As filed with the Securities and Registration No. ___-_____
Exchange Commission on May __, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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
Title of Each Class of Securities to Amount to be Offering Price per Aggregate Amount of
be Registered Registered Share(1) Offering Price Registration Fee
- ------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value per share 1,538,638(2) $0.37 $569,296 $52
- ------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value per share 1,538,638(3) $0.37 $569,296 $52
- ------------------------------------------------------------------------------------------------------------------------
Total 3,077,276 N/A N/A $104
========================================================================================================================
(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 May
20, 2002.
(2) Amount of shares of Common Stock to be registered.
(3) Amount of shares of Common Stock issuable upon exercise of warrants to be
registered. To be offered and sold by the selling stockholders upon the
exercise of outstanding warrants.
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 May __, 2002
PROSPECTUS
ALFACELL CORPORATION
3,077,276 Shares
Common Stock
---------------
Our securityholders named on page 36 of this prospectus are offering an
aggregate of 3,077,276 shares of our common stock.
Our common stock is traded on the OTC Bulletin Board under the symbol
"ACEL.OB." On May 22, 2002, the reported last sale price of our common stock on
the OTC Bulletin Board was $0.42 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.
___________, 2002
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......................................................................19
MANAGEMENT....................................................................28
SELLING SECURITYHOLDERS.......................................................35
DESCRIPTION OF SECURITIES.....................................................37
PLAN OF DISTRIBUTION..........................................................38
LEGAL MATTERS.................................................................39
EXPERTS.......................................................................39
AVAILABLE INFORMATION.........................................................39
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. 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. Based on our preclinical and clinical
testing, we believe that ONCONASE(R) and related compounds may be used to treat
various solid tumors by itself, in combination with other anti-cancer agents, or
in a variety of delivery systems.
During clinical trials, patients with advanced stages of solid tumors have
been treated with ONCONASE(R) on a weekly basis. Data from these clinical trials
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. There is currently no standard drug approved by the Food
and Drug Administration for unresectable malignant mesothelioma.
Based upon the results of early stage clinical trials of ONCONASE(R) as a
treatment for malignant mesothelioma, we commenced a two-part late stage
clinical trial for this cancer. The first part compares ONCONASE(R) by itself to
doxorubicin for the treatment of malignant mesothelioma. The second part of the
clinical trial compares ONCONASE(R) in combination with doxorubicin against
doxorubicin alone. The patient enrollment for the first part of the clinical
trial has been completed and the trial is on-going. The second part is still in
the enrollment phase. Based on the preliminary results of the trial, in March
2000, we had a meeting with the FDA to discuss these preliminary results and the
scope and details of a proposed New Drug Application, or NDA, filing. We
continue to provide the FDA with data concerning the manufacturing, efficacy and
effects of ONCONASE(R). In order to file the NDA, we have to complete the
current clinical trial, as well as present the FDA with information regarding
the methods used to manufacture ONCONASE(R), an evaluation of the therapeutic
and toxic doses of ONCONASE(R) in animals and studies regarding the detection of
ONCONASE(R) in human blood and antibody formation. If the final results of the
clinical trial confirm the preliminary data and ONCONASE(R) is found to be
effective in the treatment of malignant mesothelioma, and these 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. Currently, we are in discussions with a number of European
regulatory agencies on the proposed registration requirements for the use of
ONCONASE(R) as a treatment for malignant mesothelioma. However, we cannot be
sure that this marketing approval will be granted.
We have also conducted pilot clinical trials using ONCONASE(R) as a
treatment for non-small cell lung cancer, metastatic breast cancer and renal
cell cancer. Depending on the availability of capital, we intend to initiate
additional trials of ONCONASE(R) for the treatment of these other solid tumors.
1
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 and
other institutions.
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 audited and
unaudited financial statements and notes included in this prospectus.
August 24,
1981
(Date of
Inception) Year Ended July 31,
to January ------------------------------------------------------------------------
31, 2002 2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
Statement of Operations
Data:
Total revenue,
principally investment
income ................... $ 1,986,034 $ 13,121 $ 51,144 $ 168,372 $ 311,822 $ 442,572
Costs and Expenses:
Costs of sales ......... 336,495 0 0 0 0 0
Research and
development .......... 38,877,016 1,900,678 1,879,728 2,401,945 5,264,578 3,862,716
General and
administrative ....... 21,249,007 705,745 644,588 920,686 1,412,968 1,475,624
Interest ............... 3,131,236 153,029 4,980 2,377 21,782 123,099
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses 63,593,754 2,759,452 2,529,296 3,325,008 6,699,328 5,461,439
State tax benefit ...... 1,560,979 451,395 755,854 -- -- --
Net loss ................. $(60,046,741) $ (2,294,936) $ (1,722,298) $ (3,156,636) $ (6,387,506) $ (5,018,867)
============ ============ ============ ============ ============ ============
Net loss per common share:
Basic and diluted ...... $ (0.12) $ (0.10) $ (0.18) $ (0.40) $ (0.34)
Weighted average number
of common shares:
Basic and diluted ...... 18,927,000 17,812,000 17,271,000 15,926,000 14,597,000
Dividends ................ 0 0 0 0 0
Six Months Ended
January 31
--------------------------
2002 2001
------------ -----------
(unaudited)
Statement of Operations
Data:
Total revenue,
principally investment
income ................... $ 157 $ 6,766
Costs and Expenses:
Costs of sales ......... 0 0
Research and
development .......... 1,007,981 877,836
General and
administrative ....... 383,614 325,452
Interest ............... 37,518 3,768
------------ -----------
Total costs and expenses 1,429,113 1,207,056
State tax benefit ...... 353,730 451,395
Net loss ................. $ (1,075,226) $ (748,892)
============ ===========
Net loss per common share:
Basic and diluted ...... $ (0.05) $ (0.04)
Weighted average number
of common shares:
Basic and diluted ...... 20,326,920 18,749,429
Dividends ................ 0 0
As of
------------------------------
January 31, July 31,
2002 2001
------------------------------
(unaudited)
Balance Sheet Data:
Total assets ................................. $ 143,719 $ 201,609
Cash and cash equivalents .................... 14,483 44,781
Working Capital (deficit) .................... (1,301,228) (830,610)
Long-term liabilities ........................ 20,141 23,663
Total stockholders' equity (deficiency) ...... (1,213,627) (740,378)
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 $2,295,000 for the year ended July 31, 2001 and
approximately $1,075,000 for the six months ended January 31, 2002. We have
continued to incur losses since January 2002. In addition, we had working
capital deficit of approximately $831,000 as of July 31, 2001 and approximately
$1,301,000 as of January 31, 2002, and an accumulated deficit of approximately
$60,047,000 as of January 31, 2002.
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, 2001, we had federal net operating loss carryforwards of
approximately $40,185,000 that expire from 2002 to 2021. We also had investment
tax credit carryforwards of approximately $18,000 and research and
experimentation tax credit carryforwards of approximately $913,000 that expire
from 2002 to 2021. 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 $756,000 from the sale of our allocated tax benefits.
In December 2000, we realized net proceeds of an additional $451,000 from the
sale of our allocated tax benefits. In December 2001, we realized net proceeds
of an additional $354,000 from the sale of our allocated tax benefits. We will
attempt to sell our remaining approximately $1,051,000 net operating loss
carryforwards between January 1, 2002 and June 30, 2003, but, as there is a
limited market for these types of sales, we cannot predict whether we will be
successful.
4
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 our current clinical 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, 2001 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, 2001 and January 31, 2002 do not
include any adjustments that might result from the outcome of this uncertainty.
If the results of the continuation of our current clinical trial does 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. As
we have no liquid resources and significant liabilities, we need to raise
additional capital in order to remain in operation. We believe our current
operating levels require $160,000 of cash per month. We do not presently
maintain the cash balance needed to fund our operations. In the near term, we
expect to seek additional capital financing through the sales of equity in
private placements but cannot be sure that we will be able to raise capital on
favorable terms or at all. In addition, we expect some funds to be available
through loans from our Chief Executive Officer, although no such loans are
required to be made. We will need additional financing to fund our operations
once these sources if received, are exhausted. We cannot be sure these funds
will be received; however, if the funds are received they will assist us in
satisfying our liquidity needs.
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. Patient enrollment of the
second part of the trial began in April 1999 and is expected to be completed
December 2002. Because of the small patient population available for this trial,
the rate of enrollment has been slower than anticipated. If we are unable to
accrue sufficient additional patients in our trial during the appropriate
period, we may need to delay the submission of an FDA filing 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 in
the event of unacceptable toxicity caused by the treatment.
All statutes and regulations governing the conduct of clinical trials are
subject to change by various regulatory agencies, including the FDA, 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
competitive pressures and our ability to accrue qualified patients in the
clinical trial. If, in the future, we experience negative results in our current
Phase III clinical trial or we have
5
difficulty completing the trial, we may have to curtail, redirect or eliminate
our product development programs or spend additional monies to complete more
studies.
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 intend to file an NDA for ONCONASE(R) as a treatment for malignant
mesothelioma if the data from current clinical trials support its efficacy.
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,
even after approval, discovery of previously unknown problems could result in
additional restrictions, including withdrawal of our products.
In foreign jurisdictions, 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 product revenues for quite some time, if at all, and may not be able
to continue operations.
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 ONCONASE(R) 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.
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, which means we would not receive
significant revenues from these products. Approval by the FDA does not
necessarily mean that the medical community will be convinced of the relative
safety, efficacy and cost-effectiveness of our products as compared to other
products. In addition, third party reimbursers such as insurance companies and
HMOs may be reluctant to reimburse expenses relating to our products.
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
6
sales. We carry key person life insurance on the life of Ms. Shogen with a face
value of $1,000,000, but this amount may not be sufficient to cover our losses
from any of these delays.
Risks Related to Our Industry
Our proprietary technology and patents may offer only limited protection
against infringement and the development by our competitors of competitive
products.
We currently own nine U.S. patents, four 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. If
we were to become involved in litigation, due to our limited capital resources
and negative cash flow, we might not have the funds or other resources necessary
to carry on the litigation in an effective manner. This may prevent us from
protecting our patents or defending against claims of infringement.
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 drugs for the treatment of malignant
mesothelioma. Some of our competitors, including Eli Lilly, are more experienced
and have greater clinical, marketing and regulatory capabilities and managerial
and financial resources than we do. This may enable them to 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.
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 $3,000,000 for claims arising from the use of our products in U.S.
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 as well as 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.
7
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.
There has been no established trading market for our common stock since
the stock was delisted from Nasdaq in April 1999. Since then our common stock
has been quoted on the OTC Bulletin Board, and is currently thinly traded. From
December 2000 through April 2002, the weekly trading volume was as low as 4,160
shares per week and only as high as 309,100 shares for any week in such period.
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. Over the past three fiscal years, the sale price for our common stock,
as reported by Nasdaq and the OTC Bulletin Board has fluctuated from a low of
$0.19 to a high of $3.88. 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 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
8
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 $1,278,979 if
all of the warrants offered under this prospectus are exercised. However, the
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 warrants for
general corporate purposes, including the funding of research and development
activities. We expect to incur expenses of approximately $60,000 in connection
with this offering.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
"ACEL.OB." 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 April 30, 2002, 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, 2002
First Quarter.............................. $0.33 $0.96
Second Quarter ............................ 0.35 1.01
Third Quarter ............................. 0.42 0.77
Fourth Quarter (through May 22, 2002)...... 0.36 0.47
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 ............................ 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
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, 2001, 2000 and 1999 and the balance sheet data as of July 31,
2001 and 2000 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 and 1997 and the balance sheet data as of July 31, 1999,
1998 and 1997 are derived from our audited financial statements which were also
audited by KPMG LLP, but are not included in this prospectus or incorporated
herein by reference. The selected financial data as of and for the six months
ended January 31, 2002 and 2001 and for the period from August 24, 1981 (Date of
Inception) to January 31, 2002 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 six months
ended January 31, 2002 are not necessarily indicative of results that may be
expected for the entire year.
