ITEM 1. BUSINESS CEL-SCI Corporation (the "Company") was formed as a Colorado corporation in 1983. The Company is involved in the research and development of certain drugs and vaccines. The Company's first product, MULTIKINE(TM), manufactured using the Company'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. The Company's second product, HGP-30, is being tested to determine if it is an effective vaccine/treatment against the AIDS virus. The third technology the Company is developing, LEAPS (Ligand Epitope Antigen Presentation System) is a T-cell modulation technology which can be used to direct a specific immune response and which is thought to be particularly important in the case of diseases which have no approved vaccinations (e.g. herpes simplex, malaria, AIDS, etc.) The Company intends to use this new technology to improve the cellular immune response of persons vaccinated with HGP-30 and to develop potential treatments and/or vaccines against various diseases. Present target diseases are AIDS, herpes simplex, malaria, tuberculosis, prostate cancer and breast cancer.
The costs associated with the clinical trials relating to the Company's technologies, research expenditures and the Company's administrative expenses have been funded with the public and private sales of shares of the Company's Common Stock and borrowings from third parties, including affiliates of the Company.
There can be no assurance that either the Company or the Company's wholly owned subsidiary, Viral Technologies, Inc. ("VTI") will be successful in obtaining approvals from any regulatory authority to conduct further clinical trials or to manufacture and sell their products. The lack of regulatory approval for the Company's or VTI's products will prevent the Company and VTI from generally marketing their 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 the Company's operations.
MULTIKINE
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 lymphokines. Lymphokines regulate and modify the various functions of both T-cells and B-cells. There are many lymphokines, each of which is thought to have distinctive chemical and functional properties. IL-2 is but one of these lymphokines and it is on IL-2 and its synergy with other lymphokines that the Company 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 lymphokines and cytokines support T-cell and B-cell proliferation. However, IL-2 is the only known lymphokine or 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 lymphokines with anticancer potential, the Company 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 lymphokines and cytokines, i.e. as a "cocktail". This approach, which was pioneered by the Company, makes use of the synergism between these lymphokines. It should be noted, however, that neither the FDA nor any other agency has determined that the Company's MULTIKINE product will be effective against any form of cancer.
It has been reported by researchers in the field of lymphokine 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 the Company have indicated a correlation between administration of MULTIKINE to cancer patients and immunological responses. On the basis of these experimental results, the Company 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 the Company's MULTIKINE product. The focus of the trial was unresectable head and neck cancer (which is presently untreatable).
In 1991, four patients with regionally advanced squamous cell cancer of the head and neck were treated with the Company'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 the Company to embark on a major manufacturing program for MULTIKINE with the goal of being able to produce a MULTIKINE that would meet the stringent regulatory requirements for advanced human studies. This program included building a pilot scale manufacturing facility.
Today the Company is involved in the following clinical human studies of MULTIKINE for treatment of cancer and AIDS:
ISRAEL: MULTIKINE is being tested as a presurgical treatment prior to surgery or radiation in patients with head and neck cancer. The data from the first ten patients, presented at a scientific conference by the clinical investigator, Dr. Feinmesser, indicates that seven of the ten patients treated with MULTIKINE for only two weeks experienced regression in tumor size, with one of the patients showing a complete disappearance of the tumor. In addition, patients had a resolution of tumor ulceration, increased tongue mobility and reduction or elimination of local pain. There were no tumor progressions or adverse local changes, nor evidence of toxicity from MULTIKINE. Recovery after operation and wound healing were normal. Additionally, microscopic evaluation of surgical specimens showed evidence of cellular immune reaction against the tumors and destruction of tumor cells.
Dr. Feinmesser is planning to treat another ten patients at a higher dosage as part of this study.
CANADA: A Phase I/II study in Canada is also testing MULTIKINE as a presurgical treatment prior to surgery or radiation in patients with head and neck cancer. Initially, the study was designed to treat fourteen patients, but was subsequently increased to twenty-one patients, and recently increased further to twenty-eight patients. The study is expected to be completed in the second half of 1999.
U.S.A. & CANADA: In this U.S. and Canadian multi-center study, twenty patients who have failed conventional treatments are being treated experimentally with MULTI- KINE. The study is designed to evaluate the safety, tumor responses and immune responses of MULTIKINE in late stage head and neck cancer patients.
U.S.A.: In 1997, a prostate cancer study was conducted at Jefferson Hospital in Philadelphia, Pennsylvania. The study involved prostate cancer patients who had failed on hormonal therapy. Five patients completed the treatment and the data from this study demonstrated the safety and feasibility of using MULTIKINE in the treatment of prostate cancer. Biopsies from the patients in the study also suggest the recruitment of inflammatory cells to the tumor site. Based on these findings, investigators are currently preparing a new protocol for evaluation by the FDA to study the ability of MULTIKINE to treat patients with prostate cancer. The study is expected to test MULTIKINE as a therapy to be used prior to surgical removal of the prostate gland.
The Company is also currently completing a MULTIKINE study with fourteen HIV positive patients. The study, due to its size, will focus on the safety of MULTIKINE in the patients participating in the study.
HUNGARY: In November 1998, the Company received notification from the Hungarian National Institute of Pharmacy that a MULTIKINE study with thirty head and neck patients was approved. The study, expected to last one year, will involve the same kind of patients as are participating in the Israeli and Canadian pre-surgical studies and will employ MULTIKINE as a pre-surgical treatment.
OTHER STUDIES: In addition to the foregoing, the Company is in the process of establishing other supporting human studies for MULTIKINE.
STRATEGY FOR MULTIKINE: At the present time the Company plans to seek initial regulatory approval for the use of MULTIKINE in the treatment of head and neck cancer patients prior to surgery or radiation with the intent of increasing the success of subsequent surgery (and/or radiation). Success in this area is measured by the reduction in the number of tumor recurrences since recurrences usually lead to a poor prognosis for the patient. The Company believes, based upon discussions with experts in the field, that a reduction in recurrences is viewed by many clinicians as an indicator of increased survival.
Head and neck cancer is the sixth most frequently occurring cancer worldwide, with an incidence of 500,000 annually. Recent statistics show no reduction in head and neck cancer mortality, but rather a dramatic increase of the disease in certain segments of the population. This cancer is most frequently found in men in their 50's or early 60's with a history of smoking and alcohol consumption. Conventional treatment calls for either surgery, which can be extremely disfiguring, or radiation and chemotherapy, both of which are associated with very unpleasant side-effects.
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 the Company's research efforts, even if successful from a medical standpoint, can be completed before those of its competitors.
The Company uses an unrelated corporation for certain aspects of the production of MULTIKINE for research and testing purposes. The agreement with this corporation expires during the summer of 2000. If this corporation could not, for any reason, supply the Company with MULTIKINE, the Company estimates that it would take approximately six to ten months to obtain supplies of MULTIKINE under an alternative manufacturing arrangement. The Company does not know what cost it would incur to obtain this alternative source of supply.
AIDS VACCINE
The Company, through its wholly-owned subsidiary Viral Technologies, Inc. (VTI), is involved in the development of a preventive vaccine against HIV infection. This vaccine is currently in Phase II human clinical trials in the Netherlands.
The Company is also developing a therapeutic AIDS vaccine for people already infected with HIV. The purpose of this vaccine is to activate a person's immune system in such a way that the immune system will fight HIV more effectively. This therapeutic vaccine is currently being readied for early clinical trials which are projected to begin in the second half of 1999.
Both vaccines are derived from the Company's HGP-30 technology. HGP-30 is a thirty amino acid region of the p17 core protein of HIV. The Company has decided to produce HGP-30 as a synthetic peptide because peptides are inexpensive to manufacture and cannot infect a person with HIV. VTI holds proprietary rights to certain synthesized components of the p17 core protein.
The HGP-30 vaccine differs from most other vaccine candidates in that its active component, the HGP-30 peptide, is derived from the p17 core protein particles of the virus. Since HGP-30 is a totally synthetic molecule containing no live virus, it cannot cause infection. Unlike the envelope (i.e. outside) proteins, the p17 region of the AIDS virus appears to be relatively non-changing. In January, 1991, VTI was issued a United States patent covering the production, use and sale of HGP-30. HGP-30 may also be effective in treating persons infected with the AIDS virus.
The preventive HIV vaccine, HGP-30, was tested in London, England in eighteen healthy HIV-negative volunteers at three different dosages. Subsequently it was tested in twenty-one HIV-negative volunteers in San Francisco and Los Angeles at four different dosages. Both tests showed the vaccine to be safe and able to elicit cellular immune responses and antibody responses in the majority of the volunteers.
In April 1995, eleven of the original twenty-one California volunteers began another clinical trial. The volunteers received two booster vaccinations. The volunteers, who had originally received the two lowest dosage levels, were asked to donate blood for a SCID mouse HIV challenge study. The SCID mouse is considered by many to be the best available animal model for HIV because it lacks its own immune system and therefore permits human cell growth. White blood cells from the five (5) vaccinated volunteers and from normal donors were injected into groups of SCID mice. They were then challenged with high levels of a different strain of the HIV virus than the one from which HGP-30 is derived. Infection by virus was determined and confirmed by two different assays, p24 antigen, a component of the virus core, and reverse transcriptase activity, an enzyme critical to HIV replication. Of the SCID mice given blood from vaccinated volunteers, 78% showed no HIV infection after virus challenge as compared to 13% of the mice given blood from unvaccinated donors.
In a study published in the September 1998 issue of AIDS Research and Human Retroviruses, the Company revealed that the improved version (HPG-30W) of the Company's HIV vaccine shows greater recognition of the most prevalent subtypes of the virus, covering over 90% of the world's AIDS cases. In addition, the article also provides additional evidence that the improved vaccine induces a stronger cellular immune response, which many scientists believe to be very important in fighting HIV infection.
In the AIDS Research and Human Retroviruses paper, Dr. Prem Sarin, the Company's Senior Vice President of Research, Infectious Diseases, reported that the evaluation of blood obtained from mice immunized with HGP-30 AIDS vaccine, in the presence of the adjuvant alum, a material needed to stimulate immune response to vaccines, showed recognition of the corresponding regions of the HIV subtypes A, B, C and E. However, if alum was replaced with newer adjuvants, the recognition of some HIV subtypes was improved and the levels of antibody isotypes used as surrogate markers for cellular immune response were increased 2 to 4 fold.
One major problem facing researchers involved in developing a vaccine against HIV is the virus' substantial variability and continued mutation among the different subtypes found around the world. Subtype A is found in Africa whereas the B subtype is the dominant strain in the U.S. and Europe. Subtype C is dominant in parts of Africa and Asia. Subtype E is primarily found in Thailand.
In September 1997, the Company also completed a Phase I safety study of the HGP-30 preventive AIDS vaccine in 24 HIV-infected patients. The study showed that immunizations with this vaccine were safe in AIDS patients.
In June 1998, the Institute for Clinical Pharmacology, Pharma BioResearch, Netherlands, started inoculating the first volunteers with the Company's HGP-30W AIDS vaccine in the only ongoing European Phase II AIDS vaccine study. In the trial, 30 healthy, HIV-negative volunteers will receive one of the three different dosages of the vaccine.
Although there has been important independent research showing the possible significance of the p17 region of HIV-1, there can be no assurance that any of the Company's technology will be effective in the prevention, diagnosis
or treatment of AIDS. There can be no assurance that other companies will not develop a product that is more effective or that VTI ultimately will be able to develop and bring a product to market in a timely manner that would enable it to derive commercial benefits.
In January 1991, VTI was awarded a U.S. patent covering the exclusive production, use and sale of HGP-30. In February 1993, VTI was awarded a European patent covering HGP-30 and certain other peptides.
