of the foreign
substance. The other sub-class of lymphocytes, T-cells, regulates immune
responses. T-cells, for example, amplify or suppress antibody formation by
B-cells, and can also directly destroy "foreign" cells by activating "killer
cells."
It is generally recognized that the interplay among T-cells, B-cells and
the macrophages determines the strength and breadth of the body's response to
infection. It is believed that the activities of T-cells, B-cells and
macrophages are controlled, to a large extent, by a specific group of hormones
called cytokines. Cytokines regulate and modify the various functions of both
T-cells and B-cells. There are many cytokines, each of which is thought to have
distinctive chemical and functional properties. IL-2 is but one of these
cytokines and it is on IL-2 and its synergy with other cytokines that CEL-SCI
has focused its attention. Scientific and medical investigation has established
that IL-2 enhances immune responses by causing activated T-cells to proliferate.
Without such proliferation no immune response can be mounted. Other cytokines
support T-cell and B-cell proliferation. However, IL-2 is the only known
cytokine which causes the proliferation of T-cells. IL-2 is also known to
activate B-cells in the absence of B-cell growth factors.
Although IL-2 is one of the best characterized cytokines with anticancer
potential, CEL-SCI is of the opinion that to have optimum therapeutic value,
IL-2 should be administered not as a single substance but rather as a mixture of
IL-2 and certain cytokines, i.e. as a "cocktail". This approach, which was
pioneered by CEL-SCI, makes use of the synergism between these cytokines. It
should be noted, however, that neither the FDA nor any other agency has
determined that CEL-SCI's MULTIKINE product will be effective against any form
of cancer.
Research and human clinical trials sponsored by CEL-SCI have indicated a
correlation between administration of MULTIKINE to cancer patients and
immunological responses. On the basis of these experimental results, CEL-SCI
believes that MULTIKINE may have application for the treatment of solid tumors
in humans.
Between 1985 and 1988 MULTIKINE was tested at St. Thomas Hospital in
London, UK in forty-eight patients with various types of cancers. MULTIKINE was
shown to be safe when used by these patients.
In November 1990, the Florida Department of Health and Rehabilitative
Services ("DHRS") gave the physicians at a southern Florida medical institution
approval to start a clinical cancer trial in Florida using CEL-SCI's MULTIKINE
product. The focus of the trial was unresectable head and neck cancer.
In 1991, four patients with regionally advanced squamous cell cancer of the
head and neck were treated with CEL-SCI's MULTIKINE product. The patients had
previously received radical surgery followed by radiation therapy but developed
recurrent tumors at multiple sites in the neck and were diagnosed with terminal
cancer.
Significant tumor reduction occurred in three of the four patients as a
result of the treatment with MULTIKINE. Negligible side effects, such as
injection site soreness and headaches, were observed and the patients were
treated as outpatients. Notwithstanding the above, it should be noted that these
trials were only preliminary and were only conducted on a small number of
patients. It remains to be seen if MULTIKINE will be effective in treating any
form of cancer.
These results caused CEL-SCI to embark on a major manufacturing program for
MULTIKINE with the goal of being able to produce a drug that would meet the
stringent regulatory requirements for advanced human studies. This program
included building a pilot scale manufacturing facility.
The objective of CEL-SCI scientists is to use MULTIKINE as an additive
(adjunct) therapy to the existing treatment of previously untreated head & neck
cancer patients with the goal of reducing cancer recurrence and ultimately
increasing survival. However, pursuant to FDA regulations, CEL-SCI was required
to test the drug first for safety in locally recurrent, locally metastatic, head
and neck cancer patients who had failed other cancer therapies. This dose
escalation study was started in 1995 at several centers in Canada and the US
where 16 patients were enrolled at 4 different dosage levels. The study ended in
1998 and showed MULTIKINE to be safe and well tolerated at all dose levels.
Because CEL-SCI scientists have determined that patients with early disease
would most likely benefit more from MULTIKINE treatment, CEL-SCI started a
safety trial in Canada in 1997 in advanced primary head & neck cancer patients
who had just recently been diagnosed with head & neck cancer. This study
ultimately enrolled 28 patients, also at 4 different dosage levels, and ended in
late 1999. Halfway through this study, CEL-SCI launched a number of phase II
studies in advanced primary head & neck cancer to determine the best dosage,
best route of administration and best frequency of administration of MULTIKINE.
Those studies involved 19 patients in Israel (1997 - 2000), 30 patients in
Poland and the Czech Republic (1999 - 2000), and 94 patients (half treated with
MULTIKINE and the other half disease matched cancer patients served as control)
in Hungary (1999 - 2003). The Hungarian trial compared the control group
(receiving only conventional cancer therapy, surgery plus radiation therapy) to
the MULTIKINE treated patients (receiving MULTIKINE prior to conventional
therapy, as above) by histopathology and immunohistochemistry. The results of
these studies were published in peer-reviewed scientific journals and/or
presented at scientific meetings. The studies that have not yet been published
were either conducted in support of MULTIKINE's safety and clinical utility or
will be published in the future.
The above studies, which are all completed, indicate that MULTIKINE was
safe and well tolerated at all dose levels investigated. The studies also showed
partial and complete tumor responses following MULTIKINE treatment at the best
treatment regimen combinations as well as tumor necrosis (destruction) and
fibrosis (as determined by histopathology). Additional findings regarding
MULTIKINE treatment of head & neck cancer are expected to be presented/published
in 2004.
While CEL-SCI scientists believe partial and complete tumor responses to be
very important, they also believe that other findings with MULTIKINE in these
studies are equally important since they may serve to enhance existing cancer
therapies, thereby affecting the clinical outcome of the cancer patient's
treatment.
The initial results of the Hungarian study were published in December 2003.
Data from a Phase I/II clinical trial in fifty-four (54) advanced primary head
and neck cancer patients (half treated, half control), the first part of the
Hungarian study, were published in The Laryngoscope, December 2003, Vol.113
(12). The title of the article is "The Effect of Leukocyte Interleukin Injection
(MULTIKINE) on the Peritumoral and Intratumoral Subpopulation of Mononuclear
Cells and on Tumor Epithelia: A Possible New Approach to Augmenting Sensitivity
to Radiation Therapy and Chemotherapy in Oral Cancer - A Multi Center Phase I/II
Clinical Trial".
The data demonstrates that treatment with MULTIKINE rendered a high
proportion of the tumor cell population highly susceptible to radiation therapy.
This finding represents a major advance in the treatment of cancer since, under
current standard therapy, only about 10% of the cancer cells are thought to be
susceptible to radiation therapy at any one point in time.
The increased sensitivity of the MULTIKINE treated tumors to radiation was
derived from a dramatic increase in the number of proliferating (those that are
in cell cycle) cancer cells. Following MULTIKINE treatment, the great majority
of the tumor cells were in a proliferative state, as measured by the
well-established cell proliferation marker Ki67. The control patients (not
treated with MULTIKINE) had only low expression (near background) of the same
proliferation marker (Ki67), in this study. These findings were statistically
significant (p<0.05, ANOVA).
This is an important finding because the ability of radiation therapy (and
chemotherapy) to kill tumor cells is dependent, in large part, on the
proliferative state of the tumor cells at the time of radiation (and
chemotherapy) treatment. As seen in the control group in this study, and also in
many other tumor types, the great majority of tumor cells (about 90% or more)
are in a "resting" state (non-proliferating). It is generally accepted that
tumor cells in the "resting" state are by-and-large resistant to radiation and
chemotherapy. However, MULTIKINE treatment induced a reversal of this
non-proliferative state of the tumor cells and caused the great majority of the
tumor cells to enter into the proliferative state, thereby rendering the tumor
highly susceptible to radiation therapy (and chemotherapy).
Follow-up data for the first 8 patients sequentially treated with MULTIKINE
at one center in the Hungarian study indicated no recurrence of cancer 24 months
after treatment. This contrasts with the scientific literature, which reports
that cancer will recur in up to 50% of primary head and neck cancer patients
within 18 to 24 months after surgery and/or radiation therapy. Data on the
remaining patients is not available because follow-up was outside of the scope
of the protocol which ended at surgery, and a follow-up study for the complete
trial is not possible at this time since some to the patients were treated less
than 24 months ago. CEL-SCI considers this data to be positive and plans to
prove the clinical benefit of MULTIKINE in Phase III clinical trials.
The results of the Israeli trial have been published in Archives of
Otolaryngology - Head & Neck Surgery, August 2003, Vol.129. This paper on the
first 12 patients treated by Dr. Feinmesser shows positive safety, tumor
response and clinical outcome data, but no firm conclusions can be drawn from a
study of only 12 patients.
CEL-SCI scientists believe that they have compiled sufficient data and
clinical information to justify a Phase III clinical trial which would be
designed to prove the clinical benefit from MULTIKINE as an addition to
established anti-cancer therapies. It is CEL-SCI's intention to meet with FDA in
2004 to discuss such a trial.
MULTIKINE has also been tested in a 15 HIV-infected patients (1998 - 1999)
in California. This small study found MULTIKINE to be safe in the HIV-infected
population and showed preliminary evidence of improved delayed type
hypersensitivity response to recall antigens. The results of this study were
reported in Antiviral Therapy 5 (Supplement), 2000.
Another study at the Thomas Jefferson Medical Center (1998) used very small
amounts of MULTIKINE to determine the feasibility of injecting MULTIKINE into
the prostate of 5 hormonal therapy refractive prostate cancer patients scheduled
for prostatectomy. Although deemed safe by the investigators, MULTIKINE
administration in this trial directly into the prostate (under ultrasound
guidance) resulted in occasional mild dysuria and mild increase in urinary
frequency. Two out of the five treated cases had an inflammatory response in the
prostate and a third case had fibrosis. The Company believes that more MULTIKINE
injections will need to be given to achieve a potential outcome as seen in head
& neck cancer. None of the prostate cancer patients received more than half of
the amounts given to the head & neck cancer patients. Also, no testing was done
at the time to determine if MULTIKINE would enhance susceptibility to radiation
therapy in the prostate. The results of this trial were published in Seminars in
Oncology Vol. 26 (4) (August) 1999.
In May 2001, CEL-SCI also started a Phase I clinical trial at the
University of Maryland Biotechnology Institute (UMBI). The focus of this study
is HIV-infected women with Human Papilloma Virus (HPV)-induced cervical
dysplasia, the precursor stage before the development of cervical cancer. The
goal of the study is to obtain safety and preliminary efficacy data on MULTIKINE
as a treatment for pre-cancerous lesions of the cervix (dysplasia). Most
cervical dysplasia and cancer is due to infection with HPV. The rationale for
using MULTIKINE in the treatment of cervical dysplasia/cancer is that MULTIKINE
may safely boost the patients' immune systems to the point where their immune
systems can eliminate the virally-induced cancer. Cervical cancer is the second
leading cause of cancer death in women worldwide.
The HIV-infected women with HPV-induced cervical dysplasia were chosen as a
study group because of the high morbidity and low success rate of current
surgical therapies. Since HIV infection results in immune suppression,
HPV-induced cervical dysplasia follows a more malignant and aggressive course of
disease in such women. Co-infection with HPV is common in HIV-positive women
(about 83%) and cervical cancer is considered an AIDS-defining illness.
HPV infection is also a leading health problem in non HIV-infected American
college age women. A large concern among women who have HPV-induced cervical
dysplasia is that the repeated surgical procedures will lead to a hysterectomy
and the inability to bear children.
At the March 2002 33rd Annual Meeting of the Society of Gynecological
Oncologists in Miami, Florida, scientists from UMBI and CEL-SCI presented data
from this trial in HIV-infected women with HPV induced cervical dysplasia. The
results were as follows: 8 patients had been treated with no major toxicity. The
lower dosage group had 3 out of 5 patients resolved/improved with 2 out of 5
patients with no change in their cervical dysplasia status as compared the
patient's own baseline disease. The higher dosage group had 2 out of 3 patients
who improved and 1 out of 3 patients with no change. The changes in disease
status were determined by both Colposcopy and Histology.
Subsequent HPV testing during 2001 and 2002 of the first three patients
revealed the elimination of HPV virus types (using in situ PCR) following
treatment with MULTIKINE and ranged from 54% to 84% (Avg = 68%) reduction in HPV
virus in the cervical tissue of MULTIKINE treated HIV/HPV co-infected patients.
The study was closed in due to inability to enroll patients. CEL-SCI is planning
to file a report of the study with the FDA in the first quarter of 2004.
CEL-SCI's future studies in the HPV-induced cervical dysplasia area will
only be conducted with grant or government funds as CEL-SCI plans to devote its
resources to head and neck cancer, the area where it has the most data.
Since 1985, MULTIKINE has been well tolerated in clinical studies involving
220 patients. Forty-eight patients were treated in the United States in
accordance with clinical trials authorized by the FDA. The remaining patients
were treated outside of the United States in accordance with protocols
authorized by comparable health regulatory authorities in the countries where
the patients were treated. All the clinical trials were conducted in accordance
with the Declaration of Helsinki (1985), and informed consent was obtained from
each patient volunteer. This process is the standard procedure for the conduct
of human clinical trials.
In November 2000, CEL-SCI concluded a development, supply and distribution
agreement with Orient Europharma of Taiwan. The agreement gives Orient
Europharma the exclusive marketing rights to MULTIKINE for all cancer
indications in Taiwan, Singapore, Hong Kong and Malaysia. The agreement provides
for Orient Europharma to fund the clinical trials needed to obtain marketing
approvals in the four countries for head and neck cancer, naso-pharyngeal cancer
and potentially cervical cancer, which are very prevalent in Far East Asia.
CEL-SCI may use the clinical data generated in these trials to support
applications for marketing approvals for MULTIKINE in other parts of the world.
Under the agreement, CEL-SCI will manufacture MULTIKINE and Orient
Europharma will purchase the product from CEL-SCI for distribution in the
territory. Both parties will share in the revenue from the sale of MULTIKINE. As
of December 31, 2003 Orient Europharma had not started any clinical trials since
CEL-SCI's plan is for Orient Europharma to begin a Phase III clinical trial when
CEL-SCI begins its Phase III clinical trial.
CEL-SCI has an agreement with Eastern Biotech which provides Eastern
Biotech with the following (i) the exclusive right to distribute MULTIKINE and
CEL-1000 in Greece, Serbia and Croatia, (ii) a royalty equal to 1% of CEL-SCI's
net sales of MULTIKINE and CEL-1000 prior to May 30, 2033, (iii) 1,100,000
shares of CEL-SCI's common stock and, (iv) warrants which allow Eastern Biotech
to purchase an additional 1,100,000 shares of CEL-SCI's common stock at a price
of $0.47 per share at any time prior to May 30, 2008. In consideration for the
above Eastern Biotech paid CEL-SCI $500,000. Eastern Biotech will lose its
exclusive right to distribute CEL-SCI's products unless Eastern Biotech has
enrolled at least 20 patients in a controlled, mutually designed head and neck
cancer clinical trial by June 1, 2004. As of December 31, 2003 Eastern Biotech
had not enrolled any patents in this clinical trial.
Proof of efficacy for anti-cancer drugs is a lengthy and complex process.
At this early stage of clinical investigation, it remains to be proven that
MULTIKINE will be effective against any form of cancer. Even if some form of
MULTIKINE is found to be effective in the treatment of cancer, commercial use of
MULTIKINE may be several years away due to extensive safety and effectiveness
tests that would be necessary before required government approvals are obtained.
It should be noted that other companies and research teams are actively involved
in developing treatments and/or cures for cancer, and accordingly, there can be
no assurance that CEL-SCI's research efforts, even if successful from a medical
standpoint, can be completed before those of its competitors.
CEL-SCI uses Cambrex Biosciences, Inc. for certain aspects of the
production of MULTIKINE for research and testing purposes. The agreement with
Cambrex Biosciences, Inc. expires in 2006.
T-CELL MODULATION PROCESS
CEL-SCI's patented T-cell Modulation Process uses "heteroconjugates" to
direct the body to choose a specific immune response. The heteroconjugate
technology, referred to as L.E.A.P.S. (Ligand Epitope Antigen Presentation
System), is intended to selectively stimulate the human immune system to more
effectively fight bacterial, viral and parasitic infections and cancer, when it
cannot do so on its own. Administered like vaccines, L.E.A.P.S. combines T-cell
binding ligands with small, disease associated, peptide antigens and may provide
a new method to treat and prevent certain diseases.
The ability to generate a specific immune response is important because
many diseases are often not combated effectively due to the body's selection of
the "inappropriate" immune response. The capability to specifically reprogram an
immune response may offer a more effective approach than existing vaccines and
drugs in attacking an underlying disease.
Using the LEAPS technology, CEL-SCI discovered a peptide, named CEL-1000,
which is currently being tested in animals for the prevention/treatment of
herpes simplex, malaria, viral encephalitis, smallpox, vaccinia and a number of
other indications.
In the Spring of 2002, CEL-SCI, in conjunction with The Naval Medical
Research Center, announced that CEL-1000 provided 100% protection against
malaria infection in a mouse model. The same peptide also induced protective
effects in mouse models for herpes simplex virus and cancer. In the Fall of 2002
CEL-SCI announced that it had signed a Cooperative Research and Development
Agreement (CRADA) with the U.S. Navy for CEL-1000 in malaria. CEL-SCI also
announced an agreement with the Cincinnati Children's Hospital Medical Center
(CHMR) of the University of Cincinnati to evaluate CEL-1000 for protection
against herpes in the guinea pig vaginal challenge model.
CEL-SCI received two grants in April 2003, one grant in May 2003, and one
grant in September 2003 from the National Institutes of Health. The first grant
totaling $1,100,000 was awarded to Northeastern Ohio Universities College of
Medicine (NEOUCOM) with CEL-SCI as a subcontractor. The grant is for a period of
three years and is intended to support the development of CEL-SCI's new
compound, CEL-1000, as a possible treatment for viral encephalitis, a
potentially lethal inflammation of the brain. The grant was awarded following a
peer review process and will fund pre-clinical studies leading up to toxicology
studies. The second grant, totaling $134,000 and awarded to CEL-SCI with Johns
Hopkins Medical Institutions as a subcontractor, is a Phase I Small Business
Innovation Research (SBIR) grant for the further development of a potential
treatment for autoimmune myocarditis, a heart disease. The third grant,
announced on May 7, 2003 for $162,000 was awarded to CEL-SCI with NEOUCOM as a
sub-contractor, and is a Phase I SBIR grant for the further development of
CEL-1000 against Herpes Simplex. The fourth grant, totaling $104,000 was awarded
to CEL-SCI with the University of Nebraska as a sub-contractor, and is a Phase I
SBIR grant from the NIAID, NIH, for the development of CEL-1000 as a potential
therapeutic and prophylactic agent against vaccinia and smallpox infections as a
single agent and as an adjuvant for vaccinia vaccines. Vaccinia is the virus
used in the smallpox vaccine.
As of February 27, 2004 approximately $1,050,000 remained from these four
grants. As of February 27, 2004 CEL-SCI had received approximately $287,000 from
these grants. The remaining funds will be spent over the next two years.
In June 2003 CEL-SCI signed a Cooperative Agreement with the NIAID and the
U.S. Army Medical Research Institute of Infectious Disease (USAMRIID) to test
CEL-1000 against various bio-terrorism agents as well as other hard to treat
diseases.
RESEARCH AND DEVELOPMENT
Since 1983, and through September 30, 2003, approximately $46,622,000 has
been expended on CEL-SCI-sponsored research and development, including
approximately $1,916,000, $4,700,000 and $7,762,000, respectively during the
years ended September 30, 2003, 2002 and 2001.
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. Over the past
three years CEL-SCI's research and development expenditures have decreased, due
in part to the capital available to CEL-SCI and due in part to the fact that the
costs involved in manufacturing MULTIKINE for use in clinical trials and costs
involved in validating the manufacturing process were primarily incurred in
fiscal 2001 and prior periods. Research and development expenses declined during
fiscal 2002 because CEL-SCI completed its current production of MULTIKINE during
the first quarter of 2002.
The costs associated with the clinical trials relating to CEL-SCI's
technologies, research expenditures and CEL-SCI's administrative expenses have
been funded with the public and private sales of CEL-SCI's securities and
borrowings from third parties, including affiliates of CEL-SCI.
GOVERNMENT REGULATION
The investigational agents and future products of CEL-SCI are regulated in
the United States under the Federal Food, Drug and Cosmetic Act, the Public
Health Service Act, and the laws of certain states. The Federal Food and Drug
Administration (FDA) exercises significant regulatory control over the clinical
investigation, manufacture and marketing of pharmaceutical and biological
products.
Prior to the time a pharmaceutical product can be marketed in the United
States for therapeutic use, approval of the FDA must normally be obtained.
Preclinical testing programs on animals, followed by three phases of clinical
testing on humans, are typically required in order to establish product safety
and efficacy.
