As filed with the Securities and Exchange Commission on November __, 2003.
Registration No 333-109070
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1/A
AMENDMENT NO. 1
Registration Statement
Under
THE SECURITIES ACT OF 1933
CEL-SCI Corporation
--------------------- ---------------------
(Exact name of registrant as specified in charter)
Colorado
------------ ----------
(State or other jurisdiction of incorporation)
8229 Boone Blvd. #802
Vienna, Virginia 22182
84-09l6344 (703) 506-9460
(IRS Employer I.D. (Address, including zip code, and
Number) telephone number including area of
principal executive offices)
Geert Kersten
8229 Boone Blvd. #802
Vienna, Virginia 22182
(703) 506-9460
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications, including all communications sent to
the agent for service, should be sent to:
William T. Hart, Esq.
Hart & Trinen
1624 Washington Street
Denver, Colorado 80203
(303) 839-0061
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date
of this Registration Statement
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
1
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
Class of Maximum Maximum
Securities Securities Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Share (3) Price Fee
---------- ---------- --------- --------- ------------
Common stock (1) 14,000,000 $0.81 $11,340,000 $1,044
--------------------------------------------------------------------------------
Common stock (2) 395,726 $0.81 $320,538 30
--------------------------------------------------------------------------------
Total $11,660,538 $1,074
--------------------------------------------------------------------------------
(1) Represents shares issuable to Rubicon Group Ltd. under the equity line of
credit.
(2) Represents shares issuable upon the exercise of warrants held by Rubicon
Group Ltd.
(3) Offering price computed in accordance with Rule 457(c).
Pursuant to Rule 416, this Registration Statement includes such
indeterminate number of additional securities as may be required for issuance
upon the exercise of the warrants as a result of any adjustment in the number of
securities issuable by reason of stock splits or similar capital
reorganizations.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of l933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
CEL-SCI CORPORATION
Common Stock
This prospectus may be used only in connection with sales of up to
14,395,726 shares of the common stock of CEL-SCI Corporation by Rubicon Group
Ltd. Rubicon Group will sell shares of common stock purchased from CEL-SCI under
an equity line of credit agreement and up to 395,726 shares of common stock
which may be issued upon the exercise of warrants. The warrants were issued to
Rubicon Group upon the signing of the equity line of credit agreement. CEL-SCI
will pay for the expenses of this offering. Rubicon Group Ltd. is an
"underwriter" as that term is defined in the Securities Act of 1933.
CEL-SCI's common stock is quoted on the American Stock Exchange under the
symbol "CVM." On _____, 2003 the closing price for one share of the CEL-SCI's
common stock was $____.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
These securities are speculative and involve a high degree of risk. For a
description of certain important factors that should be considered by
prospective investors, see "Risk Factors" beginning on page 7 of this Prospectus
The date of this prospectus is _________, 2003
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PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS.
CEL-SCI
CEL-SCI Corporation was formed as a Colorado corporation in 1983. CEL-SCI
is involved in the research and development of certain drugs and vaccines.
CEL-SCI manufactures MULTIKINE(R), its first, and main product, using CEL-SCI's
proprietary cell culture technologies. CEL-SCI is testing MULTIKINE to determine
if it is effective in creating an anti-cancer immune response in head and neck
cancer patients, and in HIV-infected women with Human Papilloma Virus induced
cervical dysplasia, the precursor stage before the development of cervical
cancer.
LEAPS, another technology of CEL-SCI, is being tested by CEL-SCI to
determine if it is effective in developing potential treatments and/or vaccines
against various diseases. Present target diseases are herpes simplex, malaria
and autoimmune myocarditis.
Before human testing can begin with respect to a drug or biological
product, preclinical studies are conducted in laboratory animals to evaluate the
potential efficacy and the safety of a product. Human clinical studies generally
involve a three-phase process. The initial clinical evaluation, Phase I,
consists of administering the product and testing for safe and tolerable dosage
levels. Phase II trials continue the evaluation of safety and determine the
appropriate dosage for the product, identify possible side effects and risks in
a larger group of subjects, and provide preliminary indications of efficacy.
Phase III trials consist of testing for actual clinical efficacy within an
expanded group of patients at geographically dispersed test sites.
CEL-SCI has funded the costs associated with the clinical trials relating
to CEL-SCI's technologies, research expenditures and CEL-SCI's administrative
expenses with the public and private sales of shares of CEL-SCI's common stock
and borrowings from third parties, including affiliates of CEL-SCI.
CEL-SCI does not expect to develop commercial products for several years,
if at all. CEL-SCI has had operating losses since its inception, had an
accumulated deficit of approximately $(84,660,000) at June 30, 2003 and expects
to incur substantial losses for the foreseeable future.
CEL-SCI's executive offices are located at 8229 Boone Blvd., #802, Vienna,
Virginia 22182, and its telephone number is (703) 506-9460.
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THE OFFERING
Securities Offered:
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
has 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 the twenty four-month
period following the date of this prospectus. During this twenty four-month
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 24 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%.
Using the formula contained in the equity line of credit agreement, if
CEL-SCI had requested a drawdown on October __, 2003, the maximum amount CEL-SCI
could draw down during the subsequent 22 trading days would have been $_______.
Based upon the daily volume weighted average of CEL-SCI's common stock during
these 22 trading days, CEL-SCI would have sold ______ shares of its common stock
to Rubicon Group and would have received $______ from the sale of these shares.
For more details on the maximum drawdown amount, the calculation of the purchase
price and the number of shares CEL-SCI will sell, see "Equity Line of Credit
Agreement" beginning on page __ of this prospectus.
CEL-SCI is registering the shares of common stock issuable to Rubicon
Group under the equity line of credit, as well as the 395,726 shares underlying
the warrants that CEL-SCI granted to Rubicon Group. These shares may be offered
for sale from time to time by means of this prospectus by or for the account of
Rubicon Group. CEL-SCI will prepare and file amendments and supplements to this
prospectus as may be necessary in order to keep this prospectus effective as
long as the selling shareholders hold shares of CEL-SCI's common stock or until
these shares can be sold under an appropriate exemption from registration.
CEL-SCI has agreed to bear the expenses of registering the shares, including
legal fees of $10,000 payable to Rubicon Group's attorneys, but not the expenses
associated with selling the shares, such as broker discounts and commissions.
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As of September 15, 2003, CEL-SCI had 60,753,294 shares of common stock
issued and outstanding. The number of outstanding shares does not give effect to
shares which may be issued pursuant to the equity-line of credit or upon the
exercise and/or conversion of options, warrants or convertible notes. See
"Comparative Share Data".
CEL-SCI will not receive any proceeds from the sale of the shares by
Rubicon Group. However, CEL-SCI will receive proceeds from any sale of common
stock to Rubicon Group under the equity line of credit agreement and upon the
exercise of warrants held by Rubicon Group, when, and if, it pays the exercise
price in cash. CEL-SCI expects to use substantially all the net proceeds for
general and administrative expenses, research and clinical trials.
Risk Factors: The purchase of the securities offered by this
prospectus involves a high degree of risk. Risk
factors include the lack of revenues and history of
loss, need for additional capital and need for FDA
approval. See the "Risk Factors" section of this
prospectus for additional Risk Factors.
AMEX Symbol: CVM
Summary Financial Data
Results of Operations: Nine Months Ended Years Ended September 30,
June 30, 2003 2002 2001
----------------- ---- ----
Grant Revenue and Other: $197,520 $ 384,939 $ 293,871
-------- ---------- ------------
Expenses:
Research and Development 1,408,225 4,699,909 7,762,213
Depreciation and Amortization 143,351 226,514 209,121
General and Administrative 1,726,265 1,754,332 3,432,437
Interest Income (40,707) (85,322) (376,221)
Interest Expense 1,437,996 2,131,750 --
--------- --------- ----------------
Net Loss $(4,477,610) $(8,342,244) $(10,733,679)
Accrued Dividends on Preferred
Stock (5,844) (202,987) (53,153)
Accretion of Beneficial Conversion
Feature on Preferred stock (74,577) (1,444,757) (317,419)
-------------- -------------- ----------------
Net Loss Attributable to
Common Stockholders $(4,558,031) $(9,989,988) $(11,104,251)
============ ============ =============
Net loss per common share
(basic and diluted) $ (0.10) $ (0.35) $ (0.51)
==============================================
Weighted average common shares
outstanding 47,914,264 28,746,341 21,824,273
==============================================
Balance Sheet Data:
June 30, 2003 September 30, 2002 September 30, 2001
Working Capital $ 614,490 $ 690,804 $2,807,229
Total Assets 3,008,673 3,771,258 4,508,920
Convertible Debt 105,702 * 639,288 --
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June 30, 2003 September 30, 2002 September 30, 2001
Note Payable - Covance 199,928 * -- --
Note Payable - Cambrex 637,566 * 1,135,017 * --
Total Liabilities 1,783,610 2,709,087 507,727
Stockholders' Equity 1,225,063 1,062,171 4,001,193
* Included in Total Liabilities.
Forward Looking Statements
This prospectus contains various forward-looking statements that are based
on CEL-SCI's beliefs as well as assumptions made by and information currently
available to CEL-SCI. When used in this prospectus, the words "believe",
"expect", "anticipate", "estimate" and similar expressions are intended to
identify forward-looking statements. Such statements may include statements
regarding seeking business opportunities, payment of operating expenses, and the
like, and are subject to certain risks, uncertainties and assumptions which
could cause actual results to differ materially from projections or estimates.
Factors which could cause actual results to differ materially are discussed at
length under the heading "Risk Factors". Should one or more of the enumerated
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Investors should not place undue reliance on forward-looking
statements, all of which speak only as of the date made.
RISK FACTORS
Investors should be aware that this offering involves the risks described
below, which could adversely affect the price of CEL-SCI's common stock. In
addition to the other information contained in this prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
offered by this prospectus.
RISKS RELATED TO CEL-SCI
Since CEL-SCI Has Earned Only Limited Revenues and Has a History of Losses,
CEL-SCI Will Require Additional Capital to Remain in Operation.
CEL-SCI has had only limited revenues since it was formed in 1983. Since
the date of its formation and through June 30, 2003 CEL-SCI incurred net losses
of approximately $(84,660,000). During the years ended September 30, 2000, 2001
and 2002 CEL-SCI suffered losses of $(8,478,397), $(10,733,679) and $(8,342,244)
respectively. CEL-SCI has relied principally upon the proceeds of public and
private sales of securities and convertible notes to finance its activities to
date. All of CEL-SCI's potential products are in the early stages of
development, and any commercial sale of these products will be many years away.
Accordingly, CEL-SCI expects to incur substantial losses for the foreseeable
future.
There can be no assurance CEL-SCI will be profitable. At the present time,
CEL-SCI intends to use available funds to finance CEL-SCI's operations.
Accordingly, while payment of dividends rests within the discretion of the Board
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of Directors, no common stock dividends have been declared or paid by CEL-SCI.
CEL-SCI does not presently intend to pay dividends on its common stock and there
can be no assurance that common stock dividends will ever be paid.
If Cost Estimates for Clinical Trials and Research Are Inaccurate, CEL-SCI Will
Require Additional Capital.
CEL-SCI's estimates of the costs associated with future clinical trials
and research may be substantially lower than the actual costs of these
activities. If CEL-SCI's cost estimates are incorrect, CEL-SCI will need
additional funding for its research efforts.
If Cel-Sci cannot obtain additional capital, Cel-Sci may have to delay or
postpone development and research expenditures which may influence Cel-Sci's
ability to produce a timely and competitive product.
Clinical and other studies necessary to obtain approval of a new drug can
be time consuming and costly, especially in the United States, but also in
foreign countries. The different steps necessary to obtain regulatory approval,
especially that of the Food and Drug Administration, involve significant costs
and may require several years to complete. CEL-SCI expects that it will need
additional financing over an extended period of time in order to fund the costs
of future clinical trials, related research, and general and administrative
expenses. Although CEL-SCI's equity line of credit agreement is expected to be a
source of funding, the amounts which CEL-SCI is able to draw from the equity
line during each drawdown period may not satisfy CEL-SCI's capital needs.
Any failure to obtain or any delay in obtaining required regulatory approvals
may adversely affect the ability of CEL-SCI or potential licensees to
successfully market any products they may develop.
Therapeutic agents, drugs and diagnostic products are subject to approval,
prior to general marketing, by the FDA in the United States and by comparable
agencies in most foreign countries. The process of obtaining FDA and
corresponding foreign approvals is costly and time consuming, particularly for
pharmaceutical products such as those which might ultimately be developed by
CEL-SCI, VTI or its licensees, and there can be no assurance that such approvals
will be granted. Also, the extent of adverse government regulations which might
arise from future legislative or administrative action cannot be predicted.
CEL-SCI has, at the present time, only one source of multikine and if this
source could not, for any reason, supply CEL-SCI with Multikine, CEL-SCI
estimates that it would take approximately six to ten months to obtain supplies
of Multikine under an alternative manufacturing arrangement, in which case
CEL-SCI may have to delay its research and development activities.
CEL-SCI has an agreement with an unrelated corporation for the production,
until 2006, of Multikine. CEL-SCI does not know what cost it would incur to
obtain an alternative source of supply.
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CEL-SCI may not be able to achieve or maintain a competitive position and other
technological developments may result in CEL-SCI's proprietary technologies
becoming uneconomical or obsolete.
The biomedical field in which CEL-SCI is involved is undergoing rapid and
significant technological change. The successful development of therapeutic
agents from CEL-SCI's compounds, compositions and processes through
CEL-SCI-financed research or as a result of possible licensing arrangements with
pharmaceutical or other companies, will depend on its ability to be in the
technological forefront of this field.
Many pharmaceutical and biotechnology companies are developing products
for the prevention or treatment of cancer and infectious diseases. Many of these
companies have substantial financial, research and development, and marketing
resources and are capable of providing significant long-term competition either
by establishing in-house research groups or by forming collaborative ventures
with other entities. In addition, both smaller companies and non-profit
institutions are active in research relating to cancer and infectious diseases
and are expected to become more active in the future.
CEL-SCI's Patents Might Not Protect CEL-SCI's Technology from competitors, in
which case CEL-SCI may not have any advantage over competitors in selling any
products which it may develop.
Certain aspects of CEL-SCI's technologies are covered by U.S. and foreign
patents. In addition, CEL-SCI has a number of patent applications pending. There
is no assurance that the applications still pending or which may be filed in the
future will result in the issuance of any patents. Furthermore, there is no
assurance as to the breadth and degree of protection any issued patents might
afford CEL-SCI. Disputes may arise between CEL-SCI and others as to the scope
and validity of these or other patents. Any defense of the patents could prove
costly and time consuming and there can be no assurance that CEL-SCI will be in
a position, or will deem it advisable, to carry on such a defense. Other private
and public concerns, including universities, may have filed applications for, or
may have been issued, patents and are expected to obtain additional patents and
other proprietary rights to technology potentially useful or necessary to
CEL-SCI. The scope and validity of such patents, if any, the extent to which
CEL-SCI may wish or need to acquire the rights to such patents, and the cost and
availability of such rights are presently unknown. Also, as far as CEL-SCI
relies upon unpatented proprietary technology, there is no assurance that others
may not acquire or independently develop the same or similar technology.
CEL-SCI's first MULTIKINE patent expired in 2000. Since CEL-SCI does not know if
it will ever be able to sell MULTIKINE on a commercial basis, CEL-SCI cannot
predict what effect the expiration of this patent will have on CEL-SCI.
Notwithstanding the above, CEL-SCI believes that trade secrets and later issued
patents will protect the technology associated with MULTIKINE.
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Although CEL-SCI has product liability insurance for MULTIKINE, the successful
prosecution of a product liability case against CEL-SCI could have a materially
adverse effect upon its business if the amount of any judgment exceeds CEL-SCI's
insurance coverage.
CEL-SCI is dependent for its success on the continued availability of its
executive officers and the loss of management and scientific personnel could
adversely affect CEL-SCI.
The loss of the services of any of CEL-SCI's executive officers could have
an adverse effect on CEL-SCI's business. CEL-SCI does not carry key man life
insurance on any of its officers. CEL-SCI's future success will also depend upon
its ability to attract and retain qualified scientific personnel. There can be
no assurance that CEL-SCI will be able to hire and retain such necessary
personnel.
