As filed with the Securities and Exchange Commission on May 18, 2004
Registration No. 333-112865
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
325410
(Primary Standard
DELAWARE Industrial 22-2369085
(State or other jurisdiction of Classification Code (I.R.S. Employer
incorporation or organization) Number) Identification No.)
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 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, 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 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|.
CALCULATION OF REGISTRATION FEE
=============================================================================================================================
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate Offering Amount of
Securities to be Registered Amount to be Registered Offering Price per Share Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value
per share 1,210,654(1) $8.83(2) $10,690,075 $1,354(3)
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value
per share 1,271,187(4) $12.39(5) $15,750,007 $1,996(3)
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value
per share 394,336(6) N/A N/A N/A(7)
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value
per share 189,585(8) N/A N/A N/A(7)
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value
per share 10,851,453(9) N/A N/A N/A(10)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 13,917,215 N/A $26,440,082 $3,350(11)
=============================================================================================================================
(1) Amount of shares of Common Stock to be registered.
(2) Estimated solely for the purpose of computing the amount of the
registration fee for the shares of Common Stock to be registered 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 14, 2004, which date
was within five business days of the original filing of this registration
statement.
(3) This amount is included in the aggregate filing fee for this registration
statement of $3,350.
(4) 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.
(5) Estimated solely for the purpose of computing the amount of the
registration fee for the shares of Common Stock issuable upon exercise of
warrants to be registered in accordance with Rule 457(g) under the
Securities Act, based upon the price at which the warrants may be
exercised.
(6) Amount of shares of Common Stock to be registered for which a filing fee
was paid on February 17, 2004, in connection with the original filing of
this registration statement.
(7) A filing fee in the aggregate of $327 for these shares was previously paid
on February 17, 2004 in connection with the original filing of this
registration statement.
(8) Amount of shares of Common Stock issuable upon exercise of warrants to be
registered for which a filing fee was paid on February 17, 2004, in
connection with the original filing of this registration statement. These
shares are to be offered and sold by the selling stockholders upon the
exercise of outstanding warrants.
(9) Amount of shares of Common Stock previously registered pursuant to
Registration Statement Nos. 333-38136 and 333-89166, as amended on January
7, 2004 and Registration Statement No. 333-111101, filed on January 7,
2004.
(10) The filing fee covering these shares was previously paid.
(11) The $327 registration fee was paid on February 17, 2004 in connection with
the original filing of this registration statement. The $3,350 listed is
for those additional shares that are being added to this registration
statement with this filing.
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.
Pursuant to the provisions of Rule 429 under the Securities Act of 1933,
this Registration Statement relates to Registration Statement Nos.
333-38136, 333-89166 and 333-111101 filed by the Registrant. The
prospectus forming part of this Registration Statement shall serve the
purpose of a post-effective amendment to Registration Statement Nos.
333-38136, 333-89166 and 333-11101 as specified in Rule 429.
EXPLANATORY NOTE
Alfacell has previously filed three Registration Statements, Nos.
333-38136, 333-89166 and 333-111101, in order to register shares of its Common
Stock, as well as shares of Common Stock underlying warrants held by certain
selling stockholders. Pursuant to Rule 429 under the Securities Act of 1933,
this Registration Statement also serves as a post-effective amendment to
Registration Statement Nos. 333-38136, 333-89166 and 333-111101. This
Registration Statement eliminates those selling stockholders who have previously
sold shares pursuant to such Registration Statements and also eliminates those
selling stockholders to whom Alfacell no longer has registration obligations. On
January 7, 2004, the Company filed post-effective amendments to Registration
Statement Nos. 333-38136 and 333-89166, and a pre-effective amendment to
Registration Statement No. 333-111101. Of the 11,336,453 shares registered
pursuant to such January 7, 2004 post-effective and pre-effective amendments, as
of March 31, 2004, 485,000 shares have either been sold pursuant to the
previously filed Registration Statements or Alfacell is no longer required to
register such shares. Accordingly, this Registration Statement carries forward
from the three previously filed Registration Statements (i) 3,889,096 shares of
Common Stock and (ii) 6,962,357 shares of Common Stock underlying warrants and
options, for an aggregate of 10,851,453 shares of Common Stock.
In addition, this Registration Statement also registers an additional (i)
1,604,990 shares of Common Stock and (ii) 1,460,772 shares of Common Stock
underlying warrants, for an aggregate of 3,065,762 shares of Common Stock, all
of which have not previously been registered.
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 18, 2004
PROSPECTUS
ALFACELL CORPORATION
13,917,215 Shares
Common Stock
---------------
Our securityholders named on page 50 of this prospectus are offering an
aggregate of 13,917,215 shares of our Common Stock.
Our Common Stock is traded on the OTC Bulletin Board under the symbol
"ACEL.OB." On May 17, 2004, the reported last sale price of our Common Stock
on the OTC Bulletin Board was $7.88 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.
May [ ], 2004
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY................................................................................................1
RISK FACTORS......................................................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS................................................................13
USE OF PROCEEDS..................................................................................................13
PRICE RANGE OF COMMON STOCK......................................................................................14
DIVIDEND POLICY..................................................................................................14
SELECTED FINANCIAL DATA..........................................................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................16
BUSINESS.........................................................................................................23
MANAGEMENT.......................................................................................................39
SUMMARY COMPENSATION TABLE.......................................................................................43
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES................................44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................45
SELLING SECURITYHOLDERS..........................................................................................47
DESCRIPTION OF SECURITIES........................................................................................54
PLAN OF DISTRIBUTION.............................................................................................55
LEGAL MATTERS....................................................................................................57
EXPERTS..........................................................................................................57
AVAILABLE INFORMATION............................................................................................58
REPORTS OF INDEPENDENT AUDITORS.................................................................................F-2
FINANCIAL STATEMENTS............................................................................................F-6
NOTES TO FINANCIAL STATEMENTS..................................................................................F-16
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 a new class of therapeutic drugs for the treatment of cancer and
other pathological conditions. Based on our proprietary Ribonuclease, or RNase,
which is a type of biological enzyme that splits RNA molecules and is the basis
of our technology platform, our drug discovery and development program consists
of novel therapeutics developed from amphibian ribonucleases. These are very
basic RNA enzymes which play important roles in nature in the development of
cells and their functions. RNA is an essential bio-chemical cellular component
necessary to support life. There are various types of RNA, all of which have
specific functions in a living cell. They help control several essential
biological activities, namely regulation of cell proliferation, maturation,
differentiation and cell death. Therefore, they are ideal candidates for the
development of therapeutics for cancer and other life-threatening diseases,
including HIV and autoimmune diseases, that require anti-proliferative and
apoptotic, or programmed cell death, properties. We have co-sponsored and been a
key participant in the International Ribonuclease Meetings held every three
years.
ONCONASE(R), our trademark name for our flagship product, is undergoing
the last stage of clinical testing, or Phase III. This Phase III trial is a
two-part international centrally randomized trial of ONCONASE(R) as a treatment
for malignant mesothelioma, an inoperable form of cancer found in the lining of
the lung and abdomen. While 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 patient enrollment stage. Both parts of the Phase III trial are
survival studies, which require all patients to die before the trials are
completed. Because we are unable to predict when such patient deaths will occur,
we are currently unable to ascertain when the trials will be completed or when
we will be able to file a New Drug Application, or NDA, with the Food and Drug
Administration, or FDA. We have also conducted other randomized and
non-randomized trials with patients with advanced stages of solid tumors in
other types of cancers.
ONCONASE(R), unlike most cancer drugs that attack all cells regardless of
their phenotype, malignant versus normal, and produce a variety of severe
toxicities, is not an indiscriminate cytotoxic, or cell killing agent, but
rather, its activity is controlled through unique and specific molecular
mechanisms. ONCONASE(R) affects primarily exponentially growing malignant cells.
ONCONASE(R) is a novel amphibian ribonuclease, unique among the superfamily of
pancreatic ribonuclease that has been isolated from the eggs of the Rana pipiens
frog, commonly called the leopard frog. We have determined that thus far,
ranpirnase, the generic name of ONCONASE(R), is the smallest known protein
belonging to the superfamily of pancreatic ribonuclease and has been shown, on a
molecular level, to re-regulate the unregulated growth and proliferation of
cancer cells.
In December 2002, we received Fast Track Designation from the FDA for
ONCONASE(R) for the treatment of malignant mesothelioma. Fast Track Designation
is an FDA program designed to expedite the review of new drugs that are intended
to treat serious or life threatening conditions and that demonstrate the
potential to address unmet medical needs. In February 2001, we received an
Orphan Medicinal Product Designation for ONCONASE(R) from the European Agency
for the Evaluation of Medicinal Products, or the EMEA. Orphan Medicinal Product
Designation is a program designed to provide marketing, protocol and other
incentives for pharmaceutical companies to develop and market
products in the European Community that address life threatening or very serious
conditions that affect not more than 5 in 10,000 persons in the European
Community. Orphan designation in Europe entitles the Company to 10 years of
marketing exclusivity, reduced filing fees and regulatory guidance from the
EMEA.
These FDA and EMEA designations for ONCONASE(R) may serve to expedite its
regulatory review, assuming the clinical trials yield a positive result. Future
clinical trials, however, may not demonstrate that ONCONASE(R) is effective.
Thus, our applications for FDA or EMEA approval to market ONCONASE(R), which are
dependent upon the success of our clinical trials, may be affected. The efficacy
and safety of ONCONASE(R) for malignant mesothelioma, will ultimately be
determined by the FDA. In the interim, our Fast Track Designation allows us to
continue to have meetings and discussions with the FDA to establish mutually
agreed upon parameters for the NDA to obtain marketing approval for ONCONASE(R),
based on the assumption that the clinical trials will continue to yield
favorable results.
Our drug discovery program forms the basis for the development of specific
recombinant RNases for chemically linking drugs and other compounds such as
monoclonal antibodies, growth factors, etc. and gene fusion products with the
goal of targeting various molecular functions. This program provides for joint
design and generation of new products with outside partners. We may own these
new products along with a partner(s), or we may grant an exclusive license to
the collaborating partner(s).
We have also discovered another series of proteins, collectively named
amphinases, that may have therapeutic uses. These proteins are bioactive in that
they have an effect on living cells and organisms and have both anti-cancer and
anti-viral activity. All of the proteins characterized to date are RNases. These
products are currently undergoing preclinical testing. We are currently in
discussions with potential pharmaceutical partners for the development of these
new compounds as conjugates and fusion proteins.
We are engaged in the research, development and clinical trials of our products
both independently and through research collaborations. Due to our lack of
commercially available products, we have financed our operations since inception
through the sale of our equity securities and convertible debentures in
registered offerings and private placements. Additionally, we have raised
capital through debt financings, the sale of our tax benefits and research
products, interest income and financing received from our Chief Executive
Officer. These funds provide us with the resources to acquire staff, facilities,
capital equipment, finance our technology, product development, manufacturing
and clinical trials. We have incurred losses since inception and to date we have
not consummated any licensing, marketing or development arrangements. Presently,
our cash balance is sufficient to fund our expanded operations through July 31,
2005 based on our expected level of expenditures in relation to activities in
preparing ONCONASE(R) for an NDA filing and other ongoing operations of the
company. However, we continue to seek additional capital financing through the
sale of equity in private placements, sale of our tax benefits and exercise of
stock options and warrants but cannot be sure that we will be able to raise
capital on favorable terms or at all.
Alfacell Corporation was incorporated in Delaware in 1981. 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 Year Ended July 31,
Inception) ----------------------------------------------------------------------------
to January
31, 2004 2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
Statement of
Operations Data:
Total revenues,
principally
investment income $ 2,038,822 $ 39,877 $ 4,838 $ 13,121 $ 51,144 $ 168,372
------------ ------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Costs of sales 336,495 0 0 0 0 0
Research and
development 42,913,221 1,699,962 2,032,938 1,900,678 1,879,728 2,401,945
General and
administrative 22,936,040 624,406 798,053 705,745 644,588 920,686
Interest 3,799,258 358,398 118,741 153,029 4,980 2,377
------------ ------------ ------------ ------------ ------------ ------------
Total costs and
expenses 69,985,014 2,682,766 2,949,732 2,759,452 2,529,296 3,325,008
------------ ------------ ------------ ------------ ------------ ------------
State tax benefit 2,014,185 231,357 353,732 451,395 755,854 0
------------ ------------ ------------ ------------ ------------ ------------
Net loss $(65,932,007) $ (2,411,532) $ (2,591,162) $ (2,294,936) $ (1,722,298) $ (3,156,636)
============ ============ ============ ============ ============ ============
Net loss per common
share:
Basic and diluted $ (0.10) $ (0.12) $ (0.12) $ (0.10) $ (0.18)
------------ ------------ ------------ ------------ ------------
Weighted average
number of
common shares:
Basic and diluted 23,166,000 21,045,000 18,927,000 17,812,000 17,271,000
------------ ------------ ------------ ------------ ------------
Dividends $ 0 $ 0 $ 0 $ 0 $ 0
Six Months Ended January 31,
----------------------------
2004 2003
------------ ------------
(unaudited) (unaudited)
Statement of
Operations Data:
Total revenues,
principally
investment income $ 8,230 $ 30,234
------------ ------------
Costs and Expenses:
Costs of sales 0 0
Research and
development 1,311,286 799,370
General and
administrative 648,188 288,076
Interest 228,401 239,570
------------ ------------
Total costs and
expenses 2,187,875 1,327,016
------------ ------------
State tax benefit 221,847 229,459
------------ ------------
Net loss $ (1,957,798) $ (1,067,323)
============ ============
Net loss per common
share:
Basic and diluted $ (0.07) $ (0.05)
------------ ------------
Weighted average
number of
common shares:
Basic and diluted 27,675,584 22,830,115
------------ ------------
Dividends $ 0 $ 0
As of
--------------------------
January 31, July 31,
2004 2003
----------- -----------
(unaudited)
Balance Sheet Data:
Total assets $ 2,258,524 $ 495,322
Cash and cash equivalents 1,849,497 330,137
Working capital (deficit) (83,018) (2,404,247)
Long-term liabilities 181,436 242,516
Total stockholders' (deficiency) (104,480) (2,491,681)
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 and our other SEC
filings before deciding whether to purchase shares of our Common Stock. 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.
Risk Related to Our Company
We have incurred losses since inception and anticipate that we will incur
continued losses for the foreseeable future. We do not have a current source of
product revenue and may never be profitable.
We are a development stage company and since our inception our source of
working capital has been public and private sales of our stock. We incurred a
net loss of approximately $1,958,000 for the six months ended January 31, 2004.
We have continued to incur losses since January 2004. In addition, we had a
working capital deficit of approximately $83,000 and an accumulated deficit of
approximately $65,932,000 as of January 31, 2004. We may never achieve revenue
sufficient for us to attain profitability.
We incurred net losses of approximately $2,412,000, $2,591,000 and
$2,295,000 for the fiscal years ended July 31, 2003, 2002 and 2001,
respectively.
Our profitability will depend on our ability to develop, obtain regulatory
approvals for, and effectively market ONCONASE(R) as well as entering into
strategic alliances for the development of new drug candidates from the
out-licensing of our proprietary RNase technology. The commercialization of our
pharmaceutical products involves a number of significant challenges. In
particular our ability to commercialize ONCONASE(R) depends on the success of
our clinical development programs, our efforts to obtain regulatory approval and
our sales and marketing efforts or those of our marketing partners, if any,
directed at physicians, patients and third-party payors. A number of factors
could affect these efforts including:
o Our ability to demonstrate clinically that our products have utility
and are safe;
o Delays or refusals by regulatory authorities in granting marketing
approvals;
o Our limited financial resources relative to our competitors;
o Our ability to obtain an appropriate marketing partner;
o The availability and level of reimbursement for our products by
third party payors;
o Incidents of adverse reactions to our products;
o Side effects or misuse of our products and unfavorable publicity
that could result; and
o The occurrence of manufacturing or distribution disruptions.
We will seek to generate revenue through licensing, marketing and
development arrangements prior to receiving revenue from the sale of our
products. To date we have not consummated any licensing or marketing
arrangements and we may not be able to successfully consummate any such
arrangements. We have entered into several development arrangements, which have
resulted in limited revenues for us. However, we cannot ensure that these
arrangements or future arrangements, if any, will result in significant amounts
of revenue for us. We, therefore, are unable to predict the extent of any future
losses or the time required to achieve profitability, if at all.
4
We need additional financing to continue operations which may not be available
on acceptable terms, if it is available at all.
We need additional financing in order to continue operations, including
completion of our current clinical trials and filing marketing registrations for
ONCONASE(R) in the United States with the FDA and in Europe with the EMEA. As a
result of our continuing losses and lack of capital, the report of our
independent auditors on our July 31, 2003 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, 2003 do not
include any adjustments that might result from the outcome of this uncertainty.
If the results from our current clinical trial do not demonstrate the efficacy
and safety of ONCONASE(R) for malignant mesothelioma, our ability to raise
additional capital will be adversely affected. Even if regulatory applications
for marketing approvals are filed, we will need additional financing to continue
operations. In connection with the recent private placement of $10.0 million in
gross proceeds from an institutional investor, we plan to expand our operations
in preparing ONCONASE(R) for an NDA filing as well as fund our ongoing
operations. Presently, our cash balance is sufficient to fund our expanded
operations through July 31, 2005 based on our expected level of expenditures in
relation to activities in preparing ONCONASE(R) for an NDA filing and other
ongoing operations of the company. However, we continue to seek additional
capital financing through the sale of equity in private placements, sale of our
tax benefits and exercise of stock options and warrants but cannot be sure that
we will be able to raise capital on favorable terms or at all.
We may be unable to sell certain state tax benefits in the future and if we are
unable to do so, it would eliminate a source of financing that we have relied on
in the past.
At July 31, 2003, we had federal net operating loss carryforwards of
approximately $39,600,000 that expire from 2004 to 2023. We also had research
and experimentation tax credit carryforwards of approximately $1,186,000 that
expire from 2004 to 2023. 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. The aggregate amount of
tax benefits that New Jersey allows corporations to sell each state fiscal year
(July 1st through June 30th) is determined annually and if New Jersey reduces
such aggregate amount in any fiscal year we may be unable to sell some or all of
our available tax benefits as we have in the past. In addition, there is a
limited market for these types of sales and we may not be able to find someone
to purchase our tax benefits for a reasonable price. Our historical results of
operations have been improved by our sale of tax benefits and if we continue to
generate a limited amount of revenue and are unable in the future to sell our
tax benefits, our results of operations will be negatively impacted.
For the state fiscal year 2004 (July 1, 2003 to June 30, 2004), we had
approximately $1,378,000 total available tax benefits that were sellable, of
which New Jersey permitted us to only sell approximately $261,000. We received
approximately $222,000 from the sale of the $261,000 of tax benefits, which we
recognized as tax benefits for the six months ended January 31, 2004. For the
state fiscal year 2003 (July 1, 2002 to June 20, 2003), we had approximately
$1,373,000 in total available tax benefits that were sellable, of which New
Jersey permitted us to only sell approximately $273,000. We received
approximately $231,000 from the sale of the $273,000 of tax benefits, which we
recognized as tax benefits for the six months ended January 31, 2003.
If still available under New Jersey law, we will attempt to sell the
remaining $1,117,000 of our tax benefits, between July 1, 2004 and June 30,
2005. This amount, which is a carryover of our remaining tax benefits from state
fiscal year 2004, may increase if we incur additional tax benefits during state
fiscal year 2005. We can not estimate, however, what percentage of our sellable
tax benefits New Jersey will
5
permit us to sell, how much money we will receive in connection with the sale,
if we will be able to find a buyer for our tax benefits or if such funds will be
available in a timely manner.
We cannot predict how long it will take us nor how much it will cost us to
complete our Phase III trial because it is a survival study and we are still in
patient enrollment in part two of this Phase III trial.
We currently have ongoing a two-part confirmatory Phase III trial of
ONCONASE(R) as a treatment for malignant mesothelioma. While 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 patient enrollment stage. Both parts
of the Phase III clinical trial are survival studies, which track the length of
time enrolled patients in the studies live, and therefore, according to their
protocols, patient deaths must occur before the trials are completed. Since it
is impossible to predict when these terminal events in the Phase III trial will
occur and we are still engaged in patient enrollment in part two of the trial,
we do not have the capability of reasonably determining when the Phase III trial
will be completed nor when we will be able to file a New Drug Application, or
NDA, with the Food and Drug Administration, or FDA.
In addition, clinical trials are very costly and time consuming. The
length of time required to complete a clinical trial depends on several factors
including the size of the patient population, the ability of patients to get to
the site of the clinical study, and the criteria for determining which patients
are eligible to join the study. Delays in patient enrollment, specifically in
the second part of the Phase III clinical trial of ONCONASE(R) as a treatment
for malignant mesothelioma, could delay completion of the clinical study and
increase its costs which could delay the commercial sale of ONCONASE(R).
The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the type of complexity and novelty of the product. We cannot apply
for FDA or EMEA approval to market ONCONASE(R) until the clinical trials and all
other registration requirements have been completed and as discussed above,
since this confirmatory Phase III trial of ONCONASE(R) as a treatment for
malignant mesothelioma is a survival study, we do not have the capability of
reasonably determining when such trial will be completed.
If we fail to obtain the necessary regulatory approvals, we will not be allowed
to commercialize our drugs and will not generate product revenue.
