As filed with the Securities and Exchange Commission on July 30, 2001
Registration No. 333-38236
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE Amendment No. 2 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 325410 22-2369085
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification Code
Number)
225 Belleville Avenue, Bloomfield, New Jersey 07003
(973)748-8082
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------
Kuslima Shogen
Chief Executive Officer
Alfacell Corporation
225 Belleville Avenue, Bloomfield, New Jersey 07003
(973)748-8082
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------
Copies to:
Kevin T. Collins, Esq.
Dorsey & Whitney LLP
250 Park Avenue, New York, New York 10177
(212) 415-9200
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the securities
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
======================================= ====================
====================== ======================== ===============
Proposed Maximum
Proposed Maximum Amount of
Title of Each Class of Securities to Amount to be Offering Price per
Aggregate Registration
be Registered Registered Share (1)
Offering Price Fee
--------------------------------------- --------------------
---------------------- ------------------------ ---------------
Common Stock $.001 par value per share 2,279,542 $0.995
$2,268,144 $ 567
--------------------------------------- --------------------
---------------------- ------------------------ ---------------
Common Stock $.001 par value per share 3,360,310(2) $0.995
$3,343,508 $ 836
--------------------------------------- --------------------
---------------------- ------------------------ ---------------
Common Stock $.001 par value per share 208,870(3) $0.995
$ 207,825 $ 52
--------------------------------------- --------------------
---------------------- ------------------------ ---------------
TOTAL 5,848,722 $0.995
$5,819,477 $1,455(4)
--------------------------------------- --------------------
---------------------- ------------------------ ---------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act,
based on the average of the high and low sale price for the common stock,
$.001 par value per share, as reported by the OTC Bulletin Board on July
23, 2001.
(2) To be offered and sold by certain of the selling stockholders upon the
exercise of outstanding warrants.
(3) To be offered and sold by certain of the selling stockholders upon the
exercise of outstanding options.
(4) The registrant previously paid $1,715.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
================================================================================
SUBJECT TO COMPLETION, DATED JULY 30, 2001
PROSPECTUS
ALFACELL CORPORATION
5,848,722 Shares
Common Stock
---------------
Our securityholders named on page 36 of this prospectus are offering an
aggregate of 5,848,722 shares of our common stock.
Our common stock is traded on the OTC Bulletin Board under the symbol
"ACEL." On July 27, 2001, the reported last sale price of our common stock on
the OTC Bulletin Board was $0.99 per share.
Investing in our common stock is speculative and involves a high degree of
risk. See "Risk Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
2001
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................9
USE OF PROCEEDS..............................................................10
PRICE RANGE OF COMMON STOCK..................................................10
DIVIDEND POLICY..............................................................10
SELECTED FINANCIAL DATA......................................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................................12
BUSINESS.....................................................................17
MANAGEMENT...................................................................27
SELLING SECURITYHOLDERS......................................................36
DESCRIPTION OF SECURITIES....................................................42
PLAN OF DISTRIBUTION.........................................................44
LEGAL MATTERS................................................................45
EXPERTS......................................................................45
AVAILABLE INFORMATION........................................................45
FINANCIAL STATEMENTS.........................................................F-1
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read this entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the notes thereto, before making an investment decision.
Our Company
We are a biopharmaceutical company primarily engaged in the discovery and
development of new drugs for the treatment of cancer and other pathological
conditions. These drugs are developed from particular frog enzymes which degrade
ribonucleic acids, inhibit cell growth and induce cell death by interrupting
protein synthesis.
Our product candidate that is furthest along in the development process is
ONCONASE(R), our trademarked name for ranpirnase, which is the active ingredient
of the finished product. ONCONASE(R) is a novel enzyme isolated from the eggs of
the leopard frog. Based on our preclinical and clinical testing, we believe that
ONCONASE(R) and related compounds may be used to treat various solid tumors as a
single agent, in combination with other anti-cancer agents, or in a variety of
delivery systems.
During the clinical trials, patients with advanced stages of solid tumors
are treated with ONCONASE(R) on a weekly basis. Data from Phase II and Phase III
clinical trials of ONCONASE(R) show that the most significant clinical results
to date are observed in unresectable malignant mesothelioma, an inoperable
cancer found in the lining of the lung and abdomen for which there is currently
no standard drug approved by the Food and Drug Administration, commonly known as
the FDA. We have also conducted pilot clinical trials in non-small cell lung
cancer, metastatic breast cancer and renal cell cancer.
Based upon the results of Phase I and II clinical trials of ONCONASE(R) as
a treatment for malignant mesothelioma, we received permission from the FDA to
commence a Phase III clinical trial for this indication. In June 1997, we
initiated the Phase III clinical trial comparing ONCONASE(R) by itself to
doxorubicin for this indication. Thereafter, we amended the clinical trial to
add a comparison of ONCONASE(R) in combination with doxorubicin against
doxorubicin alone. In April 1999, we completed the patient enrollment for the
first part of the clinical trial. The first part of the clinical trial is
on-going and the second part is still in the enrollment phase. Based on the
preliminary results of the trial, in March 2000, we had a pre-New Drug
Application, or NDA, meeting with the FDA to discuss these preliminary results
and the scope and details of a proposed NDA filing. We continue to provide the
FDA with data concerning the manufacturing and pharmacology of ONCONASE(R) . In
order to file the NDA, we have to complete the Phase III clinical trial, as well
as chemistry, manufacturing and controls (methods used to manufacture
ONCONASE(R)), toxicology (studies evaluating therapeutic and toxic doses of
ONCONASE(R) in animals) and pharmacology (detection of ONCONASE(R) in human
blood and antibody formation) studies. If the Phase III preliminary data is
confirmed by the continuing study, and other requirements for filing an NDA are
satisfied, we intend to file an NDA. We cannot estimate if or when the NDA may
be filed.
Additionally, we intend to seek non-U.S. marketing approvals for
ONCONASE(R). In February 2001, we received an Orphan Medicinal Product
Designation for ONCONASE(R) with the European Agency for the Evaluation of
Medicinal Products, or EMEA. Currently, we are in discussions with a number of
European regulatory agencies on the proposed registration requirements for the
malignant mesothelioma indication. However, we cannot assure you that marketing
approval for ONCONASE(R) as a treatment for malignant mesothelioma will be
granted.
We intend to initiate trials of ONCONASE(R) in other solid tumor
indications. Prior to July 1998 our strategy was to gain marketing approval for
ONCONASE(R) in combination with tamoxifen as a
treatment for pancreatic cancer. However, in July 1998, we discontinued two
Phase III clinical trials testing this combination because it did not show a
statistically significant survival benefit.
Our research and development portfolio includes the following:
o Ranpirnase conjugates and fusion proteins,
o Proteasome inhibitors,
o Anti-viral applications of ONCONASE(R), and
o ONCONASE(R) variant-conjugates.
Our corporate headquarters is located at 225 Belleville Avenue, Bloomfield,
New Jersey 07003 and our telephone number is (973) 748-8082.
2
Summary Financial Data
You should read the following financial data in conjunction with the
sections entitled "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the financial
statements and notes included in this prospectus.
Date of
Inception Year
Ended July 31,
to July 31,
----------------------------------------------------------------------------
2000 2000 1999
1998 1997 1996
------------ ------------ ------------
------------ ------------ ------------
Statement of Operations Data:
Total revenue, principally
investment income .......... $ 1,972,756 $ 51,144 $ 168,372
$ 311,822 $ 442,572 $ 184,250
Costs and Expenses:
Costs of sales ........... 336,495 0 0
0 0 0
Research and development . 35,968,357 1,879,728 2,401,945
5,264,578 3,862,716 2,188,890
General and administrative 20,159,648 644,588 920,686
1,412,968 1,475,624 806,962
Interest ................. 2,940,689 4,980 2,377
21,782 123,099 130,550
------------ ------------ ------------
------------ ------------ ------------
Total costs and expenses . 59,405,189 2,529,296 3,325,008
6,699,328 5,461,439 3,126,402
State Tax Benefit .......... 755,854 755,854 --
-- -- --
Net loss ................... (56,676,579) (1,722,298) (3,156,636)
(6,387,506) (5,018,867) (2,942,152)
============ ============ ============
============ ============ ============
Net loss per common share:
Basic and diluted ........ (.10) (.18)
(.40) (.34) (.25)
Weighted average number of
common shares:
Basic and diluted ........ 17,812,000 17,271,000
15,926,000 14,597,000 11,969,000
Dividends .................. 0 0
0 0 0
Nine Months Ended
April 30,
---------------------------
2001 2000
----------- ------------
Statement of Operations Data: (unaudited)
Total revenue, principally
investment income .......... 8,219 $ 39,206
Costs and Expenses:
Costs and sales .......... 0 0
Research and development . 1,404,552 1,767,128
General and administrative 519,240 443,479
Interest ................. 46,901 2,600
----------- ------------
Total costs and expenses . 1,970,693 2,213,207
State Tax Benefit .......... 451,395 755,854
Net loss ................... (1,511,079) (1,418,147)
=========== ============
Net loss per common share:
Basic and diluted ........ (.08) (.08)
Weighted average number of
common shares:
Basic and diluted ........ 18,802,114 17,603,454
Dividends .................. 0 0
As of
----------------------------------------------------
April 30, 2001
July 31, 2000
----------------------------------------------------
(unaudited)
Balance Sheet Data:
Total assets............................. $543,969
$488,099
Cash and cash equivalents................ 359,767
257,445
Working Capital (deficit)................ (705,493)
(303,646)
Long-term liabilities.................... 25,896
30,251
Total stockholders' equity (deficiency) . (585,891)
(131,860)
3
RISK FACTORS
An investment in our common stock is speculative and involves a high degree
of risk. You should carefully consider the risks and uncertainties described
below and the other information in this prospectus before deciding whether to
purchase shares of our common stock. The risks described below are not the only
ones facing our company. Additional risks not presently known to us or that we
currently believe to be immaterial may also adversely affect our business. If
any of the following risks actually occur, our business and operating results
could be harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
Risks Related to Our Company
We have incurred losses since inception and anticipate that we will incur
continued losses for the foreseeable future. We do not have a current
source of product revenue and may never be profitable.
We are a development stage company and since our inception, our source of
working capital has been public and private sales of our stock. We incurred a
net loss of approximately $1,722,000 for the year ended July 31, 2000, and
approximately $1,511,000 for the nine months ended April 30, 2001. In addition,
we had working capital deficit of approximately $304,000 as of July 31, 2000 and
approximately $705,000 as of April 30, 2001, and an accumulated deficit of
approximately $58,188,000 as of April 30, 2001.
We expect to continue to incur substantial operating losses in the future.
Our profitability will depend on our ability to develop, obtain regulatory
approvals for, and effectively market ONCONASE(R). The FDA has not, and may not,
approve ONCONASE(R). We do not know if, or when, we will:
o complete our product development efforts,
o show that our products are safe and effective in clinical trials,
o submit an NDA for any of our product candidates,
o receive regulatory approval for any of our product candidates, or
o sell sufficient approved products to generate enough revenue to enable
us to earn a profit.
We will seek to generate revenue through licensing, marketing and
development arrangements prior to receiving revenue from the sale of our
products, but we may not be able to successfully consummate any licensing,
marketing or development arrangements.
We, therefore, are unable to predict the extent of any future losses or the
time required to achieve profitability, if at all.
We may not be able to utilize all of our net operating loss carryforwards.
At July 31, 2000, we had federal net operating loss carryforwards of
approximately $39,921,000 that expire from 2001 to 2020. We also had investment
tax credit carryforwards of approximately $26,867 and research and
experimentation tax credit carryforwards of approximately $818,000 that expire
from 2001 to 2020. New Jersey has enacted legislature permitting certain
corporations located in New Jersey to sell state tax loss carryforwards and
state research and development credits, or tax benefits. In December 1999, we
realized net proceeds of $755,854 from the sale of our allocated tax benefits
and in December 2000, we realized net proceeds of an additional $451,000 from
the sale of our allocated tax benefits. We will attempt to sell our remaining
approximately $1,172,000 net operating loss carryforwards between July 1, 2001
and June 30, 2002, but there is no assurance we will be successful.
Additionally, ultimate
4
utilization/availability of the net operating losses and credits may be
significantly curtailed if a significant change in ownership occurs.
We need additional financing immediately to continue operations and this
financing may not be available on acceptable terms, if it is available at
all.
We need financing immediately in order to continue operations, including
completion of the Phase III trials and filing an NDA. As a result of our
continuing losses and lack of capital, the report of our independent auditors on
our July 31, 2000 financial statements included an explanatory paragraph which
states that our recurring losses, working capital deficit and limited liquid
resources raise substantial doubt about our ability to continue as a going
concern. Our financial statements at July 31, 2000 and April 30, 2001 do not
include any adjustments that might result from the outcome of this uncertainty.
If the results of the continuation of the Phase III trials do not indicate the
efficacy and safety of ONCONASE(R) for malignant mesothelioma, our ability to
raise additional capital will be adversely affected. Even if an NDA is filed, we
will need additional financing to complete the approval process. We may not be
successful in obtaining additional financing as funds are needed to continue
operations.
Our clinical trials could take longer to complete and cost more than we
expect.
We are currently continuing our Phase III clinical trial of ONCONASE(R) for
the treatment of malignant mesothelioma. The rate of completion of our clinical
trial depends upon many factors, including the rate of enrollment of patients
for the second part of the Phase III trial. If we are unable to accrue
sufficient additional patients in our trial during the appropriate period, we
may need to delay the trial and will likely incur significant additional costs.
In addition, the FDA or institutional review boards may require us to delay,
restrict, or discontinue our clinical trial on various grounds.
The cost of human clinical trials varies dramatically based on a number of
factors, including:
o the order and timing of clinical indications pursued,
o the extent of development and financial support from corporate
collaborators,
o the number of patients required for enrollment,
o the difficulty of obtaining clinical supplies of the product
candidate, and
o the difficulty in obtaining sufficient patient populations.
All statutes and regulations governing the conduct of clinical trials are
subject to change by various regulatory agencies in the future, which could
affect the cost and duration of our clinical trials. Any unanticipated costs or
delays in our clinical studies would delay our ability to generate product
revenues and to raise additional capital and could cause us to be unable to fund
the completion of the studies.
If the results of larger scale clinical trials do not show the same
promising results as earlier trials, we will have to abandon the failed
product candidate after the expenditure of significant additional funds.
During the course of our research and development, we may find that
products that initially appeared promising no longer appear promising in
larger-scale Phase III clinical trials. Like many companies in the
pharmaceutical and biotechnology industries, we have experienced negative
results in clinical trials after experiencing promising results in earlier
trials. For example, in July 1998, we discontinued two Phase III clinical trials
testing ONCONASE(R) with tamoxifen as a treatment for pancreatic cancer due to
the lack of a statistically significant survival benefit. If, in the future, we
experience negative results in our current Phase III clinical trial we may have
to curtail, redirect or eliminate our product development programs or spend
additional monies to complete more studies.
5
If we fail to obtain the necessary regulatory approvals, we will not be
allowed to commercialize our drugs and will not generate product revenues.
We are conducting Phase III clinical trials for ONCONASE(R) as a treatment
for malignant mesothelioma and intend to file an NDA for this indication if the
data so warrants. Obtaining FDA approval can take a substantial period of time
and requires the expenditure of substantial resources for research and
development and testing.
Even if we receive regulatory approval, such approval may involve
limitations on the indicated uses for which we may market our products. Further,
later discovery of previously unknown problems could result in additional
restrictions, including withdrawal of products.
In foreign jurisdiction, we must receive marketing authorizations from the
appropriate regulatory authorities before we can commercialize our drugs.
Foreign regulatory approval processes generally include all of the risks
associated with the FDA approval procedures described above.
If we fail to achieve regulatory approval or foreign marketing
authorizations of our first product candidate we will not have a saleable
product or produce revenues for quite some time, if at all, and may not be able
to continue operations.
Our product candidates may not be accepted by the market.
Even if approved by the FDA and other regulatory authorities, our product
candidates may not achieve market acceptance and we may not receive revenues
from these products as anticipated. The degree of market acceptance will depend
upon a number of factors, including:
o the receipt and timing of regulatory approvals,
o the availability of reimbursement from insurance companies, HMOs and
other third parties, and
o the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of drug candidates,
as well as their advantages over existing technologies and
therapeutics.
We may not be able to successfully market our products even if they perform
successfully in clinical trials. Furthermore, physicians or the medical
community in general may not accept and utilize any of our products.
Our proprietary technology and patents may offer only limited protection
against infringement and the development by our competitors of competitive
products.
We currently own eight U.S. patents, three European patents and one
Japanese patent. We also have patent applications that are pending in the United
States, Europe and Japan, and an undivided interest in two patent applications
that are pending in the United States. The scope of protection afforded by
patents for biotechnological inventions can be uncertain, and such uncertainty
may apply to our patents as well. Therefore, our patents may not give us
competitive advantages or afford us adequate protection from competing products.
Furthermore, others may independently develop products that are similar to our
products, and may design around the claims of our patents.
Patent litigation and intellectual property litigation are expensive, and
if we were to become involved in such litigation, we might not have the funds or
other resources necessary to carry on the litigation in an effective manner.
6
We are and will be dependent upon third parties for manufacturing, and will
be dependent on third parties for marketing, our products. If these third
parties do not devote sufficient time and resources to our products our
revenues and profits may be adversely affected.
We do not have the facilities or expertise to manufacture or market our
products. We presently rely on third parties to perform certain of the
manufacturing processes for the production of our products for use in clinical
trials. We intend to rely on third parties to manufacture and market our
products if they are approved for sale by the appropriate regulatory agencies
and are commercialized. Third party manufacturers may not be able to meet our
needs with respect to the timing, quantity or quality of our products or to
supply products on acceptable terms. Moreover, third party manufacturers and
marketing companies often must allocate their resources between various
companies. It is likely that we will have only limited, if any, control over the
amount and timing of the resources devoted by these third parties to our
products. If third party manufacturers or marketers cannot, or do not, devote
sufficient resources to our products, our sales of products could be adversely
affected, resulting in lower than anticipated revenues or profits.
We depend upon key personnel and may not be able to retain these employees
or recruit qualified replacement or additional personnel, which would harm
our business.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical and management employees. There
is intense competition for qualified personnel in the pharmaceutical field.
Therefore the loss of key scientific, technical or management personnel,
particularly Kuslima Shogen, our Chairman and Chief Executive Officer, would
most likely delay our clinical trials, the commercialization of our products and
the potential revenue from product sales. We carry key person life insurance on
the life of Ms. Shogen with a face value of $1,000,000.
Risks Related to Our Industry
Developments by competitors may render our products obsolete or
non-competitive.
Currently, there are no approved systemic treatments for malignant
mesothelioma. To our knowledge, no other company is developing a product with
the same mechanism of action as ONCONASE(R). Several companies, universities,
research teams and scientists are developing products to treat the same medical
conditions our products are intended to treat. These competitors include Eli
Lilly and Sugen, which are developing agents for the malignant mesothelioma
indication. Eli Lilly is conducting a Phase III trial of the combination of the
multi-targeted antifolate (MTA) with cisplatin vs. cisplatin alone, and Sugen is
conducting a Phase II trial of the VEGF antagonist. There is no comparable
survival data available on the foregoing studies at this time.
Most of our competitors are more experienced and have greater clinical,
marketing and regulatory capabilities and managerial and financial resources
than we do. Our competitors may develop products to treat the same medical
conditions our products are intended to treat before we are able to complete the
development of our competing product.
Our business is very competitive and involves rapid changes in the
technologies involved in developing new drugs. If others experience rapid
technological development, our products may become obsolete before we are able
to recover expenses incurred in developing our products. We will probably face
new competitors as new technologies develop. Our success depends on our ability
to remain competitive in the development of new drugs. We may not be able to
compete successfully.
7
We may be sued for product liability.
The use of our products by humans during testing of those products or after
regulatory approval entails a risk of adverse effects which could expose us to
product liability claims. We maintain product liability insurance in the amount
of $6,000,000 for claims arising from the use of our products in clinical trials
prior to FDA approval. Additionally, we also maintain product liability
insurance in Europe in the amount of DM20,000,000. This insurance covers
specifically Germany and Italy, however, we intend to add additional European
countries as the need arises. We may not be able maintain our existing insurance
coverage or obtain coverage for the use of our products in the future. While we
believe that we maintain adequate insurance coverage, our current insurance
coverage and our financial resources may not be sufficient to pay any liability
arising from a product liability claim. A product liability claim may have a
material adverse effect on our business, financial condition or results of
operations.
Risks Related to This Offering
Our stock is thinly traded and you may not be able to sell our stock when
you want to do so.
Our common stock has been quoted on the OTC Bulletin Board since April 28,
1999, and is currently thinly traded. You may be unable to sell our common stock
when you want to do so if the trading market continues to be limited.
The price of our common stock has been, and may continue to be, volatile.
The market price of our common stock, like that of the securities of many
other development stage biotechnology companies, has fluctuated over a wide
range and it is likely that the price of our common stock will fluctuate in the
future. The market price of our common stock could be impacted by a variety of
factors, including:
o announcements of technological innovations or new commercial products
by us or our competitors,
o disclosure of the results of pre-clinical testing and clinical trials
by us or our competitors,
o disclosure of the results of regulatory proceedings,
o changes in government regulation,
o developments in the patents or other proprietary rights owned or
licensed by us or our competitors,
o public concern as to the safety and efficacy of products developed by
us or others,
o litigation, and
o general market conditions in our industry.
In addition, the stock market continues to experience extreme price and
volume fluctuations. These fluctuations have especially affected the market
price of many biotechnology companies. Such fluctuations have often been
unrelated to the operating performance of these companies. Nonetheless, these
broad market fluctuations may negatively affect the market price of our common
stock.
Our charter documents and Delaware law may discourage a takeover of our
company.
We are currently authorized to issue 1,000,000 shares of preferred stock.
Our Board of Directors is authorized, without any approval of the stockholders,
to issue the preferred stock and determine the terms of the preferred stock.
There are no shares of preferred stock currently outstanding. The authorized
shares of preferred stock will remain available for general corporate purposes,
may be privately placed and can be used to make a change in control of our
company more difficult. Under certain circumstances, our Board
8
of Directors could create impediments to or frustrate persons seeking to effect
a takeover or transfer in control of our company by causing shares of preferred
stock to be issued to a stockholder who might side with the Board of Directors
in opposing a takeover bid that the Board of Directors determines is not in the
best interests of our company and its stockholders, but in which unaffiliated
stockholders may wish to participate. Furthermore, the existence of authorized
shares of preferred stock might have the effect of discouraging any attempt by a
person, through the acquisition of a substantial number of shares of common
stock, to acquire control of our company. Accordingly, the accomplishment of a
tender offer may be more difficult. This may be beneficial to management in a
hostile tender offer, but have an adverse impact on stockholders who may want to
participate in the tender offer. Consequently, the Board of Directors, without
further stockholder approval, could issue authorized shares of preferred stock
with rights that could adversely affect the rights of the holders of our common
stock to a stockholder which, when voted together with other securities held by
members of the Board of Directors and the executive officers and their families,
could prevent the majority stockholder vote required by our certificate of
incorporation or Delaware General Corporation Law to effect certain matters.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. All statements,
other than statements of historical fact, regarding our financial position,
potential, business strategy, plans and objectives for future operations are
"forward looking statements." These statements are commonly identified by the
use of such terms and phrases as "intends," "expects," "anticipates,"
"estimates," "seeks" and "believes." You should read carefully the description
of our plans and objectives for future operations, assumptions underlying these
plans and objectives and other forward-looking statements included in
"Prospectus Summary," "Use of Proceeds," "Management's Discussion And Analysis"
and "Business" in this prospectus, but should not place undue reliance on these
statements of expectations about our future performance. These descriptions and
statements are based on management's current expectations. Our actual results
may differ significantly from the results discussed in these forward-looking
statements as a result of certain factors, including those set forth in the
"Risk Factors" section and elsewhere in this prospectus.
9
USE OF PROCEEDS
We will not receive any proceeds from the sale of our common stock in this
offering. Some of the shares of common stock to be sold in this offering have
not yet been issued and will only be issued upon the exercise of options and
warrants. We will receive estimated net proceeds of approximately $8,784,000 if
all of the options and warrants offered under this prospectus are exercised.
However, the options and warrants may not be exercised, in which event we would
not receive any proceeds. We intend to use any proceeds received from the
exercise of the options and warrants for general corporate purposes, including
the funding of research and development activities. We expect to incur expenses
of approximately $100,000 in connection with this offering.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
"ACEL." At the close of business on April 27, 1999, we were delisted from The
Nasdaq SmallCap Market for failing to meet the minimum bid price requirements
set forth in the NASD Marketplace Rules. As of June 15, 2001, we had
approximately 1,217 stockholders of record of our common stock.
The following table sets forth the range of high and low sale prices of our
common stock. The prices for the periods commencing April 28, 1999 were obtained
from the OTC Bulletin Board and the prices for the periods prior to April 28,
1999 were obtained from Nasdaq. These prices are believed to be representative
of inter-dealer quotations, without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.
Common Stock Price
-------------------------------
Low
High
----------------------------------------------------------------
-------------- -------------
Year Ending July 31, 2001
First Quarter...........................................
$0.75 $1.56
Second Quarter..........................................
0.53 1.38
Third Quarter...........................................
0.72 2.19
Fourth Quarter (through July 27, 2001)..................
0.81 1.59
Year Ended July 31, 2000
First Quarter...........................................
0.41 0.94
Second Quarter..........................................
0.38 1.94
Third Quarter...........................................
0.72 3.88
Fourth Quarter..........................................
0.69 2.63
Year Ended July 31, 1999
First Quarter...........................................
0.41 1.25
Second Quarter..........................................
0.22 0.50
Third Quarter...........................................
0.20 0.88
Fourth Quarter..........................................
0.19 0.56
DIVIDEND POLICY
We have not paid dividends on our common stock since inception and we do
not plan to pay dividends in the foreseeable future. If we realize any earnings,
they will be retained to finance our growth.
10
SELECTED FINANCIAL DATA
You should read the following selected financial data together with the
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The selected statement of operations data shown below for the years
ended July 31, 2000, 1999 and 1998 and for the period from August 29, 1981 (Date
of Inception) to July 31, 2000 and the balance sheet data as of July 31, 2000
and 1999 are derived from our audited financial statements included elsewhere in
this prospectus, and have been audited by KPMG LLP, independent auditors. The
selected statement of operations data shown below for the years ended July 31,
1998, 1997 and 1996 and the balance sheet data as of July 31, 1997 and 1996 are
derived from our audited financial statements which were also audited by KPMG
LLP, but are not included in this prospectus or incorporated by reference. The
selected financial data as of and for the nine months ended April 30, 2001 and
2000 are unaudited and, in our opinion, contain all adjustments, consisting only
of normal, recurring accruals, which are necessary for a fair statement of the
results of those periods. Results for the nine months ended April 30, 2001 are
not necessarily indicative of results that may be expected for the entire year.
Date of
Inception Year Ended
July 31,
to July 31,
----------------------------------------------------------------------------
2000 2000 1999
1998 1997 1996
------------ ------------ ------------
------------ ------------ ------------
Statement of Operations Data:
Total revenue, principally
investment income ............ $ 1,972,756 $ 51,144 $ 168,372
$ 311,822 $ 442,572 $ 184,250
Costs and Expenses:
Costs and sales ............ 336,495 0 0
0 0 0
Research and development ... 35,968,357 1,879,728 2,401,945
5,264,578 3,862,716 2,188,890
General and administrative . 20,159,648 644,588 920,686
1,412,968 1,475,624 806,962
Interest ................... 2,940,689 4,980 2,377
21,782 123,099 130,550
------------ ------------ ------------
------------ ------------ ------------
Total costs and expenses ... 59,405,189 2,529,296 3,325,008
6,699,328 5,461,439 3,126,402
State Tax Benefit ............ 755,854 755,854 --
-- -- --
Net loss ..................... (56,676,579) (1,722,298) (3,156,636)
(6,387,506) (5,018,867) (2,942,152)
============ ============ ============
============ ============ ============
Net loss per common share:
Basic and diluted .......... (.10) (.18)
(.40) (.34) (.25)
Weighted average number of
common shares:
Basic and diluted .......... 17,812,000 17,271,000
15,926,000 14,597,000 11,969,000
Dividends .................... 0 0
0 0 0
Nine Months Ended
April 30,
----------------------------
2001 2000
------------ ------------
Statement of Operations Data:
(unaudited)
Total revenue, principally
investment income ............ $ 8,219 $ 39,206
Costs and Expenses:
Costs and sales ............ 0 0
Research and development ... 1,404,552 1,767,128
General and administrative . 519,240 443,479
Interest ................... 46,901 2,600
------------ ------------
Total costs and expenses ... 1,970,693 2,213,207
State Tax Benefits ........... 451,395 755,854
Net loss ..................... (1,511,079) (1,418,147)
============ ============
Net loss per common share:
Basic and diluted .......... (.08) (.08)
Weighted average number of
common shares:
Basic and diluted .......... 18,802,114 17,603,454
Dividends .................... 0 0
As of July 31,
As of April 30,
---------------------------------------------------------------- --------------
2000 1999 1998 1997
1996 2001
----------- ---------- ---------- ----------
---------- --------------
(unaudited)
Balance Sheet Data: ......