RISKS RELATED TO THIS OFFERING
Since the Market Price for CEL-SCI's Common Stock is Volatile, Investors in This
Offering May Not Be Able to Sell Any of CEL-SCI's Shares at a Profit.
The market price of CEL-SCI's common stock, as well as the securities of
other biopharmaceutical and biotechnology companies, have historically been
highly volatile, and the market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. 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.
Shares issuable upon the exercise of options and warrants, the conversion
of promissory notes or in connection with CEL-SCI's equity line of credit may
substantially increase the number of shares available for sale in the public
market and may depress the price of CEL-SCI's common stock.
Options
CEL-SCI has issued options to its officers, directors, employees and
consultants which allow the holders to acquire additional shares of CEL-SCI's
common stock. In some cases CEL-SCI has agreed that, at its expense, it will
make appropriate filings with the Securities and Exchange Commission so that the
securities issuable upon the exercise of the options will be available for
public sale. Such filings could result in substantial expense to CEL-SCI and
could hinder future financings by CEL-SCI.
Until the options expire, the holders will have an opportunity to profit
from any increase in the market price of CEL-SCI's common stock without assuming
the risks of ownership. Holders of the options may exercise them at a time when
CEL-SCI could obtain additional capital on terms more favorable than those
10
provided by the options. The exercise of the options will dilute the voting
interest of the owners of presently outstanding shares of CEL-SCI's common stock
and may adversely affect the ability of CEL-SCI to obtain additional capital in
the future. The sale of the shares of common stock issuable upon the exercise of
the options could adversely affect the market price of CEL-SCI's stock.
Series E, F, G and I Warrants
In August 2001 three private investors exchanged their warrants for
CEL-SCI's Series E warrants. The Series E warrants collectively allow the
holders to purchase up to 815,351 shares of CEL-SCI's common stock at a price of
$1.19 per share at any time prior to August 16, 2004 and 23,758 shares of common
stock at a price of $0.77 per share at any time prior to August 17, 2006.
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 31, 2002 all of the Series F notes had been converted into
6,592,461 shares of CEL-SCI's common stock. The Series F warrants collectively
allow the holders to purchase up to 420,000 shares of CEL-SCI's common stock at
a price of $0.153 per share at any time prior to December 31, 2008.
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
20, 2003 all of the Series G notes had been converted into 8,390,746 shares of
CEL-SCI's common stock. The Series G warrants collectively allow 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.
In May 2003 CEL-SCI sold shares of its common stock plus Series I
warrants to a private investor. 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, 2006.
The exercise price of the Series F and G warrants, and the number of
shares issuable upon the exercise of the Series F and G warrants, are subject to
adjustment under those conditions explained in the section of the prospectus
entitled "Description of Securities".
The sale of common stock issued or issuable upon the exercise of the
Series E, F, G, or I warrants, or the perception that such sales could occur,
could adversely affect the market price of CEL-SCI's common stock.
Series H Convertible Notes and Series H Warrants
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. At the
holder's option the notes are convertible into shares of CEL-SCI's common stock
equal in number to the amount determined by dividing each $1,000 of note
principal to be converted by the Conversion Price. If the closing price of
CEL-SCI's common stock is less than $0.50 on any conversion date, the Conversion
Price will be 76% of the average of the three lowest daily trading prices of
CEL-SCI's common stock on the American Stock Exchange during the 15 trading days
immediately prior to the conversion date. If the closing price of CEL-SCI's
common stock is $0.50 or greater on any conversion date, the Conversion Price
11
will be 70% of the average of the three lowest daily trading prices of CEL-SCI's
common stock on the American Stock Exchange during the 15 trading days
immediately prior to the conversion date. As of September 15, 2003 Series H
notes in the principal amount of $1,050,000 had been converted into 2,637,419
shares of CEL-SCI's common stock.
The Series H warrants collectively allow 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.
The Conversion Price, the warrant exercise price, and the number of
shares issuable upon the exercise of the Series H warrants are subject to
adjustment under those conditions explained in the section of the prospectus
entitled "Description of Securities".
The sale of common stock upon the conversion of the Series H notes or the
exercise of the Series H warrants, or the perception that such sales could
occur, could adversely affect the market price of CEL-SCI's common stock.
Cambrex Bio Sciences Note
In November 2001 CEL-SCI gave a promissory note in the principal amount of
$1,172,517 to Cambrex Bio Sciences, Inc. The note represented the cost of
CEL-SCI's use of the Cambrex manufacturing facility for the three months ended
January 10, 2002 to produce MULTIKINE for CEL-SCI's clinical trials. The amount
due Cambrex bears interest at the prime interest rate, plus 3%, which is
adjusted monthly. The note is due in full, including accrued interest, on
January 2, 2004. As of September 15, 2003 CEL-SCI had made $485,525 in principal
payments on the note. Cambrex, at its option, may 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 will be determined by
dividing that portion of the note to be converted by the Conversion Price. The
"Conversion Price" is an amount equal to 90% of the average of the closing
prices of CEL-SCI's common stock for the three trading days immediately prior to
the conversion date. The Conversion Price may not be less than $0.22. As of
September 15, 2003 Cambrex had not converted any part of the note into shares of
CEL-SCI's common stock.
Equity Line of Credit
An unknown number of shares of common stock, which may be sold by means of
this prospectus, are issuable under an equity line of credit arrangement to
Rubicon Group Ltd. As CEL-SCI sells shares of its common stock to Rubicon Group
under the equity line of credit, and Rubicon Group sells the common stock to
third parties, the price of CEL-SCI's common stock may decrease due to the
additional shares in the market. If CEL-SCI decides to draw down on the equity
line of credit as the price of its common stock decreases, CEL-SCI will be
required to issue more shares of its common stock for any given dollar amount
invested by Rubicon Group, subject to the minimum selling price specified by
CEL-SCI. The more shares that are issued under the equity line of credit, the
more CEL-SCI's then outstanding shares will be diluted and the more CEL-SCI's
stock price may decrease. Any decline in the price of CEL-SCI's common stock may
12
encourage short sales, which could place further downward pressure on the price
of CEL-SCI's common stock. Short selling is a practice of selling shares which
are not owned by a seller with the expectation that the market price of the
shares will decline in value after the sale. See "Equity Line of Credit
Agreement" for more information concerning the equity line.
COMPARATIVE SHARE DATA
Number of Note
Shares Reference
Shares outstanding as of September 15, 2003 60,753,294
Shares to be sold in this Offering:
Shares issuable pursuant to the Equity
Line of Credit Agreement Unkown A
Shares issuable upon exercise of 395,726 A
warrants
The number of shares outstanding as of August 31, 2003 excludes shares
which may be issued in connection with CEL-SCI's line of credit or upon the
exercise of other options, warrants, or convertible securities previously issued
by CEL-SCI. See table below.
Other Shares Which May Be Issued:
The following table lists additional shares of CEL-SCI's common stock
which may be issued pursuant to the equity line of credit agreement and as the
result of the exercise of other outstanding options or warrants issued by
CEL-SCI:
Number of Note
Shares Reference
Shares issuable upon conversion of 556,000 B
Series H notes
Shares issuable upon exercise of 550,000 B
Series H warrants
Shares issuable upon exercise of Series E, F, 2,809,109 C
G and I warrants
Shares issuable upon exercise of equity line warrants 200,800 D
Shares issuable upon conversion of Cambrex note 946,000 E
13
Shares issuable upon exercise of options and 10,698,640 F
warrants granted to CEL-SCI's officers,
directors, employees, consultants, and third parties
Shares issuable upon exercise of options 200,000 G
granted to investor relations consultants
A. 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. See the section of this prospectus captioned
"Equity Line of Credit Agreement" for more information regarding the equity
line.
B. 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. At the
holder's option the notes are convertible into shares of CEL-SCI's common stock
equal in number to the amount determined by dividing each $1,000 of note
principal to be converted by the Conversion Price. If the closing price of
CEL-SCI's common stock is less than $0.50 on any conversion date, the Conversion
Price will be 76% of the average of the three lowest daily trading prices of
CEL-SCI's common stock on the American Stock Exchange during the 15 trading days
immediately prior to the conversion date. If the closing price of CEL-SCI's
common stock is $0.50 or greater on any conversion date, the Conversion Price
will be 70% of the average of the three lowest daily trading prices of CEL-SCI's
common stock on the American Stock Exchange during the 15 trading days
immediately prior to the conversion date. The Conversion Price may not be less
than $0.16. However, if CEL-SCI's common stock trades for less than $0.21 per
share for a period of 20 consecutive trading days, the $0.16 minimum price will
no longer be applicable.
The Series H warrants allow the holders to initially 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.
The Conversion Price, the warrant exercise price, and the number of shares
issuable upon the exercise of the warrants are subject to adjustment under those
conditions explained in the section of the prospectus entitled "Description of
Securities".
As of September 15, 2003 Series H notes in the principal amount of
$1,050,000 had been converted into 2,637,419 shares of CEL-SCI's common stock.
The actual number of additional shares issuable upon the conversion of the
Series H notes will vary depending upon a number of factors, including the price
of CEL-SCI's common stock at certain dates. Accordingly, the number of shares
which may be issued upon the conversion of the Series H notes cannot be
determined at this time. However, based upon the market price of CEL-SCI's
common stock on September 15, 2003, CEL-SCI would be required to issue
approximately 556,000 shares of common stock if all outstanding notes were
converted on September 15, 2003.
C. The Series E warrants collectively allow the holders to purchase up to
815,351 additional shares of CEL-SCI's common stock at a price of $1.19 per
14
share at any time prior to August 16, 2004 and 23,758 shares of common stock at
a price of $0.77 per share at any time prior to August 17, 2006.
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 31, 2002 all of the Series F notes had been converted into
6,592,461 shares of CEL-SCI's common stock. The Series F warrants presently
allow the holders to purchase up to 420,000 shares of CEL-SCI's common stock at
a price of $0.153 per share at any time prior to December 31, 2008.
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
20, 2003 all of the Series G notes had been converted into 8,390,746 shares of
CEL-SCI's common stock. The Series G warrants allow 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.
In May 2003 CEL-SCI sold shares of its common stock plus Series I warrants
to a private investor. 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.
The warrant exercise price, and the number of shares issuable upon the
exercise of the Series F and Series G warrants are subject to adjustment under
those conditions explained in the section of the prospectus entitled
"Description of Securities".
D. In 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.
E. In November 2001 CEL-SCI gave a promissory note in the principal amount of
$1,172,517 to Cambrex Bio Sciences, Inc. The note represented the cost of
CEL-SCI's use of the Cambrex manufacturing facility for the three months ended
January 10, 2002 to produce MULTIKINE for CEL-SCI's clinical trials. The amount
due Cambrex bears interest at the prime interest rate, plus 3%, which is
adjusted monthly. The note is due in full, including accrued interest, on
January 2, 2004. As of September 15, 2003 CEL-SCI had made $485,525 in principal
payments on the note. Cambrex, at its option, may 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 will be determined by
dividing that portion of the note to be converted by the Conversion Price. The
"Conversion Price" is an amount equal to 90% of the average of the closing
prices of CEL-SCI's common stock for the three trading days immediately prior to
the conversion date. The Conversion Price may not be less than $0.22. As of
September 15, 2003 Cambrex had not converted any part of the note into shares of
CEL-SCI's common stock. The actual number of additional shares issuable upon the
conversion of the Cambrex note will vary depending upon a number of factors,
including the price of CEL-SCI's common stock at certain dates. Accordingly, the
number of shares which may be issued upon the conversion of the Cambrex note
15
cannot be determined at this time. However, based upon the market price of
CEL-SCI's common stock on September 15, 2003, CEL-SCI would be required to issue
approximately 946,000 shares of common stock if all outstanding notes were
converted on September 15, 2003.
F. 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.
G. 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.
The shares referred to in Notes B, C, D and F are being, or will be,
offered for sale by means of separate registration statements which have been
filed with the Securities and Exchange Commission.
MARKET FOR CEL-SCI'S COMMON STOCK
As of September 15, 2003 there were approximately 2,500 record holders of
CEL-SCI's common stock. CEL-SCI's common stock is traded on the American Stock
Exchange. 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 $0.29 $0.19
3/31/03 $0.27 $0.15
6/30/03 $1.35 $0.20
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
16
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.
17
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
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, 2002 and the nine months ended June 30, 2003.
For the Years Ended September 30,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Grant Revenue and Other: $ 384,939 $293,871 $ 40,540 $66,687 $ 64,573
--------- -------- -------- ------- --------
Operating Expenses:
Research and Development 4,699,909 7,762,213 5,186,065 4,662,226 3,833,854
Depreciation and Amortization 226,514 209,121 220,994 268,210 295,331
General and Administrative 1,754,332 3,432,437 3,513,889 3,029,807 3,106,492
Interest Income ( 85,322) (376,221) (402,011) (402,831) (728,421)
Interest Expense 2,131,750 -- -- -- --
--------------------------------------------------------------------
Net Loss $(8,342,244) $(10,733,679) $(8,478,397) $(7,490,725) $(6,442,683)
Net loss attributable to
common stock holders $(9,989,988) $(11,104,251) $(8,478,397) $(7,490,725) $(6,442,683)
=====================================================================
Net loss per common share
(basic and diluted) $ (0.35) $ (0.51) $ (0.44) $ (0.52) $ (0.74)
=====================================================================
Weighted average common
shares outstanding 28,746,341 21,824,273 19,259,190 14,484,352 11,379,437
=====================================================================
Nine Months Ended June 30,
2003 2002
---- ----
Grant Revenue and Other: $197,520 $307,974
-------- --------
Operating Expenses:
Research and Development 1,408,225 3,993,047
Depreciation and Amortization 143,351 170,317
General and Administrative 1,726,265 1,282,948
Interest Income (40,707) (68,831)
Interest Expense 1,437,996 1,900,504
----------- ---------
Net Loss $(4,477,610) $(6,970,011)
Accrued Dividends on Preferred Stock (5,844) (177,464)
Accretion of Beneficial Conversion
Feature on Preferred Stock (74,577) (1,262,397)
------------ ------------
Net loss attributable to common stockholders $(4,558,031) $(8,409,872)
============ ============
Net loss per common share (basic and diluted) $ (0.10) $ (0.32)
============ ============
Weighted average common shares outstanding 47,914,264 26,508,757
============ ============
18
Balance Sheet Data: September 30,
----------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Working Capital $690,804 $2,801,299 $11,725,940 $6,152,715 $12,926,014
Total Assets 3,771,258 4,508,920 13,808,882 7,559,772 14,431,813
Convertible Debt (included in
total liabilities) 639,288 -- -- -- --
Total Liabilities 2,709,087 507,727 847,423 461,586 456,529
Stockholders' Equity 1,062,171 4,001,193 12,961,459 7,098,186 13,975,284
June 30, 2003
Working Capital $ 614,490
Total Assets 3,008,673
Convertible Debt 105,702 *
Note Payable - Covance 199,928 *
Note Payable - Cambrex 637,566 *
Total Liabilities 1,783,610
Stockholders' Equity 1,225,063
* 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, 2002 and the nine months ended June 30, 2003.
Net Loss
Quarter Net Loss per Share
12-31-00 $(2,543,489) $(0.12)
03-31-01 $(3,633,943) $(0.18)
06-30-01 $(2,045,155) $(0.09)
09-30-01 $(2,511,092) $(0.12)
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 $(1,770,763) $(0.03)
Results of Operations
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
19
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. 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.
Fiscal 2001
Research and development expenses in fiscal year 2001 are substantially
higher than the prior period due to costs involved in manufacturing substantial
quantities of MULTIKINE for use in future clinical trials and costs involved in
validating the manufacturing process. General and Administrative expenses
increased slightly due to compensation charges of $593,472 for options to
employees that were repriced and compensation charges of $316,500 for options
and common stock granted to persons other than employees for services rendered
to CEL-SCI during fiscal year 2001. These increases were offset by a decrease of
$288,000 for compensation charges related to the common stock bonus granted to
an officer. Interest income during the year ended September 30, 2001 reflects
interest accrued and received on investments.
Fiscal 2000
Research and development expense in fiscal year 2000 is higher than in
fiscal year 1999 because CEL-SCI is running more and larger clinical trials.