The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the level of complexity and novelty of the product. Drugs in late
stages of clinical development may fail to show the desired safety and efficacy
traits despite having progressed through initial clinical testing. While limited
trials with our product have produced certain favorable results we cannot be
certain that we will successfully complete Phase I, Phase II or Phase III
testing of any compound within any specific time period, if at all. Furthermore,
the FDA or the study sponsor may suspend clinical trials at any time on various
grounds, including a finding that the subjects or patients are being exposed to
an unacceptable health risk. In addition, we cannot apply for FDA or EMEA
approval to market ONCONASE(R) until pre-clinical and clinical trials have been
completed and as discussed above we do not have the capability of reasonably
determining when such trials will be completed. Several factors could prevent
the successful completion or cause significant delays of these trials including
an inability to enroll the required number of patients or failure to demonstrate
the product is safe and effective in humans. Also, if safety concerns develop,
the FDA and EMEA could stop our trials before completion.
6
In December 2002, we received Fast Track Designation from the Food and
Drug Administration, or the FDA for ONCONASE(R) for the treatment of malignant
mesothelioma. In February 2001, we received an Orphan Medicinal Product
Designation for ONCONASE(R) from the European Agency for the Evaluation of
Medicinal Products, or the EMEA. We were granted these designations because at
the time there were no approved treatments for malignant mesothelioma. Recently,
the FDA granted Eli Lilly & Company approval to sell its Alimta(R) medication as
an orphan drug to treat pleural mesothelioma.
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.
We may not market or sell any product for which we have not obtained
regulatory approval. We cannot assure that the FDA or other regulatory agencies
will ever approve the use of our products that are under development. 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 from the market.
If we fail to obtain the necessary regulatory approvals, we cannot market
or sell our products in the United States, or in other countries and our
long-term viability would be threatened. If we fail to achieve regulatory
approval or foreign marketing authorizations for ONCONASE(R) 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 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 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.
Currently, we contract with Scientific Protein Labs for the extraction of the
ONCONASE(R) protein drug substance from the oocytes, or the unfertilized eggs,
of the Rana pipiens frog, which is found in the Northwest United States and is
commonly called the leopard frog. We contract with BenVenue Corporation for vial
filling and with Cardinal Health for the labeling, storage and shipping of
ONCONASE(R) during the Phase III trial period. Because we have not yet received
drug approval, we utilize the services of these third party manufacturers solely
on an as needed basis with prices and terms customary for companies in
businesses that are similarly situated.
Our use of these manufacturers was previously submitted to and approved by
the FDA through our Investigational New Drug, or IND, application, which we
submitted to the FDA to request authorization to administer ONCONASE(R) to
humans in clinical trials. We believe there are substantial alternative service
providers for the manufacturing services for which we contract. In order to
replace an existing service provider we must amend our IND to notify the FDA of
the new manufacturer. Although the FDA generally will not suspend or delay a
clinical trial as a result of replacing an existing manufacturer, the FDA has
the authority to suspend or delay a clinical trial if, among other grounds,
human subjects are or would be exposed to an unreasonable and significant risk
of illness or injury as a result of the replacement manufacturer.
7
We intend to rely on third parties to manufacture 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.
Because we do not have marketing, sales or distribution capabilities, we expect
to contract with third parties for these functions and we will therefore be
dependent upon such third parties to market, sell and distribute our products in
order for us to generate revenues.
We currently have no sales, marketing or distribution capabilities. In
order to commercialize any product candidates for which we receive FDA approval,
we expect to rely on established third party strategic partners to perform these
functions. For example, if we are successful in our Phase III clinical trials
with ONCONASE(R), and the FDA grants approval for the commercialization of
ONCONASE(R), we will be unable to introduce the product to market without
establishing a marketing collaboration with a pharmaceutical company with those
resources. If we establish relationships with one or more biopharmaceutical or
other marketing companies with existing distribution systems and direct sales
forces to market any or all of our product candidates, we cannot assure you that
we will be able to enter into or maintain agreements with these companies on
acceptable terms, if at all. Further, it is likely that we will have limited or
no control over the manner in which product candidates are marketed or the
resources devoted to such markets.
In addition, we expect to begin to incur significant expenses in
determining our commercialization strategy with respect to one or more of our
product candidates. The determination of our commercialization strategy with
respect to a product candidate will depend on a number of factors, including:
o the extent to which we are successful in securing collaborative
partners to offset some or all of the funding obligations with
respect to product candidates;
o the extent to which our agreement with our collaborators permits us
to exercise marketing or promotion rights with respect to the
product candidate;
o how our product candidates compare to competitive products with
respect to labeling, pricing, therapeutic effect, and method of
delivery; and
o whether we are able to establish agreements with third party
collaborators, including large biopharmaceutical or other marketing
companies, with respect to any of our product candidates on terms
that are acceptable to us.
A number of these factors are outside of our control and will be difficult
to determine.
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.
8
We depend upon Kuslima Shogen and our other key personnel and may not be able to
retain these employees or recruit qualified replacement or additional personnel,
which would have a material adverse affect on our business.
We are highly dependent upon our founder, Chairman and Chief Executive
Officer, Kuslima Shogen. Kuslima Shogen's talents, efforts, personality, vision
and leadership have been, and continue to be, critical to our success. The
diminution or loss of the services of Kuslima Shogen, and any negative market or
industry perception arising from that diminution or loss, would have a material
adverse effect on our business. While our other employees have substantial
experience and have made significant contributions to our business, Kuslima
Shogen is our senior executive and also our primary supporter because she
represents the Company's primary means of accessing the capital markets.
Because of the specialized scientific nature of our business, our
continued success also is dependent upon our ability to attract and retain
qualified management and scientific personnel. There is intense competition for
qualified personnel in the pharmaceutical field. As our company grows our
inability to attract qualified management and scientific personnel could
materially adversely affect our research and development programs, the
commercialization of our products and the potential revenue from product sales.
We do not have employment contracts with Kuslima Shogen or any of our
other management and scientific personnel.
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 co-own two patents with the United States government that
expire in 2016. We also own ten United States patents outright with expiration
dates ranging from 2006 to 2019, four European patents with expiration dates
ranging from 2009 to 2016 and one Japanese patent that expires in 2010. In
addition, we have patent applications that are pending in the United States,
Europe and Japan. We do not license patent rights from any domestic or
international companies or institutions. The scope of protection afforded by
patents for biotechnological inventions is uncertain, and such uncertainty
applies to our patents as well. Therefore, our patents may not give us
competitive advantages or afford us adequate protection from competing products.
Furthermore, others may independently develop products that are similar to our
products, and may design around the claims of our patents. Patent litigation and
intellectual property litigation are expensive and our resources are limited. If
we were to become involved in litigation, we might not have the funds or other
resources necessary to conduct the litigation effectively. This might prevent us
from protecting our patents, from defending against claims of infringement, or
both. To date, we have not received any threats of litigation, legal actions or
negotiations regarding patent issues.
Developments by competitors may render our products obsolete or non-competitive.
In February 2004, the Food and Drug Administration granted Eli Lilly &
Company approval to sell its Alimta(R) medication as an orphan drug to treat
patients with pleural mesothelioma. Alimta is a multi-targeted antifolate that
is based upon a different mechanism of action than ONCONASE(R). To our
knowledge, no other company is developing a product with the same mechanism of
action as ONCONASE(R). However, there may be other companies, universities,
research teams or scientists who are developing products to treat the same
medical conditions our products are intended to treat. Eli Lilly is, and some of
these other companies, universities, research teams or scientists may be more
experienced
9
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 or we may not be able to
compete successfully.
We may be sued for product liability.
Our business exposes us to potential product liability that may have a
negative effect on our financial performance and our business generally. The
administration of drugs to humans, whether in clinical trials or commercially,
exposes us to potential product and professional liability risks which are
inherent in the testing, production, marketing and sale of new drugs for humans.
Product liability claims can be expensive to defend and may result in large
judgments or settlements against us which could have a negative effect on our
financial performance and materially adversely affect our business. We maintain
product liability insurance to protect our products and product candidates in
amounts customary for companies in businesses that are similarly situated, but
our insurance coverage may not be sufficient to cover claims. Furthermore,
liability insurance coverage is becoming increasingly expensive and we cannot be
certain that we will always be able to maintain or increase our insurance
coverage at an affordable price or in sufficient amounts to protect against
potential losses. A product liability claim, product recall or other claim, as
well as any claim for uninsured liabilities or claim in excess of insured
liabilities, may significantly harm our business and results of operations. Even
if a product liability claim is not successful, adverse publicity and time and
expense of defending such a claim may significantly interfere with our business.
If we are unable to obtain favorable reimbursement for our product candidates,
their commercial success may be severely hindered.
Our ability to sell our future products may depend in large part on the
extent to which reimbursement for the costs of our products is available from
government entities, private health insurers, managed care organizations and
others. Third-party payors are increasingly attempting to contain their costs.
We cannot predict actions third-party payors may take, or whether they will
limit the coverage and level of reimbursement for our products or refuse to
provide any coverage at all. Reduced or partial reimbursement coverage could
make our products less attractive to patients, suppliers and prescribing
physicians and may not be adequate for us to maintain price levels sufficient to
realize an appropriate return on our investment in our product candidates or
compete on price.
In some cases, insurers and other healthcare payment organizations try to
encourage the use of less expensive generic brands and over-the-counter, or OTC,
products through their prescription benefits coverage and reimbursement
policies. These organizations may make the generic alternative more attractive
to the patient by providing different amounts of reimbursement so that the net
cost of the generic product to the patient is less than the net cost of a
prescription brand product. Aggressive pricing policies by our generic product
competitors and the prescription benefits policies of insurers could have a
negative effect on our product revenues and profitability.
Many managed care organizations negotiate the price of medical services
and products and develop formularies for that purpose. Exclusion of a product
from a formulary can lead to its sharply reduced usage in the managed care
organization patient population. If our products are not included
10
within an adequate number of formularies or adequate reimbursement levels are
not provided, or if those policies increasingly favor generic or OTC products,
our market share and gross margins could be negatively affected, as could our
overall business and financial condition.
The competition among pharmaceutical companies to have their products
approved for reimbursement may also result in downward pricing pressure in the
industry or in the markets where our products will compete. We may not be
successful in any efforts we take to mitigate the effect of a decline in average
selling prices for our products. Any decline in our average selling prices would
also reduce our gross margins.
In addition, managed care initiatives to control costs may influence
primary care physicians to refer fewer patients to oncologists and other
specialists. Reductions in these referrals could have a material adverse effect
on the size of our potential market and increase costs to effectively promote
our products.
We are subject to new legislation, regulatory proposals and managed care
initiatives that may increase our costs of compliance and adversely affect our
ability to market our products, obtain collaborators and raise capital.
There have been a number of legislative and regulatory proposals aimed at
changing the healthcare system and pharmaceutical industry, including reductions
in the cost of prescription products and changes in the levels at which
consumers and healthcare providers are reimbursed for purchases of
pharmaceutical products. For example, the Prescription Drug and Medicare
Improvement Act of 2003 was recently enacted. This legislation provides a new
Medicare prescription drug benefit beginning in 2006 and mandates other reforms.
Although we cannot predict the full effects on our business of the
implementation of this new legislation, it is possible that the new benefit,
which will be managed by private health insurers, pharmacy benefit managers and
other managed care organizations, will result in decreased reimbursement for
prescription drugs, which may further exacerbate industry-wide pressure to
reduce the prices charged for prescription drugs. This could harm our ability to
market our products and generate revenues. It is also possible that other
proposals will be adopted. As a result of the new Medicare prescription drug
benefit or any other proposals, we may determine to change our current manner of
operation, provide additional benefits or change our contract arrangements, any
of which could harm our ability to operate our business efficiently, obtain
collaborators and raise capital.
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. Over
the past three years, the weekly trading volume was as low as 4,160 shares per
week and as high as 706,280 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 years, the sale price for our Common Stock, as
reported by Nasdaq and the OTC Bulletin Board has fluctuated from a low of $0.18
to a high of $9.97. The market price of our Common Stock could be impacted by a
variety of factors, including:
11
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.
Events with respect to our share capital could cause the price of our Common
Stock to decline.
Sales of substantial amounts of our Common Stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our Common Stock. We had 31,969,362 million shares of Common Stock outstanding
as of May 12, 2004. The following securities that may be exercised for, or are
convertible into, shares of our Common Stock were issued and outstanding as of
May 12, 2004:
o Options. Stock options to purchase 2,775,695 shares of our Common
Stock at a weighted average exercise price of approximately $2.28
per share.
o Warrants. Warrants to purchase 10,181,522 million shares of our
Common Stock at a weighted average exercise price of approximately
$2.74 per share.
o Convertible Notes. Notes which will convert into 3,319,402 shares of
our Common Stock and 3,860,424 warrants which are convertible into
3,860,424 shares of our Common Stock at an average conversion price
of $0.26 as of such date.
The shares of our Common Stock that may be issued under the options,
warrants and upon conversion of the notes are currently registered with the SEC
or are eligible for sale without any volume limitations pursuant to Rule 144(k)
under the Securities Act.
Our incorporation documents may delay or prevent (i) the removal of our current
management or (ii) a change of control that a stockholder may consider
favorable.
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.
This provision allows the board of directors to affect the rights of
stockholders, since the board of directors can make it more difficult for common
stockholders to replace members of the board. Because the board of directors is
responsible for appointing the members of our management, these provisions could
in turn affect any attempt to replace current management by the common
stockholders. Furthermore, the existence of authorized shares of preferred stock
might have the effect of discouraging any attempt by a person, through the
acquisition of a substantial number of shares of Common Stock, to acquire
control of our company. Accordingly, the accomplishment of a tender offer may be
more difficult. This may be beneficial to management in a hostile tender offer,
but have an adverse impact on stockholders who may want to participate in the
tender offer or inhibit a stockholder's ability to receive an acquisition
premium for his or her shares.
12
The ability of our stockholders to recover against Armus Harrison & Co., or AHC,
may be limited because we have not been able to obtain the reissued reports of
AHC with respect to the financial statements included in this prospectus, nor
have we been able to obtain AHC's consent to the use of such report herein.
Section 11 of the Securities Act of 1933 (the "Securities Act") provides
that any person acquiring a security pursuant to a registration statement may
assert a claim against every accountant who has with its consent been named as
having prepared or certified any part of the registration statement, or as
having prepared or certified any report or valuation that is used in connection
with the registration statement, if that part of the registration statement at
the time it becomes effective contains an untrue statement of a material fact,
or omits a material fact required to be stated therein or necessary to make the
statements therein not misleading (unless it is proved that at the time of such
acquisition such acquiring person knew of such untruth or omission).
In June 1996, AHC dissolved and ceased all operations. Therefore, we have
not been able to obtain the reissued reports of AHC with respect to the
financial statements included in this registration statement of which this
prospectus is a part nor have we been able to obtain AHC's consent to the use of
such report herein. As a result, in the event any persons seek to assert a claim
against AHC under Section 11 of the Securities Act for any untrue statement of a
material fact contained in these financial statements or any omissions to state
a material fact required to be stated therein, such persons will be barred.
Accordingly, you may be unable to assert a claim against AHC under Section 11 of
the Securities Act for any purchases of the Company's Common Stock pursuant to
this registration statement. In addition, the ability of AHC to satisfy any
claims properly brought against it may be limited as a practical matter due to
AHC's dissolution in 1996.
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.
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 warrants. We
will receive estimated net proceeds of approximately $26,224,565 if all such
warrants 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 $105,000 in connection with this offering.
13
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 May 12, 2004, we had
approximately 1,141 stockholders of record of our Common Stock.
The following table sets forth the range of high and low sale prices of
our Common Stock obtained from the OTC Bulletin Board. 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
-------------------------
High Low
------- -------
Year Ending July 31, 2004
First Quarter $4.51 $1.25
Second Quarter $5.14 $2.65
Third Quarter $9.97 $3.70
Fourth Quarter (through May 17, 2004) $9.42 $7.95
Year Ended July 31, 2003
First Quarter $0.36 $0.18
Second Quarter $1.01 $0.19
Third Quarter $0.85 $0.39
Fourth Quarter $1.45 $0.64
Year Ended July 31, 2002
First Quarter $0.96 $0.33
Second Quarter $1.01 $0.35
Third Quarter $0.77 $0.42
Fourth Quarter $0.47 $0.27
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.
14
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 as of and for
the year ended July 31, 2003 and the balance sheet data as of July 31, 2003 are
derived from our audited financial statements included elsewhere in this
prospectus, which have been audited by J.H. Cohn LLP, independent auditors whose
report 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
selected statement of operations data shown below for the years ended July 31,
2002 and 2001 and the balance sheet data as of July 31, 2002 are derived from
our audited financial statements included elsewhere in this prospectus, and have
been audited by KPMG LLP, independent auditors whose report 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. The selected statement of operations data shown below for the years
ended July 31, 2000 and 1999 and the balance sheet data as of July 31, 2001,
2000 and 1999 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 January 31, 2004 and for
the six months ended January 31, 2004 and 2003 and for the period from August
29, 1981 (Date of Inception) to January 31, 2004 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. The
selected financial data as of and for the six months ended January 31, 2004 and
2003 are unaudited and, in our opinion, such results of operations for the six
months ended January 31, 2004 are not necessarily indicative of results that may
be expected for the fiscal year ending July 31, 2004.
August 24,
1981
(Date of
Inception) Year Ended July 31,
to January ----------------------------------------------------------------------------
31, 2004 2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
Statement of
Operations Data:
Total revenues,
principally
investment income $ 2,038,822 $ 39,877 $ 4,838 $ 13,121 $ 51,144 $ 168,372
------------ ------------ ------------ ------------ ------------ ------------
Costs and
Expenses:
Costs of sales 336,495 0 0 0 0 0
Research and
development 42,913,221 1,699,962 2,032,938 1,900,678 1,879,728 2,401,945
General and
administrative 22,936,040 624,406 798,053 705,745 644,588 920,686
Interest 3,799,258 358,398 118,741 153,029 4,980 2,377
------------ ------------ ------------ ------------ ------------ ------------
Total costs and
expenses 69,985,014 2,682,766 2,949,732 2,759,452 2,529,296 3,325,008
------------ ------------ ------------ ------------ ------------ ------------
State tax benefit 2,014,185 231,357 353,732 451,395 755,854 0
------------ ------------ ------------ ------------ ------------ ------------
Net loss $(65,932,007) $ (2,411,532) $ (2,591,162) $ (2,294,936) $ (1,722,298) $ (3,156,636)
============ ============ ============ ============ ============ ============
Net loss per
common share:
Basic and diluted $ (0.10) $ (0.12) $ (0.12) $ (0.10) $ (0.18)
Weighted average
number of common
shares:
Basic and diluted 23,166,000 21,045,000 18,927,000 17,812,000 17,271,000
Dividends $ 0 $ 0 $ 0 $ 0 $ 0
Six Months Ended
January 31,
----------------------------
2004 2003
------------ ------------
(unaudited) (unaudited)
Statement of
Operations Data:
Total revenues,
principally
investment income $ 8,230 $ 30,234
------------ ------------
Costs and
Expenses:
Costs of sales 0 0
Research and
development 1,311,286 799,370
General and
administrative 648,188 288,076
Interest 228,401 239,570
------------ ------------
Total costs and
expenses 2,187,875 1,327,016
------------ ------------
State tax benefit 221,847 229,459
------------ ------------
Net loss $ (1,957,798) $ (1,067,323)
============ ============
Net loss per
common share:
Basic and diluted $ (0.07) $ (0.05)
Weighted average
number of common
shares:
Basic and diluted 27,675,584 22,830,115
Dividends $ 0 $ 0
15
As of
As of July 31, January 31,
----------------------------------------------------------------------- -----------
2003 2002 2001 2000 1999 2004
----------- ----------- ----------- ----------- ----------- -----------
Balance Sheet Data: (unaudited)
Total assets $ 495,322 $ 228,871 $ 201,609 $ 488,099 $ 1,728,648 $ 2,258,524
Cash and cash equivalents 330,137 85,843 44,781 257,445 1,383,133 1,849,497
Working capital (deficit) (2,404,247) (1,666,782) (830,610) (303,646) 498,993 (83,018)
Long-term liabilities 242,516 315,929 23,663 30,251 0 181,436
Total stockholders' equity
(deficiency) (2,491,681) (1,885,437) (740,378) (131,860) 757,200 (104,480)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Since our inception, we have devoted the majority of our resources to the
research and development of ONCONASE(R) and related drug candidates. We have
focused our resources towards the completion of the clinical program for
unresectable, or inoperable, malignant mesothelioma.
Since ONCONASE(R) has Fast Track Designation for the treatment of
malignant mesothelioma patients, we continue to have meetings and discussions
with the FDA to establish mutually agreed upon parameters for the New Drug
Application, or NDA to obtain marketing approval for ONCONASE(R), assuming the
Phase III clinical trial for the treatment of malignant mesothelioma yields
favorable results.
We received an Orphan Medicinal Product Designation for ONCONASE(R) from
the European Agency for the Evaluation of Medicinal Products, or the EMEA. We
continue to fulfill the EMEA requirements regarding the Marketing Authorization
Application, or MAA registration requirements for ONCONASE(R) for the treatment
of malignant mesothelioma.