Total assets ............. $ 488,099 $1,728,648 $5,516,678 $8,034,954
$8,487,711 $ 543,969
Cash and cash equivalents
257,445 1,383,133 5,099,453 7,542,289
8,131,442 359,767
Working capital (deficit). (303,646) 498,993 3,398,527 5,254,434
7,868,857 (705,493)
Long-term liabilities .... 30,251 0 6,727 15,902
1,398,760 25,896
Total stockholders' equity
(deficiency) ............. (131,860) 757,200 3,691,838 5,566,091
6,650,266 (585,891)
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Since our inception, we have devoted the majority of our resources to the
research and development of ONCONASE(R). After we obtained the results of our
preliminary analysis of the Phase III clinical trial results for the use of
ONCONASE(R) on advanced pancreatic cancer, we closed the pancreatic cancer
trials and redirected our resources towards the completion of the ongoing Phase
III clinical trial for its use on unresectable malignant mesothelioma. We have
presented our preliminary results of the Phase III trial in patients with
malignant mesothelioma to the FDA and have begun a series of meetings with the
FDA to establish the requisite data and testing for approval, including:
o completion of Phase III clinical trial,
o chemistry, manufacturing and controls (methods used to manufacture
ONCONASE(R)),
o toxicology (studies evaluating therapeutic and toxic doses of
ONCONASE(R) in animals), and
o pharmacology (detection of ONCONASE(R) in human blood and antibody
formation).
We are also exploring various strategic alternatives for our business and our
research and development operations.
We are currently funding the research and development of our products from
cash reserves resulting from the previous sales of our securities. The
termination of the Phase III clinical trials for advanced pancreatic cancer had
a significant detrimental impact on the price of our common stock and our
ability to raise additional capital for future operations. We do not have, and
may not be able to obtain, the financial resources required to pay for all the
associated costs of the malignant mesothelioma program to file a Unites States
registration for the marketing approval of ONCONASE(R) for this indication.
Results of Operations
Nine month period ended April 30, 2001 and 2000
Revenues
We are a development stage company as defined in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 7. We are
devoting substantially all of our present efforts to establishing a new business
and developing new drug products. Our planned principal operations of marketing
and/or licensing of new drugs have not commenced and, accordingly, we have not
derived any significant revenue from these operations. We focus most of our
productive and financial resources on the development of ONCONASE(R) and as such
we have not had any sales in the nine months ended April 30, 2001 and 2000.
Investment income for the nine months ended April 30, 2001 was $8,000 compared
to $39,000 for the same period in the prior fiscal year, a decrease of $31,000.
This decrease was due to lower balances of cash and cash equivalents.
Research and Development
Research and development expense for the nine months ended April 30, 2001
was $1,404,000 compared to $1,767,000 for the same period in the prior fiscal
year, a decrease of $363,000 or 21%. This decrease was primarily due to a 57%
decrease in expenses in preparation for a pre-NDA meeting with the FDA, a 38%
decrease in costs in support of on-going Phase III clinical trials for
ONCONASE(R) for
12
malignant mesothelioma, primarily due to lower clinical costs related to Phase
III clinical trials for malignant mesothelioma, and a 19% decrease in expenses
associated with the new patent and trademark applications for ONCONASE(R). These
decreases were offset by a 4% increase in personnel costs.
General and Administrative
General and administrative expense for the nine months ended April 30, 2001
was $519,000 compared to $443,000 for the same period last year, an increase of
$76,000 or 17%. This increase was primarily due to a $27,000 increase in costs
related to public activities, a 16% increase in personnel costs, and a 38%
increase in non-cash expenses relating to stock options issued for consulting
services.
Interest
Interest expense for the nine months ended April 30, 2001 was $47,000
compared to $3,000 for the same period last year, an increase of $44,000. The
increase was due to the interest expense on the convertible note and its
attached warrants, by both related and unrelated parties. The interest expense
was based on the value of the warrants using the Black-Scholes pricing model,
amortized on a straight-line basis over the ninety day life of the note.
Income Taxes
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits or tax benefits. For the state fiscal year 2001 (July 1,
2000 to June 30, 2001), we have $1,774,000 total available tax benefits of which
$602,000 was allocated to be sold between July 1, 2000 and June 30, 2001. In
December 2000, we received $451,000 from the sale of an aggregate $602,000 tax
benefits which was recognized as a tax benefit for the quarter ended October 31,
2000. In the year ended July 31, 2000 we sold tax benefits for $756,000. We will
attempt to sell the remaining balance of our tax benefits in the amount of
approximately $1,172,000 between July 1, 2001 and June 30, 2002, subject to all
existing laws of the State of New Jersey. However, we may not be able to find a
buyer for our tax benefits at all, or for an acceptable price, or be able to
assure that such funds will be available in a timely fashion.
Net Loss
We have incurred net losses during each year since our inception. The net
loss for the nine months ended April 30, 2001 was $1,511,000 as compared to
$1,418,000 for the same period last year, an increase of $93,000 or 7%. The
cumulative loss from the date of inception, August 24, 1981 to April 30, 2001
amounted to $58,188,000. Such losses are attributable to the fact that we are
still in the development stage and accordingly have not derived sufficient
revenues from operations to offset the development stage expenses.
Fiscal Years Ended July 31, 2000, 1999 and 1998
Revenues
We had no sales in fiscal 2000, 1999 and 1998. Investment income for fiscal
2000 was $51,000 compared to $168,000 for fiscal 1999, a decrease of $117,000.
This decrease was due to lower balances of cash and cash equivalents. Investment
income for fiscal 1999 was $168,000 compared to $312,000 for fiscal 1998, a
decrease of $144,000. This decrease was due to lower balances of cash and cash
equivalents.
Research and Development
Research and development expense for fiscal 2000 was $1,880,000 compared to
$2,402,000 for fiscal 1999, a decrease of $522,000 or 22%. This decrease was
primarily due to an 80% decrease in costs in support of ongoing clinical trials,
primarily due to lower clinical costs related to the Phase III clinical trials
for malignant mesothelioma and pancreatic cancer, an 82% decrease in costs
related to the preclinical research studies of ONCONASE(R), primarily due to
Cooperative Research and Development Agreement, referred to as CRADA, extensions
with no additional cost, and a 44% decrease in costs related to the manufacture
of clinical supplies of ONCONASE(R), primarily due to the lack of need to
purchase the raw
13
materials and manufacture of clinical supplies for ONCONASE(R). These decreases
were offset by an increase in expenses in preparation of an NDA filing for
ONCONASE(R) and an 82% increase in expenses associated with the new patent and
trademark applications for ONCONASE(R).
Research and development expense for fiscal 1999 was $2,402,000 compared to
$5,265,000 for fiscal 1998, a decrease of $2,863,000 or 54%. This decrease was
primarily due to a 96% decrease in costs related to the manufacture of clinical
supplies of ONCONASE(R), a 47% decrease in costs in support of ongoing clinical
trials, an 82% decrease in expenses for preparation of an NDA for ONCONASE(R)
and a 4% decrease in personnel costs. These decreases were primarily due to the
completion of the patient enrollment of the first part of the Phase III clinical
trial for malignant mesothelioma in April 1999 and the closing of the Phase III
clinical trials for pancreatic cancer in July 1998.
General and Administrative
General and administrative expense for fiscal 2000 was $645,000 compared to
$921,000 for fiscal 1999, a decrease of $276,000, or 29%. This decrease was
primarily due to a 45% reduction in administrative personnel costs, primarily
due to the resignation of our chief financial officer, a 46% decrease in
consulting fees and a 55% decrease in public relations expenses, offset by an
$20,000 increase in legal fees.
General and administrative expense for fiscal 1999 was $921,000 compared to
$1,413,000 for fiscal 1998, a decrease of $492,000, or 35%. This decrease was
primarily due to a 94% decrease in legal costs, a 25% reduction in
administrative personnel costs and a 56% decrease in public relations expenses,
offset by an $84,000 increase in consulting fees.
Interest
Interest expense for fiscal 2000 was $5,000 compared to $2,000 in fiscal
1999, an increase of $3,000. The increase was primarily due to the financing of
office equipment during the fiscal year ended July 31, 2000.
Interest expense for fiscal 1999 was $2,000 compared to $22,000 in fiscal
1998, a decrease of $20,000, or 91%. The decrease was primarily due to our
payment of the entire principal amount of our $1.4 million term loan agreement
with our bank during the fiscal year ended July 31, 1998.
Net Loss
We have incurred net losses during each year since our inception. The net
loss for fiscal 2000 was $1,722,000 as compared to $3,157,000 in fiscal 1999 and
$6,388,000 in fiscal 1998. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 2000 amounted to $56,677,000. Such losses are
attributable to the fact that we are still in the development stage and
accordingly have not derived sufficient revenues from operations to offset the
development stage expenses.
Liquidity and Capital Resources
We have financed our operations since inception primarily through equity
and debt financing, research product sales and interest income. During the nine
months ended April 30, 2001, we had a net decrease in cash and cash equivalents
of $103,000, which resulted primarily from net cash provided by financing
activities of $1,148,000, primarily from the private placement of common stock
and warrants, proceeds from the issuance of convertible notes and proceeds from
the exercise of stock options, offset by
14
net cash used in operating activities of $1,045,000. Total cash resources as of
April 30, 2001 were $360,000 compared to $257,000 at July 31, 2000.
Our current liabilities as of April 30, 2001 were $1,104,000, compared to
$590,000 at July 31, 2000, an increase of $514,000. The increase was primarily
due to the issuance of short-term convertible notes payable to both related and
unrelated parties and due to an increase in accounts payable.
To date, a significant portion of our financing has been through private
placements of common stock and warrants, the issuance of common stock or the
exercise of stock options and warrants and for services rendered, debt financing
and financing provided by our Chief Executive Officer.
The following transactions have occurred after April 2001. In July 2001, we
completed a private placement resulting in the issuance of 252,223 shares of
restricted common stock and 252,223 five-year warrants to purchase an aggregate
252,223 shares of common stock at an exercise price of $1.50 per share. We
received an aggregate $227,000 from such private placement.
Also in July 2001, convertible notes that had been issued to certain
related parties in April 2001 were converted into common stock at the conversion
price of $0.90 per share, resulting in an issuance of an aggregate 330,000
shares of common stock. Our outstanding convertible note payables were reduced
by $297,000. Our outstanding convertible note payables were reduced by $297,000.
The remainder of the notes, which are held by unrelated parties, remain
outstanding. In addition, upon conversion, they received three-year warrants to
purchase an aggregate 330,000 shares of common stock at an exercise price of
$2.50 per share that will expire on July 7, 2004.
Additionally, we, in the past, have raised capital through the sale of our
tax benefits. Until our operations generate significant revenues, we will
continue to fund operations from cash on hand and through the sources of capital
previously described. After taking into account proceeds from the financing that
occurred in July, we believe that our cash and cash equivalents will be
sufficient to meet our anticipated cash needs through September 30, 2001. The
report of our independent auditors on our July 31, 2000 financial statements
included an explanatory paragraph which states that our recurring losses,
working capital deficiency and limited liquid resources raise substantial doubt
about our ability to continue as a going concern. The financial statements at
July 31, 2000 and April 30, 2001 do not include any adjustments that might
result from the outcome of this uncertainty.
Our continued operations will depend on our ability to raise additional
funds through various potential sources such as equity and debt financing,
collaborative agreements, strategic alliances, sale of tax benefits, revenues
from the commercial sale of ONCONASE(R) and our ability to realize the full
potential of our technology and our drug candidates. Such additional funds may
not become available as we need them or on acceptable terms.
We had a pre-NDA meeting with the FDA to discuss the preliminary results of
the Phase III clinical trial in patients with malignant mesothelioma and the
scope and detail of the proposed NDA filing. We have begun a series of meetings
with the FDA to establish mutually agreed upon parameters necessary for the
submission of the NDA. If the preliminary results of the Phase III trial are
confirmed by the ongoing study and we complete all the other requirements such
as chemistry, manufacturing and controls (methods used to manufacture
ONCONASE(R)) toxicology (studies evaluating therapeutic and toxic doses of
ONCONASE(R) in animals) and pharmacology (detection of ONCONASE(R) in human
blood and antibody formation) studies, we intend to file an NDA. We cannot
estimate when the NDA may be filed. We may never file an NDA. If an NDA is
filed, marketing approval for ONCONASE(R) as a treatment for malignant
mesothelioma may not be granted by the FDA.
We will continue to incur costs in conjunction with our U.S. and foreign
registrations for marketing approval of ONCONASE(R). We are currently in
discussion with several potential strategic alliance partners, including major
international biopharmaceutical companies, to further the development and
marketing of ONCONASE(R) and other potential new products. Such alliances may
not materialize. We intend to seek marketing approval for ONCONASE(R) for the
treatment of malignant mesothelioma in foreign territories. In February 2001, we
received an Orphan Medicinal Product Designation for ONCONASE(R) with the
European Agency for the Evaluation of Medicinal Product, or EMEA. Currently, we
are in discussion with a number of European regulatory agencies on the proposed
registration requirements of ONCONASE(R)for malignant mesothelioma.
Simultaneously, we are in the process of expanding our clinical program in
Germany and Italy.
The Nasdaq SmallCap Market delisted our common stock effective at the close
of business April 27, 1999 for failing to meet the minimum bid price
requirements set forth in the NASD Marketplace Rules. As of April 28, 1999, our
common stock trades on the OTC Bulletin Board under the symbol "ACEL."
15
The market price of our common stock is volatile, and the price of the
stock could be dramatically affected depending on numerous factors. The market
price of our common stock could also be materially affected by the grant or
decline of marketing approval for ONCONASE(R).
Changes In Accountants
On December 1, 1993, some of the shareholders of Armus Harrison & Co.
terminated their association with Armus Harrison, and Armus Harrison ceased
performing accounting and auditing services, except for limited accounting
services to be performed on our behalf. In June 1996, Armus Harrison dissolved
and ceased all operations. The report of KPMG LLP with respect to our financial
statements from inception to July 31, 2000 is based on the report of Armus
Harrison for the period from inception to July 31, 1992, although Armus Harrison
has not consented to the use of its report in the registration statement of
which this prospectus is a part and will not be available to perform any
subsequent review procedures with respect to its report. Accordingly, investors
will be barred from asserting claims against Armus Harrison under Section 11 of
the Securities Act on the basis of the use of its report in any of our
registration statements into which the report is used directly on as the basis
for a report used in any registration statement of ours. In addition, if anyone
seeks to assert a claim against Armus Harrison for false or misleading financial
statements and disclosures in documents previously filed by us, the claim will
be adversely affected and possibly barred. Furthermore, due to the lack of a
consent from Armus Harrison to the use of its audit report in the registration
statement of which this prospectus is a part, our officers and directors will be
unable to rely on the authority of Armus Harrison as experts in auditing and
accounting if any claim is brought against such persons under Section 11 of the
Securities Act based on alleged false and misleading Financial Statements and
disclosures attributable to Armus Harrison. The discussion regarding certain
effects of the Armus Harrison termination is not meant and should not be
construed in any way as legal advice to any party and any potential purchaser
should consult with his, her or its own counsel with respect to the effect of
the Armus Harrison termination on a potential investment in our common stock or
otherwise.
16
BUSINESS
Overview
We are a biopharmaceutical company, organized in 1981, primarily engaged in
the discovery and development of new drugs for the treatment of cancer and other
pathological conditions. In 1987, we completed the molecular characterization
(which is the determination of the molecular structure and other physical and
chemical characteristics) of a specific protein, which we named P-30 Protein. In
October 1998, the United States Adapted Names Council adapted the name
ranpirnase as the United States adaptive name for P-30 Protein, which we have
trademarked as ONCONASE(R).
ONCONASE(R) has been isolated from the eggs of the leopard frog.
ONCONASE(R) is a novel ribonuclease that is unique among the superfamily of
pancreatic ribonuclease. Ribonucleases are enzymes that break certain bonds of
ribonucleic acids. Ribonucleases serve several important biological functions in
nature, including regulation of angiogenesis, which is the formation of new
blood vessels, anti-viral and anti-parasitic defenses, inter-strain competition
in bacteria, and restrictive pollination in plants. In addition to taking
advantage of the natural biological functions of ribonucleases, frog
ribonucleases may be more therapeutically effective in humans than human or
mammalian ribonucleases as they do not appear to be adversely affected by
inhibitors found in a mammal's ribonuclease. Therefore, the development of
amphibian ribonucleases into therapeutics may result in a new class of compounds
for the treatment of diseases such as cancer and AIDS.
Based on our preclinical and clinical testing, we believe that ONCONASE(R)
and related compounds may have utility:
o as a single agent,
o in combination with other anti-cancer agents,
o as the active ingredient, or payload, in a targeted conjugate, which
is a new compound resulting from chemically joining two different
molecules with targeted specificity, and
o in a delivery system, such as standard or "stealth" liposomes.
During the clinical trials, patients with advanced stages of solid tumors
are treated with ONCONASE(R) on a weekly basis. Data from Phase II and Phase III
clinical trials of ONCONASE(R) show that the most significant clinical results
to date have been observed in unresectable malignant mesothelioma, an inoperable
cancer found in the lining of the lung and abdomen. We have also conducted pilot
clinical trials in non-small cell lung cancer, metastatic breast cancer and
renal cell cancer.
Side effects associated with ONCONASE(R), as observed in over 650 patients
treated to date, have been modest, primarily affect the kidneys and are
reversible upon the reduction of dose or temporary or permanent discontinuation
of treatment. Patients treated with ONCONASE(R) have shown little evidence of
bone marrow suppression, hair loss or other severe organ toxicities frequently
observed after treatment with most other chemotherapeutic drugs. This safety
profile may result from the fact that ranpirnase is structurally similar to
several human ribonucleases.
In June 1997, we initiated a Phase III clinical trial comparing the safety
and efficacy of ONCONASE(R) by itself to doxorubicin in patients with
unresectable malignant mesothelioma. Doxorubicin is considered by opinion
leaders to be the most active drug against malignant mesothelioma. Unresectable
malignant mesothelioma is often linked to asbestos exposure and afflicts
approximately 2,500 to 3,500 newly diagnosed patients in the United States each
year. This disease is found in the lining of the lungs and the abdomen.
Epidemiologists have predicted that over the next 35 years over 250,000 people
will die
17
from malignant mesothelioma in Europe alone. There is currently no standard
FDA-approved drug for this disease.
Thereafter, we amended the clinical trial to allow for the comparison of
the combination of ONCONASE(R) and doxorubicin versus doxorubicin by itself. In
April 1999, we completed the patient enrollment for the first part of the
clinical trial. The second part of the trial is still in the enrollment phase.
Based on the preliminary results of the trial, in March 2000, we had a pre-NDA
meeting with the FDA to discuss these preliminary results and the scope and
details of a proposed NDA filing. Following that meeting, we initiated a series
of meetings with the FDA to establish mutually agreed parameters necessary for
the submission of the NDA. In order to file the NDA, we have to complete the
Phase III clinical trial, as well as, chemistry, manufacturing and controls
(methods used to manufacture, ONCONASE (R)), toxicology (studies evaluating
therapeutic and toxic doses of ONCONASE (R) in animals) and pharmacology
(detection of ONCONASE (R) in human blood and antibody formation) studies. If
the Phase III preliminary data is confirmed by the continuing study, and other
requirements for filing an NDA are satisfied, we intend to file an NDA. We
cannot estimate if or when we will file the NDA. If we file an NDA, marketing
approval for ONCONASE(R) as a treatment for malignant mesothelioma may not be
granted by the FDA.
Additionally, we intend to seek, but may not be able to obtain, non-U.S.
marketing approvals for ONCONASE(R). In February 2001, we received an Orphan
Medicinal Product Designation for ONCONASE(R) with the European Agency for the
Evaluation of Medicinal Products, or EMEA. Currently, we are in discussions with
a number of European regulatory agencies on the proposed registration
requirements for the malignant mesothelioma indication. However, we cannot
assure you that marketing approval for ONCONASE(R) as a treatment for malignant
mesothelioma will be granted.
We intend to initiate trials of ONCONASE(R) in other solid tumor
indications. Prior to July 1998 our strategy was to gain marketing approval for
ONCONASE(R) in combination with tamoxifen as a treatment for pancreatic cancer.
However, in July 1998, we discontinued two Phase III clinical trials testing
ONCONASE(R) in combination with tamoxifen in pancreatic cancer. This drug
combination did not demonstrate a statistically significant survival benefit in
this indication.
We have established two major scientific collaborations with the National
Institutes of Health:
o in 1989, a collaboration with the National Institute of Neurological
Disorders and Stroke, and
o in 1992, a collaboration with the National Cancer Institute.
This research primarily focuses on ONCONASE(R) mechanism of action studies, in
vivo synergisms of ONCONASE(R) with other anti-cancer agents and other routes of
administration. In vivo studies are performed on living animals.
Through laboratory experiments, we have produced a modified cloned, or
recombinant, version of ranpirnase. This recombinant version can be attached to
other molecules, which has resulted in a potential new product line, ranpirnase
conjugates. In addition, through a collaboration, the National Cancer Institute
has produced a conjugate of ranpirnase with a monoclonal antibody that has
demonstrated preclinical activity in non-Hodgkin's lymphoma. Pre-clinical
studies at the National Cancer Institute are ongoing in preparation for
commencing clinical trials for the treatment of non-Hodgkin's lymphoma with this
new conjugate, or chemical construct.
We believe that ranpirnase may also be used in the development of an
anti-viral agent. The National Institutes of Health has performed an independent
in vitro screen of ONCONASE(R) against the HIV virus type 1. In vitro studies
are those performed in artificial laboratory vessels. The results showed
ONCONASE(R) to inhibit replication of HIV by up to 99.9% after a four-day
incubation period at concentrations not toxic to uninfected cells. In addition,
in vitro findings by the National Institutes of Health revealed that ONCONASE(R)
significantly inhibited production of HIV in several persistently infected human
cell lines, preferentially breaking down viral RNA and cellular transfer RNA
while not affecting normal cellular ribosomal RNA and messenger RNAs. In
addition, the National Institutes of Health - Division of AIDS found ONCONASE(R)
has in vitro anti-viral activity. Subject to the availability
18
of the required capital, we plan to conduct further research concerning
anti-viral activity. We cannot assure you that these results can be duplicated
in humans.
Other Products
We have also discovered another series of biologically active proteins.
These proteins appear to be involved in the regulation of both early embryonic
and malignant cell growth. However, it will require significant additional
research and funding to develop these proteins into therapeutics. At this time,
we are unable to fund such research and we do not know if we will be able to
raise sufficient capital in the future.
ONCONASE(R) (Ranpirnase) Profile
Originally, we developed a biological extract from early stage leopard frog
embryos and eggs which demonstrated potent anti-tumor activity. In 1987, we
completed the molecular identification of a specific protein, P-30 Protein. In
October 1998, the United States Adopted Names Council adopted ranpirnase as the
United States adopted name for our P-30 protein, which we have trademarked as
ONCONASE(R), intended for use in the treatment of solid tumors. Based upon the
complete amino acid sequence analysis ranpirnase's novel structure was
established. We have also determined that, thus far, ranpirnase is the smallest
known protein belonging to the superfamily of pancreatic ribonuclease.
Preclinical Research
In Vitro Anti-Cancer Activity
ONCONASE(R) has demonstrated a broad spectrum of anti-tumor activity in
vitro. The National Cancer Institute Cancer Screen has determined that
ONCONASE(R) kills cancer cells, therefore, ONCONASE(R) was judged to be an
active drug. Scientists at Harvard Medical School demonstrated that ONCONASE(R)
chemically interferes with the blood supply to tumors, a process which is called
anti-angiogenic activity.
In vitro, ONCONASE(R), in combination with other drugs shown below, has
been shown to have a synergistic effect, which means that the effect of
ONCONASE(R) with certain drugs acting together is greater than the effect of
them acting alone and greater than the sum of their effects, on certain cancers
as shown by the following chart:
Drug Combination Cancer
ONCONASE(R)+ Tamoxifen Prostatic, Ovarian, Renal Cell
Carcinoma
ONCONASE(R)+ Phenothiazine Non-Small Cell Lung Carcinoma
ONCONASE(R)+ Lovastatin Non-Small Cell Lung Carcinoma,
Ovarian
ONCONASE(R)+ Cisplatin Ovarian
ONCONASE(R)+ All-trans-retionoic acid Glioma
ONCONASE(R)+ Vincristine Colorectal, Breast
ONCONASE(R)+ Doxorubicin Colorectal, Resistant Breast
ONCONASE(R)+ Taxol Resistant Breast
19
In Vivo Anti-Cancer Activity
There is in vivo data which indicates that the use of ONCONASE(R) with the
following drugs is synergistic:
o vincristine,
o doxorubicin, and
o tamoxifen.
These synergisms suggest a potential for the therapeutic utility of
ONCONASE(R) in patients with chemotherapy-resistant tumors. The National Cancer
Institute reported the ability of ONCONASE(R) to overcome multiple drug
resistance (referring to a drug that no longer kills cancer cells) both in vitro
and in vivo. Previously, ONCONASE(R) demonstrated that it could overcome other
forms of drug resistance.
ONCONASE(R) as a Radiosensitizing and Anti-Angiogenic Agent
Collaborative research at the University of Medicine and Dentistry of New
Jersey at Camden and the University of Pennsylvania Medical Center, Department
of Radiation Oncology, revealed the radiosensitizing, for example, an increasing
sensitivity to ionizing radiation, and co-antiangiogenic (the ability to
interfere with blood supply and vessel formation in tumors) effects of
ONCONASE(R). This research also indicated that systemically administered
ONCONASE(R) resulted in diminution of tumor fluid interstitial pressure. We
presented the results of these studies at scientific meetings and have had the
results published in peer reviewed journals.
Clinical Development and Clinical Trials
ONCONASE(R) has been tested in Phase I-III clinical trials in approximately
35 cancer centers across the United States, including major centers such as
Columbia-Presbyterian, University of Chicago, M.D. Anderson and Cedars-Sinai
Cancer Centers. Due to limited capital, we have been very selective in our
product development strategy, which is focused on the use of ONCONASE(R) alone
or in combination with drugs which have shown evidence of preclinical and
clinical efficacy on tumor types for which:
o median survivals are typically less than a year, and
o there are few or no approved treatments.
ONCONASE(R) has been tested as a single agent in patients with a variety of
solid tumors and in combination with tamoxifen in patients with prostate cancer,
advanced pancreatic cancer and renal cell carcinoma. We initially focused our
development efforts on clinical trials in pancreatic cancer. However, due to the
lack of a demonstrated statistically significant survival benefit, in July 1998
we discontinued two Phase III clinical trials testing ONCONASE(R) in combination
with tamoxifen in pancreatic cancer.
ONCONASE(R) as a single agent is currently in a Phase III clinical trial,
initiated in June 1997, for unresectable malignant mesothelioma, comparing
ONCONASE(R) to doxorubicin. The trial is a randomized, controlled study. We
later amended the trial to add a comparison of ONCONASE(R) in combination with
doxorubicin. We completed patient enrollment for the first part of the trial in
April 1999. The second part of the trial is currently in the patient enrollment
phase. No standard FDA-approved therapy exists to treat this deadly cancer, and
most advanced, unresectable malignant mesothelioma patients die of this
progressive disease within six to 12 months of diagnosis. We are in the process
of analyzing the Phase III data from the first part of this clinical trial and
have presented the preliminary results to the FDA. We have had a series of
meetings with the agency to establish mutually agreed upon parameters for the
NDA to obtain marketing approal for ONCONASE(R). In February 2001, we received
an Orphan Medicinal Product
20
Designation for ONCONASE(R) with the EMEA. We are currently in discussions with
a number of European regulatory agencies on the proposed registration
requirements of ONCONASE(R) for malignant mesothelioma. There can be no
assurances that marketing approval of ONCONASE(R) for the treatment of
unresectable malignant mesothelioma will be granted by the FDA or foreign
regulatory agencies.
ONCONASE(R) has demonstrated to be synergistic with tamoxifen in inhibiting
tumor cell growth in prostate and renal cell cancers in in vitro tests. We
completed Phase I/II clinical studies testing ONCONASE(R) in combination with
tamoxifen in prostate cancer and renal cell carcinoma. Reported toxicities in
Phase I/II clinical trials were primarily renal, dose-related and reversible.