Prior to October 1995, Viral Technologies, Inc. ("VTI"), a Delaware corporation, was 50% owned by the Company and 50% owned by Alpha 1 Biomedicals, Inc. In October 1995, the Company acquired Alpha 1's interest in VTI in exchange for 159,170 shares of the Company's common stock.
T-CELL MODULATION PROCESS
In January 1997, the Company acquired a new patented T-cell Modulation Process which uses "heteroconjugates" to direct the body to choose a specific immune response. The heteroconjugate technology, referred to as LEAPS (Ligand Epitope Antigen Presentation System), is intended to selectively stimulate the human immune system to more effectively fight bacterial, viral and parasitic infections and cancer, when it cannot do so on its own. Administered like vaccines, LEAPS combines T-cell binding ligands with small, disease associated, peptide antigens and may provide a new method to treat and prevent certain diseases.
The ability to generate a specific immune response is important because many diseases are often not combated effectively due to the body's selection of the "inappropriate" immune response. The capability to specifically reprogram an immune response may offer a more effective approach than existing vaccines and drugs in attacking an underlying disease.
The Company intends to use this new technology with the HGP-30 immunogen which is currently in Phase II clinical studies. To this end, the Company recently entered into formulation studies with a HGP-30/LEAPS compound called LEAPS 101. This product is likely to go into human testing in the second half of 1999. The target population will be HIV-infected individuals.
In addition, the Company intends to use the LEAPS technology to develop a potential Tuberculosis (TB) vaccine/treatment. TB is the largest killer of all infectious diseases worldwide and new strains of drug resistant TB are emerging daily. Using this new technology, the Company is currently conducting in vitro laboratory and in vivo animal studies.
In August 1996, the Company signed a 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 Company's LEAPS technology. This agreement was extended in 1998. Malaria affects about 300-500 million people per year and is responsible for about 2.7 million deaths annually. It is a parasitic disease transmitted by mosquitoes. As with
tuberculosis, the emergence of drug resistant strains is a major problem, as is the emergence of mosquitoes which are resistant to traditional insecticides. While at the present the number of malaria cases are 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.
In October 1996, the Company and Northeastern Ohio University College of Medicine signed a Collaborative Research Agreement to jointly identify and evaluate Herpes Simplex Virus related peptides. This study made use of the Company's new LEAPS technology which combines T-cell binding ligands with small, disease associated, peptide antigens. In the past, some vaccines have worked simply by vaccination with viral proteins (e.g. hepatitis B) to immunize patients. In the case of herpes simplex, that strategy has yet to be proven successful. The purpose of adding the T-cell binding ligand was to increase the effectiveness of the vaccine by directing the immune response to react in the way most likely to eliminate or control the disease agent. To test this hypothesis in herpes simplex, the researchers administered the vaccine with a T-cell binding ligand to one group of mice in order to direct the immune response to the cellular side, which is thought to be protective. The researchers also administered the vaccine to a separate group of mice using a different T-cell binding ligand to direct the immune response to the humoral (antibody) side, which is thought to be non-protective. For both vaccines, the herpes simplex peptide was kept the same. The results of the study indicated that the immunizations allowed the mice to resolve the infection quicker and more effectively resulting in minimal symptoms and mortality. The vaccine inducing a cellular immune response was protective while the vaccine inducing a humoral (antibody) immune response was not protective and actually accelerated disease progression. A subsequent study with a different herpes simplex peptide also showed protection, confirming the results from the prior study. Research conducted pursuant to this study may lead to the future development of a herpes simplex vaccine.
In May 1998, the Company announced the receipt of a Phase I $100,000 research grant to fund further animal studies with its herpes simplex vaccine. This grant was given pursuant to the Small Business Innovation Research Program of the National Institute of Allergy and Infectious Diseases.
Conservative estimates of those individuals who have genital infections are 30-40 million in the U.S. Oral herpetic infections are of a greater frequency. In newborns or in immunosuppressed patients (e.g. AIDS) herpes can lead to serious illness and death. Vaccination against herpes simplex virus may prevent or treat herpes simplex infection. Unlike most other viruses, once infected, a herpes virus remains in hiding within an individual and is reactivated often by stress-inducing factors. For some individuals, recurrences may take place on a monthly basis. Although there are antiviral drugs which are used to prevent serious disease and lessen the symptoms, there is currently no method to effectively prevent initial infection, to eliminate the virus from an infected person, or to prevent recurrences.
Scientists at Northeastern Ohio University College of Medicine have been working on methods of treating and detecting the herpes virus for over fifteen years.
The LEAPS technology was acquired from Cell-Med, Incorporated ("CELL-MED") in consideration for the Company's payment of $56,000 plus the issuance, during 1997, of 33,378 shares of the Company's common stock. The Company must pay CELL-MED additional payments of up to $600,000, depending upon the Company's ability to obtain regulatory approval for clinical studies using the technology. In addition, should the Company receive FDA approval for the sale of any product incorporating the technology, the Company is obligated to pay CELL-MED an advance royalty of $500,000, a royalty of 5% of the sales price of any product using the technology, plus 15% of any amounts the Company receives as a result of sublicensing the technology. So long as the Company retains rights in the technology, the Company has also agreed to pay the future costs associated with pursuing and or maintaining CELL-MED's patent and patent applications relating to the technology. The technology obtained from CELL-MED is covered by several U.S. and European patents. Additional patent applications are pending.
RESEARCH AND DEVELOPMENT
Since 1983, and through September 30, 1998, approximately $22,802,000 has been expended on Company-sponsored research and development, including approximately $3,834,000, $6,012,000 and $3,471,000, respectively during the years ended September 30, 1998, 1997 and 1996. Research and development expenditures prior to October 1995 do not include amounts spent by Viral Technologies, Inc. on research and development. Since May, 1986 (the inception of VTI) and through September 30, 1995, VTI has spent approximately $3,365,000 on research and development.
The Company has established a Scientific Advisory Board ("SAB") comprised of scientists distinguished in biomedical research in the field of lymphokines and related areas. From time to time, members of the SAB advise the Company 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 the Company-sponsored research. Members of the SAB receive $500 per month from the Company.
The members of the Company's SAB are:
Evan M. Hersh, M.D. - Vice-Chairman, Department of Internal Medicine, Chief, Section of Hematology/Oncology, Department of Internal Medicine, Tucson, AZ. Director of Clinical Research, Arizona Cancer Center, Tucson.
Michael J. Mastrangelo, M.D. - Director, Division of Medical Oncology; 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.
Edmond C. Tramont, M.D. - Associate Director of The Institute of Human Virology, University of Maryland Biotechnology Institute.
GOVERNMENT REGULATION
The investigational agents and future products of the Company 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. Certain states, however, have passed laws which allow a state agency having functions similar to the FDA to approve the testing and use of pharmaceutical products within the state. In the case of either FDA or state regulation, 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 (or state regulatory agency) 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 the Company, the Company 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. There can be no assurance that regulatory approval will ever be obtained for products developed by the Company. Approval of drugs and biologicals by regulatory authorities of most foreign countries must also be obtained prior to initiation of clinical studies and marketing in those countries. The approval process varies from country to country and the time period required in each foreign country to obtain approval may be longer or shorter than that required for regulatory approval in the United States.
There are no assurances that clinical trials conducted under approval from state authorities or conducted in 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 the Company 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.
COMPETITION AND MARKETING
Many companies, nonprofit organizations and governmental institutions are conducting research on lymphokines. Competition in the development of therapeutic agents and diagnostic products incorporating lymphokines is intense. Large, well-established pharmaceutical companies are engaged in lymphokine research and development and have considerably greater resources than the Company 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 the Company. Any new developments made by such organizations may render the Company's licensed technology and know-how obsolete.
Several biotechnology companies are producing IL-2-like compounds. The Company believes, however, that it is the only producer of a patented IL-2 product using a patented cell-culture technology with normal human cells. The Company foresees that its principle competition will come from producers of genetically-engineered IL-2-like products. However, it is the Company'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, the Company'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 lymphokines and other proteins, i.e. as a "cocktail". If these differences prove to be of importance, and if the therapeutic value of its MULTIKINE product is conclusively established, the Company believes it will be able to establish a strong competitive position in a future market.
The Company has not established a definitive plan for marketing nor has it established a price structure for the Company's saleable products. However, the Company intends, if the Company 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 the Company's products to cancer centers, physicians and clinics involved in immunotherapy.
Competition to develop treatments or vaccines for the control of AIDS is intense. Many of the pharmaceutical and biotechnology companies around the world are devoting substantial sums to the research and development of technologies useful in these areas. VTI's development of its experimental HGP-30 AIDS Vaccine, if successful, would likely face intense competition from other companies seeking to find alternative or better ways to prevent and treat AIDS.
Both the Company and VTI may encounter problems, delays and additional expenses in developing marketing plans with outside firms. In addition, the Company and VTI may experience other limitations involving the proposed sale of their products, such as uncertainty of third-party reimbursement. There is no assurance that the Company or VTI can successfully market any products which they may develop or market them at competitive prices.
The clinical trials funded to date by VTI have not been approved by the FDA, but rather have been conducted pursuant to approvals obtained from certain states and foreign countries. Since the results of these clinical trials may not be accepted by the FDA, companies which are conducting clinical trials approved by the FDA may have a competitive advantage in that the products of such companies are further advanced in the regulatory process than those of VTI. Notwithstanding the above, VTI's primary objective is to develop an AIDS vaccine for use in Africa and Asia. As such, the Company does not consider the lack of FDA approval to be important at this time.
ITEM 2.
ITEM 2. PROPERTIES
In October 1994, the Company completed the construction of a research laboratory in space leased by the Company. The cost of modifying and equipping this space for the Company's purposes was approximately $1,200,000. In February l997, the Company added an additional 3,900 square feet to this facility at a cost, including equipment, of approximately $l20,000. The space which houses the Company's fully equipped 11,000 square foot laboratory is rented by the Company for approximately $4,700 per month pursuant to a lease which expires in 2004, with extentions available until 2014.
The Company leases office space at 8229 Boone Blvd., Suite 802, Vienna, Virginia at a monthly rental of approximately $7,400. The Company believes this arrangement is adequate for the conduct of its present business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 15, 1998 there were approximately 2,800 record holders of the Company's common stock. Prior to June 5, 1997, the Company's Common Stock was traded on the National Association of Securities Dealers Automatic Quotation ("NASDAQ") System. Since June 5, 1997 the Company's Common Stock has traded on the American Stock Exchange. Set forth below are the range of high and low quotations for the Company's common stock for the periods indicated as reported 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 12/31/96 $ 6.63 $3.50 3/31/97 $ 6.12 $4.19 6/30/97 $ 5.12 $2.75 9/30/97 $ 8.06 $3.12
12/31/97 $10.00 $5.87 3/31/98 $ 6.56 $4.00 6/30/98 $ 6.44 $4.44 9/30/98 $ 5.94 $1.94
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 the Company's assets after payment of liabilities. The Board of Directors is not obligated to declare a dividend. The Company has not paid any dividends on its common stock and the Company does not have any current plans to pay any common stock dividends.
The provisions in the Company's Articles of Incorporation relating to the Company's Preferred Stock would allow the Company'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 the Company'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 the Company'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 the Company's operating results, announcements of technological innovations or new therapeutic products by the Company or its competitors, governmental regulation, developments in patent or other proprietary rights, public concern as to the safety of products developed by the Company or other biotechnology and pharmaceutical companies, and general market conditions may have a significant effect on the market price of the Company's Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the more detailed financial statements, related notes and other financial information included herein.