The majority of our research and development expenses since our inception
of $42,913,221 has gone toward the development of ONCONASE(R) and related drug
candidates. For the fiscal years 2003, 2002 and 2001 our research and
development expenses were $1,699,962, $2,032,938 and $1,900,678, respectively,
the majority of which was used for the development of ONCONASE(R) and related
drug candidates. Since ONCONASE(R) is currently in an international centrally
randomized Phase III trial we expect that our research and development costs
will continue to increase for at least the next two years. The Phase III trial
is a two-part trial. While 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 patient enrollment stage. Both parts of the Phase III clinical trial are
survival studies, which require all patients to die before the trial is
completed in order to determine whether the ONCONASE(R) treatment affected the
life expectancy of the patient. Therefore, since we are unable to predict when
these deaths will occur and we are still engaged in patient enrollment in part
two of the trial, we are currently unable to ascertain when the Phase III trial
will be completed, when we will be able to file an NDA with the FDA, what our
costs will be to complete this Phase III trial, when or if we will receive FDA
approval or when or if we may begin marketing and selling ONCONASE(R) . For a
more detailed discussion of the risks involved in the length of time and the
amount of costs it may take us to complete the development of ONCONASE(R),
please see "Risk Factors" - "We cannot predict how long it will take us nor how
much it will cost us to complete our Phase III trial because it is a survival
study and we are still in patient enrollment in part two of our Phase III
trial." on page 6.
We fund the research and development of our products from cash receipts
resulting from the sale of our equity securities and convertible debentures in
registered offerings and private placements. Additionally, we have raised
capital through debt financings, the sale of our tax benefits and research
products, interest income and financing received from our Chief Executive
Officer. Presently, our cash balance is sufficient to fund our expanded
operations through July 31, 2005 based on our expected level of expenditures in
16
relation to activities in preparing ONCONASE(R) for an NDA filing and other
ongoing operations of the company. However, we continue to seek additional
capital financing through the sale of equity in private placements, sale of our
tax benefits and exercise of stock options and warrants but cannot be sure that
we will be able to raise capital on favorable terms or at all.
Results of Operations
Three and six month periods ended January 31, 2004 and 2003
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 developing new drug
products. Our planned principal operations of marketing and/or licensing of new
drugs have not commenced and, accordingly, we have not derived any significant
revenue from these operations. We focus most of our productive and financial
resources on the development of ONCONASE(R) and as such we have not had any
sales in the three and six month periods ended January 31, 2004 and 2003. For
the six months ended January 31, 2004, our other income was $8,200.
Research and Development. Research and development expense for the three
months ended January 31, 2004 was $674,000 compared to $380,000 for the same
period last year, an increase of $294,000, or 77%. Research and development
expense for the six months ended January 31, 2004 was $1,311,000 compared to
$799,000 for the same period last year, an increase of $512,000, or 64%. The
increase in the current six month period was due primarily to increases in data
management and consulting fees related to our pivotal Phase III clinical trial
for malignant mesothelioma of approximately $485,000 and an increase in
regulatory consulting costs of approximately $93,000, offset by a decrease in
personnel costs of approximately $66,000.
General and Administrative. General and administrative expense for the
three months ended January 31, 2004 was $420,000 compared to $152,000 for the
same period last year, an increase of $268,000. General and administrative
expense for the six months ended January 31, 2004 was $648,000 compared to
$288,000 for the same period last year, an increase of $360,000. The increase in
the current six month period was due primarily to increases in non-cash expense
related to stock and stock options issued for consulting services associated
with business development activities of approximately $118,000, increases in
legal, public relations, accounting and insurance expenses of approximately
$120,000, $70,000, $28,000, and $24,000, respectively.
Interest. Interest expense for the three months ended January 31, 2004 was
$110,000 compared to $205,000 for the same period last year, a decrease of
$95,000. Interest expense for the six months ended January 31, 2004 was $228,000
compared to $240,000 for the same period last year, a decrease of $12,000. The
decrease in the current six month period was due primarily to the interest
expense on the beneficial conversion feature of the notes payable issued to
unrelated parties and its related warrants. The interest expense was based on
the fair value of the warrants using the Black-Scholes method, amortized over
the life of the notes payable.
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 2004 (July 1, 2003 to June 30, 2004), we had approximately $1,378,000 total
available tax benefits that were sellable, of which New Jersey permitted us to
only sell approximately $261,000. We received approximately $222,000 from the
sale of the $261,000 of tax benefits, which we recognized as tax benefits for
the six months ended January 31, 2004.
17
For the state fiscal year 2003 (July 1, 2002 to June 20, 2003), we had
approximately $1,373,000 in total available tax benefits that were sellable, of
which New Jersey permitted us to only sell approximately $273,000. We received
approximately $231,000 from the sale of the $273,000 of tax benefits, which we
recognized as tax benefits for the six months ended January 31, 2003.
If still available under New Jersey law, we will attempt to sell the
remaining $1,117,000 of our tax benefits, between July 1, 2004 and June 30,
2005. This amount, which is a carryover of our remaining tax benefits from state
fiscal year 2004, may increase if we incur additional tax benefits during state
fiscal year 2005. We can not estimate, however, what percentage of our sellable
tax benefits New Jersey will permit us to sell, how much money we will receive
in connection with the sale, if we will be able to find a buyer for our tax
benefits or if 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 three months ended January 31, 2004 was
$1,200,000 as compared to $737,000 for the same period last year, an increase of
$463,000. The net loss for the six months ended January 31, 2004 was $1,958,000
as compared to $1,067,000 for the same period last year, an increase of
$891,000. The cumulative loss from the date of inception, August 24, 1981 to
January 31, 2004, amounted to $65,932,000. We are a development stage company
and accordingly, we have not derived sufficient revenues from operations to
offset the development stage expenses.
Fiscal Years Ended July 31, 2003, 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 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). We did not
have any sales in fiscal 2003, 2002 and 2001. Investment income for fiscal 2003
was $10,000 compared to $5,000 for fiscal 2002, an increase of $5,000. The
increase was due to higher balances of cash and cash equivalents. Investment
income for fiscal 2002 was $5,000 compared to $13,000 for fiscal 2001, a
decrease of $8,000. This decrease was due to lower balances of cash and cash
equivalents.
Research and Development
Research and development expense for fiscal 2003 was $1,700,000 compared
to $2,033,000 for fiscal 2002, a decrease of $333,000, or 16.4%. This decrease
was primarily due to decreases in regulatory and clinical costs, personnel
costs, and a reduction of non-cash expenses relating to stock options issued for
consulting services of approximately $236,000, $114,000 and $23,000,
respectively. These decreases were partially offset by increases in costs
relating to patent and trademark applications for ONCONASE(R) of approximately
$40,000.
Research and development expense for fiscal 2002 was $2,033,000 compared
to $1,901,000 for fiscal 2001, an increase of $132,000, or 7%. This increase was
primarily due to an increase in costs in support of ongoing clinical trials for
ONCONASE(R) resulting from the expansion of our Phase III clinical trials for
malignant mesothelioma in Europe of approximately $246,000. This increase was
partially offset by a decrease in expenses related to outside consultants,
reduction of non-cash expenses relating to stock options issued for consulting
services and a decrease in costs relating to patent and trademark applications
for ONCONASE(R) of approximately $67,000, $36,000 and $11,000, respectively.
18
General and Administrative
General and administrative expense for fiscal 2003 was $624,000 compared
to $798,000 for fiscal 2002, a decrease of $174,000, or 21.8%. This decrease was
primarily due to decreases in costs related to public relations activities,
insurance expenses, reduction in non-cash expense relating to stock options
issued for consulting services, legal, personnel costs and other miscellaneous
office expenses of approximately $71,000, $54,000, $34,000, $10,000 and $5,000,
respectively.
General and administrative expense for fiscal 2002 was $798,000 compared
to $706,000 for fiscal 2001, an increase of $92,000, or 13%. This increase was
primarily due to an increase in costs related to public relations activities of
approximately $53,000, increases related to accrued payroll taxes, accounting
costs, legal costs associated with business development activities and insurance
expenses of approximately $44,000, $23,000, $22,000 and $14,000, respectively,
offset by a decrease in non-cash expense relating to stock options issued for
consulting services of approximately $64,000.
Interest
Interest expense for fiscal 2003 was $358,000 compared to $119,000 in
fiscal 2002, an increase of $239,000. The increase was primarily due to the
interest expense on the beneficial conversion feature of the notes payable
issued to unrelated parties, the related warrants and the increase in total
borrowing levels. 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 term of the notes.
Interest expense for fiscal 2002 was $119,000 compared to $153,000 in
fiscal 2001, a decrease of $34,000. The decrease was primarily due to the
interest expense on convertible notes and related warrants issued during the
fiscal year ended 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 term 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 2003 (July 1,
2002 to June 30, 2003), we had approximately $1,373,000 total available tax
benefits that were sellable, of which New Jersey permitted us to only sell
approximately $273,000. We received approximately $231,000 from the sale of the
$273,000 of tax benefits, which we recognized as tax benefits for fiscal 2003.
For the state fiscal year 2002 (July 1, 2001 to June 30, 2002), we had
approximately $1,535,000 total available tax benefits that were sellable, of
which New Jersey permitted us to only sell approximately $426,000. We received
approximately $354,000 from the sale of the $426,000 of tax benefits, which we
recognized as tax benefits for fiscal 2002.
For the state fiscal year 2001 (July 1, 2000 to June 30, 2001), we had
approximately $1,774,000 total available tax benefits that were sellable, of
which New Jersey permitted us to only sell approximately $602,000. We received
approximately $451,000 from the sale of the $602,000 of tax benefits, which we
recognized as tax benefits for fiscal 2001.
If still available under New Jersey law, we will attempt to sell the
remaining balance of our tax benefits in the amount of approximately $1,100,000
between July 1, 2003 and June 30, 2004. We can not estimate, however, what
percentage of our sellable tax benefits New Jersey will permit us to sell, how
19
much money we will receive in connection with the sale, if we will be able to
find a buyer for our tax benefits or if 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 fiscal 2003 was $2,412,000 as compared to $2,591,000 in fiscal 2002 and
$2,295,000 in fiscal 2001. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 2003 amounted to $63,974,000. 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 reported net losses of approximately $2,412,000, $2,591,000, and
$2,295,000 for the fiscal years ended July 31, 2003, 2002 and 2001,
respectively. The loss from date of inception, August 24, 1981, to July 31, 2003
amounts to $63,974,000. Also, we have a working capital deficit and limited
liquid resources.
We have financed our operations since inception through the sale of our
equity securities and convertible debentures in registered offerings and private
placements. Additionally, we have raised capital through debt financings, the
sale of our tax benefits and research products, interest income and financing
received from our Chief Executive Officer. During the fiscal year 2003, we had a
net increase in cash and cash equivalents of $244,000. This increase primarily
resulted from net cash provided by financing activities in the amount of
$1,798,000, primarily due to proceeds from short and long-term borrowings, from
the private placement of Common Stock and warrants and proceeds from the
exercise of warrants, offset by net cash used in operating activities of
$1,554,000. During the six months ended January 31, 2004, we had a net increase
in cash and cash equivalents of $1,519,000, which resulted primarily from net
cash provided by financing activities of $4,150,000, which resulted from
$1,500,000 gross proceeds from a private placement of Common Stock and warrants
with an institutional investor in September 2003, $1,150,000 gross proceeds from
warrants and stock options exercises and $1,500,000 gross proceeds from a
private placement of Common Stock at a price of $3.96 per share and warrants at
an exercise price of $4.75 per share in January 2004, offset by net cash used in
operating activities of $2,629,000 and net cash used in investing activities of
$2,000. Total cash resources as of January 31, 2004 were $1,849,000 compared to
$330,000 at July 31, 2003.
Our current liabilities as of July 31, 2003 were $2,744,000 compared to
$1,798,000 at July 31, 2002, an increase of $946,000. The increase was primarily
due to the short-term maturity of notes payable of approximately $529,000,
accrued payroll and payroll taxes of approximately $533,000 and other accrued
expenses of $21,000, offset by the reduction of accounts payable and loan
payable to a related party of approximately $97,000 and $40,000, respectively.
As of July 31, 2003, we had a total of $644,023 in unpaid payroll and $240,784
in unpaid payroll taxes. As of September 2003, all unpaid payroll taxes have
been fully satisfied. In addition, $115,000 in unpaid payroll was paid and since
July 31, 2003, we have been current in our payroll and payroll taxes. As of July
31, 2003 our current liabilities exceeded our current assets and we had a
working capital deficit of $2,404,000. The reports of each of our independent
auditors on our financial statements includes 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 current liabilities as of January 31, 2004 were $2,182,000 compared
to $2,744,000 at July 31, 2003, a decrease of $562,000. The decrease was
primarily due to decreased accrued expenses. As of January 31, 2004, our current
liabilities exceeded our current assets and we had a working capital deficit of
$83,000.
20
The following transactions occurred after January 31, 2004:
o From February 2004 through March 31, 2004, we issued 82,500 shares of
Common Stock upon the exercise of stock options by employees, a former
director and unrelated parties at per share exercise prices ranging from
$0.26 to $2.80. We realized aggregate gross proceeds of $106,100.
o From February 2004 through April 7, 2004, we issued an aggregate 1,468,393
shares of restricted Common Stock and 1,918,393 shares of Common Stock
underlying five-year warrants with an exercise price of $1.00 per share
upon the conversion of notes payable in the amount of $514,600 by
unrelated parties.
o In March 2004, we recorded an aggregate of $222,719 non-cash expenses for
110,000 five-year stock options that we issued to various consultants for
services rendered. The options vested immediately and have a per share
exercise price of $3.46. The non-cash expenses were based upon the fair
value of the options on the date of issuance as estimated by the
Black-Scholes options pricing model.
o In May 2004, we issued 1,210,654 shares of Common Stock to an existing
institutional investor, resulting in gross proceeds of $10,000,000 to us.
In addition, the institutional investor was granted five-year warrants to
purchase 1,210,654 shares of Common Stock at an exercise price of $12.39
per share. We paid a 5% finder's fee to a third party in connection with
the private placement, which included a five-year warrant to purchase
60,533 shares of Common Stock at an exercise price of $12.39 per share.
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), licensing of our proprietary RNase
technology and our ability to realize revenues from our technology and our drug
candidates via out-licensing agreements with other companies. Such additional
funds may not become available as we need them or be available on acceptable
terms. Through January 31, 2004, a significant portion of our financing has been
through the sale of our equity securities and convertible debentures in
registered offerings and private placements. Additionally, we have raised
capital through debt financings, the sale of our tax benefits and research
products, interest income and financing received from our Chief Executive
Officer. Until and unless our operations generate significant revenues, we
expect to continue to fund operations from the sources of capital previously
described. There can be no assurance that we will be able to raise the capital
we need on terms which are acceptable, if at all. Presently, our cash balance is
sufficient to fund our expanded operations through July 31, 2005 based on our
expected level of expenditures in relation to activities in preparing
ONCONASE(R) for an NDA filing and other ongoing operations of the company.
However, we continue to seek additional capital financing through the sale of
equity in private placements, sale of our tax benefits and exercise of stock
options and warrants but cannot be sure that we will be able to raise capital on
favorable terms or at all. The report of our independent public accountants on
our July 31, 2003 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. As of January 31, 2004, we continued to incur losses, had a working
capital deficiency and limited liquid resources which raise substantial doubt
about our ability to continue as a going concern. Our financial statements at
January 31, 2004 and July 31, 2003 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 potential strategic alliance
21
partners to further the development and marketing of ONCONASE(R) and other
related products in our pipeline. However, we cannot be sure 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).
Off-balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities or SPE's, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of January 31, 2004, we are not involved in any
material unconsolidated SPE transactions.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe based on our current business that there are no critical accounting
policies. Our accounting policies are described in Note 1 to the financial
statements.
Contractual Obligations and Commercial Commitments
Our major outstanding contractual obligations relate to our equipment
operating lease. Below is a table that presents our contractual obligations and
commercial commitments as of July 31, 2003:
Payments Due by Fiscal Year
-------------------------------
2006 and
Total 2004 2005 Thereafter
------- ------- ------- ----------
Operating lease $30,600 $17,500 $13,100 $ -0-
------- ------- ------- ----------
Total contractual cash
obligations $30,600 $17,500 $13,100 $ -0-
======= ======= ======= ==========
Changes In and Disagreements With Accountants On Accounting And Disclosure
As described in the current report on Form 8-K we filed on December 12,
2002, on December 6, 2002, KPMG LLP resigned as our independent accountants and
was replaced by J.H. Cohn LLP as our independent public accountants for fiscal
2003. The engagement of J.H. Cohn LLP was approved by our Audit Committee. The
reports of KPMG on the financial statements for the two fiscal years prior to
their
22
resignation as our independent accountants contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle except that the report on our financial
statements for the fiscal years ended July 31, 2002 and 2001 contained a
separate paragraph stating that "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." During our fiscal years ended July 31, 2002 and
July 31, 2001 and through December 6, 2002, there were no disagreements between
us and KPMG on any matter of accounting principles or practices, financial
statement disclosures or auditing scope or procedures, which disagreements if
not resolved to the satisfaction of KPMG would have caused them to make
reference thereto in their report on the financial statements for such years.
On December 1, 1993, certain stockholders of Armus Harrison & Co., or AHC,
terminated their association with AHC, or the AHC termination, and AHC ceased
performing accounting and auditing services, except for limited accounting
services to be performed on our behalf. In June 1996, AHC dissolved and ceased
all operations. The report of J.H. Cohn LLP with respect to our financial
statements from inception to July 31, 2003 is based on the report of KPMG LLP
from August 1, 1992 to July 31, 2002 and of AHC for the period from inception to
July 31, 1992, 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 on the basis of the
use of such report in any registration statement 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 us, 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, our officers and directors 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 our
Common Stock or otherwise.
BUSINESS
Overview
Alfacell Corporation, is a biopharmaceutical company primarily engaged in
the discovery and development of a new class of therapeutic drugs for the
treatment of cancer and other pathological conditions. Based on our proprietary
Ribonuclease, or RNase, which is a type of biological enzyme that splits RNA
molecules and is the basis of our technology platform, our drug discovery and
development program consists of novel therapeutics developed from amphibian
ribonucleases. These are very basic RNA enzymes which play important roles in
nature in the development of cells and their functions. RNA is an essential
bio-chemical cellular component necessary to support life. There are various
types of RNA, all of which have specific functions in a living cell. They help
control several essential biological activities, namely, regulation of cell
proliferation, maturation, differentiation and cell death. Therefore, they are
ideal candidates for the development of therapeutics for cancer and other
life-threatening diseases, including HIV and autoimmune diseases, that require
anti-proliferative and apoptotic, or programmed cell death, properties. We have
co-sponsored and been a key participant in the International Ribonuclease
Meetings held every three years.
23
ONCONASE(R), our trademark name for our flagship product, is undergoing
the last stage of clinical testing, or Phase III. This Phase III trial is a
two-part international centrally randomized trial for patients with unresectable
malignant mesothelioma, an inoperable form of cancer found in the lining of the
lung and abdomen. While 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 patient enrollment stage. Both parts of the Phase III trial are survival
studies, which require all patients to die before the trials are completed.
Because we are unable to predict when such patient deaths will occur, we are
currently unable to ascertain when the trials will be completed or when we will
be able to file a New Drug Application, or NDA, with the Food and Drug
Administration, or FDA. We have also conducted other randomized and
non-randomized trials with patients with advanced stages of solid tumors in
other types of cancers.
ONCONASE(R), unlike most cancer drugs, that attack all cells regardless of
their phenotype, malignant versus normal, and produce a variety of severe
toxicities, is not an indiscriminate cytotoxic, or cell killing agent, but
rather, its activity is controlled through unique and specific molecular
mechanisms. ONCONASE(R) affects primarily exponentially growing malignant cells.
ONCONASE(R) is a novel amphibian ribonuclease, unique among the superfamily of
pancreatic ribonuclease that has been isolated from the eggs of the Rana pipiens
frog, commonly called the leopard frog. We have determined that, thus far,
ranpirnase, the generic name of ONCONASE(R), is the smallest known protein
belonging to the superfamily of pancreatic ribonuclease and has been shown, on a
molecular level, to re-regulate the unregulated growth and proliferation of
cancer cells.
In December 2002, we received Fast Track Designation from the FDA for
ONCONASE(R) for the treatment of malignant mesothelioma. Fast Track Designation
is an FDA program designed to expedite the review of new drugs that are intended
to treat serious or life threatening conditions and that demonstrate the
potential to address unmet medical needs. In February 2001, we received an
Orphan Medicinal Product Designation for ONCONASE(R) from the European Agency
for the Evaluation of Medicinal Products, or the EMEA. Orphan Medicinal Product
Designation is a program designed to provide marketing, protocol and other
incentives for pharmaceutical companies to develop and market products in the
European Community that address life threatening or very serious conditions that
affect not more than 5 in 10,000 persons in the European Community. Orphan
designation in Europe entitles the Company to 10 years of marketing exclusivity,
reduced filing fees and regulatory guidance from the EMEA.
These FDA and EMEA designations for ONCONASE(R) may serve to expedite its
regulatory review, assuming the clinical trials yield a positive result. Future
clinical trials, however, may not demonstrate that ONCONASE(R) is effective.