The first stage of evaluation, preclinical testing, must be conducted in
animals. After lack of toxicity has been demonstrated, the test results are
submitted to the FDA along with a request for clearance to conduct clinical
testing, which includes the protocol that will be followed in the initial human
clinical evaluation. If the applicable regulatory authority does not object to
the proposed study, the investigator can proceed with Phase I trials. Phase I
trials consist of pharmacological studies on a relatively few number of humans
under rigidly controlled conditions in order to establish lack of toxicity and a
safe dosage range.
After Phase I testing is completed, one or more Phase II trials are
conducted in a limited number of patients to test the product's ability to treat
or prevent a specific disease, and the results are analyzed for clinical
efficacy and safety. If the results appear to warrant confirmatory studies, the
data is submitted to the applicable regulatory authority along with the protocol
for a Phase III trial. Phase III trials consist of extensive studies in large
populations designed to assess the safety of the product and the most desirable
dosage in the treatment or prevention of a specific disease. The results of the
clinical trials for a new biological drug are submitted to the FDA as part of a
product license application ("PLA"), a New Drug Application ("NDA") or Biologics
License Application ("BLA"), depending on the type or derivation of the product
being studied.
In addition to obtaining FDA approval for a product, a biologics
establishment license application ("ELA") may need to be filed in the case of
biological products derived from blood, or not considered to be sufficiently
well characterized, in order to obtain FDA approval of the testing and
manufacturing facilities in which the product is produced. To the extent all or
a portion of the manufacturing process for a product is handled by an entity
other than CEL-SCI, CEL-SCI must similarly receive FDA approval for the other
entity's participation in the manufacturing process. Domestic manufacturing
establishments are subject to inspections by the FDA and by other Federal, state
and local agencies and must comply with Good Manufacturing Practices ("GMP") as
appropriate for production. In complying with GMP regulations, manufacturers
must continue to expend time, money and effort in the area of production,
quality control and quality assurance to ensure full technical compliance.
The process of drug development and regulatory approval requires
substantial resources and many years. Approval of drugs and biologicals by
regulatory authorities of most foreign countries must also be obtained prior to
initiation of clinical studies and marketing in those countries. The approval
process varies from country to country and the time period required in each
foreign country to obtain approval may be longer or shorter than that required
for regulatory approval in the United States.
There are no assurances that clinical trials conducted under approvals from
foreign countries will be accepted by the FDA. Product licensure in a foreign
country does not mean that the product will be licensed by the FDA and there are
no assurances that CEL-SCI will receive any approval of the FDA or any other
governmental entity for the manufacturing and/or marketing of a product.
Consequently, the commencement of the marketing of any Company product is, in
all likelihood, many years away.
There can be no assurance that CEL-SCI will be successful in obtaining
approvals from any regulatory authority to conduct further clinical trials or to
manufacture and sell its products. The lack of regulatory approval for CEL-SCI's
products will prevent CEL-SCI from generally marketing its products. Delays in
obtaining regulatory approval or the failure to obtain regulatory approval in
one or more countries may have a material adverse impact upon CEL-SCI's
operations.
COMPETITION AND MARKETING
Many companies, nonprofit organizations and governmental institutions are
conducting research on cytokines. Competition in the development of therapeutic
agents incorporating cytokines is intense. Large, well-established
pharmaceutical companies are engaged in cytokine research and development and
have considerably greater resources than CEL-SCI has to develop products. The
establishment by these large companies of in-house research groups and of joint
research ventures with other entities is already occurring in these areas and
will probably become even more prevalent. In addition, licensing and other
collaborative arrangements between governmental and other nonprofit institutions
and commercial enterprises, as well as the seeking of patent protection of
inventions by nonprofit institutions and researchers, could result in strong
competition for CEL-SCI. Any new developments made by such organizations may
render CEL-SCI's licensed technology and know-how obsolete.
Several biotechnology companies are producing IL-2-like compounds. CEL-SCI
believes, however, that it is the only producer of a patented IL-2 product using
a patented cell-culture technology with normal human cells. CEL-SCI foresees
that its principle competition will come from producers of
genetically-engineered IL-2-like products. However, it is CEL-SCI's belief,
based upon growing scientific evidence, that its natural IL-2 products have
advantages over the genetically engineered, IL-2-like products. Evidence
indicates that genetically engineered, IL-2-like products, which lack sugar
molecules and typically are not water soluble, may be recognized by the
immunological system as a foreign agent, leading to a measurable antibody
build-up and thereby possibly voiding their therapeutic value. Furthermore,
CEL-SCI's research has established that to have optimum therapeutic value IL-2
should be administered not as a single substance but rather as an IL-2-rich
mixture of certain cytokines and other proteins, i.e. as a "cocktail". If these
differences prove to be of importance, and if the therapeutic value of its
MULTIKINE product is conclusively established, CEL-SCI believes it will be able
to establish a strong competitive position in a future market.
CEL-SCI has not established a definitive plan for marketing nor has it
established a price structure for CEL-SCI's saleable products. However, CEL-SCI
intends, if CEL-SCI is in a position to begin commercialization of its products,
to enter into written marketing agreements with various major pharmaceutical
firms with established sales forces. The sales forces in turn would probably
target CEL-SCI's products to cancer centers, physicians and clinics involved in
immunotherapy.
CEL-SCI may encounter problems, delays and additional expenses in
developing marketing plans with outside firms. In addition, CEL-SCI may
experience other limitations involving the proposed sale of its products, such
as uncertainty of third-party reimbursement. There is no assurance that CEL-SCI
can successfully market any products which they may develop or market them at
competitive prices.
Some of the clinical trials funded to date by CEL-SCI have not been
approved by the FDA, but rather have been conducted pursuant to approvals
obtained from certain states and foreign countries. Conducting clinical studies
in foreign countries is normal industry practice since these studies can often
be completed in less time and are less expensive than studies conducted in the
U.S. Conducting clinical studies in foreign countries is also beneficial since
CEL-SCI will need the approval from a foreign country prior to the time CEL-SCI
can market any of its drugs in the foreign country. However, since the results
of these clinical trials may not be accepted by the FDA, competitors conducting
clinical trials approved by the FDA may have an advantage in that the products
of such competitors are further advanced in the regulatory process than those of
CEL-SCI. CEL-SCI is conducting its trials in compliance with internationally
recognized standards. By following these standards, CEL-SCI anticipates
obtaining acceptance from world regulatory bodies, including the FDA.
Employees
As of December 31, 2003 CEL-SCI had twenty employees. Seven employees are
involved in administration, eleven employees are involved in manufacturing
research and two employees are involved in general research and development with
respect to CEL-SCI's products.
ITEM 2. PROPERTIES
CEL-SCI leases office space at 8229 Boone Blvd., Suite 802, Vienna,
Virginia at a monthly rental of approximately $7,800. The lease on the office
space expires in 2004. CEL-SCI believes this arrangement is adequate for the
conduct of its present business.
CEL-SCI has a 17,900 square foot laboratory located at 4820 A-E Seton
Drive, Baltimore, Maryland. The laboratory is leased by CEL-SCI at a cost of
approximately $11,200 per month. The laboratory lease expires in 2004, with
extensions available until 2014.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of November 30, 2003 there were approximately 2,637 record holders of
CEL-SCI's common stock. CEL-SCI's common stock is traded on the American Stock
Exchange under the symbol "CVM". Set forth below are the range of high and low
quotations for CEL-SCI's common stock for the periods indicated as reported on
the American Stock Exchange. The market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
Quarter Ending High Low
12/31/00 $2.54 $1.00
3/31/01 $3.30 $1.30
6/30/01 $1.85 $1.16
9/30/01 $1.94 $1.02
12/31/01 $1.80 $0.72
3/31/02 $1.28 $0.52
6/30/02 $0.56 $0.27
9/30/02 $0.52 $0.16
12/31/02 $0.32 $0.19
3/31/03 $0.27 $0.15
6/30/03 $1.35 $0.20
9/30/03 $1.08 $0.61
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefore 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.
Potential Issuance of Additional Shares
The following table lists additional shares of CEL-SCI's common stock
which, as of February 27, 2004, may be issued as the result of the exercise of
outstanding options or warrants issued by CEL-SCI and pursuant to an equity line
of credit agreement:
Number of Note
Shares Reference
Shares issuable upon exercise of warrants 3,886,188 A
held by private investors
Number of Note
Shares Reference
Shares issuable pursuant to equity line of credit Unknown B
Shares issuable upon exercise of equity line
warrants 395,726 B
Shares issuable upon exercise of options and 10,553,514 C
warrants granted to CEL-SCI's officers,
directors, employees, consultants, and third
parties
Shares issuable upon exercise of options 200,000 D
granted to investor relations consultants
A. In April 2001, CEL-SCI entered into an equity line of credit agreement
with Paul Revere Capital Partners. During the term the equity line of credit,
which expired in June 2003, CEL-SCI received net proceeds of $2,074,692 from the
sale of 5,430,960 shares of common stock pursuant to the terms of the equity
line. As consideration for extending the equity line of credit, CEL-SCI granted
Paul Revere Capital Partners warrants to purchase 200,800 shares of common stock
at a price of $1.64 per share at any time prior to April 11, 2004.
In August 2001, three private investors exchanged their warrants for
CEL-SCI's Series E warrants. As of November 30, 2003 the Series E warrants
allowed the holders to purchase up to 570,627 shares of CEL-SCI's common stock
at a price of $1.19 per share at any time prior to August 16, 2004. In August
2003, in accordance with the terms of the Series E preferred stock, the Company
issued warrants which permit the holders to purchase an additional 23,758 shares
of CEL-SCI's common stock at a price of $0.77 per share at any time prior to
August 17, 2006.
In July and September 2002, CEL-SCI sold Series G convertible notes, plus
Series G warrants, to a group of private investors for $1,300,000. As of June
30, 2003 all of the Series G notes had been converted into 8,390,746 shares of
CEL-SCI's common stock. As of November 30, 2003 the Series G warrants allowed
the holders to purchase up to 450,000 shares of CEL-SCI's common stock at a
price of $0.145 per share at any time prior to July 12, 2009. Every three months
after December 9, 2002, the exercise price of the Series G warrants will be
adjusted to an amount equal to 84% of the average of the 3 lowest daily trading
prices of CEL-SCI's common stock on the American Stock Exchange during the 20
trading days immediately prior to the three month adjustment date, provided that
the adjusted price is lower than the warrant exercise price on that date.
In January and July 2003, CEL-SCI sold Series H convertible notes, plus
Series H warrants, to a group of private investors for $1,350,000. As of October
31, 2003 all of the Series H notes had been converted into 3,233,229 shares of
CEL-SCI's common stock. As of November 30, 2003 the Series H warrants allowed
the holders to purchase up to 550,000 shares of CEL-SCI's common stock at a
price of $0.25 per share at any time prior to January 7, 2010. Every three
months after September 26, 2003 the exercise price of the Series H warrants will
be adjusted to an amount equal to 84% of the average of the 3 lowest daily
trading prices of CEL-SCI's common stock on the American Stock Exchange during
the 15 trading days immediately prior to the three month adjustment date,
provided that the adjusted price is lower than the warrant exercise price on
that date.
In May 2003 CEL-SCI sold shares of its common stock plus Series I warrants
to a strategic partner, at prices equal to or above the then current price of
CEL-SCI's common stock. The Series I warrants allow the holder to purchase
1,100,000 shares of CEL-SCI's common stock at a price of $0.47 per share at any
time prior to May 30, 2008.
On December 1, 2003, CEL-SCI sold 2,999,964 shares of its common stock, to
a group of private institutional investors for approximately $2,550,000, or
$0.85 per share. As part of this transaction, the investors in the private
offering received Series J warrants which allow the investors to purchase
991,003 shares of CEL-SCI's common stock at a price of $1.32 per share at any
time prior to December 1, 2006.
If CEL-SCI sells any additional shares of common stock, or any securities
convertible into common stock at a price below the then applicable exercise
price of the Series G or H warrants, the warrant exercise price will be lowered
to the price at which the shares were sold or the lowest price at which the
securities are convertible, as the case may be. If the warrant exercise price is
adjusted, the number of shares of common stock issuable upon the exercise of the
warrant will be increased by the product of the number of shares of common stock
issuable upon the exercise of the warrant immediately prior to the sale
multiplied by the percentage by which the warrant exercise price is reduced.
If CEL-SCI sells any additional shares of common stock, or any securities
convertible into common stock at a price below the market price of CEL-SCI's
common stock, the exercise price of the Series G or H warrants will be lowered
by a percentage equal to the price at which the shares were sold or the lowest
price at which the securities are convertible, as the case may be, divided by
the then prevailing market price of CEL-SCI's common stock. If the warrant
exercise price is adjusted, the number of shares of common stock issuable upon
the exercise of the warrant will be increased by the product of the number of
shares of common stock issuable upon the exercise of the warrant immediately
prior to the sale multiplied by the percentage determined by dividing the price
at which the shares were sold by the market price of CEL-SCI's common stock on
the date of sale.
However, neither the exercise price of the Series G or H warrants nor the
shares issuable upon the exercise of the Series G or H warrants will be adjusted
as the result of shares issued in connection with a Permitted Financing. A
Permitted Financing involves shares of common stock issued or sold:
o in connection with a merger or acquisition or a strategic partnership;
o upon the exercise of options or the issuance of common stock to CEL-SCI's
employees, officers, directors, consultants and vendors in accordance with
CEL-SCI's equity incentive policies;
o pursuant to the conversion or exercise of securities which were outstanding
prior to July 12, 2002 in the case of the Series G warrants and January 7,
2003 in the case of the Series H warrants;
o to key officers of CEL-SCI in lieu of their respective salaries.
B. In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products, CEL-SCI
entered into an equity line of credit agreement with Rubicon Group Ltd. in
September 2003. An unknown number of shares of common stock are issuable under
the equity line of credit agreement between CEL-SCI and Rubicon Group, Ltd. As
consideration for extending the equity line of credit, CEL-SCI granted Rubicon
Group warrants to purchase 395,726 shares of common stock at a price of $0.83
per share at any time prior to September 16, 2008.
Under the equity line of credit agreement, Rubicon Group has agreed to
provide CEL-SCI with up to $10,000,000 of funding during a two year period
beginning on the date that the registration statement filed by CEL-SCI to
register the shares to be sold to Rubicon Group is declared effective by the
Securities and Exchange Commission. During this period, CEL-SCI may request a
drawdown under the equity line of credit by selling shares of its common stock
to Rubicon Group and Rubicon Group will be obligated to purchase the shares.
CEL-SCI may request a drawdown once every 22 trading days, although CEL-SCI is
under no obligation to request any drawdowns under the equity line of credit.
During the 22 trading days following a drawdown request, CEL-SCI will
calculate the amount of shares it will sell to Rubicon Group and the purchase
price per share. The purchase price per share of common stock will be based on
the daily volume weighted average price of CEL-SCI's common stock during each of
the 22 trading days immediately following the drawdown date, less a discount of
11%.
CEL-SCI may request a drawdown by faxing a drawdown notice to Rubicon
Group, stating the amount of the drawdown and the lowest daily volume weighted
average price, if any, at which CEL-SCI is willing to sell the shares. The
lowest volume weighted average price will be set by CEL-SCI's Chief Executive
Officer in his sole and absolute discretion.
If CEL-SCI sets a minimum price which is too high and CEL-SCI's stock price
does not consistently meet that level during the 22 trading days after its
drawdown request, the amount CEL-SCI can draw and the number of shares CEL-SCI
will sell to Rubicon Group will be reduced. On the other hand, if CEL-SCI sets a
minimum price which is too low and its stock price falls significantly but stays
above the minimum price, CEL-SCI will have to issue a greater number of shares
to Rubicon Group based on the reduced market price.
As of December 1, 2003 CEL-SCI had not requested any drawdowns under the
equity line of credit since the registration statement relating to the shares to
be sold pursuant to the equity line had not been declared effective by the
Securities and Exchange Commission.
The exercise price of the Series G or H warrants and the number of shares
issuable upon the exercise of the Series G or H warrants will not be adjusted as
the result of shares issued in connection with any drawdowns.
C. The options are exercisable at prices ranging from $0.16 to $11.00 per
share. CEL-SCI may also grant options to purchase additional shares under its
Incentive Stock Option and Non-Qualified Stock Option Plans.
D. CEL-SCI has granted options for the purchase of 200,000 shares of common
stock to certain investor relations consultants in consideration for services
provided to CEL-SCI. The options are exercisable at prices ranging between $1.63
and $2.50 per share and expire between February 2004 and June 2006.
A convertible promissory note payable to Cambrex Biosciences, Inc. was paid
in full in December 2003. No part of the note was ever converted into shares of
CEL-SCI's common stock.
The shares referred to in Notes A, C and D are being, or will be, offered
for sale by means of registration statements which have been filed with the
Securities and Exchange Commission.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the more detailed financial statements, related notes and other financial
information included herein. Certain amounts reported in previous years have
been reclassified to conform to the classifications being used as of and for the
year ended September 30, 2003.
For the Years Ended September 30,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Grant Revenue and Other: $318,204 $ 384,939 $ 293,871 $ 40,540 $ 66,687
--------- --------- ---------- --------- ---------
Operating Expenses:
Research and Development 1,915,501 4,699,909 7,762,213 5,186,065 4,662,226
Depreciation and
Amortization 199,117 226,514 209,121 220,994 268,210
General and Adminis-
trative 2,287,019 1,754,332 3,432,437 3,513,889 3,029,807
Interest Income (52,502) (85,322) (376,221) (402,011) (402,831)
Interest Expense 2,340,667 2,131,750 -- -- --
---------- ---------- ---------- ---------- ----------
Net Loss $(6,371,498) $(8,342,244) $(10,733,679) $(8,478,397) $(7,490,725)
Net loss attributable to
common stock holders $(6,480,319) $(9,989,988) $(11,104,251) $(8,478,397) $(7,490,725)
=========== =========== ============ =========== ===========
Net loss per common share
(basic and diluted)$ (0.13) $ (0.35) $ (0.51) $ (0.44) $ (0.52)
=========== =========== ============ =========== ===========
Weighted average common
shares outstanding 50,961,457 28,746,341 21,824,273 19,259,190 14,484,352
=========== =========== ============ =========== ===========
Balance Sheet Data: September 30,
------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- -------- ------- -------
Working Capital $ 531,742 $ 690,804 $2,801,299 $11,725,940 $6,152,715
Total Assets 2,915,206 3,771,258 4,508,920 13,808,882 7,559,772
Convertible Debt * 32,882 639,288 -- -- --
Note Payable - Covance * 184,330 -- -- -- --
Note Payable - Cambrex * 656,076 1,135,017 -- -- --
Total Liabilities 1,690,100 2,709,087 507,727 847,423 461,586
Stockholders' Equity 1,225,106 1,062,171 4,001,193 12,961,459 7,098,186
* Included in total liabilities
No dividends have been declared on CEL-SCI's common stock.
CEL-SCI's net losses for each fiscal quarter during the two years ended
September 30, 2003 were:
Net Loss
Quarter Net Loss per Share
------- -------- ---------
12-31-01 $(2,920,620) $(0.16)
03-31-02 $(1,937,912) $(0.10)
06-30-02 $(2,111,479) $(0.08)
09-30-02 $(1,372,233) $(0.05)
12-31-02 $(1,682,865) $(0.04)
03-31-03 $(1,032,181) $(0.02)
06-30-03 $(1,762,564) $(0.03)
09-30-03 $(1,893,888) $(0.03)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
---------------------
Fiscal 2003
Grant revenues and other was lower during the year ended September 30, 2003
due to the winding down of a project for which CEL-SCI receives grant money. The
grant for this project generated $110,000 in revenue in fiscal year 2003
compared with $380,000 in revenue in fiscal year 2002. However, CEL-SCI has
received four additional grants, two grants in April 2003, one grant in May
2003, and one grant in September 2003 for other projects on which CEL-SCI is
working. These grants generated approximately $170,750 in revenue in fiscal year
2003. Research and development expenses declined because CEL-SCI completed its
current production of MULTIKINE(R) during fiscal year 2002. General and
administrative expenses were higher during the year ended September 30, 2003
since there was a reversal in 2002 of a 2001 fiscal year charge of $593,472
resulting from a decline in the intrinsic value of the options repriced to
employees. Interest income during the year ended September 30, 2003 was less
than it was during the same periods in fiscal year 2002 as a result of CEL-SCI's
smaller cash position and lower interest rates on interest bearing accounts.
During the years ended September 30, 2003 and 2002, interest expense was
$2,340,667 and $2,131,750, respectively. Interest expense for all periods
presented is primarily a non-cash item incurred to account for interest and
amortization of the discounts and deferred financing costs related to
convertible debt, the note payable to Covance AG and the convertible debt
payable to Cambrex Biosciences, Inc.