For the Years Ended September 30, 1998 1997 1996 1995 ---- ------ ------ -----
Investment Income and Other Revenues $792,994 $ 438,145 $ 322,370 $ 423,765 Expenses: Research and Development 3,833,854 6,011,670 3,471,477 1,824,661 Depreciation and Amortization 295,331 313,547 290,829 262,705 General and Administrative 3,106,492 2,302,386 2,882,958 1,713,912 Equity in loss of joint venture -- -- 3,772 501,125 --------------------------------- ----- -----------
Net Loss $(6,442,683)$(8,189,458)$(6,326,666) $(3,878,638) ============ ======================= ============
Loss per common share (basic and diluted) $(0.74) $(1.00) $(1.16) $(0. 89)
Weighted average common shares outstanding 11,379,437 9,329,419 6,425,316 4,342,628
Balance Sheet Data:
September 30, 1998 1997 1996 1995 ---- ------ ------ -----
Working Capital $12,926,014 $4,581,247 $10,266,104 $3,983,699 Total Assets 14,431,813 6,334,397 11,878,370 6,359,011 Total Liabilities 456,529 508,617 294,048 1,516,978 Shareholders' Equity 13,975,284 5,825,780 11,584,322 4,842,033
No dividends have been declared on the Company's common stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal 1998
Interest income during the year ending September 30, 1998 reflects interest accrued on investments. Interest income increased from fiscal 1997 due to the investment of the proceeds of the sale of the Series D Preferred Stock. Research and development expenses in 1998 are substantially less then the prior period since the costs of acquiring the MULTIKINE license and the LEAPS technology were expensed in fiscal 1997. General and administrative expenses increased due to additional employees needed for the Company's increased activity level and charges ($587,377) for options granted to persons other than employees with exercise prices equal to prevailing market prices at the time of grant.
Fiscal 1997
Interest income during the year ending September 30, l997 reflects interest earned on investments. Research and development expenses have increased due to the beginning of new clinical studies with cancer and AIDS patients. Research and development expenses also increased due to the purchase of the MULTIKINE rights from the Sittona Company ($2,250,000), which was expensed as research and development expenses, as well as the payment to to Cell-Med ($125,000) to retain ownership of the LEAPS technology.
Fiscal 1996
Interest income during the year ending September 30, l996 reflects interest earned on investments. Other revenues were derived from commercial
services provided by the Company's laboratory. Research and development expenses increased significantly due to the Company's new clinical trials as well as the consolidation of VTI, as explained below. Prior to October 30, 1995, VTI was owned 50% by the Company and 50% by Alpha 1 Biomedicals, Inc. Effective October 30, 1995 the Company acquired Alpha 1's interest in VTI in exchange for 159,170 shares of the Company's common stock. Prior to this acquisition the Company accounted for its investment in VTI using the equity method of accounting. Following the acquisition of the remaining 50% interest in VTI on October 30, 1995, the financial statements of VTI have been consolidated with those of the Company.
The acquisition of VTI was accounted for under the purchase method of accounting. Since the acquisition represented primarily research and development costs, the purchase price for the remaining 50% interest in VTI was expensed and caused research and development expense for the year ended September 30, 1996 to increase.
The consolidation of VTI's financial statements with those of the Company also had the following effects:
1. Interest income declined from the comparable period in the previous year since interest income associated with the Company's loans to VTI was eliminated upon consolidation.
2. Research and development expenses increased due to the inclusion of VTI's research and development expenses with those of the Company.
3. General and administrative expenses increased due to the inclusion of VTI's general and administrative expenses with those of the Company.
4. Capitalized patent costs increased due to the inclusion of VTI's patent expenditures with those of the Company.
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception in March l983. The Company has relied upon proceeds realized from the public and private sale of its Common Stock to meet its funding requirements. Funds raised by the Company 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, the funding of VTI's research and development program, patent applications, the repayment of debt, the continuation of Companysponsored research and development, administrative costs and construction of laboratory facilities. Inasmuch as the Company 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), the Company is mostly dependent upon the proceeds from the sale of its securities to meet all of its liquidity and capital resource requirements.
In May 1996, the Company sold 3,500 shares of its Series A Preferred Stock (the "Preferred Shares") for $3,500,000 or $1,000 per share. At the purchasers' option, up to 1,750 Preferred Shares were convertible, on or after 60 days from the closing date of the purchase of such shares (the "Closing"), into shares of the Company's Common Stock on the basis of one share of Preferred
Stock for shares of Common Stock equal in number to the amount determined by dividing $1,000 by 85% of the Closing Price of the Company's Common Stock. All Preferred Shares were convertible, on or after 90 days from the Closing, on the basis of one share of Preferred Stock for shares of the Company's Common Stock equal in number to the amount determined by dividing $1,000 by 83% of the Closing Price of the Company's Common Stock. The term "Closing Price" was defined as the average closing bid price of the Company's Common Stock over the five-day trading period ending on the day prior to the conversion of the Preferred Stock. All outstanding shares of the Series A Preferred Stock have since been converted into 632,041 shares of the Company's Common Stock.
In August 1996, the Company sold, in a private transaction, 5,000 shares of its Series B Preferred Stock (the "Series B Preferred Shares") for $5,000,000 or $1,000 per share. At the purchasers' option, up to 2,500 Series B Preferred Shares are convertible, on or after ten days from the date the shares were registered for public sale (the "Effective Date"), into shares of the Company's Common Stock on the basis of one share of Preferred Stock for shares of Common Stock equal in number to the amount determined by dividing $1,000 by 87% of the Closing Price of the Company's Common Stock. All Preferred Shares were convertible, on or after 40 days from the Effective Date, on the basis of one share of Preferred Stock for shares of the Company's Common Stock equal in number to the amount determined by dividing $1,000 by 85% of the Closing Price of the Company's Common Stock. The term "Closing Price" is defined as the average closing bid price of the Company's Common Stock over the five-day trading period ending on the day prior to the conversion of the Preferred Stock. Notwithstanding the above, the conversion price could not be less than $3.60 nor more than $14.75. By means of a Registration Statement filed with the Securities and Exchange Commission, the shares issuable upon the conversion of the Series B Preferred Shares have been registered for public sale. Prior to December 20, 1996, 1,900 Series B Preferred Shares were converted into 527,774 shares of the Company's common stock. In December 1996 the Company repurchased 2,850 Series B Preferred Shares for $2,850,000 plus warrants which allow the holders to purchase up to 99,750 shares of the Company's common stock for $4.25 per share at any time prior to December 15, 1999. The Company raised funds required for this repurchase from the sale of its Series C Preferred Stock. In May 1997 all remaining 250 shares of the Series B Preferred Stock were converted into 69,444 shares of common stock. As of November 30, 1998 Warrants for the purchase of 17,500 shares of common stock had been exercised.
In December 1996, the Company raised $2,850,000 from the sale of units consisting of 2,850 shares of the Company's Series C Preferred Stock, 379,763 Series A Warrants and 379,763 Series B Warrants. The Series C Preferred Shares were convertible into shares of the Company's Common Stock on the basis of one share of Preferred Stock for shares of Common Stock equal in number to the amount determined by dividing $1,000 by 85% of the Closing Price of the Company's Common Stock (the "Conversion Price"). The term "Closing Price" was defined as the average closing bid price of the Company's Common Stock over the five day trading period ending on the day prior to the conversion of the Preferred Stock. Notwithstanding the above, the Conversion Price could not be more than $4.00. Beginning 90 days after December 17, 1996 one half of the Series C Preferred Shares were convertible into shares of the Company's common stock. All preferred shares were convertible into shares of the Company's common
stock beginning 180 days after December 17, 1996. Each Series A Warrant entitles the holder to purchase one share of the Company's common stock at a price of $4.50 per share at any time prior to March 15, 1998. Each Series B Warrant entitles the holder to purchase one share of the Company's common stock at a price of $4.50 per share at any time prior to March 15, 1999. As of November 30, 1998 all shares of the Series C Preferred Stock have been converted into 915,271 shares of the Company's common stock, all 379,763 Series A Warrants had been exercised and 253,175 Series B Warrants had been exercised.
Subsequent to the issuance of the Company's 1997 consolidated financial statements, the Company determined that the application of a technical accounting treatment required the 1997 and 1996 loss per share calculations to include the impact of $1,062,482 and $1,039,679 respectively, for the accretion of the assumed beneficial conversion features, and $108,957 and $58,794, respectively, for preferred stock dividends, with respect to the issuance of the Series A, Series B and Series C Preferred Stock during fiscal 1997 and 1996. The effect of the accretion is a non-cash charge to additional paid-in capital and does not impact the previously reported net loss for the years ended September 30, 1997 and 1996, nor does it result in a net change to stockholders' equity at September 30, 1997 and 1996. The effect of the restatement was to increase net loss per share by $0.12 to $1.00 for the year ended September 30, 1997, and $0.18 to $1.16 for the year ended September 30, 1996.
In October 1994, the Company completed the construction of its own research laboratory in a facility leased by the Company. The cost of modifying the leased space and providing the equipment for the research laboratory was approximately $1,200,000. In August 1994, the Company obtained a loan to fund the majority of the costs for the research laboratory. The Company repaid this loan during the quarter ending September 30, 1996. In February l997, the Company added an additional 3,900 square feet to this facility at a cost, including equipment, of approximately $l20,000.
On December 22, 1997, the Company sold 10,000 shares of its Series D Preferred Stock, 550,000 Series A Warrants and 550,000 Series B Warrants, to ten institutional investors for $10,000,000. The Series D Preferred Shares may be converted into shares of the Company's Common Stock. Prior to September 19, 1998 (or such earlier date as the market price of the Company's Common Stock is $3.45 or less for five consecutive trading days) the number of shares issuable upon the conversion of each Series D Preferred Share is to be determined by dividing $1,000 by $8.28. On or after September 19, 1998 the number of shares issuable upon the conversion of each Series D Preferred Share is to be determined by dividing $1,000 by the lower of (i) $8.28, or (ii) the average price of the Company's common stock for any two trading days during the ten trading days preceding the conversion date. Each Series A Warrant allows the holder to
purchase one share of the Company's common stock for $8.62 at any time prior to December 22, 2001. Each Series B Warrant allows the holder to purchase one share of the Company's Common Stock for $9.31 at any time prior to December 22, 2001. The Company has agreed to file a registration statement with the Securities and Exchange Commission covering the sale of the common stock issuable upon the conversion of the Series D Preferred Stock and/or the exercise of the Series A and Series B Warrants. As of November 30, 1998 2,786 Series D Preferred Shares had been converted into 1,167,812 shares of the Company's common stock.
During fiscal l999, the Company expects that it will spend between $3,500,000 and $4,000,000 on research, development, and clinical trials. This amount includes VTI's estimated research and development expenses during fiscal l998. Prior to October l995, VTI's research and development expenses were shared 50% by the Company and 50% by Alpha 1 Biomedicals, Inc. VTI became a wholly-owned subsidiary of the Company in October l995 when the Company purchased Alpha 1's 50% interest in VTI. The Company plans to use its existing financial resources to fund its research and development program during this period.
Other than funding its research and development program and the costs associated with its research laboratory, the Company does not have any material capital commitments.
It should be noted that substantial additional funds will be needed for more extensive clinical trials which will be necessary before the Company or VTI 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, the Company will be required to raise additional funds through the sale of securities, debt financing or other arrangements in order to continue with its research efforts. However, there can be no assurance that such financing will be available or be available on favorable terms.