Thus, our applications for FDA or EMEA approval to market ONCONASE(R), which are
dependent upon the success of our clinical trials, may be affected. The efficacy
and safety of ONCONASE(R) for malignant mesothelioma, will ultimately be
determined by the FDA. In the interim, our Fast Track Designation allows us to
continue to have meetings and discussions with the FDA to establish mutually
agreed upon parameters for the NDA to obtain marketing approval for ONCONASE(R),
based on the assumption that the clinical trials will continue to yield
favorable results.
Our drug discovery program forms the basis for the development of specific
recombinant RNases for chemically linking drugs and other compounds such as
monoclonal antibodies, growth factors, etc. and gene fusion products with the
goal of targeting various molecular functions. This program provides for joint
design and generation of new products with outside partners. We may own these
new products along with a partner(s), or we may grant an exclusive license to
the collaborating partner(s).
We have established a number of scientific collaborations with academic
and research institutions including the National Cancer Institute, or NCI that
are designed to develop new therapeutic applications for ONCONASE(R). One
collaboration has produced RN321, a conjugate of ranpirnase, with a monoclonal
24
antibody that demonstrated activity in treating non-Hodgkin's lymphoma in
preclinical studies. These results were presented by the NCI investigators at
the 2002 Ribonuclease Meeting in Bath, England. The NCI has undertaken the
manufacturing of RN321 (the conjugate) according to Good Manufacturing
Practices, or GMP regulations in preparation for commencing clinical trials for
the treatment of patients with non-Hodgkin's lymphoma with RN321. Currently, the
NIH has produced RN321 clinical grade like material. Clinical grade production
of RN321 and Investigational New Drug Application, or IND, directed toxicology
studies will require further approval from the Drug Development Group of the NIH
prior to commencing human clinical trials.
We have also discovered another series of proteins, collectively named
amphinases, that may have therapeutic uses. These proteins are bioactive in that
they have an effect on living cells and organisms and have both anti-cancer and
anti-viral activity. All of the proteins characterized to date are RNases. These
products are currently undergoing preclinical testing. We are currently in
discussions with potential pharmaceutical partners for the development of these
new compounds as conjugates and fusion proteins.
We have entered into a research and development collaboration with a major
US privately held stent and drug delivery company. ONCONASE(R) is being
evaluated in stents and other delivery platforms to treat cardiovascular disease
and cancer via direct site delivery. This collaboration may result in licensing
agreement between the companies, however; there is no assurance that such
agreement will be reached.
We have entered into a collaborative agreement (anti-viral screening,
non-SARS) with the National Institute of Allergy and Infectious Diseases, or
NIAID in which five potential drug candidates (natural and genetically
engineered) are under evaluation against various RNA viruses.
Our research and development collaboration with Wyeth Pharmaceuticals is
ongoing to develop a number of designer drugs such as conjugates and fusion
proteins for a variety of indications using our technology. This collaboration
may result in a licensing agreement between the companies, however; there is no
assurance that such an agreement will be reached.
We have signed confidentiality agreements and have entered into
discussions and due diligence with a number of companies for US or non-US
marketing rights for ONCONASE(R) and for out-licensing some of our early drug
candidates.
We are engaged in the research, development and clinical trials of our
products both independently and through research collaborations. We have
financed our operations since inception through the sale of our equity
securities and convertible debentures in registered offerings and private
placements. Additionally, we have raised capital through debt financings, the
sale of our tax benefits and research products, interest income and financing
received from our Chief Executive Officer. These funds provide us with the
resources to acquire staff, facilities, capital equipment, finance our
technology, product development, manufacturing and clinical trials. We have
incurred losses since inception and to date we have not consummated any
licensing, marketing or development arrangements. Presently, our cash balance is
sufficient to fund our expanded operations through July 31, 2005 based on our
expected level of expenditures in relation to activities in preparing
ONCONASE(R) for an NDA filing and other ongoing operations of the company.
However, we continue to seek additional capital financing through the sale of
equity in private placements, sale of our tax benefits and exercise of stock
options and warrants but cannot be sure that we will be able to raise capital on
favorable terms or at all.
25
Research and Development Programs
Research and development expenses for the fiscal years ended July 31,
2003, 2002, and 2001 were $1,700,000, $2,033,000, and $1,901,000, respectively.
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 viral and autoimmune
diseases that require anti-proliferative and pro-apoptotic properties.
Technology Platform and Pipeline
Using ribonucleases as therapeutics is a relatively new approach to drug
development. The use of these proteins to re-regulate the unregulated growth and
proliferation of cancer cells is unlike most cancer drugs that attack all cells
regardless of their phenotype, malignant versus normal, and produce a variety of
severe toxicities.
ONCONASE(R) and related drug candidates are not indiscriminate cytotoxic,
or cell killing, agents, but rather, their activity is controlled through unique
and specific molecular mechanisms. They affect primarily exponentially growing
malignant cells.
Cancer is associated with the over or under production of many types of
proteins in tumor cells. We believe that the ability to selectively halt the
production of certain proteins via ribonuclease activity in tumor cells without
damaging normal cells, may make treatment of cancer more effective. To make
cancer therapy more effective and less toxic, we are developing ONCONASE(R) and
a related family of regulatory proteins, collectively named amphinases. These
novel RNases are being developed as therapeutics as well as effector moieties
(payload), or killer molecules for targeted therapies. We believe that selective
degradation of intracellular proteins is central to the process of programmed
cell death.
We have devoted significant resources towards the development of
recombinant designer RNases for chemical conjugation and gene fusion products
with various targeting moieties such as monoclonal antibodies, growth factors,
cytokines, etc.
Apoptosis
Apoptosis, or programmed cell death, is essential for the proper
development of embryos and of many body systems, including the central nervous
system, immune regulation and others. Apoptosis is required to accommodate the
billions of new cells produced daily by our bodies and to eliminate aged or
damaged cells. Abnormal regulation of the apoptosis process can result in
disease. For example, cancer, autoimmune disorders and many viral infections are
associated with inhibited apoptosis or programmed death of cells occurring too
slowly. Conversely, HIV is associated with increased apoptosis or programmed
death of cells occurring too rapidly. The process of programmed cell death is
genetically regulated. We believe that we are the first company to discover and
develop a novel family of primordial "regulatory" proteins that have been shown
to play a fundamental role in this regulatory process.
ONCONASE(R) (ranpirnase) Pro-Apoptotic Mechanisms
The molecular mechanisms were identified which determine the apoptotic
cell death induced by ranpirnase. tRNA, rRNA and mRNA are all different types of
RNA with specific functions in a living cell. Ranpirnase preferentially degrades
tRNA, leaving rRNA and mRNA apparently undamaged. The RNA damage induced by
ranpirnase appears to represent a "death signal", or triggers a chain of
molecular
26
events culminating in the activation of proteolytic enzyme cascades which, in
turn, induces disintegration of the cellular components and finally leads to
cell death. It has been shown that there is a protein synthesis
inhibition-independent component, which, together with the changes induced by
the protein synthesis inhibition, results in tumor cell death.
Many cancer cells become resistant to most types of cancer treatment,
including chemotherapy, radiation and monoclonal antibodies. Overcoming
resistance to chemotherapy remains a major challenge for cancer therapy.
ONCONASE(R) has been shown to overcome multiple drug resistance or prevent
resistance to cancer therapy, thereby dramatically increasing the sensitivity of
certain cancer cells to chemotherapy and radiation therapy.
It remains unknown whether or not ONCONASE(R) targets and binds
preferentially to tumor cells, rather than normal cells of the respective
tissues. It is possible that there is no differential targeting and/or binding,
but that tumor cells are more susceptible to the cytostatic (suppresses cancer
cells from further dividing) and cytotoxic (kills cancer cells) effects of
ONCONASE(R). The cytostatic effects are manifested by the inhibition of
progression in the cell cycle. These effects have been associated with induction
of parallel differentiation and apoptosis. The cytostatic and
differentiation-inducing effects are reflected in the stabilization of
previously progressive tumors observed in our clinical trials.
Clinical Studies and Preclinical Development of ONCONASE(R)
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 for which there are few or
no approved treatments.
ONCONASE(R) has been tested in Phase I, Phase II and Phase III clinical
trials in more than 40 cancer centers across the United States since 1991 and in
Europe since 2000, including major centers such as Columbia-Presbyterian,
University of Chicago, M.D. Anderson and Cedars-Sinai Cancer Centers.
ONCONASE(R) has been tested as a single agent in patients with a variety
of solid tumors. It has also been tested in combination with tamoxifen in
patients with prostate cancer, advanced pancreatic cancer and renal cell
carcinoma as well as with doxorubicin in patients with malignant mesothelioma.
We have collaborated with NIH, NCI and The University of Pennsylvania
Medical Center, Metabolic Magnetic Resonance Research and Computing Center, and
have developed a considerable body of knowledge in RNase technology and novel
RNase-based therapeutics. ONCONASE(R) has demonstrated a broad spectrum of
anti-tumor activity in vitro, or studies of tumor cell lines in laboratory
vessels, and was determined to kill cancer cells and therefore was judged to be
"active" in the NCI Cancer Screen.
In vitro and in vivo studies showed both cytostatic (suppresses cancer
cells from further dividing) and cytotoxic (kills cancer cells) antitumor
activity when used as a single agent and in combination with other agents.
In Vitro
ONCONASE(R), in combination with other drugs, has been shown to be
synergistic which means that the effect of ONCONASE(R) when given in combination
with other drugs is greater than if the drugs were given alone. The combination
of ONCONASE(R) and tamoxifen, an anti-cancer drug, resulted in a
27
significant cell kill in pancreatic, prostate, and ovarian tumor cell lines as
compared to each drug alone. Similar results were found with respect to the
following:
o ONCONASE(R)+ phenothiazine for non-small cell lung cancer;
o ONCONASE(R) + lovastatin in pancreatic, ovarian, and two types of
non-small cell lung cancer;
o ONCONASE(R) + cisplatin in ovarian cancer;
o ONCONASE(R) + all-trans-retinoic acid in glioma (brain) cancer;
o ONCONASE(R) + vincristine in colorectal cancer and ;
o ONCONASE(R) + doxorubicin in breast cancer including resistant
variants, malignant mesothelioma.
In Vivo Anti-Cancer Activity
ONCONASE(R) as a Single Agent
ONCONASE(R) as a single agent has shown in vivo anti-tumor activity in
several mouse models of solid tumors. The following are all examples of the
effect of ONCONASE(R) on various types of human cancer cells in mouse models:
o In the human squamous A-253 carcinoma and the NIH-OVCAR-3 ovarian
adenocarcinoma models, ONCONASE(R) has produced prolonged survival
and delayed time to development of ascites (fluid in the abdomen),
respectively.
o In mice bearing M109 Madison lung carcinoma cells, time to
appearance of ascites and survival were significantly prolonged in
ONCONASE(R) treated animals as compared to controls. Several
histologically (microscopic study of cells) confirmed cures were
noted.
o In nude mice bearing human DU-145 prostate carcinoma and pancreatic
ASPC-1 carcinoma, ONCONASE(R) inhibited growth of the subcutaneously
transplanted tumor.
o In several mouse tumor models, ONCONASE(R) not only demonstrated
direct anti-tumor activity but also increased the potential for
other drugs to penetrate the tumor tissue as well as increased the
tumor sensitivity to radiation therapy.
ONCONASE(R) in Combination With Other Agents
Based on in vivo results, ONCONASE(R) in combination with the following
known and approved anti-cancer agents has been evaluated by us, in collaboration
with the NCI:
o vincristine
o doxorubicin
o tamoxifen
When used in combination with vincristine, ONCONASE(R) prolonged the
survival of nude mice bearing vincristine-resistant, HT-29 human colorectal
carcinomas, a type of cancer cell, transfected with mdr-1 gene, a multiple drug
resistant gene. These NCI results demonstrated that ONCONASE(R) can restore the
sensitivity of resistant tumor cells to chemotherapy.
NCI experiments in nude mice transplanted intravenously with human breast
carcinoma cells treated with the combination of ONCONASE(R) and doxorubicin have
shown significantly prolonged survival. Tumor growth was significantly inhibited
as demonstrated by a decrease in the number of pulmonary metastases, or
disseminated lesions in the lung, present at the time of sacrifice.
28
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. We believe that these
in vivo results demonstrate the therapeutic utility of ONCONASE(R) in
chemotherapy-resistant tumors, and the findings suggest that ONCONASE(R) in
combination with other agents has broad clinical application in cancer
treatments.
Clinical Trials
Onconase(R) Phase III Randomized Clinical Trials
We are currently conducting a two-part Phase III clinical trial of
ONCONASE(R) as a treatment for malignant mesothelioma. The first part of the
Phase III trial compares ONCONASE(R) alone to doxorubicin. Doxorubicin has been
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 alone. The trial is an open
label, centrally randomized, controlled study. The patient enrollment for the
first part of the clinical trial has been completed and the trial is on-going.
The second part is currently in the enrollment stage and is being conducted in
the United States, Germany and Italy.
Since ONCONASE(R) has Fast Track Designation for the treatment of
malignant mesothelioma patients, we continue to have meetings and discussions
with the FDA to establish mutually agreed upon parameters for the New Drug
Application, or NDA, to obtain marketing approval for ONCONASE(R), assuming the
Phase III clinical trial yields favorable results.
Phase III Single Agent Results
The single agent Phase III results of the Treatment Target Group, or TTG,
which included 104 patients, of which 47 were treated with ONCONASE(R) and 57
were treated with doxorubicin who met the criteria for Cancer Adult Leukemia
Group B, or CALGB prognostic groups 1-4, showed a median survival benefit, or
MST, of 2 months for ONCONASE(R) treated patients, 11.6 months versus 9.6
months. This two month median survival difference favoring ONCONASE(R)
represents a 20% advantage over the active agent, doxorubicin. Moreover, the
clinical activity of ONCONASE(R) is also evident from the overall 1-year and
2-year survival rates of ONCONASE(R) versus doxorubicin, 46.8% versus 38.6% and
20.2% versus 12.3%, respectively. Doxorubicin treatment was associated with a
60% higher risk of death compared to ONCONASE(R) treatment. Tumor assessment by
an independent radiologist for 53 patients revealed evidence of objective
clinical activity in 17 patients in each treatment arm. Four partial responses
and 13 stabilization of previously progressive disease in the ONCONASE(R)
treated patients and 7 partial responses and 10 stabilization of previously
progressive disease in the doxorubicin treated patients. Despite the small
number of patients, the analysis revealed a statistically significant
difference, log rank test, p. = 0.037, in survival of the responders favoring
ONCONASE(R) treated patients with an MST 23.3 versus 14.4 months for doxorubicin
treated patients as well as the 2 year survival rates of 40% for ONCONASE(R) and
9% for doxorubicin. Preliminary results were presented at the 2000 American
Society of Clinical Oncologists, or ASCO, meeting.
These survival advantages were recognized as clinically important in this
patient population by opinion leaders and the FDA. Therefore, the FDA has
requested confirmation of the survival results in the Treatment Target Group, or
TTG, population in Part II of the ongoing trial.
In December 2002, we received Fast Track Designation from the FDA for
ONCONASE(R) and doxorubicin for the treatment of malignant mesothelioma. Fast
Track is a formal mechanism to interact with the FDA using approaches that are
available to all applicants for marketing claims for drugs that are
29
being developed for a serious or life-threatening disease for which there is an
unmet medical need. The benefits of Fast Track include scheduled meetings to
seek FDA input into development plans, the option of submitting an NDA in
sections rather than all components simultaneously, and the option of requesting
evaluation of studies using surrogate endpoints. We anticipate to use this
designation to reduce the marketing approval timeline for ONCONASE(R).
In February 2001, we received an Orphan Medicinal Product Designation for
ONCONASE(R) from the European Agency for the Evaluation of Medicinal Products,
or the EMEA. Orphan Medicinal Product Designation is a program designed to
provide marketing, protocol and other incentives for pharmaceutical companies to
develop and market products in the European Community that address life
threatening or very serious conditions that affect not more than 5 in 10,000
persons in the European Community. Orphan designation in Europe entitles the
Company to 10 years of marketing exclusivity, reduced filing fees and regulatory
guidance from the EMEA. We continue to fulfill the EMEA requirements regarding
the Marketing Authorization Application, or MAA registration requirements for
ONCONASE(R) for the treatment of malignant mesothelioma.
In part two of the ongoing Phase III trial, an interim analysis based on
the occurrence of 105 deaths is planned. Based upon the results of these
analyses, we may be able to file an NDA and an MAA within six months after the
completion of the analyses. However, we cannot assure you that marketing
approval for ONCONASE(R) as a treatment for malignant mesothelioma will be
granted by the FDA or EMEA.
Based on Phase II trial results after meeting with the FDA, we had
initiated a Phase III trial in patients with advanced pancreatic cancer in 1995.
In the Phase II trial, the median survival time of 5.5 months for 47 patients
with stage 4 disease and liver involvement treated with the combination of
ONCONASE(R) weekly and tamoxifen daily was more than double the median survival
of such patients reported in previously published trials treated with a variety
of other systemic therapies (published median survival times ranged from 2.0 to
2.5 months). The Phase III trial was a multicenter randomized trial designed to
evaluate an ONCONASE(R) and tamoxifen regimen in untreated patients as well as
patients who had failed GEMZAR(R), an approved drug for pancreatic cancer. The
primary endpoint of both segments of this Phase III trial was survival, however,
early survival analyses of both segments did not reveal a significant survival
advantage of ONCONASE(R) over the controls. Thus, due to the negative results of
the Phase III trial, despite favorable results produced in Phase II, competitive
pressures and our inability to accrue qualified patients in the clinical trials,
we made a decision that further evaluation of this end-stage patient population
was not warranted at that time and our resources were refocused on the ongoing
malignant mesothelioma program.
ONCONASE(R) Phase II Clinical Trials
ONCONASE(R) as a single agent, demonstrated objective clinical activity in
105 patients with uresectable, or inoperable, malignant mesothelioma that
included many heavily pretreated patients with refractory tumors, which are
tumors that did not readily yield to the treatment. Analysis of the TTG
population confirmed the importance of the CALGB prognostic groups and their
utility for evaluating systemic therapies in this patient population.
Of the 100 patients treated, 41 patients, or 39%, reported evidence of
clinical activity. Of the patients showing evidence of clinical activity, there
were four with partial responses, two with minor responses and 35 showed
evidence of stabilization of previously progressive disease. The MST of these
patients was 18.5 months and the overall 1-year and 2-year survival rates were
61% and 40.8%, respectively. The results of this trial demonstrated a survival
benefit for both newly diagnosed patients
30
and patients who failed prior therapies. The presentation of these data to the
FDA resulted in the design of our Phase III malignant mesothelioma trial.
A multicenter Phase II Broad Eligibility trial designed to evaluate
ONCONASE(R) as a single agent has been conducted and results of the findings for
patients with non-small cell lung cancer, or NSCLC, and advanced breast cancer
were published.
ONCONASE(R) as a single agent, demonstrated objective clinical activity in
patients with advanced NSCLC and breast cancer. The median survival time of 30
patients with advanced NSCLC was greater than that in 19 of 20 regimens when
supportive care, a placebo or another single agent was given. Furthermore it was
greater than 75% of the reported MSTs in combination chemotherapy trials. The
MST and 1 year survival rates of 7.7 months and 27%, respectively, for
ONCONASE(R) treated patients compared favorably to 7.2 months and 30% for
patients treated with Navelbine(R) (an approved drug for this indication) as a
single agent.
Thirty percent of 17 patients with advanced breast cancer demonstrated
objective clinical activity, which included, one partial response, two minor
responses and the significant reduction in bone pain and in one patient and the
control of uncontrollable malignant fluid in the lungs of another patient.
A series of pilot Phase II studies to evaluate ONCONASE(R) as a single
agent, and ONCONASE(R) and tamoxifen in previously treated patients with
unresectable, or inoperable, renal cell cancer were conducted. The results of
both the Phase II single agent and ONCONASE(R) and tamoxifen were published.
Although the single agent study did not demonstrate evidence of clinical
activity, the regimen of ONCONASE(R) and tamoxifen did demonstrate evidence of
clinical activity which indicated further evaluation in untreated patients was
warranted.
Research And Development Pipeline Of Targeted Therapies
Our drug discovery program forms the basis for the development of
recombinant designer RNases for chemical conjugation and gene fusion products
with various targeting moieties such as monoclonal antibodies, growth factors,
cytokines, etc. We believe these products can be produced in a cost effective
and controlled manufacturing environment.
This program also provides for joint design and generation of new products
with outside partners. We, along with any outside partners, may own these new
products jointly, or we may grant an exclusive license to the collaborating
partner(s).
Ranpirnase Conjugates and Fusion Proteins
The concept of targeting potent toxins as effector molecules to kill
cancer or other specifically targeted cells has been extensively evaluated over
the last two decades. An immunotoxin is an antibody linked to a toxic molecule
that is used to destroy specific cells. Several immunotoxins containing
bacterial and plant toxins or other biotoxins, have been evaluated in human
clinical trials. Efficacy has always been limited due to the high incidence of
immunogenicity, or an immune response, and other intolerable toxicities,
including death. Conjugation of ranpirnase to targeting ligands, or binding to
other molecules, appears to eliminate this safety problem in pre-clinical
studies.