August 24,
1981
(Date of
Inception) Year Ended July 31,
to January ------------------------------------------------------------------------
31, 2002 2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
Statement of Operations
Data:
Total revenue,
principally investment
income ............................... $ 1,986,034 $ 13,121 $ 51,144 $ 168,372 $ 311,822 $ 442,572
Costs and Expenses:
Costs of sales ..................... 336,495 0 0 0 0 0
Research and development ........... 38,877,016 1,900,678 1,879,728 2,401,945 5,264,578 3,862,716
General and administrative ......... 21,249,007 705,745 644,588 920,686 1,412,968 1,475,624
Interest ........................... 3,131,236 153,029 4,980 2,377 21,782 123,099
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses ........... 63,593,754 2,759,452 2,529,296 3,325,008 6,699,328 5,461,439
State tax benefit .................. 1,560,979 451,395 755,854 -- -- --
Net loss ............................. $(60,046,741) $ (2,294,936) $ (1,722,298) $ (3,156,636) $ (6,387,506) $ (5,018,867)
============ ============ ============ ============ ============ ============
Net loss per common share:
Basic and diluted .................. $ (0.12) $ (.10) $ (.18) $ (.40) $ (.34)
Weighted average number
of common shares:
Basic and diluted .................. 18,927,000 17,812,000 17,271,000 15,926,000 14,597,000
Dividends ............................ 0 0 0 0 0
Six Months Ended
January 31
--------------------------
2002 2001
------------ -----------
(unaudited)
Statement of Operations
Data:
Total revenue,
principally investment
income ............................... $ 157 $ 6,769
Costs and Expenses:
Costs of sales ..................... 0 0
Research and development ........... 1,007,981 877,836
General and administrative ......... 383,614 325,452
Interest ........................... 37,518 3,768
------------ -----------
Total costs and expenses ........... 1,429,113 1,207,056
State tax benefit .................. 353,730 451,395
Net loss ............................. $ (1,075,226) $ (748,892)
============ ===========
Net loss per common share:
Basic and diluted .................. $ (0.05) $ (0.04)
Weighted average number
of common shares:
Basic and diluted .................. 20,326,920 18,749,429
Dividends ............................ 0 0
As of
As of July 31, January 31,
------------------------------------------------------------------ -----------
2001 2000 1999 1998 1997 2002
--------- --------- ---------- ---------- ---------- -----------
Balance Sheet Data: (unaudited)
Total assets .......................... $ 201,609 $ 488,099 $1,728,648 $5,516,678 $8,034,954 $ 143,719
Cash and cash equivalents ............. 44,781 257,445 1,383,133 5,099,453 7,542,289 14,483
Working capital (deficit) ............. (830,610) (303,646) 498,993 3,398,527 5,254,434 (1,301,228)
Long-term liabilities ................. 23,663 30,251 0 6,727 15,902 20,141
Total stockholders' equity (deficiency) (740,378) (131,860) 757,200 3,691,838 5,566,091 (1,213,627)
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 observed preliminary analysis
of the progress and results of the Phase III clinical trial for advanced
pancreatic cancer, we closed the pancreatic cancer trials and redirected our
resources towards the completion of the ongoing Phase III clinical trial for
unresectable malignant mesothelioma. We have had a series of meetings and
communications with the FDA and the European Agency for the Evaluation of
Medicinal Products, or EMEA, to establish mutually agreed upon parameters for
the NDA and Marketing Authorization Application, or MAA, submissions. We must
complete the current clinical trial for the FDA filing, as well as provide the
FDA and EMEA with information regarding the methods used to manufacture
ONCONASE(R), evaluation of the therapeutic and toxic doses of ONCONASE(R) in
animals and studies regarding the detection of ONCONASE(R) in human blood and
antibody formation. Additionally, for the MAA submission, we must establish or
designate a legal partner in the EU, which is considered to be a qualified
pharmaceutical company for at least three months prior to filing the MAA. We are
also exploring various strategic alternatives for our business and our research
and development operations.
We have historically funded the research and development of our products
from cash receipts resulting from the private sales of our securities and from
certain debt financings. The termination of the Phase III clinical trials for
advanced pancreatic cancer had a significant and detrimental impact on the price
of our common stock and our ability to raise additional capital for future
operations. We may not have, or 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 and/or foreign registration for the
marketing approval of ONCONASE(R) for this indication or for continued
operations.
Results of Operations
Six Month Period Ended January 31, 2002 and 2001
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 did not had any sales in the six months ended January 31, 2002 and 2001.
Investment income for the six months ended January 31, 2002, was $200 compared
to $6,800 for the same period last year, a decrease of $6,600. This decrease was
due to lower balances of cash and cash equivalents.
Research and Development
Research and development expense for the six months ended January 31, 2002
was $1,008,000 compared to $878,000 for the same period last year, an increase
of $130,000, or 15%. This increase was primarily due to an increase in costs in
support of on-going Phase III clinical trials for ONCONASE(R) for malignant
mesothelioma and an increase in cost of clinical supplies related to the
clinical trials, both resulting from the expansion of our Phase III clinical
trials for malignant mesothelioma in Europe and an
12
increase in patent and trademark applications for ONCONASE(R). This increase was
partially offset by a reduction of a non-cash expense relating to stock options
issued for consulting services.
General and Administrative
General and administrative expense for the six months ended January 31,
2002 was $383,000 compared to $325,000 for the same period last year, an
increase of $58,000 or 18%. This increase was primarily due to an increase in
public relations expenses and an increase in legal expenses due to business
development activities, offset by a reduction in a non-cash expense relating to
stock options issued for consulting services.
Interest
Interest expense for the six months ended January 31, 2002 was $38,000
compared to $4,000 for the same period last year, an increase of $34,000. This
increase was primarily due to the interest expense on the renewal of the
convertible notes and related warrants issued to unrelated parties in April
2001. The interest expense was based on the value of the warrants using the
Black-Scholes options-pricing model, amortized on a straight-line basis over the
life of the notes.
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 2002 (July 1,
2001 to June 30, 2002), we have $1,477,000 total available tax benefits of which
$426,000 was allocated to be sold between July 1, 2001 and June 30, 2002. In
December 2001, we received $354,000 from the sale of allocated tax benefits
which was recognized as a tax benefit for the six months ended January 31, 2002.
In December 2000, we received $451,000 from the sale of the allocated tax
benefits which was recognized as a tax benefit for the six months ended January
31, 2001. We will attempt to sell the remaining balance of our tax benefits in
the amount of approximately $1,051,000 between July 1, 2002 and June 30, 2003,
subject to all existing laws of the State of New Jersey. However, we cannot
assure you that we will be able to find a buyer for our tax benefits or that
such funds will be available in a timely manner.
Net Loss
We have incurred net losses during each year since our inception. The net
loss for the six months ended January 31, 2002 was $1,075,000 as compared to
$749,000 for the same period last year, an increase of $326,000. The cumulative
loss from the date of inception, August 24, 1981 to January 31, 2002, amounted
to $60,046,000. 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, 2001, 2000 and 1999
Revenues
We did not have any sales in fiscal 2001, 2000 and 1999. Investment income
for fiscal 2001 was $13,000 compared to $51,000 for fiscal 2000, a decrease of
$38,000. This decrease was due to lower balances of cash and cash equivalents.
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.
13
Research and Development
Research and development expense for fiscal 2001 was $1,901,000 compared
to $1,880,000 for fiscal 2000, an increase of $21,000, or 1%. This increase was
primarily due to an increase in costs in support of ongoing clinical trials and
increase in costs related to ONCONASE(R) clinical supplies, both primarily due
to the expansion of our Phase III clinical trials for malignant mesothelioma in
Europe. These increases were offset by a decrease in expenses related to the NDA
filing for ONCONASE(R) with the FDA.
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) and a 44% decrease in
costs related to the manufacture of clinical supplies of 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).
General and Administrative
General and administrative expense for fiscal 2001 was $706,000 compared
to $645,000 for fiscal 2000, an increase of $61,000, or 9%. This increase was
primarily due to a 58% increase in costs related to public relations activities,
a 30% increase in non-cash expense relating to stock options issued for
consulting services, a 12% increase in personnel costs and an 87% increase in
costs associated with business development activities.
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 a
$20,000 increase in legal fees.
Interest
Interest expense for fiscal 2001 was $153,000 compared to $5,000 in fiscal
2000, an increase of $148,000. The increase was primarily due to the interest
expense on convertible notes and related warrants issued in April 2001 to
related and unrelated parties. The interest expense was based on the value of
the warrants using the Black-Scholes options-pricing model, amortized on a
straight-line basis over the life of the notes.
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.
Income Taxes
In December 2000, we received $451,000 from the sale of an aggregate of
$602,000 tax benefits which was recognized as a tax benefit for our fiscal 2001
In December 1999, we received $756,000 from the sale of our tax benefits which
was recognized as a tax benefit for our fiscal 2000.
14
Net Loss
We have incurred net losses during each year since our inception. The net
loss for fiscal 2001 was $2,295,000 as compared to $1,722,000 in fiscal 2000 and
$3,157,000 in fiscal 1999. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 2001 amounted to $58,971,000. 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
fiscal year 2001, we had a net decrease in cash and cash equivalents of
$213,000. During the six months ended January 31, 2002, we had a net decrease in
cash and cash equivalents of $30,000, which resulted primarily from net cash
used in operating activities of $572,000, offset by net cash provided by
financing activities of $542,000, primarily from the private placement of common
stock and warrants and proceeds from the short-term borrowings. Total cash
resources as of January 31, 2002 were $14,000 compared to $45,000 at July 31,
2001.
Our current liabilities as of July 31, 2001 were $918,000 compared to
$590,000 at July 31, 2000, an increase of $328,000. Our current liabilities as
of January 31, 2002 were $1,337,000 compared to $918,000 at July 31, 2001, an
increase of $419,000. The increase was primarily due to an increase in expenses
related to the expansion of our Phase III clinical trials for malignant
mesothelioma in Europe. As of January 31, 2002 our current liabilities exceeded
our current assets and we had a working capital deficit of $1,301,000.
The following transactions occurred after January 31, 2002:
o In February 2002, we issued warrants to purchase 1,500,000 shares of
common stock to Roan Meyers Associates L.P. for an aggregate warrant
purchase price of $1,500 in connection with the engagement of Roan
Meyers to render advisory services. Roan Meyers has already
exercised warrants to purchase 100,000 shares of common stock with
an exercise price of $0.50 per share, resulting in gross proceeds of
$50,000 to us. Warrants to purchase an additional 400,000 shares are
currently exercisable, of which 150,000 shares have an exercise
price of $0.50 per share and 250,000 have an exercise price of $1.00
per share. The remaining 1,000,000 warrants will become exercisable
if Roan Meyers is successful in helping us raise capital. For each
$1 million in capital financing raised with the assistance of Roan
Meyers, 200,000 warrants will become exercisable up to 1,000,000
warrants in the aggregate. Of those 1,000,000 warrants, 400,000 are
exercisable at $1.00 per share and 600,000 are exercisable at $1.50
per share. We recorded an expense equal to the fair market value of
the first 500,000 warrants in February 2002 based upon the fair
value of such warrants as estimated by Black Scholes ($153,300),
less the $1,500 received from the sale of the warrants and will
record an expense on the additional warrants when they vest using
Black Scholes to estimate their value at that time.
o In March 2002, we completed a private placement resulting in the
issuance of 200,000 shares of restricted common stock and 200,000
five-year warrants to purchase an aggregate of 200,000 shares of
common stock at an exercise price of $0.75 per share. We received an
aggregate $100,000 from such private placement.