Year 2000. The Company is in the process of modifying its computer hardware and software systems to recognize the year 2000. The Company expects these modifications to be substantially complete by early 1999. The Company does not expect these modifications to have a significant effect on its operations and the costs of modification are expected to be insignificant. In addition, the Company is evaluating significant vendors and other third parties which could have an effect on the Company's operations to ensure year 2000 compliance. If the Company's computer systems fail during the year 2000, the Company may need to have independent laboratories perform some of research that is presently being conducted by the Company's laboratory. Since the Company expects its computer systems to be compliant with the year 2000 by early 1999, the Company has not developed any contingency plans in the event the Company's computer systems fail to be year 2000 compliant.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements included with this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
Name Age Position
Maximilian de Clara 69 Director and President Geert R. Kersten, Esq. 40 Director, Chief Executive Officer, Secretary and Treasurer Patricia B. Prichep 46 Senior Vice President of Operations M. Douglas Winship 49 Senior Vice President of Regulatory Affairs and Quality Assurance Dr. Eyal Talor 43 Senior Vice President of Research and Manufacturing Dr. Prem S. Sarin 64 Senior Vice President of Research Infectious Diseases Dr. Daniel H. Zimmerman 57 Senior Vice President of Research, Cellular Immunology Michael Luecke 56 Senior Vice President of Business Development Mark V. Soresi 44 Director F. Donald Hudson 65 Director
The directors of the Company serve in such capacity until the next annual meeting of the Company's shareholders and until their successors have been duly elected and qualified. The officers of the Company serve at the discretion of the Company's directors.
Mr. Maximilian de Clara, by virtue of his position as an officer and director of the Company, may be deemed to be the "parent" and "founder" of the Company as those terms are defined under applicable rules and regulations of the Securities and Exchange Commission.
The principal occupations of the Company's officers and directors, during the past several years, are as follows:
Maximilian de Clara. Mr. de Clara has been a director of the Company since its inception in March l983, and has been president of the Company since July l983. Prior to his affiliation with the Company, 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 the Company 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 the Company's secretary and treasurer in 1989. In May 1992, Mr. Kersten was appointed Chief Operating Officer and in February 1995, Mr. Kersten became the Company'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 the Company. 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. From June 1990 to December 1992, Ms. Prichep was the Manager of Quality and Productivity for the NASD's Management, Systems and Support Department. Between 1982 and 1990, Ms. Prichep was Vice President and Operations Manager for Source Capital, Ltd.
M. Douglas Winship has been the Company's Senior Vice President of Regulatory Affairs and Quality Assurance since April 1994. Between 1988 and April 1994, Mr. Winship held various positions with Curative Technologies, Inc., including Vice President of Regulatory Affairs and Quality Assurance (1991-1994).
Eyal Talor, Ph.D. has been the Company's Senior Vice President of Research and Manufacturing since March 1994. From October 1993 until March 1994, Mr. 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, Mr. 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, Mr. Talor was also the Regulatory Affairs and Safety Officer For SRA. Since 1987, Mr. Talor has held various positions with the John 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).
Prem S. Sarin, Ph.D. has been the Company's Senior Vice President of Research, Infectious Diseases since October 1995. From May 1993 to September 1995 Dr. Sarin was the Vice President of Research for Viral Technologies, Inc. (the Company's wholly-owned subsidiary). Dr. Sarin was an Adjunct Professor of Biochemistry at the George Washington University School of Medicine, Washington, D.C., from 1986-1992. From 1975-1991 Dr. Sarin held the position of Deputy Chief, Laboratory of Tumor Cell Biology at the National Cancer Institute (NCI), NIH, Bethesda, Maryland. Dr. Sarin was a
Senior Investigator (1974-1975) and a Visiting Scientist (1972-1974) at the Laboratory of Tumor Cell Biology at NCI, NIH. From 1971-1972 Dr. Sarin held the position of Director, Department of Molecular Biology, Bionetics Research Laboratory, Bethesda, Maryland.
Daniel H. Zimmerman, Ph.D. has been the Company'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.
Michael Luecke joined the Company as Senior Vice President of Business Development in June 1998. Mr. Luecke has over 20 years of business experience in pharmaceutical and biotechnology companies. He has held senior-level business development/licensing positions with Bristol-Myers, SmithKline and Ciba-Geigy, as well as several small biopharmaceutical companies.
Mark V. Soresi. Mr. Soresi became a director of the Company in July 1989. Between 1989 and 1997, Mr. Soresi was the president and Chief Executive Officer of REMAC U.S.A., Inc. a corporation is involved in the clean-up of hazardous and toxic waste dump sites. Since 1997 Mr. Soresi has been the president and chief executive officer of Millennium Solutions & Beyond, Inc. and the senior vice president of Xecute ND, Inc. both of which are involved in the computer consulting business. Mr. Soresi attended George Washington University in Washington, D.C. where he earned a Bachelor of Science in Chemistry.
F. Donald Hudson. F. Donald Hudson has been a director of the Company since May 1992. From December 1994 to October 1995 Mr. Hudson was President and Chief Executive Officer of VIMRx Pharmaceuticals, Inc. Between 1990 and 1993, Mr. Hudson was President and Chief Executive Officer of Neuromedica, Inc., a development stage company engaged in neurological research. Until January 1989, Mr. Hudson served as Chairman and Chief Executive Officer of Transgenic Sciences, Inc. (now TSI Corporation), a publicly held biotechnology corporation which he founded in January 1987. From October 1985 until January 1987, Mr. Hudson was a director of Organogenesis, Inc., a publicly held biotechnology corporation of which he was a founder, and for five years prior thereto was Executive Vice President and a director of Integrated Genetics, Inc., a corporation also engaged in biotechnology which he co-founded and which was publicly traded until its acquisition in 1989 by Genzyme, Inc.
All of the Company's officers devote substantially all of their time on the Company's business. Messrs. Soresi and Hudson, as directors, devote only a minimal amount of time to the Company.
The Company has an audit committee whose members are Geert R. Kersten and F. Donald Hudson.
Executive Compensation
The following table sets forth in summary form the compensation received by (i) the Chief Executive Officer of the Company and (ii) by each other executive officer of the Company who received in excess of $100,000 during the fiscal year ended September 30, 1998.
Annual Compensation Long Term Compensation Re- All Other stric- Other Annual ted Com- Compen- Stock Options pensa- Name and Princi- Fiscal Salary Bonus sation Awards Granted tion pal Position Year (1) (2) (3) (4) (5) (6)
Maximilian 1998 $315,021 - $81,709 - 164,000 $73 de Clara, 1997 $319,104 - $76,290 - 333,000 $88 President 1996 $225,000 $75,000$85,016 - 70,000 $88
Geert R. Kersten, 1998 $229,533 - $15,180 2,081 164,000 $5,310 Chief Executive 1997 $228,888 - $12,314 - 313,000 $8,888 Officer, Secretary1996 $172,531 $75,000 $9,420 - 294,000 $8,869 and Treasurer M. Douglas Winship,1998 $136,918 - $2,400 1,740 - $1,060 Senior Vice President 1997 $129,926 - $2,400 - 45,000 $3,152 of Regulatory Affairs 1996 $119,100 - $2,400 - - $2,488 and Quality Assurance Prem S. Sarin, 1998 $117,035 - - 1,488 39,000 $929 Ph.D. 1997 $113,385 - - - 34,000 $3,473 Senior Vice President of Research, Infectious Diseases
Eyal Talor, Ph.D.1998 $130,845 - $3,000 1,616 27,000 $958 Senior Vice President 1997 $119,333 - $3,000 - 58,000 $3,668 of Research and Manufacturing
Daniel Zimmerman,1998 $106,360 - $3,000 1,353 39,000 $822 Ph.D., 1997 $104,000 - - - 34,000 $3,208 Senior Vice President of Cellular Immunology
(1) The dollar value of base salary (cash and non-cash) received.
(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, compensation received for serving as a member of the Company's Board of Directors.
(4) During the periods covered by the table, the shares of restricted stock issued as compensation for services to the persons listed in the table. As of September 30, 1998, the number of shares of the Company'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 the Company's common stock were:
Name Shares * Value
Maximilian de Clara -- -- Geert R. Kersten 107,021 $280,395 M. Douglas Winship 1,740 $4,559 Prem S. Sarin, Ph.D. 1,488 $3,899 Eyal Talor, Ph.D. 3,116 $8,164 Daniel Zimmerman, Ph.D. 21,383 $56,023
* Includes 401(k) shares that were issued prior to September 30, 1998.
Dividends may be paid on shares of restricted stock owned by the Company's officers and directors, although the Company 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 period covered by the Table. Includes certain options issued in connection with the Company's l998 Salary Reduction Plan as well as certain options purchased from the Company. See "Options Granted During Fiscal Year Ending September 30, l998" below.
(6) All other compensation received that the Company 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, the Company 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, the Company. Amounts in the table represent life insurance premiums and/or contributions made by the Company to a 401(k) pension plan on behalf of persons named in the table.
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
During 1993 the Company 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 the Company'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 the Company's common stock as opposed to cash. Each participant's contribution is matched by the Company 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. The Company's contribution of common stock is valued each quarter based upon the closing price of the Company's common stock. The fiscal 1998 expenses for this plan were $70,519. Other than the 401(k) Plan, the Company does not have a defined benefit, pension plan, profit sharing or other retirement plan.
Compensation of Directors
Standard Arrangements. The Company currently pays its directors $2,000 per quarter, plus expenses. The Company has no standard arrangement pursuant to which directors of the Company are compensated for any services provided as a director or for committee participation or special assignments.
Other Arrangements. The Company has from time to time granted options to its outside directors: Mr. Soresi and Mr. Hudson. See Stock Options below for additional information concerning options granted to the Company's directors.
Employment Contracts
Effective January 2, 1996, the Company entered into a three-year employment agreement with Mr. de Clara. The employment agreement provides that during the period between January 2, 1996 and January 2, 1997, the Company will pay Mr. de Clara an annual salary of $300,000. During the years ending January 2, 1998 and 1999, the Company will pay Mr. de Clara a salary of $330,000 and $363,000 respectively. 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 the Company equal to 18 months salary. For purposes of the employment agreement, a change in the control of the Company means the sale of more than 50% of the outstanding shares of the Company's Common Stock, or a change in a majority of the Company's directors.
Effective August 1, 1997, the Company entered into a three-year employment agreement with Mr. Kersten. The employment agreement provides that during the period between August 1, 1997 and July 31, 1998, the Company will pay Mr. Kersten an annual salary of $264,848. During the years ending July 31, 1999 and 2000, the Company will pay Mr. Kersten a salary of $291,333 and $320,466 respectively. In the event that there is a material reduction in Mr. Kersten's
authority, duties or activities, or in the event there is a change in the control of the Company, the agreement allows Mr. Kersten to resign from his position at the Company and receive a lump-sum payment from the Company equal to 18 months salary. For purposes of the employment agreement, a change in the control of the Company means the sale of more than 50% of the outstanding shares of the Company's Common Stock, or a change in a majority of the Company's directors.
Compensation Committee Interlocks and Insider Participation
The Company has a compensation committee comprised of all of the Company's directors, with the exception of Mr. Kersten. During the year ended September 30, 1998, Mr. de Clara was the only officer participating in deliberations of the Company's compensation committee concerning executive officer compensation. See Item 13 of this report for information concerning transactions between the Company and Mr. de Clara.