We have established a number of scientific collaborations with academic
and research institutions including the NCI. The objective of our collaboration
with the NCI is to develop new therapeutic applications for ONCONASE(R). This
collaboration has produced RN321, a conjugate of ranpirnase, with a monoclonal
antibody that demonstrated activity in treating non-Hodgkin's lymphoma in
preclinical
31
studies. The relative benefit in killing targeted tumor cells versus
non-targeted healthy cells, or the therapeutic index, is greater than
200,000-fold with this conjugate. These "proof-of-concept" results were
presented at the 2002 Ribonuclease Meeting in Bath, England. The NCI has
undertaken the manufacturing of RN321 (the conjugate) according to Good
Manufacturing Practices, or GMP regulations in preparation for commencing
clinical trials for the treatment of patients with non-Hodgkin's lymphoma with
RN321. Clinical grade production of RN321 and Investigational New Drug
Application, or IND, directed toxicology studies will require further approval
from the Drug Development Group of the NIH prior to commencing human clinical
trials.
Although ranpirnase is active against a variety of human cancers, its
activity is not uniform across different tumor types. However, whether the tumor
is more or less sensitive to ranpirnase as a single agent, its anti-tumor
activity can be greatly augmented by conjugation to different targeting
moieties, or groups. One of these moieties is the epidermal growth factor, or
EGF, which is a ligand for the EGF receptor often hyperexpressed on malignant
cells. The genetically engineered ranpirnase conjugates with EGF (rRNP-EGF)
exerted significant anti-tumor activity in human cell types of the head and neck
and pancreatic carcinomas, and human D54MG glioblastoma, a cancerous brain tumor
cell. Other constructs target tumor blood vessel formation, which could be
potentially used in a broad spectrum of solid tumors. They are in pre-clinical
evaluation by our European collaborator.
Novel Amphibian Ribonucleases
All of the proteins characterized to date are RNases. Preclinical testing
of the new candidates collectively called amphinases showed them to be similarly
active to ranpirnase. Their chemical structure makes them ideal candidates for
genetic engineering of designer products.
Research Collaborations
In addition to the above programs, we are pursuing some programs in
collaboration with the NIH, NCI and The University of Pennsylvania Medical
Center, Metabolic Magnetic Resonance Research and Computing Center.
We have established a number of scientific collaborations with the NIH and
NCI. The objective of our collaborations with the NIH and NCI is to develop new
therapeutic applications for ONCONASE(R) as well as other drug candidates.
The multiple effects of biological activity of ONCONASE(R) led to research
in other areas of cancer biology. Two important areas associated with
significant market opportunities are radiation therapy and control of tumor
angiogenesis, or new tumor blood vessel formation. Many types of cancers undergo
radiation therapy at early stages of the disease; however, success of such
treatment is often limited. We believe any agent capable of enhancing tumor
radiosensitivity has great market potential. Moreover, since the growth of
essentially all types of cancer is dependent on new blood vessel formation, any
agent that has anti-angiogenic activity, we believe, is most desirable.
Evaluation Of ONCONASE(R) As A Radiation Enhancer
The p53 gene is a tumor-suppressor gene meaning that if it malfunctions,
tumors will develop. Published studies have demonstrated that ONCONASE(R) causes
an increase in both tumor blood flow and in median tumor oxygen partial pressure
causing tumor cells to become less resistant to radiation therapy regardless of
the presence or absence of the functional p53 tumor-suppressor gene. We believe
these findings further expand the profile of ONCONASE(R) in vivo activities and
its potential clinical utility and market potential.
32
The University of Pennsylvania Medical Center, Metabolic Magnetic
Resonance Research and Computing Center will further evaluate ONCONASE(R) in
combination with radiation and cisplatin, an anti-cancer drug, in human lung
adenocarcinoma, a form of lung cancer, in a series of animal models as well as
look at the effects of ONCONASE(R) in the inhibition of sub-lethal damage repair
(SLDR) and potentially lethal damage repair (PLDR) in human lung carcinoma
cells.
ONCONASE(R) As a Resistance-Overcoming and Apoptosis-Enhancing Agent
The Fas (CD95) cell surface receptor (and its Fas ligand FasL) has been
recognized as an important "death" receptor involved in the induction of the
"extrinsic" pathway of apoptosis. The apoptotic pathways have been the preferred
target for new drug development in cancer, autoimmune, and other therapeutic
areas.
The Thoracic Surgery Branch of the NCI confirmed the synergy between
ranpirnase and soluble Fas ligand (sFasL) in inducing significant apoptosis in
sFasL-resistant Fas+tumor cells. These results provided rationale for using
ONCONASE(R) as a potential treatment of FasL-resistant tumors and possibly other
disorders such as the autoimmune lympho-proliferative syndrome (ALPS). Further
research in this area is ongoing.
Evaluation Of ONCONASE(R) As An Anti-Viral Agent
A collaborative agreement (anti-viral screening, non-SARS) with the
National Institute of Allergy and Infectious Diseases, or NIAID, has yielded
positive results, which have been confirmed with one of our amphinases. Further
evaluation of this potential therapeutic is ongoing.
The ribonucleolytic activity was the basis for testing ONCONASE(R) as a
potential anti-viral agent against HIV. The NIH has performed an independent in
vitro screen of ONCONASE(R) against the HIV virus type 1. 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 while not affecting normal cellular ribosomal RNA and
messenger RNAs, which are essential to cell function.
Moreover, the NIH, Division of AIDS also screened ONCONASE(R) for anti-HIV
activity. ONCONASE(R) demonstrated highly significant anti-HIV activity in the
monocyte/macrophage, or anti-viral, system. Ranpirnase may inhibit viral
replication at several points during the life cycle of HIV, including its early
phases. Ranpirnase may inhibit replication of all different HIV-1 subtypes.
These properties of ranpirnase are particularly relevant in view of the
extremely high and exponentially increasing rate of mutations of HIV that occur
during infection, and which are primarily responsible for the development of
resistance to several currently available anti-viral drugs. At present, over 50%
of clinical isolates of HIV are resistant to both reverse transcriptase,
mechanisms which combat viral replication, and protease inhibitors drugs, a
class of anti-viral drugs. An additional 25%, while being sensitive to protease
inhibitors, are resistant to RT inhibitor(s) drugs, reverse transcriptase drugs.
European collaborators continue to investigate the anti-viral properties of
ONCONASE(R). The ribonucleolytic activity of ONCONASE(R) suggested that it might
be active against a variety of RNA viruses, including HIV and hepatitis C.
Commercial Collaborations with Pharmaceutical/Drug Delivery Companies
A research and development collaboration with a major US privately held
stent and drug delivery company is ongoing. ONCONASE(R) is being evaluated in
stents and other delivery platforms to treat
33
cardiovascular disease and cancer via direct site delivery. This collaboration
may result in licensing agreement between the companies, however; there is no
assurance that such agreement will be reached.
Our research and development collaboration with Wyeth Pharmaceuticals is
ongoing to develop a number of designer drugs such as conjugates and fusion
proteins for a variety of indications using our proprietary technology. This
collaboration may result in a licensing agreement between the companies,
however; there is no assurance that such an agreement will be reached.
Raw Materials
The major active ingredient derived from leopard frog eggs is the protein
ranpirnase. 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 can successfully produce ranpirnase by using recombinant
technology; however, it may not be more cost effective.
Manufacturing
We have signed an agreement with Scientific Protein Laboratories, which
will perform the intermediary manufacturing process of purifying ranpirnase. We
contract with BenVenue Corporation for vial filling and with Cardinal Health for
the labeling, storage and shipping of ONCONASE(R) during the Phase III trial
period. Other than these arrangements, we do not have specific arrangements for
the manufacture of our product. Products manufactured for use in Phase III
clinical trials and for commercial sale must be manufactured in compliance with
Current Good Manufacturing Practices. Scientific Protein Laboratories, BenVenue
Corporation and Cardinal Health all 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 believe, however, that there are substantial alternative service
providers for the services for which we contract. Because we have not yet
received drug approval, we utilize the services of these third party
manufacturers solely on an as needed basis with prices and terms customary for
companies in businesses that are similarly situated. In order to replace an
existing manufacturer, we must amend our Investigational New Drug application to
notify the FDA of the new manufacturer. 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 deliver sufficient
quantities of our products on schedule.
Marketing
We do not plan to market our products at this time. We have entered into a
number of Confidential Disclosure Agreements and have been in discussions with
several United States and multinational biopharmaceutical companies for the
selection of suitable marketing partners for our lead product ONCONASE(R), our
proprietary RNA interference technology pipeline, as well as several patented
product candidates.
We intend to enter into development and marketing agreements with third
parties. We expect that under such arrangements we would grant exclusive
marketing rights to our corporate partners in return for assuming further
research and development cost, up-front fees, milestone payments and royalties
on sales. Under these agreements, our marketing partner may have the
responsibility for a significant portion of product development and regulatory
approval. In the event that our marketing partner fails to develop a marketable
product or fails to market a product successfully, our business may be adversely
affected.
34
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 that apply to the clinical testing, manufacturing and marketing
of pharmaceutical products in the United States. 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 the 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. Moreover
manufacturing processes and controls for the product are required. The
manufacturing information along with the results of these studies is 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 Marketing Authorization Application, or
MAA.
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 and Proprietary Technology
We have protected our business by applying for, and obtaining, patents and
trademark registrations. We have also relied on trade secrets and know-how to
protect our proprietary technology. We continue to develop our portfolio of
patents, trade secrets, and know how. We have obtained, and continue to apply
for, patents concerning our RNase-based technology.
In addition, we have filed (and we intend to continue to file) foreign
counterparts of certain U.S. patent applications. Generally, we apply for patent
protection in the United States, selected European countries, and Japan.
We own the following U.S. patents:
- --------------------------------------------------------------------------------------------------------------------
Patent No. Issue Date Expiration **
---------- ---------- -------------
- --------------------------------------------------------------------------------------------------------------------
6,423,515 B1 July 2002 covers methodology for synthesizing gene sequences of Sept. 2019
ranpirnase and a genetically engineered variant of
ranpirnase
- --------------------------------------------------------------------------------------------------------------------
6,290,951 B1 Sept. 2001 covers alteration of the cell cycle in vivo, Aug. 2018
particularly for inducing apoptosis of tumor cells
- --------------------------------------------------------------------------------------------------------------------
35
- -----------------------------------------------------------------------------------------------------------------
6,239,257 B1 May 2001 covers a family of variants of ONCONASE(R) Dec. 2018
- -----------------------------------------------------------------------------------------------------------------
6,175,003 B1 Jan. 2001 covers the genes of ONCONASE(R) and a variant of Sept. 2019
ONCONASE(R)
- -----------------------------------------------------------------------------------------------------------------
5,728,805 Mar. 1998 covers a family of variants of ONCONASE(R) Mar. 2015
- -----------------------------------------------------------------------------------------------------------------
5,595,734 Jan. 1997 covers combinations of ONCONASE(R) with certain other Jan. 2014
pharmaceuticals
- -----------------------------------------------------------------------------------------------------------------
5,559,212 Sept. 1996 covers the amino acid sequence of ONCONASE(R) Sept. 2013
- -----------------------------------------------------------------------------------------------------------------
5,540,925 July 1996 covers combinations of ONCONASE(R) with certain other July 2013
pharmaceuticals
- -----------------------------------------------------------------------------------------------------------------
5,529,775 June 1996 covers combinations of ONCONASE(R) with certain other Jan. 2013
pharmaceuticals
- -----------------------------------------------------------------------------------------------------------------
4,888,172 Dec. 1989 covers a pharmaceutical produced from fertilized frog Dec. 2006
eggs (Rana pipiens) and the methodology for producing
it
- -----------------------------------------------------------------------------------------------------------------
6,649,392 B1* Nov. 2003 covers a family of recombinant variants of ONCONASE(R) Apr. 2016
- -----------------------------------------------------------------------------------------------------------------
6,649,393 B1* Nov. 2003 covers nucleic acids encoding recombinant variants of Apr. 2016
ONCONASE(R) and methodology for producing such variants
- -----------------------------------------------------------------------------------------------------------------
*We own this patent jointly with the U.S. Government.
We own the following foreign patents in Europe and Japan (European patents
are validated in selected European nations):
- -----------------------------------------------------------------------------------------------------------------
Patent No. Expiration **
---------- -------------
- -----------------------------------------------------------------------------------------------------------------
EP 0 440 633 covers ONCONASE(R) and process technology for making it Mar. 2009
- -----------------------------------------------------------------------------------------------------------------
EP 0 500 589 cover combinations of ONCONASE(R) with certain other pharmaceuticals Oct. 2010
JP 2972334
- -----------------------------------------------------------------------------------------------------------------
EP 0 656 783 covers combinations of ONCONASE(R) with certain other pharmaceuticals July 2013
- -----------------------------------------------------------------------------------------------------------------
EP 0 837 878 covers a variant of ONCONASE(R) June 2016
- -----------------------------------------------------------------------------------------------------------------
** Assumes timely payment of all applicable maintenance fees and annuities;
excludes term extensions that do or may apply.
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 US patent applications, each relating to a Subject
Invention (as that term is defined in Cooperative Research and Development
Agreements, or 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
36
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 uninfringed upon. 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 that 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
In February 2004, the Food and Drug Administration granted Eli Lilly &
Company approval to sell its Alimta(R) medication as an orphan drug to treat
patients with pleural mesothelioma. Alimta(R) is a multi-targeted antifolate
that is based upon a different mechanism of action than ONCONASE(R). To our
knowledge, no other company is developing a product with the same mechanism of
action as ONCONASE(R).
There may be several companies, universities, research teams or scientists
which are engaged in research similar, or potentially similar to research
performed by us. Some of these entities or persons may have far greater
financial resources, larger research staffs and more extensive physical
facilities. In addition, these entities or persons may develop products that are
more effective than ours and may be more successful than us at producing and
marketing their products.
We are not aware, however, of any product currently being marketed that
has the same mechanism of action as our proposed anti-tumor agent, ONCONASE(R).
Search of scientific literature reveals no published information that would
indicate that others are currently employing this method or producing such an
anti-tumor agent. However, we cannot assure you that others may not develop new
treatments that are more effective than ONCONASE(R).
Employees
As of May 12, 2004, we have 12 employees, of whom 8 were engaged in
research and development activities and 4 were engaged in administration and
management. We have 6 employees who hold Ph.D. degrees. All of our employees are
covered by confidentiality agreements. We consider relations with our employees
to be excellent. 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
37
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. Our lease expired on December
31, 2001 and we have been leasing the property on a month-to-month basis. 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.
38
MANAGEMENT
Directors And Executive Officers
Name Age Director Since Position with the Company
---- --- -------------- -------------------------
Kuslima Shogen 59 1981 Chairman of the Board and Chief Executive
Officer
John P. Brancaccio, C.P.A.(1)(2)(3) 55 2004 Director
Stephen K. Carter, M.D. 65 1997 Director and Chairman of the Scientific
Advisory Board
Donald R. Conklin (2) 67 1997 Director
James J. Loughlin, C.P.A.(1)(3) 61 2004 Director
Andrew P. Savadelis(1) 46 2004 Director and Chief Financial Officer
Paul Weiss, Ph.D. 45 2003 Director
(1) Mr. Brancaccio, Mr. Loughlin and Mr. Savadelis were elected to our Board
of Directors by our stockholders on January 14, 2004.
(2) Member of Compensation Committee.
(3) 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 from June 23, 1999 until March
2004. 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 Dickenson
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 Dickenson
University, or FDU, and also completed graduate studies in 1978 in embryology.
She is a Phi Beta Kappa graduate.
John P. Brancaccio, C.P.A. joined the Board of Directors in January 2004.
For the past two years, Mr. Brancaccio has been a financial consultant to life
sciences companies, most recently serving specific companies which are
development stage and focusing on the discovery and development of
pharmaceutical and biopharmaceutical compounds and technology platforms. For
approximately one year preceding that time, he was the President/Chief Operating
Officer and a member of the Board of Directors for Eline Group Entertainment, a
publicly traded company in the entertainment and media industry. Prior thereto,
Mr. Brancaccio was the Chief Financial Officer and Americas Area Controller for
Zambon Group, a Milan, Italy based multinational pharmaceutical company for
eleven years. He is a Certified Public Accountant in the State of New Jersey and
a graduate of Seton Hall University.
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
39
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
Cytogen Corporation, Vion Pharmaceuticals, Achillion Pharmaceuticals and
Sopherion 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 Ventiv Health, Inc.
James J. Loughlin, C.P.A. joined the Board of Directors in January 2004.
Elected to partnership in 1973, Mr. Loughlin remained with KPMG LLP ("KPMG")
until September 2003, when he retired from the Pharmaceuticals Practice, Life
Sciences and Chemicals division. During his career, Mr. Loughlin served in
various executive positions throughout KPMG, including Managing Partner of the
firm's Milwaukee, Wisconsin office, Partner-in-Charge of Human Resources for the
United States in the firm's National Executive Office in New York, and
Partner-in-Charge of the Audit Practice in the firm's Short Hills, New Jersey
office. Mr. Loughlin was also elected to and served on the firm's Board of
Directors from 1994 until 1998. Mr. Loughlin has gained extensive experience
serving multinational pharmaceutical manufacturing and distribution companies.
Mr. Loughlin is a Certified Public Accountant in the States of New Jersey, New
York and Wisconsin. He received his B.S. in accounting from St. Peter's College.
Andrew P. Savadelis, joined our Board of Directors in January 2004 and
became our Chief Financial Officer in March 2004. Mr. Savadelis served as Chief
Financial Officer, Senior Vice President, Finance from September 2002 to July
2003 for Orchid BioSciences, Inc. From January 2002 through September 2002, he
was a Principal at Stratus Photonics Inc., a startup developer of optical signal
conditioning products. From September 2000 to January 2002, Mr. Savadelis served
as Chief Financial Officer and Executive Vice President, Finance for eMagin
Corporation. Prior to this, Mr. Savadelis served as Treasurer, Senior Director
of Mergers and Acquisitions and Assistant Secretary for ANADIGICS, Inc., from
1993 to 2000. From 1986 to 1993, Mr. Savadelis held several different positions
40
at Bristol-Myers Squibb Company. Mr. Savadelis received his B.S. in biology from
Albright College and his M.B.A. from Cornell University.
Paul Weiss, Ph.D., was appointed to our Board of Directors in February
2003. Dr. Weiss is President of Gala Design, a wholly-owned subsidiary of
Cardinal Health. He had served as a director on Gala's Board from 1998 to 2001,
when he joined the management team as Senior Vice President of Business
Development. Prior to joining Gala Design, Dr. Weiss was Vice President of
Technology and Product Licensing at 3-Dimensional Pharmaceuticals from 1998 to
2001. Prior to joining 3-Dimensional Pharmaceuticals, Dr. Weiss was Director of
Licensing for Wyeth-Ayerst Laboratories, a division of Wyeth Pharmaceuticals.
Dr. Weiss holds a Ph.D. in Biochemistry and an M.B.A. from the University of
Wisconsin-Madison and a B.Sc. in Biochemistry from Carleton University Institute
of Biochemistry in Ottawa, Ontario.
Directors' Compensation
Directors receive no cash compensation in consideration for their serving
on the Board of Directors.
In May 1997 and in December 1997, the Board of Directors and the
stockholders, respectively, approved our 1997 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, or 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, or 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 during the year preceding the date on which
such options are scheduled to vest and become exercisable, or from the date the
independent director joined the Board until the date on which the options are
scheduled to vest and become exercisable. However, if an independent director
does not fulfill such continuous service requirements 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 equal to the average of the high and low
trade prices of our Common Stock for the twenty trading days preceding the date
of grant.
During the fiscal year ended July 31, 2003, the following independent
directors listed below were granted options under our 1997 Stock Option Plan,
pursuant to the formula set forth above.
41
Number of
Name Options(1) Exercise Price
----------------------- ------------ ----------------
Stephen K. Carter 15,000 $0.39
Donald R. Conklin 15,000 $0.39
Martin F. Stadler(2) 15,000 $0.39
Paul M. Weiss 12,500 $0.71
- --------
(1) All of the options listed here were granted on December 31, 2002, except
for the 12,500 options which were granted to Dr. Weiss on February 3,
2003, vest on December 30, 2003 and expire on December 30, 2008.
(2) Mr. Stadler did not stand for re-election at the Company's 2003 annual
stockholders' meeting and is no longer a Director of the Company.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended July 31, 2003, the members of the Board of
Directors who served on the Compensation Committee were Donald R. Conklin,
Stephen K. Carter and Martin F. Stadler, all of whom are non-employee directors
and have never been an officer of Alfacell. During the fiscal year ended July
31, 2003, no executive officer of Alfacell served on the Compensation Committee
or Board of Directors of any other entity which had any executive officer who
also served on the Compensation Committee or Board of Directors of Alfacell.
42
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, 2003, 2002 and 2001 with
respect to the person serving as Alfacell's Chief Executive Officer during the
year ended July 31, 2003, and Alfacell's only executive officer whose annual
salary and bonus during the year ended July 31, 2003 exceeded $100,000
(collectively, the "Named Officers").
Annual Long-Term
Compensation Compensation
------------ ------------
Other
Annual Securities All Other
Name and Principal Compensation Underlying Compensation
Position Year Salary ($) Bonus ($) ($)(1) Options (#) ($)(2)
- ------------------------ ------ ----------- ----------- -------------- ------------- ---------------
Kuslima Shogen 2003 $150,000(3) 0 0 115,000 $ 2,077
Chief Executive Officer,
Chairman of the Board
of Directors and Acting 2002 $150,000 0 0 115,000 $ 4,154
Chief Financial Officer 2001 $150,000 0 0 115,000(4) $ 4,154
Stanislaw Mikulski(5) 2003 $ 55,000(5) 0 0 50,000(6) 0
Former Executive Vice
President, Medical
Director and Director 2002 $130,000(5) 0 0 50,000(6) $ 2,100
2001 $130,000 0 0 55,000(6) $ 3,900
- --------------
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed the lesser of $50,000 or 10% of the Named Officer's total
annual salary and bonus.