Fiscal 2002
Grant revenue and other is primarily grant money received in payment of
some research and development expenses. Research and development expenses in
fiscal year 2002 declined significantly because CEL-SCI completed its current
production of MULTIKINE(R) during the first quarter. This supply will be used in
future clinical trials. During the fiscal year, CEL-SCI instituted a cost
reduction program and reduced its workforce significantly. Hence, both research
and development costs and general and administrative costs declined from the
previous fiscal years. General and administrative expenses also declined due to
the reversal of compensation charges of $593,472 resulting from a decline in the
intrinsic value of options re-priced to employees. In July 2001, CEL-SCI
repriced 1,298,098 options collectively held by thirteen officers, directors and
employees. All options which had an exercise price over $2.00 per share were
adjusted to an exercise price of $1.05 per share. The expiration dates of the
repriced options remained the same. The option exercise price of $1.05 was equal
to the market price of CEL-SCI's common stock on the date of the repricing. As
the options were repriced and therefore variable accounting was required,
subsequent increases in the stock price resulted in a compensation charge of
$593,472 in fiscal year 2001. The compensation charge of $593,472 was reversed
in fiscal year 2001 since CEL-SCI's stock price was below the exercise price of
the repriced options by the end of March 2002. Interest income during the year
ended September 30, 2002 reflects interest accrued and received on certificates
of deposit. Because CEL-SCI issued Series F and Series G convertible notes
during fiscal year 2002, there is a significant charge to interest expense
during the year for the expensing of the discount on the notes and the deferred
financing costs incurred for the issuance of these notes. This discount relates
primarily to the value of the warrants received in the offering and the value of
the beneficial conversion feature of the notes.
Research and Development Expenses
During the five years ended September 30, 2003 CEL-SCI's research and
development efforts involved MULTIKINE, L.E.A.P.S. and an AIDS vaccine. The
table below shows the research and development expenses associated with each
project during this five-year period.
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
MULTIKINE 1,653,904 4,405,678 7,365,305 4,106,752 2,861,600
L.E.A.P.S. 261,597 244,769 280,766 453,061 357,731
AIDS Vaccine -- 43,462 94,642 602,252 1,418,895
Other -- 6,000 21,500 24,000 24,000
---------- --------- --------- --------- ---------
TOTAL $1,915,501 $4,699,909 $7,762,213 $5,186,065 $4,662,226
========== ========== ========== ========== ==========
CEL-SCI believes that it has compiled sufficient data and clinical
information to justify a phase III clinical trial which would be designed to
prove the clinical benefit from Multikine as an addition to established
anti-cancer therapies. It is CEL-SCI's intention to meet with FDA in 2004 to
discuss such a trial. CEL-SCI is unable to estimate the future costs of research
and clinical trials involving Multikine since CEL-SCI has not yet met with the
FDA to discuss the design of future clinical trials and until the scope of these
trials is known, CEL-SCI will not be able to price any future trials with
clinical trial organizations.
As explained in Item 1 of this report, as of December 31, 2003 CEL-SCI was
involved in a number of pre-clinical studies with respect to its L.E.A.P.S.
technology. As with Multikine, CEL-SCI does not know what obstacles it will
encounter in future pre-clinical and clinical studies involving its L.E.A.P.S.
technology. Consequently, CEL-SCI cannot predict with any certainty the funds
required for future research and clinical trials and the timing of future
research and development projects.
CEL-SCI discontinued its research efforts relating to the AIDS vaccine due
to a lack of government funding in 2000.
Clinical and other studies necessary to obtain regulatory approval of a new
drug involve significant costs and require several years to complete. The extent
of CEL-SCI's clinical trials and research programs are primarily based upon the
amount of capital available to CEL-SCI and the extent to which CEL-SCI has
received regulatory approvals for clinical trials. The inability of CEL-SCI to
conduct clinical trials or research, whether due to a lack of capital or
regulatory approval, will prevent CEL-SCI from completing the studies and
research required to obtain regulatory approval for any products which CEL-SCI
is developing. Without regulatory approval, CEL-SCI will be unable to sell any
of its products.
Since all of CEL-SCI's projects are under development, CEL-SCI cannot
predict when it will be able to generate any revenue from the sale of any of its
products.
Liquidity and Capital Resources
CEL-SCI has had only limited revenues from operations since its inception
in March l983. CEL-SCI has relied primarily upon proceeds realized from the
public and private sale of its common and preferred stock and convertible notes
to meet its funding requirements. Funds raised by CEL-SCI have been expended
primarily in connection with the acquisition of an exclusive worldwide license
to certain patented and unpatented proprietary technology and know-how relating
to the human immunological defense system, patent applications, the repayment of
debt, the continuation of Company-sponsored research and development,
administrative costs and construction of laboratory facilities. Inasmuch as
CEL-SCI does not anticipate realizing revenues until such time as it enters into
licensing arrangements regarding the technology and know-how licensed to it
(which could take a number of years), CEL-SCI is mostly dependent upon the
proceeds from the sale of its securities to meet all of its liquidity and
capital resource requirements.
In fiscal year 2003, CEL-SCI reduced its discretionary expenditures. If
necessary, CEL-SCI plans to further reduce discretionary expenditures in fiscal
2004; however such reductions would further delay the development of CEL-SCI's
products.
MULTIKINE has an FDA approved shelf life of two years. Consequently,
MULTIKINE can only be used for two years after it is manufactured. Since the
last batch of MULTIKINE was manufactured over two years ago, CEL-SCI does not
currently have any MULTIKINE available for future clinical studies. As a result,
CEL-SCI will be required to manufacture additional quantities of MULTIKINE for
future research and clinical studies. CEL-SCI anticipates that the MULTIKINE
needed for its planned Phase III clinical trial will be manufactured in several
batches over a two to three year period at a cost of between $4 to $5 million.
CEL-SCI's last batch of MULTIKINE was used during the fall of 2002.
CEL-SCI plans to use its existing financial resources, the proceeds from
the sale of its common stock, proceeds from the sale of common stock under the
equity line of credit agreement with Rubicon Capital, and the proceeds from the
issuance of convertible debt to fund its capital requirements during the year
ending September 30, 2004.
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, 2003 are as
follows:
Contractual Obligations: Years Ending September 30,
Total 2004 2005 2006
Notes Payable
Cambrex $686,992 $ 686,992 $ -- $ --
Covance 184,330 184,330 -- --
Convertible Debt 100,000 100,000 -- --
Leases 93,910 93,910 -- --
Interest and Dividends 55,011 55,011 -- --
Employment Contracts 1,625,373 733,585 552,083 339,703
--------- --------- --------- --------
$2,745,616 $ 1,853,828 $ 552,083 $339,703
========== =========== ========= ========
On December 1, 2003, CEL-SCI sold 2,999,964 shares of its common stock, to
a group of private institutional investors for approximately $2,550,000, or
$0.85 per share. As part of this transaction, the investors and the sales agent
for a number of the investors received Series J warrants which allow the
investors to purchase 991,003 shares of CEL-SCI's common stock at a price of
$1.32 per share at any time prior to December 1, 2006.
It should be noted that substantial additional funds will be needed for
more extensive clinical trials which will be necessary before CEL-SCI will be
able to apply to the FDA for approval to sell any products which may be
developed on a commercial basis throughout the United States. In the absence of
revenues, CEL-SCI will be required to raise additional funds through the sale of
securities, debt financing or other arrangements in order to continue with its
research efforts. However, there can be no assurance that such financing will be
available or be available on favorable terms. It is the opinion of management
that sufficient funds will be available from external financing and additional
capital and/or expenditure reduction in order to meet CEL-SCI's liabilities and
commitments as they come due during fiscal year 2004. Ultimately, CEL-SCI must
complete the development of its products, obtain appropriate regulatory
approvals and obtain sufficient revenues to support its cost structure.
CEL-SCI's cash flow and earnings are subject to fluctuations due to changes
in interest rates on its certificates of deposit, and, to an immaterial extent,
foreign currency exchange rates.
Equity Line of Credit
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products, CEL-SCI
entered into an equity line of credit agreement with Rubicon Group Ltd.
Under the equity line of credit agreement, Rubicon Group has agreed to
provide CEL-SCI with up to $10,000,000 of funding during a two year period
beginning on December 29, 2003. During this period, CEL-SCI may request a
drawdown under the equity line of credit by selling shares of its common stock
to Rubicon Group, and Rubicon Group will be obligated to purchase the shares.
The minimum amount CEL-SCI can draw down at any one time is $100,000, and the
maximum amount CEL-SCI can draw down at any one time will be determined at the
time of the drawdown request using a formula contained in the equity line of
credit agreement. CEL-SCI may request a drawdown once every 22 trading days,
although CEL-SCI is under no obligation to request any drawdowns under the
equity line of credit.
During the 22 trading days following a drawdown request, CEL-SCI will
calculate the number of shares it will sell to Rubicon Group and the purchase
price per share. The purchase price per share of common stock will be based on
the daily volume weighted average price of CEL-SCI's common stock during each of
the 22 trading days immediately following the drawdown date, less a discount of
11%.
As of December 31, 2003 CEL-SCI had not requested any drawdowns on the
equity line of credit.
Covance AG
On October 8, 2002, CEL-SCI signed an agreement with Covance AG (Covance),
a Swiss Corporation. Pursuant to the agreement, amounts owed to Covance totaling
$199,928 as of June 30, 2003 were converted to a note payable. The note was
payable on January 2, 2004. Interest was payable monthly at an annual rate of
8%. Until the entire amount was paid to Covance, Covance was entitled to receive
2% of any draw-down of CEL-SCI's equity credit line, 2% of any net funds
received from outside financings of less than $1 million, 3% of any net funds
received from outside financings greater than $1 million but less than $2
million and 4% of any net funds received from outside financings greater than $2
million. During the year ended September 30, 2003, CEL-SCI paid $15,598 on the
Covance note. The Note was paid in full in December 2003.
Eastern Biotech
In May 2003, CEL-SCI entered into an agreement with Eastern Biotech which
provided Eastern Biotech with the following (i) the exclusive right to
distribute MULTIKINE and CEL-1000 in Greece, Serbia and Croatia, (ii) a royalty
equal to 1% of CEL-SCI's net sales of MULTIKINE and CEL-1000 prior to May 30,
2033, (iii) 1,100,000 shares of CEL-SCI's common stock and, (iv) warrants which
allow Eastern Biotech to purchase an additional 1,100,000 shares of CEL-SCI's
common stock at a price of $0.47 per share at any time prior to May 30, 2008. In
consideration for the above Eastern Biotech paid CEL-SCI $500,000. Since the
shares issued to Eastern Biotech, as well as the shares issuable upon the
exercise of the Eastern Biotech warrants, were not registered for public sale by
September 30, 2003, the royalty percentage to Eastern Biotech increased to 2%.
Eastern Biotech will lose its exclusive right to distribute CEL-SCI's products
unless Eastern Biotech has enrolled at least 20 patients in a controlled,
mutually designed head and neck cancer clinical trial by June 1, 2004.
Cambrex Bio Science Promissory Note
In November 2001 CEL-SCI gave a promissory note to Cambrex Bio Sciences,
Inc., the owner of the manufacturing facility used by CEL-SCI to produce
MULTIKINE for CEL-SCI's clinical trials. The promissory note was in the
principal amount of $1,172,517 which represented the cost of CEL-SCI's use of
the Cambrex manufacturing facility for the three months ended January 10, 2002.
The amount due Cambrex bears interest at the prime interest rate, plus 3%, which
is adjusted monthly. As of December 1, 2003 the prime interest rate was 4% and
the interest rate on the amount due Cambrex was 7%. Pursuant to the agreement,
CEL-SCI surrendered a cash deposit and transferred title to certain equipment to
Cambrex, which reduced the amount due by $225,000. Until the note was paid in
full, CEL-SCI agreed to pay Cambrex 10% of all amounts received by CEL-SCI, net
of financing costs, from any future financings, including amounts received by
CEL-SCI from its equity line of credit. Cambrex, at its option, could convert
all or part of the amount due Cambrex into shares of CEL-SCI's common stock. The
number of shares to be issued to Cambrex upon any conversion of the note were to
be determined by dividing that portion of the note to be converted by the
Conversion Price. The "Conversion Price" was an amount equal to 90% of the
average closing prices of CEL-SCI's common stock for the three trading days
immediately prior to the conversion date. However, the Conversion Price could
not be less than $0.22.
During the quarter ended December 31, 2003, CEL-SCI paid $692,010 of
principal plus accrued interest of $59,450 to Cambrex, thereby re-paying the
remaining balance of the note. No part of the note was converted into shares of
CEL-SCI's common stock.
Convertible Notes
In December 2001 and January 2002, CEL-SCI sold Series F convertible notes,
plus Series F warrants, to a group of private investors for $1,600,000. As of
December 1, 2002 these notes had been converted into 6,592,461 shares of
CEL-SCI's common stock.
In July and September 2002, CEL-SCI sold Series G convertible notes, plus
Series G warrants, to a group of private investors for $1,300,000. As of June
30, 2003 all of the Series G notes had been converted into 8,390,746 shares of
CEL-SCI's common stock.
In January and July 2003, CEL-SCI sold Series H convertible notes, plus
Series H warrants, to a group of private investors for $1,350,000. As of
December 1, 2003 all of the Series H notes had been converted into 3,233,229
shares of CEL-SCI's common stock.
Critical Accounting Policies
CEL-SCI's significant accounting policies are more fully described in Note
1 to the Consolidated Financial Statements. However, certain accounting policies
are particularly important to the portrayal of financial position and results of
operations and require the application of significant judgments by management.
As a result, the consolidated financial statements are subject to an inherent
degree of uncertainty. In applying those policies, management uses its judgment
to determine the appropriate assumptions to be used in the determination of
certain estimates. These estimates are based on CEL-SCI's historical experience,
terms of existing contracts, observance of trends in the industry and
information available from outside sources, as appropriate. Our 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 would be the difference between the
estimated fair value of the asset and its carrying value.
Stock Options - In October 1996, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123). This statement encourages but does
not require companies to account for employee stock compensation awards based on
their estimated fair value at the grant date with the resulting cost charged to
operations. CEL-SCI has elected to continue to account for its employee
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. In December 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transaction and Disclosure"
which amends SFAS No. 123. SFAS No. 148 provided alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and requires more prominent and more
frequent disclosures in the financial statements of the effects of stock-based
compensation. The provisions of SFAS No. 148 are effective for periods beginning
after December 15, 2002. The Company has elected to continue to account for its
employee stock-based compensation using the intrinsic value method.
Asset Valuations and Review for Potential Impairments - CEL-SCI reviews its
fixed assets every fiscal quarter. This review requires that CEL-SCI make
assumptions regarding the value of these assets and the changes in circumstances
that would affect the carrying value of these assets. If such analysis indicates
that a possible impairment may exist, CEL-SCI is then required to estimate the
fair value of the asset and, as deemed appropriate, expense all or a portion of
the asset. The determination of fair value includes numerous uncertainties, such
as the impact of competition on future value. CEL-SCI believes that it has made
reasonable estimates and judgments in determining whether our long-lived assets
have been impaired; however, if there is a material change in the assumptions
used in our determination of fair values or if there is a material change in
economic conditions or circumstances influencing fair value, CEL-SCI could be
required to recognize certain impairment charges in the future. As a result of
the reviews, no changes in asset values are expected.
Convertible Notes - Convertible notes were issued during the year. CEL-SCI
initially offset a portion of the notes with a discount representing the
relative fair value of the warrants and a beneficial conversion feature
discount. This discount is amortized to interest expense over the period the
notes are outstanding and is accelerated pro-rata as the notes are converted.
The fair value of the warrants and the beneficial conversion discount are
calculated based on available market data using appropriate valuation models.
These valuations require that CEL-SCI make assumptions and estimates regarding
the convertible notes and warrants. Management uses its judgment, as well as
outside sources, to determine these assumptions and estimates.
Quantitative and Qualitative Disclosure About Market Risks
Market risk is the potential change in an instrument's value caused by, for
example, fluctuations in interest and currency exchange rates. CEL-SCI has no
derivative financial instruments. Further, there is no exposure to risks
associated with foreign exchange rate changes because none of the operations of
CEL-SCI are transacted in a foreign currency. The interest rate risk on
investments is considered immaterial due to the dollar value of investments as
of September 30, 2003. CEL-SCI has a note payable with an interest rate at prime
plus 3% and a note payable with an interest rate at 8%. This represents a market
risk if the prime interest rate rises. However, based on the most recent Federal
Reserve Board's actions, CEL-SCI believes that a large increase in the prime
rate is unlikely in the near future.
Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 149 "Amendment of SFAS
No. 133 on Derivative Instruments and Hedging Activities". The Statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. The amendments set forth in SFAS 149 improve financial reporting
by requiring that contracts with comparable characteristics be accounted
similarly. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristics of a
derivative as discussed in Statement 133. In addition, it clarifies when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 amends certain other existing
pronouncements. Those changes will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of this SFAS No. 149
did not have a material effect on CEL-SCI's financing position, results of
operations or cash flows.
In May 2003, the FASB adopted SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS No. 150
did not have a material effect on CEL-SCI's financial position, results of
operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, " (FIN 45). FIN45 establishes new
disclosure and liability recognition requirements for direct and indirect debt
guarantees with specified characteristics. The initial recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for financial statement of
interim or annual periods ending after December 15, 2002. CEL-SCI adopted FIN 45
as of December 31, 2002. CEL-SCI's implementation of FIN 45 did not have a
material effect on its financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 provides guidance on the
consolidation of certain entities, referred to as variable interest entities, in
which equity investors do not have the characteristics of a controlling
financial interest. FIN 46 was effective immediately for variable interest
entities created or acquired after January 31, 2003 and is effective July 1,
2003 for variable interest entities created or acquired on or before January 31,
2003. In October 2003, the FASB issued Staff Position FIN 46.6, which extended
the effective date of FIN 46 for variable interest entities created or acquired
before February 1, 2003 to the first interim or annual period ending after
December 15, 2003. CEL-SCI anticipates that the adoption of FIN 46 will not have
a material effect on its financial position, results of operations or cash
flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements included with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Geert Kersten, CEL-SCI's Chief Executive and Financial Officer, has
evaluated the effectiveness of CEL-SCI's disclosure controls and procedures as
of a date within 90 days prior to the filing date of this report and in his
opinion CEL-SCI's disclosure controls and procedures ensure that material
information relating to CEL-SCI, including CEL-SCI's consolidated subsidiaries,
is made known to him by others within those entities, particularly during the
period in which this report is being prepared, so as to allow timely decisions
regarding required disclosure. To the knowledge of Mr. Kersten there have been
no significant changes in CEL-SCI's internal controls or in other factors that
could significantly affect CEL-SCI's internal controls subsequent to the date of
evaluation, and as a result, no corrective actions with regard to significant
deficiencies or material weakness in CEL-SCI's internal controls were required.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
Name Age Position
Maximilian de Clara 74 Director and President
Geert R. Kersten, Esq. 44 Director, Chief Executive Officer and Treasurer
Patricia B. Prichep 51 Senior Vice President of Operations and
Secretary
Dr. Eyal Talor 47 Senior Vice President of Research and
Manufacturing
Dr. Daniel H. Zimmerman 61 Senior Vice President of Research, Cellular
Immunology
Alexander G. Esterhazy 58 Director
Dr. C. Richard Kinsolving 68 Director
Dr. Peter R. Young 58 Director
The directors of CEL-SCI serve in such capacity until the next annual
meeting of CEL-SCI's shareholders and until their successors have been duly
elected and qualified. The officers of CEL-SCI serve at the discretion of
CEL-SCI's directors.
Mr. Maximilian de Clara, by virtue of his position as an officer and
director of CEL-SCI, may be deemed to be the "parent" and "founder" of CEL-SCI
as those terms are defined under applicable rules and regulations of the
Securities and Exchange Commission.
The principal occupations of CEL-SCI's officers and directors, during the
past several years, are as follows:
Maximilian de Clara. Mr. de Clara has been a Director of CEL-SCI since its
inception in March l983, and has been President of CEL-SCI since July l983.
Prior to his affiliation with CEL-SCI, and since at least l978, Mr. de Clara was
involved in the management of his personal investments and personally funding
research in the fields of biotechnology and biomedicine. Mr. de Clara attended
the medical school of the University of Munich from l949 to l955, but left
before he received a medical degree. During the summers of l954 and l955, he
worked as a research assistant at the University of Istanbul in the field of
cancer research. For his efforts and dedication to research and development in
the fight against cancer and AIDS, Mr. de Clara was awarded the "Pour le Merit"
honorary medal of the Austrian Military Order "Merito Navale" as well as the
honor cross of the Austrian Albert Schweitzer Society.
Geert R. Kersten, Esq. Mr. Kersten was Director of Corporate and Investment
Relations for CEL-SCI between February 1987 and October 1987. In October of
1987, he was appointed Vice President of Operations. In December 1988, Mr.
Kersten was appointed Director of the Company. Mr. Kersten also became CEL-SCI's
Treasurer in 1989. In May 1992, Mr. Kersten was appointed Chief Operating
Officer and in February 1995, Mr. Kersten became CEL-SCI's Chief Executive
Officer. In previous years, Mr. Kersten worked as a financial analyst with
Source Capital, Ltd., an investment advising firm in McLean, Virginia. Mr.