There has been little evidence of bone marrow suppression, hair loss or other
severe toxicities frequently observed after treatment with most other
chemotherapeutic drugs. We intend to proceed with prostate and renal cell cancer
research in the future either on our own or in collaboration with others;
however, at this time we are not certain if this research will involve
ONCONASE(R) or another drug, nor can we assure you that we will have the
financings for such research.
We completed a Phase I/II clinical trial testing ONCONASE(R) in combination
with 13-cis-retinoic acid and alpha-interferon in metastatic renal cell
carcinoma. A metastatic renal cell carcinoma is a cancer of, and which
originated in, the kidney and spread to the other parts of the body. The Phase I
results have led to the modification of the trial design. The new study has not
yet been initiated.
A collaboration with the National Cancer Institute has produced a conjugate
of ranpirnase with a monoclonal antibody which has been deemed active in vivo
for non-Hodgkin's lymphoma. The conjugate is currently being evaluated by the
National Cancer Institute for clinical trials.
Research and Development Programs
Research and development expenses for the fiscal years ended July 31, 2000,
1999, and 1998 were $1,880,000, $2,402,000, and $5,265,000, respectively.
Research and development expenses for the nine months ended April 30, 2001 were
$1,404,000. Our research and development programs focus primarily on the
development of therapeutics from amphibian ribonucleases. Ribonucleases are
enzymes which have been shown to be involved in the regulation of cell
proliferation, maturation, differentiation and programmed cell death known as
apoptosis. Therefore, ribonucleases may be ideal candidates for the development
of therapeutics for the treatment of cancer and other life-threatening diseases,
including HIV infection, that require anti-proliferative and pro-apoptotic
properties.
Our research and development programs relate to the development of drugs to
treat the following cancers and other diseases:
o unresectable malignant mesothelioma,
o renal cell carcinoma,
o other cancers (epithelial malignancies),
o non-Hodgkin's lymphoma,
o primary brain tumors,
o viral diseases,
o anti-inflammatory diseases, and
o other pathological conditions such as organ transplantation.
We are pursuing some of these programs independently, while others are being
undertaken in collaboration with the National Institutes of Health, or other
institutions such as the University of Pennsylvania.
21
Ranpirnase Conjugates and Fusion Proteins
In addition to using it in its native form, we are conjugating, or
chemically linking, ranpirnase with targeting molecules, resulting in various
conjugates, to ensure its delivery to specific tissue targets. Several
conjugates are being developed by the National Institutes of Health in
collaboration with our scientists and have demonstrated significant anti-tumor
activity, reflecting significant prolongation of survival of treated animals as
compared to untreated animals. In addition, we are synthesizing several genes
of ranpirnase, its variants and other amphibian ribonucleases using recombinant
technologies. We intend to use these genes to develop novel therapeutics that
selectively target specific tumors. Production of these engineered genes and
products may also lead to their use in gene therapy and other therapeutic
applications in cancer and other pathological conditions.
We, in collaboration with the National Cancer Institute, are developing a
ranpirnase conjugate for the treatment of patients with non-Hodgkin's lymphoma.
This potential product is in preclinical testing at the National Cancer
Institute; however, we cannot ascertain when the clinical trials will commence.
Proteasome Inhibitors
Cyclins and cyclin-dependent kinases are two major groups of protein
regulators of the cell cycle progression. This means that each dividing cell,
such as a tumor (malignant) cell, undergoes cyclical metabolic and morphological
(structural) changes which are defined as the cell cycle. Cancer can be defined
as the uncontrolled growth and proliferation of cells often associated with a
de-regulated pattern of cell growth maturation and division. In vitro studies of
ONCONASE(R) have shown its ability to interrupt cell cycle progression. Given
that ONCONASE(R) and proteasome inhibitors both have been shown in vitro to
modulate fundamental mechanisms governing tumor cell growth, proliferation and
death, we are testing ONCONASE(R) and proteasome inhibitors in combination and
have discovered synergistic anti-tumor effects. We believe that a new class of
anti-cancer compounds can be developed combining ranpirnase and its variants
with proteasome inhibitors.
HIV Infection
The drugs currently approved in the United States for the treatment of the
HIV infection consist primarily of reverse transcriptase inhibitors and protease
inhibitors. There is an extremely high rate of resistance developing to several
currently available anti-viral drugs, primarily due to the exponentially
increasing rate of mutations of HIV that occur during infection, and patient
non-compliance (when patients do not take drugs as prescribed).
Experimental data shows that anti-HIV effects of ONCONASE(R) are quite
selective, independent of the HIV envelope and therefore likely to inhibit
replication of the different HIV-1 subtypes. In vitro studies have been
performed by independent scientific collaborators, including the National
Institutes of Health - Division of AIDS. Ranpirnase is an enzyme highly
specialized in the breakdown of RNA molecules and might be an effective anti-HIV
agent, irrespective of viral mutations that render other antiviral agents
ineffective. We retain all commercial rights to compounds resulting from these
studies. However, we do not currently possess the funds necessary to conduct
further research for this indication.
Ranpirnase Variant Conjugates
We have developed a variant of ranpirnase and conjugated it to a variety of
clinically important proteins and peptides. These conjugates are designed to
specifically target relevant molecular structures in the body. These conjugates
may have therapeutic applications in the treatment of anti-inflammatory
22
diseases, such as arthritis and other autoimmune diseases. However, these
products may never be successfully developed.
Raw Materials
The major active ingredient derived from leopard frog eggs is the protein
ranpirnase. Although we currently acquire our natural source material from a
single supplier, we believe that it is abundantly available from other sources.
We have sufficient egg inventory on hand to produce enough ONCONASE(R) to
complete the current Phase III clinical trial for malignant mesothelioma and
supply ONCONASE(R) for up to two years after commercialization. In addition, we
have successfully completed the cloning of the gene of natural protein
ranpirnase. The use of recombinant technology may not be more cost effective
than the natural source.
Manufacturing
We have signed an agreement with Scientific Protein Laboratories, a
subsidiary of a division of American Home Products Corp., which will perform the
intermediary manufacturing process of purifying ranpirnase. Scientific Protein
Laboratories sends the intermediate product to a contract filler for the final
manufacturing step and vial filling. Other than these arrangements, we do not
have specific arrangements for the manufacture of our product. Products
manufactured for use in Phase III clinical trials and for commercial sale must
be manufactured in compliance with Current Good Manufacturing Practices. Both
Scientific Protein Laboratories, and the contract filler to whom the
intermediate product is sent, manufacture in accordance with Current Good
Manufacturing Practices. For the foreseeable future, we intend to rely on these
manufacturers, or substitute manufacturers, if necessary, to manufacture our
product. We might never be able to find substitute manufacturers, if necessary.
We are dependent upon our contract manufacturers to comply with Current Good
Manufacturing Practices and to meet our production requirements. It is possible
that our contract manufacturers may not comply with Current Good Manufacturing
Practices or timely deliver sufficient quantities of our products.
Marketing
Neither our company nor any of our officers or employees has pharmaceutical
marketing experience. If we were to market our products ourselves, we would need
significant additional expenditures and management resources to develop an
internal sales force. We cannot assure you that if we were to market our product
ourselves we would successfully penetrate the markets for any products developed
or that we would be able to develop internal marketing capabilities at all. We
intend, in some instances, to enter into development and marketing agreements
with third parties. We expect that under such arrangements we would act as a
co-marketing partner or would grant exclusive marketing rights to our corporate
partners in return for possibly assuming further research and development cost,
up-front fees, milestone payments and royalties on sales. Under these
agreements, our marketing partner may have the responsibility for a significant
portion of development of the product and regulatory approval. In the event that
our marketing partner fails to develop a marketable product or fails to market a
product successfully, our business may be adversely affected.
Government Regulation
The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the Federal Food, Drug and
Cosmetic Act. Similar approvals by comparable regulatory agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards which apply to the clinical testing, manufacturing and
marketing of pharmaceutical
23
products. Obtaining FDA approval for a new therapeutic may take many years and
involve substantial expenditures. State, local and other authorities also
regulate pharmaceutical manufacturing facilities.
As an initial step in the FDA regulatory approval process, preclinical
studies are conducted in laboratory dishes and animal models to assess the
drug's efficacy and to identify potential safety problems. The results of these
studies are submitted to the FDA as a part of the IND, which is filed to obtain
approval to begin human clinical testing. The human clinical testing program
typically involves up to three phases. Data from human trials as well as other
regulatory requirements such as chemistry, manufacturing and controls,
pharmacology and toxicology sections, are submitted to the FDA in an NDA or
Biologics License Application. Preparing an NDA or BLA involves considerable
data collection, verification and analysis.
We have not received United States or other marketing approval for any of
our product candidates and may not receive any approvals. We may encounter
difficulties or unanticipated costs in our effort to secure necessary
governmental approvals, which could delay or preclude us from marketing our
products.
With respect to patented products, delays imposed by the governmental
approval process may materially reduce the period during which we may have the
exclusive right to exploit them.
Patents
We believe it is important to develop new technology and to improve our
existing technology. When appropriate, we file patent applications to protect
inventions in which we have an ownership interest.
We own eight patents in the United States:
o U.S. Patent No. 4,888,172, issued in 1989, which covers a
pharmaceutical produced from fertilized frog eggs (Rana pipiens) and
the methodology for producing it.
o U.S. Patent No. 5,559,212, issued in 1996, which covers the amino acid
sequence of ONCONASE(R).
o U.S. Patents Nos. 5,529,775 and 5,540,925, issued in 1996, and U.S.
Patent No. 5,595,734, issued in 1997, which cover combinations of
ONCONASE(R)with certain other pharmaceuticals.
o U.S. Patent No. 5,728,805, issued in 1998, which covers a family of
variants of ONCONASE(R).
o U.S. Patent No. 6,175,003 B1, issued January 16, 2001, which covers
the genes of ONCONASE(R)and a variant of ONCONASE(R).
o U.S. Patent No. 6,239,257 B1, issued on May 29, 2001, which covers a
family of variants of ONCONASE(R).
We own three European patents, which have been validated in certain
European countries. These patents cover ONCONASE(R), process technology for
making ONCONASE(R), and combinations of ONCONASE(R) with certain other
chemotherapeutics. We also have patent applications pending in the United
States, Europe, and Japan. Additionally, we own one Japanese patent and have an
undivided interest in two applications that are pending in the United States.
Each of these applications relate to a Subject Invention (as that term is
defined in CRADAs to which we and the National Institutes of Health are
parties).
The scope of protection afforded by patents for biotechnological inventions
can be uncertain, and such uncertainty may apply to our patents as well. The
patent applications we have filed, or that we may file in the future, may not
result in patents. Our patents may not give us competitive advantages, may be
wholly or partially invalidated or held unenforceable, or may be held
uninfringed by products that compete
24
with our products. Patents owned by others may adversely affect our ability to
do business. Furthermore, others may independently develop products that are
similar to our products or that duplicate our products, and may design around
the claims of our patents. Although we believe that our patents and patent
applications are of substantial value to us, we cannot assure you that such
patents and patent applications will be of commercial benefit to us, will
adequately protect us from competing products or will not be challenged,
declared invalid, or declared uninfringed. We also rely on proprietary know-how
and on trade secrets to develop and maintain our competitive position. Others
may independently develop or obtain access to such know-how or trade secrets.
Although our employees and consultants having access to proprietary information
are required to sign agreements which require them to keep such information
confidential, our employees or consultants may breach these agreements or these
agreements may be held to be unenforceable.
Competition
Currently, there are no approved systemic treatments for malignant
mesothelioma. To our knowledge, no other company is developing a product with
the same mechanism of action as ONCONASE(R). There are several companies,
universities, research teams and scientists, both private and
government-sponsored, which engage in research similar, or potentially similar,
to that performed by us. These include Eli Lilly and Sugen which are developing
agents for the malignant mesothelioma indication. Eli Lilly is conducting a
Phase III trial of the combination of the multi-targeted antifolate (MTA) with
cisplatin vs. cisplatin alone, and Sugen is conducting a Phase II trial of the
VEGF antagonist. There is no comparable survival data available on the foregoing
studies at this time.
Most of our competitors have far greater financial resources, larger
research staffs and more extensive physical facilities. These competitors may
develop products that are more effective than ours and may be more successful
than us at producing and marketing their products. We are not aware, however, of
any product currently being marketed that has the same mechanism of action as
our proposed anti-tumor agent, ONCONASE(R). Search of scientific literature
reveals no published information which would indicate that others are currently
employing this method or producing such an anti-tumor agent. There are several
chemotherapeutic agents currently used to treat the forms of cancer which
ONCONASE(R) is being used to treat. ONCONASE(R) may not prove to be as safe and
as effective as currently-used drugs. Others may develop new treatments which
are more effective than ONCONASE(R).
Employees
As of June 15, 2001, we employed 15 persons, of whom 12 were engaged in
research and development activities and three were engaged in administration and
management. We have five employees who hold Ph.D. or M.D. degrees. All of our
employees are covered by confidentiality agreements. We consider relations with
our employees to be very good. None of our employees are covered by a collective
bargaining agreement.
Environmental Matters
Our operations are subject to comprehensive regulation with respect to
environmental, safety and similar matters by the United States Environmental
Protection Agency and similar state and local agencies. Failure to comply with
applicable laws, regulations and permits can result in injunctive actions,
damages and civil and criminal penalties. If we expand or change our existing
operations or propose any new operations, we may need to obtain additional or
amend existing permits or authorizations. We spend time, effort and funds in
operating our facilities to ensure compliance with environmental and other
regulatory requirements. Such efforts and expenditures are common throughout the
biotechnology industry and generally should have no material adverse effect on
our financial condition. The principal environmental
25
regulatory requirements and matters known to us requiring or potentially
requiring capital expenditures by us do not appear likely, individually or in
the aggregate, to have a material adverse effect on our financial condition. We
believe that we are in compliance with all current laws and regulations.
Properties
We lease a total of approximately 17,000 square feet in an industrial
office building located in Bloomfield, New Jersey. We lease the facility under a
five-year operating lease which is due to expire December 31, 2001. The annual
rental obligation, which commenced January 1, 1997, is $96,775 and is subject to
escalation amounts. We believe that the facility is sufficient for our needs in
the foreseeable future.
Legal Proceedings
We are presently not involved in any legal proceedings.
26
MANAGEMENT
Directors And Executive Officers
Our directors and executive officers are:
Name Age Director Since
Position with the Company
------------------------------------ -------- --------------------
------------------------------------------------
Kuslima Shogen 55 1981
Chairman of the Board, Chief Executive Officer
and
Acting Chief Financial Officer
Stanislaw M. Mikulski, M.D. 56 1986
Executive Vice President, Medical Director and
Director
Stephen K. Carter, M.D.(1) 62 1997
Director and Chairman of the Scientific
Advisory Board
Donald R. Conklin (1)(2) 64 1997
Director
Martin F. Stadler(1)(2) 58 1997
Director
--------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Business Experience of Directors and Executive Officers
Kuslima Shogen has served as our Chief Executive Officer since September
1986, as Chairman of the Board since August 1996, as a Director since our
inception and as Acting Chief Financial Officer since June 23, 1999. She also
served as our Chief Financial Officer from September 1986 through July 1994 and
as our President from September 1986 through July 1996. Ms. Shogen formed the
company in 1981 to pursue research that she had initiated while a biology
student in the University Honors Program at Fairleigh Dickinson University.
Prior to our founding, from 1976 to 1981 she was founder and president of a
biomedical research consortium specializing in Good Laboratory Practices and
animal toxicology. During that time, she also served as a consultant for the
Lever Brothers Research Group. Ms. Shogen has received numerous awards for
achievements in biology, including the Sigma Xi first prize from the Scientific
Research Society of North America in 1974 and first prize for the most
outstanding research paper in biology at the Eastern College Science Conferences
competitions in 1972, 1973, and 1974. She earned a B.S. degree in 1974 and an
M.S. degree in 1976 in biology from Fairleigh Dickinson University, and also
completed graduate studies in 1978 in embryology. She is a Phi Beta Kappa
graduate. In April 1998 Ms. Shogen received the Pinnacle Award from Farleigh
Dickinson University, the highest honor the University bestows on its graduates.
Stanislaw M. Mikulski, M.D., F.A.C.P. has served as our Executive Vice
President and Medical Director since 1987 and as a Director since 1986. Prior to
his affiliation with us, Dr. Mikulski was Special Assistant to the Chief of the
Investigational Drug Branch of the National Cancer Institute and the Coordinator
for Immunotherapy Trials in Cancer for the Division of Cancer Treatment. Prior
to joining us, he maintained a private practice in medical oncology for over
eight years. He is a diplomate of the American Board of Internal Medicine and
Medical Oncology as well as a fellow of the American College of Physicians and a
member of the American Society of Clinical Oncology. Dr. Mikulski is currently a
clinical assistant Professor of Medicine at the University of Medicine and
Dentistry of New Jersey. He
27
received his M.D. in 1967 from the Medical School of Warsaw, Poland, and
subsequently performed post-doctoral studies in human tumor immunology at the
University of California in Los Angeles.
Stephen K. Carter, M.D. joined the Board of Directors in May 1997 and
serves as Chairman of our Scientific Advisory Board. In addition to his
positions with us, Dr. Carter also serves as a senior clinical consultant to
Sugen, Inc. From 1995 through 1997, he served as Senior Vice President of
Research and Development for Boehringer-Ingelheim Pharmaceuticals. Before this,
Dr. Carter spent over 13 years with Bristol-Myers Squibb, an international
leader in the development of innovative anti-cancer and anti-viral therapies. He
held a variety of senior executive research and development positions while at
Bristol-Myers, including serving for five years as Senior Vice President of
worldwide clinical research and development of its Pharmaceutical Research
Institute. From 1976 to 1982, he established and directed the Northern
California Cancer Program. Prior to this, he held a number of positions during a
nine-year tenure at the National Cancer Institute, including the position of
Deputy Director at the National Institutes of Health. He has also been a member
of the faculties of the medical schools of Stanford University, the University
of California at San Francisco and New York University. Dr. Carter has published
extensively on the development of anti-cancer drugs, was the co-founding editor
of journals devoted to cancer therapeutics or immunology, and has served on the
editorial boards of a number of additional journals dedicated to cancer
treatment. He is a member of the American Society of Clinical Oncology, the
American Association for Cancer Research, and the Society of Surgical Oncology,
as well as several other medical societies. Dr. Carter earned his B.A. from
Columbia University and his M.D. from New York Medical College. He currently
serves on the board of directors of Allos Therapeutics.
Donald R. Conklin joined the Board of Directors in May 1997. Prior to his
retirement in May 1997, Mr. Conklin was a senior executive with Schering-Plough,
a major worldwide pharmaceutical firm. During his more than 35 years with
Schering-Plough, he held a variety of key management positions within the firm.
From 1986 to 1994, he served as President of Schering-Plough Pharmaceuticals and
Executive Vice-President of Schering-Plough Corporation. In this position, he
was responsible for worldwide pharmaceutical operations, including the launch of
INTRON(R) A (interferon alfa-2b). Prior to this, Mr. Conklin had served as
President of Schering USA and had held a variety of executive marketing
positions in the United States, Europe, and Latin America. Immediately preceding
his retirement, he was Chairman of Schering-Plough Health Care Products and an
Executive Vice President of Schering-Plough Corporation. Mr. Conklin received
his B.A. with highest honors from Williams College and his M.B.A. degree from
the Rutgers University School of Business. He currently serves on the board of
directors of Vertex Pharmaceuticals, Inc. and BioTransplant, Inc.
Martin F. Stadler joined the Board of Directors in November 1997. At the
end of 1996, Mr. Stadler retired from Hoffmann La-Roche, Inc. after 32 years of
pharmaceutical, chemical and diagnostic experience. Mr. Stadler served as senior
vice president and chief financial officer, and was a member of the Hoffmann
La-Roche, Inc. board of directors, from 1985 through 1996. His responsibilities
included finance, information technology, human resources, quality control and
technical services. Prior to 1985, Mr. Stadler served as vice- president of
strategic planning and business development. Mr. Stadler received his B.S.
degree from Rutgers University and his M.B.A. from Fairleigh Dickinson
University. In April 1999, he received the Pinnacle Award from Fairleigh
Dickinson University, the highest honor the University bestows on its graduates.
Mr. Stadler is a member of the Finance Council of the American Management
Association, a trustee of Fairleigh Dickinson University and a member of the
Advisory Board for Horton International.
28
Executive Compensation
Summary Compensation Table
The following table provides a summary of cash and non-cash compensation
for each of the last three fiscal years ended July 31, 2000, 1999 and 1998
earned by our Chief Executive Officer and our only other executive officer
during the last fiscal year.
Securities
Other Annual Underlying All other
Name and
Compensation Options/SARs Compensation
Principal Position Year Salary ($) Bonus ($)
($)(1) (#) ($)(2)
---------------------------------- -------- ----------- -----------
--------------- ---------------- --------------
Kuslima Shogen, 2000 $150,000 -0-
-0- 215,000 3,615
Chief Executive Officer, 1999 150,000 -0-
-0- -0- 3,289
Chairman of the Board of 1998 150,000 -0-
-0- -0- -0-
Directors and Acting Chief
Financial Officer...........
Stanislaw M. Mikulski 2000 130,000 -0-
-0- 140,000 3,600
Executive Vice President and 1999 130,000 -0-
-0- 50,000 2,850
Medical Director............ 1998 130,000 -0-
-0- -0- -0-
---------------------
(1) Excludes perquisites and other personal benefits which in the aggregate do
not exceed 10% of such executive officer's total annual salary and bonus.
(2) Consists of our contributions to a 401(k) plan.
29
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock
options to our executive officers during the fiscal year ended July 31, 2000:
Number of % of Total
Securities Options Exercise
Potential Realizable Value at
Underlying Granted to or Base
Assumed Annual Rates of Stock
Options Employees in Price
Expiration Price Appreciation for Option Term(2)
Name Granted (#) Fiscal Year ($/Share)(1)
Date 0%($) 5%($) 10%($)
----------------------- -------------- --------------- -----------
------------ ---------- ---------- ---------
Kuslima Shogen......... 23,000(3) 3.25% $.54
10/15/04 -- $621 $1,242
23,000(3) 3.25% .54
10/15/05 -- 621 1,242
23,000(3) 3.25% .54
10/15/06 -- 621 1,242
23,000(3) 3.25% .54
10/15/07 -- 621 1,242
23,000(3) 3.25% .54
10/15/08 -- 621 1,242
100,000(4) 14.14% .48
12/31/01 -- 2,400 4,800
Stanislaw M. Mikulski.. 11,000(3) 1.56% $.54
10/15/04 -- $297 $594
11,000(3) 1.56% .54
10/15/05 -- 297 594
11,000(3) 1.56% .54
10/15/06 -- 297 594
11,000(3) 1.56% .54
10/15/07 -- 297 594
11,000(3) 1.56% .54
10/15/08 -- 297 594
75,000(4) 10.61% .48
12/31/01 -- 1,800 3,600
---------------------
(1) The exercise prices of these options were based on the average of the high
and low trade prices of our common stock for the twenty (20) trading days
preceding the date of grant.
(2) The amounts set forth in the three columns represent hypothetical gains
that might be achieved by the optionees if the respective options are
exercised at the end of their terms. These gains are based on assumed rates
of stock price appreciation of 0%, 5% and 10%. The 0% appreciation column
is included because the exercise price of the options equals the market
price of the underlying common stock on the date the options were granted,
and thus the options will have no value unless our stock price increases
above the exercise price.
(3) These options vest and become exercisable as to 20% of the shares on the
date of grant and 20% of the shares each year thereafter. An aggregate
32,555 of these options issued to Kuslima Shogen were exercised in March
2001.
(4) These options will vest and become exercisable upon FDA approval of
ONCONASE(R) for malignant mesothelioma provided that ONCONASE(R) must be
approved on or before December 31, 2001, or these options will terminate,
and the executive officers must be actively employed by us through the date
of the approval. These options will expire five years after the vesting
date.
30
Option Exercises and Fiscal Year-End Values
The following table sets forth the information with respect to our
executive officers concerning the exercise of options during the fiscal year
ended July 31, 2000 and unexercised options held as of July 31, 2000.
Number of
Securities Underlying Value of Unexercised
Unexercised
Options at Fiscal In-The-Money Options at Fiscal
Year-End
(#) Year-End ($)(2)
------------------------------------ --------------------------------
Shares Value
Acquired on Realized
Name Exercise (#) ($)(1) Exercisable
Unexercisable Exercisable Unexercisable
-------------------------- --------------- ----------- ----------------
---------------- ------------- ----------------
Kuslima Shogen............ -0- -0- 1,127,723
192,000 $8,510 $77,040
Stanislaw M. Mikulski..... -0- -0- 339,845
119,000 $28,070 $48,530
---------------------
(1) Based upon the fair market value of the purchased shares on the option
exercise date less the exercise price paid for the shares.
(2) The fair market value of our common stock at the fiscal year end was based
on the average of the high and low trade prices ($0.91) for our common
stock obtained from the OTC Bulletin Board on the last trading day of the
fiscal year July 31, 2000.
31
Employment and Termination Agreements
On August 31, 1999 we entered into a separation agreement and general
release with Ms. Gail E. Fraser pursuant to which:
o Ms. Fraser confirmed her resignation as our vice president, finance,
chief financial officer, director and employee effective as of June
23, 1999;
o we agreed to pay Ms. Fraser her regular salary for the period
commencing on the date of resignation through July 31, 1999;
o we agreed with Ms. Fraser that an aggregate of 395,000 options granted
to Ms. Fraser under our 1993 Stock Option Plan, all of which had
vested as of the date of her resignation, will remain vested and
exercisable until December 30, 2000 and an aggregate of 70,000 options
granted under our 1993 Stock Option Plan, which had not vested on the
date of her resignation, will be deemed vested as of the date of
resignation and will remain exercisable until December 30, 2000, of
which an aggregate 90,000 options were exercised and the remaining
375,000 options expired;
o we agreed to pay for health insurance for Ms. Fraser and her
dependents until July 1999;
o Ms. Fraser and the company released each other from all claims; and
o Ms. Fraser agreed not to compete with us until December 30, 2000.
Directors' Compensation
Directors receive no cash compensation in consideration for their serving
on our Board of Directors. In November 1993 and January 1994, the Board of
Directors and the stockholders, respectively, approved our 1993 Stock Option
Plan which, among other things, provides for automatic grants of options under a
formula to non-employee directors, or independent directors, on an annual basis.
The formula provides that:
o on each December 31st each independent director receives automatically
an option to purchase 15,000 shares of our common stock, referred to
as the regular grant; and
o on the date of each independent director's initial election to the
Board of Directors, the newly elected independent director
automatically receives an option to purchase the independent
director's pro rata share of the regular grant which equals the
product of 1,250 multiplied by the number of whole months remaining in
the calendar year, referred to as the pro rata grant.
32
Each option granted pursuant to a regular grant and a pro rata grant vests and
becomes exercisable on December 30th following the date of grant. An option will
not become exercisable as to any shares unless the independent director has
served continuously on the Board of Directors during the year preceding the date
on which the options are scheduled to vest and become exercisable, or from the
date the independent director joined the Board of Directors until the date on
which the options are scheduled to vest and become exercisable. However, if an
independent director does not fulfill the continuous service requirement due to
the independent director's death or disability all options held by the
independent director nonetheless vest and become exercisable as described
herein. An option granted pursuant to the formula remains exercisable for a
period of five years after the date the option first becomes exercisable. The
per share exercise price of an option granted under the formula is the average
of the high and low trade prices for the twenty (20) days prior to the date of
the grant.
During the fiscal year ended July 31, 2000, we granted the following
non-employee directors the options listed below pursuant to the formula under
the 1993 Stock Option Plan. The exercise prices of the options are equal to the
formula set forth above.
Name Number of Options
Exercise Price Expiration
---------------------------------------- -------------------------
-------------------- -----------------
Stephen K. Carter.................... 15,000
$0.48 12/30/05
Donald R. Conklin.................... 15,000
$0.48 12/30/05
Martin F. Stadler.................... 15,000
$0.48 12/30/05
Additionally, in December 1999 our compensation committee approved the
issuance of an aggregate total of 75,000 stock options to our outside Board of
Directors, which vested on the date of grant. The exercise price of the stock
options was $0.47 per share which based on the average of the high and low trade
prices of our common stock for the twenty (20) trading days preceding the date
of grant.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended July 31, 2000, the members of our Board of
Directors who served on the Compensation Committee were Stephen K. Carter,
Donald R. Conklin and Martin F. Stadler.