15
o In April 2002, we completed a private placement resulting in the
issuance of 838,638 shares of restricted common stock and 838,638
five-year warrants to purchase an aggregate of 838,638 shares of
common stock at an exercise price of $0.75 per share. We received an
aggregate $375,000 from such private placement.
o In April 2002, we issued a note payable to an unrelated party in the
amount of $100,000. The note was due thirty days bearing interest at
8% per annum. In addition, he will receive 100,000 stock options to
purchase 100,000 shares of common stock at an exercise price of
$0.60 per share. In May 2002, the lender orally agreed to extend the
note for an undetermined period.
o On May 13, 2002, we completed a private placement resulting in the
issuance of 500,000 shares of restricted common stock and 500,000
five-year warrants to purchase an aggregate of 500,000 shares of
common stock at an exercise price of $1.00 per share. We received an
aggregate $200,000 from such private placement.
From time to time, Kuslima Shogen, our Chief Executive Officer and acting
Chief Financial Officer and the Chairman of our board of directors, has made
some loans to us, a portion of which has been repaid. The amounts loaned are
repayable upon demand and bear interest at 8% per annum. As of April 30, 2002,
we owed Ms. Shogen $126,500.
We have continued to incur losses since January 2002. As of April 30, 2002
we had an estimated working capital deficit of approximately $1,402,000.
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 2002 (July 1,
2001 to June 30, 2002), we have $1,477,000 total available tax benefits of which
$426,000 was allocated to be sold between July 1, 2001 and June 30, 2002. In
December 2001, we received $354,000 from the sale of the allocated tax benefits
which was recognized as a tax benefit for the quarter ended October 31, 2001. In
December 2000, we received $451,000 from the sale of an aggregate of $602,000
tax benefits which was recognized as a tax benefit for our fiscal 2001. In
December 1999, we received $756,000 from the sale of our tax benefits which was
recognized as a tax benefit for our fiscal 2000. We will attempt to sell the
remaining balance of our tax benefits in the amount of approximately $1,051,000
between July 1, 2002 and June 30, 2003, 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 or that such funds may not be available in a timely manner.
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 be available on acceptable terms. To
date, a significant portion of our 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 our Chief Executive Officer. Until our operations generate
significant revenues, we will need to continue to fund operations through the
sources of capital previously described. From August 1, 2001 through May 13,
2002, we received gross proceeds of approximately $1,271,000 from the private
placement of equity from various individual investors, issuance of note payable
to an unrelated party and the exercise of warrants by an unrelated party. We
have also received from time to time loans payable on demand from a related
party. As of April 30, 2002 the aggregate balance of these loans was $126,500.
Additionally, in December 2001 we received $354,000 through the sale of our tax
benefits. As we have no liquid
16
resources and significant liabilities, we need to raise additional capital in
order to remain in operation. We believe our current operating levels require
$160,000 of cash per month. We do not presently maintain the cash balance needed
to fund our operations; however, to date we have been able to meet the cash
needed for continued operations.
In the near term we continue to seek additional capital financing through
the sales of equity in private placements but cannot be sure that we will be
able to raise capital on favorable terms or at all. In addition, we expect some
funds to be available through loans from our Chief Executive Officer, although
no such loans are required to be made. Once any of these sources, if received,
are exhausted, we will need additional financing through the sources described
above to continue our operations. We cannot be sure these funds will be
received; however, if the funds are received they will assist us in satisfying
our liquidity needs. The report of our independent auditors on our July 31, 2001
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, 2001 and January 31, 2002 do not include any
adjustments that might result from the outcome of this uncertainty.
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
discussions 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 our pipeline. However, we
cannot be certain that any such alliances will materialize.
Our 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. Since April 28, 1999, our
common stock has traded on the OTC Bulletin Board under the symbol "ACEL.OB".
Delisting of our common stock from Nasdaq could have a material adverse effect
on our ability to raise additional capital, our stockholders' liquidity and the
price of our common stock.
The market price of our common stock is volatile, and the price of the
stock could be dramatically affected one way or another depending on numerous
factors. The market price of our common stock could also be materially affected
by the marketing approval or lack of approval of 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, 2001 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
17
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.
18
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), which has been isolated from the eggs of the leopard frog, is
a novel ribonuclease that is unique among the superfamily of pancreatic
ribonuclease. We have determined that, thus far, ranpirnase is the smallest
known protein belonging to 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, 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 ribonuclease as they do not appear to be inhibited by human
ribonuclease inhibitors. 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 in a targeted conjugate, which is a new
compound resulting from chemically joining two different molecules
with targeted specificity, and
o in a variety of delivery systems.
During clinical trials, patients with advanced stages of solid tumors have
been treated with ONCONASE(R) on a weekly basis. Data from these clinical trials
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. Unresectable malignant mesothelioma is often linked to
asbestos exposure and afflicts approximately 3,500 to 5,000 newly diagnosed
patients in the United States each year. Epidemiologists have predicted that
over the next 35 years over 250,000 people will die from malignant mesothelioma
in Europe alone. There is currently no standard approved drug for this disease.
We have also conducted pilot clinical trials in non-small cell lung cancer,
metastatic breast cancer and renal cell cancer. We intend to initiate trials of
ONCONASE(R) in other cancer indications.
Side effects associated with ONCONASE(R), as observed in over 700 patients
treated to date, have been modest. The most significant side effect has been in
kidney function, which has been observed to be 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 damage 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.
We are currently conducting a two-part Phase III clinical trial of
ONCONASE(R) as a treatment for malignant mesothelioma. The first part compares
ONCONASE(R) to doxorubicin in patients with
19
unresectable malignant mesothelioma. Doxorubicin is considered by opinion
leaders to be the most effective drug for the treatment of malignant
mesothelioma. The second part of the trial compares the combination of
ONCONASE(R) and doxorubicin versus doxorubicin by itself. The patient enrollment
for the first part of the clinical trial has been completed however, the trial
is still ongoing. The second part of the trial is still in the enrollment phase.
We have had a series of meetings with the FDA to establish mutually agreed
upon parameters for the NDA to obtain marketing approval for ONCONASE(R). In
order to file the NDA, we have to complete the current clinical trial, as well
as provide the FDA with information regarding the methods used to manufacture
ONCONASE(R), evaluation of the therapeutic and toxic doses of ONCONASE(R) in
animals and studies regarding the detection of ONCONASE(R) in human blood and
antibody formation. We cannot estimate if or when we will file the NDA. Even if
we file an NDA, marketing approval for ONCONASE(R) as a treatment for malignant
mesothelioma may not be granted by the FDA.
In February 2001, we received an Orphan Medicinal Product Designation for
ONCONASE(R) from The European Agency for the Evaluation of Medicinal Products,
or EMEA. We are currently in discussions with the EMEA regarding the Marketing
Authorization Application, or MAA, registration requirements of ONCONASE(R) for
the treatment of malignant mesothelioma. We must establish or designate a legal
partner in the European Union, which is considered to be a qualified
pharmaceutical company for at least three months prior to filing the MAA. We
cannot predict whether this marketing approval will be granted.
We have established a scientific collaboration with the National Cancer
Institute, or NCI. This collaboration has produced a conjugate, or chemical
construct, of ranpirnase with a monoclonal antibody that demonstrated activity
in treating non-Hodgkin's lymphoma in preclinical studies. Additionally,
preclinical studies are ongoing at the NCI in preparation for commencing
clinical trials for the treatment of patients with non-Hodgkin's lymphoma with
this new conjugate.
We believe that ranpirnase may also be used in the development of an
anti-viral agent. The National Institutes of Health, or NIH, have 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 vitro
findings by the NIH 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. Moreover, the NIH - Division of AIDS
found that ONCONASE(R) has in vitro anti-viral effects. Subject to the
availability of the required capital, we plan to conduct further research
concerning anti-viral effects.
Other Products
We have also discovered another series of proteins that may have
therapeutic uses. 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 for such research; however, we
are in early discussions with potential collaborators for the development of
these new compounds.
20
Research and Development Programs
Research and development expenses for the fiscal years ended July 31,
2001, 2000, and 1999 were $1,901,000, $1,880,000, and $2,402,000, respectively.
Research and development expenses for the six months ended January 31, 2002 were
$1,008,000. Our research and development programs focus primarily on the
development of therapeutics from amphibian ribonucleases. Because ribonucleases
have been shown to be involved in the regulation of cell proliferation,
maturation, differentiation and programmed cell death known as apoptosis,
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 and
other institutions.
Clinical Development and Clinical Trials
ONCONASE(R) has been tested in Phase I, Phase II and Phase III clinical
trials in more than 35 cancer centers across the United States and Europe,
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 median survivals
are typically less than a year and 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.
ONCONASE(R) is currently in a Phase III clinical trial for unresectable
malignant mesothelioma, comparing ONCONASE(R) alone to doxorubicin and comparing
ONCONASE(R) with doxorubicin to doxorubicin alone. The trial is a randomized,
controlled study. No standard approved therapy exists to treat this deadly
cancer, and most advanced, unresectable malignant mesothelioma patients die of
progressive disease within six to 12 months of diagnosis.
We have had a series of meetings with the FDA to establish mutually agreed
upon parameters for the NDA to obtain marketing approval for ONCONASE(R). In
February 2001, we received an Orphan Medicinal Product Designation for
ONCONASE(R) from the EMEA. We are currently in discussions with the EMEA on the
MAA registration requirements for ONCONASE(R) as treatment for malignant
21
mesothelioma. We cannot predict whether 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 these trials were primarily renal, dose-related and reversible.
There has been little evidence of bone marrow suppression, hair loss or other
severe organ damage 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 we will have the financings for such
research.
A collaboration with the NCI 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 NCI for clinical
trials.
Preclinical Research
The results of our preclinical research have been presented at scientific
meetings or have been published in peer-reviewed journals.
In Vitro Anti-Cancer Activity
ONCONASE(R) has demonstrated a broad spectrum of anti-tumor effects in
vitro. The NCI Cancer Screen has determined that ONCONASE(R) kills cancer cells,
therefore, was judged to be what is called an "active" drug in accordance with
NCI criteria. Scientists at Harvard Medical School demonstrated in vitro that
ONCONASE(R) interferes with new blood vessel formation in tumors.
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 these drugs acting together is greater than if used alone with
respect to the following:
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
22
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 broader therapeutic utility of
ONCONASE(R) in cancer treatments. The NCI reported the ability of ONCONASE(R) to
overcome multiple drug resistance as well as other forms of drug resistance
(referring to a drug that no longer kills cancer cells) both in vitro and in
vivo.
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, demonstrated that ranpirnase makes tumors more
susceptible to be killed by radiation treatment and interferes with tumor blood
vessel supply.
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 NIH 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, or cloning, 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 diseases.
Ranpirnase Variant Conjugates
We have developed a variant of ranpirnase and conjugated, or linked, it to
a variety of clinically important proteins and peptides. These conjugates are
designed to specifically target selected molecular structures in the body. These
conjugates may have therapeutic applications in the treatment of
anti-inflammatory diseases, such as arthritis, and other autoimmune diseases.
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
23
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 to patients
not taking drugs as prescribed.
Experimental data shows that anti-HIV effects of ONCONASE(R) are quite
selective, resulting in a likelihood to inhibit replication of the different
HIV-1 subtypes. In vitro studies have been performed by independent scientific
collaborators, including the NIH - 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 do not currently possess the funds necessary to conduct further
research relating to most, if not all, of our preclinical research and cannot be
certain that we will be able to obtain the financing to do so.
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 the natural protein
ranpirnase; however, the use of this recombinant technology may not be more cost
effective than the natural source.
Manufacturing
We have 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. 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 not 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 we nor any of our officers or employees have 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 may not be able to successfully penetrate
24
the markets for any products developed or develop internal marketing
capabilities. 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 partners may have the responsibility for a
significant portion of development of the product and regulatory approval. In
the event that our partners fail to develop and/or 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 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, or BLA. Preparing an NDA or BLA involves
considerable data collection, verification and analysis. A similar process in
accordance with EMEA regulations is required to gain marketing approval in
Europe. Moreover, a commercial entity must be established and approved by the
EMEA in a member state of the EU at least three months prior to filing the MAA
in the EU in preparation for the commercialization of ONCONASE(R).