General and administrative expenses increased due to the lawsuit brought by
former directors which was settled in May of 2000. Interest income during the
year ended September 30, 2000 reflects interest received and accrued on
investments.
Three and Nine Months Ended June 30, 2003
Grant revenues and other was lower during the three and nine months ended
June 30, 2003 due to the winding down of the project for which CEL-SCI receives
grant money. 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 nine months ended
June 30, 2002 since there was a reversal 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 three and nine months ended June 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 nine months ended June 30, 2003 and 2002, interest
expense was $1,437,996 and $1,900,504, respectively. During the three months
ended June 30, 2003 and 2002 interest expense was $771,138 and $1,074,136,
respectively. Interest expense for all periods presented is primarily a non-cash
20
item incurred to account for amortization of the discounts and deferred
financing costs related to the issuance of the convertible notes and for
interest expense on the note payable to Cambrex.
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 2002, CEL-SCI reduced its discretionary expenditures. If
necessary, CEL-SCI plans to further reduce discretionary expenditures in fiscal
2003; however such reductions would further delay the development of CEL-SCI's
products.
During fiscal year 2003, CEL-SCI expects that it will spend significantly
less on research, development, and clinical trials, mainly due to the completion
of CEL-SCI's manufacturing validation program. CEL-SCI plans to use its existing
financial resources, the proceeds from the sale of its 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 this
period.
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 August 31, 2003 are as follows:
Contractual Obligations: Years Ending September 30,
----------------------------------
Total 2003 2004 2005
----- ---- ---- ----
Notes Payable
Cambrex $686,992 $ -- $ 686,992 $ --
Covance 199,928 -- 199,928 --
Convertible Debt 450,000 -- -- 450,000
Leases 76,027 18,634 57,393 --
Interest and Dividends 68,602 68,602 -- --
-------- --------- --------- --------
$1,481,549 $ 87,236 $ 944,313 $450,000
========== ========= ========= ========
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
21
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 2003. 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 with the date of this prospectus. 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%.
Covance AG
On October 8, 2002, the Company signed an agreement with Covance AG (Covance), a
Swiss Corporation. Pursuant to the agreement, amounts owed to Covance totaling
$199,928 as of June 30, 2003 were converted to a note payable. The note is
payable on January 2, 2004. Interest will be payable monthly 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 nine months ended June 30, 2003, the Company paid $39,430 to
Covance in accordance with the agreement.
22
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 2% 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.
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. The note is due in full, including accrued interest, on
January 2, 2004. 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 is paid in full, CEL-SCI has 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. As of September 15, 2003 CEL-SCI had made $485,525 in principal payments
on the note. Cambrex, at its option, may 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 will be determined by dividing that
portion of the note to be converted by the Conversion Price. The "Conversion
Price" is an amount equal to 90% of the average of the closing prices of
CEL-SCI's common stock for the three trading days immediately prior to the
conversion date. However, the Conversion Price may not be less than $0.22. As of
September 15, 2003 Cambrex had not converted any part of the note 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 November 30, 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 July
31, 2003 all of the Series G notes had been converted into 8,390,746 shares of
CEL-SCI's common stock.
23
On 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. The notes
bear interest at 7% per year, are due and payable on January 7, 2005 and are
secured by substantially all of CEL-SCI's assets. Interest is payable quarterly.
If CEL-SCI fails to make any interest payment when due, the notes will become
immediately due and payable.
See "Description of Securities" for further information regarding other
terms of the Series H notes.
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. Options to non-employees are accounted
for in accordance with FASB's Emerging Issues Task Force (EITF) Issue 96-18
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Accordingly,
compensation is recognized when goods or services are received and is measured
using the Black-Scholes valuation model. The Black-Scholes model requires
management to make assumptions regarding the fair value of the options at the
date of grant and the expected life of the options.
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
24
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.
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. 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 or debt. 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, 2002 and June 30, 2003. CEL-SCI has a note
payable with an interest rate at prime plus 3%. This represents a market risk if
the prime interest rate rises. However, based on the 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 June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 provides that intangible assets with
finite useful lives be amortized and that goodwill and intangible assets with
indefinite lives not be amortized but will rather be tested at least annually
for impairment. CEL-SCI adopted SFAS No. 142 on October 1, 2002. There was not a
material impact from the implementation of SFAS No. 142 on its consolidated
financial position, results of operations or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. There was not a material impact from
25
the adoption of SFAS No. 143 on its consolidated financial position, results of
operations, or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of", and the accounting and reporting
provisions of Accounting Principles Board Statement ("APB") 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business. CEL-SCI adopted SFAS
No. 144 on October 1, 2002. The adoption of SFAS No. 144 did not have a material
effect on its consolidated financial position, results of operations or cash
flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 requires the classification of gains and losses from
extinguishments of debt as extraordinary items only if they meet certain
criteria for such classification in APB No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". Any
gain or loss on extinguishments of debt classified as an extraordinary item in
prior periods that does not meet the criteria must be reclassified to other
income or expense. These provisions are effective for fiscal years beginning
after May 15, 2002. Additionally, SFAS No. 145 requires sale-leaseback
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. These lease provisions are effective for
transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not
have a material effect on CEL-SCI's consolidated financial position, results of
operations or cash flows.
In July 2002, the FASB issued SFAS No. 146 , "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces "Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have a material
effect on CEL-SCI's consolidated financial position, results of operations or
cash flows.
In December 2002, the FASB issued Statement No. 148 (SFAS No. 148),
"Accounting for Stock-Based Compensation - Transition and Disclosure" which
amends Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". 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
26
after December 15, 2002 and the interim disclosure provisions are effective for
interim periods beginning after December 15, 2002. CEL-SCI has adopted SFAS No.
148 and has provided the required interim disclosures in Note A to its financial
statements for the three months ended March 31, 2003 which are included as part
of this prospectus.
In April 2003, the FASB issued 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.
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 tested in over 190 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
27
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 tumor response data suggests that further studies
are warranted. CEL-SCI is currently conducting one additional Phase II head and
neck cancer study and one study with HIV-infected women with HPV-induced
cervical dysplasia.
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.
28
It has been reported by researchers in the field of cytokine research that
IL-2 can increase the number of killer T-cells produced by the body, which
improves the body's capacity to selectively destroy specific tumor cells.
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.
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 x-ray therapy but developed
recurrent tumors at multiple sites in the neck and were diagnosed with terminal
cancer. The patients had low levels of lymphocytes and evidence of immune
deficiency (generally a characteristic of this type of cancer).
Significant tumor reduction occurred in three of the four patients as a
result of the treatment with MULTIKINE. Negligible side effects 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.
Since that time, MULTIKINE has been well tolerated in clinical studies
involving approximately 190 patients. Clinical data were presented at the 5th
International Congress on Head and Neck Cancer in San Francisco in August, 2000.
The study enrolled advanced primary head and neck cancer patients who were
treated prior to surgery and/or radiation for 2 weeks. Dr. Dudkevitch from the
Department of Otolaryngology at the Rabin Medical Center, Israel, presented data
showing that, of the 12 patients treated, two patients had a complete tumor
response (100% tumor reduction) following the 2-week treatment with the
MULTIKINE regimen. He also noted that upon histopathological examination of the
tissue removed during surgery, no tumor residues were found in those patients.
Another 4 patients showed a partial (greater than 50%) tumor reduction and six
patients had tumor reductions of less than 50%. Two patients refused surgery
after treatment with MULTIKINE.
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
29
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.
Results from this ongoing Phase I clinical trial of MULTIKINE in cervical
dysplasia in HPV/HIV co-infected women indicated elimination or reduction of
dysplasia in seventy-one percent (71%) of the patients, excellent treatment
tolerance, and the confirmation of dysplasia elimination or reduction in
severity by histopathology.
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. The
Company 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.
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 an unrelated corporation for certain aspects of the
production of MULTIKINE for research and testing purposes. The agreement with
this corporation expires in 2006.
30
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.
CEL-SCI intends to use this technology to develop potential treatments
and/or vaccines against various diseases. Present target diseases are herpes
simplex, malaria, and myocarditis.
CEL-SCI is involved in the following publicly announced studies which are
designed to determine the effectiveness of the L.E.A.P.S. technology in
preclinical studies:
Cooperative Research and Development Agreement ("CRADA") with the Naval
Medical Research Institute of the U.S. Navy to jointly develop a potential
malaria vaccine using the L.E.A.P.S. technology. While at present the number of
malaria cases is not a major problem in the continental U.S., there are an
increasing number of cases involving Americans bringing the disease home from
overseas travels. Currently, there is no approved malaria vaccine anywhere in
the world.
Development of a herpes simplex virus vaccine based on the L.E.A.P.S.
technology with funding from the National Institute of Allergy and Infectious
Diseases.
Collaborative study for the treatment, and possible prevention, of
autoimmune myocarditis with researchers at the Department of Pathology, the
Johns Hopkins Medical Institutions, Baltimore, Maryland.
An outgrowth of CEL-SCI's L.E.A.P.S. technology is a new compound called
CEL-1000. CEL-1000 has shown protection in animal testing against malaria,
herpes simplex and cancer in early studies.
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
31
(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 and one grant in May 2003. The
first grant, totaling $1,100,000 and announced on April 4, 2003, was awarded by
the United States government to Northeastern Ohio Universities College of
Medicine and CEL-SCI. The grant 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 grant is for a period of three years. The
second grant, announced on April 23, 2003, is a Phase I Small Business
Innovation Research (SBIR) grant from the National Heart, Lung and Blood
Institute (NHLBI), National Institutes of Health (NIH), in the amount of
$134,000 for the further development of a potential treatment for autoimmune
myocarditis, a heart disease. The work will be done in conjunction with
scientists at Johns Hopkins Medical Institutions in Baltimore, Maryland. The
third grant was announced on May 7, 2003. This grant for $162,000 is a Phase I
SBIR grant from the National Institutes of Allergy and Infectious Diseases, NIH
for the further development of CEL-1000 against Herpes Simplex.
RESEARCH AND DEVELOPMENT
Since 1983, and through September 30, 2002, approximately $44,700,000 has
been expended on CEL-SCI-sponsored research and development, including
approximately $4,700,000, $7,762,000 and $5,186,000, respectively during the
years ended September 30, 2002, 2001 and 2000.
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 shares of CEL-SCI's common
stock, preferred stock and borrowings from third parties, including affiliates
of CEL-SCI.
CEL-SCI has a Scientific Advisory Board ("SAB") comprised of scientists
distinguished in biomedical research in the field of cytokines and related
areas. From time to time, members of the SAB advise CEL-SCI on its research
activities. Institutions with which members of the SAB are affiliated have in
the past conducted and may in the future conduct Company-sponsored research. The
SAB has in the past and may in the future, at its discretion, invite other
scientists to opine in confidence on the merits of CEL-SCI-sponsored research.
The members of CEL-SCI's SAB are:
Michael J. Mastrangelo, M.D. - Professor of Medicine, Jefferson Medical
College, Philadelphia, Pennsylvania; and Associate Clinical Director, Jefferson
Cancer Center, Philadelphia, Pennsylvania.
Alan B. Morris, Ph.D. - Professor, Department of Biological Sciences,
University of Warwick, Coventry, U.K.
32
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
33
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
34
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.
PROPERTIES
CEL-SCI leases office space at 8229 Boone Blvd., Suite 802, Vienna,
Virginia at a monthly rental of approximately $7,800. CEL-SCI believes this
arrangement is adequate for the conduct of its present business.
CEL-SCI has a 17,900 square foot laboratory which 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.
MANAGEMENT
Officers and Directors
Name Age Position
Maximilian de Clara 73 Director and President
Geert R. Kersten, Esq. 43 Director, Chief Executive Officer and Treasurer
35
Name Age Position
Patricia B. Prichep 50 Senior Vice President of Operations and
Secretary
Dr. Eyal Talor 46 Senior Vice President of Research and
Manufacturing
Dr. Daniel H. Zimmerman 60 Senior Vice President of Research, Cellular
Immunology
Alexander G. Esterhazy 57 Director
Dr. C. Richard Kinsolving 67 Director
Peter R. Young 57 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
36
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 Chief Operating Officer of Immune Therapies
37
International, Inc., which has its principal operations in Tucson, Arizona.
Immune Therapies International treats patients requiring immune system therapy
to fight serious diseases such as cancer, multiple sclerosis and hepatitis. 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. Messrs. Esterhazy, Kinsolving and Young, as directors,
devote only a minimal amount of time to CEL-SCI.
CEL-SCI has an audit committee and compensation committee. The members of
the audit committee are Alexander G. Esterhazy, C. Richard Kinsolving and Peter
Young. The members of the compensation committee are Maximilian de Clara,
Alexander Esterhazy and C. Richard Kinsolving.
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, 2002.
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, 2002 $363,000 -- $46,079 $ 89,334 75,000 --
President 2001 $357,167 -- $52,186 $262,000 95,000 $ 64
2000 $345,583 -- $72,945 $550,000 60,000 $ 64
Geert R. Kersten, 2002 $346,324 -- $15,044 $ 10,929 105,000 --
Chief Executive 2001 $265,175 -- $10,462 $ 8,313 655,000 $4,114
Officer and 2000 $303,049 -- $15,349 $ 10,375 60,000 $4,114
Treasurer
Patricia B. Prichep 2002 $140,464 -- $ 3,000 $ 5,597 90,500 --
Senior Vice President 2001 $104,505 -- $ 3,000 $ 6,270 260,000 $ 63
of Operations and 2000 $114,430 -- $ 3,000 $ 6,998 23,000 $ 63
Secretary
Eyal Talor, Ph.D. 2002 $187,075 -- $ 3,000 $ 5,702 85,000 --
Senior Vice President 2001 157,420 -- $ 3,000 $ 9,269 200,000 $ 63
of Research and 2000 $150,334 -- $ 3,000 $ 9,020 50,000 $ 63
Manufacturing
Daniel Zimmerman, 2002 $143,583 -- $ 3,000 $ 5,763 91,000 --
Ph.D., 2001 $117,145 -- $ 3,000 $ 6,962 175,000 $ 64
Senior Vice President 2000 $124,165 -- $ 3,000 $ 7,450 20,000 $ 64
of Cellular Immunology
38
(1) The dollar value of base salary (cash and non-cash) received. During the
year ended September 30, 2002, $468,703 of the total salaries paid to the
persons shown in the table were paid in restricted shares of CEL-SCI's
common stock.
(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, 2002,
$24,250 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 rendered to CEL-SCI. 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, 2002, 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 525,421 $ 95,296
Geert R. Kersten 667,762 $120,197
Patricia B. Prichep 206,484 $ 37,167
Eyal Talor, Ph.D. 192,527 $ 34,655
Daniel Zimmerman, Ph.D. 214,391 $ 38,590
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, 2002" 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 represent
life insurance premiums.
39
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
2002 expenses for this plan were $71,824. 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.
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
40
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.
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, 2002, 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, 2002, 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, 2002, 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, 2002
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 75,000 8.73% 0.54 3/14/12 $25,500 $64,500
Geert R. Kersten 75,000 8.73% 0.54 3/14/12 $25,500 $64,500
30,000 (2) 3.49% 0.54 3/14/12 $10,200 $28,500
--------
105,000
Patricia B. Prichep 30,000 3.49% 1.00 12/3/11 $18,900 $47,700
10,500 (2) 1.22% 0.54 3/14/12 $ 3,750 $ 9,030
50,000 5.82% 0.33 4/26/12 $10,500 $26,000
------
90,500
Eyal Talor, Ph.D. 35,000 4.07% 1.00 12/3/11 $22,050 $55,650
50,000 5.82% 0.33 4/26/12 $10,500 $26,000
------
85,000
41
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%
------ ------------ ----------- --------- ---------- ---- ----
Daniel Zimmerman,
Ph.D. 30,000 3.49% 0.54 3/14/12 $10,200 $25,800
11,000 (2) 1.28% 0.54 3/14/12 $ 3,740 $ 9,460
50,000 5.82% 0.33 4/26/12 $10,500 $26,000
------
91,000
(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%.
(2) Options were granted in accordance with CEL-SCI's Salary Adjustment Plan.
Pursuant to the Salary Adjustment Plan, any employee of CEL-SCI was allowed
to receive options (exercisable at market price at the time of grant) in
exchange for a one-time reduction in such employee's salary.