Kersten is a stepson of Maximilian de Clara, who is the President and a Director
of CEL-SCI. Mr. Kersten attended George Washington University in Washington,
D.C. where he earned a B.A. in Accounting and an M.B.A. with emphasis on
International Finance. He also attended law school at American University in
Washington, D.C. where he received a Juris Doctor degree.
Patricia B. Prichep has been the Company's Senior Vice President of
Operations since March 1994. Between December 1992 and March 1994, Ms. Prichep
was the Company's Director of Operations. Ms. Prichep became CEL-SCI's Secretary
in May 2000. From June 1990 to December 1992, Ms. Prichep was the Manager of
Quality and Productivity for the NASD's Management, Systems and Support
Department. Between 1982 and 1990, Ms. Prichep was Vice President and Operations
Manager for Source Capital, Ltd.
Eyal Talor, Ph.D. has been CEL-SCI's Senior Vice President of Research and
Manufacturing since March 1994. From October 1993 until March 1994, Dr. Talor
was Director of Research, Manufacturing and Quality Control, as well as the
Director of the Clinical Laboratory, for Chesapeake Biological Laboratories,
Inc. From 1991 to 1993, Dr. Talor was a scientist with SRA Technologies, Inc.,
as well as the director of SRA's Flow Cytometry Laboratory (1991-1993) and
Clinical Laboratory (1992-1993). During 1992 and 1993, Dr. Talor was also the
Regulatory Affairs and Safety Officer For SRA. Since 1987, Dr. Talor has held
various positions with the Johns Hopkins University, including course
coordinator for the School of Continuing Studies (1989-Present), research
associate and lecturer in the Department of Immunology and Infectious Diseases
(1987-1991), and associate professor (1991-Present).
Daniel H. Zimmerman, Ph.D. has been CEL-SCI's Senior Vice President of
Cellular Immunology since January 1996. Dr. Zimmerman founded CELL-MED, Inc. and
was its president from 1987-1995. From 1973 to 1987 Dr. Zimmerman served in
various positions at Electronucleonics, Inc. including Scientist, Senior
Scientist, Technical Director and Program Manager. From 1969-1973 Dr. Zimmerman
was a Senior Staff Fellow at NIH.
Alexander G. Esterhazy has been an independent financial advisor since
November 1997. Between July 1991 and October 1997 Mr. Esterhazy was a senior
partner of Corpofina S.A. Geneva, a firm engaged in mergers, acquisitions and
portfolio management. Between January 1988 and July 1991 Mr. Esterhazy was a
managing director of DG Bank in Switzerland. During this period Mr. Esterhazy
was in charge of the Geneva, Switzerland branch of the DG Bank, founded and
served as vice president of DG Finance (Paris) and was the President and Chief
Executive officer of DG-Bourse, a securities brokerage firm.
C. Richard Kinsolving, Ph.D. has been a Director of CEL-SCI since April
2001. Since February 1999 Dr. Kinsolving has been the Chief Executive Officer of
BioPharmacon, a pharmaceutical development company. Between December 1992 and
February 1999 Dr. Kinsolving was the President of Immuno-Rx, Inc., a company
engaged in immuno-pharmaceutical development. Between December 1991 and
September 1995 Dr. Kinsolving was President of Bestechnology, Inc. a nonmedical
research and development company producing bacterial preparations for industrial
use. Dr. Kinsolving received his Ph.D. in Pharmacology from Emory University
(1970), his Masters degree in Physiology/Chemistry from Vanderbilt University
(1962), and his Bachelor's degree in Chemistry from Tennessee Tech. University
(1957).
Peter R. Young, Ph.D. has been a Director of CEL-SCI since August 2002. Dr.
Young has been a senior executive within the pharmaceutical industry in the
United States and Canada for most of his career. Over the last 20 years he has
primarily held positions of Chief Executive Officer or Chief Financial Officer
and has extensive experience with acquisitions and equity financings. Since
November 2001 Dr. Young has been the President of Agnus Dei, LLC, which acts as
a partner in an organization managing immune system clinics which treat patients
with diseases such as cancer, multiple sclerosis and hepatitis. Since January
2003 Dr. Young has been the President and Chief Executive Officer of SRL
Technology, Inc., a company involved in the development of pharmaceutical (drug)
delivery systems. Between 1998 and 2001 Dr. Young was the Chief Financial
Officer of Adams Laboratories, Inc. Dr. Young received his Ph.D. in Organic
Chemistry from the University of Bristol, England (1969), and his Bachelor's
degree in Honors Chemistry, Mathematics and Economics also from the University
of Bristol, England (1966).
All of CEL-SCI's officers devote substantially all of their time to
CEL-SCI's business.
CEL-SCI has an audit committee and compensation committee. The members of
the audit committee are Alexander G. Esterhazy, C. Richard Kinsolving and Dr.
Peter Young. Dr. Peter Young serves as the audit committee's financial expert.
In this capacity, Dr. Young is independent, as that term is defined in the
listing standards of the American Stock Exchange. The members of the
compensation committee are Maximilian de Clara, Alexander Esterhazy and C.
Richard Kinsolving.
CEL-SCI has adopted a Code of Ethics which is applicable to CEL-SCI'S
principal executive, financial, and accounting officers and persons performing
similar functions. The Code of Ethics is available on CEL-SCI's website, located
at www.cel-sci.com.
If a violation of this code of ethics act is discovered or suspected, the
Senior Officer must (anonymously, if desired) send a detailed note, with
relevant documents, to CEL-SCI's Audit Committee, c/o Dr. Peter Young, 1904
Canterbury Drive, Westover Hills, TX 76107.
Executive Compensation
The following table sets forth in summary form the compensation received by
(i) the Chief Executive Officer of CEL-SCI and (ii) by each other executive
officer of CEL-SCI who received in excess of $100,000 during the fiscal year
ended September 30, 2003.
All
Other Other
Annual Restric- Com-
Compen- ted Stock Options pensa-
Name and Princi- Fiscal Salary Bonus sation Awards Granted tion
pal Position Year (1) (2) (3) (4) (5) (6)
-------- ------ ----- ------- -------- ------- --------
Maximilian de Clara, 2003 $363,000 -- $65,121 -- 574,999 $72,600
President 2002 $363,000 -- $46,079 $ 89,334 75,000 --
2001 $357,167 -- $52,186 $ 262,000 95,000 $ 64
Geert R. Kersten, 2003 $354,087 -- $12,558 $ 9,244 1,890,000 $71,068
Chief Executive 2002 $346,324 -- $15,044 $ 10,929 105,000 --
Officer and 2001 $265,175 -- $10,462 $ 8,313 655,000 $4,114
Treasurer
Patricia B. Prichep 2003 $147,904 -- $ 3,000 $ 4,902 580,000 --
Senior Vice President 2002 $140,464 -- $ 3,000 $ 5,597 90,500 --
of Operations and 2001 $104,505 -- $ 3,000 $ 6,270 260,000 $ 63
Secretary
Eyal Talor, Ph.D. 2003 $191,574 -- $ 3,000 $ 4,950 374,166 --
Senior Vice President 2002 $187,075 -- $ 3,000 $ 5,702 85,000 --
of Research and 2001 157,420 -- $ 3,000 $ 9,269 200,000 $ 63
Manufacturing
Daniel Zimmerman, Ph.D, 2003 $147,000 -- $ 3,000 $ 5,005 392,000 --
Senior Vice President 2002 $143,583 -- $ 3,000 $ 5,763 91,000 --
of Cellular Immunology 2001 $117,145 -- $ 3,000 $ 6,962 175,000 $ 64
(1) The dollar value of base salary (cash and non-cash) received. During the
year ended September 30, 2003, $701,397 of the total salaries paid to the
persons shown in the table were paid in restricted shares of CEL-SCI's
common stock.
Information concerning the issuance of these restricted shares is shown in
the following table:
Date Shares Number of Price
Were Issued Shares Issued Per Share
----------- ------------- ---------
November 8, 2002 660,636 $0.20
March 27, 2003 690,636 $0.20
April 30, 2003 299,139 $0.21
April 30, 2003 2,394,462 $0.15
July 21, 2003 95,578 $0.65
On each date the amount of compensation satisfied through the issuance of
shares was determined by multiplying the number of shares issued by the Price
Per Share. With the exception of the 2,394,462 shares issued on April 30, 2003
the price per share was equal to the closing price of CEL-SCI's common stock on
the date prior to the date the shares were issued. The closing price of
CEL-SCI's common stock on April 29, 2003, the date prior to the issuance of the
2,394,462 shares, was $0.21.
The 2,394,462 shares were issued to Mr. de Clara and Mr. Kersten in payment
of their respective salaries for the six month period ended September 30, 2003.
Since the shares were issued at a discount of $0.06 per share to the market
price of CEL-SCI's common stock, the additional compensation received by Mr. de
Clara and Mr. Kersten from the receipt of these shares is shown in the "All
Other Compensation Column".
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
Amounts in the table represent automobile, parking and other transportation
expenses, plus, in the case of Maximilian de Clara and Geert Kersten,
director's fees of $8,000. During the year ended September 30, 2003,
$25,000 of the total Other Annual compensation paid to the persons shown in
the table were paid in restricted shares of CEL-SCI's common stock.
(4) During the periods covered by the table, the value of the shares of
restricted stock issued as compensation for services to the persons listed
in the table. In the case of Mr. de Clara the shares were issued in
consideration for past services to the Company. In the case of all other
persons listed in the table, the shares were issued as CEL-SCI's
contribution on behalf of the named officer to CEL-SCI's 401(k) retirement
plan.
As of September 30, 2003, the number of shares of CEL-SCI's common stock,
owned by the officers included in the table above, and the value of such shares
at such date, based upon the market price of CEL-SCI's common stock were:
Name Shares Value
--------- ------- --------
Maximilian de Clara 1,782,295 $1,657,534
Geert R. Kersten 2,345,993 $2,181,773
Patricia B. Prichep 471,479 $ 438,475
Eyal Talor, Ph.D. 474,615 $ 441,392
Daniel Zimmerman, Ph.D. 438,776 $ 408,062
Dividends may be paid on shares of restricted stock owned by CEL-SCI's
officers and directors, although CEL-SCI has no plans to pay dividends.
(5) The shares of Common Stock to be received upon the exercise of all stock
options granted during the periods covered by the table. Includes certain
options issued in connection with CEL-SCI's Salary Reduction Plans as well
as certain options purchased from CEL-SCI. See "Options Granted During
Fiscal Year Ended September 30, 2003" below.
(6) All other compensation received that CEL-SCI could not properly report in
any other column of the table including annual Company contributions or
other allocations to vested and unvested defined contribution plans, and
the dollar value of any insurance premiums paid by, or on behalf of,
CEL-SCI with respect to term life insurance for the benefit of the named
executive officer, and the full dollar value of the remainder of the
premiums paid by, or on behalf of, CEL-SCI. Amounts in the table for fiscal
2001 represent life insurance premiums. Amounts in the table for fiscal
2003 represent the value of CEL-SCI's common stock issued at below market
prices and discussed in (1) above.
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
During 1993 CEL-SCI implemented a defined contribution retirement plan,
qualifying under Section 401(k) of the Internal Revenue Code and covering
substantially all the Company's employees. Prior to January 1, 1998 CEL-SCI's
contribution was equal to the lesser of 3% of each employee's salary, or 50% of
the employee's contribution. Effective January 1, 1998 the plan was amended such
that the Company's contribution is now made in shares of CEL-SCI's common stock
as opposed to cash. Each participant's contribution is matched by CEL-SCI with
shares of common stock which have a value equal to 100% of the participant's
contribution, not to exceed the lesser of $1,000 or 6% of the participant's
total compensation. CEL-SCI's contribution of common stock is valued each
quarter based upon the closing price of the Company's common stock. The fiscal
2003 expenses for this plan were $48,437. Other than the 401(k) Plan, CEL-SCI
does not have a defined benefit, pension plan, profit sharing or other
retirement plan.
Compensation of Directors
Standard Arrangements. CEL-SCI currently pays its directors $2,000 per
quarter, plus expenses. CEL-SCI has no standard arrangement pursuant to which
directors of CEL-SCI are compensated for any services provided as a director or
for committee participation or special assignments.
Other Arrangements. CEL-SCI has from time to time granted options to its
outside directors. See Stock Options below for additional information concerning
options granted to CEL-SCI's directors.
Employment Contracts.
In March 2002 the Company entered into a three-year employment agreement
with Mr. de Clara which expires March 31, 2005. The employment agreement
provides that CEL-SCI will pay Mr. de Clara an annual salary of $363,000 during
the term of the agreement. In the event that there is a material reduction in
Mr. de Clara's authority, duties or activities, or in the event there is a
change in the control of the Company, then the agreement allows Mr. de Clara to
resign from his position at the Company and receive a lump-sum payment from
CEL-SCI equal to 18 months salary. For purposes of the employment agreement, a
change in the control of CEL-SCI means the sale of more than 50% of the
outstanding shares of CEL-SCI's Common Stock, or a change in a majority of
CEL-SCI's directors.
The Employment Agreement will also terminate upon the death of Mr. de
Clara, Mr. de Clara's physical or mental disability, the conviction by Mr. de
Clara of any crime involving fraud, moral turpitude, or CEL-SCI's property, or a
breach of the Employment Agreement by Mr. de Clara. If the Employment Agreement
is terminated for any of these reasons Mr. de Clara, or his legal
representatives, as the case may be, will be paid the salary provided by the
Employment Agreement through the date of termination.
Effective September 1, 2003, CEL-SCI entered into a three-year employment
agreement with Mr. Kersten. The employment agreement provides that during the
term of the employment agreement CEL-SCI will pay Mr. Kersten an annual salary
of $370,585. In the event there is a change in the control of CEL-SCI, the
agreement allows Mr. Kersten to resign from his position at CEL-SCI and receive
a lump-sum payment from CEL-SCI equal to 24 months salary. For purposes of the
employment agreement a change in the control of CEL-SCI means: (1) the merger of
CEL-SCI with another entity if after such merger the shareholders of CEL-SCI do
not own at least 50% of voting capital stock of the surviving corporation; (2)
the sale of substantially all of the assets of CEL-SCI; (3) the acquisition by
any person of more than 50% of CEL-SCI's common stock; or (4) a change in a
majority of CEL-SCI's directors which has not been approved by the incumbent
directors.
The Employment Agreement will also terminate upon the death of Mr. Kersten,
Mr. Kersten's physical or mental disability, willful misconduct, an act of fraud
against CEL-SCI, or a breach of the Employment Agreement by Mr. Kersten. If the
Employment Agreement is terminated for any of these reasons Mr. Kersten, or his
legal representatives, as the case may be, will be paid the salary provided by
the Employment Agreement through the date of termination.
Compensation Committee Interlocks and Insider Participation
CEL-SCI has a compensation committee comprised of all of CEL-SCI's
directors, with the exception of Mr. Kersten. During the year ended September
30, 2003, Mr. de Clara was the only officer participating in deliberations of
CEL-SCI's compensation committee concerning executive officer compensation.
During the year ended September 30, 2003, no director of CEL-SCI was also
an executive officer of another entity, which had an executive officer of
CEL-SCI serving as a director of such entity or as a member of the compensation
committee of such entity.
Stock Options
The following tables set forth information concerning the options granted
during the fiscal year ended September 30, 2003, to the persons named below, and
the fiscal year-end value of all unexercised options (regardless of when
granted) held by these persons.
Options Granted During Fiscal Year Ended September 30, 2003
Potential Realizable
% of Total Value at Assumed
Options Annual Rates of Stock
Granted to Exercise Price Appreciation
Options Employees in Price Per Expiration for Option Term (1)
Name Granted (#) Fiscal Year Share Date 5% 10%
------------------ -------- ------------- --------- ---------- ------ ------
Maximilian de Clara 574,999 11.20% 0.22 4/1/13 $63,302 $126,604
Geert R. Kersten 1,890,000 36.83% 0.22 4/1/13 $208,071 $416,142
Patricia B. Prichep 580,000 11.30% 0.22 4/1/13 $63,852 $127,705
Eyal Talor, Ph.D. 374,166 7.33% 0.22 4/1/13 $41,412 $82,825
Daniel Zimmerman, Ph.D. 392,000 7.64% 0.22 4/1/13 $43,155 $86,311
(1) The potential realizable value of the options shown in the table assuming
the market price of CEL-SCI's Common Stock appreciates in value from the
date of the grant to the end of the option term at 5% or 10%.
Option Exercises and Year-End Option Values
Value (in $) of
Unexercised
Number of In-the-Money
Unexercised Options at Fiscal
Shares Options (3) Year-End (4)
Acquired On Value Exercisable/ Exercisable/
Name Exercise (1) Realized (2) Unexercisable Unexercisable
---------- ----------- ----------- ------------ -------------
Maximilian de Clara -- -- 504,999/ 644,999 $ 9,750/$ 427,749
Geert R. Kersten -- -- 1,800,000/1,980,000 $13,650/$1,369,200
Patricia Prichep -- -- 511,334/ 648,666 $11,365/$ 434,530
Eyal Talor 309,167/ 439,165 $10,000/$ 285,658
Daniel Zimmerman -- -- 324,668/ 459,332 $15,330/$ 308,980
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 2003.
(2) With respect to options exercised during CEL-SCI's fiscal year ended
September 30, 2003, the dollar value of the difference between the option
exercise price and the market value of the option shares purchased on the
date of the exercise of the options.
(3) The total number of unexercised options held as of September 30, 2003,
separated between those options that were exercisable and those options
that were not exercisable.
(4) For all unexercised options held as of September 30, 2003, the market value
of the stock underlying those options as of September 30, 2003.
Stock Option and Bonus Plans
CEL-SCI has Incentive Stock Option Plans, Non-Qualified Stock Option Plans
and Stock Bonus Plans. All Stock Option and Bonus Plans have been approved by
the stockholders. A summary description of these Plans follows. In some cases
these Plans are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans collectively
authorize the issuance of up to 4,100,000 shares of CEL-SCI's Common Stock to
persons who exercise options granted pursuant to the Plan. Only Company
employees may be granted options pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option holder's
employment by CEL-SCI is terminated (except if such termination is due to
death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option holder's
employment by CEL-SCI is terminated, if such termination is due to the
Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of CEL-SCI,
his executors or administrators may exercise, within three months following
the date of his death, the option as to any of the shares not previously
exercised;
The total fair market value of the shares of Common Stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common Stock of
CEL-SCI may not be exercisable by its terms after five years from the date of
grant. Any other option granted pursuant to the Plan may not be exercisable by
its terms after ten years from the date of grant.
The purchase price per share of Common Stock purchasable under an option is
determined by the Committee but cannot be less than the fair market value of the
Common Stock on the date of the grant of the option (or 110% of the fair market
value in the case of a person owning more than 10% of CEL-SCI's outstanding
shares).
Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans
collectively authorize the issuance of up to 7,760,000 shares of CEL-SCI's
Common Stock to persons that exercise options granted pursuant to the Plans.
CEL-SCI's employees, directors, officers, consultants and advisors are eligible
to be granted options pursuant to the Plans, provided however that bona fide
services must be rendered by such consultants or advisors and such services must
not be in connection with the offer or sale of securities in a capital-raising
transaction. The option exercise price is determined by the Committee but cannot
be less than the market price of CEL-SCI's Common Stock on the date the option
is granted.
Stock Bonus Plan. Up to 1,940,000 shares of Common Stock may be granted
under the Stock Bonus Plan. Such shares may consist, in whole or in part, of
authorized but unissued shares, or treasury shares. Under the Stock Bonus Plan,
CEL-SCI's employees, directors, officers, consultants and advisors are eligible
to receive a grant of CEL-SCI's shares, provided however that bona fide services
must be rendered by consultants or advisors and such services must not be in
connection with the offer or sale of securities in a capital-raising
transaction.
Other Information Regarding the Plans. The Plans are administered by
CEL-SCI's Compensation Committee ("the Committee"), each member of which is a
director of the Company. The members of the Committee were selected by CEL-SCI's
Board of Directors and serve for a one-year tenure and until their successors
are elected. A member of the Committee may be removed at any time by action of
the Board of Directors. Any vacancies which may occur on the Committee will be
filled by the Board of Directors. The Committee is vested with the authority to
interpret the provisions of the Plans and supervise the administration of the
Plans. In addition, the Committee is empowered to select those persons to whom
shares or options are to be granted, to determine the number of shares subject
to each grant of a stock bonus or an option and to determine when, and upon what
conditions, shares or options granted under the Plans will vest or otherwise be
subject to forfeiture and cancellation.