During the year ended September 30, 1998, no director of the Company was also an executive officer of another entity, which had an executive officer of the Company 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, 1998, 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 Ending September 30, l998
Potential Individual Grants Realizable Value at % of Total Assumed Annual Options Rates of Stock Price Granted to Exercise Appreciation for Options Employees in Price Per Expiration Option Term (2) Name Granted (#) Fiscal Year Share Date 5% 10%
Maximilian 114,000 (1) $2.94 1/10/02 $60,420 $128,820 de Clara 50,000 $4.68 5/01/08 $147,000 $372,000 ------ 164,000
Geert R. 114,000 (1) $2.94 1/10/02 $60,420 $128,820 Kersten 50,000 $4.68 5/01/08 $147,000 $372,000 ------ 164,000
M. Douglas - -- -- -- -- Winship -
Prem S. 24,000 (1) $2.94 1/10/02 $12,700 $27,100 Sarin, Ph.D.15,000 $4.68 5/01/08 $435,00 $111,600 ------ 39,000
Eyal 12,000 (1) $2.94 1/10/02 $6,360 $13,600 Talor, Ph.D. 15,000 $3.31 8/03/08 $30,800 $78,900 ------ 27,000
Daniel 24,000 (1) $2.94 1/10/02 $12,700 $27,100 Zimmerman, 15,000 $5.06 2/19/08 $47,000 $120,700 ------ Ph.D. 39,000
(1) Options were granted in accordance with the Company's 1998 Salary Reduction Plan. Pursuant to the Salary Reduction Plan, any employee of the Company was allowed to receive options (exercisable at market price at time of grant) in exchange for a one-time reduction in such employee's salary. (2) The potential realizable value of the options shown in the table assuming the market price of the Company's Common Stock appreciates in value from the date of the grant to the end of the option term at 5% or 10%.
Option Exercises and Year End Option Values
Value (in $) of Unexercised In-the- Number of Money Options Unexercised at Fiscal Shares Options (3) Year-End (4) Acquired On Value Re- Exercisable/ Exercisable/ Name Exercise (1) alized (2) Unexercisable Unexercisable - ---- ------------ ---------- ------------- -------------
Maximilian de Clara52,715 170,607 289,667/300,666 -/- Geert R. Kersten 20,000 113,800 689,084/286,666 -/- M. Douglas Winship -- -- 37,000/30,000 -/- Prem S. Sarin -- -- 57,834/49,666 -/- Eyal Talor 11,166 61,202 40,167/60,333 -/- Daniel Zimmerman -- -- 40,334/44,666 -/-
(1) The number of shares received upon exercise of options during the fiscal year ended September 30, 1998.
(2) With respect to options exercised during the Company's fiscal year ended September 30, 1998, 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, 1998, separated between those options that were exercisable and those options that were not exercisable.
(4) For all unexercised options held as of September 30, 1998, the market value of the stock underlying those options (as of September 30, 1998) was less than the exercise price of the options.
Stock Option and Bonus Plans
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option Plans and a Stock Bonus Plan. 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 1,100,000 shares of the Company's Common Stock to persons that 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 the Company 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 the Company 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 the Company, 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 the Company 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 the Company's outstanding shares).
Non-Qualified Stock Option Plan. The Non-Qualified Stock Option Plans collectively authorize the issuance of up to 2,760,000 shares of the Company's Common Stock to persons that exercise options granted pursuant to the Plans. The Company's employees, directors, officers, consultants and advisors are eligible to be granted options pursuant to the Plans, provided however that bona fide services must be rendered by such consultants or advisors and such services must not be in connection with the offer or sale of securities in a capital-raising transaction. The option exercise price is determined by the Committee but cannot be less than the market price of the Company's Common Stock on the date the option is granted.
Stock Bonus Plan. Up to 40,000 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, the Company's employees, directors, officers, consultants and advisors are eligible to receive a grant of the Company'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 the Company's Compensation Committee ("the Committee"), each member of which is a director of the Company. The members of the Committee were selected by the Company'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 the Company or the period of time a non-employee must provide services to the Company. At the time an employee ceases working for the Company (or at the time a non-employee ceases to perform services for the Company), 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 the Company'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 the Company may at any time, and from time to time, amend, terminate, or suspend one or more of the Plans in any manner they deem appropriate, provided that such amendment, termination or suspension will not adversely affect rights or obligations with respect to shares or options previously granted. The Board of Directors may not, without shareholder approval: make any amendment which would materially modify the eligibility requirements for the Plans; increase or decrease the total number of shares of Common Stock which may be issued pursuant to the Plans except in the case of a reclassification of the Company's capital stock or a consolidation or merger of the Company; 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.
Option Summary. The following sets forth certain information, as of November 30, 1998, concerning the stock options granted by the Company. Each option represents the right to purchase one share of the Company's Common Stock.
Total Shares Shares Reserved for Remaining Reserved Outstanding Options Name of Plan Under Plan Options Under Plan
Incentive Stock Option Plans 1,100,000 772,384 309,449 Non-Qualified Stock Option Plans 2,760,000 1,959,700 441,924
As of November 30, 1998, 18,880 shares had been issued pursuant to the Company's Stock Bonus Plan as part of the Company's contribution to its 401(k) plan.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 30, 1998, 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 289,667 2.2% Bergstrasse 79 6078 Lungern, Obwalden, Switzerland
Geert R. Kersten 802,105 (2) 6% 8229 Boone Blvd. Suite 802 Vienna, VA 22182
Patricia B. Prichep 97,972 * 8229 Boone Blvd. Suite 802 Vienna, VA 22182
M. Douglas Winship 38,740 * 8229 Boone Blvd. Suite 802 Vienna, VA 22182
Eyal Talor, Ph.D. 43,283 * 8229 Boone Blvd. Suite 802 Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 66,717 * 8229 Boone Blvd. Suite 802 Vienna, VA 22182
Prem Sarin, Ph.D. 59,322 * 8229 Boone Blvd. Suite 802 Vienna, VA 22182
Michael Luecke 900 * 8229 Boone Blvd. Suite 802 Vienna, VA 22182
Mark Soresi 100,000 * 8229 Boone Blvd. Suite 802 Vienna, VA 22182
F. Donald Hudson 117,000 * 53 Mt. Vernon Street Boston, MA 02108
All Officers and Directors as a Group (10 persons) 1,615,706 11.4% ========== ===== *Less than 1% (1) Includes shares issuable prior to February 28, 1999 upon the exercise of options or warrants granted to the following persons:
Options or Warrants Exercisable Name Prior to February 28, 1999
Maximilian de Clara 289,667 Geert R. Kersten 695,084 Patricia B. Prichep 93,667 M. Douglas Winship 37,000 Eyal Talor, Ph.D. 40,167 Daniel H. Zimmerman, Ph.D. 45,334 Prem Sarin, Ph.D. 57,834 Michael Luecke -- Mark Soresi 85,000 F. Donald Hudson 117,000
See Item 10 of this report for information concerning outstanding stock options.
(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 excludes shares which may be issued upon the exercise or conversion of other options, warrants and other convertible securities previously issued by the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to January 1997 the Company's MULTIKINE technology was owned by Hooper Trading Company, N.V., ("Hooper"), and Shanksville Corporation, ("Shanksville") and licensed to Sittona Company, B.V., ("Sittona"). In 1983, Sittona licensed the MULTIKINE Technology to the Company and received from the Company a $1,400,000 advance royalty payment. The Company also agreed to (i) pay royalties to Sittona equal to l0% of net sales and l5% of the licensing royalties received from third parties (ii) bear the expense of preparing, filing
and processing patent applications and (iii) obtain and maintain patents in the United States and foreign countries on all inventions, developments and improvements made by or on behalf of the Company relating to the MULTIKINE technology.
Prior to October, 1996, Maximilian de Clara, an Officer, Director and shareholder of the Company, owned 50% and 30%, respectively, of Hooper and Shanksville. Between 1985 and October 1996 Mr. de Clara owned all of the issued and outstanding stock of Sittona. In October 1996, Mr. de Clara disposed of his interest in Hooper, Shanksville and Sittona.
In January 1997 Hooper and Shanksville sold all of their rights in the MULTIKINE technology to Sittona. Immediately following these transactions, Sittona sold all of its rights in the MULTIKINE technology to the Company, including all rights acquired from Hooper and Shanksville, in consideration for $500,000 in cash and 751,678 shares of the Company's common stock. The shares of the Company's Common Stock acquired by Sittona as a result of this transaction are being offered for public sale by means of a registration statement filed with the Securities and Exchange Commission.
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years Ended September 30, 1998, 1997 (Restated), and 1996 (Restated), and Independent Auditors' Report
CEL-SCI CORPORATION
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 (RESTATED), AND 1996 (RESTATED):
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements -
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of CEL-SCI Corporation:
We have audited the accompanying consolidated balance sheets of CEL-SCI Corporation and subsidiary (the Company) as of September 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1998. 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 generally accepted auditing standards. 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 its subsidiary as of September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 14, the 1997 and 1996 consolidated financial statements have been restated.
DELOITTE & TOUCHE LLP Washington, DC December 11, 1998
CEL-SCI CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1998 AND 1997 - --------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS: Cash and cash equivalents $2,813,225 $3,508,606 Investment securities available for sale 9,675,311 745,216 Interest and other receivables 69,809 106,443 Prepaid expenses 723,834 410,788
Advances to officer/shareholder 70,982 291,781 and employees ----------------------------
Total current assets 13,353,161 5,062,834
RESEARCH AND OFFICE EQUIPMENT - Less accumulated depreciation of $1,352,165 and $1,128,410 619,496 791,964
DEPOSITS 14,828 18,178
PATENT COSTS - Less accumulated amortization of $454,328 and $402,025 444,328 461,421 ------------- --------------- $14,431,813 $6,334,397 ============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: Accounts payable and accrued expenses $427,147 $481,587 --------------- ------------
Total current liabilities 427,147 481,587
DEFERRED RENT 29,382 27,030 ------------ ----------------
Total liabilities 456,529 508,617 ------------- ---------------
STOCKHOLDERS' EQUITY: Series D Preferred stock, $0.01 90 - par value - authorized, 10,000 shares; issued and outstanding, 9,002 shares Common stock, $.01 par value - authorized, 100,000,000 shares; issued and outstanding, 11,972,695 and 10,445,691 shares 119,726 104,457 Additional paid-in capital 59,040,864 44,419,244 Net unrealized loss on marketable (48,291) (3,499) equity securities Accumulated deficit (45,137,105) (38,694,422) ------------- ---------------
Total stockholders' equity 13,975,284 5,825,780 ------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,431,813 $6,334,397 ============= ===============
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 - -------------------------------------------------------------------------------
1998 1997 1996 (As restated, (As restated, see Note 14) see Note 14)
INVESTMENT INCOME $728,421 $386,547 $255,053
OTHER INCOME 64,573 51,598 67,317 ----------------------------------------
Total income 792,994 438,145 322,370 ----------------------------------------
OPERATING EXPENSES: Research and development 3,833,854 6,011,670 3,471,477 Depreciation and amortization 295,331 313,547 290,829 General and administrative 3,106,492 2,302,386 2,882,958 ------------------------------------------
Total operating expenses 7,235,677 8,627,603 6,645,264 -----------------------------------------
EQUITY IN LOSS OF JOINT VENTURE - - (3,772) ---------------------------------------
NET LOSS $6,442,683.00 $8,189,458.0 $6,326,666.00 ===============================================
ACCRETION OF PREFERRED 1,980,000.00 1,062,482.00 1,039,679.00 STOCK
PREFERRED STOCK DIVIDENDS - 108,957.00 58,794.00 -------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $8,422,683.00 $9,360,897.0 $7,425,139.00 =========================================
LOSS PER COMMON SHARE $0.74 $1.00 $1.16 (BASIC) =============================================
LOSS PER COMMON SHARE $0.74 $1.00 $1.16 (DILUTED) ============================================
Weighted average common 11,379,437 9,329,419 6,425,316 shares outstanding ========== ========= =========
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
CEL-SCI CORPORATION
STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 - --------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Issuance of convertible debentures - - 1,250,000 Issuance of preferred and common stock and warrant conversion for cash 14,077,049 597,672 10,927,075 Repayment of note receivable for 86,100 stock option exercise - - Repayment of note payable - - (811,263) Dividends paid (58,794) - (108,957) ----------------------------------
Net cash provided by financing activities 14,077,049 488,715 11,393,118 ----------------------------------
NET DECREASE IN CASH (695,381) (41,204) (337,140)
CASH, BEGINNING OF YEAR 3,508,606 3,549,810 3,886,950 ----------------------------------
CASH, END OF YEAR $2,813,225$3,508,606 $3,549,810 ==================================
SUPPLEMENTAL DISCLOSURES: In March 1996, a shareholder of the Company exercised options to purchase 40,000 shares of common stock. The shareholder signed a note for the stock, agreeing to pay the note by the end of June 1996. The note was repaid in June 1996.