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 -- -- 439,999/135,000 0/0
Geert R. Kersten -- -- 1,725,000/165,000 0/0
Patricia Prichep -- -- 465,168/114,832 0/0
Eyal Talor 272,500/101,666 0/0
Daniel Zimmerman -- -- 281,001/110,999 0/0
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 2002.
(2) With respect to options exercised during CEL-SCI's fiscal year ended
September 30, 2002, 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, 2002,
separated between those options that were exercisable and those options
that were not exercisable.
(4) For all unexercised options held as of September 30, 2002, the market value
of the stock underlying those options as of September 30, 2002.
42
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
43
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
44
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 15,
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 1,207,368 732,632
Of the shares issued pursuant to CEL-SCI's Stock Bonus Plans 470,252
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, 2002, 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 (a))
Plan category Options (a) Options (b) (c)
------------------------------------------------------------------------------------
Incentive Stock
Option Plans 1,251,100 $1.62 762,315
Non-Qualified Stock
Option Plans 4,073,434 $1.10 589,105
--------- ----- -------
5,324,534 $1.23 1,351,420
========= ===== =========
45
In January 2000 CEL-SCI issued Mr. de Clara 200,000 shares of common stock
for past services provided to CEL-SCI. In September 2001 CEL-SCI issued Mr. de
Clara an additional 200,000 shares of common stock for past services provided to
CEL-SCI. In October 2001 CEL-SCI issued Mr. de Clara an additional 75,071 shares
of common stock for past services provided to CEL-SCI.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 15, 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 2,437,294 4%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 4,177,791 6.7%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Patricia B. Prichep 981,328 1.6%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 790,782 1.3%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 761,928 1.3%
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 117,090 *
P.O. Box 20193
Bradenton, FL 34204-0193
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Name and Address Number of Shares (1) Percent of Class (3)
---------------- ----------------- ----------------
Peter R. Young 45,518 *
8229 Boone Blvd., Suite 802
Vienna, VA 22182
All Officers and Directors 9,366,731 14.6%
as a Group (8 persons)
* Less than 1%
(1) Includes shares issuable prior to November 30, 2003 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to November 30, 2003
Maximilian de Clara 504,999
Geert R. Kersten 1,800,000
Patricia B. Prichep 511,334
Eyal Talor, Ph.D. 317,500
Daniel H. Zimmerman, Ph.D. 324,668
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.
EQUITY LINE OF CREDIT AGREEMENT
Overview
On September 16, 2003, CEL-SCI entered into an equity line of credit
agreement with Rubicon Group Ltd. in order to establish a possible source of
funding for the development of CEL-SCI's technologies. The equity line of credit
agreement establishes what is sometimes also referred to as an equity drawdown
facility.
Under the equity line of credit agreement, Rubicon Group has agreed to
provide CEL-SCI with up to $10,000,000 of funding during the twenty-four month
period following the date of this prospectus. During this twenty-four month
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
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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 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.
Calculation of Drawdown Amount, Purchase Price and Number of Shares Sold
The minimum amount CEL-SCI can draw down at any one time is $100,000. The
maximum amount CEL-SCI can draw down at any one time is the lesser of $2,000,000
or the amount equal to:
o 4.5% of the weighted average price of CEL-SCI's common stock for the
ninety calendar day period prior to the date of the drawdown request
o multiplied by the total trading volume of CEL-SCI's common stock for
the ninety calendar day period prior to the date of the drawdown
request.
On the day following the delivery of the drawdown notice, a valuation
period of 22 trading days will start:
o On each trading day during the valuation period where the daily volume
weighted average price of CEL-SCI's common stock on the American Stock
Exchange exceeds the minimum price, if any, specified by CEL-SCI in
the drawdown notice, the purchase price will equal 89% of the volume
weighted average price on that day.
o On each of the 22 trading days during the valuation period, the number
of shares to be sold to Rubicon Group will be determined by dividing
1/22 of the drawdown amount by the purchase price on each trading day.
o If the volume weighted average price for CEL-SCI's common stock on any
trading day during the 22 trading day calculation period is below the
minimum price, then Rubicon Group will not purchase any shares on that
day, and the drawdown amount will be reduced by 1/22.
Using the formula described above, if CEL-SCI had requested a drawdown on
October __, 2003, the maximum amount CEL-SCI could draw down during the
subsequent 22 trading days would have been $______. Based upon the volume
weighted average of CEL-SCI's common stock during these 22 trading days, CEL-SCI
would have sold ____ shares of its common stock to Rubicon Group and would have
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received proceeds from the sale of these shares equal to $______.
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.
Payment for Shares Issued
The shares purchased on the first 11 trading days will be issued and paid
for on the 13th trading day following the drawdown request. The shares purchased
on the 12th through the 22nd trading days will be issued and paid for on the
24th trading day following the drawdown request.
Upon closing of the equity line of credit Agreement, CEL-SCI paid $10,000
to Feldman Weinstein LLP, legal counsel to Rubicon Group, for Rubicon Group's
legal expenses relating to the equity line of credit.
Grant of Warrants
As consideration for extending the equity line of credit, CEL-SCI granted
Rubicon Group warrants to purchase 395,726 shares of common stock at any time
prior to September 16, 2008 at a price of $0.83 per share. Rubicon Group is not
obligated to exercise any warrants.
CEL-SCI believes that the fair value of these warrants using customary
pricing models is approximately $254,000. The fair value of these warrants will
be reflected in CEL-SCI's financial statements and recorded as both a charge and
an addition to Additional paid-in capital for the year ended September 30, 2003.
Restrictions on Future Financings
During the term of the equity line of credit agreement, CEL-SCI may not
raise capital through any other equity line of credit arrangement.
Termination of the Equity Line of Credit Agreement
The Equity Line of Credit Agreement will be terminated if:
o any event, which has not been corrected within 30 days, has taken place
which has any material adverse effect on the business or financial
condition of CEL-SCI or which prohibits or interferes with the ability
of CEL-SCI to perform any of its material obligations under the equity
line of credit agreement,
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o CEL-SCI's common stock is de-listed from the American Stock Exchange
unless the de-listing is in connection with CEL-SCI's subsequent listing
of its common stock on the NASDAQ National Market, the NASDAQ SmallCap
Market, the New York Stock Exchange, the OTC Bulletin Board, or
o CEL-SCI files for protection from its creditors under the Federal
Bankruptcy laws.
CEL-SCI may terminate the equity line of credit if Rubicon Group fails to
honor more than one drawdown notice.
Indemnification
Rubicon Group is entitled to customary indemnification from CEL-SCI for
any losses or liabilities it suffers based upon material misstatements or
omissions from the registration statement and this prospectus, except as they
relate to information Rubicon Group supplied to CEL-SCI for inclusion in the
registration statement and prospectus.
SELLING SHAREHOLDER
This prospectus relates to sales of CEL-SCI's common stock by Rubicon Group
Ltd. Rubicon Group will receive shares of CEL-SCI's common stock under an equity
line of credit agreement and up to 395,726 shares of common stock upon the
exercise of warrants. Rubicon Group is sometimes referred to in this prospectus
as the selling shareholder.
CEL-SCI will not receive any proceeds from the sale of the shares by
Rubicon Group. Rubicon Group may resell the shares it acquires by means of this
prospectus from time to time in the public market. The costs of registering the
shares offered by Rubicon Group is being paid by CEL-SCI. Rubicon Group will pay
all other costs of the sale of the shares offered by it. During the past three
years neither the Rubicon Group nor its controlling persons had any relationship
with CEL-SCI, or CEL-SCI's officers or directors.
The following table shows the shares which are being offered for sale by
Rubicon Group.
Share
Shares Shares to Be Ownership
Presently Sold in this After
Name Owned Offering Offering
Rubicon Group Ltd. 395,726 (2) --
(1) Represents shares issuable upon the exercise of the warrants held by the
Rubicon Group, but excludes any shares which may be acquired by the Rubicon
Group under the Equity Line of Credit Agreement.
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(2) The number of shares to be sold by the Rubicon Group in this offering will
vary from time-to-time and will depend upon the number of shares purchased from
CEL-SCI pursuant to the terms of the Equity Line Agreement and upon the exercise
of warrants.
Manner of Sale.
The shares of common stock owned, or which may be acquired, by Rubicon
Group may be offered and sold by means of this prospectus from time to time as
market conditions permit in the over-the-counter market, or otherwise, at prices
and terms then prevailing or at prices related to the then-current market price,
or in negotiated transactions. These shares may be sold by one or more of the
following methods, without limitation:
o a block trade in which a broker or dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o face-to-face transactions between sellers and purchasers without a
broker/dealer.
In effecting sales, brokers or dealers engaged by Rubicon Group may
arrange for other brokers or dealers to participate. Such brokers or dealers may
receive commissions or discounts from Rubicon Group in amounts to be negotiated.
Rubicon Group is an "underwriter" and any broker/dealers who act in
connection with the sale of the shares by means of this prospectus may be deemed
to be "underwriters" within the meaning of ss.2(11) of the Securities Acts of
1933, and any commissions received by them and profit on any resale of the
shares as principal might be deemed to be underwriting discounts and commissions
under the Securities Act. CEL-SCI has agreed to indemnify Rubicon Group and any
securities broker/dealers who may be deemed to be underwriters against certain
liabilities, including liabilities under the Securities Act as underwriters or
otherwise.
CEL-SCI has advised Rubicon Group that it and any securities
broker/dealers or others who may be deemed to be statutory underwriters will be
subject to the prospectus delivery requirements under the Securities Act of
1933. CEL-SCI has also advised Rubicon Group that in the event of a
"distribution" of its shares Rubicon Group, any "affiliated purchasers", and any
broker/dealer or other person who participates in such distribution may be
subject to Rule 102 under the Securities Exchange Act of 1934 ("1934 Act") until
their participation in that distribution is completed. Rule 102 makes it
unlawful for any person who is participating in a distribution to bid for or
purchase stock of the same class as is the subject of the distribution. A
"distribution" is defined in Rule 102 as an offering of securities "that is
distinguished from ordinary trading transactions by the magnitude of the
offering and the presence of special selling efforts and selling methods".
CEL-SCI has also advised Rubicon Group that Rule 101 under the 1934 Act
prohibits any "stabilizing bid" or "stabilizing purchase" for the purpose of
pegging, fixing or stabilizing the price of the common stock in connection with
this offering.
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Grant of Registration Rights
CEL-SCI granted registration rights to Rubicon Group to enable it to sell
the common stock it may acquire under the equity line of credit agreement or
upon the exercise of the warrants. Notwithstanding these registration rights,
CEL-SCI has no obligation:
o to assist or cooperate with Rubicon Group in the offering or
disposition of their shares;
o to obtain a commitment from an underwriter relative to the sale of any
the shares; or
o to include the shares within any underwritten offering.
The registration rights agreement with Rubicon Group permits CEL-SCI to
restrict the resale of the shares Rubicon Group has purchased under the equity
line of credit agreement for a period of time sufficient to permit CEL-SCI to
amend or supplement this prospectus to include material information. If CEL-SCI
restricts the ability of Rubicon Group to resell shares at any time during the
thirty-two trading days following the delivery of a drawdown notice, and
CEL-SCI's stock price declines during the restriction period, then, in order to
compensate Rubicon Group for its inability to sell shares during the restriction
period, CEL-SCI will be required to pay Rubicon Group an amount determined by
multiplying:
o the number of shares Rubicon Group is committed to purchase following
the delivery of the drawdown notice, and
o the difference between the highest daily weighted average price of
CEL-SCI's common stock during the restriction period and the weighted
average price of CEL-SCI's common stock on the day after the
restriction period ends.
DESCRIPTION OF SECURITIES
Common Stock
CEL-SCI is authorized to issue 100,000,000 shares of common stock, (the
"common stock"). Holders of common stock are each entitled to cast one vote for
each share held of record on all matters presented to shareholders. Cumulative
voting is not allowed; hence, the holders of a majority of the outstanding
common stock can elect all directors.
Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor and,
in the event of liquidation, to share pro rata in any distribution of CEL-SCI's
assets after payment of liabilities. The board is not obligated to declare a
dividend. It is not anticipated that dividends will be paid in the foreseeable
future.
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Holders of common stock do not have preemptive rights to subscribe to
additional shares if issued by CEL-SCI. There are no conversion, redemption,
sinking fund or similar provisions regarding the common stock . All of the
outstanding shares of Common stock are fully paid and non-assessable.
Preferred Stock
CEL-SCI is authorized to issue up to 200,000 shares of preferred stock.
CEL-SCI's Articles of Incorporation provide that the Board of Directors has the
authority to divide the preferred stock into series and, within the limitations
provided by Colorado statute, to fix by resolution the voting power,
designations, preferences, and relative participation, special rights, and the
qualifications, limitations or restrictions of the shares of any series so
established. As the Board of Directors has authority to establish the terms of,
and to issue, the preferred stock without shareholder approval, the preferred
stock could be issued to defend against any attempted takeover of CEL-SCI.
Series E Warrants
In August 2001 three private investors exchanged their warrants for
CEL-SCI's Series E warrants. The Series E warrants collectively allow the
holders to purchase up to 815,351 additional shares of CEL-SCI's common stock at
a price of $1.19 per share at any time prior to August 16, 2004 and 23,758
shares of common stock at a price of $0.77 per share at any time prior to August
17, 2006.
Series F and Series G Warrants
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.
All of the convertible notes have since been converted into 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. All of the
Series G convertible notes have since been converted into shares of CEL-SCI's
common stock.
As of September 15, 2003 the Series F warrants collectively allowed the
holders to purchase 420,000 share of CEL-SCI's common stock at a price of $0.153
per share at any time prior to December 31, 2008. Every three months after
August 17, 2003, the exercise price of the Series F 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 the adjustment date.
As of September 15, 2003 the Series G warrants collectively 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
September 9, 2003, 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
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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.
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 F or Series G 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 F or Series G 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 F or Series G warrants
nor the shares issuable upon the exercise of the Series F or Series G 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:
- in connection with a merger or acquisition;
- 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;
- pursuant to the conversion or exercise of securities which were
outstanding prior to December 31, 2001 in the case of the Series F
warrants and July 12, 2002 in the case of the Series G warrants;
- to key officers of CEL-SCI in lieu of their respective salaries.
The sale of the Series G and H notes and warrants did not result in any
change to the exercise price of the Series F warrants. The sale of the Series H
notes and warrants did not result in any change to the exercise price of the
Series G warrants.
54
Series H Notes and Warrants
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. The notes
bear interest at 7% per year, are due and payable on January 7, 2005 and are
secured by substantially all of CEL-SCI's assets. Interest is payable quarterly
with the first interest payment due on April 1, 2003. If CEL-SCI fails to make
any interest payment when due, the notes will become immediately due and
payable. CEL-SCI filed a registration statement with the Securities and Exchange
Commission in order that the shares of common stock issuable upon the conversion
of the Series H notes or the exercise of the Series H warrants may be resold in
the public market.
At the holder's option the Series H notes are convertible into shares of
CEL-SCI's common stock equal in number to the amount determined by dividing each
$1,000 of note principal to be converted by the Conversion Price. The Conversion
Price is 76% of the average of the three lowest daily trading prices of
CEL-SCI's common stock on the American Stock Exchange during the 15 trading days
immediately prior to the conversion date. If the closing price of CEL-SCI's
common stock is less than $0.50 on any conversion date, the Conversion Price
will be 76% of the average of the three lowest daily trading prices of CEL-SCI's
common stock on the American Stock Exchange during the 15 trading days
immediately prior to the conversion date. If the closing price of CEL-SCI's
common stock is $0.50 or greater on any conversion date, the Conversion Price
will be 70% of the average of the three lowest daily trading prices of CEL-SCI's
common stock on the American Stock Exchange during the 15 trading days
immediately prior to the conversion date. The Conversion Price will decline to
60% if (i) CEL-SCI defaults in the performance of any material covenant,
condition or agreement with the holders of the notes or, (ii) CEL-SCI's common
stock is delisted from the American Stock Exchange. The Conversion Price may not
be less than $0.16. However, if CEL-SCI's common stock trades for less than
$0.21 per share for a period of 20 consecutive trading days, the $0.16 minimum
price will no longer be applicable. As of September 15, 2003 Series H notes in
the principal amount of $1,050,000 had been converted into 2,637,419 shares of
CEL-SCI's common stock.