In the discretion of the Committee, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Committee may also
accelerate the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited if the "vesting" schedule established by the
Committee administering the Plan at the time of the grant is not met. For this
purpose, vesting means the period during which the employee must remain an
employee of CEL-SCI or the period of time a non-employee must provide services
to CEL-SCI. At the time an employee ceases working for CEL-SCI (or at the time a
non-employee ceases to perform services for CEL-SCI), any shares or options not
fully vested will be forfeited and cancelled. At the discretion of the Committee
payment for the shares of Common Stock underlying options may be paid through
the delivery of shares of CEL-SCI's Common Stock having an aggregate fair market
value equal to the option price, provided such shares have been owned by the
option holder for at least one year prior to such exercise. A combination of
cash and shares of Common Stock may also be permitted at the discretion of the
Committee.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Committee when the shares were issued.
The Board of Directors of CEL-SCI may at any time, and from time to time,
amend, terminate, or suspend one or more of the Plans in any manner they deem
appropriate, provided that such amendment, termination or suspension will not
adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of CEL-SCI's capital stock or a consolidation or merger of
CEL-SCI; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
Summary. The following sets forth certain information, as of September 30,
2003, concerning the stock options and stock bonuses granted by CEL-SCI. Each
option represents the right to purchase one share of CEL-SCI's common stock.
Total Shares
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
-------------- ----------- ---------- ----------- -------------
Incentive Stock Option
Plans 4,100,000 3,801,100 N/A 212,315
Non-Qualified Stock
Option Plans 7,760,000 6,453,973 N/A 151,899
Stock Bonus Plans 1,940,000 N/A 1,225,036 714,964
Of the shares issued pursuant to CEL-SCI's Stock Bonus Plans 487,920 shares
were issued as part of CEL-SCI's contribution to its 401(k) plan.
The following table shows the weighted average exercise price of the
outstanding options granted pursuant to the Company's Incentive and
Non-Qualified Stock Option Plans as of September 30, 2003, CEL-SCI's most recent
fiscal year end. CEL-SCI's Incentive and Non-Qualified Stock Option Plans have
been approved by CEL-SCI's shareholders.
Number of Securities
Remaining Available
Number For Future Issuance
of Securities Under Equity
to be Issued Weighted-Average Compensation Plans,
Upon Exercise Exercise Price of Excluding Securities
of Outstanding of Outstanding Reflected in Column
Plan category Options (a) Options (a)
------------------- --------------- --------------- -------------------
Incentive Stock Option
Plans 3,801,100 $0.68 212,315
Non-Qualified Stock
Option Plans 6,453,973 $0.74 151,899
---------- ----- -------
10,255,073 $0.72 364,214
========== ===== =======
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 30, 2003, information with
respect to the only persons owning beneficially 5% or more of the outstanding
Common Stock and the number and percentage of outstanding shares owned by each
director and officer and by the officers and directors as a group. Unless
otherwise indicated, each owner has sole voting and investment powers over his
shares of Common Stock.
Name and Address Number of Shares (1) Percent of Class (3)
------------------- ------------------- --------------------
Maximilian de Clara 2,238,044 3.6%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 4,192,911 (2) 6.6%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Patricia B. Prichep 1,016,549 1.6%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 723,601 1.2%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 744,860 1.2%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Alexander G. Esterhazy 55,000 *
20 Chemin du Pre-Poiset
CH- 1253 Vandoeuvres
Geneve, Switzerland
C. Richard Kinsolving 119,090 *
P.O. Box 20193
Bradenton, FL 34204-0193
Peter R. Young, Ph.D. 47,518 *
1904 Canterbury Drive
Westover Hills, TX 76107
All Officers and Directors 9,137,573 13.9%
as a Group (8 persons)
* Less than 1%
(1) Includes shares issuable prior to February 28, 2004 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to February 28, 2004
Maximilian de Clara 504,999
Geert R. Kersten 1,800,000
Patricia B. Prichep 529,667
Eyal Talor, Ph.D. 329,167
Daniel H. Zimmerman, Ph.D. 331,334
Alexander G. Esterhazy 55,000
C. Richard Kinsolving, Ph.D. 50,000
Peter R. Young, Ph.D. 6,667
(2) Amount includes shares held in trust for the benefit of Mr. Kersten's minor
children. Geert R. Kersten is the stepson of Maximilian de Clara.
(3) Amount includes shares referred to in (1) above but excludes shares which
may be issued upon the exercise or conversion of other options, warrants
and other convertible securities previously issued by CEL-SCI.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to CEL-SCI for the
years ended September 30, 2003 and September 30, 2002 by Deloitte & Touche, LLP,
CEL-SCI independent auditors: Year Ended September 30, 2003 2002
Audit Fees $131,049 $139,516
Audit-Related Fees 50,027 35,468
Financial Information Systems --
Design and Implementation Fees -- --
Tax Fees -- --
All Other Fees -- --
Audit fees represent amounts billed for professional services rendered for
the audit of the CEL-SCI's annual financial statements and the reviews of the
financials statements included in CEL-SCI's Forms 10-Q for the fiscal year.
Audit Related Fees represent amounts charged for reviewing various registration
statements filed with the Securities and Exchange Commission by CEL-SCI during
the year. Before Deloitte & Touche, LLP was engaged by CEL-SCI to render audit
or non-audit services, the engagement was approved by CEL-Sci's audit committee.
CEL-SCI's Board of Directors is of the opinion that the Audit Related Fees
charged by Deloitte & Touche, LLP are consistent with Deloitte & Touche, LLP
maintaining its independence from CEL-SCI.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) See the Financial Statements attached to this Report.
(b) The Company did not file any reports on Form 8-K during the three months
ended September 30, 2003.
(c) Exhibits Page Number
3(a) Articles of Incorporation Incorporated by reference to Exhibit
3(a) of CEL-SCI's combined Registration
Statement on Form S-1 and Post-Effective
Amendment ("Registration Statement"),
Registration Nos. 2-85547-D and 33-7531.
(b) Amended Articles Incorporated by reference to Exhibit 3(a)
of CEL-SCI's Registration Statement on
Form S-1, Registration Nos. 2-85547-D and
33-7531.
(c) Amended Articles Filed as Exhibit 3(c) to CEL-SCI's
(Name change only) Registration Statement on Form S-1
Registration Statement (No. 33-34878).
(d) Bylaws Incorporated by reference to Exhibit 3(b)
of CEL-SCI's Registration Statement on
Form S-1, Registration Nos. 2-85547-D
and 33-7531.
(a) Specimen copy of Stock Incorporated by reference to Exhibit 4(a)
Certificate of CEL-SCI's Registration Statement on
Form S-1 Registration Nos. 2-85547-D and
33-7531.
(b) Designation of Series E Incorporated by reference to Exhibit 4 to
Preferred Stock report on Form 8-K dated August 21, 2001.
10(d) Employment Agreement with Incorporated by reference to Exhibit 10(d
Maximilian de Clara to CEL-SCI's Registration Statement on Form
S-1 (Commission File #333-102639).
10(e) Employment Agreement with Incorporated by reference to Exhibit 10(e)
Geert Kersten to CEL-SCI's Registration Statement on Form
S-3 (Commission File #106879).
10(q) Common Stock Purchase Incorporated by reference to Exhibit 10(q)
Agreement with Rubicon to CEL-SCI's Registration statement on Form
Group Ltd. S-1 (Commission File No. 333-109070).
10(r) Stock Purchase Warrant issued Incorporated by reference to Exhibit 10(r)
to Rubicon Group Ltd. to CEL-SCI's Registration statement on Form
S-1 (Commission File No. 333-109070).
10(s) Securities Exchange Agreement Incorporated by reference to Exhibit 10.1
(together with Schedule required to report on Form 8-K dated August 21,
by Instruction 2 to Item 601 2001.
Regulation S-K)
10(t) Form of Series E Warrant Incorporated by reference to Exhibit 10.2
to report on Form 8-K dated August 21, 2001.
10(u) Form of Secondary Warrant Incorporated by reference to Exhibit 10.3
to report on Form 8-K dated August 21, 2001.
10(v) Note and Warrant Purchase Incorporated by reference to Exhibit 10(v)
Agreement (together with to CEL-SCI's Registration Statement on
Schedule required by Form S-3 (Commission File Number 333-76396)
Instruction 2 to Item
601 Regulation S-K)p
pertaining to notes sold
in December 2001 and January 2002
10(vi) Note and Warrant Purchase Incorporated by reference to Exhibit (vi)
Agreement (together with to CEL-SCI's Registration statement on
Schedule required by Form S-3 (Commission File No. 333-97171)
Instruction 2 to Item 601
Regulation S-K) pertaining
to Series G notes and warrants
10(vii) Note and Warrant Purchase Incorporated by reference to Exhibit 10
Agreement (together with to CEL-SCI's report on Form 8-K dated
Schedule required by Instruction January 14, 2003.
2 to Item 601 Regulation S-K)
pertaining to Series H notes and
warrants
10(w) Master Production Agreement between *
Company and Bio Science Contract --------------------------
Production Corp.
10(x) Distribution and Royalty Agreement Incorporated by reference to Exhibit
with Eastern Biotech 10(x) to Amendment No. 2 to CEL-SCI's
Registration statement on Form S-3
(Commission File No. 333-106879).
10(y) Promissory Note payable to Cambrex Bio *
Science, Inc., together with Security -----------------------
Agreement and amendments.
10(z) Development, Supply and Distribution *
Agreement between Company and Orient -----------------------
Europharma Co., Ltd.
23 Consent of Deloitte & Touche LLP ___________________
31 Rule 13a-14(a) Certifications ___________________
32 Section 1350 Certifications ___________________
* Previously filed.
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2003, 2002, and 2001,
and Independent Auditors' Report
CEL-SCI CORPORATION
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED SEPTEMBER 30, 2003, 2002, AND 2001:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Comprehensive Loss F-6
Consolidated Statements of Stockholders' Equity F-7 - F-9
Consolidated Statements of Cash Flows F-10 - F-13
Notes to Consolidated Financial Statements F-14 - F-31
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
CEL-SCI Corporation:
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation and subsidiary (the Company) as of September 30, 2003 and 2002, and
the related consolidated statements of operations, comprehensive loss,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte & Touche LLP
McLean, Virginia
December 15, 2003
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
-----------------------------------------------------------------------------
ASSETS 2003 2002
CURRENT ASSETS:
Cash and cash equivalents $ 1,753,307 $ 2,079,276
Interest and other receivables 47,051 31,477
Prepaid expenses 357,531 452,123
Deposits 14,828 -
Deferred financing costs 16,243 176,995
--------- ---------
Total current assets 2,188,960 2,739,871
RESEARCH AND OFFICE EQUIPMENT--Less accumulated
depreciation of $2,002,232 and $2,027,225 278,706 473,555
DEPOSITS - 139,828
PATENT COSTS--Less accumulated amortization
of $704,522 and $641,711 447,540 418,004
--------- ---------
$ 2,915,206 $ 3,771,258
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 481,985 $ 735,646
Accrued expenses 99,172 148,812
Due to officer/shareholder and employees 227,115 29,592
Deposits held 3,000 -
Deferred rent 5,540 -
Note payable - Cambrex, net of discount 656,076 1,135,017
Note payable - Covance 184,330 -
--------- ---------
Total current liabilities 1,657,218 2,049,067
DEFERRED RENT - 20,732
CONVERTIBLE DEBT, NET 32,882 639,288
--------- ---------
Total liabilities 1,690,100 2,709,087
--------- ---------
STOCKHOLDERS' EQUITY:
Series E cumulative convertible redeemable
preferred stock, $.01 par value, $1,000
liquidation value--authorized, 6,288 shares;
issued and outstanding, -0- and 1,192
shares at September 30, 2003 and 2002, respectively - 12
Common stock, $.01 par value--authorized,
100,000,000 shares; issued and outstanding,
61,166,345 and 37,255,142 shares
at September 30, 2003 and 2002, respectively 611,663 372,551
Additional paid-in capital 87,167,091 80,871,758
Accumulated deficit (86,553,648) (80,182,150)
----------- -----------
Total stockholders' equity 1,225,106 1,062,171
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,915,206 $ 3,771,258
=========== ===========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001
-------------------------------------------------------------------------
2003 2002 2001
GRANT REVENUE AND OTHER $ 318,304 $ 384,939 $ 293,871
OPERATING EXPENSES:
Research and development 1,915,501 4,699,909 7,762,213
Depreciation and amortization 199,117 226,514 209,121
General and administrative 2,287,019 1,754,332 3,432,437
----------- ----------- -----------
Total operating expenses 4,401,637 6,680,755 11,403,771
----------- ----------- -----------
NET OPERATING LOSS (4,083,333) (6,295,816) (11,109,900)
INTEREST INCOME 52,502 85,322 376,221
INTEREST EXPENSE (2,340,667) (2,131,750) -
----------- ----------- -----------
NET LOSS (6,371,498) (8,342,244) (10,733,679)
ACCRUED DIVIDENDS ON
PREFERRED STOCK (32,101) (202,987) (53,153)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (76,720) (1,444,757) (317,419)
----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(6,480,319) $(9,989,988) $(11,104,251)
=========== =========== ============
NET LOSS PER COMMON SHARE (BASIC) $ (0.13) $ (0.35) $ (0.51)
=========== =========== ============
NET LOSS PER COMMON SHARE (DILUTED)$ (0.13) $ (0.35) $ (0.51)
=========== =========== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 50,961,457 28,746,341 21,824,273
=========== =========== ============
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED SEPTEMBER 30, 2003, 2002,
AND 2001
--------------------------------------------------------------------------------
2003 2002 2001
NET LOSS $ (6,371,498) $ (8,342,244) $ (10,733,679)
OTHER COMPREHENSIVE LOSS--Unrealized
gain on investments - 210 61,354
----------- ----------- ------------
COMPREHENSIVE LOSS $ (6,371,498) $ (8,342,034) $ (10,672,325)
============ ============ =============
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
YEARS ENDED SEPTEMBER 30, 2003, 2002,
AND 2001
Accumulated
Preferred Additional Unearned Other Compre-
Series E Stock Common Stock Paid-In Compen- hensive Accumulated
Shares Amount Shares Amount Capital sation (Loss) Income Deficit Total
--------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 - $ - 20,459,700 $204,597 $73,924,653 $ - $(61,564) $(61,106,227) $12,961,459
Exercise of warrants 3,794,432 37,944 (37,593) 351
Stock issued to employees
for service 114,867 1,149 113,718 114,867
Repriced options 613,108 (19,636) 593,472
Stock options issued to
non-employees for services 167,087 167,087
Stock issued to non-employees
for service 34,546 346 34,201 34,547
Exchange of common stock for
Preferred Series E 6,288 63 (3,589,289) (35,893) 35,830 -
Conversion of Preferred
Series E to common stock (425) (4) 348,841 3,488 (3,484) -
Issuance--common stock 522,108 5,221 584,779 590,000
401(k) contributions 66,877 669 93,036 93,705
Stock bonus to officer 200,000 2,000 260,000 262,000
Costs for equity related
transactions (143,970) (143,970)
Change in unrealized gain
(loss) of investment
securities available for sale 61,354 61,354
Net loss (10,733,679) (10,733,679)
----------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2001 5,863 59 21,952,082 219,521 75,641,365 (19,636) (210) (71,839,906) 4,001,193
Exercise of warrants 104,500 1,045 21,668 22,713
Stock issued to employees
for service 1,885,600 18,856 502,038 520,894
Repriced options (613,108) 19,636 (593,472)
Stock options issued to
non-employees for service (2,262) (2,262)
Stock issued to nonemployees
for service 45,596 456 45,140 45,596
Conversion of Preferred
Series E to common stock (4,671) (47) 4,282,150 42,822 (42,775) -
Dividends on Preferred Series
E paid in common stock 122,760 1,227 131,875 133,102
Dividends accrued on Preferred
Series E stock (202,987) (202,987)
Issuance of Series F
convertible debt with warrants -
and beneficial conversion feature 1,600,000 1,600,000
Conversion of Series F
convertible debt 5,611,344 56,113 1,403,885 1,459,998
Interest on Series F convertible
debt paid in common stock 1,269 13 752 765
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2003, 2002,
AND 2001
---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Additional Unearned Other Compre-
Series E Stock Common Stock Paid-In Compen- hensive Accumulated
Shares Amount Shares Amount Capital sation (Loss) Income Deficit Total
--------------------------------------------------------------------------------------------------
Issuance of Series G
convertible debt with warrants
and beneficial conversion
feature 690,709 690,709
Conversion of Series G
convertible debt 277,778 2,777 47,225 50,002
Issuance--common stock 150,000 1,500 148,500 150,000
401(k) contributions 193,818 1,938 69,885 71,823
Stock bonus to officer 75,071 751 88,583 89,334
Issuance of common stock for
equity line 2,553,174 25,532 1,341,265 1,366,797
Change in unrealized gain
(loss) of investment securities
available for sale 210 210
Net loss (8,342,244) (8,342,244)
---------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2002 1,192 12 37,255,142 372,551 80,871,758 - - (80,182,150) 1,062,171
Exercise of warrants 1,435,500 14,355 255,027 269,382
Stock issued to employees for
service 4,409,932 44,099 920,117 964,216
Stock options issued to
non-employees for service 6,727 6,727
Stock issued to non-employees
for service 559,089 5,591 123,100 128,691
Conversion of Preferred Series
E to common stock (1,192) (12) 1,018,439 10,184 (10,172) -
Dividends on Preferred Series
E paid in common stock 97,389 974 98,650 99,624
Dividends accrued on Preferred
Series E stock (21,189) (21,189)
Conversion of Series F
convertible debt 979,670 9,797 130,203 140,000
Interest on Series F
convertible debt paid in 22,608 226 4,040 4,266
common stock
Conversion of Series G
convertible debt 8,076,420 80,764 1,169,236 1,250,000
Interest on Series G convertible
debt paid in common stock 109,428 1,094 20,378 21,472
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2003, 2002,
AND 2001
--------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Additional Unearned Other Compre-
Series E Stock Common Stock Paid-In Compen- hensive Accumulated
Shares Amount Shares Amount Capital sation (Loss) Income Deficit Total
--------------------------------------------------------------------------------------------------
Issuance of Series H
convertible debt with
warrants and beneficial
conversion feature 1,054,647 1,054,647
Conversion of Series H
convertible debt 3,003,929 30,039 1,219,961 1,250,000
Interest on Series H
convertible debt paid in
common stock 80,010 800 25,430 26,230
Issuance of Cambrex note
payable with beneficial
conversion feature 106,716 106,716
Costs for equity related
transactions (40,600) (40,600)
Sale of common stock to Eastern
Biotech 1,100,000 11,000 489,000 500,000
Exercise of options 6,667 67 2,133 2,200
401(k) contributions 134,336 1,344 45,707 47,051
Issuance of common stock for
equity line 2,877,786 28,778 696,222 725,000
Net loss (6,371,498) (6,371,498)
----------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 - $ - 61,166,345 611,663 87,167,091 $ - $ - $(86,553,648) $1,225,106
======= ====== ========== ======= ========== ======= ====== ============ ===========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003, 2002, AND
2001
-------------------------------------------------------------------------------
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,371,498) (8,342,244) (10,733,679)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Depreciation and amortization 199,117 226,514 209,121
Issuance of stock options for
services 6,727 (2,262) 167,087
Repriced options - (593,472) 593,472
Common stock bonus granted to officer - 89,334 262,000
Issuance of common stock for services 1,092,907 566,490 149,414
Common stock contributed to 401(k)
plan 47,051 71,823 93,705
Net realized (gain) loss on sale of
securities - (2,758) 9,831
Impairment loss on abandonment of
patents 9,828 39,960 30,439
Gain on retired equipment (5,913) - -
Gain on sale of equipment (26,463) - -
R&D expenses paid with note payable - 872,517 -
Amortization of deferred financing
costs 385,170 276,785 -
Amortization of discount on note
payable 113,300 262,500 -
Amortization of discount on
convertible debt 1,738,241 1,539,994 -
Changes in assets and liabilities:
(Increase) decrease in interest and
other receivables (15,574) 8,899 (1,124)
Decrease in prepaid expenses 87,752 413,935 972,318
Decrease in advances - - 728
Increase (decrease) in accounts
payable and accrued expenses 15,216 321,297 (346,553)
Increase in due to officer/shareholder
and employees 197,523 29,131 461
Increase in deposits held 3,000 - -
(Decrease) increase in deferred rent (15,192) (10,486) 6,396
----------- ----------- -----------
Net cash used for operating
activities (2,538,808) (4,232,043) (8,586,384)
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES:
Sales and maturities of investments - 596,352 3,219,064
Proceeds from disposal of equipment 7,812 - -
Purchases of equipment (6,905) (15,313) (168,537)
Expenditures for patent costs (93,509) (39,439) (35,797)
--------- --------- --------
Net cash (used for) provided
by investing activities (92,602) 541,600 3,014,730
--------- -------- ---------
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003, 2002, AND
2001
---------------------------------------------------------------------------
2003 2002 2001
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of
common stock 500,000 150,000 590,000
Proceeds from exercise of warrants 269,382 22,713 351
Draw-downs on equity line (net) 725,000 1,366,797 -
Exercise of stock options 2,200 - -
Proceeds from short-term loan 25,000 - -
Payment on short-term loan (25,000) - -
Payments on notes payable (276,122) - -
Proceeds from convertible debt 1,350,000 2,900,000 -
Costs for convertible debt
transactions (224,419) (453,781) -
Costs for equity related transactions (40,600) - (143,970)
---------- --------- --------
Net cash provided by
financing activities 2,305,441 3,985,729 446,381
---------- --------- -------
NET (DECREASE) INCREASE IN CASH (325,969) 295,286 (5,125,273)
---------- --------- ---------
CASH, BEGINNING OF YEAR 2,079,276 1,783,990 6,909,263
----------- ----------- --------
CASH, END OF YEAR $1,753,307 $2,079,276 $1,783,990
========== ========== ==========
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001
------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH
TRANSACTIONS 2003 2002 2001
CONVERSION OF COMMON STOCK INTO
PREFERRED STOCK:
Increase in preferred stock $ - $ - $ 63
Decrease in common stock - - (35,893)
Increase in additional paid-in capital - - 35,830
------ ------ ---------
$ - $ - $ -
======= ====== ========
CONVERSION OF PREFERRED STOCK INTO
COMMON STOCK:
Decrease in preferred stock $ (12) $ (47) $ (4)
Increase in common stock 10,184 42,822 3,488
Decrease in additional paid-in capital (10,172) (42,775) (3,484)
------- -------- --------
$ - $ - $ -
======= ====== ========
COMMON STOCK IN LIEU OF CASH DIVIDENDS
AND INTEREST ON PREFERRED STOCK:
Decrease in accrued liabilities $($99,625) (133,102) $ -
Increase in common stock 974 1,227 -
Increase in additional paid-in capital 98,651 131,875 -
--------- --------- --------
$ - $ - $ -
========= ======== ========
ACCRUAL OF DIVIDENDS ON PREFERRED STOCK:
Increase in accrued liabilities $ 21,189 $202,987 $ 53,153
Decrease in additional paid-in capital (21,189) (202,987) (53,153)
---------- -------- --------
$ - $ - $ -
========= ======== ========
ISSUANCE OF CONVERTIBLE DEBT WITH WARRANTS
AND BENEFICIAL CONVERSION:
Decrease in convertible debt $(1,054,647) $(2,290,709) $ -
Increase in additional paid-in capital 1,054,647 2,290,709 -
---------- --------- ---------
$ - $ - $ -
========= ======== =========
CONVERSION OF CONVERTIBLE DEBT INTO
COMMON STOCK:
Decrease in convertible debt $(2,640,000) $(1,510,000) $ -
Increase in common stock 120,600 58,890 -
Increase in additional paid-in capital 2,519,400 1,451,110 -
--------- --------- ---------
$ - $ - $ -
=========== ========= ==========
CONVERSION OF INTEREST ON CONVERTIBLE DEBT
INTO COMMON STOCK:
Decrease in accrued liabilities $(51,968) $ (765) $ -
Increase in common stock 2,120 13 -
Increase in additional paid-in capital 49,848 752 -
--------- --------- ---------
$ - $ - $ -
========== ========= ==========
CHANGES IN UNEARNED COMPENSATION
FOR VARIABLE OPTIONS:
Decrease in additional paid-in
capital $ - $ (19,636) $ -
Decrease in unearned compensation $ - $ 19,636 $ -
---------- --------- ----------
$ - $ - $ -
========= ======== =========
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001
------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS 2003 2002 2001
ACCRETION TO THE BENEFICIAL CONVERSION
ON PREFERRED STOCK:
Increase in additional paid-in capital $ 76,720 $ 1,444,757 $317,419
Decrease in additional paid-in capital (76,720) (1,444,757) (317,419)
---------- ----------- ---------
$ - $ - $ -
========= ========== ========
EQUIPMENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in equipment costs $ (157) $ (677) $ -
Increase in accounts payable 157 677 -
--------- ---------- --------
$ - $ - $ -
========= ========== ========
PATENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in patent costs $ (11,659) $ (17,321) $ -
Increase in accounts payable 11,659 17,321 -
---------- ---------- --------
$ - $ - $ -
========= ========== ========
BENEFICIAL CONVERSION FEATURE OF NOTE PAYABLE:
Increase in additional paid-in capital $ 106,716 $ - $ -
Decrease in notes payable (106,716) - -
--------- ---------- -------
$ - $ - $ -
========= ========== ========
SURRENDER OF DEPOSIT AND SALE OF EQUIPMENT TO
REDUCE NOTE PAYABLE:
Decrease in deposits $ 125,000 $ - $ -
Decrease in equipment, net 100,000 - -
Decrease in notes payable (225,000) - -
--------- --------- ---------
$ - $ - $ -
========= ========== ========
CONVERSION OF ACCOUNTS PAYABLE INTO NOTES PAYABLE:
Decrease in accounts payable $(199,928) $ - $ -
Increase in notes payable 199,928 - -
--------- --------- ---------
$ - $ - $ -
========= ========== ========
RECLASS OF INVENTORY TO EQUIPMENT:
Decrease in inventory $ 6,839 $ - $ -
Increase in equipment (6,839) - -
--------- --------- ---------
$ - $ - $ -
========= ========== ========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the "Company") was incorporated on March 22, 1983, in
the State of Colorado, to finance research and development in biomedical
science and ultimately to engage in marketing and selling products.