Certain Relationships and Related Transactions
On July 23, 1991, the Board of Directors authorized us to pay Kuslima
Shogen an amount equal to 15% of any gross royalties which may be paid to us
from any license(s) with respect to our principal product, ONCONASE(R), or any
other products derived from amphibian source extract, produced either as a
natural, synthesized, and/or genetically engineered drug for which we own or are
a co-owner of the patent, or acquire such rights in the future, for a period not
to exceed the life of the patents. If we manufacture and market the drugs
ourselves, we will pay an amount equal to 5% of net sales from any products sold
during the life of the patents.
In August 1998, Ms. Shogen and Dr. Mikulski settled, and the court approved
the settlement, of a claim brought against them in the United States District
Court, District of New Jersey at Newark, New Jersey, by a shareholder under
Section 16(b) of the Securities Exchange Act of 1934, as amended, for profits
alleged to have been realized by Ms. Shogen and Dr. Mikulski in transactions
involving our securities in 1988 and 1989. Claims under Section 16(b) are for
profits calculated under such statute to have been realized for sales and
purchases of our securities made within a six month period. In this case the
purchases which formed the basis for this claim were issuances of shares of
stock to Ms. Shogen and Dr. Mikulski under employment agreements with us based
upon our achievement of certain milestones. No allegations of fraud were made.
Ms. Shogen agreed to pay us $91,971.00 and Dr. Mikulski agreed to pay us
33
$72,903.00. Such payments are to be made in a form acceptable to us whether in
cash, shares of our common stock or options to purchase our common stock, with
25% of such payments having been made in August 1998 and the remainder of such
amounts payable in three equal installments in August 1999, 2000 and 2001. The
August 1998 payments were made by the cancellation of options to purchase 44,999
shares of common stock owned by Ms. Shogen and the cancellation of options to
purchase 35,669 shares of common stock owned by Dr. Mikulski. In August 1999,
Ms. Shogen paid the balance in full by the cancellation of options to purchase
134,995 shares owned by Ms. Shogen and Dr. Mikulski paid an installment equal to
one-third of the balance by the cancellation of options to purchase 35,367
shares owned by Dr. Mikulski. In February 2000 Dr. Mikulski paid the balance in
full by the cancellation of options to purchase 31,599 shares owned by him.
In December 1999, our compensation committee approved the issuance of an
aggregate total of 75,000 stock options to our outside board of directors, which
vested on the date of grant. The exercise price of stock options was $0.47 per
share which was based on the average of the high and low trade prices of our
common stock for the twenty (20) trading days preceding the date of grant. An
aggregate 50,000 of these options have been exercised.
In April 2001, we issued convertible notes to Kuslima Shogen, our Chief
Executive Officer and director and two of our other directors, Donald Conklin
and Martin Stadler, and unrelated parties in the aggregate amount of $366,993.
The notes are due within ninety days unless the lenders elect to exercise an
option to convert their note into common stock at the conversion price of $0.90
per share. The related parties named above have elected to convert their notes
into an aggregate 330,000 shares of common stock. In addition, upon conversion,
they will receive three-year warrants to purchase an aggregate 330,000 shares of
common stock at an exercise price of $2.50 per share that will expire on July 7,
2004.
34
Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth certain information concerning stock
ownership of each person who is the beneficial owner of five percent or more of
our outstanding common stock, each of the current directors, our Chief Executive
Officer and each of our other executive officers with annual compensation of
more than $100,000 and all directors and executive officers as a group as of
July 20, 2001. Except as otherwise noted, each person has sole voting and
investment power with respect to the shares shown as beneficially owned.
Number
Percentage of
Directors, Officers or 5% Stockholders(1)(2) of Shares(3)
Stock Outstanding
---------------------------------------------------------
------------------ ------------------------
Kuslima Shogen....................................... 2,272,546(4)
11.00%
Stanislaw M. Mikulski................................ 647,831(5)
3.23%
Stephen K. Carter.................................... 128,750(6)
*
Donald R. Conklin.................................... 404,250(7)
2.03%
Martin F. Stadler.................................... 466,250(8)
2.33%
All executive officers and directors as a group (five
persons) ............................................ 3,919,609(9)
18.24%
---------------------
* Less than one percent.
(1) The address of all officers and directors listed above is in the care of
the company.
(2) The percentage of stock outstanding for each stockholder is calculated by
dividing (i) the number of shares of common stock deemed to be beneficially
held by such stockholder as of July 20, 2001 by (ii) the sum of (A) the
number of shares of common stock outstanding as of July 20, 2001 plus (B)
the number of shares issuable upon exercise of options or warrants held by
such stockholder which were exercisable as of July 20, 2001 or which will
become exercisable within 60 days after July 20, 2001.
(3) All shares listed are common stock. Except as discussed below, none of
these shares are subject to rights to acquire beneficial ownership, as
specified in Rule 13d-3(d)(1) under the Exchange Act, and the beneficial
owner has sole voting and investment power, subject to community property
laws where applicable.
(4) Includes 803,926 shares underlying options and 110,000 shares underlying
warrants which were exercisable as of July 20, 2001 or which will become
exercisable within 60 days after July 20, 2001.
(5) Includes 286,563 shares underlying options which were exercisable as of
July 20, 2001 or which will become exercisable within 60 days after July
20, 2001.
(6) Includes 128,750 shares underlying options which were exercisable as of
July 20, 2001 or which will become exercisable within 60 days after July
20, 2001.
(7) Includes 63,750 shares underlying options and 110,000 shares underlying
warrants which were exercisable as of July 20, 2001 or which will become
exercisable within 60 days after July 20, 2001.
(8) Includes 106,250 shares underlying options which were exercisable as of
July 20, 2001 or which will become exercisable within 60 days after July
20, 2001 and 35,000 shares underlying warrants which were exercisable as of
July 20, 2001 or which will become exercisable within 60 days after July
20, 2001.
(9) Includes all shares owned beneficially by the directors and the executive
officers named in the table.
35
SELLING SECURITYHOLDERS
On February 20, 1998, we completed a private placement that resulted in the
issuance of an aggregate of 2,337,150 shares of restricted common stock and
1,168,575 three-year warrants to purchase an aggregate of 1,168,575 shares of
common stock at an exercise price of $2.50 per share. We received an aggregate
$4,674,300 from such private placement. The Board of Directors extended the
expiration date of these warrants until August 17, 2001. We filed a registration
statement on Form S-3 registering the shares of common stock and the shares of
common stock underlying the warrants both issued in connection with the February
1998 private placement on March 31, 1998. The shares of common stock and the
shares of common stock underlying the warrants registered in connection with the
February 1998 private placement were de-registered effective October 31, 1999.
This prospectus relates to the offer and sale of 1,168,575 shares of common
stock underlying the warrants issued in the February 1998 private placement by
the holders.
Sanders Morris Harris Inc. (formerly known as Harris, Webb & Garrison,
Inc.), an investment banking firm located in Houston, Texas, acted as placement
agent in the February 1998 private placement and received as part of its
compensation a three-year warrant to purchase 116,858 units at an exercise price
of $4.40 per unit. The Board of Directors extended the expiration date of these
warrants until August 17, 2001. Each unit consists of two shares of our common
stock and one three-year warrant to purchase one share of common stock at an
exercise price of $2.50 per share. In May 1998, warrants to purchase 1,500 of
such units were exercised and the 3,000 shares of common stock underlying the
units were subsequently sold. The warrants issued upon the exercise of these
units has not been exercised or sold. Warrants to purchase an additional 650
units were exercised in June 1998 and the 1,300 shares of common stock
underlying the unit were sold as well as the 650 shares that were issued upon
the exercise of the warrants included in such units. This prospectus relates to
the offer and sale by the placement agent of the 345,624 shares of common stock
underlying the placement agent warrant.
On October 10, 1997, we issued options to purchase 12,000 shares of common
stock at an exercise price of $3.91 per share to Expert Medical Consultants,
Inc. as payment for services to be rendered. 5,000 of such options have since
been cancelled. The remaining options vested as to 1,000 shares per month from
October 10, 1997 through April 10, 1998 and expire five years from the
respective vesting date. As of the date hereof, all of the options are fully
vested and remain outstanding. This prospectus relates to the offer and sale by
the option holder of 7,000 shares of common stock underlying the options.
On October 1, 1998, we issued options to purchase 200,000 shares of common
stock at an exercise price of $1.00 per share to Sage Partners as payment for
services to be rendered. 150,000 of such options were cancelled in November 1999
upon the cancellation of the contract with Sage Partners. The remaining options
vested as to 2,500 shares per month from October 31, 1998 through September 30,
1999 and as to 20,000 shares on October 1, 1999. The options expire five years
from the respective vesting date. As of the date hereof, all of the options are
fully vested and remain outstanding. This prospectus relates to the offer and
sale by the option holder of 50,000 shares of common stock underlying the
options.
On March 30, 1994, we issued options to purchase 379,678 shares of common
stock at an exercise price of $3.20 per share to Kuslima Shogen in satisfaction
for money loaned to us. A total of 227,808 of such options have since terminated
or were cancelled. The remaining options expire as to 75,935 shares on each of
March 30, 2002 and March 30, 2003. As of the date hereof, the remaining 151,870
options remain outstanding. This prospectus relates to the offer and sale by the
option holder of 151,870 shares of common stock underlying the options by the
holders.
36
In August 1999 and January 2000, we issued 40,000 and 100,000 shares of
common stock, respectively, to DZS Computer Solutions, Inc. as payment for
services rendered. This prospectus relates to the offer and resale by DZS
Computer Solutions, Inc. of 140,000 shares of common stock.
In September 1999, January 2000 and August 2000, we issued 14,600, 20,365
and 11,800 shares of common stock, respectively, to Mark Jay for payment of
legal services. This prospectus relates to the offer and resale by Mr. Jay of
46,765 shares of common stock.
In February 2000, we completed two private placements. The first resulted
in the issuance of 187,500 units for an aggregate $375,000, each unit consisting
of two shares of our common stock, one three-year warrant to purchase one share
of common stock at $3.25 per share and one five-year warrant to purchase one
share of common stock at $4.55 per share. The second private placement resulted
in the issuance of 250,000 units for an aggregate $250,000, each unit consisting
of two shares of our common stock, one three-year warrant to purchase one share
of common stock at $1.03 per share and one five-year warrant to purchase one
share of common stock at $2.50 per share. This prospectus relates to the offer
and resale of 875,000 shares of common stock and 875,000 shares issuable upon
the exercise of warrants to purchase common stock issued in the February 2000
private placements.
In August and September 2000, we completed three private placements
resulting in the issuance of an aggregate 333,332 shares of restricted common
stock and 166,666 five-year warrants to purchase an aggregate of 166,666 shares
of common stock at an exercise price of $3.00 per share. We received an
aggregate $499,998 from such private placements. This prospectus relates to the
offer and resale of 333,332 shares of common stock and 166,666 shares of common
stock underlying the warrants.
In September 2000 and January 2001, we issued 80,000 shares of common stock
upon the exercise of stock options by Mr. Donald R. Conklin and Mr. Martin F.
Stadler. We received an aggregate $37,900 from such exercise. This prospectus
relates to the offer and resale by Messrs. Conklin and Stadler of 80,000 shares
of common stock.
In April 2001, we completed a private placement resulting in the issuance
of 222,222 shares of restricted common stock and 222,222 three-year warrants to
purchase an aggregate of 222,222 shares of common stock at an exercise price of
$2.50 per share. We received an aggregate $200,000 from such private placements.
This prospectus relates to the offer and resale of 222,222 shares of common
stock and 222,222 shares of common stock underlying warrants.
In April 2001, we issued convertible notes to certain related and unrelated
parties in the aggregate amount of $366,993. The notes are due within ninety
days unless the lenders elect to exercise an option to convert their note into
common stock at the conversion price of $0.90 per share. The related parties
have elected to convert their notes into an aggregate 330,000 shares of common
stock. In addition, upon conversion, they will receive three-year warrants to
purchase an aggregate 330,000 shares of common stock at an exercise price of
$2.50 per share that will expire on July 7, 2004. This prospectus relates to the
offer and resale of 330,000 shares of common stock and 330,000 shares of common
stock underlying the warrants.
In July 2001, we completed a private placement resulting in the issuance of
252,223 shares of restricted common stock and 252,223 five-year warrants to
purchase an aggregate 252,223 shares of common stock at an exercise price of
$1.50 per share. We received an aggregate $227,000 from such private placement.
This prospectus relates to the offer and resale of 252,223 shares of common
stock and 252,223 shares of common stock underlying warrants.
37
We are required to maintain the effectiveness of this registration
statement for a period of two years from the date this prospectus is declared
effective.
38
Stock Ownership
The table below sets forth the number of shares of common stock:
o owned beneficially by each of the selling stockholders;
o offered by each selling stockholder pursuant to this prospectus;
o to be owned beneficially by each selling stockholder after completion
of the offering, assuming that all of the warrants and options held by
the selling stockholders are exercised and all of the shares offered
in this prospectus are sold and that none of the other shares held by
the selling stockholders, if any, are sold; and
o the percentage to be owned by each selling stockholder after
completion of the offering, assuming that all of the warrants and
options held by the selling stockholders are exercised and all of the
shares offered in this prospectus are sold and that none of the other
shares held by the selling stockholders, if any, are sold.
For purposes of this table each selling stockholder except Mukul Garg, Martin
Stadler, Kuslima Shogen, Donald Conklin, Eva Patton, Michael Pisani, James
McCash, Donna McCash, David McCash, Michael McCash, Colleen Lowe, Corinne
Champagne and Mary Thompson, is deemed to own beneficially:
o the shares of common stock underlying the warrants and options offered
hereby;
o the issued and outstanding shares of common stock owned by the selling
stockholder as of June 5, 2001; and
o the shares of common stock underlying any other options or warrants
owned by the selling stockholder which are exercisable as of June 5,
2001 or which will become exercisable within 60 days after June 5,
2001. Except as otherwise noted, none of such persons or entities has
had any material relationship with us during the past three years.
Mukul Garg, Martin Stadler, Kuslima Shogen, Donald Conklin, Eva Patton,
Michael Pisani, James McCash, Donna McCash, David McCash, Michael McCash,
Colleen Lowe, Corinne Champagne and Mary Thompson were each issued an aggregate
804,445 shares after June 5, 2001 and therefore each is deemed to beneficially
own:
o the shares of common stock underlying the warrants and options offered
hereby;
o the issued and outstanding shares of common stock owned by the selling
stockholder as of July 20, 2001; and
o the shares of common stock underlying any other options or warrants
owned by the selling stockholder which are exercisable as of July 20,
2001 or which will become exercisable within 60 days after July 20,
2001. Except as otherwise noted, none of such persons or entities has
had any material relationship with us during the past three years.
In connection with the registration of the shares of common stock offered
in this prospectus, we will supply prospectuses to the selling stockholders.
Shares Owned
Shares Owned
Upon % of Shares
Prior To
Shares Being Completion Owned After
Name(1) Offering
Offered Of Offering Offering(2)
--------------------------------------------------- ----------------
--------------- ----------------- ----------------
Aries Select I, LLC 247,500
247,500 -- *
Aries Select, Ltd. 502,500
502,500 -- *
Berkley Corporation 12,500
12,500 -- *
Bridgewater Partners, L.P. 25,000
25,000 -- *
39
Shares Owned
Shares Owned
Upon % of Shares
Prior To
Shares Being Completion Owned After
Name(1) Offering
Offered Of Offering Offering(2)
--------------------------------------------------- ----------------
--------------- ----------------- ----------------
Burke Jr., William R. 3,000
3,000 - *
Champagne, Corinne M.(6) 179,140
153,000 26,140 *
C.S.L. Associates, L.P. 25,000
25,000 - *
Cobbs, Jerald(3) (4) 63,549
63,549 - *
Conklin, Donald(5)(6) 404,250
260,000 144,250 *
Cranshire Capital, L.P. 31,250
31,250 - *
Curran Partners, L.P. 61,875
61,875 - *
Davis, Richard H. 5,000
5,000 - *
DePeyster, Ashton 99,999
99,999 - *
Duncan, Robert D. 5,000
5,000 - *
DZS Computer Solutions, Inc.(7) 140,000
140,000 - *
EC Investment Ltd. 128,000
50,000 78,000 *
Expert Medical Consultants, Inc. 7,000
7,000 - *
Garcia, Ray R. 500
500 - *
Garg, Mukul (6) 186,112
111,112 75,000 *
Garrison II, Robert E. (3) 35,058
35,058 - *
Goodwin, Todd 114,999
99,999 15,000 *
Henry, Heather 20,400
5,000 15,400 *
Henry, Kimberly A. 20,400
5,000 15,400 *
Henry, Robert R. (8) 151,300
15,000 136,300 *
Huque, Khundker Selim 3,000
1,000 2,000 *
Jay, Mark(9) 181,072
46,765 134,307 *
Khondker, Zia (3) 420
420 - *
Cowen & Co. Cust. FBO Brit W. King 1,000
1,000 - *
King, Brit (3) 120
120 - *
Knutsen, A. Roy 11,250
11,250 - *
Delaware Charter Guarantee and Trust Company
Trustee F/B/O Richard T. LeBuhn 15,000
5,000 10,000 *
First Trust Corp Robert LeBuhn Keogh (10) 52,500
12,500 40,000 *
Lowe, Colleen A.(6) 182,640
153,000 29,640 *
McCash, James O.(6)(11) 1,056,229
250,000 601,785 3.04%
McCash, Donna M.(6)(12) 1,056,229
204,444 601,785 3.03%
McCash, David J.(6) 178,640
153,000 25,640 *
McCash, Michael J.(6) 184,140
153,000 31,140 *
Muniz, Charles(13) 1,110,000
750,000 110,000 *
Muniz, Melba(14) 1,110,000
250,000 110,000 *
Odin Partners, L.P. 56,250
18,750 37,500 *
Patton, Eve M.(6) 933,334
633,334 300,000 1.51%
Paul L. Trump Trust U/A/Dtd 10/10/80, Revised and
Amended 1/9/96 125,000
25,000 100,000 *
Phillips, Charles B. & Deidre JT TEN 250
250 - *
Pisani, B. Michael(6)(15) 227,500
105,000 122,500 *
Ramsey III, J. Daniel (3) 74,670
74,670 - *
Reza, Mashud M. 2,500
2,500 - *
Sanders Morris Harris Inc. (3)(16) 171,363
171,363 - *
Shogen, Kuslima (16) 2,272,546
371,870 1,900,676 9.20%
Stadler, Martin & Kristine JT TEN (6)(18) 466,250
285,000 181,250 *
Sage Partners 50,000
50,000 - *
Thompson, Mary M.(6) 182,640
153,000 29,640 *
Raymond James & Associates Inc., CSDN FBO David
F. Willardson 1,200
1,200 - *
Willardson, David K. (19) 1,444
1,444 - *
40
--------------------------
(*) Less than one percent.
(1) The last name of the individual selling stockholders is listed first.
(2) The percentage of stock outstanding for each stockholder after the offering
is calculated by dividing (i) (A) the number of shares of common stock
deemed to be beneficially held by such stockholder as of June 5, 2001,
minus (B) the number of shares being offered in this offering by such
stockholder (including shares underlying options and warrants) by (i) the
sum of (A) the number of shares of common stock outstanding as of June 5,
2001 plus (B) the number of shares of common stock issuable upon the
exercise of options and warrants held by such stockholder which were
exercisable as of June 5, 2001 or which will be exercisable within 60 days
after June 5, 2001.
(3) The shares offered represent shares underlying the placement agent warrant
issued in the February 1998 Private Placement.
(4) Mr. Jerald Cobbs is a principal of HWG who acted as the placement agent in
the February 1998 Private Placement.
(5) Mr. Donald R. Conklin is one of our directors and his share ownership gives
effect to shares underlying options he received for services rendered as a
director.
(6) The percentage of stock outstanding for each stockholder after the offering
is calculated by dividing (i) (A) the number of shares of common stock
deemed to be beneficially held by such stockholder as of July 20, 2001,
minus (B) the number of shares being offered in this offering by such
stockholder (including shares underlying options and warrants) by (i) the
sum of (A) the number of shares of common stock outstanding as of July 20,
2001 plus (B) the number of shares of common stock issuable upon the
exercise of options and warrants held by such stockholder which were
exercisable as of July 20, 2001 or which will be exercisable within 60 days
after July 20, 2001.
(7) DZS Computer Solutions, Inc. is our data management firm. The 140,000
shares offered represent shares issued for services rendered.
(8) Mr. Robert Henry was one of our former directors. His share ownership gives
effect to shares underlying options he received as a director.
(9) Mark Jay is our intellectual property attorney. The 46,765 shares offered
represent shares issued for services rendered.
(10) Includes 15,000 shares held by First Trust Corp. C/F Robert Le Buhn Keogh.
(11) Includes 501,944 shares of common stock, of which 72,500 are held by Mr.
McCash's wife, Donna McCash, 102,222 shares are held in an irrevocable
trust for the benefit of Donna McCash, 102,222 shares of common stock
underlying warrants are held in an irrevocable trust for the benefit of
Donna McCash, 125,000 shares are held in Mr. McCash's IRA account, 50,000
shares are held in a revocable trust for the benefit of Mr. McCash and
50,000 shares underlying warrants are held in a revocable trust for the
benefit of Mr. McCash. Mr. McCash disclaims beneficial ownership of all
shares of common stock held by his wife or for the benefit of his wife.
(12) Includes 908,729 shares of common stock, of which 479,285 are held by Mrs.
McCash's husband, James McCash, 102,222 shares are held in an irrevocable
trust for the benefit of Mrs. McCash, 102,222 shares underlying warrants
are held in an irrevocable trust for the benefit of Mrs. McCash, 125,000
are held in an IRA account by James McCash, 50,000 are held in a revocable
trust for the benefit of James McCash, and 50,000 shares underlying
warrants are held in a revocable trust for the benefit of Mr. McCash. Mrs.
McCash disclaims beneficial ownership of all shares of common stock held by
her husband or for the benefit of her husband.
(13) Mr. Charles Muniz is deemed to beneficially own 250,000 shares of common
stock that are currently held in the name of his wife, Melba Muniz.
(14) Mrs. Melba Muniz is deemed to beneficially own 360,000 shares of common
stock and 500,000 shares of common stock underlying warrants that are
currently held in the name of her husband, Charles Muniz.
(15) Includes 12,500 shares which are owned by Granite Securities, which is a
corporation controlled by Mr. Pisani.
(16) Sanders Morris Harris Inc. (formerly known as Harris, Webb & Garrison,
Inc.) acted as placement agent in the February 1998 private placement. The
shares offered represent shares underlying the placement agent warrant.
(17) Kuslima Shogen is our Chief Executive Officer and Chairman of the Board.
Ms. Shogen is also one of our principal stockholders. Her beneficial
ownership includes shares underlying options for services rendered and
money owed to her.
41
(18) Mr. Martin F. Stadler is one of our directors and his share ownership gives
effect to shares underlying options he received for services rendered as a
director.
(19) Mr. David K. Willardson's offering includes 444 shares of common stock
underlying the placement agent warrant.
42
DESCRIPTION OF SECURITIES
Our certificate of incorporation provides for authorized capital stock of
41,000,000 shares, including 40,000,000 shares of common stock, par value $.001
per share, and 1,000,000 shares of preferred stock, par value $.001 per share.
Common Stock
As of June 5, 2001 we had 18,942,246 shares of common stock issued and
outstanding. We cancelled 1,000 shares of common stock in July 2001 and issued
an additional 804,445 shares of common stock between June 5, 2001 and July 20,
2001. Holders of our common stock are entitled to one vote per share in the
election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of our common stock are not entitled to
cumulative voting rights. Therefore, holders of a majority of the shares voting
for the election of directors can elect all of the directors. Subject to the
terms of any outstanding series of preferred stock, the holders of common stock
are entitled to dividends in amounts and at times as may be declared by the
Board of Directors out of funds legally available. Upon liquidation or
dissolution, holders of our common stock are entitled to share ratably in all
net assets available for distribution to stockholders after payment of any
liquidation preferences to holders of our preferred stock. Holders of our common
stock have no redemption, conversion or preemptive rights.
Warrants
We currently have outstanding warrants to purchase an aggregate of
3,360,310 shares of common stock. All of the 3,360,310 shares underlying the
warrants are being registered for sale under this prospectus.
1,168,575 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants sold in the February 1998 private placement. All
of these shares of common stock are exercisable at a price of $2.50 per share
until August 2001.
345,624 shares of common stock covered by this prospectus are issuable upon
the exercise of warrants issued to the placement agent in the February 1998
private placement. 114,708 warrants are exercisable at an exercise price of
$4.40 per unit which consists of two (2) shares of common stock and one (1)
three-year warrant to purchase one (1) share of common stock at an exercise
price of $2.50 per share.
875,000 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants issued in the February 2000 private placements.
Warrants to purchase 187,500 and 250,000 shares of common stock underlying the
warrants are exercisable at a price of $3.25 and $1.03 per share, respectively,
for a period of three years from the date of grant. Warrants to purchase 187,500
and 250,000 shares of common stock are exercisable at a price of $4.55 and $2.50
per share, respectively, for a five-year period from the date of grant.
166,666 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants issued in the August and September 2000 private
placements. Such warrants are exercisable at a price of $3.00 per share for a
five-year period from the date of grant.
222,222 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants issued in the April 2001 private placement. Such
warrants are exercisable at a price of $2.50 per share for a period of three
years from the date of grant.
43
252,223 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants issued in a July 2001 private placement. Such
warrants are exercisable at a price of $1.50 per share for a five-ye ar period
from the date of grant.
330,000 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants issued upon the conversion of a convertible note
converted in July 2001. These warrants are exercisable at a price of $2.50 per
share that will expire on July 7, 2004.
Options
208,870 shares of common stock covered by this prospectus are issuable upon
the exercise of options. Options to purchase 7,000 shares of common stock are
exercisable at a price of $3.91 per share for a period of five years from the
vesting date. Options to purchase 151,870 shares of common stock are exercisable
at a price of $3.20 per share for a period of five years from the vesting date.
Options to purchase 50,000 shares of common stock are exercisable at a price of
$1.00 per share for a period of five years from the vesting date. At June 15,
2001, we had outstanding options to purchase 2,825,214 shares of common stock,
in addition to the 208,870 shares underlying options covered by this prospectus,
at an average purchase price of $2.21 per share.
44
PLAN OF DISTRIBUTION
Shares of common stock currently outstanding and shares of common stock
issuable upon exercise of the warrants and options covered by this prospectus
may be sold pursuant to this prospectus by the selling stockholders. These sales
may occur in privately negotiated transactions or in the over-the-counter market
through brokers and dealers as agents or to brokers and dealers as principals,
who may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders or from the purchasers of the common
stock for whom the broker-dealers may act as agent or to whom they may sell as
principal, or both. Some of the selling stockholders may also sell some of their
shares of common stock pursuant to Rule 144 under the Securities Act. We have
been advised by the selling stockholders that they have not made any
arrangements relating to the distribution of the shares of common stock covered
by this prospectus. In effecting sales, broker-dealers engaged by the selling
stockholders may arrange for other broker-dealers to participate. Broker-dealers
will receive commissions or discounts from the selling stockholders in amounts
to be negotiated immediately prior to the sale.
Upon being notified by a selling stockholder that any material arrangement
(other than a customary brokerage account agreement) has been entered into with
a broker or dealer for the sale of shares through a block trade, purchase by a
broker or dealer, or similar transaction, we will file a supplemented prospectus
pursuant to Rule 424(c) under the Securities Act disclosing (a) the name of each
such broker-dealer, (b) the number of shares involved, (c) the price at which
such shares were sold, (d) the commissions paid or discounts or concessions
allowed to such broker-dealer(s), (e) if applicable, that such broker-dealer(s)
did not conduct any investigation to verify the information set out or
incorporated by reference in the prospectus, as supplemented, and (f) any other
facts material to the transaction.
Some of the selling stockholders and any broker-dealers who execute sales
for the selling stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act by virtue of the number of shares of common stock
to be sold or resold by such persons or entities or the manner of sale thereof,
or both. If any of the selling stockholders, broker-dealers or other holders
were determined to be underwriters, any discounts, concessions or commissions
received by them or by brokers or dealers acting on their behalf and any profits
received by them on the resale of their shares of common stock might be deemed
underwriting discounts and commissions under the Securities Act.
The selling stockholders have represented to us that any purchase or sale
of our common stock by them will be in compliance with the Exchange Act. In
general, Rule 102 under Regulation M under the Exchange Act prohibits any person
connected with a distribution of our common stock from directly or indirectly
bidding for, or purchasing for any account in which he has a beneficial
interest, any common stock or any right to purchase common stock, or attempting
to induce any person to purchase common stock or rights to purchase common
stock, for a period of one business day prior to and subsequent to completion of
his participation in the distribution.