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 nine 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).
25
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 Patent No. US 6,175,003 B1, issued January 16, 2001, which covers
the genes of ONCONASE(R) and a variant of ONCONASE(R).
o Patent No. US 6,239,257 B1, issued on May 29, 2001, which covers a
family of variants of ONCONASE(R).
o Patent No. US 6,290,951 B1 issued in September 18, 2001, which
covers alteration of the cell cycle in vivo, particularly for
inducing apoptosis of tumor cells.
We own four European patents, which have been validated in certain
European countries. These patents cover ONCONASE(R), a variant of 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 NIH 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 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.
Some 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
26
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 April 30, 2002, we employed 14 persons, of whom 11 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 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 expired December 31, 2001. We are currently
negotiating our new lease agreement under similar terms. The monthly rental
obligation is $11,333. 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.
27
MANAGEMENT
Directors And Executive Officers
Our directors and executive officers are:
Name Age Director Since Position with the Company
- ---------------------------- --- -------------- ---------------------------------------------
Kuslima Shogen 56 1981 Chairman of the Board, Chief Executive
Officer and Acting Chief Financial Officer
Stanislaw M. Mikulski, M.D. 57 1986 Executive Vice President, Medical Director
and Director
Stephen K. Carter, M.D.(1) 63 1997 Director and Chairman of the Scientific
Advisory Board
Donald R. Conklin (1)(2) 65 1997 Director
Martin F. Stadler(1)(2) 59 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, or FDU, 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 FDU, 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,
The American Association for Cancer Research and the American Association for
the Advancement of Science. Dr. Mikulski is currently a clinical assistant
Professor of Medicine at the University of Medicine and Dentistry of New Jersey.
He received his M.D. in 1967 from the Medical School of Warsaw, Poland and
subsequently
28
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 A(R) (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 Dickenson
University. In April 1999, he received the Pinnacle Award from FDU, the highest
honor the University bestows on its graduates. Mr. Stadler is a member of the
Finance Council of the American Management Association and a trustee of
Fairleigh Dickenson University.
In March 1998 the SEC approved the settlement previously disclosed in our
November 1997 Proxy Statement of allegations by the SEC of violations of
Sections 13 and 16 of the Securities Exchange Act of 1934, as amended (the
Exchange Act) by Kuslima Shogen, Chairman and Chief Executive Officer and
Stanislaw Mikulski, Executive Vice President. Ms. Shogen and Dr. Mikulski agreed
to the entry of a cease and desist order and the payment of monetary penalties
totaling $40,000 (payable by us under our
29
indemnity agreements with these individuals) without admitting or denying any of
the SEC's allegations concerning certain allegedly late filings required to be
made by them pursuant to Sections 13 and 16 of the Exchange Act with respect to
changes in beneficial ownership of our securities. With the exception of one
late filing by Ms. Shogen in 1996, each of the allegedly unreported transactions
occurred during the years 1983 to 1994. The alleged reporting violations relate
solely to the filings of required forms. There was no allegation by the SEC of
any fraudulent or willful misconduct. No action was brought against us.
Executive Compensation
Summary Compensation Table
The following table provides a summary of cash and non-cash compensation
for each of the last three fiscal years ended July 31, 2001, 2000 and1999 earned
by our Chief Executive Officer and our only other executive officer during the
last fiscal year.
Securities
Other Annual Underlying All other
Name and Salary Bonus Compensation Options/SARs Compensation
Principal Position Year ($) ($) ($)(1) (#) ($)(2)
- ------------------------------------- ---- -------- ----- ------------ ------------ ------------
Kuslima Shogen,
Chief Executive Officer, 2001 $150,000 -0- -0- 115,000 $4,154
Chairman of the Board of 2000 150,000 -0- -0- 215,000 3,615
Directors and Acting Chief 1999 150,000 -0- -0- -0- -0-
Financial Officer
Stanislaw M. Mikulski 2001 $130,000 -0- -0- 55,000 $3,900
Executive Vice President and 2000 130,000 -0- -0- 130,000 3,600
Medical Director 1999 130,000 -0- -0- -0- -0-
- ---------------------
(1) Excludes perquisites and other personal benefits which in the aggregate do
not exceed 10% of such executive officer's total annual salary and bonus.
(2) Consists of our contributions to a 401(k) plan.
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock
options to our executive officers during the fiscal year ended July 31, 2001:
Number of % of Total Exercise
Securities Options or Base Potential Realizable Value at
Underlying Granted to Price Assumed Annual Rates of Stock
Options Employees in ($/Share) Expiration Price Appreciation for Option Term(2)
Name Granted (#) Fiscal Year (1) Date 0%($) 5%($) 10%($)
- ------------------------- ------------- -------------- ------------ ------------ ------ ------ -------
Kuslima Shogen........... 115,000(3) 32.67% $.85 (4) -- $4,888 $9,775
Stanislaw M. Mikulski.... 55,000(3) 15.63% $.85 (4) -- $2,338 $4,675
- ---------------------
(1) The exercise price of these options was based on the average of the high
and low trade prices of our common stock for the twenty trading days
preceding the date of grant.
(2) The amounts set forth in the three columns represent hypothetical gains
that might be achieved by the optionees if the respective options are
exercised at the end of their terms. These gains are based on assumed
rates of stock price appreciation of 0%, 5% and 10%. The 0% appreciation
column is included because the exercise prices of the options equal the
market price of the underlying
30
common stock on the date the options were granted, and thus the options
will have no value unless our stock price increases above the exercise
prices.
(3) These options vested and became exercisable as to 20% of the shares on the
date of the grant and 20% of the shares each year thereafter. An aggregate
23,000 options issued to Kuslima Shogen were exercised in March 2001.
(4) These options will expire five years after the vesting date.
Option Exercises and Fiscal Year-End Values
The following table sets forth the information with respect to our
executive officers concerning the exercise of options during the fiscal year
ended July 31, 2001 and unexercised options held as of July 31, 2001.
Number of Securities Underlying
Unexercised Options at Fiscal Value of Unexercised In-The-Money
Shares Value Year-End (#) Options at Fiscal Year-End ($)(2)
Acquired on Realized ---------------------------------- ---------------------------------
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ------------- ---------- -------------- ---------------- ------------- ---------------
Kuslima Shogen........... 55,555 $12,870 780,926 261,000 $ 4,639 $ 67,525
Stanislaw M. Mikulski.... -0- -0- 275,563 152,000 $30,725 $ 43,300
- ---------------------
(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 ($0.89) for our common
stock obtained from the OTC Bulletin Board on the last trading day of the
fiscal year July 31, 2001.
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.
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
31
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, 2001, the following independent
directors listed below were granted options under our 1997 Stock Option Plan
(1997 Plan) pursuant to the same formula under the 1993 Plan as set forth above.
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 $0.82 12/30/06
Donald R. Conklin 15,000 $0.82 12/30/06
Martin F. Stadler 15,000 $0.82 12/30/06
Additionally, in April 2001 our board of directors approved the issuance
of 50,000 stock options under the 1997 Plan to Martin Stadler, which vested on
the date of grant. The exercise price of the stock options was $0.90 per share
which was based on the average of the high and low trade prices of our common
stock for the ten trading days preceding the date of grant.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended July 31, 2001, the members of our Board of
Directors who served on the Compensation Committee were Stephen K. Carter,
Donald R. Conklin and Martin F. Stadler, all of whom are non-employee directors.
As more fully described under "Certain Relationships and Related Transactions",
Messrs. Conklin and Stadler were issued convertible notes which were converted
into common stock and warrants to purchase common stock.
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 patents, 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. On April 16, 2001, this agreement was amended
and clarified to provide that Ms. Shogen would receive the 15% royalty payment
relating to licensees or the 5% fee relating to sales but not both, unless we
and a licensee both market the licensed product.
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 was based on the average of the high and low trade prices of our
common stock for the twenty trading days preceding the date of grant. An
aggregate 50,000 of these options were exercised.
In April 2001, our board of directors approved the issuance of 50,000
stock options under the 1997 Plan to Martin Stadler, which vested on the date of
grant. The exercise price of the stock options was $0.90 per share which was
based on the average of the high and low trade prices of our common stock for
the ten trading days preceding the date of grant. In April 2001, we issued
convertible notes to
32
Kuslima Shogen, our Chief Executive Officer and a director, two of our
directors, Donald Conklin and Martin Stadler, and unrelated parties in the
aggregate amount of $366,993. Messrs. Conklin and Stadler are members of our
Compensation Committee. The notes were 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 elected to
convert their notes into an aggregate 330,000 shares of common stock. 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
and with an expiration date of July 7, 2004. The notes issued to unrelated
parties with an aggregate balance of $69,993 were renewed for one hundred twenty
(120) days for the same conversion price of $0.90 per share. These unrelated
parties elected to convert an aggregate of $64,993 notes payable into an
aggregate 72,214 shares of common stock in October 2001. In addition, upon
conversion, they received five-year warrants to purchase an aggregate 72,214
shares of common stock at an exercise price of $1.50 per share. On October 31,
2001, the Board of Directors approved a change in the exercise price of the
330,000 warrants issued to related parties upon conversion of notes from $2.50
per share to $1.50 per share and changed the expiration date to July 7, 2006.
From August 1, 2001 to April 30, 2002, Kuslima Shogen loaned us an
aggregate of $150,000 from time to time, of which an aggregate of $41,400 was
repaid during such time period. The amounts loaned are repayable upon demand and
bear interest at 8% per annum. As of April 30, 2002, we owed Ms. Shogen
$126,500.
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
April 30, 2002. 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................................ 1,981,305(4) 8.8%
Stanislaw M. Mikulski......................... 582,531(5) 2.6%
Stephen K. Carter............................. 193,750(6) *
Donald R. Conklin............................. 429,250(7) 2.0%
Martin F. Stadler............................. 466,250(8) 2.1%
All executive officers and directors
as a group (five persons) .................... 3,653,086(9) 15.7%
- ---------------------
* Less than one percent.
(1) The address of all officers and directors listed above is in the care of
the company.
(2) 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.
(3) 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 April 30, 2002 by (ii) the sum
of (A) the number of shares of common stock outstanding as of April 30,
2002 plus
33
(B) the number of shares issuable upon exercise of options or warrants
held by such stockholder which were exercisable as of April 30, 2002 or
which will become exercisable within 60 days after April 30, 2002.
(4) Includes 512,685 shares underlying options which were exercisable as of
April 30, 2002 or which will become exercisable within 60 days after April
30, 2002 and 110,000 shares underlying warrants which were exercisable as
of April 30, 2002 or which will become exercisable within 60 days after
April 30, 2002.
(5) Includes 221,281 shares underlying options which were exercisable as of
April 30, 2002 or which will become exercisable within 60 days after April
30, 2002.
(6) Includes 193,750 shares underlying options which were exercisable as of
April 30, 2002 or which will become exercisable within 60 days after April
30, 2002.
(7) Includes 88,750 shares underlying options which were exercisable as of
April 30, 2002 or which will become exercisable within 60 days after April
30, 2002 and 110,000 shares underlying warrants which were exercisable as
of April 30, 2002 or which will become exercisable within 60 days after
April 30, 2002.
(8) Includes 131,250 shares underlying options which were exercisable as of
April 30, 2002 or which will become exercisable within 60 days after April
30, 2002 and 110,000 shares underlying warrants which were exercisable as
of April 30, 2002 or which will become exercisable within 60 days after
April 30, 2002.
(9) Includes all shares owned beneficially by the directors and the executive
officers named in the table.
34
SELLING SECURITYHOLDERS
In March 2002, we completed a private placement resulting in the issuance
of 200,000 shares of restricted common stock and 200,000 five-year warrants to
purchase an aggregate of 200,000 shares of common stock at an exercise price of
$0.75 per share. We received an aggregate $100,000 from such private placement.