If CEL-SCI sells any additional shares of common stock, or any securities
convertible into common stock at a price below the then applicable Conversion
Price of the Series H notes, the Conversion Price of the Series H notes will be
lowered to the price at which the shares were sold or the lowest price at which
the securities are convertible. 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 Conversion Price of the Series H
notes will lowered by a percentage equal to the price at which the shares were
sold or the lowest price at which the securities are convertible, divided by the
then prevailing market price of CEL-SCI's common stock. However the Conversion
Price will not be adjusted as the result of shares issued in connection with a
Permitted Financing. A Permitted Financing involves shares of common stock
issued or sold:
- in connection with a merger or acquisition;
55
- 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;
- pursuant to the conversion or exercise of securities which were
outstanding prior to January 7, 2003;
- to key officers of CEL-SCI in lieu of their respective salaries.
CEL-SCI's agreement with the Series H note holders places the following
restrictions on CEL-SCI's operations. Any of the following restrictions may be
waived with the written consent of the holders of a majority of the principal
amount of the Series H notes outstanding at the time the consent is required.
o So long as the Series H notes are outstanding:
- declare or pay any dividends (other than a stock dividend or
stock split) or make any distributions to any holders of its
common stock, or
- purchase or otherwise acquire for value, directly or indirectly,
any common or preferred stock.
Until the date that 50% of the Series H notes are no longer outstanding
CEL-SCI may not sell any common stock or any securities convertible into common
stock. However, this restriction will not apply to shares issued in a Permitted
Financing.
So long as the Series H notes remain outstanding, the note holders will
have a first right of refusal to participate in any subsequent financings
involving CEL-SCI. If CEL-SCI enters into any subsequent financing on terms more
favorable than the terms governing the notes and warrants, then the note holders
may exchange notes and warrants for the securities sold in the subsequent
financing.
Upon the occurrence of any of the following events CEL-SCI is required to
redeem the Series H notes at a price equal to 130% of then outstanding principal
balance of the notes:
- the suspension from listing or the failure of CEL-SCI's common stock
to be listed on the American Stock Exchange for a period of five
consecutive trading days; or
- the effectiveness of the Registration Statement lapses for any
reason or the Registration Statement is unavailable to the note
holders and the lapse or unavailability continues for a period of
ten consecutive trading days, provided the cause of the lapse or
unavailability is not due to factors primarily within the control of
the note holders.
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- any representation or warranty made by CEL-SCI to the note holders
proves to be materially inaccurate or CEL-SCI fails to perform any
material covenant or condition in its agreement with the note
holders.
- the completion of a merger or other business combination involving
CEL-SCI and as a result of which CEL-SCI is not the surviving
entity.
- a purchase, tender or exchange offer accepted by the holders of more
than 30% of CEL-SCI's outstanding shares of common stock.
- CEL-SCI files for protection from its creditors under the federal
bankruptcy code.
The Series H warrants allow 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 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.
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 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.
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 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, divided by the then prevailing market
price of CEL-SCI's common stock. If the exercise price of the Series H warrants
is adjusted, the number of shares of common stock issuable upon the exercise of
the 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 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 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.
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Series I Warrants
In May 2003 CEL-SCI sold shares of its common stock plus Series I warrants
to a private investor. The Series I warrants allow the holders 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.
Transfer Agent
Computershare Trust Company, Inc., of Denver, Colorado, is the transfer
agent for CEL-SCI's common stock.
EXPERTS
The financial statements as of September 30, 2002 and 2001, and for each
of the three years in the period ended September 30, 2002 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
INDEMNIFICATION
CEL-SCI's bylaws authorize indemnification of a director, officer,
employee or agent of CEL-SCI against expenses incurred by him in connection with
any action, suit, or proceeding to which he is named a party by reason of his
having acted or served in such capacity, except for liabilities arising from his
own misconduct or negligence in performance of his duty. In addition, even a
director, officer, employee, or agent of CEL-SCI who was found liable for
misconduct or negligence in the performance of his duty may obtain such
indemnification if, in view of all the circumstances in the case, a court of
competent jurisdiction determines such person is fairly and reasonably entitled
to indemnification. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, or persons
controlling CEL-SCI pursuant to the foregoing provisions, CEL-SCI has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ADDITIONAL INFORMATION
CEL-SCI is subject to the requirements of the Securities Exchange Act of
l934 and is required to file reports, proxy statements and other information
with the Securities and Exchange Commission. Copies of any such reports, proxy
statements and other information filed by CEL-SCI can be read and copied at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.,
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The Commission
58
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding CEL-SCI. The address of that site is
http://www.sec.gov.
CEL-SCI will provide, without charge, to each person to whom a copy of
this prospectus is delivered, including any beneficial owner, upon the written
or oral request of such person, a copy of any or all of the documents
incorporated by reference below (other than exhibits to these documents, unless
the exhibits are specifically incorporated by reference into this prospectus).
Requests should be directed to:
CEL-SCI Corporation
8229 Boone Blvd., #802
Vienna, Virginia 22182
(703) 506-9460
CEL-SCI has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of l933, as amended, with
respect to the securities offered by this prospectus. This prospectus does not
contain all of the information set forth in the Registration Statement. For
further information with respect to CEL-SCI and such securities, reference is
made to the Registration Statement and to the exhibits filed with the
Registration Statement. Statements contained in this prospectus as to the
contents of any contract or other documents are summaries which are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement and related exhibits may also be examined at the
Commission's internet site.
59
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2002, 2001, and 2000,
and Independent Auditors' Report
CEL-SCI CORPORATION
TABLE OF CONTENTS
------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED SEPTEMBER 30, 2002, 2001, AND 2000:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Comprehensive Loss F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-9
Notes to Consolidated Financial Statements F-10 - F-27
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 subsidiaries (the Company) as of September 30, 2002 and 2001,
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, 2002. 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 CEL-SCI Corporation
and subsidiaries as of September 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States of America.
Deloitte & Touche LLP
McLean, Virginia
December 23, 2002
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001
----------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $2,079,276 $1,783,990
Investment securities available for sale - 593,384
Interest and other receivables 31,477 40,376
Prepaid expenses 452,123 866,058
Deferred financing costs 176,995 -
--------- ---------
Total current assets 2,739,871 3,283,808
RESEARCH AND OFFICE EQUIPMENT--Less accumulated
depreciation of $2,027,225 and $1,864,182 473,555 620,608
DEPOSITS 139,828 139,828
PATENT COSTS--Less accumulated amortization
of $641,711 and $623,235 418,004 464,676
--------- ---------
$3,771,258 $4,508,920
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 735,646 $ 422,895
Accrued expenses 148,812 53,153
Due to officer/shareholder and employees 29,592 461
Note payable 1,135,017 -
--------- ---------
Total current liabilities 2,049,067 476,509
DEFERRED RENT 20,732 31,218
CONVERTIBLE DEBT, NET 639,288 -
--------- ---------
Total liabilities 2,709,087 507,727
--------- ---------
STOCKHOLDERS' EQUITY:
Series E cumulative convertible redeemable
preferred stock, $.01 par value, $1,000 liquidation
value--authorized, 6,288 shares; issued and
outstanding, 1,192 and 5,863 shares at
September 30, 2002 and 2001, respectively 12 59
Common stock, $.01 par value--authorized,
100,000,000 shares; issued and outstanding,
37,255,142 and 21,952,082 shares at
September 30, 2002 and 2001, respectively 372,551 219,521
Additional paid-in capital 80,871,758 75,641,365
Unearned compensation - (19,636)
Accumulated other comprehensive loss - (210)
Accumulated deficit (80,182,150) (71,839,906)
----------- -----------
Total stockholders' equity 1,062,171 4,001,193
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,771,258 $ 4,508,920
=========== ===========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
--------------------------------------------------------------------------------
2002 2001 2000
GRANT REVENUE AND OTHER $ 384,939 $ 293,871 $ 40,540
OPERATING EXPENSES:
Research and development 4,699,909 7,762,213 5,186,065
Depreciation and amortization 226,514 209,121 220,994
General and administrative 1,754,332 3,432,437 3,513,889
---------- ----------- ---------
Total operating expenses 6,680,755 11,403,771 8,920,948
---------- ------------ ---------
NET OPERATING LOSS (6,295,816) (11,109,900) (8,880,408)
INTEREST INCOME 85,322 376,221 402,011
INTEREST EXPENSE (2,131,750) - -
------------ ------------ ----------
NET LOSS (8,342,244) (10,733,679) (8,478,397)
ACCRUED DIVIDENDS ON PREFERRED STOCK (202,987) (53,153) -
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (1,444,757) (317,419) -
------------ ------------- ----------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (9,989,988) $(11,104,251)$(8,478,397)
============ ========================
NET LOSS PER COMMON SHARE (BASIC) $ (0.35) $ (0.51)$ (0.44)
============ ========================
NET LOSS PER COMMON SHARE (DILUTED) $ (0.35) $ (0.51)$ (0.44)
============ ========================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 28,746,341 21,824,273 19,259,190
============ =========== ==========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
--------------------------------------------------------------------------------
2002 2001 2000
NET LOSS $ (8,342,244) $ (10,733,679) $(8,478,397)
OTHER COMPREHENSIVE LOSS--Unrealized
gain on investments 210 61,354 55,095
---------- ------------- -----------
COMPREHENSIVE LOSS $ (8,342,034) $ (10,672,325) $(8,423,302)
========== ============= ===========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
-------------------------------------------------------------------------------
Accumulated
Preferred Additional Other
Series E Stock Common Stock Paid-In Unearned Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation (Loss) Income Deficit Total
BALANCE, SEPTEMBER 30, 1999 $ - 17,002,341 170,023 59,672,653 $ - $ (116,659) $(52,627,830) $7,098,187
Exercise of stock options 1,047,612 10,476 3,646,991 3,657,467
Issuance--common stock 2,175,258 21,753 9,958,247 9,980,000
401(k) contributions 34,489 345 98,762 99,107
Stock bonus to officer 200,000 2,000 548,000 550,000
Change in unrealized gain
(loss) of investment securities
available for sale 55,095 55,095
Net loss (8,478,397) (8,478,397)
-------- -------- --------- ------- ---------- ------ ---------- ------------ -----------
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
nonemployees for services 167,087 167,087
Stock issued to nonemployees
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)
-------- ----------- -------- ------- -------- --------- ---------- -----------------------
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
----------------------------------------------------------------------------
Accumulated
Preferred Additional Other
Series E Stock Common Stock Paid-In Unearned Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation (Loss) Income Deficit Total
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
nonemployees 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
Dividend expense 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
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
===================================================================================================
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,342,244) $ (10,733,679) $ (8,478,397)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 226,514 209,121 220,994
Issuance of stock options for services (2,262) 167,087 -
Repriced options (593,472) 593,472 -
Common stock bonus granted to officer 89,334 262,000 550,000
Issuance of common stock for services 566,490 149,414 -
Common stock contributed to 401(k) plan 71,823 93,705 99,107
Net realized (gain) loss on sale of securities (2,758) 9,831 49,963
Impairment loss on abandonment of patents 39,960 30,439 -
R&D expenses paid with note payable 872,517 - -
Amortization of deferred financing costs 276,785 - -
Amortization of discount on note payable 262,500 - -
Amortization of discount associated with - - -
convertible notes 1,539,994 - -
Changes in assets and liabilities: - - -
Decrease (increase) in interest and other receivables 8,899 (1,124) 23,573
Decrease (increase) in prepaid expenses 413,935 972,318 (1,323,804)
Decrease in advances - 728 68,720
Increase in deposits - - (125,000)
Increase (decrease) in accounts payable and - - -
accrued expenses 321,297 (346,553) 389,336
Increase in due to officer/shareholder and employees 29,131 461 -
(Decrease) increase in deferred rent (10,486) 6,396 (3,499)
---------------------------------------------------------
Net cash used in operating activities (4,232,043) (8,586,384) (8,529,007)
---------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Purchases of investments - - (2,000,587)
Sales and maturities of investments 596,352 3,219,064 1,436,289
Expenditures for property and equipment (15,313) (168,537) (284,043)
Expenditures for patents (39,439) (35,797) (98,500)
---------------------------------------------------------------
Net cash provided by (used in) investing activities 541,600 3,014,730 (946,841)
-----------------------------------------------------------------
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
2002 2001 2000
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Cash proceeds from issuance of preferred and common
stock and exercise of warrants for cash 172,713 590,351 13,637,467
Cash proceeds drawn on equity line (net) 1,366,797 -- --
Proceeds from convertible notes 2,900,000 -- --
Costs for convertible notes transactions (453,781) -- --
Costs for equity-related transactions -- (143,970) --
-----------------------------------------------------------------
Net cash provided by financing activities 3,985,729 446,381 13,637,467
----------------------------------------------------
NET INCREASE (DECREASE) IN CASH 295,286 (5,125,273) 4,161,619
----------------------------------------------------
CASH, BEGINNING OF YEAR 1,783,990 6,909,263 2,747,644
----------------------------------------------------
CASH, END OF YEAR $ 2,079,276 $ 1,783,990 $ 6,909,263
====================================================
(Continued)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
--------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS 2002 2001 2000
ACCRUAL OF DIVIDENDS ON PREFERRED STOCK:
Increase in accrued liabilities $202,987 $ 53,153 $ -
Decrease in additional paid-in capital (202,987) (53,153)
-------- -------- ------
$ - $ - $ -
======== ======== ======
COMMON STOCK IN LIEU OF CASH DIVIDENDS AND INTEREST:
Decrease in accrued liabilities $(133,102) $ - $ -
Increase in common stock 1,227
Increase in additional paid-in capital 131,875
--------- -------- -----
$ - $ - $ -
========= ======== =====
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK:
Decrease in preferred stock $ (47) $ (4) $ -
Increase in common stock 42,822 3,488
Decrease in additional paid-in capital (42,775) $ (3,484)
---------- -------- -----
$ - $ - $ -
========== ======== =====
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
---------- -------- -----
$ - $ - $ -
========== ======== =====
ISSUANCE OF CONVERTIBLE DEBT WITH WARRANTS
AND BENEFICIAL CONVERSION:
Decrease in convertible debt $(2,290,709) $ - $ -
Increase in additional paid-in capital 2,290,709
----------- -------- -----
$ - $ - $ -
=========== ======== =====
CONVERSION OF CONVERTIBLE DEBT INTO COMMON STOCK:
Decrease in convertible debt $(1,510,000) $ - $ -
Increase in common stock 58,890
Increase in additional paid-in capital 1,451,110
----------- -------- -----
$ - $ - $ -
=========== ======== =====
CONVERSION OF INTEREST ON CONVERTIBLE DEBT
INTO COMMON STOCK:
Decrease in accrued liabilities $ (765) $ - $ -
Increase in common stock 13
Increase in additional paid-in capital 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, 2002, 2001, AND 2000
--------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS
2002 2001 2000
ACCRETION TO THE BENEFICIAL CONVERSION
ON PREFERRED STOCK:
Increase in additional paid-in capital $1,444,757 $ 317,419 $ -
Decrease in additional paid-in capital (1,444,757) (317,419)
---------- --------- -------
$ - $ - $ -
========== ========= =======
EQUIPMENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in equipment costs $ 677 - -
Increase in accounts payable (677)
---------- --------- -------
$ - $ - $ -
========== ========= =======
PATENTS COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in patent costs $ 17,321 $ - $ -
Increase in accounts payable (17,321)
---------- --------- -------
$ - $ - $ -
========== ========= =======
(Concluded)
See notes to consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
------------------------------------------------------------------------
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 products.
Significant accounting policies are as follows:
a. Principles of Consolidation--The consolidated financial statements
include the accounts of CEL-SCI Corporation and its wholly owned
subsidiaries, Viral Technologies, Inc., and MaxPharma AG. 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, 2002 and 2001, the Company recorded patent
impairment charges of $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. There were no impairment charges for the
fiscal year ended September 30, 2000.