During the distribution period, Rule 104 under Regulation M prohibits the
selling stockholders and any other person engaged in the distribution from
engaging in any stabilizing bid or purchasing the common stock except for the
purpose of preventing or retarding a decline in the open market price of the
common stock. No such person may effect any stabilizing transaction to
facilitate any offering at the market. Inasmuch as the selling stockholders will
be reoffering and reselling the common stock at the market, Rule 104 prohibits
them from effecting any stabilizing transaction in contravention of Rule 104
with respect to the common stock.
45
LEGAL MATTERS
The validity of the shares to be offered by this prospectus will be passed
upon for us by Dorsey & Whitney, LLP, New York, New York.
EXPERTS
Our financial statements as of July 31, 2000 and 1999 and for each of the
years in the three-year period ended July 31, 2000, and the period from August
24, 1981 (the date of inception) to July 31, 2000, have been included herein and
in the registration statement in reliance on the report of KPMG LLP, independent
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG LLP with respect to our
financial statements from inception to July 31, 2000 is based on the report of
Armus Harrison, appearing elsewhere herein, for the period from inception to
July 31, 1992. As discussed elsewhere herein, Armus Harrison ceased performing
accounting and auditing services for the Company in 1993 and subsequently
dissolved and ceased all operations.
The report of KPMG LLP covering the July 31, 2000 financial statements
contains an explanatory paragraph that states that our recurring losses from
operations, net working capital deficiency and limited liquid resources raise
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act and,
accordingly, file reports, proxy statements and other information with the SEC.
These reports, proxy statements and other information filed with the SEC are
available for inspection and copying at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a site on
the World Wide Web at http://www.sec.gov that contains reports, proxy statements
and other information regarding registrants that filed electronically with the
SEC.
We have filed with the SEC a registration statement under the Securities
Act on Form S-1 to register with the SEC the securities offered by this
prospectus. This prospectus is a part of that registration statement. As allowed
by SEC rules, this prospectus does not contain all of the information contained
in the registration statement or the exhibits to that registration statement.
46
PART II
Item 13. Expenses of Issuance and Distribution
The following table sets forth an itemized estimate of fees and expenses
payable by the Registrant in connection with the offering of the securities
described in this registration statement.
SEC registration fee............................. $ 1,715
Blue Sky......................................... $ 5,000
Legal fees and expenses.......................... $ 50,000
Accounting fees and expenses..................... $ 25,000
Printing expenses................................ $ 10,000
Miscellaneous.................................... $ 8,285
---------
Total................................... $ 100,000
Item 14. Indemnification of Directors and Officers
Under the General Corporation Law of Delaware a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation), by reason of the fact that he or she is or was our
director, officer, employee or agent, or is or was serving at our request
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to our best interests, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful.
In addition, the Delaware GCL also provides that we also may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in our right to procure a
judgment in our favor by reason of the fact that he or she is or was our
director, officer, employee or agent, or is or was serving at our request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the defense or
settlement of such action or suit if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to our best
interests. However, in such an action by or on our behalf, no indemnification
may be made in respect of any claim, issue or matter as to which the person is
adjudged liable to us unless and only to the extent that the court determines
that, despite the adjudication of liability but in view of all the
circumstances, the person is fairly and reasonably entitled to indemnity for
such expenses which the court shall deem proper.
Our certificate of incorporation is consistent with the Delaware GCL and
our by-laws provide that each of our directors, officers, employees and agents
shall be indemnified to the extent permitted by the Delaware GCL.
We have entered into indemnification agreements with each of our directors.
The indemnity agreements are consistent with our by-laws and our policy to
indemnify directors to the fullest extent permitted by law. The indemnity
agreements provide for indemnification of directors for liabilities arising out
of claims against such persons acting as our directors (or any entity
controlling, controlled by or under common control with us) due to any actual or
alleged breach of duty, neglect, error, misstatement, misleading statement,
omission or other act done, or suffered or wrongfully attempted by such
directors, except as prohibited by law. The indemnity agreements also provide
for the advancement of costs and expenses, including attorneys' fees,
II-1
reasonably incurred by directors in defending or investigating any action, suit,
proceeding or claim, subject to an undertaking by such directors to repay such
amounts if it is ultimately determined that such directors are not entitled to
indemnification. The indemnity agreements cover future acts and omissions of
directors for which actions may be brought.
The indemnity agreements also provide that directors, officers, employees
and agents are entitled to indemnification against all expenses (including
attorneys' fees) reasonably incurred in seeking to collect an indemnity claim or
to obtain advancement of expenses from us. The rights of directors under the
indemnity agreements are not exclusive of any other rights directors may have
under Delaware GCL, any liability insurance policies that may be obtained, our
by-laws or otherwise. We would not be required to indemnify a director for any
claim based upon the director gaining in fact a personal profit or advantage to
which such director was not legally entitled, any claim for an accounting of
profits made in connection with a violation of Section 16(b) of the Securities
Exchange Act of 1934 or a similar state or common law provision or any claim
brought about or contributed to by the dishonesty of the director.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of transactions involving our securities during
the last three years. Each of the following was exempt from registrations under
Section 4(2) of the Securities Act of 1933, as amended, based upon the fact that
each issuance was to an accredited investor. The net proceeds from these
transactions was used for general corporate purposes, including the funding of
research and development.
On February 20, 1998, we completed a private placement that resulted in the
issuance of an aggregate of 2,337,150 shares of restricted common stock and
1,168,575 three-year warrants to purchase an aggregate of 1,168,575 shares of
common stock at an exercise price of $2.50 per share. We received an aggregate
$4,674,300 from such private placement. The Board of Directors extended the
expiration date of these warrants until August 17, 2001.
Sanders Morris Harris Inc. (formerly known as Harris, Webb & Garrison,
Inc.), an investment banking firm located in Houston, Texas, acted as placement
agent in the February 1998 private placement and received as part of its
compensation a three-year warrant to purchase 116,858 units at an exercise price
of $4.40 per unit. The Board of Directors extended the expiration date of these
warrants until August 17, 2001. Each unit consists of two shares of our common
stock and one three-year warrant to purchase one share of common stock at an
exercise price of $2.50 per share. In May 1998, warrants to purchase 1,500 of
such units were exercised and the 3,000 shares of common stock underlying the
units were subsequently sold. The warrants issued upon the exercise of these
units has not been exercised or sold. Warrants to purchase an additional 650
units were exercised in June 1998 and the 1,300 shares of common stock
underlying the unit were sold as well as the 650 shares that were issued upon
the exercise of the warrants included in such units.
In March 1998, we entered into a conversion agreement with one of our raw
material suppliers for the conversion of an outstanding payable into 50,000
shares of our common stock. The fair value of the Common Stock approximated the
outstanding payable amount of $100,000.
On October 1, 1998, we issued options to purchase 200,000 shares of common
stock at an exercise price of $1.00 per share to Sage Partners as payment for
services to be rendered. 150,000 of such options were cancelled in November 1999
upon the cancellation of the contract with Sage Partners. The remaining options
vested as to 2,500 shares per month from October 31, 1998 through September 30,
1999 and as to 20,000 shares on October 1, 1999. The options expire five years
from the respective vesting date. As of the date hereof, all of the options are
II-2
fully vested and remain outstanding.
In July 1999, we issued 40,701 shares of common stock for payment of legal
services. The fair value of the common stock in the amount of $16,631 was
charged to operations.
In July 1999, we issued 6,000 shares of common stock for payment of
services rendered. The fair value of the common stock in the amount of $2,460
was charged to operations.
In August 1999 and January 2000, we issued 40,000 and 100,000 shares of
common stock, respectively, to DZS Computer Solutions, Inc. as payment for
services rendered.
In September 1999, January 2000 and August 2000, we issued 14,600, 20,365
and 11,800 shares of common stock, respectively, to Mark Jay for payment of
legal services.
In February 2000, we completed two private placements. The first resulted
in the issuance of 187,500 units for an aggregate $375,000, each unit consisting
of two shares of our common stock, one three-year warrant to purchase one share
of common stock at $3.25 per share and one five-year warrant to purchase one
share of common stock at $4.55 per share. The second private placement resulted
in the issuance of 250,000 units for an aggregate $250,000, each unit consisting
of two shares of our common stock, one three-year warrant to purchase one share
of common stock at $1.03 per share and one five-year warrant to purchase one
share of common stock at $2.50 per share.
In August and September 2000, we completed three private placements
resulting in the issuance of an aggregate 333,332 shares of restricted common
stock and 166,666 five-year warrants to purchase an aggregate of 166,666 shares
of common stock at an exercise price of $3.00 per share. We received an
aggregate $499,998 from such private placements.
In September 2000 and January 2001, we issued 80,000 shares of common stock
upon the exercise of stock options by Mr. Donald R. Conklin and Mr. Martin F.
Stadler. We received an aggregate $37,900 from such exercise.
In April 2001, we completed a private placement resulting in the issuance
of 222,222 shares of restricted common stock and 222,222 three-year warrants to
purchase an aggregate of 222,222 shares of common stock at an exercise price of
$2.50 per share. We received an
II-3
aggregate $200,000 from such private placements.
In April 2001, we issued convertible notes to certain related and unrelated
parties in the aggregate amount of $366,993. The notes are due within ninety
days unless the lenders elect to exercise an option to convert their note into
common stock at the conversion price of $0.90 per share. The related parties
have elected to convert their notes into an aggregate 330,000 shares of common
stock. In addition, upon conversion, they will receive three-year warrants to
purchase an aggregate 330,000 shares of common stock at an exercise price of
$2.50 per share that will expire on July 7, 2004.
In July 2001, we completed a private placement resulting in the issuance of
252,223 shares of restricted common stock and 252,223 five-year warrants to
purchase an aggregate 252,223 shares of common stock at an exercise price of
$1.50 per share. We received an aggregate $227,000 from such private placement.
II-4
Item 16. Exhibits, Financial Statement Schedules
Exhibit No. Title
Exhibit No.
-----------------------------------------
---------------------------------------------
--------------------------------
(or Exhibit Incorporation No. Reference)
(or Incorporated by Reference)
3.1 Certificate of Incorporation
*
3.2 By-Laws
*
3.3 Amendment to Certificate of
Incorporation #
3.4 Amendment to Certificate of
Incorporation +++
4.1 Form of Convertible Debenture
**
5.1 Opinion of Dorsey & Whitney
^
10.1 Form of Stock and Warrant
Purchase ##
Agreements used in private
placements
completed in April 1996 and June
1996
10.2 Lease Agreement - 225
Belleville Avenue, ###
Bloomfield, New Jersey
10.3 Form of Stock Purchase
Agreement and ***
Certificate used in connection
with various
private placements
10.4 Form of Stock and Warrant
Purchase ***
Agreement and Warrant Agreement
used in
Private Placement completed on
March 21,
1994
10.5 1993 Stock Option Plan and Form
of Option *****
Agreement
10.6 Debt Conversion Agreement dated
March 30, ****
1994 with Kuslima Shogen
10.7 Accrued Salary Conversion
Agreement dated ****
March 30, 1994 with Kuslima Shogen
10.8 Accrued Salary Conversion
Agreement dated ****
March 30, 1994 with Stanislaw
Mikulski
10.9 Option Agreement dated March 30,
1994 with ****
Kuslima Shogen
10.10 Amendment No. 1 dated June
20, 1994 to ****
Option Agreement dated March 30,
1994 with
Kuslima Shogen
10.11 Form of Amendment No. 1 dated
June 20, 1994 *****
to Option Agreement dated March
30, 1994
with Kuslima Shogen
10.12 Form of Amendment No. 1 dated
June 20, 1994 *****
to Option Agreement dated March
30, 1994
with Stanislaw Mikulski
10.13 Form of Stock and Warrant
Purchase +
Agreement and Warrant Agreement
used in
Private Placement completed on
September
13, 1994
II-5
Exhibit No. Title
Exhibit No.
-----------------------------------------
---------------------------------------------
--------------------------------
(or Exhibit Incorporation No. Reference)
(or Incorporated by Reference)
10.14 Form of Subscription Agreements
and Warrant #
Agreement used in Private
Placements closed
in October 1994 and September 1995
10.15 1997 Stock Option Plan
###
10.16 Separation Agreement with
Michael C. Lowe ++
dated October 9, 1997
10.17 Form of Subscription Agreement
and Warrant +++
Agreement used in Private
Placement
completed on February 20, 1998
10.18 Form of Warrant Agreement
issued to the +++
Placement Agent in connection
with the
Private Placement completed on
February 20,
1998
10.19 Placement Agent Agreement dated
December +++
15, 1997
10.20 Separation Agreement with Gail
Fraser dated ####
August 31, 1999
10.21 Form of Subscription Agreement
and Warrant ######
Agreement used in Private
Placements
completed in February 2000
10.22 Form of Subscription Agreement and
Warrant
Agreement used in the August and
September
2000 Private Placements
++++
15, 1997
10.23 Form of Subscription Agreement and
Warrant
Agreement used in the April 2001
Private Placement
10.23
10.24 Form of Convertible Note entered
into in 10.24
April 2001
10.25 Form of Subscription Agreement and
Warrant 10.25
Agreement used in the July 2001
Private
Placement
21.1 Subsidiaries of Registrant
21.1
23.1 Consent of KPMG LLP
23.1
23.2 Consent of Dorsey & Whitney LLP in
(included
in Exhibits
^
99.1 Factors to Consider in
Connection with ####
Forward-Looking Statements
* Previously filed as exhibit to the Company's Registration Statement on Form
S-18 (File No. 2-79975-NY) and incorporated herein by reference thereto.
** Previously filed as exhibits to the Company's Annual Report on Form 10-K for
the year ended July 31, 1993 and incorporated herein by reference thereto.
*** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended January 31, 1994 and incorporated herein by
reference thereto.
**** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1994 and incorporated herein by reference
thereto.
*****Previously filed as exhibits to the Company's Registration Statement Form
SB-2 (File No. 33-76950) and incorporated herein by reference thereto.
+ Previously filed as exhibits to the Company's Registration Statement on Form
SB-2 (File No. 33-83072) and incorporated herein by reference thereto.
++ Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
for the quarter ended October 31, 1997 and incorporated herein by reference
thereto.
II-6
+++ Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
for the quarter ended January 31, 1998 and incorporated herein by reference
thereto.
++++ Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
for the quarter ended October 31, 2000 and incorporated herein by reference
thereto.
# Previously filed as exhibits to the Company's Annual Report on Form 10-KSB for
the year ended July 31, 1995 and incorporated herein by reference thereto.
## Previously filed as exhibits to the Company's Registration Statement on Form
SB-2 (File No. 333-11575) and incorporated herein by reference thereto.
### Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1997 and incorporated herein by reference
thereto.
#### Previously filed as exhibit to the Company's Annual Report on Form 10-K for
the year ended July 31, 1999 and incorporated herein by reference thereto.
###### Previously filed as exhibit to the Company's Annual Report on Form 10-K
for the year ended July 31, 2000 and incorporated herein by reference thereto.
^ To be filed by amendment.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in the volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
II-7
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ALFACELL CORPORATION
Dated: July 25, 2001
By: /s/ KUSLIMA SHOGEN
-------------------
Kuslima Shogen, Chief Executive Officer,
Acting Chief Financial Officer and Chairman
of the Board.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the indicated capacities
on July 25, 2001.
/s/ KUSLIMA SHOGEN
------------------------------------------
Kuslima Shogen, Chief Executive Officer,
Acting Chief Financial Officer
Principal Executive Officer, Principal Accounting Officer
and Chairman of the Board
*
------------------------------------------
Stanislaw M. Mikulski, M.D.,
Executive Vice President and Director
*
------------------------------------------
Stephen K. Carter, M.D., Director
*
------------------------------------------
Donald R. Conklin, Director
*
------------------------------------------
Martin F. Stadler, Director
--------------------------
* The undersigned by signing her name hereto, does hereby sign this Registration
Statement or amendment thereto on behalf of the above indicated directors and
officers of Alfacell Corporation pursuant to the power of attorney executed on
behalf of each such director and officer.
By: /s/ KUSLIMA SHOGEN
---------------------
Kuslima Shogen
Attorney-in-fact
II-9
Exhibit Index
5.1^ Opinion of Dorsey & Whitney LLP
10.23 Form of Subscription Agreement and Warrant
Agreement used in April 2001 Private Placement
10.24 Form of Convertible Note entered into in April
2001
10.25 Form of Subscription Agreement and Warrant Agreement
used in July 2001 Private Placement
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2^ Consent of Dorsey & Whitney LLP (included in
Exhibit 5.1)
^ To be filed by Amendment.
II-10
ALFACELL CORPORATION
(A Development Stage Company)
Index
Page
Audited Financial Statements:
Independent Auditors' Report of KPMG LLP....................................F-2
Independent Auditors' Report of Armus, Harrison & Co........................F-3
Balance Sheets - July 31, 2000 and 1999..................................F-5
Statements of Operations - Years ended July 31, 2000, 1999 and 1998 and
the Period from August 24, 1981
(Date of Inception) to July 31, 2000................................F-6
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2000................................F-7
Statements of Cash Flows - Years ended July 31, 2000, 1999 and 1998 and
Period from August 24, 1981
(Date of Inception) to July 31, 2000...............................F-12
Notes to Financial Statements - Years ended July 31, 2000, 1999 and 1998
and the Period from August 24, 1981
(Date of Inception) to July 31, 2000...............................F-15
Unaudited Financial Statements:
Unaudited Balance Sheet - April 30, 2001................................F-40
Statements of Operations (unaudited) - Nine Months Ended April 30, 2001
and 2000 and the Period from
August 24, 1981 (Date of Inception) to April 30, 2001..............F-41
Statements of Cash Flows (unaudited) - Nine Months Ended April 30, 2001
and 2000 and the Period from
August 24, 1981 (Date of Inception) to April 30, 2001..............F-42
Notes to Unaudited Financial Statement..................................F-44
F-1
Independent Auditors' Report
The Stockholders and Board of Directors
Alfacell Corporation:
We have audited the accompanying balance sheets of Alfacell Corporation (a
development stage company) as of July 31, 2000 and 1999, and the related
statements of operations, stockholders' equity (deficiency), and cash flows for
each of the years in the three-year period ended July 31, 2000 and the period
from August 24, 1981 (date of inception) to July 31, 2000. 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. The financial statements of Alfacell Corporation (a development
stage company) for the period from August 24, 1981 (date of inception) to July
31, 1992 were audited by other auditors whose report dated December 9, 1992,
except as to note 18 which is July 19, 1993 and note 3 which is October 28,
1993, expressed an unqualified opinion on those statements with an explanatory
paragraph regarding the Company's ability to continue as a going concern.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for the effect on the period from
August 24, 1981 (date of inception) to July 31, 2000 of the amounts for the
period from August 24, 1981 (date of inception) to July 31, 1992, on the report
of other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of Alfacell Corporation (a
development stage company) as of July 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the three-year period
ended July 31, 2000 and the period from August 24, 1981 (date of inception) to
July 31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficit and has limited liquid resources which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
KPMG LLP
F-2
Short Hills, New Jersey
October 4, 2000
On December 1, 1993, certain shareholders of Armus Harrison & Co. ("AHC")
terminated their association with AHC (the "AHC termination"), and AHC ceased
performing accounting and auditing services, except for limited accounting
services to be performed on behalf of the Company. In June 1996, AHC dissolved
and ceased all operations. The report of AHC with respect to the financial
statements of the Company from inception to July 31, 1992 is included herein,
although AHC has not consented to the use of such report herein and will not be
available to perform any subsequent review procedures with respect to such
report. Accordingly, investors will be barred from asserting claims against AHC
under Section 11 of the Securities Act of 1933, as amended (the "Securities
Act") on the basis of the use of such report in any registration statement of
the Company into which such report is incorporated by reference. In addition, in
the event any persons seek to assert a claim against AHC for false or misleading
financial statements and disclosures in documents previously filed by the
Company, such claim will be adversely affected and possibly barred. Furthermore,
as a result of the lack of a consent from AHC to the use of its audit report
herein, or, to its incorporation by reference into a registration statement, the
officers and directors of the Company will be unable to rely on the authority of
AHC as experts in auditing and accounting in the event any claim is brought
against such persons under Section 11 of the Securities Act based on alleged
false and misleading financial statements and disclosures attributable to AHC.
The discussion regarding certain effects of the AHC termination is not meant and
should not be construed in any way as legal advice to any party and any
potential purchaser should consult with his, her or its own counsel with respect
to the effect of the AHC termination on a potential investment in the Common
Stock of the Company or otherwise.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Alfacell Corporation
Bloomfield, New Jersey
We have audited the balance sheets of Alfacell Corporation (a Development Stage
Company) as of July 31, 1992 and 1991, as restated, and the related statements
of operations, stockholders' deficiency, and cash flows for the three years
ended July 31, 1992, as restated, and for the period from inception August 24,
1981 to July 31, 1992, as restated. In connection with our audit of the 1992 and
1991 financial statements, we have also audited the 1992, 1991 and 1990
financial statement schedules as listed in the accompanying index. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in all
material respects, the financial position of Alfacell Corporation as of July 31,
1992 and 1991, as restated, and for the three
F-3
years ended July 31, 1992, as restated, and for the period from inception August
24, 1981 to July 31, 1992, as restated, and the results of operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liability in the normal course of business. As shown in the statement of
operations, the Company has incurred substantial losses in each year since its
inception. In addition, the Company is a development stage company and its
principal operation for production of income has not commenced. The Company's
working capital has been reduced considerably by operating losses, and has a
deficit net worth. These factors, among others, as discussed in Note 2 to the
Notes of Financial Statements, indicates the uncertainties about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts and the amount of classification of liabilities that might be
necessary should the Company be unable to continue its existence.
/s/ Armus, Harrison & Co.
--------------------------------
Armus, Harrison & Co.
Mountainside, New Jersey
December 9, 1992
Except as to Note 18 which
is July 19, 1993 and Note 3
which is October 28, 1993
F-4
ALFACELL CORPORATION
(A Development Stage Company)
Balance Sheets
July 31, 2000 and 1999
2000
1999
------------
------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 257,445
$ 1,383,133
Other assets ............................................... 28,617
87,308
------------
------------
Total current assets ................................... 286,062
1,470,441
Property and equipment, net of accumulated depreciation and
amortization of $1,006,808 in 2000 and $944,830 in 1999
142,170
198,807
Other assets ................................................... 59,867
59,400
------------
------------
Total assets ........................................... $ 488,099
$ 1,728,648
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Current portion of long-term debt .......................... $ 7,074
$ 6,727
Accounts payable ........................................... 170,788
186,071
Accrued expenses ........................................... 411,846
778,650
Total current liabilities .............................. 589,708
971,448
Long-term debt, less current portion ........................... 30,251
--
------------
------------
Total liabilities ...................................... 619,959
971,448
------------
------------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 2000 and 1999 .............. --
--
Common stock $.001 par value. Authorized 40,000,000 shares;
issued and outstanding 18,431,559 shares and 17,286,594
shares at July 31, 2000 and 1999, respectively .......... 18,431
17,286
Capital in excess of par value ............................. 56,526,288
55,694,195
Deficit accumulated during development stage ............... (56,676,579)
(54,954,281)
------------
------------
Total stockholders' equity (deficiency) ................ (131,860)
757,200
------------
------------
Total liabilities and stockholders' equity (deficiency) $ 488,099
$ 1,728,648
============
============
See accompanying notes to financial statements.
F-5
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 2000, 1999 and 1998,
and the Period from August 24, 1981
(Date of Inception) to July 31, 2000
August 24, 1981
(date of
inception)
to July 31, 2000 2000
1999 1998
---------------- ---------
--------- ---------
Revenues:
Sales .................................... $ 553,489 --
-- --
Investment income ........................ 1,359,164 51,144
168,372 311,822
Other income ............................. 60,103 --
-- --
------------ -----------
----------- -----------
1,972,756 51,144
168,372 311,822
------------ -----------
----------- -----------
Cost and expenses:
Cost of sales ............................ 336,495 --
-- --
Research and development ................. 35,968,357 1,879,728
2,401,945 5,264,578
General and administrative ............... 20,159,648 644,588
920,686 1,412,968
Interest:
Related parties ....................... 1,033,960 --
-- --
Others ................................ 1,906,729 4,980
2,377 21,782
------------ -----------
----------- -----------
59,405,189 2,529,296
3,325,008 6,699,328
------------ -----------
----------- -----------
Net loss before state tax benefit ............ $(57,432,433) (2,478,152)
(3,156,636) (6,387,506)
State tax benefit ........................... 755,854 755,854
-- --
------------ -----------
----------- -----------
Net loss .......................... $(56,676,579) (1,722,298)
(3,156,636) (6,387,506)
============ ===========
=========== ===========
Loss per basic and diluted common share ..... $ (0.10)
$ (0.18) $ (0.40)
===========
=========== ===========
Weighted average number of shares outstanding 17,812,000
17,271,000 15,926,000
===========
=========== ===========
See accompanying notes to financial statements.