This prospectus relates to the offer and resale of 200,000 shares of common
stock and 200,000 shares of common stock underlying warrants issued in the March
private placement.
In April 2002, we completed a private placement resulting in the issuance
of 838,638 shares of restricted common stock and 838,638 five-year warrants to
purchase an aggregate of 838,638 shares of common stock at an exercise price of
$0.75 per share. We received an aggregate $375,000 from such private placement.
This prospectus relates to the offer and resale of 838,638 shares of common
stock and 838,638 shares of common stock underlying warrants issued in the April
private placement.
On May 13, 2002, we completed a private placement resulting in the
issuance of 500,000 shares of restricted common stock and 500,000 five-year
warrants to purchase an aggregate of 500,000 shares of common stock at an
exercise price of $1.00 per share. We received an aggregate $200,000 from such
private placement. This prospectus relates to the offer and resale of 500,000
shares of common stock and 500,000 shares of common stock underlying warrants
issued in the May private placement.
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.
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 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 April 30, 2002; and
o the shares of common stock underlying any other options or warrants
owned by the selling stockholder which are exercisable as of April
30, 2002 or which will become exercisable within 60 days after April
30, 2002.
Except as otherwise noted, none of such persons or entities has had any material
relationship with us during the past three years.
35
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 % of Shares
Prior To Shares Being Upon Completion Owned After
Name(1) Offering Offered Of Offering Offering(2)
AIG DKR Soundshore Holding, Ltd. (3) 454,546 (454,546) 0 *
AIG DKR Soundshore Strategic
Holding Fund, Ltd. (3) 454,546 (454,546) 0 *
AIG DKR Soundshore Private Investors
Holding Fund, Ltd. (3) 454,546 (454,546) 0 *
Hamblett, Michael (4) 113,638 (113,638) 0 *
Muniz, Charles (5) 2,107,000 (500,000) 1,107,000 4.89%
Muniz, Melba (6) 2,107,000 (500,000) 1,107,000 4.89%
Seguso, Robert (7) 200,000 (200,000) 0 *
Stone, Michael 300,000 (300,000) 0 *
Torkan, Lisa 117,000 (100,000) 17,000 *
Total 4,201,276 3,077,276 1,124,000
- --------------------------
* 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 April 30,
2002, 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
April 30, 2002 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 April 30, 2002 or which will be exercisable within 60
days after April 30, 2002.
(3) Includes 227,273 shares of common stock underlying warrants that become
exercisable on July 16, 2002.
(4) Includes 56,819 shares of common stock underlying warrants that become
exercisable on July 23, 2002.
(5) Mr. Charles Muniz is deemed to beneficially own 497,000 shares of common
stock and 250,000 shares of common stock underlying warrants that are
currently held in the name of his wife, Melba Muniz. His ownership
includes 250,000 shares of common stock underlying warrants that become
exercisable on August 13, 2002.
(6) Mrs. Melba Muniz is deemed to beneficially own 610,000 shares of common
stock and 750,000 shares of common stock underlying warrants that are
currently held in the name of her husband, Charles Muniz. Her ownership
includes 250,000 shares of common stock underlying warrants that become
exercisable on August 13, 2002.
(7) Includes 100,000 shares of common stock underlying warrants that become
exercisable on July 4, 2002.
36
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 April 30, 2002 we had 21,866,423 shares of common stock issued and
outstanding. 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
5,817,143 shares of common stock. Of such shares, 4,278,505 shares underlying
the warrants are covered by an effective registration statement on Form S-1 and
the remaining 1,538,638 shares underlying the warrants are being registered for
sale under this prospectus.
200,000 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants issued in a March 2002 private placement. Such
warrants are exercisable at a price of $0.75 per share for a five-year period
from the date of grant.
838,638 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants issued in an April 2002 private placement. Such
warrants are exercisable at a price of $0.75 per share for a five-year period
from the date of grant.
500,000 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants issued in a May 2002 private placement. Such
warrants are exercisable at a price of $1.00 per share for a five-year period
from the date of grant.
Options
At April 30, 2002, we had outstanding options to purchase 2,908,433 shares
of common stock at an average purchase price of $1.73 per share.
37
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.
38
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, 2001 and 2000 and for each of the
years in the three-year period ended July 31, 2001, and the period from August
24, 1981 (the date of inception) to July 31, 2001, have been included herein and
in the registration statement in reliance on the report of KPMG LLP, independent
accountants, 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, 2001 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, 2001 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.
39
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, 2001 and 2000......................................F-5
Statements of Operations - Years ended July 31, 2001, 2000, and 1999
and the Period from August 24, 1981
(Date of Inception) to July 31, 2001....................................F-6
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2001....................................F-7
Statements of Cash Flows - Years ended July 31, 2001, 2000, and 1999
and Period from August 24, 1981
(Date of Inception) to July 31, 2001...................................F-12
Notes to Financial Statements - Years ended July 31, 2001, 2000 and
1999 and the Period from August 24, 1981
(Date of Inception) to July 31, 2001...................................F-15
Unaudited Financial Statements:
Unaudited Balance Sheet - January 31, 2002..................................F-37
Statements of Operations (unaudited) - Siz Months Ended January 31,
2002 and 2001 and the Period from
August 24, 1981 (Date of Inception) to January 31, 2002................F-38
Statement of Cash Flows (unaudited) - Six Months Ended January 31, 2002
and 2001 and the Period from
August 24, 1981 (Date of Inception) to January 31, 2002................F-39
Notes of Unaudited Financial Statements.....................................F-41
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, 2001 and 2000, 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, 2001 and the period
from August 24, 1981 (date of inception) to July 31, 2001. 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 for the period from
August 24, 1981 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 to July 31, 2001 of the amounts for the period from August 24,
1981 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 as of July 31, 2001 and 2000, and the results
of its operations and its cash flows for each of the years in the three-year
period ended July 31, 2001 and the period from August 24, 1981 to July 31, 2001
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
Short Hills, New Jersey
October 12, 2001
F-2
- --------------------------------------------------------------------------------
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 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.
F-3
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, 2001 and 2000
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 44,781 $ 257,445
Other assets ............................................... 42,933 28,617
------------ ------------
Total current assets ................................... 87,714 286,062
Property and equipment, net of accumulated depreciation and
amortization of $1,081,423 in 2001 and $1,006,808 in 2000 .. 67,555 142,170
Other assets ................................................... 46,340 59,867
------------ ------------
Total assets ........................................... $ 201,609 $ 488,099
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt .......................... $ 7,057 $ 7,074
Note payable - convertible debt - unrelated party, less debt
discount of $34,511 ........................................ 35,482 --
Accounts payable ........................................... 409,972 170,788
Accrued expenses ........................................... 465,813 411,846
------------ ------------
Total current liabilities .............................. 918,324 589,708
Long-term debt, less current portion ........................... 23,663 30,251
------------ ------------
Total liabilities ...................................... 941,987 619,959
------------ ------------
Stockholders' deficiency:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 2001 and 2000 .............. -- --
Common stock $.001 par value. Authorized 40,000,000 shares;
issued and outstanding 19,802,245 shares and 18,431,559
shares at July 31, 2001 and 2000, respectively .......... 19,802 18,431
Capital in excess of par value ............................. 58,211,335 56,526,288
Deficit accumulated during development stage ............... (58,971,515) (56,676,579)
------------ ------------
Total stockholders' deficiency ......................... (740,378) (131,860)
------------ ------------
Total liabilities and stockholders' deficiency ......... $ 201,609 $ 488,099
============ ============
See accompanying notes to financial statements.
F-5
ALFACELL CORPORATION
Statements of Operations
Years ended July 31, 2001, 2000 and
1999, and the Period from August
24, 1981 (Date of Inception) to
July 31, 2001
August 24, 1981
(date of
inception)
to July 31, 2001 2001 2000 1999
---------------- ----------- ----------- -----------
Revenues:
Sales ................................... $ 553,489 -- -- --
Investment income ....................... 1,372,285 13,121 51,144 168,372
Other income ............................ 60,103 -- -- --
------------ ----------- ----------- -----------
1,985,877 13,121 51,144 168,372
------------ ----------- ----------- -----------
Cost and expenses:
Cost of sales ........................... 336,495 -- -- --
Research and development ................ 37,869,035 1,900,678 1,879,728 2,401,945
General and administrative .............. 20,865,393 705,745 644,588 920,686
Interest:
Related parties ...................... 1,142,860 108,900 -- --
Others ............................... 1,950,858 44,129 4,980 2,377
------------ ----------- ----------- -----------
62,164,641 2,759,452 2,529,296 3,325,008
------------ ----------- ----------- -----------
Net loss before state tax benefit ........... $(60,178,764) (2,746,331) (2,478,152) (3,156,636)
State tax benefit ........................... 1,207,249 451,395 755,854 --
------------ ----------- ----------- -----------
Net loss ......................... $(58,971,515) (2,294,936) (1,722,298) (3,156,636)
============ =========== =========== ===========
Loss per basic and diluted common share ..... $ (0.12) $ (0.10) $ (0.18)
=========== =========== ===========
Weighted average number of shares outstanding 18,927,000 17,812,000 17,271,000
=========== =========== ===========
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, 2001
Deficit
Common Stock 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 -- --
Adjustment for 3 for 2 stock split declared September 8, 1982 422,321 422 (422) -- --
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 and
consultants ............................................... 15,394 15 215,385 -- --
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)
Deferred Total
compensation, Stockholders'
Subscription restricted Equity
Receivable 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 and
consultants ............................................... -- -- 215,400
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
Deficit
Common Stock 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)
Deferred Total
compensation, Stockholders'
Subscription restricted Equity
Receivable 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
Deficit
Common Stock 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)
Deferred Total
compensation, Stockholders'
Subscription restricted Equity
Receivable 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
Deficit
Common Stock 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)
Deferred Total
compensation, Stockholders'
Subscription restricted Equity
Receivable 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
Deficit
Common Stock 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)
Sale of shares to private investors, net ............ 863,331 863 955,561 -- --
Exercise of options at $0.29 - $0.85 per share ...... 165,555 166 83,565 -- --
Issuance of shares for services, net ................ 11,800 12 10,018 -- --
Exercise of convertible debentures at $0.90 per share 330,000 330 296,670 -- --
Issuance of warrants with convertible debt .......... -- -- 178,807 -- --
Issuance of options for services .................... -- -- 160,426 -- --
Net loss ............................................ -- -- -- -- (2,294,936)
---------- ------- ----------- ----- ------------
Balance at July 31, 2001 ............................ 19,802,245 $19,802 $58,211,335 $ -- $(58,971,515)
========== ======= =========== ===== ============
Deferred Total
compensation, Stockholders'
Subscription restricted Equity
Receivable 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)
Sale of shares to private investors, net ............ -- -- 956,424
Exercise of options at $0.29 - $0.85 per share ...... -- -- 83,731
Issuance of shares for services, net ................ -- -- 10,030
Exercise of convertible debentures at $0.90 per share -- -- 297,000
Issuance of warrants with convertible debt .......... -- -- 178,807
Issuance of options for services .................... -- -- 160,426
Net loss ............................................ -- -- (2,294,936)
----- ----- -----------
Balance at July 31, 2001 ............................ $ -- $ -- (740,378)
===== ===== ===========
See accompanying notes to financial statements.