Significant accounting policies are as follows:
a. Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Viral
Technologies, Inc. All significant intercompany transactions have been
eliminated upon consolidation.
b. Investments--Investments that may be sold as part of the liquidity
management of the Company or for other factors are classified as
available-for-sale and are carried at fair market value. Unrealized gains
and losses on such securities are reported as a separate component of
stockholders' equity. Realized gains and losses on sales of securities are
reported in earnings and computed using the specific identified cost
basis.
c. Research and Office Equipment--Research and office equipment is recorded
at cost and depreciated using the straight-line method over estimated
useful lives of five to seven years. Leasehold improvements are
depreciated over the shorter of the estimated useful life of the asset or
the terms of the lease. Repairs and maintenance are expensed when
incurred.
d. Research and Development Costs--Research and development expenditures are
expensed as incurred. The Company has an agreement with an unrelated
corporation for the production of MULTIKINE, which is the Company's only
product source.
e. 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.
f. Patents--Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology or
other circumstances impair the value or life of the patent, appropriate
adjustment in the asset value and period of amortization is made. An
impairment loss is recognized when estimated future undiscounted cash flows
expected to result from the use of the asset, and from disposition, is less
than the carrying value of the asset. The amount of the impairment loss
would be the difference between the estimated fair value of the asset and
its carrying value. During the years ended September 30, 2003, 2002 and
2001, the Company recorded patent impairment charges of $9,828, $39,960 and
$30,439 for the net book value of patents abandoned during the year. These
amounts are included in general and administrative expenses.
g. Net Loss Per Common Share--Net loss per common share is computed by
dividing the net loss, after increasing the loss for the effect of any
accrued dividends on the preferred stock and the accretion of the
beneficial conversion feature related to the preferred stock, by the
weighted average number of common shares outstanding during the period.
Common stock equivalents, including convertible preferred stock and
options to purchase common stock, were excluded from the calculation for
all periods presented as they were antidilutive.
h. Prepaid Expenses--The majority of prepaid expenses consist of
manufacturing production advances and bulk purchases of laboratory
supplies to be consumed in the manufacturing of the Company's product for
clinical studies.
i. Deferred Financing Costs--Deferred financing costs are capitalized and
expensed over the shorter of the period the notes are outstanding or on a
pro-rata basis as the notes are converted.
j. Income Taxes--Income taxes are accounted for using the asset and liability
method under which deferred tax liabilities or assets are determined based
on the difference between the financial statement and tax basis of assets
and liabilities (i.e., temporary differences) and are measured at the
enacted tax rates. Deferred tax expense is determined by the change in the
liability or asset for deferred taxes. The difference in the Company's U.S.
Federal statutory income tax rate and the Company's effective rate is
primarily attributed to the recording of a valuation allowance due to the
uncertainty of the amount of future tax benefits that will be realized
because it is more likely than not that future taxable income will not be
sufficient to realize such tax benefits.
k. Cash and Cash Equivalents--For purposes of the statements of cash flows,
cash and cash equivalents consists principally of unrestricted cash on
deposit and short-term money market funds. The Company considers all
highly liquid investments with a maturity when purchased of less than
three months, and those investments that are readily convertible to known
amounts of cash and are so close to maturity that they bear no interest
rate risk, as cash and cash equivalents.
l. Convertible Debt--Convertible debt issued by the Company is initially
offset by a discount representing the relative fair value of the warrants
and beneficial conversion feature. This discount is amortized to interest
expense over the period the debt is outstanding and accelerated pro-rata as
the notes are converted. The fair value of the warrants and beneficial
conversion discount are calculated based on available market data using
appropriate valuation models. Notes 6 and 12 provide additional information
on the valuation of the warrants and beneficial conversion discount.
m. Use of Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
n. Reclassifications--Certain reclassifications have been made to the fiscal
year 2001 financial statements to conform with the presentation of fiscal
years 2003 and 2002.
o. New Accounting Pronouncements--In April 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
(" SFAS") No. 149 "Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities". The Statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under SFAS No. 133. The
amendments set forth in SFAS No.149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristics of a
derivative as discussed in SFAS No. 133. In addition, it clarifies when a
derivative contains a financing component that warrants special reporting
in the statement of cash flows. SFAS No. 149 amends certain other existing
pronouncements. Those changes will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of this SFAS No.
149 did not have a material effect on the Company's financial position,
results of operations or cash flows.
In May 2003, the FASB adopted SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS No. 150 did not have a material effect
on the Company's financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", (FIN 45). FIN 45 establishes new
disclosure and liability recognition requirements for direct and indirect
debt guarantees with specified characteristics. The initial recognition
and measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company
adopted FIN 45 as of December 31, 2002 and the implementation did not have
a material effect on the Company's financial position, results of
operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", (FIN 46). FIN 46 provides guidance on the
consolidation of certain entities in which equity investors do not have
the characteristics of a controlling financial interest. Such entities are
referred to as variable interest entities. FIN 46 was effective
immediately for variable interest entities created or acquired after
January 31, 2003 and is effective July 1, 2003 for variable interest
entities created or acquired on or before January 31, 2003. In October
2003, the FASB issued Staff Position FIN 46.6, which extended the
effective date of FIN 46 for variable interest entities created or
acquired before February 1, 2003 to the first interim or annual period
ending after December 15, 2002. The Company anticipates that the adoption
of FIN 46 will not have a material effect on the Company's financial
position, results of operations or cash flows.
p. Stock-Based Compensation--In October 1996, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement encourages but
does not require companies to account for employee stock compensation
awards based on their estimated fair value at the grant date with the
resulting cost charged to operations. The Company has elected to continue
to account for its employee stock-based compensation using the intrinsic
value method prescribed in APB No. 25, "Accounting for Stock Issued to
Employees, and related Interpretations". In December 2002, the FASB issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" which amends SFAS No. 123. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and requires
more prominent and more frequent disclosures in the financial statements
of the effects of stock-based compensation. The provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002. The Company has
elected to continue to account for its employee stock-based compensation
using the intrinsic value method. If the Company had elected to recognize
compensation expense based on the fair value of the awards granted,
consistent with the provisions of SFAS No. 123, the Company's net loss and
net loss per common share would have been increased to the pro forma
amounts indicated below:
Year Ended September 30,
---------------------------------------
2003 2002 2001
---- ---- ----
Net loss:
As reported $(6,371,498) $(8,342,244) $(10,733,679)
Add/(subtract):
Recording of and reversal of
compensation expense for
stock-based performance
awards included in reported
net loss, net of related
tax effects - (593,472) 593,472
Add: Total stock-based
employee compensation expense
determined under fair-value
based method for all awards,
net of related tax effects (971,076) (990,949) (2,167,866)
--------- ---------- ----------
Pro forma $(7,342,574) $(9,926,665) $(12,308,073)
Net loss per common share:
As reported $ (0.13) $ (0.35) $ (0.51)
Pro forma $ (0.14) $ (0.40) $ (0.58)
The weighted average fair value at the date of grant for options granted
during fiscal years 2003, 2002 and 2001 was $0.22, $0.49, and $0.90, per
option, respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
2003 2002 2001
---- ---- ----
Expected stock risk volatility 77% 90 to 93% 98 to 109%
Risk-free interest rate 3.12% 4.10 to 4.12% 3.12 to 4.12%
Expected life options 5 Years 5 Years 1 to 6Years
Expected dividend yield - - -
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts.
The Company's stock options are not transferable, and the actual value of
the stock options that an employee may realize, if any, will depend on the
excess of the market price on the date of exercise over the exercise
price. The Company has based its assumption for stock price volatility on
the variance of monthly closing prices of the Company's stock. The
risk-free rate of return used for fiscal years 2003 and 2002 equals the
yield on five-year zero-coupon U.S. Treasury issues on the grant date. The
risk-free rate of return used for fiscal year 2001 equals the yield on one
to six year zero-coupon U.S. Treasury issues in the date of grant. No
discount was applied to the value of the grants for nontransferability or
risk of forfeiture.
2. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in connection
with the acquisition of certain patented and unpatented proprietary
technology and know-how relating to the human immunological defense system,
patent applications, research and development, administrative costs,
construction of laboratory facilities, and clinical trials. The Company has
funded such costs with proceeds realized from the public and private sale of
its common and preferred stock. The Company will be required to raise
additional capital or find additional long-term financing in order to
continue with its research efforts. The Company expects to receive additional
funding from private investors subsequent to September 30, 2003; however,
there can be no assurances that the Company will be able to raise additional
capital or obtain additional financing. To date, the Company has not
generated any revenue from product sales. The ability of the Company to
complete the necessary clinical trials and obtain FDA approval for the sale
of products to be developed on a commercial basis is uncertain.
The Company plans to seek continued funding of the Company's development by
raising additional capital. In fiscal year 2003 and fiscal year 2002, the
Company reduced its discretionary expenditures. If necessary, the Company
plans to further reduce discretionary expenditures in fiscal year 2004;
however such reductions would further delay the development of the Company's
products. It is the opinion of management that sufficient funds will be
available from external financing and additional capital and/or expenditure
reductions in order to meet the Company's liabilities and commitments as they
come due during fiscal year 2004. Ultimately, the Company must complete the
development of its products, obtain the appropriate regulatory approvals and
obtain sufficient revenues to support its cost structure.
3. INVESTMENTS
There were no investments or associated unrealized gains or losses as of
September 30, 2003. The gross realized gains and losses of sales of
investments available-for-sale for the years ended September 30, 2003, 2002,
and 2001, are as follows:
2003 2002 2001
---- ---- ----
Realized gains
$ - $ 2,758 $14,997
Realized losses - - (24,828)
------ -------- --------
Net realized gain (loss) $ - $ 2,758 $(9,831)
====== ======== ========
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2003 and 2002, consist of the
following:
2003 2002
---- ----
Research equipment $ 1,999,475 $ 2,192,054
Furniture and equipment 238,422 265,685
Leasehold improvements 43,041 43,041
----------- ------------
2,280,938 2,500,780
Less: Accumulated depreciation and
amortization (2,002,232) (2,027,225)
------------ -----------
Net research and office equipment $ 278,706 $ 473,555
========== ===========
5. INCOME TAXES
The approximate tax effect of each type of temporary difference and
carryforward that gave rise to the Company's deferred tax assets and
liabilities at September 30, 2003 and 2002, are as follows:
2003 2002
---- ----
Depreciation $ (16,367) $ (17,244)
Prepaid expenses (135,719) (171,626)
Net operating loss carryforward 32,658,426 31,578,427
Other 2,103 7,870
Less: Valuation allowance (32,508,443) (31,397,427)
----------- -----------
Net deferred $ - $ -
============ ============
The Company has available for income tax purposes net operating loss
carryforwards of approximately $86,428,896, expiring from 2004 through 2023.
In the event of a significant change in the ownership of the Company, the
utilization of such carryforwards could be substantially limited.
For fiscal years 2003, 2002 and 2001, the Company's federal statutory tax
rate was 35%, and the state tax rate was 6%. The effective tax rate was 0%.
The difference between the rates was primarily attributable to the effect of
state taxes and the non-recognition of deferred taxes due to the valuation
allowance.
6. STOCK OPTIONS, BONUS PLAN AND WARRANTS
Non-Qualified Stock Option Plan--At September 30, 2003, the Company has
collectively authorized the issuance of 7,760,000 shares of common stock
under the Non-Qualified Plan. Options typically vest over a three-year period
and expire no later than ten years after the grant date. Terms of the options
are to be determined by the Company's Compensation Committee, which
administers all of the plans. The Company's employees, directors, officers,
and consultants or advisors are eligible to be granted options under the
Non-Qualified Plan.
Information regarding the Company's Non-Qualified Stock Option Plan is
summarized as follows:
Outstanding Exercisable
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding,
September 30, 2000 1,801,206 3.18 1,547,445 3.19
Options granted 1,673,500 1.20
Options exercised - -
Options forfeited (114,640) 2.82
---------
Options outstanding, September 30,
2001 3,360,066 1.29 1,640,047 1.38
Options granted 860,000 0.44
Options exercised - -
Options forfeited (146,632) 1.50
---------
Options outstanding, September 30,
2002 4,073,434 1.10 3,159,938 1.25
Options granted 2,582,165 0.22
Options exercised (6,667) 0.33
Options forfeited (194,959) 1.44
----------
Options outstanding, September 30,
2003 6,453,973 0.74 3,319,317 1.18
=========
At September 30, 2003, options outstanding and exercisable were as follows:
Weighted Weighted Weighted
Average Average Average
Range of Number Exercise Remaining Exercise
Exercise Out- Price Out- Contractual Number Price
Prices standing standing Life Exercisable Exercisable
$0.16 - $0.24 2,572,165 $0.22 9.49 years 6,667 $ 0.16
$0.33 - $0.50 443,333 $0.34 8.62 years 133,337 $ 0.33
$0.54 - $0.81 291,500 $0.54 8.51 years 97,167 $ 0.54
$1.05 - $1.58 2,443,266 $1.07 2.65 years 2,390,436 $ 1.06
$1.67 - $2.51 677,109 $1.79 1.96 years 665,110 $ 1.79
$3.25 - $4.88 25,800 $3.34 3.57 years 25,800 $ 3.34
$6.25 - $9.38 800 $6.25 5.00 years 800 $ 6.25
During March 2000, the Company agreed to restore and vest 40,000 options at
prices ranging from $5.25 to $5.62, to one former Director and one Director
as part of a settlement agreement. The options will expire on September 25,
2006. As of September 30, 2003, 20,000 options had been exercised. In October
2000 and April 2001, the Company extended the expiration dates on
approximately 1,056,000 options from the Nonqualified Stock Option Plan with
exercise prices ranging from $2.38 to $5.25. The options originally expired
from October 2000 to January 2001 but were extended to expiration dates
ranging from October 2001 to January 2002. Each of these two dates was
considered a new measurement date with respect to all of the modified
options; however, on each date the exercise price of the options exceeded the
fair market value of the Company's common stock, and therefore, no
compensation expense was recorded.
In July 2001, the Company repriced 1,298,098 outstanding employee and
director stock options under the Nonqualified Plans that were priced over
$2.00 down to $1.05. In accordance with Financial Interpretation No. 44
(FIN 44), such repriced options are considered to be variable options.
During the year ended September 30, 2001, compensation charges of $364,532
were recorded in the consolidated statement of operations and unearned
compensation of $11,916 was recorded on the consolidated balance sheet as
of September 30, 2001. The compensation expense was originally determined
based upon the difference between the fair market value of the Company's
common stock at the date of modification and the exercise price of each
stock option. On September 30, 2001, the incremental compensation expense
was determined based on the difference between the fair market value of the
stock on September 30, 2001, and the exercise price, less the previously
recorded expense. During the year ended September 30, 2002, the change in
the market value of the Company's common stock resulted in the reversal of
$364,532 of compensation expense. Changes in the fair market value of the
Company's stock may result in future changes to compensation expense. There
was no expense recorded during the year ended September 30, 2003. As of
September 30, 2003, all options remain outstanding.
In November 2001, the Company extended the expiration date on 242,000 options
at $1.05 from the Nonqualified Plans. The options were to expire between June
2002 and October 2002 and were extended by one year to June 2003 through
October 2003. The options had originally been granted between October 1989 to
December 1995. These dates were considered a new measurement date with
respect to all of the modified options. In addition, in February, April, and
July of 2002, the Company modified options outstanding to employees who had
been terminated in conjunction with their change in employee status so that
all options vested on the date of termination. These dates were considered a
new measurement date with respect to all of the newly vested options. At each
of the dates of modification, the exercise price of the options exceeded the
fair market value of the Company's common stock and no compensation expense
was recorded.