F-6
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2000
Common
Stock
----------------------
Deficit
Capital In Common Accumulated
Excess of Stock to During
Number
par be Development
of Shares
Amount Value Issued Stage
----------
-------- ----------- --------- -----------
Issuance of shares to officers and stockholders for
equipment, research and development, and expense
reimbursement 712,500 $
713 $ 212,987 -- $ --
Issuance of shares for organizational legal service 50,000
50 4,950 -- --
Sale of shares for cash, net 82,143
82 108,418 -- --
Net loss --
-- -- -- (121,486)
---------
----- --------- --------- ----------
Balance at July 31, 1982 1,266,964
1,267 325,933 -- (121,486)
Issuance of shares for equipment 15,000
15 13,985 -- --
Sale of shares to private investors 44,196
44 41,206 -- --
Sale of shares in public offering, net 660,000
660 1,307,786 -- --
Issuance of shares under stock grant program 20,000
20 109,980 -- --
Exercise of warrants, net 1,165
1 3,494 -- --
Net loss --
-- -- -- (558,694)
---------
----- --------- --------- ----------
Balance at July 31, 1983 2,007,325
2,007 1,802,384 -- (680,180)
Exercise of warrants, net 287,566
287 933,696 -- --
Issuance of shares under stock grant program 19,750
20 101,199 -- --
Issuance of shares under stock bonus plan for directors
and consultants 130,250
131 385,786 -- --
Net loss --
-- -- -- (1,421,083)
---------
----- --------- --------- ----------
Balance at July 31, 1984 2,444,891
2,445 3,223,065 -- (2,101,263)
Issuance of shares under stock grant program 48,332
48 478,057 -- --
Issuance of shares under stock bonus plan for directors
and consultants 99,163
99 879,379 -- --
Shares canceled (42,500)
(42) (105,783) -- --
Exercise of warrants, net 334,957
335 1,971,012 --
Net loss --
-- -- -- (2,958,846)
---------
----- --------- --------- ----------
Balance at July 31, 1985 2,884,843
2,885 6,445,730 -- (5,060,109)
Issuance of shares under stock grant program 11,250
12 107,020 -- --
Issuance of shares under stock bonus plan for directors 15,394
15 215,385 -- --
and consultants
Exercise of warrants, net 21,565
21 80,977 -- --
Net loss --
-- -- -- (2,138,605)
---------
----- --------- --------- ----------
Balance at July 31, 1986 (carried forward) 2,933,052
2,933 6,849,112 -- (7,198,714)
Total
Deferred Stockholders'
Subscription
compensation, Equity
Receivable
restricted stock (Deficiency)
-----------
---------------- --------------
Issuance of shares to officers and stockholders for
equipment, research and development, and expense
reimbursement $ -- $
-- $ 213,700
Issuance of shares for organizational legal service --
-- 5,000
Sale of shares for cash, net --
-- 108,500
Adjustment for 3 for 2 stock split declared September 8, 1982 --
-- --
Net loss --
-- (121,486)
-----------
------------ -----------
Balance at July 31, 1982 --
-- 205,714
Issuance of shares for equipment --
-- 14,000
Sale of shares to private investors --
-- 41,250
Sale of shares in public offering, net --
-- 1,308,446
Issuance of shares under stock grant program --
-- 110,000
Exercise of warrants, net --
-- 3,495
Net loss --
-- (558,694)
-----------
------------ -----------
Balance at July 31, 1983 --
-- 1,124,211
Exercise of warrants, net --
-- 933,983
Issuance of shares under stock grant program --
-- 101,219
Issuance of shares under stock bonus plan for directors
and consultants --
-- 385,917
Net loss --
-- (1,421,083)
-----------
------------ -----------
Balance at July 31, 1984 --
-- 1,124,247
Issuance of shares under stock grant program --
-- 478,105
Issuance of shares under stock bonus plan for directors
and consultants --
-- 879,478
Shares canceled --
-- (105,825)
Exercise of warrants, net --
-- 1,971,347
Net loss --
-- (2,958,846)
-----------
------------ -----------
Balance at July 31, 1985 --
-- 1,388,506
Issuance of shares under stock grant program --
-- 107,032
Issuance of shares under stock bonus plan for directors --
-- 215,400
and consultants
Exercise of warrants, net --
-- 80,998
Net loss --
-- (2,138,605)
-----------
------------ -----------
Balance at July 31, 1986 (carried forward) --
-- (346,669)
F-7
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
----------------------
Deficit
Capital In Common Accumulated
Excess of Stock to During
Number
par be Development
of Shares
Amount Value Issued Stage
----------
-------- ----------- --------- -----------
Balance at July 31, 1986 (brought forward) 2,933,052 $
2,933 $ 6,849,112 -- $ (7,198,714)
Exercise of warrants at $10.00 per share 14,745
15 147,435 -- --
Issuance of shares under stock bonus plan for directors
and consultants 5,000
5 74,995 -- --
Issuance of shares for services 250,000
250 499,750 -- --
Sale of shares to private investors, net 5,000
5 24,995 -- --
Net loss -- --
-- -- (2,604,619)
---------
----- ---------- ----- -----------
Balance at July 31, 1987 3,207,797
3,208 7,596,287 -- (9,803,333)
Issuance of shares for legal and consulting services 206,429
207 724,280 -- --
Issuance of shares under employment incentive program 700,000
700 2,449,300 -- --
Issuance of shares under stock grant program 19,000
19 66,481 -- --
Exercise of options at $3.00 per share 170,000
170 509,830 -- --
Issuance of shares for litigation settlement 12,500
12 31,125 -- --
Exercise of warrants at $7.06 per share 63,925
64 451,341 -- --
Sale of shares to private investors 61,073
61 178,072 -- --
Amortization of deferred compensation, restricted stock -- --
-- -- --
Net loss -- --
-- -- (3,272,773)
---------
----- ---------- ----- -----------
Balance at July 31, 1988 4,440,724
4,441 12,006,716 -- (13,076,106)
Sale of shares for litigation settlement 135,000
135 1,074,703 -- --
Conversion of debentures at $3.00 per share 133,333
133 399,867 -- --
Sale of shares to private investors 105,840
106 419,894 -- --
Exercise of options at $3.50 per share 1,000
1 3,499 -- --
Issuance of shares under employment agreement 750,000
750 3,749,250 -- --
Issuance of shares under the 1989 Stock Plan 30,000
30 149,970 -- --
Amortization of deferred compensation, restricted stock -- --
-- -- --
Net loss -- --
-- -- (2,952,869)
---------
----- ---------- ----- -----------
Balance at July 31, 1989 5,595,897
5,596 17,803,899 -- (16,028,975)
Issuance of shares for legal and consulting services 52,463
52 258,725 -- --
Issuance of shares under the 1989 Stock Plan 56,000
56 335,944 -- --
Sale of shares for litigation settlement 50,000
50 351,067 -- --
Exercise of options at $3.00 - $3.50 per share 105,989
106 345,856 -- --
Sale of shares to private investors 89,480
90 354,990 -- --
Issuance of shares under employment agreement 750,000
750 3,749,250 -- --
Conversion of debentures at $5.00 per share 100,000
100 499,900 -- --
Amortization of deferred compensation, restricted stock -- --
-- -- --
Net loss -- --
-- -- (4,860,116)
---------
----- ---------- ----- -----------
Balance at July 31, 1990 (carried forward) 6,799,829
6,800 23,699,631 -- (20,889,091)
Total
Deferred Stockholders'
Subscription
compensation, Equity
Receivable
restricted stock (Deficiency)
-----------
---------------- -------------
Balance at July 31, 1986 (brought forward) --
-- $ (346,669)
Exercise of warrants at $10.00 per share --
-- 147,450
Issuance of shares under stock bonus plan for directors
and consultants --
-- 75,000
Issuance of shares for services --
-- 500,000
Sale of shares to private investors, net --
-- 25,000
Net loss --
-- (2,604,619)
-----------
-------------- -------------
Balance at July 31, 1987 --
-- (2,203,838)
Issuance of shares for legal and consulting services --
-- 724,487
Issuance of shares under employment incentive program --
(2,450,000) --
Issuance of shares under stock grant program --
-- 66,500
Exercise of options at $3.00 per share --
-- 510,000
Issuance of shares for litigation settlement --
-- 31,137
Exercise of warrants at $7.06 per share --
-- 451,405
Sale of shares to private investors --
-- 178,133
Amortization of deferred compensation, restricted stock --
449,167 449,167
Net loss --
-- (3,272,773)
-----------
-------------- -------------
Balance at July 31, 1988 --
(2,000,833) (3,065,782)
Sale of shares for litigation settlement --
-- 1,074,838
Conversion of debentures at $3.00 per share --
-- 400,000
Sale of shares to private investors --
-- 420,000
Exercise of options at $3.50 per share --
-- 3,500
Issuance of shares under employment agreement --
(3,750,000) --
Issuance of shares under the 1989 Stock Plan --
(150,000) --
Amortization of deferred compensation, restricted stock --
1,050,756 1,050,756
Net loss --
-- (2,952,869)
-----------
-------------- -------------
Balance at July 31, 1989 --
(4,850,077) (3,069,557)
Issuance of shares for legal and consulting services --
-- 258,777
Issuance of shares under the 1989 Stock Plan --
(336,000) --
Sale of shares for litigation settlement --
-- 351,117
Exercise of options at $3.00 - $3.50 per share --
-- 345,962
Sale of shares to private investors --
-- 355,080
Issuance of shares under employment agreement --
(3,750,000) --
Conversion of debentures at $5.00 per share --
-- 500,000
Amortization of deferred compensation, restricted stock --
3,015,561 3,015,561
Net loss --
-- (4,860,116)
-----------
-------------- -------------
Balance at July 31, 1990 (carried forward) --
(5,920,516) (3,103,176)
F-8
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
----------------------
Deficit
Capital In Common Accumulated
Excess of Stock to During
Number
par be Development
of Shares
Amount Value Issued Stage
----------
-------- ----------- --------- -------------
Balance at July 31, 1990 (brought forward) 6,799,829 $
6,800 $ 23,699,631 -- $(20,889,091)
Exercise of options at $6.50 per share 16,720
16 108,664 -- --
Issuance of shares for legal consulting services 87,000
87 358,627 -- --
Issuance of shares under the 1989 Stock Plan 119,000
119 475,881 -- --
Amortization of deferred compensation, restricted stock --
-- -- -- --
Net loss --
-- -- -- (5,202,302)
---------
----- ---------- ------ -----------
Balance at July 31, 1991 7,022,549
7,022 24,642,803 -- (26,091,393)
Exercise of options at $3.50 per share 1,000
1 3,499 -- --
Sale of shares to private investors 70,731
71 219,829 -- --
Conversion of debentures at $5.00 per share 94,000
94 469,906 -- --
Issuance of shares for services 45,734
46 156,944 -- --
Issuance of shares under the 1989 Stock Plan 104,000
104 285,896 -- --
Amortization of deferred compensation, restricted stock --
-- -- -- --
Net loss --
-- -- -- (4,772,826)
---------
----- ---------- ------ -----------
Balance at July 31, 1992 7,338,014
7,338 25,778,877 -- (30,864,219)
Sale of share to private investors 352,667
353 735,147 -- --
Issuance of shares for legal services 49,600
50 132,180 -- --
Issuance of shares for services 5,000
5 9,995 -- --
Issuance of shares under the 1989 Stock Plan 117,000
117 233,883 -- --
Amortization of deferred compensation, restricted stock --
-- -- -- --
Net loss --
-- -- -- (2,357,350)
---------
----- ---------- ------ -----------
Balance at July 31, 1993 7,862,281
7,863 26,890,082 -- (33,221,569)
Conversion of debentures at $2.75 per share to $6.00 per
share 425,400
425 1,701,575 -- --
Sale of shares to private investors, net 743,000
743 1,710,048 -- --
Conversion of short-term borrowings 72,800
73 181,927 -- --
Issuance of shares for services 16,200
16 43,334 -- --
Issuance of shares under the 1989 Stock Plan, for services 5,000
5 14,995 -- --
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses --
-- 3,194,969 -- --
Repurchase of stock options from related party --
-- (198,417) -- --
Issuance of options upon conversion of accrued interest --
-- 142,441 -- --
Common stock to be issued --
-- -- 50,000 --
Amortization of deferred compensation, restricted stock --
-- -- -- --
Net loss --
-- -- -- (2,234,428)
---------
----- ---------- ------ -----------
Balance at July 31, 1994 (carried forward) 9,124,681
9,125 33,680,954 50,000 (35,455,997)
Total
Deferred Stockholders'
Subscription
compensation, Equity
Receivable
restricted stock (Deficiency)
-----------
---------------- -------------
Balance at July 31, 1990 (brought forward) $ -- $
(5,920,516) $ (3,103,176)
Exercise of options at $6.50 per share --
-- 108,680
Issuance of shares for legal consulting services
-- 358,714
Issuance of shares under the 1989 Stock Plan --
(476,000) --
Amortization of deferred compensation, restricted stock --
2,891,561 2,891,561
Net loss --
-- (5,202,302)
-------
------- ----------
Balance at July 31, 1991 --
(3,504,955) (4,946,523)
Exercise of options at $3.50 per share --
-- 3,500
Sale of shares to private investors --
-- 219,900
Conversion of debentures at $5.00 per share --
-- 470,000
Issuance of shares for services --
-- 156,990
Issuance of shares under the 1989 Stock Plan --
(286,000) --
Amortization of deferred compensation, restricted stock --
3,046,726 3,046,726
Net loss --
-- (4,772,826)
-------
------- ----------
Balance at July 31, 1992 --
(744,229) (5,822,233)
Sale of share to private investors --
-- 735,500
Issuance of shares for legal services --
-- 132,230
Issuance of shares for services --
(10,000) --
Issuance of shares under the 1989 Stock Plan --
(234,000) --
Amortization of deferred compensation, restricted stock --
664,729 664,729
Net loss --
-- (2,357,350)
-------
------- ----------
Balance at July 31, 1993 --
(323,500) (6,647,124)
Conversion of debentures at $2.75 per share to $6.00 per
share --
-- 1,702,000
Sale of shares to private investors, net --
-- 1,710,791
Conversion of short-term borrowings --
-- 182,000
Issuance of shares for services --
-- 43,350
Issuance of shares under the 1989 Stock Plan, for services --
-- 15,000
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses --
-- 3,194,969
Repurchase of stock options from related party --
-- (198,417)
Issuance of options upon conversion of accrued interest --
-- 142,441
Common stock to be issued --
-- 50,000
Amortization of deferred compensation, restricted stock --
265,000 265,000
Net loss --
-- (2,234,428)
-------
------- ----------
Balance at July 31, 1994 (carried forward) --
(58,500) (1,774,418)
F-9
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
----------------------
Deficit
Capital In Common Accumulated
Excess of Stock to During
Number
par be Development
of Shares
Amount Value Issued Stage
----------
------------- ------------ ------------ ------------
Balance at July 31, 1994 (brought forward) 9,124,681 $
9,125 $ 33,680,954 $ 50,000 $(35,455,997)
Sale of shares to private investors, net 961,000
961 2,023,241 (50,000) --
Conversion of short-term borrowings 17,600
17 43,983 -- --
Issuance of shares for services 30,906
31 77,234 -- --
Exercise of options at $2.27 - $2.50 per share 185,000
185 437,015 -- --
Common stock to be issued --
-- -- 339,008 --
Common stock to be issued, for services --
-- -- 4,800 --
Amortization of deferred compensation, restricted stock --
-- -- -- --
Net loss --
-- -- -- (1,993,123)
----------
------------ ------------ ------------ ------------
Balance at July 31, 1995 10,319,187
10,319 36,262,427 343,808 (37,449,120)
Sale of shares to private investors, net 2,953,327
2,953 8,969,655 (339,008) --
Issuance of shares for services 19,995
20 70,858 (4,800) --
Exercise of options at $2.50 - $3.87 per share 566,700
567 1,657,633 -- --
Sale of warrants --
-- 12,084 -- --
Issuance of options/warrants for services --
-- 50,872 -- --
Common stock to be issued --
-- -- 258,335 --
Subscription receivable --
-- -- -- --
Net loss --
-- -- -- (2,942,152)
----------
------------ ------------ ------------ ------------
Balance at July 31, 1996 13,859,209
13,859 47,023,529 258,335 (40,391,272)
Sale of shares to private investors, net 112,000
112 503,888 -- --
Issuance of options for services --
-- 76,504 -- --
Exercise of options at $2.45 - $4.00 per share, net 729,134
729 2,620,359 (258,335) --
Exercise of warrants at $5.00 per share, net 147,450
148 737,102 -- --
Net loss --
-- -- -- (5,018,867)
----------
------------ ------------ ------------ ------------
Balance at July 31, 1997 14,847,793
14,848 50,961,382 -- (45,410,139)
Sale of shares to private investors, net 2,337,150
2,337 4,199,877 -- --
Issuance of options for services --
-- 199,954 -- --
Exercise of warrants at $2.20 - $2.50 per share 4,950
5 11,080 -- --
Issuance of shares for services, net 50,000
50 99,950 -- --
Net loss --
-- -- -- (6,387,506)
----------
------------ ------------ ------------ ------------
Balance at July 31, 1998 17,239,893
17,240 55,472,243 -- (51,797,645)
Issuance of options for services --
-- 205,593 -- --
Issuance of shares for services, net 46,701
46 16,359 -- --
Net loss --
-- -- -- (3,156,636)
----------
------------ ------------ ------------ ------------
Balance at July 31, 1999 (carried forward) 17,286,594 $
17,286 $ 55,694,195 $ -- $(54,954,281)
Total
Deferred Stockholders'
Subscription
compensation, Equity
Receivable
restricted stock (Deficiency)
------------
---------------- -------------
Balance at July 31, 1994 (brought forward) $ -- $
(58,500) $ (1,774,418)
Sale of shares to private investors, net --
-- 1,974,202
Conversion of short-term borrowings --
-- 44,000
Issuance of shares for services --
-- 77,265
Exercise of options at $2.27 - $2.50 per share --
-- 437,200
Common stock to be issued --
-- 339,008
Common stock to be issued, for services --
-- 4,800
Amortization of deferred compensation, restricted stock --
58,500 58,500
Net loss --
-- (1,993,123)
------------
------------ ------------
Balance at July 31, 1995 --
-- (832,566)
Sale of shares to private investors, net --
-- 8,633,600
Issuance of shares for services --
-- 66,078
Exercise of options at $2.50 - $3.87 per share --
-- 1,658,200
Sale of warrants --
-- 12,084
Issuance of options/warrants for services --
-- 50,872
Common stock to be issued --
-- 258,335
Subscription receivable (254,185)
-- (254,185)
Net loss --
-- (2,942,152)
------------
------------ ------------
Balance at July 31, 1996 (254,185)
-- 6,650,266
Sale of shares to private investors, net --
-- 504,000
Issuance of options for services --
-- 76,504
Exercise of options at $2.45 - $4.00 per share, net 254,185
-- 2,616,938
Exercise of warrants at $5.00 per share, net --
-- 737,250
Net loss --
-- (5,018,867)
------------
------------ ------------
Balance at July 31, 1997 --
-- 5,566,091
Sale of shares to private investors, net --
-- 4,202,214
Issuance of options for services --
-- 199,954
Exercise of warrants at $2.20 - $2.50 per share --
-- 11,085
Issuance of shares for services, net --
-- 100,000
Net loss --
-- (6,387,506)
------------
------------ ------------
Balance at July 31, 1998 --
-- 3,691,838
Issuance of options for services --
-- 205,593
Issuance of shares for services, net --
-- 16,405
Net loss --
-- (3,156,636)
------------
------------ ------------
Balance at July 31, 1999 (carried forward) $ -- $
-- $ 757,200
F-10
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
----------------------
Deficit
Capital In Common Accumulated
Excess of Stock to During
Number
par be Development
of Shares Amount
Value Issued Stage
---------- -------------
------------ -------- ------------
Balance at July 31, 1999 (brought forward) 17,286,594 $ 17,286
$ 55,694,195 $ -- $(54,954,281)
Sale of shares to private investors, net 875,000 875
547,417 -- --
Exercise of options at $0.43 - $1.43 per share 95,000 95
45,755 -- --
Issuance of shares for services, net 174,965 175
92,009 -- --
Vesting of options previously issued for services -- --
146,912 -- --
Net loss -- --
-- -- (1,722,298)
---------- ------------
------------ ------ -----------
Balance at July 31, 2000 18,431,559 18,431
56,526,288 -- (56,676,579)
Total
Deferred
Stockholders'
Subscription compensation,
Equity
Receivable restricted stock
(Deficiency)
------------ --------------
-------------
Balance at July 31, 1999 (brought forward) $ -- $ --
$ 757,200
Sale of shares to private investors, net -- --
548,292
Exercise of options at $0.43 - $1.43 per share -- --
45,850
Issuance of shares for services, net -- --
92,184
Vesting of options previously issued for services -- --
146,912
Net loss -- --
(1,722,298)
------ -------
------------
Balance at July 31, 2000 -- --
(131,860)
See accompanying notes to financial statements.
F-11
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 1999, 1998 and 1997,
and the Period from August 24, 1981
(Date of Inception) to July 31, 2000
August 24,
1981
(date
of
inception) to
July
31,
2000
2000 1999 1998
----------- ---------- ---------- ----------
Cash flows from operating activities:
Net loss
$(56,676,579) $ (1,722,298) $ (3,156,636) $ (6,387,506)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of marketable securities
(25,963) -- -- --
Depreciation and amortization
1,417,843 93,748 101,231 102,836
Loss on disposal of property and equipment
18,926 -- -- --
Noncash operating expenses
5,519,384 146,912 208,053 199,954
Amortization of deferred compensation
11,442,000 -- -- --
Amortization of organization costs
4,590 -- -- --
Changes in assets and liabilities:
(Increase) decrease in loan receivable, related party
-- -- -- --
(Increase) decrease in other current assets
(88,484) 58,224 (29,521) 47,919
Decrease in other assets
36,184 -- -- --
Increase in loans and interest payable, related party
744,539 -- -- --
Increase (decrease) in accounts payable
456,868 76,901 (513,338) 438,336
Increase in accrued payroll and expenses, related parties
2,348,145 -- -- --
Increase (decrease) in accrued expenses
953,359 (366,804) (314,248) 399,057
----------- ---------- ---------- ----------
Net cash used in operating activities
(33,849,188) (1,713,317) (3,704,459) (5,199,404)
----------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of marketable securities
(290,420) -- -- --
Proceeds from sale of marketable equity securities
316,383 -- -- --
Purchase of property and equipment
(1,406,836) (37,575) -- (75,315)
Patent costs
(97,841) -- -- --
----------- ---------- ---------- ----------
Net cash used in investing activities
(1,478,714) (37,575) -- (75,315)
----------- ---------- ---------- ----------
F-12
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24,
1981
(date of
inception) to
July 31,
2000
2000 1999 1998
------------
-------------- ------------- -------------
Cash flows from financing
Proceeds from short-term borrowings $ 849,500
$ -- $ -- $ --
Payment of short-term borrowings
(623,500) -- -- --
Increase in loans payable, related party, net 2,628,868
-- -- --
Proceeds from bank debt and other long-term debt, net of
deferred debt costs 2,452,460
41,577 -- --
Reduction of bank debt and long-term debt
(2,929,243) (10,515) (9,175) (1,381,416)
Proceeds from issuance of common stock, net 27,353,739
548,292 (2,686) 4,202,214
Proceeds from exercise of stock options and warrants, net 5,506,523
45,850 -- 11,085
Proceeds from issuance of convertible debentures 347,000
-- -- --
Net cash provided by financing activities 35,585,347
625,204 (11,861) 2,831,883
------------
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 257,445
(1,125,688) (3,716,320) (2,442,836)
Cash and cash equivalents at beginning of period --
1,383,133 5,099,453 7,542,289
------------
------------ ------------ ------------
Cash and cash equivalents at end of period $ 257,445
$ 257,445 $ 1,383,133 $ 5,099,453
============
============ ============ ============
Supplemental disclosure of cash flow information - interest paid $ 1,653,713
$ 4,980 $ 2,378 $ 21,782
============
============ ============ ============
Noncash financing activities:
Issuance of convertible subordinated debenture for loan
payable to officer $ 2,725,000
$ -- $ -- $ --
============
============ ============ ============
Issuance of common stock upon the conversion of convertible
subordinated debentures, related party $ 2,945,000
$ -- $ -- $ --
============
============ ============ ============
Conversion of short-term borrowings to common stock $ 226,000
$ -- $ -- $ --
============
============ ============ ============
Conversion of accrued interest, payroll and expenses by
related parties to stock options $ 3,194,969
$ -- $ -- $ --
============
============ ============ ============
Repurchase of stock options from related party $
(198,417) $ -- $ -- $ --
============
============ ============ ============
Conversion of accrued interest to stock options $ 142,441
$ -- $ -- $ --
============
============ ============ ============
Conversions of accounts payable to common stock $ 286,170
$ 92,184 $ 16,631 $ 100,000
============
============ ============ ============
F-13
August 24,
1981
(date of
inception) to
July 31,
2000
2000 1999 1998
------------
-------------- ------------- -------------
Conversion of notes payable, bank and accrued interest
to long-term debt $ 1,699,072
$ -- $ -- $ --
============
============ ============ ============
Conversion of loans and Interest Payable, related party and
accrued payroll and expenses, related parties to long-term
accrued payroll and other, related party $ 1,863,514
$ -- $ -- $ --
============
============ ============ ============
Issuance of common stock upon the conversion of convertible
subordinated debentures, other $ 127,000
$ -- $ -- $ --
============
============ ============ ============
Issuance of common stock for services rendered $ 2,460
$ -- $ 2,460 $ --
============
============ ============ ============
See accompanying notes to financial statements.
F-14
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Years ended July 31, 2000, 1999 and 1998
and the Period From August 24, 1981
(Date of Inception) to July 31, 2000
(1) Summary of Significant Accounting Policies
Business Description
Alfacell Corporation (the "Company") was incorporated in Delaware on
August 24, 1981 for the purpose of engaging in the discovery,
investigation and development of a new class of anti-cancer drugs and
anti-viral agents. The Company is a development stage company as defined
in the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 7. The Company is devoting substantially all of
its present efforts to establishing its business. Its planned principal
operations have not commenced and, accordingly, no significant revenue has
been derived therefrom.
The Company's current operations encompass all the risks inherent in
discovering and developing a new drug, including: an uncertainty regarding
the timing and amount of future revenues to be derived from the Company's
technology; obtaining future capital as needed; attracting and retaining
key personnel; and a business environment with heightened competition,
rapid technological change and strict government regulations.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect reported amounts and disclosures in
these financial statements. Actual results could differ from those
estimates.
Certain reclassifications to the prior year financial information were
made to conform with the July 31, 2000 presentation.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets ranging from three to seven years. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in
operations for the period.
The cost of repairs and maintenance is charged to operations as incurred;
significant renewals and betterments are capitalized.
Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less, at the time of purchase, to be cash equivalents.
F-15
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
Research and Development
Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
For all financial instruments, their carrying value approximates fair
value due to the short maturity of those instruments.
Comprehensive Income (Loss)
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The net loss of $1,722,000,
$3,157,000 and $6,388,000, recorded for the years ended July 31, 2000,
1999 and 1998, respectively, is equal to the comprehensive loss for those
periods.
Earnings Per Common Share
"Basic" earnings per common share equals net income divided by weighted
average common shares outstanding during the period. "Diluted" earnings
per common share equals net income divided by the sum of weighted average
common shares outstanding during the period plus common stock equivalents.
The Company's Basic and Diluted per share amounts are the same since the
assumed exercise of stock options and warrants are all anti-dilutive. The
number of options and warrants excluded from the calculation was
6,156,195, 5,894,875 and 5,911,557 at July 31, 2000, 1999 and 1998,
respectively.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of long-lived assets held and to be used based on
undiscounted cash flows, and measures the impairment, if any, using
discounted cash flows. SFAS No. 121 has not had a material impact on the
Company's financial position, operating results or cash flows.
Stock Option Plans
Prior to August 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date
F-16
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
of grant only if the current market price of the underlying stock exceeded
the exercise price. On August 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma disclosure in accordance with the provisions of SFAS No. 123.
(2) Liquidity
The Company has reported net losses of $1,722,000, $3,157,000, and
$6,388,000 for the fiscal years ended July 31, 2000, 1999 and 1998,
respectively. The loss from date of inception, August 24, 1981, to July
31, 2000 amounts to $56,677,000. Also, the Company has a working capital
deficit and limited liquid resources. These factors raise substantial
doubt about its ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability
and classification of reported asset amounts or the amounts or
classification of liabilities which might result from the outcome of this
uncertainty.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of tax
benefits, revenues from the commercial sale of ONCONASE(R) and its ability
to realize the full potential of its technology and its drug candidates.
Such additional funds may not become available or be available on
acceptable terms. To date, a significant portion of the Company's
financing has been through private placements of common stock and
warrants, the issuance of common stock for stock options and warrants
exercised and for services rendered, debt financing and financing provided
by the Company's Chief Executive Officer. Additionally, the Company raised
capital through the sale of a portion of its tax benefits. Until the
Company's operations generate significant revenues, the Company will
continue to fund operations from cash on hand and through the sources of
capital previously described. In August and September 2000, the Company
received gross proceeds of approximately $516,000 from the private
placement of various individual investors and exercise of stock options by
a related party.
The Company will continue to incur costs in conjunction with its U.S. and
foreign registrations for marketing approval of ONCONASE(R). The Company
is currently in discussion with several potential strategic alliance
partners including major international biopharmaceutical companies to
further the development and marketing of ONCONASE(R) and other related
products in its pipeline. However, there can be no assurance that any such
alliances will materialize. The Company intends to seek foreign marketing
approvals for ONCONASE(R) for the treatment of malignant mesothelioma.
Clinical data is required in certain European countries for registration.
Therefore, the Company has initiated a plan to expand its ongoing clinical
trial internationally. However, there can be no assurance that any such
plan will materialize. The Company's ability to raise funding at this time
may be dependent upon other factors including, without limitation, market
conditions, and such funds may not be available or be available on
acceptable terms.
F-17
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Liquidity, (Continued)
The Company's common stock was delisted from The Nasdaq SmallCap Market
effective at the close of business April 27, 1999 for failing to meet the
minimum bid price requirements set forth in the NASD Marketplace Rules. As
of April 28, 1999, the Company's common stock trades on the OTC Bulletin
Board under the symbol "ACEL". Delisting of the Company's common stock
from Nasdaq could have a material adverse effect on its ability to raise
additional capital, its stockholders' liquidity and the price of its
common stock.
(3) Property and Equipment
Property and equipment, at cost, consists of the following at July 31:
2000 1999
---- ----
Laboratory equipment $ 755,040 755,040
Office equipment 296,105 290,764
Leasehold improvements 97,833 97,833
---------- ---------
$1,148,978 1,143,637
========== =========
(4) Long-term Debt
Long-term debt consists of the following at July 31:
2000 1999
---- ----
Note payable, in monthly installments of $1,459, including
$ 37,325 $ --
principal and interest commencing April 2000 and each month
thereafter until March 2005, secured by equipment.
Note payable in monthly installments of $729, including
-- 6,727
-------- --------
principal and interest commencing April 1996 and each month
thereafter until May 2000, secured by equipment.
37,325 6,727
Less current portion
7,074 6,727
-------- --------
$ 30,251 $ --
-------- --------
(5) Leases
The Company leases its facility under a five-year operating lease which is
due to expire on December 31, 2001. The annual rental obligation, which
commenced January 1, 1997, is $96,775 and is subject to annual escalation
amounts. Rent expense charged to operations was $127,000, $108,000, and
$97,000 in 2000, 1999 and 1998, respectively.
F-18
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(5) Leases, Continued
Future minimum lease payments under noncancellable leases for the next two
years ending July 31 are as follows:
Operating
leases
------
2001 136,000
2002 56,667
(6) Stockholders' Equity
On September 1, 1981, the Company issued 712,500 shares of common stock
(1,068,750 shares adjusted for the stock split on September 8, 1982) to
officers and stockholders in exchange for equipment, research and
development services, stock registration costs, reimbursement of expenses
and other miscellaneous services. The common stock issued for services was
recorded at the estimated fair value of services rendered based upon the
Board of Directors' determination and ratification of the value of
services. Equipment received in exchange for common stock was recorded at
the transferor's cost. Common stock issued for reimbursement of expenses
was recorded based upon expenses incurred. All values assigned for
expenses and services rendered have been charged to operations except for
stock registration costs which were charged against proceeds.