F-11
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 2001, 2000 and 1999,
and the Period from August 24, 1981
(Date of Inception) to July 31, 2001
August 24, 1981
(date of
inception) to
July 31,
2001 2001 2000 1999
------------ ----------- ----------- -----------
Cash flows from operating activities:
Net loss ........................................... $(58,971,515) $(2,294,936) $(1,722,298) $(3,156,636)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on sale of marketable securities ............ (25,963) -- -- --
Depreciation and amortization .................... 1,492,458 74,615 93,748 101,231
Loss on disposal of property and equipment ....... 18,926 -- -- --
Noncash operating expenses ....................... 5,824,106 304,722 146,912 208,053
Amortization of deferred compensation ............ 11,442,000 -- -- --
Amortization of organization costs ............... 4,590 -- -- --
Changes in assets and liabilities:
(Increase) decrease in other current assets .... (102,800) (14,316) 58,224 (29,521)
Decrease in other assets ....................... 49,711 13,527 -- --
Increase in loans and interest
payable, related party ........................ 744,539 -- -- --
Increase (decrease) in accounts payable ........ 706,082 249,214 76,901 (513,338)
Increase in accrued payroll and
expenses, related parties ..................... 2,348,145 -- -- --
Increase (decrease) in accrued expenses ........ 1,007,326 53,967 (366,804) (314,248)
------------ ----------- ----------- -----------
Net cash used in operating activities ........ (35,462,395) (1,613,207) (1,713,317) (3,704,459)
------------ ----------- ----------- -----------
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) --
Patent costs ..................................... (97,841) -- -- --
------------ ----------- ----------- -----------
Net cash used in investing activities .......... (1,478,714) -- (37,575) --
------------ ----------- ----------- -----------
F-12
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24, 1981
(date of
inception) to
July 31,
2001 2001 2000 1999
------------ ----------- ----------- -----------
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 -- 41,577 --
Reduction of bank debt and long-term debt ................... (2,935,848) (6,605) (10,515) (9,175)
Proceeds from issuance of common stock, net ................. 28,310,163 956,424 548,292 (2,686)
Proceeds from exercise of stock options and warrants, net ... 5,590,254 83,731 45,850 --
Proceeds from issuance of convertible debentures,
related party .............................................. 297,000 297,000 -- --
Proceeds from issuance of convertible debentures,
unrelated party ............................................ 416,993 69,993 -- --
------------ ----------- ----------- -----------
Net cash provided by financing activities ................. 36,985,890 1,400,543 625,204 (11,861)
------------ ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ...... 44,781 (212,664) (1,125,688) (3,716,320)
Cash and cash equivalents at beginning of period ............... -- 257,445 1,383,133 5,099,453
------------ ----------- ----------- -----------
Cash and cash equivalents at end of period ..................... $ 44,781 $ 44,781 $ 257,445 $ 1,383,133
============ =========== =========== ===========
Supplemental disclosure of cash flow information - interest paid $ 1,662,446 $ 8,733 $ 4,980 $ 2,378
============ =========== =========== ===========
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 ...... $ 3,242,000 $ 297,000 $ -- $ --
============ =========== =========== ===========
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.............. $ 296,200 $ 10,030 $ 92,184 $ 16,631
============ =========== =========== ===========
Conversion of notes payable, bank and accrued
interest to long-term debt.................................. $ 1,699,072 $ -- $ -- $ --
============ =========== =========== ===========
F-13
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24, 1981
(date of
inception) to
July 31,
2001 2001 2000 1999
------------ ----------- ----------- -----------
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, 2001, 2000
and 1999 and the Period From
August 24, 1981 (Date of
Inception) to July 31, 2001
(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.
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.
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. The debt has been
issued at rates which represent prevailing market rates for similar
financings.
F-15
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
Comprehensive Income (Loss)
The net loss of $2,295,000, $1,722,000 and $3,157,000, recorded for the
years ended July 31, 2001, 2000 and 1999, respectively, is equal to the
comprehensive loss for those periods in accordance with Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
Earnings (Loss) 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
Company is in a loss position and the assumed exercise of stock options
and warrants would be all anti-dilutive. The number of outstanding options
and warrants that could dilute earnings per share in future periods was
6,445,748, 6,156,195 and 5,894,875 at July 31, 2001, 2000 and 1999,
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
Stock based compensation is recognized using the intrinsic value method.
For disclosure purposes, proforma net income (loss) and net income (loss)
per share data are provided in accordance with Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" as if the
fair value method had been applied.
The Company records compensation expense equal to the value of stock
options granted for consulting services rendered to the Company by
non-employees. The value of the options granted to non-employees is
determined by the Black Scholes option pricing model.
(2) Liquidity
The Company has reported net losses of $2,295,000, $1,722,000, and
$3,157,000 for the fiscal years ended July 31, 2001, 2000 and 1999,
respectively. The loss from date of inception, August 24, 1981, to July
31, 2001 amounts to $58,971,000. 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.
F-16
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Liquidity, (Continued)
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. From August through October 4, 2001, the
Company received gross proceeds of approximately $178,500 from the private
placement of various individual investors and $100,000 note payable upon
demand from an unrelated party. No assurances can be provided that the
additional capital will be sufficient to meet the Company's needs.
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.
Therefore, the Company expanded its ongoing clinical trial
internationally. 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.
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:
2001 2000
---- ----
Laboratory equipment............ $ 755,040 755,040
Office equipment................ 296,105 296,105
Leasehold improvements.......... 97,833 97,833
---------- ----------
Total........................ 1,148,978 1,148,978
Less accumulated depreciation 1,081,423 1,006,808
---------- ----------
Property and equipment, net.. $ 67,555 142,170
========== ==========
F-17
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(4) Long-term Debt
Long-term debt consists of the following at July 31:
2001 2000
------- -------
Note payable, in monthly installments of $1,459, including principal and
interest commencing April 2000 and each month thereafter until March
2005, secured by equipment .......................................... $30,720 $37,325
Less current portion ................................................... 7,057 7,074
------- -------
$23,663 $30,251
======= =======
(5) Note Payable - Convertible Note
In April 2001, the Company entered into convertible notes payable with
certain related and unrelated parties in the aggregate amount of $366,993.
The notes were due within ninety (90) 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 based on the average of the high and low trade
prices of the Company's common stock for the ten (10) trading days
preceding 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 warrants of $133,793, using the
Black-Scholes options-pricing model, was recorded as interest expense over
the ninety day note term. In July 2001, an aggregate of $297,000 note
payables were converted which resulted in the issuance of 330,000 shares
of the Company's common stock. In addition, upon conversion, the Company
issued the agreed to three-year warrants to purchase an aggregate of
330,000 shares of common stock at an exercise price of $2.50 per share. An
aggregate balance of the convertible notes in the amount of $69,993 was
renewed for one hundred twenty (120) days for the same conversion price of
$0.90 per share. In addition, upon conversion, the lender would receive a
five-year warrant for each share of converted Alfacell common stock at an
exercise price of $1.50 per share. The estimated value of the warrants of
$45,000, using the Black-Scholes options-pricing model, was treated as a
debt discount which will accrete as interest expense over the one hundred
twenty day note term through October 31, 2001.
(6) Leases
The Company leases its facility under a five-year operating lease which is
due to expire on December 31, 2001 and will be negotiating a new lease
agreement under similar terms. 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 $136,000, $127,000, and
$108,000 in 2001, 2000 and 1999, respectively.
Future minimum lease payments under noncancellable leases for the next
year ending July 31 are as follows:
Operating leases
----------------
2002 56,667
F-18
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) 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.
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.
F-19
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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.
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.
F-20
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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.
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-21
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) 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.
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 2000.
F-22
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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. The options expired during the fiscal year ended July
31, 2001.
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. Of these options, an aggregate
total of 1,666 expired in September and October 2001.
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(R) in the United States. The
Company recorded research and development expense of $326,500 which was
the fair value on the date of issuance of that portion of the stock
options that had vested as of July 31, 2001.
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.
F-23
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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, 2001, the Company
recorded general and administrative expense of $162,500, 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.
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.
F-24
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 May 2001, the expiration date of these
warrants was extended from May 19, 2001 to August 17, 2001. The warrants
expired on August 17, 2001.
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, 2001, the Company recorded general and administrative expense of
$109,300, 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.
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. These options expired in August 2000.
F-25
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 was 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. These options
expired three years after it vested.
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.
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.
F-26
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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.
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.
During the fiscal year ended July 31, 2001, 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.
During the fiscal year ended July 31, 2001, the Company sold an aggregate
of 863,331 shares of common stock to private investors at prices ranging
from $0.90 to $1.50 per share resulting in net proceeds of $956,000 to the
Company. In addition, the private investors were granted warrants to
purchase an aggregate of 696,665 shares of common stock at per share
exercise prices ranging from $1.50 to $3.00. The warrants will expire
during the period commencing July 2004 and ending in October 2006.
During the fiscal year ended July 31, 2001, the Company issued 165,555
shares of common stock upon the exercise of stock options by related
parties which resulted in gross proceeds of $83,700 to the Company. The
per share exercise prices of the options ranged from $0.29 to $0.85.
During the fiscal year ended July 31, 2001, the Company issued 50,000
five-year stock options to a director as payment for non-board related
services. These options vested immediately and have an 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, using the
Black-Scholes options-pricing model, 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 its affiliates.
During the fiscal year ended July 31, 2001, the Company issued 330,000
shares of common stock upon the conversion of convertible notes from
related parties. In addition, upon conversion, the related parties were
granted three-year warrants to purchase an aggregate of 330,000 shares of
common stock at an exercise price of $2.50 per share. The estimated value
of these warrants in the amount of $108,900 was recorded by the Company as
interest expense during the fiscal year ended July 31, 2001.
(8) 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 2001:
F-27
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Common Stock Warrants, (Continued)
Warrants Exercise 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
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 8/17/01
Issued to the Placement Agent in connection with
the February 1998 Private placement (see note 7) 350,574 2.20 - 2.50 8/17/01
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 8/17/01
Expired 55,945 4.00 10/1/98
------
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
Sold in various private placements 696,665 1.50 - 3.00 7/07/04 to 10/30/06
Issued to related parties upon conversion of note
payable 330,000 2.50 7/07/04
---------
Outstanding at July 31, 2001 3,415,864 1.03 - 4.55 8/17/01 to 10/30/06
========= ===========
F-28
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) 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.
The following table summarizes stock option activity for the period August
1, 1994 to July 31, 2001:
Shares Available Number of Weighted Average Exercise
for Grant Shares Price Per Share
--------- ------ ---------------
Balance August 1, 1994 1,926,841 5,935,337 $3.76
Granted (818,850) 818,850 2.60
Exercised -- (185,000) 2.36
Canceled -- (1,897,500) 4.30
---------- ----------
Balance July 31, 1995 1,107,991 4,671,687 3.39
Granted (296,205) 296,205 3.99
Exercised -- (656,334) 2.92
Canceled 6,500 (235,333) 4.89
---------- ----------
Balance July 31, 1996 818,286 4,076,225 3.43
1997 Plan 2,000,000 -- --
Granted (932,500) 932,500 4.90
Exercised -- (639,500) 3.82
Canceled 484,845 (484,845) 4.70
---------- ----------
Balance July 31, 1997 2,370,631 3,884,380 3.56
Granted (234,333) 234,333 3.31
Canceled 91,100 (91,100) 3.81
---------- ----------
Balance July 31, 1998 2,227,398 4,027,613 3.54
Granted (595,000) 595,000 0.62
Canceled 443,934 (555,737) 3.97
---------- ----------
Balance July 31, 1999 2,076,332 4,066,876 3.05
Granted (827,000) 827,000 0.52
Exercised -- (95,000) 0.48
Canceled 638,395 (1,031,880) 2.73
---------- ----------
Balance July 31, 2000 1,887,727 3,766,996 2.65
Granted (447,000) 447,000 0.85
Exercised -- (165,555) 0.51
Canceled 774,315 (1,018,557) 3.42
---------- ----------
Balance July 31, 2001 2,215,042 3,029,884 2.24
========== ========== =====
F-29
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
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 certain milestones, 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. No compensation expense was issued in 2000 and 2001. An aggregate
50,000 options issued to the Company's outside board of directors were
exercised during the fiscal year 2001. The options outstanding at July 31,
2001 will expire between August 1, 2001 and August 21, 2009.