In November 2002 and March 2003, the Company extended the expiration date on
897,000 options from the Nonqualified Stock Option Plan with exercise prices
ranging from $1.05 to $1.94. The options originally expired from January 2003
to October 2003, but were extended to expiration dates ranging from January
2005 to October 2005. Each of these two dates was considered a new
measurement date. At each of the dates of modification, the exercise price of
the options exceeded the fair market value of the Company's common stock and
no compensation expense was recorded. As of September 30, 2003, all options
remain outstanding.
Incentive Stock Option Plan--At September 30, 2003, the Company has
collectively authorized the issuance of 4,100,000 shares of common stock
under the Incentive Stock Option Plan. Options vest after a one-year to
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers all of the plans. Only the Company's employees
and directors are eligible to be granted options under the Incentive Plan.
Information regarding the Company's Incentive Stock Option Plan is summarized
as follows:
Outstanding Exercisable
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding,
September 30, 2000 1,046,766 3.62 722,435 3.98
Options granted 130,000 1.24
Options exercised - -
Options forfeited (6,666) 3.36
---------
Options outstanding,
September 30, 2001 1,170,100 1.65 862,103 2.33
Options granted 81,000 1.08
Options exercised - -
Options forfeited - -
------
Options outstanding,
September 30, 2002 1,251,100 1.62 1,062,769 1.69
Options granted 2,550,000 0.22
Options exercised - -
Options forfeited - -
---------
Options outstanding,
September 30, 2003 3,801,100 0.68 1,162,768 1.65
=========
At September 30, 2003, options outstanding and exercisable were as follows:
Weighted Weighted Weighted
Average Average Average
Range of Number Exercise Remaining Exercise
Exercise Out- Price Out- Contractual Number Price
Prices standing standing Life Exercisable Exercisable
$0.22 - $0.33 2,550,000 $ 0.22 9.50 years - $ 0.00
$1.00 - $1.50 1,006,066 $ 1.08 4.75 years 924,400 $ 1.07
$1.85 - $2.78 81,167 $ 2.00 3.87 years 74,501 $ 2.02
$2.87 - $4.31 33,167 $ 3.35 1.07 years 33,167 $ 3.35
$4.50 - $6.75 129,600 $ 5.06 4.69 years 129,600 $ 5.06
$9.00 - $13.50 1,100 $ 10.09 2.73 years 1,100 $10.09
During fiscal year 2001, the Company extended the expiration date on 50,000
options at $2.87 from the Incentive Stock Option Plan. The options were to
expire November 1, 2001, and were extended to November 1, 2002. The options
had originally been granted in November 1991. November 1, 2001 was considered
a new measurement date; however, the exercise price on all the options
modified exceeded the fair market value of the Company's common stock, and
therefore, no compensation expense was recorded.
In July 2001, the Company repriced 816,066 outstanding employee and director
stock options under the Incentive Stock Option Plan that were priced over
$2.00 down to $1.05. In accordance with FIN 44, such repriced options are
considered to be variable options. During the year ended September 30, 2001,
compensation charges of $228,940 were recorded in the consolidated statement
of operations and unearned compensation of $7,720 was recorded on the
consolidated balance sheet as of September 30, 2001. The compensation expense
was originally determined based upon the difference between the fair market
value of the Company's common stock at the date of modification and the
exercise price of each stock option. On September 30, 2001, the incremental
compensation expense was determined based on the difference between the fair
market value of the stock on September 30, 2001, and the exercise price, less
the previously recorded expense. During the year ended September 30, 2002,
this charge was completely reversed as the stock price declined. No expense
was recorded during the year ended September 30, 2003 related to these
options. As of September 30, 2003, all options remain outstanding. Changes in
the fair market value of the Company's common stock will result in future
changes in compensation expenses.
In November 2001, the Company extended the expiration date on 56,000 options
at $1.05 from the Incentive Stock Option Plan. The options were to expire
between November 2002 and December 2002, and were extended by one year to
November 2003 to December 2003. The options had originally been granted
between November 1999 and December 1992. This date was considered a new
measurement date with respect to the modified options. In addition, in
February, April, and July of 2002, the Company modified options outstanding
to employees who had been terminated in conjunction with their change in
employee status so that all options vested on the date of termination. At
each of the dates of modification, the exercise price of the options exceeded
the fair market value of the Company's common stock and no compensation
expense was recorded.
In March 2003, the Company extended the expiration date on 105,500 options
from the Incentive Stock Option Plan with exercise prices ranging from $1.05
to $1.94. The options originally expired from August 2003 to March 2004 but
were extended to expiration dates ranging from August 2005 to March 2006.
This was considered a new measurement date with respect to all of the
modified options. At each of the dates of modification, the exercise price of
the options exceeded the fair market value of the Company's common stock and
no compensation expense was recorded. As of September 30, 2003, all options
remain outstanding.
Other Options and Warrants--In connection with the 1992 public offering,
5,175,000 common stock purchase warrants were issued and outstanding at
September 30, 1997. Every ten warrants entitled the holder to purchase one
share of common stock at a price of $15.00 per share. Subsequently, the
expiration date of the warrants was extended to February 1998. Effective
June 1, 1997, the exercise price of warrants was lowered from $15 to $6 and
only five warrants, rather than 10 warrants, were required to purchase one
share of common stock. Subsequent to September 30, 1997, warrant holders
who tendered five warrants and $6.00 between January 9, 1998, and February
7, 1998, would receive one share of the Company's common stock and one new
warrant. The new warrants would permit the holder to purchase one share of
the Company's common stock at a price of $10.00 per share prior to February
7, 2000. During fiscal year 1998, the expiration date of the original
warrants was extended to July 31, 1998, and 582,025 original warrants were
tendered for 116,405 common shares. As of September 30, 1999, the 4,592,975
original warrants had expired. In January 2001, the Company extended the
expiration date on the remaining 116,405 warrants to August 2001 and
repriced them from $10.00 to $3.00 per share. In July 2001, the Company
extended the expiration date further to February 2002. The incremental
value at the date of these modifications collectively of $43,842 is
recorded as an addition to additional paid-in capital and also a charge to
additional paid-in capital since the Company is in an accumulated deficit
position. In January 2002, the Company extended the expiration date further
to February 6, 2003. The additional incremental value at the date of the
modification of $5,997 is recorded as an addition to additional paid-in
capital and also a charge to additional paid-in capital since the Company
is in an accumulated deficit position. The fair value was valued using the
Black-Scholes pricing methodology. All warrants expired on February 6,
2003.
During fiscal year 1995, the Company granted a consultant options to purchase
17,858 shares of the Company's common stock. These shares became exercisable
on November 2, 1995, and were to expire November 1, 1999. In February 2000,
the Company extended the expiration date on the options by one year to
February 6, 2001. All outstanding options expired during the year ended
September 30, 2001.
During fiscal year 1997, the Company granted four consultants options to
purchase a total of 268,000 shares of the Company's common stock. The fair
value of the options is expensed over the life of the consultants' contracts.
Of the 268,000 options, 218,000 options became exercisable during fiscal year
1997 at prices ranging from $2.50 to $4.50. The remaining 50,000 options
became exercisable during fiscal year 1998 at $5.00. During fiscal year 1997,
50,000 options were exercised at $3.50. During fiscal year 1998, 114,500
options were exercised at prices ranging from $3.50 to $4.50. During fiscal
year 1999, 18,500 options were exercised at prices ranging from $3.50 to
$4.50. In December 1999, the Company extended the expiration date on 10,000
options exercisable at $3.25 per share to June 30, 2000. Subsequently, the
expiration date was extended to June 30, 2001. On June 30, 2001, these 10,000
options expired. During fiscal year 2000, 25,000 options were exercised at
prices ranging from $2.50 to $3.94. At September 30, 2000, 60,000 options
related to the four consultants remained outstanding at prices ranging from
$3.50 to $5.00. In September 2002, the remaining 50,000 options at $5.00
expired. During fiscal year 1998, the Company granted seven consultants
options to purchase a total of 282,000 shares of the Company's common stock.
The fair value of the options were expensed over the life of the consultant's
contracts. All remaining options expired during the year ended September 30,
2001.
In connection with the December 1997 private offering of common stock, the
Company issued to the underwriters warrants to purchase 50,000 shares of
common stock at $8.63 per share. The warrants were exercisable at any time
prior to December 22, 2000, at which time they expired.
During fiscal year 1999, the Company granted a consultant options to purchase
a total of 50,000 shares of the Company's common stock. The fair value of the
options is expensed over the life of the consultant's contract. All 50,000
options became exercisable during fiscal year 1999 at $2.50 per share. The
options expire February 4, 2004. At September 30, 2003, all 50,000 options
remained outstanding.
During fiscal year 2001, the Company granted options to consultants to
purchase a total of 180,000 shares of the Company's common stock at exercise
prices ranging from $1.05 to $1.63 expiring from June to July of 2006. As of
September 30, 2003, all options were outstanding. The fair value of 30,000
options was expensed immediately. The fair value of the remaining 150,000
options was expensed on a monthly basis as the options were earned and vested
over a period of one year. Total compensation of $77,206 was expensed for
these options. The compensation expense was determined using the
Black-Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 98% to 104%
Risk-free interest rate 3.12% to 4.12%
Expected life of option 3 Years
Expected dividend yield -0-
In connection with the April 2001 common stock purchase agreement discussed
in Note 13, the Company issued 200,800 common stock purchase warrants. Each
warrant entitles the holder to purchase one share of common stock at $1.64
per share, expiring in April 2004.
The warrants have a relative fair value of $200,000 calculated using the
Black-Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 98%
Risk-free interest rate 3.12%
Expected life of warrant 3 Years
Expected dividend yield -0-
The fair value of the warrants has been recorded as an addition to additional
paid-in capital and also a charge to additional paid-in capital since the
Company is in an accumulated deficit position.
In August 2001, the Company issued 272,108 common stock purchase warrants in
connection with a private offering of common stock as discussed in Note 13.
Each warrant entitles the holder to purchase one share of common stock at
$1.75 per share, expiring July 2004. The warrants have a relative fair value
of $224,000 calculated using the Black-Scholes pricing methodology with the
following assumptions:
Expected stock risk volatility 98%
Risk-free interest rate 3.12%
Expected life of warrant 3 Years
Expected dividend yield -0-
The fair value of the warrants has been recorded as an addition to additional
paid-in capital and also a charge to additional paid-in capital since the
Company is in an accumulated deficit position.
Series E warrants were issued in connection with the issuance of preferred
stock in August 2001. The Series E warrants allowed the holders to purchase
up to 815,351 shares of the Company's common stock at a price of $1.19 per
share at any time prior to August 16, 2004. In August 2003, in accordance
with the Series E agreement discussed in Note 13, the Company issued 23,758
warrants to purchase shares of common stock at a price of $0.77 per share.
The warrants are exercisable at any time prior to August 17, 2006. These
warrants were valued using the Black Scholes pricing methodology with the
following assumptions:
Expected stock risk volatility 94%
Risk-free interest rate 2.00%
Expected life of warrant 3 Years
Expected dividend yield -0-
The fair value of the warrants has been recorded as an addition to additional
paid-in capital and also a charge to additional paid-in capital since the
Company is in an accumulated deficit position. These warrants are considered
a deemed dividend and the fair value, as determined using Black-Scholes, of
$10,912 is included in the accrued dividends on preferred stock in the
statements of operations for the year ended September 30, 2003.
As of September 30, 2003, all Series E warrants remained outstanding. As of
November 10, 2003, 244,724 warrants were exercised for proceeds of $291,222.
Warrants were issued in connection with the issuance of the convertible debt
in December 2001 and January 2002. The Series F warrants allowed the holders
to purchase up to 960,000 shares of the Company's common stock at a price
equal to 110% of the closing price per share at any time prior to the date
which is seven years after the closing of the transaction. The warrant price
is adjustable if the Company sells any additional shares of its common stock
or convertible securities for less than fair market value or at an amount
lower than the exercise price of the Series F warrants. The warrant price is
adjusted every three months to an amount equal to 110% of the conversion
price on such date, provided that the adjusted price is lower than the
warrant exercise price on that date. If the warrant exercise price is
adjusted, the number of shares of common stock issuable upon exercise of the
warrant would also be adjusted accordingly. On the date that the registration
statement was declared effective by the Securities and Exchange Commission
(SEC), and every three months following the effective date, the warrant
exercise price was adjusted to an amount equal to 110% of the conversion
price of the convertible debt on such date, provided that the adjusted price
was lower than the warrant exercise price on that date. In accordance with
the terms of the warrants, the exercise price was adjusted to $0.65 per share
on January 17, 2002. On April 17, 2002, the price was adjusted to $0.24, on
July 17, the price was adjusted to $0.19, and on October 17, 2002 the price
was adjusted to $0.153. There have been no further adjustments in accordance
with the terms of the warrants since the adjusted price would have been
higher. As of September 30, 2002, $1,460,000 of the notes had been converted
into 5,611,344 shares of common stock. As of November 30, 2002, all
convertible debt had been converted into a total of 6,592,461 shares of the
Company's common stock. In addition, 104,500 warrants were exercised during
the year ended September 30, 2002, for proceeds of $22,713. During the year
ended September 30, 2003, 435,500 warrants were exercised for proceeds of
$66,632. As of September 30, 2003, 420,000 warrants remained outstanding.
Warrants were also issued in connection with the issuance of the convertible
debt in July and September 2002. The Series G warrants allowed the holders to
purchase up to 900,000 shares of the Company's common stock at a price equal
to $0.25 per share at any time prior to July 12, 2009. If the Company sells
any additional shares of common stock, or any securities convertible into
common stock at a price below the then applicable warrant exercise price, the
warrant exercise price will be lowered to the price at which the shares were
sold or the lowest price at which the securities were convertible, as the
case may be. The warrant exercise price is adjusted every three months to an
amount equal to 110% of the conversion price on such date, provided that the
adjusted price is lower than the warrant exercise price on that date. If the
warrant exercise price is adjusted, the number of shares of common stock
issuable upon the exercise of the warrant would be increased by the product
of the number of shares of common stock issuable upon the exercise of the
warrant immediately prior to the sale multiplied by the percentage by which
the warrant exercise price was reduced. In accordance with the terms of the
warrants, the exercise price was adjusted to $0.18 on December 9, 2002. The
exercise price was adjusted to $0.145 on March 9, 2003. In accordance with
the terms of the warrants, there were no further adjustments since the price
would have been higher. As of September 30, 2002, $50,000 of the notes had
been converted into 277,778 shares of common stock. During the year ended
September 30, 2003, all of the remaining convertible debt were converted into
8,076,420 shares of common stock for a total conversion of 8,354,198 shares
of common stock for Series G convertible debt. In addition, interest totaling
$21,472 was converted into 109,428 shares of common stock during the year
ended September 30, 2003. During the year ended September 30, 2003, 450,000
warrants were exercised for proceeds of $65,250. As of September 30, 2003,
450,000 warrants remain outstanding.
Warrants were also issued in connection with the issuance of the convertible
debt in January and July 2003. The Series H warrants allowed the holders to
purchase up to 1,100,000 shares of the Company's common stock at a price
equal to $0.25 per share at any time prior to January 7, 2010. If the Company
sells any additional shares of common stock, or any securities convertible
into common stock at a price below the then applicable exercise price of the
Series H warrants, the exercise price of the Series H warrants will be
lowered to the price at which the shares were sold or the lowest price at
which the securities are convertible. If the exercise price of the Series H
warrants is adjusted, the number of shares of common stock issuable upon the
exercise of the Series H warrants will be increased by the product of the
number of shares of common stock issuable upon the exercise of the warrant
immediately prior to the sale multiplied by the percentage by which the
warrant exercise price is reduced. However, neither the exercise price nor
the shares issuable upon the exercise of the Series H warrants will be
adjusted as the result of shares issued in connection with a permitted
financing. Every three months after June 26, 2003, the exercise price of the
Series H warrants will be adjusted to an amount equal to 110% of the
conversion price on such date, provided that the adjusted price is lower than
the warrant exercise price on that date. During the year ended September 30,
2003, $1,250,000 of the total Series H convertible debt were converted into
3,003,929 shares of common stock. Additionally, interest of $26,230 was
converted into 80,010 shares of common stock. As of October 2, 2003, all of
the Series H notes had been converted into a total of 3,183,358 shares of
common stock and total interest of $32,914 had been converted into 83,227
shares of common stock. During the year ended September 30, 2003, 550,000
warrants were exercised at $0.25 for proceeds of $137,500. As of September
30, 2003, 550,000 warrants remain outstanding.
Warrants were issued in connection with obtaining an equity line of credit in
September 2003, discussed in Note 13. There were 395,726 warrants issued at
an exercise price of $0.83, which expire in September 2008. The fair value of
these warrants of $244,867 was determined using the Black-Scholes pricing
methodology with the following assumptions:
Expected stock risk volatility 98%
Risk-free interest rate 3.12%
Expected life of warrant 5 Years
Expected dividend yield -0-
The fair value of the warrants has been recorded as an addition to additional
paid-in capital and also a charge to additional paid-in capital since the
Company is in an accumulated deficit position.
In addition, 30,000 options were issued to a consultant in May 2003 at a
price of $0.41. The options vest over a three year period and expire in May
2013. The compensation expense for these options was determined using the
Black Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 84%
Risk-free interest rate 2.0%
Expected life of warrant 3 Years
Expected dividend yield -0-
The fair value of the options was recorded as general and administrative
expense. Compensation expense of $6,727 was recorded for the year ended
September 30, 2003.
In connection with an agreement with a private investor in May 2003, which is
discussed in Note 14, 1,100,000 warrants were issued with an exercise price
of $0.47. The warrants initially expired May 30, 2006. In accordance with the
terms of the agreement, the expiration was extended to May 30, 2008 on
September 30, 2003. The fair value of these warrants of $710,919 was
determined using the Black-Scholes pricing methodology with the following
assumptions:
Expected stock risk volatility 93%
Risk-free interest rate 2.00%
Expected life of options 5 Years
Expected dividend yield -0-
The fair value of the warrants has been recorded as an addition to additional
paid-in capital and also as a charge to additional paid-in capital since the
Company is in an accumulated deficit position.
Stock Bonus Plan--At September 30, 2003, the Company had been authorized to
issue up to 1,940,000 shares of common stock under the Stock Bonus Plan. All
employees, directors, officers, consultants, and advisors are eligible to be
granted shares. During the year ended September 30, 2002, 327,530 shares with
related expenses of $186,594 were issued under the Plan and recorded in the
consolidated statement of operations. During the year ended September 30,
2003, 134,336 shares with related expenses of $47,051 were issued under the
Plan and recorded in the consolidated statement of operations.
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, 2003,
2002, and 2001, in connection with this Plan was $48,437, $71,823, and
$93,705, respectively.
8. OPTIONAL SALARY ADJUSTMENT PLAN
In July 2001, the Company issued an "Optional Salary Adjustment Plan" (the
"Plan"). The terms of the Plan allow certain employees the option to forgo
salary increments of $6,000 in exchange for stock options for the period
beginning from July 16, 2001, through October 15, 2001. In accordance with
the Plan, employees will receive 40,000 stock options for each salary
increment of $6,000. The total amount of options to be granted under the Plan
is limited to 1,200,000. For the year ended September 30, 2001, 900,000
options were issued in lieu of compensation in the amount of $135,000.
Additionally, 180,000 options were issued in lieu of compensation of $27,000
related to the year ended September 30, 2002. No compensation expense was
recorded for the options since such options were issued with exercise prices
equal to the fair market value of the Company's common stock on the date of
grant. During the year ended September 30, 2003, there were no options issued
in lieu of compensation.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases-The future minimum annual rental payments due under
noncancelable operating leases for office and laboratory space are as
follows:
Year Ending September 30, 2004 $93,910
=======
Rent expense for the years ended September 30, 2003, 2002, and 2001, was
$276,564, $229,428 and $220,903, respectively. Minimum payments have not been
reduced by minimum sublease rental receivable under future noncancelable
subleases totaling $7,500.
Employment Contracts--In March 2002 the Company entered into a three-year
employment agreement with its President and Director which expires March 31,
2005. The employment agreement provides that Company will pay him an annual
salary of $363,000 during the term of the agreement. In the event that there
is a material reduction in his authority, duties or activities, or in the
event there is a change in the control of the Company, then the agreement
allows him to resign from his position at the Company and receive a lump-sum
payment from 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.
Effective September 1, 2003, the Company entered into a three-year employment
agreement with its Chief Executive and Financial Officer. The employment
agreement provides that during the term of the employment agreement the
Company will pay him an annual salary of $370,585. In the event there is a
change in the control of the Company, the agreement allows him to resign from
his position at the Company and receive a lump-sum payment from the Company
equal to 24 months salary. For purposes of the employment agreement a change
in the control of the Company means: (1) the merger of the Company with
another entity if after such merger the shareholders of the Company do not
own at least 50% of voting capital stock of the surviving corporation; (2)
the sale of substantially all of the assets of the Company; (3) the
acquisition by any person of more than 50% of the Company's common stock; or
(4) a change in a majority of the Company's directors which has not been
approved by the incumbent directors.