On July 30, 1982, the Company sold 82,143 shares of common stock (123,214
shares adjusted to reflect the stock split on September 8, 1982) to a
private investor at a price of $1.40 per share, resulting in net proceeds
to the Company of approximately $108,500.
On September 8, 1982, the Company declared a 3-for-2 stock split. Shares
previously issued by the Company have been restated in accordance with the
stock split.
On September 8, 1982, the Company issued 15,000 shares of common stock to
an officer and stockholder in exchange for equipment. The equipment
received in exchange for the common stock was recorded at the transferor's
cost.
On November 1, 1982 and January 3, 1983, the Company sold 28,125 and
16,071 shares of common stock, respectively, to private investors at $.93
per share, resulting in net proceeds to the Company of approximately
$41,250.
On January 17, 1983, the Company sold 660,000 shares of its common stock
and 330,000 common stock purchase warrants in a public offering at a price
of $2.50 per share, resulting in net proceeds to the Company of
approximately $1,308,446. The warrants were to expire 12 months after
issuance; however, the Company extended the expiration date to July 16,
1984. During the fiscal years ended July 31, 1983 and 1984, the net
proceeds to the Company from the exercise of the warrants amounted to
$934,000. Each common stock purchase warrant was not detachable from its
common stock or exercisable until six months after the issuance date of
January 17, 1983. Each warrant entitled the holder to purchase one share
of common stock at an exercise price of $3.00 after six months and prior
to nine months after issuance. The exercise price increased to $3.50 after
nine months and prior to 12 months after issuance.
F-19
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
In connection with the public offering, the Company sold 60,000 five-year
purchase warrants to the underwriters at a price of $.001 per warrant.
Each warrant entitled the holder to purchase one share of common stock at
an exercise price of $3.00. Pursuant to the antidilution provisions of the
warrants, the underwriters received warrants to purchase 67,415 shares at
an exercise price of $2.67 per share. As of July 31, 1986, all such
warrants were exercised and the Company received proceeds of approximately
$180,000.
On February 22, 1984, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of two series of new
warrants, each to purchase an aggregate of 330,000 shares (hereinafter
referred to as one-year warrants and two-year warrants). The one-year
warrants had an exercise price of $6.50 per share and expired July 17,
1985. The two-year warrants had an exercise price of $10.00 per share and
were to expire July 17, 1986. However, the Company extended the expiration
date to August 31, 1987. The one-year warrants and two-year warrants were
issued as of July 17, 1984 on a one-for-one basis to those public offering
warrant holders who exercised their original warrants, with the right to
oversubscribe to any of the warrants not exercised. During the fiscal
years ended July 31, 1985, 1986, 1987 and 1988, the Company received net
proceeds of approximately $2,471,000 as a result of the exercise of the
warrants.
On January 2, 1987, the Company issued 250,000 shares of common stock to
officers and stockholders, including the President and Chief Executive
Officer, in recognition of services performed for the Company. The fair
value of such shares was recorded as compensation expense.
On February 3, 1987, the Company sold 5,000 shares of common stock to a
private investor for $5.00 per share, resulting in net proceeds to the
Company of approximately $25,000.
On September 1, 1987, the Board of Directors approved new wage contracts
for three officers. The contracts provided for the issuance of 700,000
shares of common stock as an inducement for signing. The fair value of
these shares was recorded as deferred compensation and was amortized over
the term of the employment agreements. The contracts also provided for the
issuance of 1,500,000 shares of common stock in 750,000 increments upon
the occurrence of certain events. These shares were issued during the
fiscal years ended July 31, 1989 and 1990 and the fair value of such
shares was recorded as deferred compensation and was amortized over the
remaining term of the employment agreements. The contracts also provided
for five-year options to purchase 750,000 shares of common stock at $3.00
per share; options for the purchase of 170,000 shares were exercised on
June 16, 1988 and the remaining options for the purchase of 580,000 shares
expired on September 2, 1992.
During the fiscal year ended July 31, 1988, the Company issued 206,429
shares of common stock for payment of legal and consulting services. The
fair value of such shares was charged to operations.
During the fiscal year ended July 31, 1988, the Company issued 12,500
shares of common stock in connection with the settlement of certain
litigation. The fair value of these shares was charged to operations.
F-20
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 1988, the Company sold 61,073 shares
of common stock to private investors at $2.92 per share resulting in net
proceeds to the Company of approximately $178,133.
On September 21, 1988, the Company entered into a stipulation of
settlement arising from a lawsuit wherein it agreed to pay a total of
$250,000 in 12 monthly installments. Under the agreement, the Company
authorized the issuance on September 7, 1988 and October 18, 1988 of
85,000 and 50,000 shares, respectively, to an escrow account to secure
payment of the $250,000 due under the stipulation of settlement. During
the fiscal year ended July 31, 1989, the Company issued and sold the
135,000 shares of common stock for $1,074,838. On February 14, 1989, the
Board of Directors authorized the issuance of an additional 50,000 shares.
During the year ended July 31, 1990, the shares were sold for $351,117.
The proceeds from the above transactions were used to pay the settlement
and related legal costs, reduce loans from and interest due to the
Company's Chief Executive Officer, and for working capital.
During the fiscal year ended July 31, 1989, the Company sold 105,840
shares of common stock to private investors at $3.97 per share resulting
in net proceeds to the Company of approximately $420,000.
During the fiscal year ended July 31, 1990, the Company issued 52,463
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company issued 50,000
shares of common stock in connection with the settlement of certain
litigation. The fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company sold 89,480 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $355,080.
During the fiscal year ended July 31, 1991, the Company issued 87,000
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1992, the Company sold 70,731 shares
of common stock to private investors at $2.75 to $3.50 per share resulting
in net proceeds to the Company of approximately $219,900.
During the fiscal year ended July 31, 1992, the Company issued 45,734
shares of common stock as payment for services rendered to the Company.
The fair value of the common stock was charged to operations.
F-21
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal years ended July 31, 1992 and 1990, 94,000 and 50,000
shares of common stock, respectively, were issued to the Company's Chief
Executive Officer upon the conversion of outstanding debentures.
During the fiscal year ended July 31, 1993, the Company sold 352,667
shares of common stock to private investors at prices ranging from $2.00
to $3.00 per share resulting in net proceeds to the Company of
approximately $735,500. In addition, the private investors were granted
options to purchase common stock totaling 587,167 shares at prices ranging
from $3.00 to $7.00. During the fiscal years ended July 31, 1995 and 1996,
322,500 and 228,833 options expired, respectively. A total of 42,167
options due to expire on July 31, 1995 were extended to July 31, 1996 and
their exercise price was reduced to $2.50. During the fiscal year ended
July 31, 1996, 35,834 options were exercised resulting in net proceeds to
the Company of approximately $89,600.
During the fiscal year ended July 31, 1993, the Company issued 54,600
shares of common stock as payment for legal and other services performed
for the Company. The fair value of 49,600 shares was charged to
operations. The remaining 5,000 shares were recorded as deferred
compensation and were amortized over a one-year period, beginning in
February 1993, in accordance with the agreement entered into with the
recipient.
During the fiscal year ended July 31, 1994, the Company issued 7,000
shares of common stock as payment for services performed for the Company.
The fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1994, the Company sold 25,000 shares
of common stock to a private investor at $2.00 per share resulting in net
proceeds to the Company of $50,000. In addition, the private investor was
granted options to purchase common stock totaling 25,000 shares at $4.00
per common share. These options were exercised in September 1996 resulting
in net proceeds to the Company of $100,000.
During the fiscal year ended July 31, 1994, the Company sold 800,000
shares of common stock to private investors at $2.50 per share resulting
in net proceeds to the Company of $1,865,791. In addition, the private
investors were granted warrants to purchase common stock totaling 800,000
shares at $5.00 per common share. Warrants for the purchase of 147,450
shares were exercised during fiscal 1997 resulting in net proceeds to the
Company of $737,250. The remaining 652,550 warrants expired during fiscal
1997.
During the fiscal year ended July 31, 1994, 400,000 shares of common stock
were issued to the Company's Chief Executive Officer upon the conversion
of outstanding debentures.
During the fiscal year ended July 31, 1994, 25,400 shares of common stock
were issued upon the conversion of other outstanding debentures.
F-22
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
In September 1994, the Company completed a private placement resulting in
the issuance of 288,506 shares of common stock and three-year warrants to
purchase 288,506 shares of common stock at an exercise price of $5.50 per
share. The warrants expired during fiscal 1998. The common stock and
warrants were sold in units consisting of 20,000 shares of common stock
and warrants to purchase 20,000 shares of common stock. The price per unit
was $50,000. The Company received proceeds of approximately $545,000, net
of costs associated with the placement of approximately $55,000 and the
conversion of certain debt by creditors of $121,265 into equivalent
private placement units of 17,600 shares for conversion of short-term
borrowings and 30,906 shares issued for services rendered. In October
1994, an additional two units at $50,000 per unit were sold to a private
investor under the same terms as the September 1994 private placement
resulting in the issuance of 40,000 shares of common stock and warrants to
purchase 40,000 shares of common stock. The warrants expired during fiscal
1998.
During the fiscal year ended July 31, 1995, 185,000 shares of common stock
were issued upon the exercise of stock options by unrelated parties
resulting in net proceeds to the Company of $437,200. The exercise prices
of the options ranged from $2.27 to $2.50, which had been reduced from
$3.50 and $5.00, respectively, during fiscal 1995.
During the fiscal year ended July 31, 1995, the Company sold 681,000
shares of common stock to private investors resulting in net proceeds to
the Company of approximately $1,379,000. The shares were sold at prices
ranging from $2.00 to $2.25.
During the fiscal year ended July 31, 1995, the Company sold 139,080
shares of common stock and 47,405 three-year warrants to purchase shares
of common stock at an exercise price of $4.00 per share to private
investors. The stock and warrants were sold at prices ranging from $2.25
to $2.73 per share and resulted in net proceeds to the Company of
$343,808, of which $4,800 was for services rendered. The common shares
were issued to the investors subsequent to July 31, 1995.
On August 4, 1995, the Company issued 6,060 shares of common stock as
payment for services rendered to the Company. The fair value of the common
stock was charged to operations.
On September 29, 1995, the Company completed a private placement resulting
in the issuance of 1,925,616 shares of common stock and three-year
warrants to purchase an aggregate of 55,945 shares of common stock at an
exercise price of $4.00 per share. Of these shares 1,935 were issued for
services rendered to the Company. The common stock was sold alone at per
share prices ranging from $2.00 to $3.70, and in combination with warrants
at per unit prices ranging from $4.96 to $10.92, which related to the
number of warrants contained in the unit. The Company received proceeds of
approximately $4.1 million, including $1,723,000 for approximately 820,000
shares received during the fiscal year ended July 31, 1995. The warrants
expired in October 1998.
As consideration for the extension of the Company's term loan agreement
with its bank, the Company granted the bank a warrant to purchase 10,000
shares of common stock at an exercise price of $4.19. The warrants were
issued as of October 1, 1995 and expired on August 31, 1997.
F-23
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
In June 1996, the Company sold in a private placement 1,515,330 shares of
common stock and three-year warrants to purchase 313,800 shares of common
stock at an exercise price of $7.50 per share. Of these shares, 12,000
were issued for services rendered to the Company. The common stock was
sold alone at a per share price of $3.70, in combination with warrants at
a per unit price of $12.52 and warrants were sold alone at a per warrant
price of $1.42. Each unit consisted of three shares of common stock and
one warrant. The Company received proceeds of approximately $5.7 million.
The warrants expired during the fiscal year ended July 31, 2000.
In June 1996, the Company issued 10,000 five-year stock options as payment
for services rendered. The options vested immediately and have an exercise
price of $4.95 per share. The Company recorded research and development
expense of $28,260 which was the fair value of the stock options on the
date of issuance.
During the fiscal year ended July 31, 1996, 207,316 shares of common stock
were sold from October 1995 to April 1996 at per share prices ranging from
$3.60 to $4.24 resulting in proceeds of approximately $808,000.
During the fiscal year ended July 31, 1996, 656,334 stock options were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $1.9 million to the Company. Of these shares, 89,634 were
issued subsequent to July 31, 1996. The exercise prices of the options
ranged from $2.50 to $3.87 per share.
In August 1996, the Company issued 10,000 stock options with an exercise
price of $4.69 per share exercisable for five years as payment for
services to be rendered. An equal portion of these options vested monthly
for one year commencing September 1, 1996. The Company recorded general
and administrative expense of $27,900 which was the fair value of the
stock options on the date of issuance.
In March 1997, the Company issued 112,000 shares of common stock at $4.50
per share in a private placement to a single investor resulting in net
proceeds of $504,000 to the Company.
In May 1997, the Company issued 100,000 stock options to a director with
an exercise price of $5.20 per share as payment for serving as Chairman of
the Scientific Advisory Board (the "SAB"). These options will vest as
follows provided the director is then serving as Chairman of the SAB at
the time of vesting: 10,000 vested immediately, 10,000 after one full
calendar year, 10,000 annually for each of the following three years and
50,000 on May 13, 2002. The vesting of the 50,000 options which vest in
May 2002 may be accelerated upon the occurrence of the following events:
25,000 options upon the good faith determination by the Company's Board of
Directors that a substantive collaborative agreement with a major
biopharmaceutical company was a result of Dr. Carter's efforts and 25,000
options upon the good faith determination by the Company's Board of
Directors that Dr. Carter made a material contribution towards the
approval by the United States Food and Drug Administration of a New Drug
Application for the marketing of ONCONASE in the United States. The
Company recorded research and development expense of $263,800 which was
the fair value on the date of issuance of that portion of the stock
options that had vested as of July 31, 2000.
F-24
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 1997, 639,500 stock options were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $2.6 million to the Company. The exercise prices of the
options ranged from $2.45 to $4.00 per share.
During the fiscal year ended July 31, 1997, 147,450 warrants were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $737,250 to the Company. The exercise price of the
warrants was $5.00 per share.
In October 1997, the Company issued 75,000 stock options to a director
with an exercise price of $3.66 per share as payment for non-board related
services to be rendered. These options will vest as follows provided he
has been serving continuously on the Company's board of directors at the
time of vesting: 10,000 vested immediately; 10,000 after one full calendar
year; 10,000 annually for each of the following three years; and 25,000 on
October 31, 2002. The vesting and exercisability of the 25,000 options
which vest in October 2002 may be accelerated upon the good faith
determination of the Company's Board of Directors that a substantive
collaborative agreement with a major pharmaceutical/biotechnology company
was a direct result of the director's efforts. A total general and
administrative expense of $185,600 is being amortized over a five-year
period which commenced in October 1997. As of July 31, 2000, the Company
recorded general and administrative expense of $124,600, based upon the
fair value of such 75,000 options on the date of issuance, amortized on a
straight-line basis over the vesting period of the grant.
In October 1997, the Company issued 12,000 five-year stock options to a
consultant with an exercise price of $3.91 per share as payment for
services to be rendered. An equal portion of these options vest monthly
and are to be amortized over a one-year period which commenced in October
1997. In May 1998, the Company terminated the services of the consultant
which resulted in the cancellation of 5,000 options. The Company recorded
a total research and development expense for the remaining 7,000 options
in the amount of $15,800, based upon the fair value of such options on the
date of issuance, amortized on a straight-line basis over the vesting
period of the grant.
On December 9, 1997, the stockholders authorized the amendment of the
Company's Certificate of Incorporation to increase the number of
authorized shares of common stock, par value $.001 from 25,000,000 shares
to 40,000,000 shares.
On December 9, 1997, the stockholders approved the 1997 Stock Option Plan
(the "1997 Plan"). The total number of shares of common stock authorized
for issuance upon exercise of options granted under the 1997 Plan is
2,000,000. Options are granted at fair market value on the date of the
grant and generally are exercisable in 20% increments annually over five
years starting one year after the date of grant and terminate five years
from their initial exercise date.
F-25
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
On January 23, 1998 the Securities and Exchange Commission (the "SEC")
declared effective a registration statement on Form S-3 for the offer and
sale by certain stockholders of up to 3,734,541 shares of common stock. Of
these shares (i) an aggregate of 2,737,480 shares were issued to private
placement investors in private placement transactions which were completed
during the period from March 1994 through March 1997 (the "Earlier Private
Placements"), (ii) an aggregate of 409,745 shares are issuable upon
exercise of warrants which were issued to private placement investors in
the Earlier Private Placements and (iii) an aggregate of 587,316 shares
may be issued, or have been issued, upon exercise of options which were
issued to option holders in certain other private transactions. As a
result of the delisting of the Company's Common Stock from the Nasdaq
SmallCap Market, the Company no longer qualified for the use of a Form S-3
registration statement for this offering when it filed its Annual Report
on Form 10-K for the fiscal year ended July 31, 1999 and thus, this
registration statement was no longer effective. The Company filed a
registration statement on Form S-1 to register these shares, which has not
yet been declared effective.
In February 1998, the Company completed the February 1998 Private
Placement primarily to institutional investors which resulted in the
issuance of 1,168,575 units at a unit price of $4.00. Each unit consisted
of two (2) shares of the Company's common stock, par value $.001 per share
and one (1) three-year warrant to purchase one (1) share of common stock
at an exercise price of $2.50 per share. The Company received proceeds of
approximately $4,202,000, net of costs associated with the private
placement of approximately $472,000. The placement agent also received
warrants to purchase an additional 116,858 units comprised of the same
securities sold to investors at an exercise price of $4.40 per unit as
part of its compensation.
In March 1998, the Company entered into a conversion agreement with one of
its raw material suppliers (the "Supplier") for the conversion of an
outstanding payable (the "Conversion Agreement") into 50,000 shares of the
Company's Common Stock. Pursuant to the Conversion Agreement, the Company
issued 50,000 shares of Common Stock to the Supplier. The fair value of
the Common Stock approximated the outstanding payable amount of $100,000.
In March 1998, the Company issued 75,000 stock options to a director with
an exercise price of $2.80 per share as payment for non-board related
services to be rendered. These options will vest as follows provided he
has been serving continuously on the Company's board of directors at the
time of vesting: 10,000 vested immediately; 10,000 after one full calendar
year; 10,000 annually for each of the following three years; and 25,000 on
March 24, 2003. The vesting and exercisability of the 25,000 options which
vest in March 2003 may be accelerated upon the good faith determination of
the Company's Board of Directors that a substantive collaborative
agreement and licensing or financing arrangement with a major
pharmaceutical/biotechnology company was a direct result of the director's
efforts. A total general and administrative expense of $138,100 is being
amortized over a five-year period which commenced in March 1998. As of
July 31, 2000, the Company recorded general and administrative expense of
$81,100, based upon the fair value of such 75,000 options on the date of
issuance, amortized on a straight-line basis over the vesting period of
the grant.
F-26
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
On April 20, 1998 the SEC declared effective a registration statement on
Form S-3 for the offer and sale by certain stockholders of up to 3,918,299
shares of common stock. Of these shares (i) an aggregate of 2,337,150
shares of Common Stock were issued to the private placement investors in
the February 1998 Private Placement, (ii) an aggregate of 1,168,575 shares
may be issued upon exercise of the Warrants which were issued to the
private placement investors in the February 1998 Private Placement, (iii)
350,574 shares may be issued upon the exercise of the Placement Agent
Warrant which was issued to the placement agent in the February 1998
Private Placement and the Warrants issuable upon exercise of the Placement
Agent Warrant, (iv) 50,000 shares of Common Stock were issued to a
Supplier in connection with conversion of an outstanding accounts payable,
and (v) 12,000 shares may be issued upon the exercise of options which
were issued as payment for services to be rendered. As a result of the
delisting of the Company's Common Stock from the Nasdaq SmallCap Market,
the Company no longer qualified for the use of a Form S-3 registration
statement for this offering when it filed its Annual Report on Form 10-K
for the fiscal year ended July 31, 1999 and thus, this registration
statement was no longer effective. The Company filed a registration
statement on Form S-1 to register these shares, which has not yet been
declared effective.
During the fiscal year ended July 31, 1998, the Company issued 833
three-year stock options as payment for services rendered in August 1997.
The options vested thirty days from the issuance date and have an exercise
price of $4.47 per share. The total general and administrative expense
recorded for these options was $1,700, based upon the fair value of such
options on the date of issuance.
During the fiscal year ended July 31, 1998, the Company issued 15,000
three-year stock options with an exercise price of $4.15 per share as
payment for services to be rendered. An equal portion of these options
vest monthly and a total general and administrative expense of $30,000 is
being amortized over a one-year period which commenced September 1997. The
Company also issued 5,000 three-year stock options with an exercise price
of $4.15 per share as payment for services to be rendered. Of these
options, 833 vested monthly for five months commencing September 30, 1997
and 835 vested on the last day of the sixth month. Total general and
administrative expense of $9,700 is being amortized over a six-month
period which commenced September 1997. As of July 31, 1998, the Company
recorded general and administrative expense of $37,100, based upon the
fair value of the 20,000 stock options on the date of the issuance,
amortized on a straight-line basis over the vesting periods of the grants.
During the fiscal year ended July 31, 1998, 4,950 shares of Common Stock
were issued upon the exercise of warrants by unrelated parties resulting
in net proceeds of approximately $11,100 to the Company. The exercise
prices of the warrants ranged from $2.20 to $2.50 per share.
F-27
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
On October 1, 1998 (the "Effective Date"), the Company entered into an
agreement with a consultant (the "Agreement"), resulting in the issuance
of 200,000 five-year stock options with an exercise price of $1.00 per
share as payment for services to be rendered. These options will vest as
follows: an aggregate of 20,000 shall vest on October 1, 1999 or upon
signing of the first corporate partnering deal, whichever shall occur
first; an aggregate of 2,500 of such options shall vest on the last day of
each month over the first twelve months after the Effective Date of the
Agreement; the remaining 150,000 options will vest on the third
anniversary of the Effective Date of the Agreement provided that the
consultant is still providing consulting services to the Company under the
Agreement at that time. The vesting of such remaining options shall be
accelerated as follows: 50,000 of such options or the remainder of the
unvested options, whichever is less, shall vest upon the signing of each
corporate partnering deal in which the total consideration provided in the
Agreement is less than $5,000,000; 100,000 of such options or the
remainder of the unvested options, whichever is less, shall vest upon the
signing of each corporate partnering deal in which the total consideration
provided in the Agreement is greater than $5,000,000 but less than
$10,000,000; 200,000 of such options or the remainder of the unvested
options, whichever is less, shall vest upon the signing of each corporate
partnering deal in which the total consideration provided in the Agreement
is greater than $10,000,000. Should the Company sell a controlling
interest in its assets and/or equity at any time after the signature of
the Agreement, all options will vest. The Company has recorded
approximately $49,300 of general and administrative expense based upon the
fair value of the vested options through July 31, 2000. Additional expense
will be recorded in subsequent periods through October 1, 2001 as the
remainder of the options vest. During the fiscal year ended July 31 2000,
the Agreement was terminated which resulted in the cancellation of 150,000
options.
During the fiscal year ended July 31, 1999, the Company issued 5,000
three-year stock options as payment for services rendered. The options
vested immediately and have an exercise price of $1.43 per share. The
total general and administrative expense recorded for these options was
$4,200, based upon the fair value of such options on the date of issuance.
During the fiscal year ended July 31, 1999, the Company issued 40,701
shares of common stock for payment of legal services. The fair value of
the common stock in the amount of $16,631 was charged to operations.
During the fiscal year ended July 31, 1999, the Company issued 6,000
shares of common stock for payment of services rendered. The fair value of
the common stock in the amount of $2,460 was charged to operations.
During the fiscal year ended July 31, 2000, the Company issued 174,965
shares of common stock for payment of services rendered. The fair value of
the common stock in the amount of $92,184 was charged to operations.
During the fiscal year ended July 31, 2000, the Company issued 95,000
shares of common stock upon the exercise of stock options by unrelated
parties which resulted in gross proceeds of $45,850 to the Company. The
exercise prices of the options ranged from $0.43 to $1.43.
F-28
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 2000, the Company sold an aggregate
of 875,000 shares of common stock to private investors at prices ranging
from $0.50 to $1.00 per share resulting in net proceeds of $548,300 to the
Company. In addition, the private investors were granted warrants to
purchase an aggregate of 875,000 shares of common stock, inclusive of
additional warrants issued so that all investors in the private placements
received substantially the same securities, at per share exercise prices
ranging from $1.03 to $4.55. The warrants will expire during the period
commencing May 2003 and ending in May 2005.
(7) Common Stock Warrants
During the fiscal years 1988 and 1991, the Board of Directors granted
stock purchase warrants to acquire a maximum of 400,000 shares of common
stock at $5.00 per share which were not exercised and expired.
The following table summarizes the activity of common stock warrants
issued in connection with the Private Placements completed in fiscal years
1994 through 2000:
Exercise
Warrants
Price Expiration
--------
----- ----------
Sold in March 1994 Private Placement 800,000 $
5.00 3/21/97 to 6/21/97
Outstanding at July 31, 1994 800,000
5.00 3/21/97 to 6/21/97
Sold in September 1994 Private Placement 288,506
5.50 12/9/97 to 12/14/97
Sold in October 1994 Private Placement 40,000
5.50 1/21/98
Sold in September 1995 Private Placement 47,405
4.00 10/1/98
---------
Outstanding and exercisable at July 31, 1995 1,175,911
4.00 - 5.50 3/21/97 to 10/1/98
Issued to bank in connection with an
amendment to the Company's term loan 10,000
4.19 8/31/97
Sold in September 1995 Private Placement 8,540
4.00 10/1/98
Sold in June 1996 Private Placement 313,800
7.50 8/29/99 to 9/10/99
---------
Outstanding and exercisable at July 31, 1996 1,508,251
4.00 - 7.50 3/21/97 to 9/10/99
Exercised 147,450
5.00 3/21/97 to 6/21/97
Expired 652,550
5.00 3/21/97 to 6/21/97
---------
Outstanding and exercisable at July 31, 1997 708,251
4.00 - 7.50 12/9/97 to 9/10/99
Sold in February 1998 Private Placement 1,168,575
2.50 5/19/01
F-29
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Common Stock Warrants, (Continued)
Exercise
Warrants
Price Expiration
--------
----- ----------
Issued to the Placement Agent in
connection with the February 1998
Private Placement (see note 6) 350,574
2.20 - 2.50 5/19/01
Exercised 4,950
2.20 - 2.50 5/19/01
Expired 338,506
4.19 - 5.50 8/31/97 to 1/21/98
---------
Outstanding and exercisable at July 31, 1998 1,883,944
2.20 - 7.50 10/1/98 to 5/19/01
Expired 55,945
4.00 10/1/98
---------
Outstanding and exercisable at July 31, 1999 1,827,999
2.20 - 7.50 10/1/98 to 5/19/01
Sold in February 2000 Private Placement 875,000
1.03 - 4.55 5/28/03 to 5/28/05
Expired 313,800
7.50 8/30/99 to 9/11/99
---------
Outstanding and exercisable at July 31, 2000 2,389,199
1.03 - 4.55 5/19/01 to 5/28/05
=========
===========
(8) Stock Options
1993 Stock Option Plan
The Company's stockholders approved the 1993 stock option plan totaling
3,000,000 shares, which provide that options may be granted to employees,
directors and consultants. Options are granted at market value on the date
of the grant and generally are exercisable in 20% increments annually over
five years starting one year after the date of grant and terminate five
years from their initial exercise date.
1997 Stock Option Plan
The Company's stockholders approved the 1997 stock option plan totaling
2,000,000 shares, which provide that options may be granted to employees,
directors and consultants. Options are granted at market value on the date
of the grant and generally are exercisable in 20% increments annually over
five years starting one year after the date of grant and terminate five
years from their initial exercise date.