(2) Consist of Alfacell's annual contributions to a 401(k) plan.
(3) Includes $80,780 of unpaid gross salary for Ms. Shogen.
(4) Of these options, 23,000 were exercised in March 2001 and the balance
remains outstanding.
(5) Stanislaw Mikulski resigned as the Company's Executive Vice President,
Medical Director and as a member of the Board of Directors effective as of
January 7, 2003. His unpaid gross salary for calendar year 2002 has been
paid in full as of September 30, 2003.
(6) Of these options, an aggregate of 74,000 shares were exercised in June
2003 and July 2003 and the balance either expired or were cancelled.
43
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock
options to the Named Officers during the fiscal year ended July 31, 2003:
Individual Grants
---------------------------------------------------------------
Number of % of Total Potential Realizable Value at
Securities Options Assumed Annual Rates of Stock
Underlying Granted to Exercise or Price Appreciation for Option Term (2)
Options Employees in Base Price Expiration --------------------------------------
Name Granted (#) Fiscal Year ($/Share)(1) Date 0%($) 5%($) 10%($)
- ---------------------------------------------------------------------------------------------------------------------------------
Kuslima Shogen 115,000(3) 31.08% $.26 (3) -- $ 1,150 $ 3,450
Stanislaw Mikulski 50,000(3) (4) 13.51% $.26 (3) -- $ 500 $ 1,500
- ----------
(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 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 vest and become exercisable as to 20% of the shares on the
date of grant and as to an additional 20% of the shares each year
thereafter until these options are fully vested and will expire five years
after the date they become exercisable.
(4) Of these options, 10,000 were exercised in June 2003 and the balance were
canceled.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the information with respect to the Named
Officers concerning the exercise of options during 2003 and unexercised options
held as of July 31, 2003.
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year-End (#) at Fiscal Year-End($)(2)
------------------------------ -------------------------------
Shares Value
Acquired on Realized
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------------
Kuslima Shogen None None 267,445 230,000 $228,523 $301,300
Stanislaw M. Mikulski 124,000 $ 28,460 0 0 $ 0 $ 0
(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 the Common Stock at the fiscal year end was based
on the average of the high and low trade prices ($1.31) for the Common
Stock obtained from the OTC Bulletin Board on the last trading day of the
fiscal year, July 31, 2003.
44
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, each of our named
officers and all directors and named officers as a group as of May 12, 2004
(unless otherwise indicated). Except as otherwise noted, each person has sole
voting and investment power with respect to the shares shown as beneficially
owned.
Aggregate
number of shares Percent of
Name and address of beneficial beneficially shares
owner or identity of group(1) Position owned(2) outstanding(3)
- ----------------------------- ----------------------------- ----------------- --------------
<c>
Kuslima Shogen Chief Executive Officer and 1,915,065(4) 5.9%
Chairman of the Board
John P. Brancaccio, C.P.A. Director 0(5) *
Stephen K. Carter, M.D. Director and Chairman of the 180,000(6) *
Scientific Advisory Board
Donald R. Conklin Director 455,500(7) 1.4%
James J. Loughlin Director 0(8) *
Andrew P. Savadelis Director and Chief Financial 50,000(9) *
Officer
Paul M. Weiss, Ph.D.(10) Director 50,000(11) *
Stanislaw Mikulski Former Executive Vice 624,531(12) 1.9%
President, Medical Director
and Director
SF Capital Partners, Ltd.(13) 2,083,716(14) 6.5%
The Knoll Group(15) 3,113,688(16) 9.4%
All executive officers and directors 3,275,096(17) 9.9%
as a group (8 persons)
- ----------
* Represents less than 1% of Alfacell's outstanding Common Stock.
45
(1) The address of all executive officers and directors is c/o Alfacell
Corporation, 225 Belleville Avenue, Bloomfield, New Jersey, 07003.
(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(1) under the Exchange Act, and the beneficial
owner has sole voting and investment power, subject to community property
law where applicable.
(3) The percentage of stock outstanding for each stockholder is calculated by
dividing (i) the number of shares deemed to be beneficially held by such
stockholder as of the date of the calculation by (ii) the sum of (A) the
number of shares of Common Stock outstanding as of the date of the
calculation, plus (B) the number of shares issuable upon exercise of
options or warrants held by such stockholder which were exercisable as of
the date of the calculation or which will become exercisable within 60
days after the date of the calculation. Except where indicated, the
calculation date for each person listed in the table is May 12, 2004.
(4) Includes 446,445 shares underlying options which are currently exercisable
or which will become exercisable within 60 days after May 12, 2004 and
110,000 shares underlying warrants which are currently exercisable or
which will become exercisable within 60 days after May 12, 2004.
(5) Does not include 13,750 shares of Common Stock underlying options which do
not become exercisable until December 30, 2004.
(6) Includes 180,000 shares underlying options which are currently exercisable
or which will become exercisable within 60 days after May 12, 2004.
(7) Includes 70,000 shares underlying options which are currently exercisable
or which will become exercisable within 60 days after May 12, 2004 and
110,000 shares underlying warrants which are currently exercisable or
which will become exercisable within 60 days after May 12, 2004.
(8) Does not include 13,750 shares of Common Stock underlying options which do
not become exercisable until December 30, 2004.
(9) Includes 50,000 shares of Common Stock underlying options which are
currently exercisable or which will become exercisable within 60 days
after May 12, 2004. Does not include 350,000 shares of Common Stock
underlying options which vest annually or 13,750 shares of Common Stock
underlying options which do not become exercisable until December 30,
2004.
(10) Dr. Weiss joined Alfacell's Board of Directors effective as of February 3,
2003.
(11) Dr. Weiss' beneficial ownership includes 37,500 shares underlying options
which are currently exercisable or which will become exercisable within 60
days after May 12, 2004.
(12) Stanislaw Mikulski resigned as the Company's Executive Vice President,
Medical Director and as a member of the Board of Directors effective as of
January 7, 2003. His beneficial ownership includes 263,281 shares
underlying options which were exercisable as of January 31, 2003 or which
became exercisable within 60 days after January 31, 2003. Of these
options, 124,000 were exercised and the balance have since been cancelled.
(13) Michael A. Roth and Brian J. Stark are the founding members and direct the
management of Staro Asset Management, L.L.C., a Wisconsin limited
liability company ("Staro"). Staro acts as investment manager and has sole
power to direct the management of SF Capital Partners, Ltd., a British
Virgin Islands company ("SF Capital"), which directly holds all of the
shares of Common Stock. Through Staro, Messrs. Roth and Stark possess sole
voting and dispositive power over all of the foregoing shares. This
information concerning the stock ownership of Messrs. Roth and Stark was
obtained from the Schedule 13G filed with the Securities and Exchange
Commission on February 12, 2004.
(14) This does not include 1,041,858 shares of Common Stock that are issuable
to the stockholder pursuant to certain outstanding warrants, because as of
May 12, 2004 such warrants were not exercisable nor will they
automatically become exercisable within 60 days after May 12, 2004.
(15) Pursuant to Item 403(a) of Regulation S-K and for purposes of this table,
Knoll Capital Fund II, Europa Capital International, Inc. and Clifford and
Phyllis Kalista JTWROS, are deemed to be a "group" and therefore are
collectively referred to as The Knoll Group.
(16) Includes 1,210,654 shares underlying warrants which are currently
exercisable or which will become exercisable within 60 days after May 12,
2004.
(17) Includes all shares owned beneficially by the directors and the executive
officers named in the table.
46
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 gross 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 license(s) or the 5% of the net sales from any products sold
during the life of the patents but not both, unless we and a licensee both
market the licensed product.
In April 2001, we issued convertible notes to 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. Mr.
Conklin is a member of our Compensation Committee. The notes were due within
ninety days unless the lenders elected to exercise an option to convert their
note into Common Stock at the conversion price of $0.90 per share. One of the
related parties named above elected to convert his notes into an aggregate
330,000 shares of Common Stock. In addition, upon conversion, he received
three-year warrants to purchase an aggregate 330,000 shares of Common Stock at
an exercise price of $2.50 per share that will expire on July 7, 2004. In
October 2001, the Board of Directors approved a change in the exercise price of
the 330,000 warrants issued to the related parties from $2.50 per share to $1.50
per share and changed the expiration date to July 7, 2006, to conform with
private placements to unrelated parties. The notes issued to the 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. In addition, upon
conversion, they will receive five-year warrants to purchase an aggregate 77,770
shares of Common Stock at an exercise price of $1.50 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, they received
five-year warrants to purchase an aggregate 72,214 shares of Common Stock at an
exercise price of $1.50 per share.
During the fiscal years ended July 31, 2003 and 2002, our CEO made loans
to us payable on demand bearing interest at 8% per annum. At July 31, 2002, we
owed $139,794 to our CEO which was repaid during the fiscal year 2003. We also
owed approximately $81,000 of gross salary to our CEO as of July 31, 2003. Also,
at July 31, 2003, pursuant to a loan made prior to July 30, 2002 which has not
since been materially modified, $142,287 was due from our CEO, from which we
earned approximately $9,500 in interest.
In November 2003, we issued 25,000 five-year stock options to Paul Weiss,
a current director, as payment for non-board related services. The options
vested immediately and have a per share exercise price of $3.46. We recorded a
total of $52,658 of non-cash expenses for these options, based upon the fair
value on the date of the issuance as estimated by the Black-Scholes options
pricing model.
In March 2004, we issued an option to Andrew Savadelis, a current
director, to purchase 400,000 shares of Common Stock at a per share exercise
price of $4.75 in connection with his appointment as Chief Financial Officer of
the Company.
SELLING SECURITYHOLDERS
Alfacell has previously filed three Registration Statements, Nos.
333-38136, 333-89166 and 333-111101, in order to register shares of its Common
Stock, as well as shares of Common Stock underlying
47
warrants held by certain selling stockholders. Pursuant to Rule 429 under the
Securities Act of 1933, this Registration Statement also serves as a
post-effective amendment to Registration Statement Nos. 333-38136, 333-89166 and
333-111101. This Registration Statement eliminates those selling stockholders
who have previously sold shares pursuant to such Registration Statements and
also eliminates those selling stockholders to whom Alfacell no longer has
registration obligations. On January 7, 2004, Alfacell filed post-effective
amendments to Registration Statement Nos. 333-38136 and 333-89166, and a
pre-effective amendment to Registration Statement No. 333-111101. Of the
11,336,453 shares registered pursuant to such January 7, 2004 post-effective and
pre-effective amendments, as of March 31, 2004, 485,000 shares have either been
sold pursuant to the previously filed Registration Statements or Alfacell is no
longer required to register such shares. Accordingly, this Registration
Statement carries forward from the three previously filed Registration
Statements (i) 3,889,096 shares of Common Stock and (ii) 6,962,357 shares of
Common Stock underlying warrants and options, for an aggregate of 10,851,453
shares of Common Stock. As described in Registration Statements Nos. 333-38136,
333-89166 and 333-111101, Alfacell issued such shares in various private
placements from February 2000 through September 2003.
In addition, this Registration Statement also registers an additional (i)
1,604,990 shares of Common Stock and (ii) 1,460,772 shares of Common Stock
underlying warrants, for an aggregate of 3,065,762 shares of Common Stock, all
of which have not previously been registered.
On September 3, 2003, Alfacell entered into a two-part financing agreement
with SF Capital Partners, Ltd. for the initial sale of 1,704,546 shares of
Common Stock and warrants to purchase 852,273 shares of Common Stock, at an
exercise price of $1.50 per share. As consideration, Alfacell received
$1,500,000. In addition, the Company agreed to grant SF Capital Partners, Ltd. a
warrant to invest an additional $1,500,000 to purchase the Company's Common
Stock at an exercise price based upon a 20-day trailing average of the closing
price per share of the Company's Common Stock (the "Additional Warrants").
On January 16, 2004, Alfacell issued the Additional Warrants to SF
Capital. On January 29, 2004, SF Capital exercised the Additional Warrants and
invested an additional $1,500,000 to purchase the Alfacell's Common Stock at a
20-day trailing average exercise price of $3.956. In exchange, SF Capital
received 379,170 shares of Common Stock and an Exercise Warrant to purchase an
additional 189,585 shares of Common Stock at a per share exercise price of
$4.75. Pursuant to the terms of the financing agreement entered into in the
September private placement, Alfacell is registering the resale by SF Capital of
568,755 shares of Common Stock. Previously, Alfacell had registered the resale
by SF Capital of 2,556,819 shares of Common Stock in Registration Statement No.
333-111101. Alfacell also issued 15,166 shares of restricted Common Stock to a
third party as finder's fee, which are being registered pursuant to this
registration statement.
On May 11, 2004, Alfacell completed a private placement and issued
1,210,654 shares of Common Stock to Knoll Capital Fund II, Europa International,
Inc. and Clifford and Phyllis Kalista JTWROS. In addition, these entities and
individuals were also granted five-year warrants to purchase an additional
1,210,654 shares of Common Stock, at an exercise price of $12.39 per share. As
consideration, Alfacell received $10,000,000. Pursuant to the terms of the
financing agreement entered into in this private placement, Alfacell is
registering the resale by Knoll Capital Fund II, Europa International, Inc. and
Clifford and Phyllis Kalista JTWROS of 2,421,308 shares of Common Stock.
Alfacell also paid a 5% finder's fee to a third party in connection with the
private placement, which included a five-year warrant to purchase 60,533 shares
of Common Stock at an exercise price of $12.39 per share. These warrants are
also being registered pursuant to this registration statement.
48
We are required to maintain the effectiveness of this registration
statement for a period of two years from the date this registration statement is
declared effective or such earlier date when all of the shares registered
hereunder have been sold or may be sold without volume limitations pursuant to
Rule 144(k) of the Securities Act of 1933, as amended.
Stock Ownership
The table below sets forth the number of shares of Common Stock, including
those shares of Common Stock carried forward and offered by the selling
stockholders pursuant to Registration Statement Nos. 333-38136, 333-89166 and
333-111101, that are:
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
beneficially own:
o the shares of Common Stock underlying all warrants and options owned
by the selling stockholders as of March 31, 2004 or which were
exercisable within 60 days after March 31, 2004, unless otherwise
indicated; and
o the issued and outstanding shares of Common Stock owned by the
selling stockholder as of March 31, 2004, unless otherwise
indicated.
Because the selling stockholders may offer all or some portion of the
above-referenced securities under this prospectus or otherwise, no estimate can
be given as to the amount or percentage that will be held by the selling
stockholders upon termination of any sale. In addition, the selling stockholders
identified above may have sold, transferred or otherwise disposed of all or a
portion of such securities since the date on which information in this table is
provided, in transactions exempt from the registration requirements of the
Securities Act. Information about the selling stockholders may change from time
to time. Any changed information will be set forth in prospectus supplements, if
required.
Except as otherwise noted, none of such persons or entities has had any
material relationship with us during the past three years.
In connection with the registration of the shares of Common Stock offered
in this prospectus, we will supply prospectuses to the selling stockholders.
49
Shares Being Shares Being
Offered Offered Shares % of
Shares Pursuant to Pursuant to Owned Shares
Owned Previous Current Total Shares Upon Owned
Prior to Registration Registration Being Completion After
Name(1) Offering Statements(2) Statement Offered of Offering Offering(3)
- ----------------------------- -------------- --------------- ------------- ------------- -------------- -------------
<c>
Anthony, Karen(4) 208,880 135,000 0 135,000 73,880 *
Bachrodt, Patrick M.(5) 100,000 100,000 0 100,000 0 *
Basso Holdings, Ltd.(6) 227,273 227,273 0 227,273 0 *
Beto, David(7) 40,000 40,000 0 40,000 0 *
Bowen Gas Corporation(8) 100,000 100,000 0 100,000 0 *
Brown, Dennis(9) 163,800 100,000 0 100,000 63,800 *
Caasi, Krista J.(10) 5,000 5,000 0 5,000 0 *
Caasi, Santiago(11) 183,328 16,664 0 16,664 166,664 *
Conklin, Donald(12) 455,500 110,000 0 110,000 345,500 1.13%
Danson, III Edward B. Family 100,000 50,000 0 50,000 50,000 *
Trust(13)
DePeyster, Ashton(14) 155,553 61,110 0 61,110 94,443 *
DePeyster, Margo(15) 55,554 27,777 0 27,777 27,777 *
Dimzon, Delmer(16) 44,440 22,220 0 22,220 22,220 *
DKR Soundshore Strategic 227,273 227,273 0 227,273 0 *
Holding Fund, Ltd(17)
DZS Computer Solutions, 301,112 105,556 0 105,556 195,556 *
Inc.(18)
Europa International, Inc.(19) 1,766,000 0 1,185,000 1,185,000 581,000 1.8%
Falkner, R. Jerry(20) 125,126 75,126 0 75,126 50,000 *
Furno, Robert C. and Mary E 25,000 25,000 0 25,000 0 *
Furno(21)
Furst, Thomas(22) 95,000 80,000 0 80,000 15,000 *
Garg, Mukul(23) 180,012 55,556 0 55,556 124,456 *
Goodwin, Todd(24) 114,999 33,333 0 33,333 81,666 *
Gostine, Mark(25) 700,000 700,000 0 700,000 0 *
Hamblett, Michael(26) 28,819 28,819 0 28,819 0 *
Jacobson Living Trust(27) 290,000 175,000 0 175,000 115,000 *
Kalista JTWROS, Clifford and 51,308 0 51,308 51,308 0 *
Phyllis(28)
Keating, A.J. Jr., M.D.(29) 70,000 40,000 0 40,000 30,000 *
Knoll Capital Fund II(30) 1,296,380 0 1,185,000 1,185,000 111,380 *
Krogh, Jeffrey A.(31) 275,000 200,000 0 200,000 75,000 *
Krogh, Sally J.(32) 405,000 350,000 0 350,000 55,000 *
McCash Family Limited 4,566,242 1,506,570 0 1,506,570 3,059,672 9.13%
Partnership.(33)
McCash, Donna M. Irrevocable 351,944 177,222 0 177,222 174,722 *
Trust(34)
McCash, James O.(35) 1,684,035 120,000 0 120,000 1,564,035 5.14%
Muniz, Charles(36) 1,395,714 1,035,714 0 1,035,714 360,000 1.16%
Muniz, Melba(37) 1,032,714 785,714 0 785,714 247,000 *
Neill, Carol(38) 120,000 120,000 0 120,000 0 *
Neill, Doug(39) 130,000 50,000 0 50,000 80,000 *
Number One Corporation 53,876 38,710 15,166 53,876 0 *
50
Shares Being Shares Being
Offered Offered Shares % of
Shares Pursuant to Pursuant to Owned Shares
Owned Previous Current Total Shares Upon Owned
Prior to Registration Registration Being Completion After
Name(1) Offering Statements(2) Statement Offered of Offering Offering(3)
- ----------------------------- -------------- --------------- ------------- ------------- -------------- -------------
<c>
Patton, Eve M.(40) 708,334 266,667 0 266,667 441,667 1.45%
Pawl, Lawrence E.(41) 200,000 200,000 0 200,000 0 *
Pisani, B. Michael(42) 60,000 30,000 0 30,000 30,000 *
Plikerd, William D.(43) 100,000 100,000 0 100,000 0 *
Provenzano, Matthew J.(44) 60,000 60,000 0 60,000 0 *
Samet, Roger(45) 480,000 50,000 0 50,000 430,000 1.42%
Schiro, Anthony(46) 100,000 50,000 0 50,000 50,000 *
SF Capital Partners, Ltd.(47) 2,083,716 2,556,819 568,755 3,125,574 0 *
Shogen, Kuslima(48) 1,765,065 110,000 0 110,000 1,655,065 5.39%
Sitao, Janine(49) 151,260 33,330 0 33,330 117,930 *
Stadler, Martin(50) 247,000 110,000 0 110,000 137,000 *
Theresa M. Provenzano 40,000 40,000 0 40,000 0 *
Revocable Living Trust U/A(51)
Tweiten, Vicki K.(52) 40,000 40,000 0 40,000 0 *
VFT Special Ventures Ltd.(53) 60,533 0 60,533 60,533 0 *
Williams, Ira(54) 131,800 100,000 0 100,000 31,800 *
Wood, Scott(55) 80,000 80,000 0 80,000 0 *
Zaumseil, Dean R.(56) 100,000 100,000 0 100,000 0 *
Total 23,532,590 10,851,453 3,065,762 13,917,215 10,657,233
* Represents less than one percent of, Alfacell's outstanding Common Stock.
(1) The last name of the individual selling stockholder is listed first.
(2) Amounts represented are shares of Common Stock and shares of Common Stock
underlying warrants that were registered pursuant to Registration
Statements Nos. 333-38136 and 333-89166, previously filed with the SEC on
March 3, 2003. Such shares are being offered pursuant to this combined
prospectus, which serves as a post-effective amendment to such previously
filed Registration Statements.
(3) 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 October 17,
2003, 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
October 17, 2003 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 October 17 2003 or which will be exercisable within
60 days after October 17, 2003.