The weighted-average fair value per option at the date of grant for
options granted during the fiscal years 2001, 2000 and 1999 were $0.74,
$0.45 and $0.36, respectively. The fair value was estimated using the
Black-Scholes options pricing model based on the following assumptions:
2001 2000 1999
------- ------- -------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 5.50% 6.00% 6.00%
Expected stock price volatility 104.25% 114.50% 93.99%
Expected term until exercise (years) 6.00 6.37 5.59
Pro forma net loss and loss per share reflecting approximate compensation
cost for the fair value of stock options awarded are as follows:
2001 2000 1999
---- ---- ----
Net Loss:
As reported $ (2,294,936) $ (1,722,298) $ (3,156,636)
Pro forma (2,522,656) (1,956,667) (3,429,057)
Loss per common share:
As reported $ (0.12) $ (0.10) $ (0.18)
Pro forma (0.13) (0.11) (0.20)
The following table summarizes information concerning options outstanding
at July 31, 2001:
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 1,404,445 5.66 $ 0.62 528,645 $ 0.61
2.00 - 2.99 96,550 5.14 2.73 41,550 2.80
3.00 - 3.99 1,132,794 1.57 3.20 1,097,794 3.19
4.00 - 4.99 183,595 1.78 4.60 183,595 4.60
5.00 - 5.99 167,500 3.38 5.17 117,500 5.16
6.00 - 6.99 45,000 1.42 6.97 45,000 6.97
=========== ------ ==== ==== ------ ======
3,029,884 2,014,084
========= =========
F-30
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
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:
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
as described in note 9) 894,887 $2.50-7.00
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
======== ==========
All of the above options are expired as of July 31, 2001.
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.
(9) Stock Options, (Continued)
F-31
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
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
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.
(10) 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 ended Fair Amount 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 ended Fair Amount 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-32
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) 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 2001, 2000 or 1999.
(11) 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. For the state fiscal year 2001 (July
1, 2000 to June 30, 2001), the Company had $1,774,000 total available tax
benefits of which $602,000 was allocated to be sold between July 1, 2000
to June 30, 2001. In December 2000, the Company received $451,000 from the
sale of an aggregate of $602,000 tax benefits which was recognized as a
tax benefit for the fiscal year 2001. In December 1999, the Company
received $756,000 from the sale of its allocated tax benefits which was
recognized as a tax benefit for the fiscal year 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-33
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) Income Taxes, (Continued)
At July 31, 2001 and 2000, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
2001 2000
---- ----
Deferred tax assets:
Excess of book over tax depreciation and amortization $ 83,946 $ 72,248
Accrued expenses 131,098 171,916
Federal and state net operating loss carryforwards 14,666,868 14,838,624
Research and experimentation and investment tax
credit carry forwards 1,203,536 922,785
------------ ------------
Total gross deferred tax assets 16,085,448 16,005,573
Valuation allowance (16,085,448) (16,005,573)
------------ ------------
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. The
tax benefit assumed using the federal statutory tax rate of 34% has been
reduced to an actual benefit of zero due principally to the aforementioned
valuation allowance.
At July 31, 2001, the Company has federal net operating loss carryforwards
of approximately $40,185,440 that expire in the years 2002 to 2021. The
Company also has investment tax credit carryforwards of $17,719 and
research and experimentation tax credit carryforwards of $913,149 that
expire in the years 2002 to 2021. 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.
(12) Other Financial Information
Accrued expenses as of July 31, consist of the following:
2001 2000
---- ----
Payroll and payroll taxes $ 43,876 $ 34,926
Professional fees 50,690 51,007
Clinical trial grants 327,745 308,070
Other 43,502 17,844
-------- --------
$465,813 $411,847
======== ========
Other current assets as of July 31, consist of the following:
2001 2000
---- ----
Prepaid insurance $ 35,380 $ 15,963
Other 7,553 12,654
-------- --------
$ 42,933 $ 28,617
======== ========
F-34
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(13) Commitments and Contingencies
On July 23, 1991, the Board of Directors authorized the Company to pay
Kuslima Shogen 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(R), 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 patents. If the Company manufactures
and markets its own drugs, then the Company will pay an amount equal to 5%
of net sales from any products sold during the life of the patents. On
April 16, 2001, this agreement was amended and clarified to provide that
Ms. Shogen would receive the 15% royalty payment relating to licensees or
the 5% fee relating to sales but not both, unless the Company and the
licensee both market the licensed product.
The Company has product liability insurance coverage in the amount of
$6,000,000 for clinical trials in the U.S. Additionally, the Company also
maintains product liability insurance in Europe in the amount of
DM20,000,000. 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.
(14) Research and Development Agreement
In November 1992, the Company entered into a CRADA with the NIH. In
accordance with this CRADA, the NIH performed 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 year ended July 31, 1999.
In August 1995, the Company entered into a CRADA with the NCI. In
accordance with this CRADA, the NCI performed 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 and $62,400 for the fiscal years ended July 31, 2000 and 1999,
respectively.
(15) 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 vesting schedule was
based from the date the Plan was adopted. For the fiscal years ended July
31, 2001, 2000 and 1999, the Company's contribution to the Plan amounted
to $23,826, $21,714 and $16,052, respectively.
F-35
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(16) Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
2001 2000
First Second Third Fourth Totals First Second Third Fourth Totals
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 3.8 $ 3.0 $ 1.5 $ 4.8 $ 13.1 $ 15.0 $ 11.3 $ 13.0 $ 11.8 $ 51.1
Operating loss (511.9) (688.4) (762.2) (783.8) (2,746.3) (714.2) (731.5) (728.2) (304.2) (2,478.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (60.5) (688.4) (762.2) (783.8) (2,294.9) (714.2) 24.3 (728.2) (304.2) (1,722.3)
Loss per share-basic
and diluted $ 0.00 $ (0.04) $ (0.04) $ (0.04) $ (0.12) $ (0.04) $ 0.00 $ (0.04) $ (0.02) $ (0.10)
F-36
ALFACELL CORPORATION
(A Development Stage Company)
BALANCE SHEET
January 31, 2002
(Unaudited)
ASSETS January 31, 2002
----------------
Current assets:
Cash and cash equivalents ............................................. $ 14,483
Other assets .......................................................... 21,494
------------
Total current assets ................................................ 35,977
Property and equipment, net of accumulated depreciation
and amortization of 1,105,503 ......................................... 43,475
Other assets ............................................................. 64,267
------------
Total assets .................................................... $ 143,719
============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
Current liabilities:
Current portion of long-term debt .................................... $ 7,694
Accounts payable ..................................................... 689,059
Accrued expenses ..................................................... 504,987
Loan payable related party ........................................... 135,465
------------
Total current liabilities ....................................... 1,337,205
Long-term debt, less current portion ..................................... 20,141
------------
Total liabilities ............................................... 1,357,346
------------
Stockholders' (deficiency):
Preferred stock, $.001 par value
Authorized and unissued, 1,000,000 shares ......................... --
Common stock $.001 par value
Authorized 40,000,000 shares;
Issued and outstanding, 20,727,785 shares ......................... 20,728
Capital in excess of par value ....................................... 58,812,386
Deficit accumulated during development stage ......................... (60,046,741)
------------
Total stockholders' (deficiency) ....................................... (1,213,627)
------------
Total liabilities and stockholders' (deficiency) ................ $ 143,719
============
See Accompanying Notes to the financial statements.
F-37
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Six months ended January 31, 2002 and 2001,
and the Period from August 24, 1981
(Date of Inception) to January 31, 2002
(Unaudited)
August 24, 1981
(Date of
Inception)
Six Months Ended to
January 31, January 31, 2002
----------- ----------------
2002 2001
---- ----
Revenue:
Sales ...................................... $ -- $ -- $ 553,489
Investment income .......................... 157 6,769 1,372,442
Other income ............................... -- -- 60,103
------------ ------------ ------------
Total revenue .............................. 157 6,769 1,986,034
------------ ------------ ------------
Costs and expenses:
Cost of sales .............................. -- -- 336,495
Research and development ................... 1,007,981 877,836 38,877,016
General and administrative ................. 383,614 325,452 21,249,007
Interest:
Related parties .......................... -- -- 1,142,860
Others ................................... 37,518 3,768 1,988,376
------------ ------------ ------------
Total costs and expenses ........................ 1,429,113 1,207,056 63,593,754
------------ ------------ ------------
Net loss before state tax benefit ............... (1,428,956) (1,200,287) (61,607,720)
State tax benefit ............................... 353,730 451,395 1,560,979
------------ ------------ ------------
Net loss ........................................ $ (1,075,226) $ (748,892) $(60,046,741)
============ ============ ============
Loss per basic and diluted common share ......... $ (0.05) $ (0.04)
============ ============
Weighted average number of shares outstanding ... 20,326,920 18,749,429
============ ============
See accompanying notes to financial statements
F-38
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Six months ended January 31, 2002 and 2001,
and the Period from August 24, 1981
(Date of Inception) to January 31, 2002
(Unaudited)
Six Months Ended August 24, 1981
January 31, (Date of Inception)
----------- to
2002 2001 January 31, 2002
---- ---- ----------------
Cash flows from operating activities:
Net loss .......................................................... $ (1,075,226) $ (748,892) $(60,046,741)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities ........................... -- -- (25,963)
Depreciation and amortization ................................... 24,080 38,060 1,516,538
Loss on disposal of property and equipment ...................... -- -- 18,926
Noncash operating expenses ...................................... 107,315 64,405 5,931,421
Amortization of deferred compensation ........................... -- -- 11,442,000
Amortization of organization costs .............................. -- -- 4,590
Changes in assets and liabilities:
Decrease (increase) other current assets ........................ 21,439 (67,881) (81,361)
(Increase) decrease in other assets ............................. (17,927) -- 31,784
Increase in interest payable-related party ...................... -- -- 744,539
Increase in accounts payable .................................... 329,087 3,760 1,035,169
Increase in accrued payroll and
expenses, related parties .................................... -- -- 2,348,145
Increase in accrued expenses .................................... 39,174 2,700 1,046,500
------------ ------------ ------------
Net cash used in operating activities ........................... (572,058) (707,848) (36,034,453)
------------ ------------ ------------
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)
------------ ------------ ------------
(continued)
See accompanying notes to financial statements.
F-39
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Continued
Six months ended January 31, 2002 and 2001,
and the Period from August 24, 1981
(Date of Inception) to January 31, 2002
(Unaudited)
Six Months Ended August 24, 1981
January 31, (Date of
----------- Inception) to
2002 2001 January 31, 2002
---- ---- ----------------
Cash flows from financing activities:
Proceeds from short-term borrowings .............................. $ -- $ -- $ 849,500
Payment of short-term borrowings ................................. (5,000) -- (628,500)
Increase in loans payable - related party, net ................... 135,465 -- 2,764,333
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 ........................ (2,885) (2,720) (2,938,733)
Proceeds from issuance of common stock, net ...................... 414,180 503,493 28,724,343
Proceeds from exercise of stock options and warrants, net ........ -- 46,600 5,590,254
Proceeds from issuance of convertible debentures, related party . -- -- 297,000
Proceeds from issuance of convertible debentures, unrelated party -- -- 416,993
------------ ------------ ------------
Net cash (used in) provided by financing activities ................ 541,760 547,373 37,527,650
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ............... (30,298) (160,475) 14,483
Cash and cash equivalents at beginning of period ................... 44,781 257,445 --
------------ ------------ ------------
Cash and cash equivalents at end of period ......................... $ 14,483 $ 96,970 $ 14,483
============ ============ ============
Supplemental disclosure of cash flow information - interest
paid ............................................................ $ 5,278 $ 3,768 $ 1,669,639
============ ============ ============
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 ........................ $ -- $ -- $ 3,242,000
============ ============ ============
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 .................. $ 50,000 $ 10,030 $ 346,200
------------ ============ ============
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 ................................ $ 64,993 -- $ 191,993
============ ============ ============
Issuance of common stock for services rendered .................. $ -- $ -- $ 2,460
============ ============ ============
See accompanying notes to financial statements.