During 1996, $1,250,000 of the convertible debentures were converted into 250,000 shares of common stock.
During 1998, 1997, and 1996, the net unrealized loss on investments available-for-sale was $48,291, $3,499, and $16,078, respectively.
During the quarter ended December 31, 1996, 600 shares of Series A Preferred Stock were converted into 127,945 shares of common
stock and 1,900 shares of Series B Preferred Stock were converted into 527,774 shares of common stock. During the quarter ended March 31, 1997, 500 shares of Series C Preferred Stock were converted into 125,000 shares of common stock. During the quarter ended June 30, 1997,250 shares of Series B Preferred Stock was converted into 69,444 shares of common stock and 2,350 shares of Series C Preferred Stock were converted into 790,271 shares of common stock
In March 1997, CEL-SCI issued 751,678 shares of common stock as consideration for the purchase of the rights to its Multikine technology. In addition, the Company paid $500,000 in cash for the rights, included in research and development expense.
In April 1997, CEL-SCI issued 33,378 shares of common stock to Cell-Med as a payment for the company's heteroconjugate technology. CEL-SCI also paid $50,000 in cash to Cell-Med, included in research and development expense.
See notes to consolidated financial (Concluded) statements.
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 - -------------------------------------------------------------------------------- 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.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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.
Significant accounting policies are as follows:
Principles of Consolidation - The consolidated financial statements include the accounts of CEL-SCI Corporation and its wholly owned subsidiary, Viral Technologies, Inc. All significant intercompany transactions have been eliminated upon consolidation.
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.
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.
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, for research and testing purposes, which is the Company's only product source.
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.
Net Loss Per Share - Net loss per common share is computed by dividing the net loss, after increasing the loss for the effect of any preferred stock dividends, by the weighted average number of common shares outstanding during the period. Common stock equivalents, including options to purchase common stock, were excluded from the calculation for all periods presented as they were antidilutive.
Investment in Joint Venture - Through October 1996, the investment in joint venture was accounted for by the equity method. The Company's proportionate share of the net loss of the joint venture has been included in the respective statements of operations. In October 1996, the Company purchased
the remaining 50% interest in the joint venture, and as of October 15, 1996, the operations of the joint venture are consolidated in the financial statements of the Company.
Statement of Cash Flows - For purposes of the statements of cash flows, cash consists principally of unrestricted cash on deposit, and short-term money market funds. The Company considers all highly liquid investments with a maturity of less than three months to be cash equivalents.
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 and for its further development, and the cost of options for nonemployee services.
Income Taxes - Income taxes are accounted for using the liability method under which deferred tax liabilities or assets are determined based on the difference between the financial statement and tax bases 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.
Reclassifications - Certain reclassifications have been made to the 1997 and 1996 financial statements for comparative purposes with the 1998 financial statements.
2. INVESTMENTS
The carrying values and estimated market values of investments available-for-sale at September 30, 1998 and 1997, are as follows:
While management has classified investments as available-for-sale, management intends to hold such securities to maturity for the foreseeable future.
The gross realized gains and losses of sales of investments available-for-sale for the years ended September 30, 1998, 1997, and 1996 are as follows:
1998 1997 1996
Realized gains $1,485 $- $-
Realized losses 1,494 - - -----------------------------------------------
Net realized (loss) $(9) gain $- $- ===============================================
3. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 1998 and 1997, consist of the following:
1998 1997
Research equipment $1,728,968 $1,700,173
Furniture and equipment 237,579 200,929
Leasehold improvements 5,114 19,272 --------------------------------------
1,920,374 1,971,661
Less accumulated (1,128,410.00) depreciation and (1,352,165) amortization --------------------------------------
Net research and office equipment $619,496 $791,964 ============ ======== ===================================
4. JOINT VENTURE
In October 1996, the Company purchased the remaining 50 percent interest in VTI from Alpha 1. Prior to this date, VTI was wholly owned by the Company and Alpha 1, each having a 50% ownership interest. The Company conveyed 159,170 shares of CEL-SCI common stock as the consideration for the net assets of VTI with a fair value of approximately $170,000. The acquisition was accounted for under the purchase method of accounting with substantially all of the value of the purchase price being expensed as research and development expense for the year ended September 30, 1997, as the acquisition represents primarily research and development costs. Effective October 31, 1995, the Company consolidated CEL-SCI's and VTI's financial statements, and the consolidated financial statements reflect the results of VTI's operations since the date of acquisition.
In July 1996, VTI purchased all of the remaining rights to HGP-30 from a former Japanese partner in return for 45,000 shares of the Company's common stock which was charged to expense as purchased research and development.
5. CREDIT ARRANGEMENTS
As of September 30, 1998, the Company had a line of credit outstanding with a bank in the total amount of $500,000, which can be used through January 5, 1999. Interest on the line of credit is based on the bank's prime rate plus two percent. No amounts have been borrowed under this agreement for the years ended September 30, 1998 and 1997.
6. RELATED-PARTY TRANSACTIONS
On March 10, 1997, the Company purchased from Sittona Company, B.V., Netherlands, all rights to its MULTIKINE technology, including all patents and trade secrets. The previous agreement with Sittona required CEL-SCI to pay a 10% royalty on sales and a 15% royalty on sublicenses for the use of the technology, know-how, and trade secrets. The Company purchased these rights with $500,000 in cash and 751,678 shares of its common stock. The total purchase price of $2,250,000 was charged to expense as purchased research and development.
The technology and know-how licensed to the Company, called MULTIKINE, was developed by a group of researchers under the direction of Dr. Hans-Ake Fabricius and was assigned during 1980 and 1981 to Hooper Trading Company, N.V., a Netherlands Antilles corporation (Hooper) and Shanksville Corporation, also a Netherlands Antilles corporation (Shanksville). Maximilian de Clara, an officer and director in the Company, and Dr. Fabricius owned 50% and 30%, respectively, of each of these companies. The technology and know-how assigned to Hooper and Shanksville was licensed to Sittona Company, B.V., a Netherlands corporation (Sittona), effective September, 1982 pursuant to a licensing agreement which required Sittona to pay to Hooper and Shanksville royalties on income received by Sittona respecting the technology and know-how licensed to Sittona. In 1983, Sittona licensed this technology to the Company. At such time as the Company generates revenues from the sale or sublicense of this technology, the Company was to pay royalties to Sittona equal to 10% of net sales and 15% of licensing royalties received from third parties. In that event, Sittona, pursuant to its licensing agreements with Hooper and Shanksville, would have been required to pay to those companies a minimum of 10% of any royalty payments received from the Company.
In 1985 Mr. de Clara acquired 100% of the issued and outstanding stock of Sittona. In this arrangement Mr. de Clara and Dr. Fabricius, because of their ownership interests in Hooper and Shanksville, would have received approximately 50% and 30%, respectively, of any royalties paid by Sittona to Hooper and Shanksville; and Mr. de Clara, through his interest in all three companies (Hooper, Shanksville, and Sittona), could have received up to 95% of any royalties paid by the Company.
Between 1985 and October 1996, Mr. de Clara owned all of the issued and outstanding stock of Sittona. In October 1996 Mr. de Clara disposed of his interest in Sittona.
During the year ended September 30, 1996, a shareholder and officer of the Company borrowed $86,100 from the Company to exercise the purchase of 40,000 shares of common stock, which was evidenced by a short-term promissory note. The note was subsequently repaid during the year.
In October 1996, the Company loaned $300,000 to an officer and shareholder. The loan carried an interest rate of 5% and was due on December 31, 1996. At that time, the loan was extended and the balance was due in full as of March 31, 1998. Payments have been made on the note, and the balance outstanding on September 30, 1998, was $70,809.
7. INCOME TAXES
The approximate tax effect of each type of temporary differences and carry forward that gave rise to the Company's deferred tax assets and liabilities at September 30, 1998 and 1997, is as follows:
1998 1997
Depreciation $(17,089) $(18,258)
Prepaid expenses (227,795) (91,186.00)
Net operating loss carry 17,346,440 14,811,399.00 forward
Other 8,347 10,261.00
Less: Valuation allowance (17,109,902) (14,712,216) ---------------------------------------
Net deferred $- $- ========================================
The Company has available for income tax purposes net operating loss carry forwards of approximately $45,589,000, expiring from 1998 through 2013.
In the event of a significant change in the ownership of the Company, the utilization of such carry forwards could be substantially limited.
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 is more likely than not to be realized.
8. STOCK OPTIONS, WARRANTS, AND BONUS PLAN
1998 Plans: During the year ended September 30, 1998, the shareholders of the Company approved the adoption of three new Plans, the 1998 Incentive Stock Option Plan (1998 Incentive Plan), the 1998 Non-Qualified Stock Option Plan (1998 Non-Qualified Plan), and the 1998 Stock Bonus Plan. Shares are reserved under each plan and total 300,000, 300,000 and 100,000 shares, respectively.
1996 Plans: During the year ended September 30, 1996, the shareholders of the Company approved the adoption of two new Plans, the 1996 Incentive Stock Option Plan (1996 Incentive Plan) and the 1996 Non-Qualified Stock Option Plan (1996 Non-Qualified Plan). Shares are reserved under each plan and total 600,000 and 400,000 shares, respectively. In August 1997, the 1996 Non-Qualified Plan was amended to provide for 1,500,000 shares to be reserved under the 1996 Non-Qualified Plan.
1995 Plans: The shareholders of the Company approved the adoption of the 1995 Non-Qualified Stock Option Plan (1995 Non-Qualified Plan) and reserved 400,000 shares under the plan. Terms of the options are to be determined by
the Company's Compensation Committee, but in no event are options to be granted for shares at a price below fair market value at the date of grant. In December 1995, the 1995 Non-Qualified Plan was amended to provide for 800,000 shares to be reserved under the 1995 Non-Qualified Plan.
1994 Plans: Shares are reserved under the 1994 Incentive Stock Option Plan (1994 Incentive Plan) and the 1994 Non-Qualified Stock Option Plan (1994 Non-Qualified) and total 100,000 shares in each plan. Only employees of the Company are eligible to receive options under the 1994 Incentive Plan, while the Company's employees, directors, officers, and consultants or advisors are eligible to be granted options under the 1994 Non-Qualified Plan. Terms of the options are to be determined by the Company's Compensation Committee, which will administer all of the plans, but in no event are options to be granted for shares at a price below fair market value at date of grant. Options granted under the option plans must be granted before July 29, 2004.
1992 Plans: The 1992 Incentive Stock Option Plan (1992 Incentive Plan), the 1992 Non-Qualified Stock Option Plan (1992 Non-Qualified Plan), and the Stock Bonus Plan (1992 Bonus Plan) include shares that are reserved under each plan and total 100,000, 60,000, and 40,000 shares, respectively. Only employees of the Company are eligible to receive options under the Incentive Plan, while the Company's employees, directors, officers, and consultants or advisors are eligible to be granted options under the Non-Qualified Plan or issued shares under the Bonus Plan. Terms of the options are to be determined by the Company's Compensation Committee, which will administer all of the plans, but in no event are options to be granted for shares at a price below fair market value at date of grant. Options granted under the option plans must be granted, or shares issued under the bonus plan issued, before August 20, 2002.