(4) Beneficial ownership includes an aggregate of 100,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(5) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(6) Beneficial ownership includes an aggregate of 227,273 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(7) Beneficial ownership includes an aggregate of 20,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(8) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
51
(9) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(10) Beneficial ownership includes an aggregate of 5,000 shares of Common Stock
underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(11) Beneficial ownership includes an aggregate of 166,664 shares of Common
Stock underlying warrants and options, of which 16,664 shares are being
offered pursuant to this Registration Statement. Mr. Caasi is also the
beneficial owner of an additional 5,000 shares of Common Stock underlying
warrants which are held in the name of his minor daughter, Krista J.
Caasi.
(12) Mr. Conklin is a member of the Board of Directors of the Company.
Beneficial ownership includes an aggregate of 180,000 shares of Common
Stock underlying warrants and options, of which 110,000 shares are being
offered pursuant to this Registration Statement.
(13) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(14) Beneficial ownership includes an aggregate of 61,110 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement. Mr. DePeyster is also the beneficial owner of an
additional 27,777 shares of Common Stock, and 27,777 shares of Common
Stock underlying warrants which are held in the name of his wife, Margo
DePeyster. Mr. DePeyster disclaims beneficial ownership of the shares held
in the name of his wife.
(15) Beneficial ownership includes an aggregate of 27,777 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement. Mrs. DePeyster is also the beneficial owner of an
additional 94,443 shares of Common Stock, and 61,110 shares of Common
Stock underlying warrants which are held in the name of her husband,
Ashton DePeyster. Mrs. DePeyster disclaims beneficial ownership of the
shares held in the name of her husband.
(16) Beneficial ownership includes an aggregate of 22,220 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(17) Beneficial ownership includes an aggregate of 227,273 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(18) Beneficial ownership includes an aggregate of 55,556 shares of Common
Stock underlying warrants all of which are being offered pursuant to this
Registration Statement.
(19) Beneficial ownership includes an aggregate of 592,500 shares of Common
Stock underlying warrants as of May 12, 2004, all of which are being
offered pursuant to this Registration Statement.
(20) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying options.
(21) Beneficial ownership includes an aggregate of 25,000 shares of Common
Stock underlying warrants all of which are being offered pursuant to this
Registration Statement.
(22) Beneficial ownership includes an aggregate of 40,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(23) Beneficial ownership includes an aggregate of 55,556 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(24) Beneficial ownership includes an aggregate of 33,333 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(25) Beneficial ownership includes an aggregate of 350,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(26) Beneficial ownership includes an aggregate of 28,819 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(27) Beneficial ownership includes an aggregate of 125,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(28) Clifford and Phyllis Kalista of Clifford and Phyllis Kalista JTWROS, are
employees of a broker-dealer and purchased all shares covered by this
prospectus in the ordinary course of business and, at the time of the
purchase of the shares to be resold, had no agreements or understandings,
directly or indirectly, with any person to distribute such shares.
Beneficial ownership includes an aggregate of 26,654 shares of Common
Stock underlying warrants as of May 12, 2004, all of which are being
offered pursuant to this Registration Statement.
(29) Beneficial ownership includes an aggregate of 20,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
52
(30) Beneficial ownership includes an aggregate of 592,500 shares of Common
Stock underlying warrants as of May 12, 2004, all of which are being
offered pursuant to this Registration Statement.
(31) Beneficial ownership includes an aggregate of 175,000 shares of Common
Stock underlying warrants and options, of which 100,000 shares are being
offered pursuant to this Registration Statement. Mr. Krogh is also the
beneficial owner of an additional 205,000 shares of Common Stock, and
200,000 shares of Common Stock underlying warrants which are held in the
name of his wife, Sally Krogh.
(32) Beneficial ownership includes an aggregate of 200,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement. Mrs. Krogh is also the beneficial owner of an
additional 100,000 shares of Common Stock and 175,000 shares of Common
Stock underlying warrants and options, which are held in the name of her
husband, Jeffrey Krogh.
(33) Beneficial ownership includes an aggregate of 3,187,146 shares of Common
Stock underlying warrants, of which 1,506,570 shares are being offered
pursuant to this Registration Statement.
(34) Beneficial ownership includes an aggregate of 177,222 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement. Mrs. McCash is also the beneficial owner of an
additional 1,564,035 shares of Common Stock, and 120,000 shares of Common
Stock underlying warrants which are held in the name of her husband, James
McCash. Mrs. McCash disclaims beneficial ownership of the shares held in
the name of her husband.
(35) Beneficial ownership includes an aggregate of 120,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement. Mr. McCash is also the beneficial owner of an
additional 174,722 shares of Common Stock, and 177,222 shares of Common
Stock underlying warrants which are held in the name of his wife, Donna
McCash Irrevocable Trust. Mr. McCash disclaims beneficial ownership of the
shares held in the name of his wife.
(36) Beneficial ownership includes an aggregate of 642,857 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement. Mr. Muniz is also the beneficial owner of an
additional 639,857 shares of Common Stock, and 392,857 shares of Common
Stock underlying warrants which are held in the name of his wife, Melba
Muniz. Mr. Muniz disclaims beneficial ownership of the shares held in the
name of his wife.
(37) Beneficial ownership includes an aggregate of 392,857 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement. Mrs. Muniz is also the beneficial owner of an
additional 752,857 shares of Common Stock, and 642,857 shares of Common
Stock underlying warrants which are held in the name of her husband,
Charles Muniz. Mrs. Muniz disclaims beneficial ownership of the shares
held in the name of her husband.
(38) Beneficial ownership includes an aggregate of 60,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement. Mrs. Neill is also the beneficial owner of an
additional 50,000 shares of Common Stock, and 50,000 shares of Common
Stock underlying warrants which are held in the name of her husband, Doug
Neill.
(39) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement. Mr. Neill is also the beneficial owner of an
additional 60,000 shares of Common Stock, and 60,000 shares of Common
Stock underlying warrants which are held in the name of his wife, Carol
Neill.
(40) Beneficial ownership includes an aggregate of 266,667 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(41) Beneficial ownership includes an aggregate of 200,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(42) Beneficial ownership includes an aggregate of 30,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(43) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(44) Beneficial ownership includes an aggregate of 30,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(45) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
53
(46) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(47) SF Capital Partners Ltd., an affiliate of a broker-dealer, purchased all
shares covered by this prospectus in the ordinary course of business and,
at the time of the purchase of the shares to be resold, had no agreements
or understandings, directly or indirectly, with any person to distribute
such shares.
Michael A. Roth and Brian J. Stark are the founding members and direct the
management of Staro Asset Management, L.L.C., a Wisconsin limited
liability company ("Staro"). Staro acts as investment manager and has sole
power to direct the management of SF Capital Partners, Ltd., a British
Virgin Islands company ("SF Capital"), which directly holds all of the
shares of Common Stock. Through Staro, Messrs. Roth and Stark possess sole
voting and dispositive power over all of the foregoing shares. Ownership
prior to the offering excludes an aggregate of (i) 852,273 shares of
Common Stock underlying warrants issued to SF Capital on September 3, 2003
and (ii) 189,585 shares of Common Stock underlying warrants issued to SF
Capital on January 29, 2004, because the terms of such warrants preclude
SF Capital from exercising the warrants if prior to or after such
exercise, SF Capital or any of its affiliates beneficially own or will own
in excess of 4.99% of the outstanding shares of Common Stock of the
Company. The 852,273 shares of Common Stock underlying the September
warrants were previously registered pursuant to Registration Statement No.
333-111101 and the 189,585 shares of Common Stock underlying the
Additional Warrants are being registered pursuant to this Registration
Statement.
(48) Ms. Shogen is Chairman of the Board and Chief Executive Officer of the
Company. Beneficial ownership includes an aggregate of 406,445 shares of
Common Stock underlying warrants and options, of which 110,000 shares are
being offered pursuant to this Registration Statement.
(49) Beneficial ownership includes an aggregate of 108,330 shares of Common
Stock underlying warrants and options, of which 33,330 shares are being
offered pursuant to this Registration Statement.
(50) Mr. Stadler was a member of the Board of Directors of the Company but did
not stand for re-election at the annual meeting of stockholders held on
January 14, 2004. Beneficial ownership includes an aggregate of 244,500
shares of Common Stock underlying warrants and options, of which 110,000
shares are being offered pursuant to this Registration Statement.
(51) Beneficial ownership includes an aggregate of 20,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(52) Beneficial ownership includes an aggregate of 20,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(53) VFT Special Ventures Ltd., an affiliate of a broker-dealer, purchased all
shares covered by this prospectus in the ordinary course of business and,
at the time of the purchase of the shares to be resold, had no agreements
or understandings, directly or indirectly, with any person to distribute
such shares.
Beneficial ownership includes an aggregate of 60,533 shares of Common
Stock underlying warrants as of May 12, 2004, all of which are being
offered pursuant to this Registration Statement.
(54) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(55) Beneficial ownership includes an aggregate of 40,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
(56) Beneficial ownership includes an aggregate of 50,000 shares of Common
Stock underlying warrants, all of which are being offered pursuant to this
Registration Statement.
DESCRIPTION OF SECURITIES
On January 14, 2004, Alfacell's stockholders approved an amendment to
Alfacell's Certificate of Incorporation, as amended, to increase the number of
authorized shares of Common Stock by 60,000,000 shares so that the total number
of shares of Common Stock authorized for issuance is now 100,000,000 shares of
Common Stock, $0.001 par value per share, and 1,000,000 shares of preferred
stock, $0.001 par value per share.
54
Common Stock
As of May 12, 2004 we had 31,969,362 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.
Preferred Stock
We are currently authorized to issue 1,000,000 shares of preferred stock,
$0.001 par value per share (the "Preferred Stock"). The Certificate of
Incorporation, as amended, authorizes our Board of Directors to provide by
resolution, without any approval of the stockholders, for the issuance of shares
of Preferred Stock and to determine the terms of such Preferred Stock. Pursuant
to the authority vested in the Board of Directors, on September 2, 2003, in
accordance with the Delaware General Corporation Law, Section 151, the Company
adopted resolutions establishing a series of 200,000 shares of Preferred Stock
to be designated as Series A Preferred Stock, par value $0.001 per share. On
February 4, 2004, the Company filed a Certificate of Elimination with the
Delaware Secretary of State to eliminate the class of Series A Preferred Stock,
which are no longer necessary due to the automatic reversion of the Company's
notes from being convertible into Series A Preferred Stock to being convertible
into Common Stock.
There are no shares of Preferred Stock currently outstanding.
Warrants
As of May 12, 2004 we had outstanding warrants to purchase an aggregate of
10,181,522 shares of Common Stock. Of such shares, 6,962,357 shares underlying
the warrants are covered by effective registration statements on Forms S-1 and
1,460,772 shares underlying the warrants are being registered for sale under
this prospectus. Such warrants are exercisable at an average price of $2.74 per
share.
Options
As of May 12, 2004, we had outstanding options to purchase 2,775,695
shares of Common Stock at an average purchase price of $2.28 per share.
PLAN OF DISTRIBUTION
We are registering for resale by the selling stockholders and certain
transferees a total of 13,917,215 shares of Common Stock, of which 5,494,086 are
issued and outstanding and up to 8,423,129 are issuable upon exercise of
warrants.
The Selling Stockholders and any of their pledgees, donees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
55
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders may from time to time pledge or grant a security
interest in some or all of the Shares or Warrant Shares owned by them and, if
they default in the performance of their secured obligations, the pledgees or
secured parties may offer and sell shares of Common Stock from time to time
under this prospectus, or under an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
Upon the Company being notified in writing by a Selling Stockholder that
any material arrangement has been entered into with a broker-dealer for the sale
of Common Stock through a block trade, special offering, exchange distribution
or secondary distribution or a purchase by a broker or dealer, a supplement to
this prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such Selling Stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such the shares of Common Stock were sold, (iv) the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, and (vi) other facts material to the transaction. In addition,
upon the Company being notified in writing by a Selling Stockholder that a donee
or pledge intends to sell more than 500 shares of Common Stock, a supplement to
this prospectus will be filed if then required in accordance with applicable
securities law.
The Selling Stockholders also may transfer the shares of Common Stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus.
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts
56
under the Securities Act. Each Selling Stockholders has represented and
warranted to the Company that it does not have any agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock.
The Company is required to pay all fees and expenses incident to the
registration of the shares. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
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, 2003 and the period from August
24, 1981 (the date of inception) to July 31, 2003, have been included herein and
in the registration statement in reliance upon the report of J.H. Cohn LLP,
independent public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing. The report of J.H.
Cohn LLP with respect to our financial statements from inception to July 31,
2003 is based on the reports of Armus Harrison & Co. and KPMG LLP, appearing
elsewhere herein, for the period from inception to July 31, 2002. As discussed
elsewhere herein, Armus Harrison & Co. ceased performing accounting and auditing
services for the Company in 1993 and subsequently dissolved and ceased all
operations.
The report of J.H. Cohn LLP covering the July 31, 2003 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.
Our financial statements as of July 31, 2002 and for each of the years in
the two-year period ended July 31, 2002, and the period from August 24, 1981
(the date of inception) to July 31, 2002 (not presented herein), have been
included herein and in the registration statement in reliance upon 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, 2002 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, 2002 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.
Alfacell Corporation has agreed to indemnify and hold KPMG LLP (KPMG)
harmless against and from any and all legal costs and expenses incurred by KPMG
in successful defense of any legal action or proceeding that arises as a result
of KPMG's consent to the inclusion of its audit report on the Company's past
financial statements included in this registration statement.
57
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.
58
Index
Audited Financial Statements: Page
- ---------------------------- ----
Independent Auditors' Report of J.H. Cohn LLP .................................. F-3
Independent Auditors' Report of KPMG LLP ....................................... F-4
Independent Auditors' Report of Armus, Harrison & Co ........................... F-5
Balance Sheets - July 31, 2003 and 2002 ........................................ F-6
Statements of Operations - Years ended July 31, 2003, 2002, and 2001 and the
Period from August 24, 1981
(Date of Inception) to July 31, 2003 .................................. F-7
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2003 .................................. F-8
Statements of Cash Flows - Years ended July 31, 2003, 2002, and 2001 and Period
from August 24, 1981
(Date of Inception) to July 31, 2003 .................................. F-14
Notes to Financial Statements - Years ended July 31, 2003, 2002 and 2001 and
the Period from August 24, 1981
(Date of Inception) to July 31, 2003 .................................. F-17
Unaudited Financial Statements:
Balance Sheets - January 31, 2004 (Unaudited) and July 31, 2003 ................ F-43
Statements of Operations (unaudited) - Three Months and Six Months Ended January
31, 2004 and 2003 and the Period from August
24, 1981 (Date of Inception) to January 31, 2004 ...................... F-44
Statements of Cash Flows (unaudited) - Six Months ended January 31, 2004 and
2003, and the Period from August 24, 1981
(Date of Inception) to January 31, 2004 ............................... F-45
Notes to Unaudited Financial Statements ........................................ F-47
F-1
REPORTS OF INDEPENDENT AUDITORS
On December 1, 1993, certain stockholders 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.
F-2
Independent Auditors' Report
The Stockholders and the Board of Directors
Alfacell Corporation
We have audited the accompanying balance sheet of ALFACELL CORPORATION (A
Development Stage Company) as of July 31, 2003, and the related statements of
operations, stockholders' deficiency and cash flows for the year then ended and
for the period from August 24, 1981 (date of inception) to July 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Alfacell Corporation for the period from
August 24, 1981 to July 31, 2002 were audited by other auditors whose reports
dated November 4, 2002 and December 9, 1992, except for Note 18 which is as of
July 19, 1993 and Note 3 which is as of October 28, 1993, expressed unqualified
opinions on those statements with explanatory paragraphs relating to 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, 2003 of the amounts for the period from August 24,
1981 to July 31, 2002, on the reports 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, 2003, and its results
of operations and cash flows for the year then ended and for the period from
August 24, 1981 to July 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
The financial statements referred to above 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 substantial losses from inception
and is a development stage company. Such matters raise substantial doubt about
the ability of the Company to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
referred to above do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ J.H. Cohn LLP
Roseland, New Jersey
September 26, 2003, except for Note 18,
which is as of October 14, 2003
F-3
Independent Auditors' Report
The Stockholders and Board of Directors
Alfacell Corporation:
We have audited the accompanying balance sheet of Alfacell Corporation (a
development stage company) as of July 31, 2002, and the related statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
years in the two-year period ended July 31, 2002 and the period from August 24,
1981 (date of inception) to July 31, 2002 (not presented herein). 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, 2002 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, 2002, and the results of its
operations and its cash flows for each of the years in the two-year period ended
July 31, 2002 and the period from August 24, 1981 to July 31, 2002 (not
presented herein) 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
November 4, 2002
F-4
Independent Auditors' Report
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.
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-5
ALFACELL CORPORATION
(A Development Stage Company)
FINANCIAL STATEMENTS
Balance Sheets
July 31, 2003 and 2002
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 330,137 $ 85,843
Other assets 10,103 45,754
------------ ------------
Total current assets 340,240 131,597
Property and equipment, net of accumulated depreciation and
amortization of $1,136,183 in 2003 and $1,120,371 in 2002 12,795 28,607
Loan receivable, related party 142,287 68,667
------------ ------------
Total assets $ 495,322 $ 228,871
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt, net of debt discount of
$187,121 at July 31, 2003 $ 637,080 $ 8,179
Loan payable, related party -- 139,794
Accounts payable 699,429 796,128
Accrued expenses 1,407,978 854,278
------------ ------------
Total current liabilities 2,744,487 1,798,379
Long-term debt, less current portion, net of debt discount of
$163,687 at July 31, 2003 242,516 315,929
------------ ------------
Total liabilities 2,987,003 2,114,308
------------ ------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 2003 and 2002 -- --
Common stock $.001 par value. Authorized 40,000,000 shares;
issued and outstanding 25,026,129 shares and 22,760,921
shares at July 31, 2003 and 2002, respectively 25,026 22,761
Capital in excess of par value 61,457,502 59,654,479
Deficit accumulated during development stage (63,974,209) (61,562,677)
------------ ------------
Total stockholders' deficiency (2,491,681) (1,885,437)
------------ ------------
Total liabilities and stockholders' deficiency $ 495,322 $ 228,871
============ ============
See accompanying notes to financial statements.
F-6
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 2003, 2002 and 2001,
and the Period from August 24, 1981
(Date of Inception) to July 31, 2003
August 24, 1981
(date of
inception)
to July 31, 2003 2003 2002 2001
---------------- ------------ ------------ ------------
Revenues:
Sales $ 553,489 $ -- $ -- $ --
Investment income 1,387,000 9,877 4,838 13,121
Other income 90,103 30,000 -- --
------------ ------------ ------------ ------------
2,030,592 39,877 4,838 13,121
------------ ------------ ------------ ------------
Cost and expenses:
Cost of sales 336,495 -- -- --
Research and development 41,601,935 1,699,962 2,032,938 1,900,678
General and administrative 22,287,852 624,406 798,053 705,745
Interest:
Related parties 1,147,547 -- 4,687 108,900
Others 2,423,310 358,398 114,054 44,129
------------ ------------ ------------ ------------
67,797,139 2,682,766 2,949,732 2,759,452
------------ ------------ ------------ ------------
Loss before state tax benefit (65,766,547) (2,642,889) (2,944,894) (2,746,331)
State tax benefit 1,792,338 231,357 353,732 451,395
------------ ------------ ------------ ------------
Net loss $(63,974,209) $ (2,411,532) $ (2,591,162) $ (2,294,936)
============ ============ ============ ============
Loss per basic and diluted common share $ (0.10) $ (0.12) $ (0.12)
============ ============ ============
Weighted average number of shares
outstanding 23,166,000 21,045,000 18,927,000
============ ============ ============
See accompanying notes to financial statements.