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 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 to be cash equivalents.
l. 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.
m Reclassifications--Certain reclassifications have been made to the fiscal
year 2001 and 2000 financial statements to conform with the current-year
presentation.
n. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets". SFAS No. 142 provides that intangible
assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives not be amortized but will
rather be tested at least annually for impairment. The Company is
required to adopt SFAS No. 142 on October 1, 2002. The Company does
not expect that there will be a material impact from the adoption of
SFAS No. 142 on consolidated financial position, results of
operations, or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The
Company does not expect that there will be a material impact from the
adoption of Statement of Financial Accounting Standards No. 143 on its
consolidated financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. It supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of", and the accounting and reporting provisions of Accounting
Principles Board Statement ("APB") No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", for the disposal of a segment of a business. The
Company is required to adopt SFAS No. 144 on October 1, 2002. The
Company does not expect that there will be a material impact from the
adoption of SFAS No. 144 on its consolidated financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 requires the classification of
gains and losses from extinguishments of debt as extraordinary items
only if they meet certain criteria for such classification in APB No.
30, "Reporting the Results of Operations, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions". Any gain or loss on
extinguishments of debt classified as an extraordinary item in prior
periods that does not meet the criteria must be reclassified to other
income or expense. These provisions are effective for fiscal years
beginning after May 15, 2002. Additionally, SFAS No. 145 requires
sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. These lease
provisions are effective for transactions occurring after May 15,
2002. The Company does not believe that the adoption of SFAS No. 145
will have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces
"Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS
No. 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of
a commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No.
146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect the
adoption of SFAS No. 146 to have a material effect on its consolidated
financial position, results of operations or cash flows.
2. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in connection
with the acquisition of an exclusive worldwide license to certain patented
and unpatented proprietary technology and know-how relating to the human
immunological defense system, patent applications, research and development,
administrative costs, construction of laboratory facilities, and clinical
trials. The Company has funded such costs with proceeds realized from the
public and private sale of its common and preferred stock. The Company will
be required to raise additional capital or find additional long-term
financing in order to continue with its research efforts. The Company
expects to receive additional funding from private investors subsequent to
September 30, 2002; 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 2002, the Company reduced its
discretionary expenditures. If necessary, the Company plans to further
reduce discretionary expenditures in fiscal year 2003; 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 2003. 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
The carrying values and estimated market values of investments
available-for-sale at September 30, 2001, are below. There were no
investments or associated unrealized gains or losses as of September 30,
2002.
September 30, 2001
Gross Gross Market Value
Amortized Unrealized Unrealized at September 30,
Cost Gains Losses 2001
Fixed income mutual funds $ 593,594 $ - $ (210) $ 593,384
----------------------------------------------------
Total $ 593,594 $ - $ (210) $ 593,384
====================================================
The gross realized gains and losses of sales of investments available-for-sale
for the years ended September 30, 2002, 2001, and 2000, are as follows:
2002 2001 2000
Realized gains $ 2,758 $ 14,997 $ -
Realized losses - (24,828) (49,963)
-------------------------------------------
Net realized gain (loss) $ 2,758 $ (9,831) $ (49,963)
=======================================
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2002 and 2001, consist of the
following:
2002 2001
Research equipment $2,192,054 $2,177,553
Furniture and equipment 265,685 265,581
Leasehold improvements 43,041 41,656
---------- ----------
2,500,780 2,484,790
Less: Accumulated depreciation
and amortization (2,027,225) (1,864,182)
---------- ----------
Net research and office equipment $ 473,555 $ 620,608
========== ==========
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, 2002 and 2001, are as follows:
2002 2001
Depreciation $ (17,244) $ (23,140)
Prepaid expenses (171,626) (300,068)
Net operating loss carryforward 31,578,427 27,611,749
Compensation expense for repriced options - 225,282
Other 7,870 9,422
Less: Valuation allowance (31,397,427) (27,523,245)
--------------------------------------
Net deferred $ - $ -
======================================
The Company has available for income tax purposes net operating loss
carryforwards of approximately $72,739,064, expiring from 2003 through 2021.
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 2002, 2001 and 2000, the Company's statutory tax rate was
35%, and its effective tax rate was 0%. The difference between the rates was
primarily attributable to net operating loss carryforwards and
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, 2002, the Company has
collectively authorized the issuance of 5,760,000 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, October 1, 1999 2,374,057 $2.80 1,595,934 $3.09
Options granted 262,500 3.09
Options exercised (789,085) 3.41
Options forfeited (46,266) 2.34
---------
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
==========
At September 30, 2002, options outstanding and exercisable were as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Range of Number Price - Remaining Number Price
Exercise Prices Outstanding Outstanding Contractual Life Exercisable Exercisable
$0.16 - $0.24 20,000 $0.16 9.05 years - $ -
$0.33 - $0.50 435,000 $0.33 9.54 years - $ -
$0.54 - $0.81 291,500 $0.54 9.51 years - $ -
$1.05 - $1.58 2,526,766 $1.07 3.03 years 2,384,269 $ 1.07
$1.67 - $2.51 773,568 $1.81 2.06 years 749,069 $ 1.81
$3.25 - $4.88 25,800 $3.34 4.84 years 25,800 $ 3.34
$6.25 - $9.38 800 $6.25 6.00 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, 2002, 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. As of September 30, 2002, all options
remain outstanding.
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. As of
September 30, 2002, 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.
Incentive Stock Option Plan--At September 30, 2002, the Company has
collectively authorized the issuance of 2,100,000 shares of common stock
under the Incentive Stock Option Plan. Options vest after a one-year to
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers all of the plans. Only the Company's employees
and directors are eligible to be granted options under the Incentive Plan.
Information regarding the Company's Incentive Stock Option Plan is
summarized as follows:
Outstanding Exercisable
------------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding, October 1, 1999 976,850 $ 3.71 20,688 $3.86
Options granted 140,000 3.77
Options exercised (68,418) 4.47
Options forfeited (1,666) 3.38
--------
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
=========
At September 30, 2002, options outstanding and exercisable were as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Range of Number Price - Remaining Number Price
Exercise Prices Outstanding Outstanding Contractual Life Exercisable Exercisable
$1.00 - $1.50 1,006,066 $ 1.08 5.63 years 835,068 $ 1.07
$1.85 - $2.78 81,167 $ 2.00 3.70 years 67,834 $ 2.03
$2.87 - $4.31 33,167 $ 3.35 1.37 years 33,167 $ 3.35
$4.50 - $6.75 129,600 $ 5.06 5.69 years 125,600 $ 5.08
$9.00 - $13.50 1,100 $10.09 3.73 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. All options
remain outstanding as of September 30, 2002.
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. As of September 30, 2002, 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 Plans. 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.
Stock Bonus Plan--At September 30, 2002, the Company has authorized the
issuance of 1,440,000 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.
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 considered a
deemed dividend and 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 considered a deemed
dividend and 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 deemed dividend was valued using the
Black-Scholes pricing methodology. All warrants remained outstanding as of
September 30, 2002.
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. At September 30, 2002, all 50,000 options remained outstanding.
In January 1999, the Company revised the terms of 23,500 and 125,000 options
granted to consultants in fiscal years 1997 and 1998, respectively. During
fiscal year 2000, all 120,000 options to purchase shares were exercised at
$2.50 per share.
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, 2002, 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 vest
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 12, 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 12.
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.
Warrants were issued in connection with the issuance of the convertible
notes in December 2001 and January 2002. The Series F warrants will allow
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 will 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 will be adjusted to an amount equal to 110% of the
conversion price of the convertible notes on such date, provided that the
adjusted price is 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. 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 notes 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. As of September 30, 2002, 855,500 warrants remained
outstanding.
Warrants were also issued in connection with the issuance of the convertible
notes in July and September 2002. The Series G warrants will allow 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 are
convertible, as the case may be. The warrant exercise price will be 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
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.
In accordance with the terms of the warrants, the exercise price was
adjusted to $0.18 on December 9, 2002. As of September 30, 2002, all
warrants remain outstanding.
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". 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,
---------------------------------------
2002 2001 2000
(In Thousands)
Net loss:
As reported $(8,342,244) $(10,733,679) $(8,478,397)
Pro forma (9,926,665) (12,308,073) (8,908,999)
Net loss per common share:
As reported $(0.35) $ (0.51) $ (0.44)
Pro forma (0.40) (0.58) (0.46)
The weighted average fair value at the date of grant for options granted
during fiscal years 2002, 2001, and 2000, was $0.49, $0.90, and $2.57, 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:
2002 2001 2000
Expected stock risk volatility 90 to 93% 98 to 109% 98%
Risk-free interest rate 4.10 to 4.12% 3.12 to 4.12% 6.32%
Expected life options 5 years 1 to 6 years 4.91 years
Expected dividend yield - - -
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts.
The Company's stock options are not transferable, and the actual value of
the stock options that an employee may realize, if any, will depend on the
excess of the market price on the date of exercise over the exercise price.
The Company has based its assumption for stock price volatility on the
variance of monthly closing prices of the Company's stock. The risk-free
rate of return used equals the yield on one- to three-year zero-coupon U.S.
Treasury issues on the grant date. No discount was applied to the value of
the grants for nontransferability or risk of forfeiture.
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. Prior to January 1, 1998, the Company
contributed an amount equal to 50% of each employee's contribution not to
exceed 3% of the participant's salary. Effective January 1, 1998, the plan
was amended such that the Company's contribution is now made in shares of
the Company's common stock as opposed to cash. 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 price of the Company's common stock. The expense for the years ended
September 30, 2002, 2001, and 2000, in connection with this plan was
$71,823, $93,705, and $99,107, 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.
9. LEASE COMMITMENTS
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,
2003 $202,649
2004 57,395
--------
Total minimum lease payments $260,044
========
Rent expense for the years ended September 30, 2002, 2001, and 2000, was
$229,428, $220,903, and $233,559, respectively.
10. NOTE PAYABLE
On November 15, 2001, the Company signed an agreement with Cambrex
Bioscience, 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 will begin 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 will give
Cambrex certain equipment and requires the Company to surrender a security
deposit, which will reduce the amount owed by $225,000. The remaining
balance is payable pursuant to a note due January 2, 2004. In addition, the
agreement requires the Company to pay $150,000 on the note from its next
financing agreement and 10% of all other future financing transactions,
including draws on the equity line-of-credit. 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 stock can be converted at a price
no lower than $0.22 per share.
11. CONVERTIBLE DEBT
In December 2001, the Company agreed to sell redeemable convertible notes
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 is included
in deferred financing costs in the accompanying balance sheet as of
September 30, 2002. The notes bear interest at 7% per year and will be due
and payable December 31, 2003. Interest is payable quarterly beginning July
1, 2002. 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.
The notes are 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 may be lowered if the Company sells
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 are 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 remain outstanding, the note-holders will have a first
right of refusal to participate in any subsequent financings involving the
Company. If the Company enters into any subsequent financing on terms more
favorable than the terms governing the notes and warrants, then the
note-holders may exchange notes and warrants for the securities sold in the
subsequent financing.
The entire balance of the convertible notes was initially offset by a
discount of $1,600,000 which represents 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 notes will be amortized to
interest expense over the two-year period. Any unamortized discount
associated with the convertible notes is fully amortized to interest expense
upon redemption. 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.
The Series F warrants allow 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 will also be adjusted accordingly. On
the date that the registration statement which the Company has agreed to
file is declared effective by the SEC, and every three months following the
effective date, the warrant exercise price will be adjusted to an amount
equal to 110% of the conversion price of the convertible notes on such date,
provided that the adjusted price is 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, 2002, the price was adjusted to
$0.19, and on October 17, 2002, the price was adjusted to $0.153. As of
November 30, 2002, all convertible notes 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. As of September 30, 2002, 855,500 warrants remained
outstanding.
In July and September 2002, the Company sold convertible notes, plus Series
G warrants, to a group of private investors for $1,300,000 less transaction
costs of $177,370, of which $161,879 is included in deferred financing costs
in the accompanying balance sheet as of September 30, 2002. The notes bear
interest at 7% per year and will be due and payable September 9, 2004.
Interest is payable quarterly beginning October 1, 2002. 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 holder's 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 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 may not be less than $0.18. However,
if the Company's common stock trades for less than $0.24 per share for a
period of 20 consecutive trading days, the $0.18 minimum price will no
longer be applicable. The Conversion Price will decline 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
defaults in the performance of any material covenant, condition or agreement
with the holders of the notes or, (iii) the Company's common stock is
delisted from the American Stock Exchange.
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, as the case may be. If the Company sells 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 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 the Company's common stock.
So long as the notes remain outstanding, the note holders will have a first
right of refusal to participate in any subsequent financings involving the
Company. If the Company enters into any subsequent financing on terms more
favorable than the terms governing the notes and warrants, then the note
holders may exchange 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 $607,366. 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. As of November 30, 2002, $650,000 in
convertible notes had been converted into 4,291,818 shares of common stock.
The Series G warrants will allow 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 are convertible, as the case may be. The
warrant exercise price will be 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 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. In accordance with the terms of the
warrants, the exercise price was adjusted to $0.18 on December 9, 2002. As
of September 30, 2002, all warrants remain outstanding.
In connection with both the Series F and Series G convertible debt certain
officers and directors of the Company signed a separate agreement. Pursuant
to this agreement, the officers and directors agreed to refrain from selling
any stock owned by them until October 18, 2002.
12. 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
allows 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 is restricted from entering
into any other equity line of credit arrangement and the agreement expires
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 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.
All outstanding shares of the Company's Series E Preferred Stock will be
automatically converted after two years (the Automatic Conversion Date) into
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. The automatic conversion is subject to suspension for
certain occurrences. If the automatic conversion is suspended as a result of
limitations on beneficial ownership as defined by Section 13(d) of the
Securities and Exchange Act of 1934, the conversion price will be fixed on
the Automatic Conversion Date and the dividends payable will be increased to
20% until such time that conversion is permitted.
In addition, the Company will issue a common stock purchase warrant for each
share of the Series E Preferred stock outstanding after two years 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. The issuance of the warrants is not subject
to suspension. Since the terms of these warrants are contingent, no
accounting has been given to such warrants in the accompanying consolidated
financial statements as of September 30, 2002.
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 is being accreted to additional
paid-in capital over a two-year period. During the years ended September 30,
2002 and September 30,2001, $1,444,757, and $317,419, respectively, of the
beneficial conversion discount was accreted. During the year ended September
30, 2001, 425 shares of the Series E Preferred Stock were converted into
348,841 shares of common stock. 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. At September 30, 2002, 1,192 shares of Series E
Preferred Stock remained outstanding.
In October 2001, the Company issued 150,000 shares of common stock in a
private offering for proceeds of $150,000. The investor also received
warrants which entitled the holder to purchase 75,000 shares of common stock
at $1.50 per share, expiring October 2004.
13. 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 11,118,168 and
6,876,972 potentially dilutive securities outstanding at September 30, 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.
2002 2001 2000
Net loss per common share (basic and diluted) $(0.35) $(0.51) $(0.44)
======= ======= =======
14. SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" in the fiscal year ended September
30,1999. SFAS No. 131 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.