F-40
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(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 January 31, 2002 and the results of operations for the three and six
month periods ended January 31, 2002 and 2001 and the period from August
24, 1981 (date of inception) to January 31, 2002. The results of
operations for the six months ended January 31, 2002 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 ("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 $1,075,000 and
$749,000 recorded for the six months ended January 31, 2002 and 2001,
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
accountants on the Company's July 31, 2001 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, 2001 and January 31, 2002 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. Until the Company's operations
generate significant revenues, the Company will need to continue to fund
operations through the sources of capital previously described. From
August, 2001 through March 21, 2002, the Company received gross proceeds
of approximately $600,000 from private placements of equity to various
individual investors and exercise of warrants by an unrelated party. The
Company also has received from time to time loans payable on demand from a
related party. As of January 31, 2002 the aggregate balance of these loans
was $135,500. Additionally, in December 2001 the Company has raised
capital amounting to $354,000 through the sale of its tax benefits. As the
Company has no liquid resources and significant liabilities, it needs to
raise additional capital in order to remain in operation. The Company
believes its current operating levels require $160,000 of cash per month.
The Company does not presently maintain the cash balance needed to fund
its operations; however, to date it has been able to meet the cash needed
for continued operations. In the near term, management continues to seek
additional capital financing
F-41
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Organization and Basis of Presentation, Continued
through sales of equity in private placements and exercise of warrants. In
addition, the Company expects some funds to be available through loans
from its Chief Executive Officer, although no such loans are required to
be made. Once any of these sources if received are exhausted, the Company
will need additional financing through the sources described above, to
continue its operations. There is no assurance these funds will be
received, however, if the funds will be received it will assist in
allowing the Company to satisfy its liquidity needs.
(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 7,802,895 and 6,060,363 at January 31, 2002 and 2001,
respectively.
(3) Loan Payable, Related Party
From August 2001 to January 2002, Kuslima Shogen the Company's Chief
Executive Officer, loaned the Company some amounts payable upon demand
bearing an interest at 8% per annum. As of January 31, 2002, the loan
balance was $135,500.
(4) Capital Stock
In August 2001, the Company issued 55,556 shares of common stock in
settlement of accounts payable. In addition, the vendor was granted
five-year warrants to purchase 55,556 shares of common stock at an
exercise price of $1.50 per share. The settled accounts payable totaled
$50,000 and therefore that amount has been charged to equity as the value
of the stock and warrants.
In August 2001, the Company issued 70,000 five-year stock options as
payment for services to be rendered. The options vested immediately and
have an exercise price of $0.75 per share. The total general and
administrative expense recorded for these options was $35,770, based upon
the fair value of such option on the date of issuance.
During the quarter ended October 31, 2001, the Company sold an aggregate
of 440,000 shares of common stock to private investors at a price of $0.50
to $0.90 per share resulting in net proceeds of $252,000 to the Company.
In addition, the private investors were granted five-year warrants to
purchase an aggregate of 440,000 shares of common stock at an exercise
price of $1.50 per share.
In October 2001, the Company issued 72,214 shares of common stock upon the
exercise of convertible debentures by unrelated parties. In addition, upon
conversion, the unrelated parties were granted five-year warrants to
purchase 72,214 shares of common stock at $1.50 per share.
During the quarter ended January 31, 2002, the Company sold an aggregate
of 359,070 shares of common stock to private investors at a price of $0.50
per share resulting in net proceeds of $162,200 to the Company. In
addition, the private investors were granted five-year warrants to
purchase an aggregate of 409,070 shares of common stock at an exercise
price of $1.50 per share.
F-42
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(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 2002 (July
1, 2001 to June 30, 2002), the Company has $1,477,000 total available tax
benefits of which $426,000 was allocated to be sold between July 1, 2001
and June 30, 2002. In December 2001, the Company received $354,000 from
the sale of the allocated tax benefits which was recognized as a tax
benefit for the six months ended January 31, 2002. In December 2000, the
Company received $451,000 from the sale of the allocated tax benefits
which was recognized as a tax benefit for the six months ended January 31,
2001. The Company will attempt to sell the remaining balance of its tax
benefits in the amount of approximately $1,051,000 between July 1, 2002
and June 30, 2003, 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-43
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...................................... $ 104
Blue Sky.................................................. $ 5,000
Legal fees and expenses................................... $ 30,000
Accounting fees and expenses.............................. $ 10,000
Printing expenses......................................... $ 10,000
Miscellaneous............................................. $ 4,896
Total............................................ $ 60,000
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
II - 1
expenses, including attorneys' fees, 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 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.
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 January 2000, we issued 100,000 shares of common stock to DZS Computer
Solutions, Inc. as payment for services rendered.
II - 2
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. On October 31, 2001, the Board of Directors approved a change
in the exercise price of these warrants from $2.50 per share to $1.50 per share
and changed the expiration date from July 7, 2004 to July 7, 2006. We received
an 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 were 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 elected to convert an aggregate $297,000 notes payable into an aggregate
330,000 shares of common stock. In addition, upon conversion, they received
warrants to purchase an aggregate 330,000 shares of common stock at an exercise
price of $2.50 per share and with an expiration date of July 7, 2004. An
aggregate balance of the notes to unrelated parties in the amount of $69,993 was
renewed for 120 days for the same conversion price of $0.90 per share. In
October 2001, the remaining noteholders elected to convert an aggregate $64,993
notes payable into an aggregate 72,214 shares of common stock. In addition, upon
conversion, they received five-year warrants to purchase an aggregate 72,214
shares of common stock at an exercise price of $1.50 per share. On October 31,
2001, the Board of Directors approved a change in the exercise price of the
330,000 warrants issued to related parties upon conversion of the notes from
$2.50 per share to $1.50 per share and changed the expiration date to July 7,
2006.
In July 2001, we completed a private placement resulting in the issuance
of 307,777 shares of restricted common stock and 307,777 five-year warrants to
purchase an aggregate 307,777 shares of common stock at an exercise price of
$1.50 per share. We received an aggregate $227,000 from such private placement.
In August 2001, we completed a private placement resulting in the issuance
of 115,000 shares of restricted common stock and 115,000 five-year warrants to
purchase an aggregate of 115,000 shares of common stock at per share exercise
price of $1.50 per share. We received an aggregate $103,500 from such private
placement.
II - 3
In August 2001, we converted $50,000 of our accounts payable owed to DZS
Computer Solutions, Inc., into 55,556 shares of common stock. In addition we
issued to DZS Computer Solutions, Inc. 55,556 five-year warrants to purchase
55,556 shares of common stock at an exercise price of $1.50 per share.
In September 2001, we completed a private placement resulting in the
issuance of 200,000 shares of restricted common stock and 200,000 five-year
warrants to purchase 200,000 shares of common stock at an exercise price of
$1.50 per share. We received an aggregate $100,000 from such private placement.
In October 2001, we completed a private placement resulting in the
issuance of 125,000 shares of restricted common stock and 125,000 five-year
warrants to purchase an aggregate 125,000 shares of common stock at an exercise
price of $1.50 per share. We received an aggregate $62,500 from such private
placement.
In November 2001, we completed a private placement resulting in the
issuance of 209,070 shares of restricted common stock and 259,070 five-year
warrants to purchase our aggregate 259,070 shares of common stock at an exercise
price of $1.50 per share. We received an aggregate $104,535 from such private
placement.
In January 2002, we completed a private placement resulting in the
issuance of 150,000 shares of restricted common stock and 150,000 five-year
warrants to purchase an aggregate 150,000 shares of common stock at an exercise
price of $1.50 per share. We received an aggregate $75,000 from such private
placement.
In February 2002, we completed a private placement resulting in the
issuance of 1,500,000 five-year warrants to purchase 1,500,000 shares of common
stock. Of such warrants, 100,000 were exercised in March 2002 at an exercise
price of $0.50 per share, another 150,000 are exercisable at $0.50 per share,
650,000 are exercisable at $1.00 per share and 600,000 are exercisable at $1.50
per share. We received $1,500 from such private placement.
In March 2002, we completed a private placement resulting in the issuance
of 200,000 shares of restricted common stock and 200,000 five-year warrants to
purchase an aggregate of 200,000 shares of common stock at an exercise price of
$0.75 per share. We received an aggregate $100,000 from such private placement.
In April 2002, we completed a private placement resulting in the issuance
of 838,638 shares of restricted common stock and 838,638 five-year warrants to
purchase an aggregate of 838,638 shares of common stock at an exercise price of
$0.75 per share. We received an aggregate $375,000 from such private placement.
On May 13, 2002, we completed a private placement resulting in the
issuance of 500,000 shares of restricted common stock and 500,000 five-year
warrants to purchase an aggregate of 500,000 shares of common stock at an
exercise price of $1.00 per share. We received an aggregate $200,000 from such
private placement.
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 *
II - 4
Exhibit No. Title Exhibit No.
- ----------------------------------------- --------------------------------------------- --------------------------------
(or Exhibit Incorporation No. Reference) (or Incorporated by Reference)
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 LLP 5.1
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
II - 5
Exhibit No. Title Exhibit No.
- ----------------------------------------- --------------------------------------------- --------------------------------
(or Exhibit Incorporation No. Reference) (or Incorporated by Reference)
10.13 Form of Stock and Warrant Purchase +
Agreement and Warrant Agreement used in
Private Placement completed on September
13, 1994
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
10.23 Form of Subscription Agreement and Warrant ^
Agreement used in April 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 Private Placement
10.26 Form of Subscription Agreement and Warrant ^
Agreement used in the August and October
2001 private placement
II - 6
Exhibit No. Title Exhibit No.
- ----------------------------------------- --------------------------------------------- --------------------------------
(or Exhibit Incorporation No. Reference) (or Incorporated by Reference)
10.27 Form of Subscription Agreement and Warrant ^
Agreement used in the September 2001,
November 2001 and January 2002 private
placements.
10.28 Warrant issued in the February 2002 private ^
placement
10.29 Form of Subscription Agreement and Warrant 10.29
Agreement used in the March 2002, April
2002 and May 2002 private placements.
21.1 Subsidiaries of Registrant 21.1
23.1 Consent of KPMG LLP 23.1
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
* 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.
+++ 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 exhibit to the Company's Quarterly Report in 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.
II - 7
### 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.
^ Previously filed as exhibits to the Company's Registration Statement Form
S-1 (File No. 333-38136) and incorporated herein by reference thereto.
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.
(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.
II - 8
(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 - 9
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: May 24, 2002
By: /s/ KUSLIMA SHOGEN
----------------------------
Kuslima Shogen, Chief Executive Officer,
Acting Chief Financial Officer and Chairman of
the Board.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kuslima Shogen, his or her true and
lawful attorney-in-fact and agent, with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement (or any other registration statement for the same
offering that is effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933) and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorney-in-fact and agents, or his or her substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the indicated capacities
on May 24, 2002.
/s/ KUSLIMA SHOGEN
- --------------------------------------------
Kuslima Shogen, Chief Executive Officer,
Acting Chief Financial Officer
Principal Executive Officer, Principal Accounting Officer
and Chairman of the Board
/s/ STANISLAW M. MIKULSKI, M.D.
- --------------------------------------------
Stanislaw M. Mikulski, M.D.,
Executive Vice President and Director
/s/ STEPHEN K. CARTER, M.D.
- --------------------------------------------
Stephen K. Carter, M.D., Director
- --------------------------------------------
Donald R. Conklin, Director
- --------------------------------------------
Martin F. Stadler, Director
II - 10
Exhibit Index
5.1 Opinion of Dorsey & Whitney LLP 5.1
10.29 Form of Subscription Agreement and Warrant Agreement used 10.29
in the March 2002, April 2002 and May 2002 private
placements.
21.1 Subsidiaries of Registrant None
23.1 Consent of KPMG LLP 23.1
23.2 Consent of Dorsey & Whitney LLP (included in
Exhibit 5.1)
II - 11