1987 Plan: The 1987 Nonqualified Stock Option and Stock Bonus Plan (the 1987 Plan) reserved 200,000 shares of the Company's previously unissued common stock to be granted as incentive stock options to employees. The 1987 Plan reserved 50,000 shares of the Company's previously unissued common stock to be granted as stock bonuses to employees. The exercise price of the options could not be established at less than fair market value on the date of grant and the option period could not be greater than ten years. During 1993, the 1987 Plan was terminated and no further options will be granted and no further bonus shares will be issued pursuant to the 1987 Plan. In June 1997, all options outstanding under the 1987 Plan expired.
Information regarding the Company's stock option plans are summarized as follows:
Outstanding Exercisable ---------------- --------------- Range Weighted Weighted of Average Average Option Exercise Exercise Prices Shares Prices Shares Prices
1987 Stock Option and Bonus Plan:
Balance, September $16.50 - 30, 1995 and 1996 19.70 7,000.00 $17.41 7,000.00$17.41 Forfeitures $16.50 - 19.70 7,000.00 17.41 7,000.00 17.41 ---------------- ---------------
Balance, September 30, 1997 - - - - ======================================
====================================== 1992 Incentive Stock Option Plan: ======================================
Balance, October 1, $2.87 - 3.87 1995 57,550 $3.01 20,917 $2.87 Forfeitures $2.94 - 3.44 (5,833) 2.96 - -
Granted $2.87 - 3.87 45,500 3.23 - - Exercised $2.87 (14,001) 2.87 (14,001) 2.87 Became $2.87 - 3.87 - - 39,102 3.13 exercisable --------------------------------------
Balance, September $2.87 - 30, 1996 3.87 83,216.00 3.16 46,018 3.12 Forfeitures $2.87 (500) 2.87 - -
Exercised $2.87 (1,000) 2.87 (1,000) 2.87 Became $2.87 - exercisable 3.87 - - 19,516 3.12 --------------------------------------
Balance, September 30, 1997 81,716.00 3.16 64,534.00 3.13 Exercised $2.87 (3,166.00) 2.87 (3,166.00)2.87 Became exercisable $2.94-3.87 - - 9,848.00 3.38 --------------------------------------
Balance, September 30, 1998 78,550.00 $3.17 71,216.00$3.17 ======================================
1992 Nonqualified Stock Option Plan:
Balance, October 1, $2.87 - 1995 15.60 60,000 $4.92 60,000 60,000 $4.92 Granted - - - - Exercised $2.87 (25,500) 2.87 (25,500) 2.87 --------------------------------------
Balance, September $2.87 - 30, 1996 15.60 34,500.00 6.44 34,500.00 6.44 Forfeitures $13.40 (2,500.00)13.40 (2,500.0013.40 Exercised $2.87 (11,500.00)2.87 (11,500.002.87 --------------------------------------
Balance, September $2.87 - 30, 1997 15.60 20,500.00 7.59 20,500.00 7.59 Forfeitures $13.80 - 15.60 (8,000.00)14.96 (8,000.0014.96 Exercised $2.87 (9,000.00) 2.87 (9,000.00)2.87 --------------------------------------
Balance, September 30, 1998 3,500.00 $2.88 3,500.00 $2.88 ======================================
======================================
1994 Incentive Stock Option Plan: =======================================
Balance, October 1, $2.87 - 1995 3.87 100,000 $2.87 61,000 $2.87 Became exercisable $2.87 - - 11,000 2.87 ---------------------------------------
Balance, September $2.87 30, 1996 100,000.00 2.87 72,000 2.87 Became exercisable $2.87 - - 11,000 2.87 ---------------------------------------
Balance, September 30, 1997 100,000.00 2.87 83,000.00 2.87 ---------------------------------------
Became exercisable $2.87 - - 11,000 2.87 --------------------------------------
Balance, September 30, 1998 100,000 $2.87 94,000.00 $2.87 =======================================
1994 Nonqualified Stock Option Plan: Balance, October 1, $2.87 - 1995 3.87 97,250.00 $2.90 48,084.00 $2.94
Exercised $2.87 (46,667) 2.87 (46,667) 2.87 Became exercisable $2.87 - - 24,167 2.87 ---------------------------------------
Balance, September $2.87 - 30, 1996 3.87 50,583 2.92 25,584 2.90 Became exercisable $2.87 - 3.87 - - 24,166 2.90 ---------------------------------------
Balance, September 30, 1997 50,583 2.92 49,750 2.90 Exercised $2.87 (23,333) 2.87 (23,333) 2.87 Became exercisable - - 833 2.87 ---------------------------------------
--------------------------------------- Balance, September 30, 1998 27,250 $2.96 27,250 $2.92 =======================================
1995 Nonqualified Stock Option:
Balance, October 1, $2.87 - 1995 3.87 329,251.00 $3.26 70,000.00 $2.87 Forfeitures $2.87 (12,625) 2.87 - - Granted $2.38 - 5.62 419,500 2.75 - - Exercised $2.87 - 3.87 (85,375) 2.88 (85,375) 2.88 Became exercisable $2.87 - 3.87 - - 146,628 3.32 ---------------------------------------
Balance, September $2.38 - 30, 1996 5.62 650,751 2.97 131,253 2.75 Granted $5.25 20,000 5.50 - - Exercised $2.38 - 3.87 (19,000) 3.56 (19,000) 3.56 Became exerciable $2.38 - 5.62 - - 449,501 2.74 ------------------ ---------------
Balance, September 30, 1997 651,751 3.02 561,754 2.72 Forfeitures $5.62 (7,500.00) 5.62 (7,500.00) 5.62 Exercised $2.38 - 3.87 (121,334) 2.89 (121,334) 2.88 Became exercisable $3.87 - 5.62 - - 79,997 4.48 ---------------------------------------
Balance, September 30, 1998 521,917 $3.01 82,416 $2.92 =======================================
1996 Incentive Stock Option Plan: Granted in 1996 $5.62 - 11.00 65,700 $5.70 - $- -------------------------------------
Balance, September 30, $5.62 - 1996 11.00 65,700 5.70 - - Forfeitures $3.25 - 6.88 (5,500.00) 4.08 - - Granted $3.25 - 5.18 331,800.00 3.89 - - Became exercisable $5.62 - 11.00 - - 21,234.00 5.57 -------------------------------------
Balance, September 30, 1997 392,000.00 4.19 21,234.00 5.57 Granted $3.31 - 5.12 205,000.00 4.76 - - Forfeitures $3.62 - 7.12 (3,666.00) 5.34 (3,666.00) 5.34 Became exercisable - - 128,838.00 4.19 ----------------- -----------------
Balance, September 30, 1998 593,334.00 $4.38 146,406.00 $4.36 =====================================
===================================== 1996 Nonqualified Stock Option Plan: Granted in 1996 $5.62 70,000 $5.62 - $- -------------------------------------
Balance, September 30, $5.62 1996 70,000.00 5.62 - - Granted $3.12 - 5.25 880,000 3.52 - - Became exercisable $5.62 - - 23,334.00 5.62 -------------------------------------
Balance, September 30, 1997 950,000.00 3.67 23,334.00 5.62 Granted $2.50 - 8.13 474,700.00 2.98 - Exercised $3.25 (16,667.00) 3.25 (16,667.00) 3.25 Forfeitures (2,000.00) 3.12 - - Became exercisable $3.12 - 5.62 - - 528,000.00 3.13 ----------------- ----------------
Balance, September 30, 1998 1,406,033.0$3.44 534,667.00 $3.23 ================= =================
(Concluded)
No options have been granted as of September 31, 1998, under Incentive Plan, the 1998 Non-Qualified Plan, or the 1998 Stock Bonus Plan.
The weighted average remaining contractual life for options outstanding at September 30, 1998, is as follows:
Plan Weighted Average Remaining Contractual Life (Years)
1992 Incentive Stock Option Plan 4.35 1992 Nonqualified Stock Option Plan 5.75 1994 Incentive Stock Option Plan 4.33 1994 Nonqualified Stock Option Plan 2.85 1995 Nonqualified Stock Option Plan 3.20 1996 Incentive Stock Option Plan 8.96 1996 Nonqualified Stock Option Plan 4.32
Other Options and Warrants - During 1991, the Company granted a consultant an option to purchase 50,000 shares of the Company's common stock. The options were exercisable at $13.80 per share and expired in March 1996. The holder of the option had the right to have the shares issuable upon the exercise of the option included in any registration statement filed by the Company.
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 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, 1998, the remaining 4,592,975 original warrants had expired.
Also in connection with the 1992 offering, the Company issued to the underwriter warrants to purchase 9,000 equity units, each unit consisting of 5 shares of common stock and 5 warrants entitling the holder to purchase one additional share of common stock. The equity unit warrants were outstanding at September 30, 1996, and were exercisable through February 8, 1997, at a price of $255.70 per unit. The common stock warrants included in the units were exercisable at a price of $76.70 per share. As of September 30, 1997, all warrants have expired.
During 1995, the Company granted another consultant options to purchase 17,858 shares of the Company's common stock. These shares became exercisable on November 2, 1995, and will expire November 1, 1999. These options are exercisable at $5.60 per share and as of September 30, 1998, 17,858 options remain outstanding.
In June and September 1995, the Company completed private offerings whereby it sold a total of 1,150,000 units at $2.00 per unit. Each unit consisted of one share of Common Stock and one Warrant. Each Warrant entitles the holder to purchase one additional share of Common Stock at a price of $3.25 per share at any time prior to June 30, 1997. All Warrants sold in this Offering were exercised during 1996. Additionally, the Company issued to the underwriter warrants to purchase 230,000 equity units. Each unit consisted of one share of the Company's common stock. For the June 1995 private placement, 57,500 equity units were issued at $2.00 per unit and another 57,500 equity units were issued at $3.25 per unit. All units issued in the June 1995 private placement were exercised at September 30, 1996. For the September 1995 private placement, 57,500 equity units were issued at $2.40 per unit and another 57,500 equity units were issued at $3.25 per unit. As of September 30, 1996, 21,890 equity units had been exercised at $3.25 per unit and 21,890 equity units had been exercised at $2.40 per unit. As of September 30, 1997, 35,610 equity units had been exercised at $2.40 per unit and 25,610 equity units were exercised at $3.25 per unit. All remaining 10,000 equity units will expire on March 31, 1999.
During 1996, the Company granted two consultants options to purchase a total of 70,000 shares of the Company's common stock. The fair value of the options is expensed over the life of the consultants' contracts. The 50,000 options became exercisable on August 21, 1996, at $3.25. Of the 50,000 options, 24,000 shares were exercised in August 1996 and 26,000 were
exercised in February of 1997. An additional 20,000 options became exercisable at August 31, 1997, at $3.25 and were exercised in February of 1997.
During 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 1997 at prices ranging from $3.50 to $4.50. During 1997, 50,000 options were exercised at $3.50. During 1998, 114,500 options were exercised at prices ranging from $3.50 to $4.50. At September 30, 1998, 103,500 options related to the four consultants remained outstanding.
During 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 is expensed over the life of the consultants' contracts. All options became exercisable during 1998 that were exercisable at prices ranging from $3.50 to $7.31. During 1998, 10,048 options were exercised at prices ranging from $3.50 to $4.50. At September 30, 1998, 271,952 options related to the consultants remain outstanding.
In connection with the December 1997 private offering, the Company issued to the underwriters warrants to purchase 50,000 shares of common stock at $8.63 per share. The warrants are exercisable at any time prior to December 22, 2000. At September 30, 1998, all warrants remained outstanding.