******
CEL-SCI CORPORATION
INTERIM FINANICAL STATEMENTS
JUNE 30, 2003
(Unaudited)
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
ASSETS
(unaudited)
June 30, September 30,
2003 2002
--------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,707,182 $ 2,079,276
Interest and other receivables 36,142 31,477
Prepaid expenses 355,714 452,123
Deposits 14,828 139,828
Deferred financing costs 170,011 176,995
--------------------------------
Total Current Assets 2,283,877 2,879,699
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation
of $1,963,548 and $2,027,225 303,774 473,555
PATENT COSTS- less accumulated
amortization of
$686,045 and $641,711 421,022 418,004
--------------------------------
TOTAL ASSETS $ 3,008,673 $ 3,771,258
================================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
June 30, September 30,
2003 2002
-------------------------------
CURRENT LIABILITIES:
Accounts payable $ 517,731 $ 735,646
Accrued expenses 111,159 148,812
Due to officer/shareholder and employees 203,003 29,592
Note payable - Cambrex, net of discount 637,566 1,135,017
Note payable - Covance 199,928 -
-------------------------------
Total current liabilities 1,669,387 2,049,067
CONVERTIBLE NOTES, NET 105,702 639,288
DEFERRED RENT 8,521 20,732
-------------------------------
Total liabilities 1,783,610 2,709,087
STOCKHOLDERS' EQUITY
Series E cumulative convertible redeemable
preferred stock $.01 par value, $1,000
liquidation value - authorized 6,288;
issued and outstanding, 39 and 1,192 shares
at June 30, 2003 and September 30, 2002,
respectively - 12
Common stock, $.01 par value; authorized,
100,000,000 shares; issued and outstanding,
58,445,795 and 37,255,142 shares at June 30,
2003 and September 30, 2002, respectively 584,458 372,551
Additional paid-in capital 85,531,055 80,871,758
Unearned compensation (230,690) -
Accumulated deficit (84,659,760) (80,182,150)
-------------------------------
Total stockholders' equity 1,225,063 1,062,171
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,008,673 $ 3,771,258
===============================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Nine Months Ended
June 30,
2003 2002
-------------------------------
REVENUES:
Grant revenue and other $ 197,520 $ 307,974
-------------------------------
EXPENSES:
Research and development 1,408,225 3,993,047
Depreciation and amortization 143,351 170,317
General and administrative 1,726,265 1,282,948
-------------------------------
Total Operating Expenses 3,277,841 5,446,312
-------------------------------
NET OPERATING LOSS (3,080,321) (5,138,338)
INTEREST INCOME 40,707 68,831
INTEREST EXPENSE (1,437,996) (1,900,504)
-------------------------------
NET LOSS (4,477,610) (6,970,011)
ACCRUED DIVIDENDS ON PREFERRED STOCK (5,844) (177,464)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (74,577) (1,262,397)
-------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(4,558,031) $(8,409,872)
===============================
NET LOSS PER COMMON SHARE (BASIC) $ (0.10) $ (0.32)
===============================
NET LOSS PER COMMON SHARE (DILUTED) $ (0.10) $ (0.32)
===============================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 47,914,264 26,508,757
===============================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
June 30,
2003 2002
-------------------------------
REVENUES:
Grant revenue and other $ 61,878 $ 86,323
-------------------------------
EXPENSES:
Research and development 472,237 621,711
Depreciation and amortization 47,418 57,459
General and administrative 545,406 465,684
-------------------------------
Total Operating Expenses 1,065,061 1,144,854
-------------------------------
NET OPERATING LOSS (1,003,183) (1,058,531)
INTEREST INCOME 11,757 21,188
INTEREST EXPENSE (771,138) (1,074,136)
-------------------------------
NET LOSS (1,762,564) (2,111,479)
ACCRUED DIVIDENDS ON PREFERRED STOCK (1,923) (34,025)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (6,276) (253,932)
-------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,770,763) $(2,399,436)
===============================
NET LOSS PER COMMON SHARE (BASIC) $ (0.03) $ (0.08)
===============================
NET LOSS PER COMMON SHARE (DILUTED) $ (0.03) $ (0.08)
===============================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 54,037,022 31,575,255
===============================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
---------------------------------
(unaudited)
Nine Months Ended
June 30,
2003 2002
-------------------------------
NET LOSS $(4,477,610) $(6,970,011)
OTHER COMPREHENSIVE GAIN -
Unrealized gain on investments - 210
----------- -----------
COMPREHENSIVE LOSS $(4,477,610) $(6,969,801)
=========== ===========
Three Months Ended
June 30,
2003 2002
---------- ---------
NET LOSS $ (1,762,564) $ (2,111,479)
OTHER COMPREHENSIVE GAIN/LOSS -
Unrealized gain/loss on investments - -
------------ ------------
COMPREHENSIVE LOSS $ (1,762,564) $ (2,111,479)
============ ============
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Nine Months Ended
June 30,
2003 2002
------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
NET LOSS $(4,477,610) $(6,970,011)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 143,351 170,317
Issuance of common stock for services 783,822 386,540
Common stock contributed to 401(k) plan 31,149 58,579
Stock bonus granted to officer - 75,071
Repriced options - (593,472)
Amortization of discount on note payable 37,500 187,500
R&D expenses paid with note payable - 859,000
Issuance of stock options for services 465 -
Amortization of discount associated with
convertible notes 1,035,762 1,434,993
Amortization of discount associated with
Cambrex note 45,640
Amortization of deferred financing costs 250,759 247,905
Gain on sale of equipment (26,463) -
Impairment loss on abandonment of patents 8,432 5,816
Impairment loss on retired equipment 1,899 -
Realized gain on investments - (2,758)
Increase in receivables (4,665) (17,392)
Decrease in prepaid expenses 96,409 531,060
Decrease in deferred rent (12,211) (6,586)
Increase in accrued expenses 45,553 29,339
Increase in amount due to
officer/shareholder & employees 173,411 -
(Decrease) increase in accounts payable (38,143) 259,760
---------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,904,940) (3,344,339)
---------------------------------
CASH FLOWS (USED IN) PROVIDED BY INVESTING
ACTIVITIES:
Sales of investments - 593,594
Purchase of research and office equipment (285) (14,710)
Patent costs (46,979) (33,439)
---------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (47,264) 545,445
---------------------------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Cash proceeds from issuance of common stock 500,000 150,000
Cash proceeds from drawdown on equity line 725,000 1,325,692
Cash proceeds from exercise of warrants 131,882 13,213
Proceeds from short term loan 25,000 -
Payments on short term loan (25,000) -
Exercise of stock options 2,200 -
Payments on note payable (248,874) -
(continued)
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Nine Months Ended
June 30,
2003 2002
------------------------
Proceeds from convertible notes 600,000 1,600,000
Transaction costs related to convertible
notes (130,098) (309,410)
---------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,580,110 2,779,495
---------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (372,094) (19,399)
CASH AND CASH EQUIVALENTS:
Beginning of period 2,079,276 1,783,990
---------------------------------
End of period $ 1,707,182 $ 1,764,591
=================================
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS
Accrual of dividends on preferred stock:
Increase in accrued expenses $ 5,844 $ 177,464
Decrease in additional paid-in capital (5,844) (177,464)
---------------------------------
$ - $ -
=================================
Common stock issued in lieu of cash dividends:
Decrease in accrued expenses $ (53,692) $ (94,000)
Increase in common stock 2,460 867
Increase in additional paid-in capital 51,232 93,133
---------------------------------
$ - $ -
=================================
Conversion of preferred stock into common
stock:
Decrease in preferred stock $ (11) $ (40)
Increase in common stock 9,464 35,899
Decrease in additional paid-in capital (9,453) (35,859)
---------------------------------
$ - $ -
=================================
Conversion of convertible notes into common stock:
Decrease in convertible notes $(1,690,000) $(1,380,000)
Increase in common stock 101,632 50,557
Increase in additional paid-in capital 1,588,368 1,329,443
---------------------------------
$ - $ -
=================================
Changes in unearned compensation for variable
options:
Decrease in additional paid-in capital $ - $ 19,636
Decrease in unearned compensation - (19,636)
---------------------------------
$ - $ -
=================================
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Nine Months Ended
June 30,
2003 2002
------------------------
Accretion for the beneficial conversion on
preferred stock:
Increase in additional paid-in capital $ 74,577 $ 1,262,397
Decrease in additional paid-in capital (74,577) (1,262,397)
---------------------------------
$ - $ -
=================================
Surrender of deposit and sale of equipment to
reduce note payable:
Decrease in deposits $ 125,000 $ -
Decrease in equipment, net 100,000 -
Decrease in note payable (225,000) -
---------------------------------
$ - $ -
=================================
Deferred financing costs for new convertible
notes included in accounts payable:
Increase in accounts payable $ 6,000 $ 8,310
Increase in deferred financing costs (6,000) (8,310)
---------------------------------
$ - $ -
=================================
Issuance of convertible notes with warrants and
beneficial conversion:
Decrease in convertible notes $ (479,349) $(1,600,000)
Increase in additional paid-in capital 479,349 1,600,000
---------------------------------
$ - $ -
=================================
continued
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Nine Months Ended
June 30,
2003 2002
------------------------
Deferred warrant costs on convertible notes:
Increase deferred financing costs $ (107,677) $ -
Increase additional paid-in capital 107,677 -
---------------------------------
$ - $ -
=================================
Beneficial conversion feature on Cambrex note:
Decrease Cambrex note payable $ (106,717) $ -
Increase additional paid-in capital 106,717 -
---------------------------------
$ - $ -
=================================
Interest expense paid for with common stock:
Decrease in accrued expenses $ (34,807) $ (766)
Increase in common stock 1,965 13
Increase in additional paid-in capital 32,842 753
---------------------------------
$ - $ -
=================================
Patent costs included in accounts payable:
Increase in accounts payable $ 13,194 $ 20,947
Increase in patent costs (13,194) (20,947)
---------------------------------
$ - $ -
=================================
Equipment included in accounts payable:
Increase in accounts payable $ 962 $ -
Increase in equipment $ (962) $ -
---------------------------------
$ - $ -
=================================
Accounts payable converted to short-term note
payable:
Increase in note payable $ 199,928 $ -
Decrease in accounts payable $ (199,928) $ -
---------------------------------
$ - $ -
=================================
Change in unearned compensation for stock
issued to officers:
Increase in additional paid-in capital $ 230,690 $ -
Increase in unearned compensation $ (230,690) $ -
---------------------------------
$ - $ -
=================================
concluded
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of the
Company and subsidiary (the Company) are unaudited and certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. While management of the Company believes that the disclosures
presented are adequate to make the information presented not misleading,
interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes included in the
Company's annual report on Form 10-K for the year ended September 30,
2002.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all accruals and adjustments
(each of which is of a normal recurring nature) necessary for a fair
presentation of the financial position as of June 30, 2003 and the results
of operations for the three and nine-month period then ended. The
condensed consolidated balance sheet as of September 30, 2002 is derived
from the September 30, 2002 audited consolidated financial statements.
Significant accounting policies have been consistently applied in the
interim financial statements and the annual financial statements. The
results of operations for the three and nine-month period ended June 30,
2003 are not necessarily indicative of the results to be expected for the
entire year.
Significant accounting policies are as follows:
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Viral
Technologies, Inc. All intercompany transactions have been eliminated upon
consolidation.
Reclassifications--Certain reclassifications have been made to the June
30, 2002 financial statements to conform with the current period
presentation.
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 to be cash equivalents.
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.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
Prepaid Expenses--The majority of prepaid expenses consist of bulk
purchases of laboratory supplies to be consumed in the manufacturing of
the Company's product for clinical studies.
Deferred Financing Costs--Deferred financing costs are capitalized and
expensed over the period the notes are outstanding or on a pro-rata basis
as the notes are converted.
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. During the nine months ended June 30, 2003, the Company retired
equipment with a net book value of $1,899 and such amount is included in
general and administrative expenses. There were no retirements of
equipment during the nine months ended June 30, 2002.
Patents--Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology or
other circumstances impair the value or life of the patent, appropriate
adjustment in the asset value and period of amortization is made. An
impairment loss is recognized when estimated future undiscounted cash
flows expected to result from the use of the asset, and from disposition,
is less than the carrying value of the asset. The amount of the impairment
loss would be the difference between the estimated fair value of the asset
and its carrying value. During the nine months ended June 30, 2003 and
2002, the Company recorded patent impairment charges of $8,432 and $5,816
respectively for the net book value of patents abandoned during the period
and such amount is included in general and administrative expenses. During
the next five years, the Company expects that the amortization of patent
expenses will total approximately $277,000.
Convertible Notes--The Company initially offsets a portion of its
convertible notes issued with a discount representing the relative fair
value of the warrants and a beneficial conversion feature. This discount
is amortized to interest expense over the period the notes are
outstanding. 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 the Company 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.
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.
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.
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.
Potentially dilutive common shares, including
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
convertible preferred stock and options to purchase common stock, were
excluded from the calculation because they are antidilutive.
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. The Company 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. Options to non-employees are accounted for in accordance
with FASB's Emerging Issues Task Force (EITF) Issue 96-18 Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services. Accordingly,
compensation is recognized when goods or services are received and is
measured using the Black-Scholes valuation model. The Black-Scholes model
requires management to make assumptions regarding the fair value of the
options at the date of grant and the expected life of the options.
Asset Valuations and Review for Potential Impairments--The Company reviews
its fixed assets every fiscal quarter. This review requires that the
Company make assumptions regarding the value of these assets and the
changes in circumstances that would affect the carrying value of these
assets. If such analysis indicates that a possible impairment may exist,
the Company is then required to estimate the fair value of the asset and,
as deemed appropriate, expense all or a portion of the asset. The
determination of fair value includes numerous uncertainties, such as the
impact of competition on future value. The Company believes that it has
made reasonable estimates and judgments in determining whether 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, the Company could be required to recognize certain
impairment charges in the future.
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.
New Accounting Pronouncements--In December 2002, the FASB issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
which amends Statement of Financial Accounting Standards No. 123,
"Accounting for 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. 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.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
The provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002 and the interim disclosure provisions are effective for
interim 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 prescribed in APB No. 25, "Accounting for Stock
Issued to Employees, and related Interpretations". 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:
Nine Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Net loss:
As reported $(4,477,610) $(6,970,011)
Add: Reversal of compensation
expense for stock-based performance
awards included in reported net loss,
net of related tax effects - (593,472)
Add: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects (747,195) (950,673)
---------- ----------
Pro forma net loss $(5,224,805) $(8,514,156)
=========== ===========
Net loss per common share, basic and diluted:
As reported $ (0.10) $ (0.32)
=========== ============
Pro forma $ (0.11) $ (0.38)
=========== ============
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
Three Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Net loss:
As reported $(1,762,564) $(2,111,479)
Add: Reversal of compensation
expense for stock-based performance
awards included in reported net loss,
net of related tax effects - -
Add: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects (173,845) (324,023)
----------- -----------
Pro forma net loss $(1,936,409) $(2,435,502)
=========== ===========
Net loss per common share, basic and diluted:
As reported $ (0.03) $ (0.08)
=========== ============
Pro forma $ (0.04) $ (0.09)
=========== ============
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with risk volatilities
ranging from 90-103%, risk-free interest rate ranging from 3.12 to 6.69%
and an expected option life of 5 years.
In April 2003, the FASB issued 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, this Statement
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. Statement 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. This Statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Management does not expect
that the adoption of this pronouncement will have a material effect on the
financial position, results of operations or cash flows of the Company.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
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 Company does not expect that the adoption of this
pronouncement will have a material effect on its financial position,
results of operations or cash flows.
B. STOCKHOLDERS' EQUITY
During the nine months ended June 30, 2002, the Company issued 150,000
units at $1.00 to a private investor. Each unit consists of one share of
common stock and 1/2 warrant. Each warrant allows the holder to purchase
one share of common stock at $1.50 per share at any time prior to October
5, 2004. All of the warrants remain outstanding as of June 30, 2003. Also
during the nine-month period ended June 30, 2002, 75,071 shares of common
stock were issued to an employee from the Company's stock bonus plan. In
addition, during the nine months ended June 30, 2003 and 2002, the Company
issued stock for services to both employees and nonemployees with a fair
value of $1,014,512 and $386,540, respectively. During the three-month
period ended June 30, 2003 and 2002, the Company issued stock for services
with a fair value of $587,078 and $169,899. During the three-month period
ended June 30, 2003, $502,837 in common stock was issued to two officers
in lieu of six months salary . Of this amount, $230,690 is recorded in the
accompanying condensed consolidated balance sheet as of June 30, 2003 as
unearned compensation and the balance was expensed and is included in the
$587,078.
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 from prior
offerings for new Series E warrants. 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 of the Company's common
stock for the 5 days prior to the date of each conversion notice. The
lowest price at which the Series E Preferred stock can be converted is
$1.08. 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%. There were
39 shares of preferred stock outstanding at June 30, 2003. During the nine
months ended June 30, 2003, 1,154 preferred shares were converted into
946,445 shares of common stock. In addition, dividends were converted into
an additional 49,558 shares of common stock. During the three months ended
June 30, 2003, 28 preferred shares were converted into 25,844 shares of
common stock. Dividends totaled $1,923 and $34,025 during the three months
ended June 30, 2003 and 2002 respectively. Dividends payable, a component
of accrued expenses, totaled $25,110 at June 30, 2003.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
C. FINANCING TRANSACTIONS
In December 2001, the Company sold redeemable convertible notes and Series
F warrants, to a group of private investors for proceeds of $1,600,000,
less transaction costs of $276,410. All of the deferred financing costs
have been expensed to interest expense at June 30, 2003. The notes bore
interest at 7% per year and were due and payable December 31, 2003. 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. 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. In addition, the notes were
required to be redeemed by the Company at 130% upon certain occurrences.