10.CAMBREX NOTE PAYABLE
On November 15, 2001, the Company signed an agreement with Cambrex Bio
Science, Inc., (Cambrex) in which Cambrex provided manufacturing space and
support to the Company during November and December 2001 and January 2002. In
exchange, the Company signed a note with Cambrex to pay a total of
$1,172,517, to Cambrex. In December 2001, the note was amended to extend the
due date to January 2, 2003. Unpaid principal began accruing interest on
November 16, 2002, at the Prime Rate plus 3%. The note is collateralized by
certain equipment. The imputed interest on this note has been capitalized and
is being expensed over the life of the loan. As shown in the consolidated
balance sheet, this liability is recorded at September 30, 2002, along with
an unamortized discount of $37,500 representing imputed interest. Interest
expense of $262,500 has been recorded on the note for the year ended
September 30, 2002. In December 2002, the Company negotiated an extension of
the note with Cambrex. Per the agreement, the Company gave Cambrex certain
equipment and surrendered a security deposit, which reduced the amount owed
by $225,000. The remaining balance is payable pursuant to a note due January
2, 2004. In addition, the agreement required the Company to pay $150,000 on
the note from the Series H convertible debt and 10% of all other future
financing transactions, including draws on the equity line-of-credit. During
the year ended September 30, 2003, the Company paid down the note by
$485,524. The Company also recorded interest expense of $49,486 and amortized
the remaining discount of $37,500 from the year ended September 30, 2002.
There are also conversion features allowing Cambrex to convert either all or
part of the note into shares of the Company's common stock. The principal
balance of the note and any accrued interest are convertible into common
stock at 90% of the average of the closing prices of the common stock for the
three trading days immediately prior to the conversion date subject to a
floor of $0.22 per share. A beneficial conversion cost of $106,716 was
recorded during the year for the difference between the conversion price of
the stock and the market price of the stock. Of this amount, $75,800 was
amortized during the year ended September 30, 2003, leaving $30,916 as a
discount to the note recorded in the balance sheet at September 30, 2003. As
of September 30, 2003, there is $686,992 in principal remaining unpaid.
11. COVANCE NOTE PAYABLE
On October 8, 2002, the Company signed an agreement with Covance AG
(Covance), a Swiss Corporation. Pursuant to the agreement, amounts owed to
Covance totaling $199,928 as of June 30, 2003 were converted to note payable.
The note is payable on January 2, 2004. Interest will be payable at an annual
rate of 8%. Until the entire amount has been paid to Covance, Covance is
entitled to receive 2% of any draw-down of the Company's equity credit line,
2% of any net funds received from outside financings of less than $1 million,
3% of any net funds received from outside financings greater than $1 million
but less than $2 million and 4% of any net funds received from outside
financings greater than $2 million. During the year ended September 30, 2003,
the Company paid $15,598 on the note payable to Covance in accordance with
the agreement.
12. CONVERTIBLE DEBT
In December 2001, the Company agreed to sell redeemable convertible debt and
Series F warrants, to a group of private investors for proceeds of
$1,600,000, less transaction costs of $276,410 of which $15,116 was included
in deferred financing costs in the accompanying balance sheet as of September
30, 2002. The notes bore interest at 7% per year and would have been due and
payable December 31, 2003. Interest was payable quarterly beginning July 1,
2002. The notes were secured by substantially all of the Company's assets and
contain certain restrictions, including limitations on such items as
indebtedness, sales of common stock and payment of dividends.
The notes were convertible into shares of the Company's common stock at the
holder's option determinable by dividing each $1,000 of note principal by 76%
of the average of the three lowest daily trading prices of the Company's
common stock on the American Stock Exchange during the twenty trading days
immediately prior to the closing date. The conversion price may not be less
than a floor of $0.57; however the floor could have been lowered if the
Company sold any shares of common stock or securities convertible to common
stock at a price below the market price of the Company's common stock.
Additionally, the notes were required to be redeemed by the Company at 130%
upon certain occurrences; such as failure to file a Registration Statement to
register the notes with the Securities and Exchange Commission (SEC) or the
effectiveness of such statement lapses, delisting of the Company's common
stock, completion of certain mergers or business combinations, filing
bankruptcy, and exceeding its drawdown limits under the Company's equity line
of credit.
So long as the notes remained outstanding, the note-holders had a first right
of refusal to participate in any subsequent financings involving the Company.
If the Company had entered into any subsequent financing on terms more
favorable than the terms governing the notes and warrants, then the
note-holders could have exchanged notes and warrants for the securities sold
in the subsequent financing.
The entire balance of the convertible debt was initially offset by a discount
of $1,600,000 which represented the relative fair value of the Series F
warrants of $763,000 and a beneficial conversion discount of $837,000. The
discount on outstanding convertible debt was amortized to interest expense as
the notes were converted. As of September 30, 2002, $1,460,000 of the notes
had been converted into 5,611,344 shares of common stock. In addition,
$1,512,500 of the discount had been amortized to interest expense as of
September 30, 2002. As of November 30, 2002, all convertible debt had been
converted into a total of 6,592,461 shares of the Company's common stock and
all of the discount had been amortized to interest expense. All deferred
financing costs had also been amortized to interest expense as of November
30, 2002.
In July and September 2002, the Company sold convertible debt, plus Series G
warrants, to a group of private investors for $1,300,000 less transaction
costs of $177,370, of which $161,879 was included in deferred financing costs
in the accompanying balance sheet as of September 30, 2002. The notes bore
interest at 7% per year and were due and payable September 9, 2004. Interest
was payable quarterly beginning October 1, 2002. The notes were secured by
substantially all of the Company's assets and contained certain restrictions,
including limitations on such items as indebtedness, sales of common stock
and payment of dividends. At the holder's option the notes were convertible
into shares of the Company's common stock equal in number to the amount
determined by dividing each $1,000 of note principal to be converted by the
Conversion Price. The Conversion Price is 76% of the average of the three
lowest daily trading prices of the Company's common stock on the American
Stock Exchange during the 15 trading days immediately prior to the conversion
date. The Conversion Price could not be less than $0.18. However, if the
Company's common stock traded for less than $0.24 per share for a period of
20 consecutive trading days, the $0.18 minimum price would no longer have
been applicable. The Conversion Price would have declined from 76% to 60% if
(i) on any trading day after September 9, 2002 the closing daily price of the
Company's common stock multiplied by the total number of shares of common
stock traded on that day is less than $29,977, (ii) the Company defaulted in
the performance of any material covenant, condition or agreement with the
holders of the notes or, (iii) the Company's common stock was delisted from
the American Stock Exchange.
If the Company sold any additional shares of common stock, or any securities
convertible into common stock at a price below the then applicable Conversion
Price, the Conversion Price would have been lowered to the price at which the
shares were sold or the lowest price at which the securities were
convertible, as the case may be. If the Company had sold any additional
shares of common stock, or any securities convertible into common stock at a
price below the market price of the Company's common stock, the Conversion
Price would have been lowered by a percentage equal to the price at which the
shares were sold or the lowest price at which the securities were
convertible, as the case may be, divided by the then prevailing market price
of the Company's common stock.
So long as the notes remained outstanding, the note holders had a first right
of refusal to participate in any subsequent financings involving the Company.
If the Company had entered into any subsequent financing on terms more
favorable than the terms governing the notes and warrants, then the note
holders could have exchanged notes and warrants for the securities sold in
the subsequent financing. A portion of the proceeds was initially offset by a
discount of $690,706, which represents the relative fair value of the Series
G warrants of $83,340 and a beneficial conversion discount of $677,140. As of
September 30, 2002, $50,000 of the notes had been converted into 277,778
shares of common stock. In addition, $27,496 of the discount on the debt had
been amortized to interest expense. During the year ended September 30, 2003,
the balance of the notes were converted into an additional 8,076,420 shares
of common stock. In addition, interest totaling $21,472 was converted into
109,428 shares of common stock during the year ended September 30, 2003. All
of the remaining discount and deferred financing costs were amortized to
interest expense during the year ended September 30, 2003.
In January and July 2003, the Company sold convertible debt, plus Series H
warrants to purchase up to 1,100,000 shares of common stock, to a group of
private investors for $1,350,000 less transaction costs of approximately
$220,419, of which $16,243 is included in deferred financing costs in the
accompanying balance sheet as of September 30, 2003. The first funds,
totaling $600,000, were received in January 2003 and the balance of $750,000
was received on July 2, 2003. The notes bear interest at 7% per year. The
first notes will be due and payable January 7, 2005 and the second notes will
be due and payable July 7, 2005. Interest is payable quarterly. The notes are
secured by substantially all of the Company's assets and contain certain
restrictions, including limitations on such items as indebtedness, sales of
common stock and payment of dividends. At the holders' option the notes are
convertible into shares of the Company's common stock equal in number to the
amount determined by dividing each $1,000 of note principal to be converted
by the conversion price. The conversion price defaults to 60% of the average
of the three lowest daily trading prices of the Company's common stock on the
American Stock Exchange during the 15 trading days immediately prior to the
conversion date in the event of default. On May 8, 2003, the Company signed
an amendment to the agreement that prevented the conversion price from
defaulting to 60%. In the agreement, the conversion price declines to 70% of
the average of the three lowest daily trading prices of the Company's common
stock if the price of the stock climbs over $0.50. If the Company sells any
additional shares of common stock, or any securities convertible into common
stock at a price below the then applicable conversion price, the conversion
price will be lowered to the price at which the shares were sold or the
lowest price at which the securities are convertible. On May 30, 2003, the
price of the Company's stock rose above $0.50. In accordance with the
agreement, the discount percentage changed from 76% to 70%. This change
increased the discount on the debt that the Company recorded for the Series H
convertible debt by $67,669 and is included in the $1,054,647 total discount.
During the year ended September 30, 2003, $1,250,000 of the notes had been
converted into 3,003,929 shares of common stock. Additionally, $1,023,731 of
the total discount of $1,054,647 had been amortized to interest expense.
Interest of $26,230 was converted into 80,010 shares of common stock during
the year ended September 30, 2003. As of October 2, 2003, all of the Series H
notes had been converted into a total of 3,183,358 shares of common stock and
total interest of $32,914 had been converted into 83,227 shares of common
stock.
13. STOCKHOLDERS' EQUITY
During December 1997, the Company issued 10,000 shares of Series D Preferred
Stock for $10,000,000. The issuance included 550,000 Series A Warrants and
550,000 Series B Warrants. The number of common shares issuable upon
conversion of the Preferred Shares is determinable by dividing $1,000 by
$8.28 prior to September 19, 1998, or at any time at which the Company's
common stock is $3.45 or less for five consecutive days. On or after
September 19, 1998, the number of common shares to be issued upon conversion
is determined by dividing $1,000 by the lesser of (1) $8.28 or (2) the
average price of the stock for any two trading days during the ten trading
days preceding the conversion date. The Series A Warrants are exercisable at
any time for $8.62 prior to December 22, 2001, and the Series B Warrants are
exercisable at any time for $9.31 prior to December 22, 2001. Each warrant
entitles the holder to purchase one share of common stock. At September 30,
1998, 998 shares of Series D Preferred Stock had been converted into 441,333
shares of common stock. At September 30, 1999, 9,002 shares of Series D
Preferred Stock had been converted into 4,760,127 shares of common stock.
There are no remaining shares of Series D Preferred Stock. All Series A and
Series B Warrants issued expired December 22, 2001. In connection with the
Company's December 1997 $10,000,000 Series D Preferred Stock offering, the
Series A and Series B warrants were assigned a relative fair value of
$1,980,000 in accordance with APB No. 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants, (APB 14) and were recorded as
additional paid-in capital. The $1,980,000 allocated to the warrants was
accreted immediately.
In April 2001, the Company signed a common stock purchase agreement that
allowed the Company at its discretion to draw up to $10 million of Common
stock in increments of a minimum of $100,000 and the maximum of $2 million
for general operating requirements. The Company was restricted from entering
into any other equity line of credit arrangement and the agreement expired in
June 2003. As discussed in Note 6, the Company issued 200,800 warrants to the
issuer pursuant to this agreement. During the year ended September 30, 2002,
the Company sold 2,553,174 shares of its common stock pursuant to this
agreement for net proceeds of $1,366,797. During the year ended September 30,
2003, the Company sold 2,877,786 shares of its common stock pursuant to this
agreement for net proceeds of $725,000.
During fiscal year 2001, the Company issued 522,108 shares of common stock in
two private offerings of common stock. Pursuant to the private offerings, one
of the investors also received warrants to purchase 272,108 shares of common
stock as discussed in Note 6.
During August 2001, three private investors exchanged shares of the Company's
common stock and remaining Series D Warrants, which they owned, for 6,288
shares of the Company's Series E Preferred Stock. These investors also
exchanged their Series A and Series C Warrants for new Series E Warrants as
discussed in Note 6. The Preferred shares are entitled to receive cumulative
annual dividends in an amount equal to $60 per share and have liquidation
preferences equal to $1,000 per share. Each Series E Preferred share is
convertible into shares of the Company's common stock on the basis of one
Series E Preferred share for shares of common stock equal in number to the
amount determined by dividing $1,000 by the lesser of $5 or 93% of the
average closing bid prices (Conversion Price) of the Company's common stock
for the five days prior to the date of each conversion notice. The Series E
Preferred stock has no voting rights and is redeemable at the Company's
option at a price of 120% plus accrued dividends until August 2003 when the
redemption price will be fixed at 100%. During the year ended September 30,
2002, the Company incurred $202,987 in dividends. Dividends paid in common
stock totaled $133,103, interest expense on unpaid dividends was $9,404 and
accrued dividends and interest payable was $78,436 at September 30, 2002. For
the year ended September 30, 2003, the Company incurred $32,101 in
dividends,. During the year ended September 30, 2003, $99,624 in accrued
dividends and interest were converted into 97,389 shares of common stock.
There were no dividends and interest payable on the Preferred stock at
September 30, 2003.
All outstanding shares of the Company's Series E Preferred Stock, 39 shares,
were automatically converted on August 17, 2003, (the Automatic Conversion
Date) into 47,531 common shares (the Automatic Conversion Shares). The number
of common shares for the conversion is 200% times the quotient obtained by
dividing $1,000 by the Conversion Price.
In addition, the Company issued 23,758 common stock purchase warrants which
was one warrant for each share of the Series E Preferred stock outstanding as
of August 17, 2003 to acquire shares equal to 33% of the Automatic Conversion
Shares at an exercise price of 110% of the volume weighted average price for
the five trading days preceding the date of issuance. Since the terms of
these warrants were contingent, no accounting has been given to such warrants
in the accompanying consolidated financial statements as of September 30,
2002. As of September 30, 2003, the warrants were valued using Black Scholes
methodology as discussed in Note 6 and the resulting costs of $10,912 were
recorded as a deemed dividend as a debit and an offsetting credit to
additional paid-in capital as the Company is in a deficit position. See Note
6 for further discussion of the warrants issued at the time the Preferred
stock converted to common stock.
The common stock, preferred stock and warrants exchanged had different
rights, preferences and terms. However, since the equity securities were
exchanged for equity securities, the exchange had no effect on the Company's
total stockholders' equity. In connection with the exchange, the total
implied value of the equity securities received was $8,957,000 of which
$848,000 represented the relative fair value of the warrants which was
recorded to additional paid-in capital and the remaining value of $8,109,000
was allocated to preferred stock. The Series E Warrants were valued using the
Black-Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 105%
Risk-free interest rate 3.12%
Expected life of option 3 Years
Expected dividend yield -0-
Pursuant to the exchange, the holders received a beneficial conversion
discount in the amount of $5,365,381, which was accreted to additional
paid-in capital over a two-year period. During the years ended September 30,
2003, September 30, 2002 and September 30, 2001, $76,720, $1,444,757 and
$317,419, respectively, of the beneficial conversion discount was accreted.
During the year ended September 30, 2002, 4,671 shares of the Series E
Preferred Stock were converted into 4,282,150 shares of common stock. During
the year ended September 30, 2003, 1,192 shares of the Series E Preferred
stock were converted into 1,018,439 shares of common stock. As of September
30, 2003, there are no shares of Series E Preferred stock remaining.
In October 2001, the Company issued 150,000 shares of common stock in a
private offering for proceeds of $150,000. The investor also received
warrants which entitled the holder to purchase 75,000 shares of common stock
at $1.50 per share, expiring October 2004.
In May 2003, the Company sold 1,100,000 shares of common stock and an
additional 1,100,000 warrants to purchase common stock in conjunction with a
marketing agreement as discussed in Note 6. The Company received proceeds of
$500,000 for the stock and warrants. The warrants are exercisable at a price
of $0.47 per The warrants initially expired May 30, 2006. In accordance with
the terms of the agreement, the expiration was extended to May 30, 2008
In September 2003, the Company signed a common stock purchase agreement that
allowed the Company at its discretion to draw up to $10 million of common
stock in increments of a minimum of $100,000 and a maximum amount that can be
drawn down at any one time that will be determined at the time of the
drawdown request, using a formula contained in the agreement. The Company is
restricted from entering into any other equity line of credit arrangement
until the earlier of the expiration of the agreement or two years from the
date of registration. As discussed in Note 6, the Company issued 395,726
warrants to the issuer at a price of $0.83 and the warrants expire September
16, 2008 pursuant to the agreement. There were no drawdowns on this line of
credit as of September 30, 2003 as the registration statement for the shares
is not yet effective. Expenses of $40,600 were recorded to additional paid-in
capital as a cost of equity related - transaction during the year ended
September 30, 2003.
14. MARKETING AGREEMENT
On May 30, 2003, the Company and Eastern Biotech signed an agreement to
develop both Multikine and CEL-1000, and their derivatives and improvements,
in three Eastern European countries: Greece, Serbia and Croatia. Eastern
Biotech also has the exclusive right to sales in these three countries. As
part of the agreement, Eastern Biotech gained the right to receive a 1%
royalty on the future net sales of these two products and their derivatives
and improvements worldwide. Eastern Biotech also purchased 1,100,000 shares
of common stock and warrants, which allow the holder to purchase up to
1,100,000 shares of the Company's common stock at a price equal to $0.47. The
Company received proceeds of $500,000 for these shares and warrants. Because
the Company did not register these shares prior to September 30, 2003, the
royalty percentage increased to 2%. If Eastern Biotech does not meet certain
clinical development milestones within one year, it will lose the right to
sell both products in these three countries.
15. NET LOSS PER COMMON SHARE
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net income or loss attributable to common stockholders by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (convertible preferred stock, warrants to purchase common stock
and common stock options using the treasury stock method) were exercised or
converted into common stock. The Company had 4,906,527, 11,118,168 and
6,876,972 potentially dilutive securities outstanding at September 30, 2003,
2002 and 2001, respectively, that were not included in the computation of
diluted loss per share because to do so would have been antidilutive for all
periods presented. The loss attributable to common stockholders includes the
impact of the accretion of the beneficial conversion feature of Series E
Preferred Stock and the accrual of cumulative preferred stock dividends.
2003 2002 2001
Net loss per common share (basic and $(0.13) $(0.35) $(0.51)
======= ======= =======
16. SEGMENT REPORTING
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision maker, or decision-making group, in making decisions how
to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS No. 131, is the Chief Executive Officer. To
date, the Company has viewed its operations as principally one segment, the
research and development of certain drugs and vaccines. As a result, the
financial information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
17. SUBSEQUENT EVENT
On December 1, 2003, CEL-SCI sold 2,994,964 shares of its common stock, to a
group of private institutional investors for approximately $2,550,000, or
$0.85 per share. As part of this transaction, the investors in the private
offering received Series J warrants which allow the investors to purchase
899,988 shares of CEL-SCI's common stock at a price of $1.32 per share at any
time prior to December 1, 2006.
******
SIGNATURES
In accordance with Section 13 or 15(a) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized on the 3rd day of March 2004.
CEL-SCI CORPORATION
By: /s/ Maximilian de Clara
-------------------------
Maximilian de Clara, President
By: /s/ Geert R. Kersten
-------------------------
Geert R. Kersten, Chief Executive
and Principal Financial Officer
Pursuant to the requirements of the Securities Act of l934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Maximilian de Clara Director March 3, 2004
------------------------
Maximilian de Clara
/s/ Geert R. Kersten Director March 3, 2004
------------------------
Geert R. Kersten
Director
--------------------------
Alexander G. Esterhazy
/s/ C. Richard Kinsolving Director March 3, 2004
---------------------------
C. Richard Kinsolving
/s/ Peter R. Young Director March 3, 2004
---------------------------
Dr. Peter R. Young
CEL-SCI CORPORATION
FORM 10-K/A
EXHIBITS