In October 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 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. If the Company had elected to recognize compensation expense based on the fair value of the awards granted in 1998, 1997, and 1996, consistent with the provisions of SFAS 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, ----------------------------------------------- 1998 1997 1996 (In thousands)
Net loss
As reported $(6,442,638.00) $(8,189,458.00) $(6,326,666.00) Pro forma (7,018,634) (9,687,999.00) (7,032,936.00) Loss per common share: As reported $0.74 $1.00 $1.16 Pro forma 0.79 1.17 1.27
The weighted average fair value at the date of grant for options granted during 1998, 1997, and 1996, was $2.17, $1.16 and $1.18 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:
1998 1997 1996
Expected stock price volatility 79 % 74 % 91 % Risk-free interest rate 5.49 % 5.36% 5.82% Expected life options 2.00 2.00 2.00 Expected dividend yield 0 0 0
The effects of applying SFAS 123 in this pro forma disclosure are not necessarily indicative of the effect on future amounts. SFAS 123 does not apply to awards granted prior to fiscal 1996.
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 from its initial offering date to the present. 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.
9. 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 CEL-SCI employees. Prior to January 1, 1998, the employer 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, 1998, 1997, and 1996, in connection with this plan was approximately $70,519, $35,800, and $29,800, respectively.
10. 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,
$131,196.00 2000 133,892.00 2001 139,175.00 2002 143,818 2003 112,390 Thereafter 7,605 -----------------
Total minimum lease payments $668,076 =================
Rent expense for the years ended September 30, 1998, 1997, and 1996, was approximately $165,067, $185,776, and $177,858, respectively.
11. STOCKHOLDERS' EQUITY
In December 1996, the Company authorized 3,600 shares of Series C Preferred Stock (Series C Stock) with a par value of $.01 per share and sold 2,850 shares of Series C for $1,000 per share.
Series C Stock is convertible into shares of the Company's common stock on the basis of one share of Series C Stock for shares of common stock equal in number to the amount determined by dividing $1,000 by 85% of the average closing price of the Company's common stock over the five-day trading period ending on the day prior to the conversion of the Series C Stock. The conversion price may not be more than $4.00. Beginning 90 days after December 17, 1996, one-half of the Series C Stock is convertible into shares of the Company's common stock. All preferred shares are convertible into shares of the Company's common stock beginning 180 days after December 17, 1996 provided that, if the Company's common stock trades for more than $8.00 at any time, then all shares of the Series C Stock will thereafter be immediately convertible into shares of the Company's common stock. During the year ended September 30, 1997, 2,850 shares of Series C stock were converted into 915,271 shares of the Company's common stock.
In addition, 379,793 Series A warrants and 379,763 Series B warrants were sold with the Series C Preferred Stock. The Series A warrants entitle the holder to purchase one share of the Company's common stock at a price of $4.50 per share at any time prior to March 15, 1998. Each Series B warrant entitles the holder to purchase one share of the Company's common stock at a price of $4.50 per share at any time prior to March 15, 1999. During 1998, all 379,765 Series A warrants were exercised and 272,073 Series B warrants were exercised.
In April 1997, the Company purchased the rights to Cell-Med's LEAPS technology for consideration of $50,000 in cash and 33,378 shares of the Company's common stock. The total purchase price of $125,000 was expensed as research and development expense. Additional payments to Cell-Med for such rights of up to $600,000 are contingent upon the development and viability of the technology. In addition, royalty payments of 5% of the sales price of technology using the product plus 15% of any amounts for sublicensing are.
In March 1996 the Company sold $1,250,000 of Convertible Notes (the Notes) to two persons. The Notes were convertible from time to time, in whole or in part, into shares of the Company's Common Stock. The conversion price was the lesser of (i) $5 per share or (ii) 80% of the average closing bid price of the Company's Common Stock during the five trading days immediately preceding the date of such conversion. The Notes were payable on December 1, 1996, and accrued interest at 10% per annum. All of the Notes have since been converted into 257,480 shares of the Company's Common Stock.
During the year ended September 30, 1996, the Company authorized 3,500 shares of Series A Preferred Stock (Series A Stock) with a par value of $.01 per share. The Company also authorized 5,000 shares of Series B Preferred Stock (Series B Stock) with a par value of $.01 per share. Holders of Series A Stock and Series B Stock are entitled to dividends, payable quarterly if declared, at the rate of $17.50 per quarter. Dividends which are not declared will not accrue nor be cumulative.
During 1996, the Company issued 3,500 shares of Series A Stock for cash consideration of $3,500,000 and 5,000 shares of Series B Stock for cash consideration of $5,000,000. Commissions of $375,000 were paid relative to the preferred stock offerings and were recorded as a reduction of additional paid-in capital on the transaction.
Each share of Series A Stock was convertible into shares of common stock equal in number to the amount determined by dividing $1,000 by 85% of the closing price of the Company's common stock on or after 60 days from issuance, and 83% of the closing price on or after 90 days from issuance, with the conversion price not less than $3.00 nor more than $8.00. Each share of Series B Stock was convertible into shares of common stock equal in number to the amount determined by dividing $1,000 by 87% of the closing price of the Company's common stock on or after 10 days from the effective registration date of the common shares, and 85% of the closing price on or after 40 days from the effective date, with the conversion price not less than $3.60 nor more than $14.75.
Also during 1996, 2,900 shares of Series A Stock were converted into 504,096 shares of the Company's common stock. In August 1996, the Board of Directors declared dividends on Series A Stock ($17.50 per quarter) and cash dividends of $58,794 were paid as of September 30, 1996. In November 1996, the Board of Directors declared dividends on Series A Stock ($17.50 per quarter) and Series B Stock ($17.50 per quarter) and cash dividends of $108,957 were paid.
In December 1996, the Company repurchased 2,850 shares of Series B Preferred Shares for $2,850,000 plus warrants which allow the holders to purchase up to 99,750 shares of the Company's common stock for $4.25 per share prior to December 15, 1999. During 1997, the remaining 2,150 and 600 shares, respectively, of Series B and A stock were converted into 597,218 and 127,945 shares of the Company's common stock, respectively.
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 converts into 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. All Series A and Series B Warrants issued remain outstanding at September 30, 1998. 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, and have been recorded as additional paid-in capital.
12. LOSS PER SHARE
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" (EPS), which simplifies the standards for computing EPS previously found in Accounting Principles Board Opinion (APB) No. 15 and makes them comparable to international EPS standards. Basic 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. Potential common shares in the diluted EPS computation are excluded in net loss periods as their effect would be antidilutive. The loss attributable to common stockholders includes the impact of the accretion of Series A, Series B and Series C Preferred Stock beneficial conversion features, the accretion of Series D Preferred Stock warrants and preferred stock dividends. The statement is effective for financial statements issued for periods ending after December 15, 1997. The Company adopted this statement during the year ended September 30, 1998. EPS for all periods have been computed in accordance with SFAS No. 128.
1998 1997 1996
Loss per common share (basic and diluted)$0.74 $1.00 $1.16
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Boards issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. These standards are effective for the Company beginning in fiscal 1999.
SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) and requires that items of other comprehensive income be classified by their nature in the financial statements and that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders.
In February 1998, FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, an Amendment of SFAS Nos. 87, 88, and 106. SFAS No. 132 revises employers' disclosure about pension and other postretirement benefit plans.
In June 1998, FASB issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities.
The Company does not believe that the adoption of SFAS 130, SFAS 131, SFAS 132, and SFAS 133 will have a material effect on its financial position or results of operation.
14. RESTATEMENT
Subsequent to the issuance of the Company's 1997 consolidated financial statements, the Company determined that the application of a technical accounting treatment required the 1997 and 1996 loss per share calculations to include the impact of $1,062,482 and $1,039,679, respectively, for the accretion of the assumed beneficial conversion features, and $108,957 and $58,794, respectively, for preferred stock dividends, of the Series A,
Series B and Series C Preferred Stock issued during fiscal 1997 and 1996. The effect of the accretion is a non-cash charge to additional paid-in capital and does not impact the previously reported net loss for the years ended September 30, 1997 and 1996, nor does it result in a net change to stockholders' equity at September 30, 1997 and 1996. The effect of the restatement was to increase net loss per share by $0.12 to $1.00 for the year ended September 30, 1997, and $0.18 to $1.16 for the year ended September 30, 1996.
A summary of the significant effects of the restatement is as follows (in thousands, except net income (loss) per share amounts):
1997 1996 ---------------------- ---------------------- As As Previously As Previously As Reported Restated Reported Restated
FOR THE YEAR ENDED SEPTEMBER 30: Net loss attributable to common stockholders $8,189,458 $9,360,897 $6,326,666 $7,425,139 Loss per common share (basic) $ 0.88 $ 1.00 $ 0.98 $ 1.16 Loss per common share (diluted)$0.88 $ 1.00 $ 0.98 $ 1.16
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) See the Financial Statements attached to this Report.
(b) The Company did not file any reports on Form 8-K during the quarter ended September 30, 1998.
(c) Exhibits Page Number
3(a) Articles of Incorporation Incorporated by reference to Exhibit 3(a) of the Company'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 the Company's Registration Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531.
(c) Amended Articles Incorporated by reference to Exhibit (Name change only) 3(c) filed with Registration Statement on Form S-1 (No. 33-34878).
(d) Bylaws Incorporated by reference to Exhibit 3(b) of the Company's Registration Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531.
4(a) Specimen copy of Incorporated by reference to Exhibit Stock Certificate 4(a) of the Company's Registration Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531.
4(c) Form of Common Stock Incorporated by reference to Exhibit Purchase Warrant 4(c) filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-43281).
10(a) Purchase Agreement Incorporated by reference to Exhibit dated April 21, 1986 10(a) of the Company's Registration with Alpha I Biomedical Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531.
(b) Agreement with Sittona Incorporated by reference to Exhibit Company B.V. dated 10(c) of the Company's Registration May 3, 1983 Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531.
(c) Addendum effective May 3, Incorporated by reference to 1983 to Licensing Agreement Exhibit 10(e) of the Company's with Sittona Company, B.V. Registration Statement of Form S- 1, Registration Nos. 2-85547-D and 33-7531.
(d) Addendum effective October Incorporated by reference to Exhibit 13, 1989 to Licensing Agree- 10(d) of Company's Annual Report ment with Sittona Company, on Form 10-K for the year ended B.V. September 30, 1989.
10(e) Employment Agreement with Incorporated by reference to Exhibit Geert Kersten 10(e) filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-43281).
l0(f) Research Agreement between Incorporated by reference to Exhibit Viral Technologies, Inc. and the 10(f) filed as an exhibit to the George Washington University Company's Registration Statement on Form S-1 (Registration No. 33-43281).
l0(g) Agreement between Viral Incorporated by reference to Exhibit Technologies, Inc. and 10(g) filed as an exhibit to the Com- Nippon Zeon Co., Ltd. pany's Registration Statement on Form S-1 (Registration No. 33-43281).
23 Consent of accountants Filed with this report
27 Financial data schedule Filed with this report
(d) Financial statement schedules. None
SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CEL-SCI CORPORATION
Dated: January 11, 1999 By: /s/ Maximilian de Clara ---------------------------------
Maximilian de Clara, President
By: /s/ Geert R. Kersten --------------------------------- Geert R. Kersten, Chief Executive Officer
Pursuant to the requirements of the Securities Act of l934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Maximillian de Clara Director and Principal January 11, 1999 MAXIMILIAN DE CLARA Executive Officer
/s/ Geert R. Kersten Director, Principal January 11, 1999 GEERT R. KERSTEN Financial Officer and Chief Executive Officer
/s/ Mark V. Soresi Director January 11,1999 MARK V. SORESI
/s/ F. Donald Hudson Director January 11, 1999 F. DONALD HUDSON
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-55966 of Cel-Sci Corporation on Form S-8 of our report dated December 11, 1998, appearing in this Annual Report on Form 10-K of Cel-Sci Corporation for the year ended September 30, 1998.
/s/ Deloitte & Touche LLP - --------------------------
Washington, D.C. January 12, 1999
EXHIBIT 27