As of November 30, 2002, all of the notes were converted into 6,592,461
shares of common stock. The Series F warrants allow 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. The warrant price is
currently $0.153. During the nine-month period ended June 30, 2003,
435,500 warrants were exercised for proceeds of $66,631. During the
three-month period ended June 30, 2003, 285,500 warrants were exercised
for proceeds of $43,682. As of June 30, 2003, 420,000 warrants remain
outstanding.
In July and September 2002, the Company sold convertible notes, plus
Series G warrants, to a group of private investors for $1,300,000 less
transaction costs of $177,370. 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 contain certain restrictions, including
limitations on such items as indebtedness, sales of common stock and
payment of dividends. At the holders' 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 was 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. 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. As of June 30, 2003, all of the notes had
been converted into 8,354,193 shares of common stock. In addition, all of
the discount associated with the notes had been amortized to interest
expense. Interest totaling $20,695 was converted into 102,401 shares of
common stock during the nine months ended June 30, 2003. Of this amount,
$10,846 was converted into 68,418 shares of common stock during the three
months ended June 30, 2003. The Series G warrants allow the holders to
purchase up to 900,000 shares of the Company's common stock at a price
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. The
warrant price is currently $0.145. As of June 30, 2003, 450,000
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
warrants had been exercised and 450,000 warrants remain outstanding.
During the three and nine-month period ended June 30, 2003, 450,000
warrants were exercised for common stock for proceeds of $65,250,
In January 2003, the Company sold convertible notes, plus Series H
warrants to purchase 1,100,000 shares of common stock, to a group of
private investors for $1,350,000 less transaction costs of approximately
$130,098, of which $98,182 is included in deferred financing costs in the
accompanying balance sheet as of June 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 will be 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. As of
and during the quarter ended June 30, 2003, $300,000 of the notes had been
converted into 1,107,067 shares of common stock. In addition, 64,423
shares of common stock were issued for interest totaling $13,319. The
Series H warrant price as of June 30, 2003 is $0.25. No warrants had been
exercised through June 30, 2003. 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 notes by $67,669. Of this amount, $35,446 had been charged to
interest expense as of June 30, 2003.
On November 15, 2001, the Company signed an agreement with Cambrex
Bioscience, 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. Pursuant to an amendment to the agreement in
December 2002, the remaining balance at June 30, 2003 is $698,642. Payment
of $225,000 was made in December 2002 by the sale of certain equipment
with a net book value of $73,537 to Cambrex and the surrender of a
security deposit held by Cambrex. The gain on the sale of the equipment of
$26,463 is included in Grant revenue and other on the income statement
during the nine months ended June 30, 2003. In addition, payments on the
note totaled $248,874 during the nine months ended June 30, 2003. Unpaid
principal began accruing interest on November 16, 2002 and carries an
interest rate of the Prime Rate plus 3%. The amendment extended the
maturity date to January 2, 2004. Prior to this amendment, the note was
due January 2, 2003. In addition, the
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
amendment required the Company to pay $150,000 on the note from its next
financing agreement, which was paid in January 2003, and 10% of all other
future financing transactions, including draws on the equity
line-of-credit. 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 three latest trading prices,
subject to a floor of $0.22 per share. This conversion feature has been
accounted for as a discount on the note totaling $106,717, of which
$45,640 has been amortized to interest expense during the three and
nine-month periods ended June 30, 2003. As of June 30, 2003, $37,192 is
included in accrued expenses as interest payable and none of the note has
been converted into common stock.
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 become a note payable. The
note is payable on January 2, 2004. Interest will be payable monthly 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 three
months ended June 30, 2003, the Company paid $16,789 to Covance in
accordance with the agreement. During the nine months ended June 30, 2003,
the Company paid $39,430 to Covance in accordance with the agreement.
In April 2001, the Company signed an equity line of credit agreement with
Paul Revere Capital with up to $10,000,000 of funding prior to June 22,
2003. During this twenty-four month period, the Company may request a
drawdown under the equity line of credit by selling shares of its common
stock to Paul Revere Capital Partners and they will be obligated to
purchase the shares. The Company may request a drawdown once every 22
trading days, although the Company is under no obligation to request any
drawdowns under the equity line of credit. If the Company maintains a
balance of less than $1,000,000 in its bank account in any month, it may
draw down the maximum amount allowable for such month under its equity
line of credit. If the Company maintains a balance greater than $1,000,000
in its bank account in any month, it may only draw down a maximum of
$235,000 per month. During the nine-month period ending June 30, 2003, the
Company sold 2,877,786 shares of common stock to Paul Revere Capital for
proceeds of $710,000, net of financing costs of $15,000. During the
nine-month period ending June 30, 2002, the Company sold 2,381,993 shares
of common stock for proceeds of $1,325,692, net of financing costs of
$2,212 to Paul Revere Capital. During the three-month period ended June
30, 2002, the Company sold 1,309,682 for proceeds of $384,998. During the
three-month period ended June 30, 2003, the Company sold 802,679 shares of
common stock for proceeds of $315,000, net of costs of $5,000 and sold
2,877,786 shares of common stock for proceeds of $710,000, net of costs of
$15,000 during the nine months ended June 30, 2003.
D. GRANTS
The Company received two grants in April 2003. The first, totaling $1.1
million and announced on April 4, 2003, was awarded by the United States
government to Northeastern Ohio Universities College of Medicine and
the Company. It is intended to support the development of the
Company's
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
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 grant is for a period of three years. The
second grant, announced on April 23, 2003, is a Phase I Small Business
Innovation Research (SBIR) grant from the National Heart, Lung and Blood
Institute, National Institutes of Health (NIH), in the amount of $134,000
for the further development of a potential treatment for autoimmune
myocarditis, a heart disease. The work will be done in conjunction with
scientists at Johns Hopkins Medical Institutions in Baltimore, Maryland.
On May 7, 2003, the Company was awarded a Phase I SBIR grant from the
National Institutes of Allergy and Infectious Diseases (NIAID), National
Institutes of Health (NIH), in the amount of $162,000 for the further
development of CEL-1000 against herpes simplex. The work will be done in
collaboration with Northeast Ohio Universities College of Medicine.
E. MARKETING AGREEMENT
On May 30, 2003, the Company and Eastern Biotech signed an
agreement to develop both MultikineR 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. The Company must register these shares
prior to September 30, 2003 or the royalty percentage will increase to 2%.
If Eastern Biotech does not meet certain clinical development milestones
within one year, they will lose the right to sell both products in these
three countries.
F. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of an exclusive worldwide license to
certain patented and unpatented proprietary technology and know-how
relating to the human immunological defense system, patent applications,
research and development, administrative costs, construction of laboratory
facilities and clinical trials. The Company has funded such costs with
proceeds realized from the public and private sale of its common and
preferred stock. The Company will be required to raise additional capital
or find additional long-term financing in order to continue with its
research efforts. The Company expects to receive additional funding from
private investors subsequent to June 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 2002 and for the nine-month period ended June 30, 2003,
the Company reduced its discretionary expenditures. If
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
necessary, the Company plans to further reduce discretionary expenditures
in fiscal year 2003; 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
2003. Ultimately, the Company must complete the development of its
products, obtain the appropriate regulatory approvals and obtain
sufficient revenues to support its cost structure.
G. SUBSEQUENT EVENT
On July 2, 2003, the Company received the second tranche of the
convertible Series H notes, totaling $750,000, less transaction costs of
$86,621. On May 8, 2003, the Company signed an amendment to the agreement
that prevented the conversion price from defaulting to 60%. Additionally,
the Company signed an amendment related to these notes on July 2, 2003,
reiterating the May 8, 2003 amendment and set the due date of the second
tranche notes to July 2, 2005.
No dealer salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus. Any information or representation not contained in this prospectus
must not be relied upon as having been authorized by CEL-SCI. This prospectus
does not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby in any state or other jurisdiction to any person to
whom it is unlawful to make such offer or solicitation. Neither the delivery of
this prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that there has been no change in the affairs of CEL-SCI
since the date of this prospectus.
TABLE OF CONTENTS
Page
Prospectus Summary..........................................
Risk Factors................................................
Comparative Share Data......................................
Market for CEL-SCI's Common Stock...........................
Management's Discussion and Analysis of.
Financial Condition and Results of Operations.............
Business....................................................
Management..................................................
Principal Shareholders......................................
Selling Shareholders........................................
Description of Securities...................................
Legal Proceedings...........................................
Experts.....................................................
Indemnification.............................................
Additional Information......................................
Common stock
CEL-SCI CORPORATION
PROSPECTUS
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
SEC Filing Fee $ 463
Blue Sky Fees and Expenses 100
Printing and Engraving Expenses 2,000
Legal Fees and Expenses 20,000
Accounting Fees and Expenses 10,000
Miscellaneous Expenses 2,437
---------
TOTAL $35,000
=======
All expenses other than the SEC filing fees are estimated.
Item 14. Indemnification of Officers and Directors.
-----------------------------------------
Section 7-109-102 of the Colorado Revised Statutes and CEL-SCI's Bylaws
provides that CEL-SCI may indemnify any and all of its officers, directors,
employees or agents or former officers, directors, employees or agents, against
expenses actually and necessarily incurred by them, in connection with the
defense of any legal proceeding or threatened legal proceeding, except as to
matters in which such persons shall be determined to not have acted in good
faith and in the best interest of CEL-SCI.
Item 15. Recent Sales of Unregistered Securities.
In December 1999 and January 2000 the Company sold 1,148,592 shares of its
common stock, plus Series A and Series B warrants, to three private investors
for $2,800,000. As of August 16, 2001 all of the Series B warrants had expired.
In March 2000 the Company sold 1,026,666 shares of its common stock, plus
Series C and Series D warrants, to the same private investors referred to above
for $7,700,000.
In August 2001 the three investors exchanged 3,588,654 shares of the
Company's common stock which they owned, plus their unexercised Series D
Warrants, for 6,288 shares of the Company's Series E Preferred stock. As part of
this transaction the three investors also exchanged their Series A and Series C
warrants for new Series E warrants. The Series E warrants collectively allow the
holders to purchase up to 815,351 additional shares of the Company's common
stock at a price of $1.19 per share at any time prior to August 16, 2004.
Between August 21, 2001 and December 12, 2001 the Company issued 327,361
shares of its common stock to eighteen persons including eight persons who were
officers, directors or employees of the Company. The shares were issued in
payment of accrued salaries, consulting fees, outstanding liabilities and
directors' fees.
60
In May 2003, the Company 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 the Company's net sales of MULTIKINE and CEL-1000 prior to May
30, 2033, (iii) 1,100,000 shares of the Company's common stock and, (iv)
warrants which allow Eastern Biotech to purchase an additional 1,100,000 shares
of the Company's common stock at a price of $0.47 per share at any time prior to
May 30, 2006.
In July 2003, the Company issued 120,608 shares of its common stock to
certain employees and directors in lieu of salary and fees.
In August 2003, the Company issued 47,831 shares of its common stock in
payment of approximately $26,000 in accrued and unpaid dividends which were owed
to a holder of the Company's Series E preferred stock.
The foregoing securities were not issued under the Securities Act of 1933
but were issued or sold in reliance upon the exemption provided by Section 4(2)
of the Act. The persons who acquired these securities were either accredited or
sophisticated investors. The securities were acquired for investment purposes
only and without a view to distribution. The persons who acquired these
securities were informed and advised about matters concerning the Company,
including the Company's business, financial affairs and other matters. The
investors acquired these shares for their own accounts. The certificates
representing the securities bear legends stating that they may not be offered,
sold or transferred other than pursuant to an applicable exemption from
registration. The preferred shares and warrants are "restricted" securities as
that term is defined in Rule 144 of the Securities and Exchange Commission.
Item 16. Exhibits
3(a) Articles of Incorporation Incorporated
by reference to Exhibit 3(a) of
CEL-SCI's combined Registration
Statement on Form S-1 and Post-Effective
Amendment ("Registration Statement"),
Registration Nos. 2-85547-D and 33-7531.
(b) Amended Articles Incorporated by
reference to Exhibit 3(a) of CEL-SCI's
Registration Statement on Form S-1,
Registration Nos. 2-85547-D and 33-7531.
(c) Amended Articles (Name change only)Filed as Exhibit 3(c) to CEL-SCI's
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 Incorporated by reference to Exhibit
Stock Certificate 4(a) of CEL-SCI's Registration Statement
on Form S-1 Registration Nos. 2-85547-D
and 33-7531.
(b) Designation of Series E Incorporated by reference to Exhibit 4
Preferred Stock to report on Form 8-K dated August 21,
2001.
5. Opinion of Counsel (1)
-----------------------------
10(d) Employment Agreement with Incorporated by reference to Exhibit
Maximilian de Clara 10(d) to CEL-SCI's Registration
Statement on Form S-1 (Commission File
#333-102639).
10(e) Employment Agreement with Incorporated by reference to Exhibit
Geert Kersten 10(e) of CEL-SCI's Registration
Statement on Form S-3 (Commission File
#106879).
10(q) Common Stock Purchase Agreement (1)
with Rubicon Group Ltd. -----------------------------
10(r) Stock Purchase Warrant issued to (1)
Rubicon Group Ltd. -----------------------------
10(s) Securities Exchange Agreement Incorporated by reference to Exhibit
(together with Schedule 10.1 to report on Form 8-K dated August
required by Instruction 2 to 21, 2001.
Item 601 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
Agreement (together with 10(v) to CEL-SCI's Registration
Schedule required by Statement on Form S-3 (Commission File
Instruction 2 to Item 601 Number 333-76396)
Regulation S-K) pertaining
to notes sold in December 2001
and January 2002
10(vi)Note and Warrant Purchase Incorporated by reference to Exhibit
Agreement (together with (vi) to CEL-SCI's Registration
Schedule required by statement on Form S-3 (Commission File
Instruction 2 to Item 601 No. 333-97171)
Regulation S-K) pertaining to
Series G notes and warrants
10(vii) Note and Warrant Purchase Incorporated by reference to Exhibit
Agreement (together with 10 to CEL-SCI's report on Form 8-K dated
Schedule required by January 14, 2003
Instruction 2 to Item 601
Regulation S-K) pertaining to
Series H notes and warrants
10(x) Distribution and Royalty Incorporated by reference to Exhibit
Agreement with Eastern 10(x) to Amendment No. 2 to CEL-SCI's
Biotech Registration statement on Form S-3
(Commission File No. 333-106879).
23(a) Consent of Hart & Trinen (1)
(b) Consent of Deloitte & Touche, LLP (1)
(1) Filed with original registration statement.
Item 17. Undertakings.
------------
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement.
(i) To include any prospectus required by Section l0(a)(3) of the
Securities Act of l933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement, including
(but not limited to) any addition or deletion of a managing underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of l933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of l933 may be permitted to directors, officers and controlling persons of
the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
authorizes the agent for service named in this Registration Statement, with full
power to act alone, to file one or more amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as such agent for service deems
appropriate, and the Registrant and each such person hereby appoints such agent
for service as attorney-in-fact, with full power to act alone, to execute in the
name and in behalf of the Registrant and any such person, individually and in
each capacity stated below, any such amendments to this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of l933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vienna, Commonwealth of Virginia, on the 28th day of
October 2003.
CEL-SCI CORPORATION
By: /s/ Maximilian de Clara
Maximilian de Clara, President
Pursuant to the requirements of the Securities Act of l933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Maximilian de Clara Director and Principal October 28, 2003
------------------------
Maximilian de Clara Executive Officer
/s/ Geert R. Kersten Director, Principal October 28, 2003
------------------------
Geert R. Kersten Financial Officer
and Chief Executive Officer
Director
Alexander G. Esterhazy
/s/ C. Richard Kinsolving Director October 28, 2003
------------------------------
C. Richard Kinsolving, Ph.D.
/s/ Peter R. Young Director October 28, 2003
------------------------
Peter R. Young, Ph.D.