F-30
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
The following table summarizes stock option activity for the period August
1, 1994 to July 31, 2000:
Weighted Average
Shares Available
Number of Exercise Price Per
for Grant
Shares Share
---------
------ -----
Balance August 1, 1994 1,926,841
5,935,337 $ 3.76
Granted (818,850)
818,850 2.60
Exercised
Canceled
(185,000) 2.36
Balance July 31, 1995
(1,897,500) 4.30
-----------
Granted 1,107,991
4,671,687 3.39
Exercised (296,205)
296,205 3.99
Canceled --
(656,334) 2.92
Balance July 31, 1996 6,500
(235,333) 4.89
---------
-----------
1997 Plan 818,286
4,076,225 3.43
Granted 2,000,000
-- --
Exercised (932,500)
932,500 4.90
Canceled --
(639,500) 3.82
Balance July 31, 1997 484,845
(484,845) 4.70
---------
-----------
Granted 2,370,631
3,884,380 3.56
Canceled (234,333)
234,333 3.31
Balance July 31, 1998 91,100
(91,100) 3.81
---------
-----------
Granted 2,227,398
4,027,613 3.54
Canceled (595,000)
595,000 0.62
Balance July 31, 1999 443,934
(555,737) 3.97
---------
-----------
Granted 2,076,332
4,066,876 3.05
Exercised (827,000)
827,000 0.52
Canceled -
(95,000) 0.48
Balance July 31, 2000 638,395
(1,031,880) 2.73
---------
-----------
1,887,727
3,766,996 2.65
=========
=========== ====
The stock options granted in fiscal year ended July 31, 2000 included an
aggregate total of 75,000 stock options issued to the Company's outside
board of directors and an aggregate total of 350,000 stock options issued
to the employees of the Company, which will vest and become exercisable
upon FDA approval of ONCONASE(R) for malignant mesothelioma provided that
ONCONASE(R) must be approved on or before December 31, 2001, or these
options will terminate, and the employees must be actively employed by
Alfacell through the date of the approval. Compensation expense, if any,
will be determined based on the Company's stock price on the vesting date
relative to the options exercise price. The options outstanding at July
31, 2000 will expire between August 4, 2000 and October 18, 2008.
F-31
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
In August 1998, Ms. Shogen and Dr. Mikulski settled, and the court
approved the settlement, of a claim brought against them in the United
States District Court, District of New Jersey at Newark, New Jersey, by a
shareholder under Section 16(b) of the Securities Exchange Act of 1934 for
profits alleged to have been realized by Ms. Shogen and Dr. Mikulski in
transactions involving the Company's securities in 1988 and 1989. Claims
under section 16(b) are for profits calculated under such statute to have
been realized for sales and purchases of the Company's securities made
within a six month period. In this case the purchases which formed the
basis for this claim were issuances of shares of stock to Ms. Shogen and
Dr. Mikulski under employment agreements with the Company based upon the
Company's achievement of certain milestones. No allegations of fraud were
made. Ms. Shogen agreed to pay the Company $91,971.00 and Dr. Mikulski
agreed to pay the Company $72,903.00. Such payments are to be made in a
form acceptable to the Company whether in cash, shares of the Company's
common stock or options to purchase the Company's common stock, with 25%
of such payments having been made in August 1998 and the remainder of such
amounts payable in three equal installments in August 1999, 2000 and 2001.
The initial payments were made by the cancellation of options to purchase
44,999 shares of common stock owned by Ms. Shogen and the cancellation of
options to purchase 35,669 shares of common stock owned by Dr. Mikulski.
The obligation to make the remaining payments is secured by the pledge to
the Company of options to purchase 154,908 and 122,136 shares of common
stock by Ms. Shogen and Dr. Mikulski, respectively. In August 1999, Ms.
Shogen paid the balance in full by the cancellation of options to purchase
134,995 shares owned by Ms. Shogen and Dr. Mikulski paid an installment
equal to one-third of the balance by the cancellation of options to
purchase 35,367 shares owned by Dr. Mikulski. In February 2000 Dr.
Mikulski paid the balance in full by the cancellation of options to
purchase 31,599 shares owned by him.
On August 31, 1999 the Company entered into a separation agreement and
general release with Ms. Gail E. Fraser, former Chief Financial Officer
pursuant to which the Company and Ms. Fraser agreed that an aggregate of
395,000 options granted to Ms. Fraser under the 1993 Plan, all of which
had vested as of the date of resignation will remain vested and
exercisable until December 30, 2000 and an aggregate of 70,000 options
granted under the 1993 Plan which had not vested on the date of
resignation will be deemed vested as of the date of resignation and will
remain exercisable until December 30, 2000. As of July 31, 2000, 90,000 of
these options were exercised.
The weighted-average fair value per option at the date of grant for
options granted during the fiscal years 2000, 1999 and 1998 were $0.45,
$0.36 and $2.03, respectively. The fair value was estimated using the
Black-Scholes options pricing model based on the following assumptions:
2000 1999
1998
---- ----
----
Expected dividend yield 0% 0%
0%
Risk-free interest rate 6.00% 6.00%
6.00%
Expected stock price volatility 114.50% 93.99%
88.15%
Expected term until exercise (years) 6.37 5.59
6.17
Pro forma net loss and loss per share reflecting approximate compensation
cost for the fair value of stock options awarded are as follows:
F-32
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
2000
1999 1998
----
---- ----
Net Loss:
As reported $(1,722,298)
$(3,156,636) $(6,387,506)
Pro forma (1,956,667)
(3,429,057) (6,697,066)
Loss per common share:
As reported $ (0.10) $
(0.18) $ (0.40)
Pro forma (0.12)
(0.22) (0.42)
The pro forma effects on net loss and loss per share for 2000, 1999 and
1998 may not be representative of the pro forma effects in future years
since compensation cost is allocated on a straight-line basis over the
vesting periods of the grants, which extend beyond the reported years.
The following table summarizes information concerning options outstanding
at July 31, 2000:
Options Outstanding
Options Exercisable
-----------------------------------------------------------------------
-----------------------------
Weighted Average Weighted
Weighted
Remaining Average
Average
Range of Contractual Exercise
Exercise
Exercise Prices Shares Term (Years) Price
Shares Price
--------------- ------ ------------ -----
------ -----
$ 0.00 - 1.99 1,148,000 6.17 $ 0.51
487,400 $ 0.53
2.00 - 2.99 204,000 3.08 2.59
139,000 2.54
3.00 - 3.99 1,639,318 1.96 3.21
1,594,318 3.20
4.00 - 4.99 563,178 1.20 4.29
541,178 4.27
5.00 - 5.99 167,500 4.38 5.17
97,500 5.17
6.00 - 6.99 45,000 2.42 6.97
45,000 6.97
----------- --------- ---- ----
--------- ----
3,766,996
2,904,396
=========
=========
Stock option activity prior to adoption of SFAS No. 123 is as follows:
1981 Non-Qualified Stock Option Plan
In 1981, the Board of Directors adopted a non-qualified stock option plan
and had reserved 300,000 shares for issuance to key employees or
consultants. Options were nontransferable and expired if not exercised
within five years. Option grants of 60,000 shares expired unexercised by
July 31, 1991.
Non-Qualified Stock Options
The Board of Directors issued non-qualified stock options which were not
part of the 1981 non-qualified stock option plan or the 1989 Stock Plan as
follows:
F-33
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
Shares Price Range
------ -----------
Granted
1,782,000 $ 3.00-3.87
Exercised
(276,989) 3.00-3.50
Canceled
(106,000) 3.00-3.50
Expired
(649,011) 3.00-3.50
Granted pursuant to conversion of certain liabilities:
Related party
1,324,014 3.20
Unrelated party
73,804 3.20
Repurchased stock options
(102,807) 3.20
---------
Balance at July 31, 1994
2,045,011 3.20-3.87
========= =========
In connection with certain private placements, the Board of Directors had
included in the agreements, options to purchase additional shares of the
Company's common stock as follows:
Shares Price Range
------ -----------
Granted (42,167 options were repriced and extended
894,887 $ 2.50-7.00
as described in note 8)
Exercised
(81,000) 3.97-6.50
Expired
(201,720) 3.97-6.50
--------
Balance at July 31, 1994
612,167 2.50-7.00
======= =========
1989 Stock Plan
On February 14, 1989, the Company adopted the Alfacell Corporation 1989
Stock Plan (the "1989 Stock Plan"), pursuant to which the Board of
Directors could issue awards, options and grants. The maximum number of
shares of common stock that could have been issued pursuant to the option
plan was 2,000,000.
No more options are being granted pursuant to this plan. The per share
option exercise price was determined by the Board of Directors. All
options and shares issued upon exercise were nontransferable and
forfeitable in the event employment was terminated within two years of the
date of hire. In the event the option was exercised and said shares were
forfeited, the Company would return to the optionee the lesser of the
current market value of the securities or the exercise price paid.
The stock option activity is as follows:
Shares Price Range
------ -----------
Granted, February 14, 1989 3,460,000 $ 3.50-5.00
Options issued in connection
with share purchase 36,365 2.75
F-34
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued) Shares Price Range
------ -----------
Expired (1,911,365) 2.75-5.00
Canceled (10,000) 5.00
---------
Balance at July 31, 1994 1,575,000 3.50-5.00
========= =========
As of fiscal year ended July 31, 1994, 1,703,159 options were granted
under the 1993 stock option plan.
(9) Stock Grant and Compensation Plans
The Company had adopted a stock grant program effective September 1, 1981,
and pursuant to said plan, had reserved 375,000 shares of its common stock
for issuance to key employees. The stock grant program was superseded by
the 1989 Stock Plan and no further grants will be given pursuant to the
grant plan. The following stock transactions occurred under the Company's
stock grant program:
Year Amount
ended Fair of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1983 20,000 $ 5.50 $110,000
1984 19,750 5.125 101,219
1985 48,332 5.125-15.00 478,105
1986 11,250 5.125-15.00 107,032
1988 19,000 3.50 6,500
====== ==== =====
On January 26, 1984, the Company adopted a stock bonus plan for directors
and consultants. The plan was amended on October 6, 1986, to reserve
500,000 shares for issuance under the plan and to clarify a requirement
that stock issued under the Plan could not be transferred until three
years after the date of the grant. The stock bonus plan for directors and
consultants was superseded by the 1989 Stock Plan and no further grants
will be given pursuant to the stock bonus plan for directors and
consultants. The following stock transactions occurred under the Company's
stock bonus plan:
Year Amount
ended Fair of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1984 130,250 $ 2.50-3.88 $385,917
1985 99,163 3.50-15.00 879,478
1985 (42,500) 2.50 (105,825)*
1986 15,394 9.65-15.00 215,400
1987 5,000 15.00 75,000
===== ===== ======
* Shares granted in 1984 were renegotiated in 1985 and canceled as a
result of the recipient's termination.
F-35
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Grant and Compensation Plans, (Continued)
1989 Stock Plan
Under the 1989 Stock Plan, one million shares of the Company's common
stock were reserved for issuance as awards to employees. The 1989 Stock
Plan also provides for the granting of options to purchase common stock of
the Company (see note 8). In addition, the 1989 Stock Plan provided for
the issuance of 1,000,000 shares of the Company's common stock as grants.
To be eligible for a grant, grantees must have made substantial
contributions and shown loyal dedication to the Company.
Awards and grants were authorized under the 1989 Stock Plan during the
following fiscal years:
Year ended Amount of
July 31, Shares Fair Value Compensation
-------- ------ ---------- ------------
1989 30,000 $5.00 $150,000
1990 56,000 6.00 336,000
1991 119,000 4.00 476,000
1992 104,000 2.75 286,000
1993 117,000 2.00 234,000
1994 5,000 3.00 15,000
======= ===== ========
Compensation expense is recorded for the fair value of all stock awards
and grants over the vesting period. The 1994 stock award was immediately
vested. There were no stock awards in fiscal 2000, 1999 or 1998.
(10) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax
rates in effect for all years in which the temporary differences are
expected to reverse.
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits or tax benefits. Approximately $2.4 million of the
Company's tax benefits were approved for sale by the state in December
1999, of which approximately $1 million was allocated to be sold between
July 1, 1999 and June 30, 2000. In December 1999, the Company received
$755,854 from the sale of $1 million of its tax benefits. The Company will
attempt to sell the remaining balance of its tax benefits in the amount of
approximately $1.4 million between July 1, 2000 and June 30, 2001, subject
to all existing laws of the State of New Jersey. However, there is no
assurance that the Company will be able to find a buyer for its tax
benefits or that such funds will be available in a timely manner.
At July 31, 2000 and 1999, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
F-36
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) Income Taxes, (Continued)
2000
1999
----
----
Deferred tax assets:
Excess of book over tax depreciation $
72,248 $ 37,035
Accrued expenses
171,916 311,458
Federal and state net operating loss carryforwards
14,838,624 15,227,316
Research and experimentation and investment tax
credit carry forwards
922,785 843,418
----------- -----------
Total gross deferred tax assets
16,005,573 16,419,227
Valuation allowance
(16,005,573) (16,419,227)
----------- -----------
Net deferred tax assets $ --
$ --
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
At July 31, 2000, the Company has federal net operating loss carryforwards
of approximately $39,920,910 that expire in the years 2001 to 2020. The
Company also has investment tax credit carryforwards of $26,867 and
research and experimentation tax credit carryforwards of $818,308 that
expire in the years 2001 to 2020. Ultimate utilization/availability of
such net operating losses and credits may be significantly curtailed if a
significant change in ownership occurs in accordance with the provisions
of the Tax Reform Act of 1986.
(11) Other Financial Information
Accrued expenses as of July 31, consist of the following:
2000 999
---- ---
Payroll and payroll taxes $ 34,926 $ 50,160
Professional fees 43,000 28,000
Clinical trial grants 308,070 683,515
Other 25,851 16,975
--------- ---------
$ 411,847 $ 778,650
========= =========
Other current assets as of July 31, consist of the following:
2000 1999
---- ----
Insurance $ 15,963 $ 65,330
NIH research -- 14,579
Other 12,654 7,399
-------- ---------
$ 28,617 $ 87,308
======== =========
F-37
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(12) Commitments and Contingencies
On July 23, 1991, the Board of Directors authorized the Company to pay to
the Chief Executive Officer of the Company an amount equal to 15% of any
gross royalties which may be paid to the Company from any license(s) with
respect to the Company's principal product, ONCONASE, or any other
products derived from amphibian source extract, produced either as a
natural, synthesized, and/or genetically engineered drug for which the
Company is the owner or co-owner of the patents, or acquires such rights
in the future, for a period not to exceed the life of the patent. If the
Company manufactures and markets its own drugs, then the Company will pay
to the Chief Executive Officer an amount equal to 5% of gross sales from
any products sold during the life of the patents. In addition, the
agreement provides for a reduction of any indebtedness to the Chief
Executive Officer in the amount of $200,000 upon the Company entering into
a licensing agreement for its principal product.
The Company has product liability insurance coverage in the amount of
$6,000,000 for clinical trials. No product liability claims have been
filed against the Company. If a claim arises and the Company is found
liable in an amount that significantly exceeds the policy limits, it may
have a material adverse effect upon the financial condition of the
Company.
(13) Research and Development Agreement
In November 1992, the Company entered into a CRADA with the NIH. In
accordance with this CRADA, the NIH will perform research for the Company
on potential uses for its drug technology. During the term of this
research and development agreement, which expired in July 31, 1999, the
Company was obligated to pay approximately $5,300 per month to the NIH.
Total research and development expenses under this arrangement amounted to
$64,000 for the years ended July 31, 1999 and 1998.
In August 1995, the Company entered into a CRADA with the NCI. In
accordance with this CRADA, the NCI will perform research for the Company
on potential uses for its drug technology. During the term of this
research and development agreement, which expired in August 1999, the
Company was obligated to pay approximately $5,200 per month to the NCI. In
September 1999, this research and development agreement was amended to
expire in August 2000 and in June 2000 the expiration was extended to
expire in August 2001. Both extensions were without additional cost for
the Company. Total research and development expenses under this
arrangement amounted to $5,200, $62,400 and $60,400 for the fiscal years
ended July 31, 2000, 1999 and 1998, respectively.
(14) 401 (K) Savings Plan
Effective October 1, 1998, the Company adopted a 401(K) Savings Plan (the
"Plan"). Qualified employees may participate by contributing up to 6% of
their gross earnings to the Plan subject to certain Internal Revenue
Service restrictions. The Company will match an amount equal to 50% of the
first 6% of each participant's contribution. The Company's contribution is
subject to a vesting schedule of 0%, 25%, 50%, 75% and 100% for employment
of less than one year, one year, two years, three years and four years,
respectively, except for existing employees which
F-38
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
vesting schedule was based from the date the Plan was adopted. For the
fiscal years ended July 31, 2000 and 1999, the Company's contribution to
the Plan amounted to $21,714 and $16,052, respectively.
F-39
ALFACELL CORPORATION
(A Development Stage Company)
BALANCE SHEET
April 30, 2001
(Unaudited)
April 30, 2001
--------------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $
359,767
Other assets .........................................................
38,704
------------
Total current assets .............................................
398,471
Property and equipment, net of accumulated depreciation and amortization of
$1,063,346 at April 30, 2001 ............................................
85,631
Other assets ..............................................................
59,867
------------
Total assets ..................................................... $
543,969
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt .................................... $
7,100
Note payable - convertible debt - related party, less debt discount
of $78,330 .......................................................
218,670
Note payable - convertible debt - unrelated party, less debt discount
of $15,325 .......................................................
54,668
Accounts payable .....................................................
349,265
Accrued expenses .....................................................
474,261
------------
Total current liabilities ........................................
1,103,964
Long-term debt, less current portion ......................................
25,896
------------
Total liabilities ................................................
1,129,860
------------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock, $.001 par value .....................................
Authorized and unissued, 1,000,000 shares ..at April 30, 2001 ....
--
Common stock $.001 par value .........................................
Authorized 40,000,000 shares at April 30, 2001
Issued and outstanding 18,942,246 shares at April 30, 2001 .......
18,942
Capital in excess of par value .......................................
57,382,825
Common stock to be issued, 222,222 shares at April 30, 2001 ..........
200,000
Deficit accumulated during development stage .........................
(58,187,658)
------------
Total stockholders' equity (deficiency) ..........................
(585,891)
------------
Total liabilities and stockholders' equity (deficiency) .......... $
543,969
============
See accompanying notes to unaudited financial statements.
F-40
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Nine months ended April 30, 2001 and 2000,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2001
(Unaudited)
August 24, 1981 Nine Months
ended
(Date of Inception) to April 30,
April 30, 2001 2001
2000
-------------- ----
----
REVENUE:
Sales $ 553,489 $ -- $
--
Investment 1,367,383 8,219
39,206
Other income 60,103 --
--
------------ ------------
------------
TOTAL REVENUE 1,980,975 8,219
39,206
COSTS AND EXPENSES:
Costs of sales 336,495 --
--
Research and development 37,372,909 1,404,552
1,767,128
General and administrative 20,678,888 519,240
443,479
Interest:
Related parties 1,066,070 32,110
--
Others 1,921,520 14,791
2,600
------------ ------------
------------
TOTAL COSTS AND EXPENSES 61,375,882 1,970,693
2,213,207
------------ ------------
------------
NET LOSS BEFORE STATE TAX
BENEFIT $(59,394,907) $ (1,962,474) $
(2,174,001)
STATE TAX BENEFIT 1,207,249 451,395
755,854
------------ ------------
------------
NET LOSS $(58,187,658) $ (1,511,079) $
(1,418,147)
============ ============
============
Loss per basic and diluted
common share $ (6.99) $ (.08) $
(.08)
============ ============
============
Weighted average number of
shares outstanding 8,320,015 18,802,114
17,603,454
============ ============
============
See accompanying notes to unaudited financial statements.
F-41
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Nine months ended April 30, 2001 and 2000,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2001
(Unaudited)
Nine Months
ended August 24, 1981
April 30,
(Date of Inception) to
2001
2000 April 30, 2001
------------
------------ --------------
Cash flows from operating activities:
Net Loss $ (1,511,079) $
(1,418,147) $(58,187,658)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities --
-- (25,963)
Depreciation and amortization 56,538
71,227 1,474,381
Loss on disposal of property and equipment --
-- 18,926
Noncash operating expenses 168,360
112,459 5,687,744
Amortization of deferred compensation --
-- 11,442,000
Amortization of organization costs --
-- 4,590
Changes in assets and liabilities:
Increase in other current assets (10,087)
(19,145) (98,571)
Decrease in other assets --
-- 36,184
Increase in interest payable, related party --
-- 744,539
Increase in accounts payable 188,507
152,690 645,375
Increase in accrued payroll and expenses, related parties --
-- 2,348,145
Increase (decrease) in accrued expenses 62,415
(35,810) 1,015,774
------------
------------ ------------
Net cash used in operating activities (1,045,346)
(1,136,726) (34,894,534)
------------
------------ ------------
Cash flows from investing activities:
Purchase of marketable equity securities --
-- (290,420)
Proceeds from sale of marketable equity securities --
-- 316,383
Purchase of property and equipment --
-- (1,406,836)
Patent costs --
-- (97,841)
------------
------------ ------------
Net cash used in investing activities --
-- (1,478,714)
============
============ ============
F-42
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Continued
Nine months ended April 30, 2001 and 2000,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2001
(Unaudited)
Nine Months Ended August 24, 1981
April 30, (Date of Inception) to
2001 2000 April 30, 2001
------------ ------------ --------------
Cash flows from financing activities:
Proceeds from short-term borrowings $
-- $ -- $ 849,500
Payment of short-term borrowings
-- -- (623,500)
Increase in loans payable - related party, net
-- -- 2,628,868
Proceeds from bank debt and other long-term debt, net of
deferred debt costs
-- -- 2,452,460
Reduction of bank debt and long-term debt
(4,329) (6,263) (2,933,572)
Proceeds from issuance of common stock, net
501,274 613,653 27,855,013
Proceeds from exercise of stock options and warrants, net
83,730 41,337 5,590,253
Proceeds from issuance of convertible debentures
-- -- 347,000
Proceeds from issuance of convertible debt - related party
297,000 -- 297,000
Proceeds from issuance of convertible debt - unrelated party
69,993 -- 69,993
Proceeds from common stock to be issued
200,000 -- 200,000
------------ ------------ ------------
Net cash provided by financing activities
1,147,668 648,727 36,733,015
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents
102,322 (487,999) 359,767
Cash and cash equivalents at beginning of period
257,445 1,383,133 --
------------ ------------ ------------
Cash and cash equivalents at end of period $
359,767 $ 895,134 $ 359,767
------------ ------------ ------------
Supplemental disclosure of cash flow information -
interest paid $
6,763 $ 2,600 $ 1,660,476
------------ ------------ ------------
Noncash financing activities:
Issuance of convertible subordinated
debenture for loan payable to officer $
-- $ -- $ 2,725,000
============ ============ ============
Issuance of common stock upon the conversion of
convertible subordinated debentures, related party $
-- $ -- $ 2,945,000
============ ============ ============
Conversion of short-term borrowings to common stock $
-- $ -- $ 226,000
============ ============ ============
Conversion of accrued interest, payroll and expenses by
related parties to stock options $
-- $ -- $ 3,194,969
============ ============ ============
Repurchase of stock options from related party $
-- $ -- $ (198,417)
============ ============ ============
Conversion of accrued interest to stock options $
-- $ -- $ 142,441
============ ============ ============
Conversion of accounts payable to common stock $
10,030 $ 92,184 $ 296,200
============ ============ ============
Conversion of notes payable, bank and accrued interest to
long-term debt $
-- $ -- $ 1,699,072
============ ============ ============
Conversion of loans and interest payable, related party
and accrued payroll and expenses, related parties to
long-term accrued payroll and other, related party $
-- $ -- $ 1,863,514
============ ============ ============
Issuance of common stock upon the conversion of
convertible subordinated debentures, other $
-- $ -- $ 127,000
============ ============ ============
Issuance of common stock for services rendered $
-- $ -- $ 2,460
============ ============ ============
See accompanying notes to unaudited financial statements.
F-43
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the Company's financial position as
of April 30, 2001 and the results of operations for the nine month periods
ended April 30, 2001 and 2000 and the period from August 24, 1981 (date of
inception) to April 30, 2001. The results of operations for the nine
months ended April 30, 2001 are not necessarily indicative of the results
to be expected for the full year.
The Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 7. The Company is devoting substantially all of its present efforts to
establishing a new business. Its planned principal operations have not
commenced and, accordingly, no significant revenue has been derived
therefrom.
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, or SFAS 130, Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The net loss of $1,511,000 and
$1,418,000, recorded for the nine months ended April 30, 2001 and 2000,
respectively, is equal to the comprehensive loss for those periods.
The Company has reported net losses since its inception. Also, the Company
has limited liquid resources. The report of the Company's independent
auditors on the Company's July 31, 2000 financial statements included an
explanatory paragraph which states that the Company's recurring losses,
working capital deficit and limited liquid resources raise substantial
doubt about the Company's ability to continue as a going concern. The
financial statements at July 31, 2000 or April 30, 2001 do not include any
adjustments that might result from the outcome of this uncertainty.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of tax
benefits, revenues from the commercial sale of ONCONASE(R) and its ability
to realize the full potential of its technology and its drug candidates.
Such additional funds may not become available as needed or be available
on acceptable terms. To date, a significant portion of the Company's
financing has been through private placements of common stock and
warrants, the issuance of common stock for stock options and warrants
exercised and for services rendered, debt financing and financing provided
by the Company's Chief Executive Officer. Additionally, the Company has
raised capital through the sale of its tax benefits. The Company believes
that its cash and cash equivalents as of April 30, 2001 will be sufficient
to meet its anticipated cash needs through fiscal year ending July 31,
2001. However, until the Company's operations generate significant
revenues, the Company will continue to fund its operations from cash on
hand and through the sources of capital previously described.
F-44
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED
2. EARNINGS (LOSS) PER COMMON SHARE
"Basic" earnings (loss) per common share equals net income (loss) divided
by weighted average common shares outstanding during the period. "Diluted"
earnings (loss) per common share equals net income divided by the sum of
weighted average common shares outstanding during the period plus common
stock equivalents. The Company's Basic and Diluted per share amounts are
the same since the assumed exercise of stock options and warrants are all
anti-dilutive. The amount of options and warrants excluded from the
calculation was 5,604,599 and 6,180,945 at April 30, 2001 and 2000,
respectively.
3. NOTE PAYABLE - CONVERTIBLE DEBT
In April 2001, the Company entered into a non-interest bearing convertible
note payable with certain related and unrelated parties in the aggregate
amount of $366,993. The note is due within ninety (90) days unless the
lenders elect to exercise an option to convert the note into Alfacell
common stock, par value $.001 per share, at a conversion price of $0.90
per share (the estimated fair market value of the stock on the loan date).
In addition, upon conversion, the lender would receive a three-year
warrant for each share of converted Alfacell common stock at an exercise
price of $2.50 per share that will expire on July 7, 2004. The estimated
value of the warrant determined using Black Scholes has been treated as a
debt discount which will accrete as interest expense over the ninety day
note term.
4. CAPITAL STOCK
In August 2000, the Company issued 11,800 shares of common stock for
payment of services rendered. The fair value of the common stock in the
amount of $10,030 was charged to operations.
In August and September 2000, the Company sold an aggregate of 333,332
shares of common stock to private investors at a price of $1.50 per share
resulting in net proceeds of $501,000 to the Company. In addition, the
private investors were granted five-year warrants to purchase an aggregate
of 166,666 shares of common stock at a per share exercise price of $3.00.
In September 2000, the Company issued 40,000 shares of common stock upon
the exercise of stock options by a related party resulting in gross
proceeds of $16,100 to the Company.
In January 2001, the Company issued 70,000 shares of common stock upon the
exercise of stock options by related parties resulting in gross proceeds
of $30,500 to the Company.
In March 2001, the Company issued 55,555 shares of common stock upon the
exercise of stock options by a related party resulting in gross proceeds
of $37,100 to the Company.
In April 2001, the Company issued 50,000 five-year stock options to a
director as payment for non-board related services over the past 18
months. These options vested immediately and have an
F-45
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED
4. CAPITAL STOCK, Continued
exercise price of $0.90 per share. The Company recorded general and
administrative expense of $31,600 which was the fair market value of the
options on the date of issuance. In addition, the director will receive a
contingent award of 50,000 shares of the Company's common stock should the
Company complete a strategic partnership or receive an investment from the
prospective partner or one of its affiliates.
In April 2001, the Company sold 222,222 shares of common stock to a
private investor at a price of $0.90 per share resulting in gross proceeds
of $200,000 to the Company. In addition, the private investor was granted
three-year warrants to purchase an aggregate of 222,222 shares of common
stock at a per share exercise price of $2.50 that will expire on July 7,
2004. The stock certificate for the shares will be issued in June 2001.
5. SALE OF NET OPERATING LOSSES
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits or tax benefits. For the state fiscal year 2001 (July
1, 2000 to June 30, 2001), the Company has $1,774,000 total available tax
benefits of which $602,000 was allocated to be sold between July 1, 2000
and June 30, 2001. In December 2000, the Company received $451,000 from
the sale of its allocated tax benefits which was recognized as a tax
benefit for the quarter ended October 31, 2000. The Company will attempt
to sell the remaining balance of its tax benefits in the amount of
approximately $1,172,000 between July 1, 2001 and June 30, 2002, subject
to all existing laws of the State of New Jersey. However, there is no
assurance that the Company will be able to find a buyer for its tax
benefits or that such funds will be available in a timely manner.
F-46