F-7
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2003
Common Stock
----------------------------
Deficit
Common Accumulated
Capital In Stock to During
Number of Excess of par be Development
Shares Amount Value Issued Stage
------------ ------------ ------------ ------------ ------------
Issuance of shares to officers and stockholders
for equipment, research and development, and 712,500 $ 713 $ 212,987 -- $ --
expense reimbursement
Issuance of shares for organizational legal 50,000 50 4,950 -- --
service
Sale of shares for cash, net 82,143 82 108,418 -- --
Adjustment for 3 for 2 stock split declared 422,321 422 (422) -- --
September 8, 1982
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 130,250 131 385,786 -- --
directors and consultants
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 99,163 99 879,379 -- --
directors and consultants
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 15,394 15 215,385 -- --
directors and consultants
Exercise of warrants, net 21,565 21 80,977 -- --
Net loss -- -- -- -- (2,138,605)
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1986 (carried forward) 2,933,052 2,933 6,849,112 -- (7,198,714)
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- ------------
Issuance of shares to officers and stockholders
for equipment, research and development, and $ -- $ -- $ 213,700
expense reimbursement
Issuance of shares for organizational legal -- -- 5,000
service
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 -- -- 385,917
directors and consultants
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 -- -- 879,478
directors and consultants
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 -- -- 215,400
directors and consultants
Exercise of warrants, net -- -- 80,998
Net loss -- -- (2,138,605)
------------ ------------ ------------
Balance at July 31, 1986 (carried forward) -- -- (346,669)
F-8
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
-------------------------
Deficit
Common Accumulated
Capital In Stock to During
Number of Excess of par be Development
Shares Amount Value Issued Stage
---------- ------------ ------------- ---------- ------------
Balance at July 31, 1986 2,933,052 $ 2,933 $ 6,849,112 -- $ (7,198,714)
(brought forward)
Exercise of warrants at 14,745 15 147,435 -- --
$10.00 per share
Issuance of shares under 5,000 5 74,995 -- --
stock bonus plan for
directors and consultants
Issuance of shares for 250,000 250 499,750 -- --
services
Sale of shares to private 5,000 5 24,995 -- --
investors, net
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 206,429 207 724,280 -- --
and consulting services
Issuance of shares under 700,000 700 2,449,300 -- --
employment incentive
program
Issuance of shares under 19,000 19 66,481 -- --
stock grant program
Exercise of options at $3.00 170,000 170 509,830 -- --
per share
Issuance of shares for 12,500 12 31,125 -- --
litigation settlement
Exercise of warrants at $7.06 63,925 64 451,341 -- --
per share
Sale of shares to private 61,073 61 178,072 -- --
investors
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 135,000 135 1,074,703 -- --
settlement
Conversion of debentures at 133,333 133 399,867 -- --
$3.00 per share
Sale of shares to private 105,840 106 419,894 -- --
investors
Exercise of options at $3.50 1,000 1 3,499 -- --
per share
Issuance of shares under 750,000 750 3,749,250 -- --
employment agreement
Issuance of shares under the 30,000 30 149,970 -- --
1989 Stock Plan
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 52,463 52 258,725 -- --
and consulting services
Issuance of shares under the 56,000 56 335,944 -- --
1989 Stock Plan
Sale of shares for litigation 50,000 50 351,067 -- --
settlement
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- ------------
Balance at July 31, 1986 $ -- $ -- $ (346,669)
(brought forward)
Exercise of warrants at -- -- 147,450
$10.00 per share
Issuance of shares under -- -- 75,000
stock bonus plan for
directors and consultants
Issuance of shares for -- -- 500,000
services
Sale of shares to private -- -- 25,000
investors, net
Net loss -- -- (2,604,619)
------------ ------------ ------------
Balance at July 31, 1987 -- -- (2,203,838)
Issuance of shares for legal -- -- 724,487
and consulting services
Issuance of shares under -- (2,450,000) --
employment incentive
program
Issuance of shares under -- -- 66,500
stock grant program
Exercise of options at $3.00 -- -- 510,000
per share
Issuance of shares for -- -- 31,137
litigation settlement
Exercise of warrants at $7.06 -- -- 451,405
per share
Sale of shares to private -- -- 178,133
investors
Amortization of deferred -- 449,167 449,167
compensation, restricted
stock
Net loss -- -- (3,272,773)
------------ ------------ ------------
Balance at July 31, 1988 -- (2,000,833) (3,065,782)
Sale of shares for litigation -- -- 1,074,838
settlement
Conversion of debentures at -- -- 400,000
$3.00 per share
Sale of shares to private -- -- 420,000
investors
Exercise of options at $3.50 -- -- 3,500
per share
Issuance of shares under -- (3,750,000) --
employment agreement
Issuance of shares under the -- (150,000) --
1989 Stock Plan
Amortization of deferred -- 1,050,756 1,050,756
compensation, restricted
stock
Net loss -- -- (2,952,869)
------------ ------------ ------------
Balance at July 31, 1989 -- (4,850,077) (3,069,557)
Issuance of shares for legal -- -- 258,777
and consulting services
Issuance of shares under the -- (336,000) --
1989 Stock Plan
Sale of shares for litigation -- -- 351,117
settlement
F-9
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------------
Deficit
Common Accumulated
Capital In Stock to During
Number of Excess of par be Development
Shares Amount Value Issued Stage
----------- ------------ ------------- --------- ------------
Exercise of options at $3.00 - 105,989 $ 106 $ 345,856 -- $ --
$3.50 per share
Sale of shares to private 89,480 90 354,990 -- --
investors
Issuance of shares under 750,000 750 3,749,250 -- --
employment agreement
Conversion of debentures at 100,000 100 499,900 -- --
$5.00 per share
Amortization of deferred -- -- -- -- --
compensation, restricted stock
Net loss -- -- -- -- (4,860,116)
----------- ------------ ------------ --------- ------------
Balance at July 31, 1990 6,799,829 6,800 23,699,631 -- (20,889,091)
Exercise of options at $6.50 16,720 16 108,664 -- --
per share
Issuance of shares for legal 87,000 87 358,627 -- --
consulting services
Issuance of shares under the 119,000 119 475,881 -- --
1989 Stock Plan
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 1,000 1 3,499 -- --
per share
Sale of shares to private 70,731 71 219,829 -- --
investors
Conversion of debentures at 94,000 94 469,906 -- --
$5.00 per share
Issuance of shares for services 45,734 46 156,944 -- --
Issuance of shares under the 104,000 104 285,896 -- --
1989 Stock Plan
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 352,667 353 735,147 -- --
investors
Issuance of shares for legal 49,600 50 132,180 -- --
services
Issuance of shares for services 5,000 5 9,995 -- --
Issuance of shares under the 117,000 117 233,883 -- --
1989 Stock Plan
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 425,400 425 1,701,575 -- --
$2.75 per share to $6.00 per
share
Sale of shares to private 743,000 743 1,710,048 -- --
investors, net
Conversion of short-term 72,800 73 181,927 -- --
borrowings
Issuance of shares for services 16,200 16 43,334 -- --
Issuance of shares under the 5,000 5 14,995 -- --
1989 Stock Plan, for services
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- ------------
Exercise of options at $3.00 - $ -- $ -- $ 345,962
$3.50 per share
Sale of shares to private -- -- 355,080
investors
Issuance of shares under -- (3,750,000) --
employment agreement
Conversion of debentures at -- -- 500,000
$5.00 per share
Amortization of deferred -- 3,015,561 3,015,561
compensation, restricted stock
Net loss -- -- (4,860,116)
------------ ------------ ------------
Balance at July 31, 1990 -- (5,920,516) (3,103,176)
Exercise of options at $6.50 -- -- 108,680
per share
Issuance of shares for legal -- -- 358,714
consulting services
Issuance of shares under the -- (476,000) --
1989 Stock Plan
Amortization of deferred -- 2,891,561 2,891,561
compensation, restricted stock
Net loss -- -- (5,202,302)
------------ ------------ ------------
Balance at July 31, 1991 -- (3,504,955) (4,946,523)
Exercise of options at $3.50 -- -- 3,500
per share
Sale of shares to private -- -- 219,900
investors
Conversion of debentures at -- -- 470,000
$5.00 per share
Issuance of shares for services -- -- 156,990
Issuance of shares under the -- (286,000) --
1989 Stock Plan
Amortization of deferred -- 3,046,726 3,046,726
compensation, restricted stock
Net loss -- -- (4,772,826)
------------ ------------ ------------
Balance at July 31, 1992 -- (744,229) (5,822,233)
Sale of share to private -- -- 735,500
investors
Issuance of shares for legal -- -- 132,230
services
Issuance of shares for services -- (10,000) --
Issuance of shares under the -- (234,000) --
1989 Stock Plan
Amortization of deferred -- 664,729 664,729
compensation, restricted stock
Net loss -- -- (2,357,350)
------------ ------------ ------------
Balance at July 31, 1993 -- (323,500) (6,647,124)
Conversion of debentures at -- -- 1,702,000
$2.75 per share to $6.00 per
share
Sale of shares to private -- -- 1,710,791
investors, net
Conversion of short-term -- -- 182,000
borrowings
Issuance of shares for services -- -- 43,350
Issuance of shares under the -- -- 15,000
1989 Stock Plan, for services
F-10
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------------
Deficit
Common Accumulated
Capital In Stock to During
Number of Excess of par be Development
Shares Amount Value Issued Stage
------------ ------------ ------------ ------------ ------------
Issuance of options to related
parties upon conversion of
accrued interest, payroll and -- $ -- $ 3,194,969 -- $ --
expenses
Repurchase of stock options -- -- (198,417) -- --
from related party
Issuance of options upon -- -- 142,441 -- --
conversion of accrued interest
Common stock to be issued -- -- -- 50,000 --
Amortization of deferred -- -- -- -- --
compensation, restricted stock
Net loss -- -- -- -- (2,234,428)
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1994 9,124,681 9,125 33,680,954 50,000 (35,455,997)
Sale of shares to private 961,000 961 2,023,241 (50,000) --
investors, net
Conversion of short-term 17,600 17 43,983 -- --
borrowings
Issuance of shares for services 30,906 31 77,234 -- --
Exercise of options at $2.27 - 185,000 185 437,015 -- --
$2.50 per share
Common stock to be issued -- -- -- 339,008 --
Common stock to be issued, -- -- -- 4,800 --
for services
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 2,953,327 2,953 8,969,655 (339,008) --
investors, net
Issuance of shares for services 19,995 20 70,858 (4,800) --
Exercise of options at $2.50 - 566,700 567 1,657,633 -- --
$3.87 per share
Sale of warrants -- -- 12,084 -- --
Issuance of options/warrants -- -- 50,872 -- --
for services
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 112,000 112 503,888 -- --
investors, net
Issuance of options for -- -- 76,504 -- --
services
Exercise of options at $2.45 - 729,134 729 2,620,359 (258,335) --
$4.00 per share, net
Exercise of warrants at $5.00 147,450 148 737,102 -- --
per share, net
Net loss -- -- -- -- (5,018,867)
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1997 14,847,793 14,848 50,961,382 -- (45,410,139)
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- ------------
Issuance of options to related
parties upon conversion of
accrued interest, payroll and $ -- $ -- $ 3,194,969
expenses
Repurchase of stock options -- -- (198,417)
from related party
Issuance of options upon -- -- 142,441
conversion of accrued interest
Common stock to be issued -- -- 50,000
Amortization of deferred -- 265,000 265,000
compensation, restricted stock
Net loss -- -- (2,234,428)
------------ ------------ ------------
Balance at July 31, 1994 -- (58,500) (1,774,418)
Sale of shares to private -- -- 1,974,202
investors, net
Conversion of short-term -- -- 44,000
borrowings
Issuance of shares for services -- -- 77,265
Exercise of options at $2.27 - -- -- 437,200
$2.50 per share
Common stock to be issued -- -- 339,008
Common stock to be issued, -- -- 4,800
for services
Amortization of deferred -- 58,500 58,500
compensation, restricted stock
Net loss -- -- (1,993,123)
------------ ------------ ------------
Balance at July 31, 1995 -- -- (832,566)
Sale of shares to private -- -- 8,633,600
investors, net
Issuance of shares for services -- -- 66,078
Exercise of options at $2.50 - -- -- 1,658,200
$3.87 per share
Sale of warrants -- -- 12,084
Issuance of options/warrants -- -- 50,872
for services
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 -- -- 504,000
investors, net
Issuance of options for -- -- 76,504
services
Exercise of options at $2.45 - 254,185 -- 2,616,938
$4.00 per share, net
Exercise of warrants at $5.00 -- -- 737,250
per share, net
Net loss -- -- (5,018,867)
------------ ------------ ------------
Balance at July 31, 1997 -- -- 5,566,091
F-11
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------------
Deficit
Common Accumulated
Capital In Stock to During
Number of Excess of par be Development
Shares Amount Value Issued Stage
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1997 14,847,793 $ 14,848 $ 50,961,382 -- $(45,410,139)
(brought forward)
Sale of shares to private 2,337,150 2,337 4,199,877 -- --
investors, net
Issuance of options for -- -- 199,954 -- --
services
Exercise of warrants at $2.20 4,950 5 11,080 -- --
- - $2.50 per share
Issuance of shares for 50,000 50 99,950 -- --
services, net
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 -- -- 205,593 -- --
services
Issuance of shares for 46,701 46 16,359 -- --
services, net
Net loss -- -- -- -- (3,156,636)
----------- ------------ ------------ ----------- ------------
Balance at July 31, 1999 17,286,594 17,286 55,694,195 -- (54,954,281)
(carried forward)
Sale of shares to private 875,000 875 547,417 -- --
investors, net
Exercise of options at $0.43 - 95,000 95 45,755 -- --
$1.43 per share
Issuance of shares for 174,965 175 92,009 -- --
services, net
Vesting of options -- -- 146,912 -- --
previously issued for
services
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 863,331 863 955,561 -- --
investors, net
Exercise of options at $0.29 - 165,555 166 83,565 -- --
$0.85 per share
Issuance of shares for 11,800 12 10,018 -- --
services, net
Exercise of convertible 330,000 330 296,670 -- --
debentures at $0.90 per share
Issuance of warrants with -- -- 178,807 -- --
convertible debt
Issuance of options for -- -- 160,426 -- --
services
Net loss -- -- -- -- (2,294,936)
----------- ------------ ------------ ----------- ------------
Balance at July 31, 2001 19,802,245 19,802 58,211,335 -- (58,971,515)
Sale of shares to private 2,622,122 2,623 1,047,925 -- --
investors, net
Exercise of stock options and 186,000 186 92,814 -- --
warrants
Issuance of shares for 78,340 78 64,048 -- --
services, net
Exercise of convertible 72,214 72 64,921 -- --
debentures at $0.90 per share
Vesting of options -- -- 173,436 -- --
previously issued for
services
Net loss -- -- -- -- (2,591,162)
----------- ------------ ------------ ----------- ------------
Balance at July 31, 2002 22,760,921 22,761 59,654,479 -- (61,562,677)
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- ------------
Balance at July 31, 1997 $ -- $ -- $ 5,566,091
(brought forward)
Sale of shares to private -- -- 4,202,214
investors, net
Issuance of options for -- -- 199,954
services
Exercise of warrants at $2.20 -- -- 11,085
- - $2.50 per share
Issuance of shares for -- -- 100,000
services, net
Net loss -- -- (6,387,506)
------------ ------------ ------------
Balance at July 31, 1998 -- -- 3,691,838
Issuance of options for -- -- 205,593
services
Issuance of shares for -- -- 16,405
services, net
Net loss -- -- (3,156,636)
------------ ------------ ------------
Balance at July 31, 1999 -- -- 757,200
(carried forward)
Sale of shares to private -- -- 548,292
investors, net
Exercise of options at $0.43 - -- -- 45,850
$1.43 per share
Issuance of shares for -- -- 92,184
services, net
Vesting of options -- -- 146,912
previously issued for
services
Net loss -- -- (1,722,298)
------------ ------------ ------------
Balance at July 31, 2000 -- -- (131,860)
Sale of shares to private -- -- 956,424
investors, net
Exercise of options at $0.29 - -- -- 83,731
$0.85 per share
Issuance of shares for -- -- 10,030
services, net
Exercise of convertible -- -- 297,000
debentures at $0.90 per share
Issuance of warrants with -- -- 178,807
convertible debt
Issuance of options for -- -- 160,426
services
Net loss -- -- (2,294,936)
------------ ------------ ------------
Balance at July 31, 2001 -- -- (740,378)
Sale of shares to private -- -- 1,050,548
investors, net
Exercise of stock options and -- -- 93,000
warrants
Issuance of shares for -- -- 64,126
services, net
Exercise of convertible -- -- 64,993
debentures at $0.90 per share
Vesting of options -- -- 173,436
previously issued for
services
Net loss -- -- (2,591,162)
------------ ------------ ------------
Balance at July 31, 2002 -- -- (1,885,437)
F-12
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------------
Deficit
Common Accumulated
Capital In Stock to During
Number of Excess of par be Development
Shares Amount Value Issued Stage
------------ ------------ ------------ ------------ ------------
Balance at July 31, 2002 22,760,921 $ 22,761 $ 59,654,479 -- $(61,562,677)
(brought forward)
Sale of shares to private 1,315,000 1,315 652,312 -- --
investors, net
Exercise of stock options 764,000 764 376,896 -- --
and warrants
Issuance of shares for 186,208 186 94,037 -- --
payment of accounts
payable
Issuance of options for -- -- 75,521 -- --
services rendered
Vesting of options -- -- 10,038 -- --
previously issued for
services
Issuance of warrants in -- -- 594,219 -- --
connection with debt
issuances
Net loss -- -- -- -- (2,411,532)
---------- ------------ ------------ ------------ ------------
Balance at July 31, 2003 25,026,129 $ 25,026 $ 61,457,502 $ -- $(63,974,209)
========== ============ ============ ============ ============
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- ------------
Balance at July 31, 2002 $ -- $ -- $ (1,885,437)
(brought forward)
Sale of shares to private -- -- 653,627
investors, net
Exercise of stock options -- -- 377,660
and warrants
Issuance of shares for -- -- 94,223
payment of accounts
payable
Issuance of options for -- -- 75,521
services rendered
Vesting of options -- -- 10,038
previously issued for
services
Issuance of warrants in -- -- 594,219
connection with debt
issuances
Net loss -- -- (2,411,532)
------------ ------------ ------------
Balance at July 31, 2003 $ -- $ -- $ (2,491,681)
============ ============ ============
See accompanying notes to financial statements.
F-13
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 2003, 2002 and 2001,
and the Period from August 24, 1981
(Date of Inception) to July 31, 2003
August 24, 1981
(date of
inception)
to July 31, 2003 2003 2002 2001
---------------- ----------- ----------- -----------
Cash flows from operating activities:
Net loss $(63,974,209) $(2,411,532) $(2,591,162) $(2,294,936)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on sale of marketable securities (25,963) -- -- --
Depreciation and amortization 1,547,218 15,812 38,948 74,615
Loss on disposal of property and equipment 18,926 -- -- --
Noncash operating expenses 6,117,612 85,559 207,947 304,722
Amortization of debt discount 243,411 243,411 -- --
Amortization of deferred compensation 11,442,000 -- -- --
Amortization of organization costs 4,590 -- -- --
Changes in assets and liabilities:
(Increase) decrease in other current
assets (69,970) 35,651 (2,821) (14,316)
(Increase) decrease in other assets (46,236) (73,620) (22,327) 13,527
Increase in loans and interest payable,
related party 744,539 -- -- --
Increase (decrease) in accounts payable 1,153,888 (2,476) 450,282 249,214
Increase in accrued payroll and expenses,
related parties 2,348,145 -- -- --
Increase in accrued expenses 1,949,491 553,700 388,465 53,967
------------ ----------- ----------- -----------
Net cash used in operating activities (38,546,558) (1,553,495) (1,530,668) (1,613,207)
------------ ----------- ----------- -----------
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) -- -- --
Patent costs (97,841) -- -- --
------------ ----------- ----------- -----------
Net cash used in investing activities (1,478,714) -- -- --
------------ ----------- ----------- -----------
F-14
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24, 1981
(date of
inception)
to July 31, 2003 2003 2002 2001
---------------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings $ 874,500 $ 25,000 $ -- $ --
Payment of short-term borrowings (653,500) (25,000) (5,000) --
Increase (decrease) in loans payable, related
party, net 2,628,868 (139,794) 139,794 --
Proceeds from bank debt and other long-term debt,
net of deferred debt costs 3,667,460 915,000 300,000 --
Reduction of bank debt and long-term debt (2,951,164) (8,704) (6,612) (6,605)
Proceeds from issuance of Common Stock, net 30,014,338 653,627 1,050,548 956,424
Proceeds from exercise of stock options and
warrants, net 6,060,914 377,660 93,000 83,731
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 40,355,409 1,797,789 1,571,730 1,400,543
------------ ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 330,137 244,294 41,062 (212,664)
Cash and cash equivalents at beginning of period -- 85,843 44,781 257,445
------------ ----------- ----------- -----------
Cash and cash equivalents at end of period $ 330,137 $ 330,137 $ 85,843 $ 44,781
============ =========== =========== ===========
Supplemental disclosure of cash flow information -
interest paid $ 1,707,338 $ 24,697 $ 20,195 $ 8,733
============ =========== =========== ===========
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 $ -- $ -- $ --
============ =========== =========== ===========
F-15
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24,
1981 (date of
inception) to
July 31, 2003 2003 2002 2001
-------------- ----------- ----------- -----------
Conversions of accounts payable to Common Stock $ 454,549 $ 94,223 $ 64,126 $ 10,030
============ =========== =========== ===========
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 $ 191,993 $ -- $ 64,993 $ --
============ =========== =========== ===========
Issuance of Common Stock for services rendered $ 2,460 $ -- $ -- $ --
============ =========== =========== ===========
Issuance of warrants with notes payable $ 594,219 $ 594,219 $ -- $ --
============ =========== =========== ===========
See accompanying notes to financial statements.
F-16
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Years ended July 31, 2003, 2002 and 2001
and the Period From August 24, 1981
(Date of Inception) to July 31, 2003
(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. Debt instruments
have been issued at rates which represent prevailing market rates for
similar financings.
F-17
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 $2,412,000, $2,591,000 and $2,295,000 recorded for the
years ended July 31, 2003, 2002 and 2001, 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 (loss) per common share equals net income (loss) 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, adjusted for the
effects of potentially dilutive securities. 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 9,663,023, 9,040,881
and 6,445,748 at July 31, 2003, 2002 and 2001, 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. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, has not had a material impact on the
Company's financial position, operating results or cash flows.
Stock Option Plans
Statements of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), provides for the use of a fair
value based method of accounting for employee stock compensation. However,
SFAS 123 also allows an entity to continue to measure compensation cost
for stock options granted to employees and directors using the intrinsic
value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), which
only requires charges to compensation expense for the excess, if any, of
the fair value of the underlying stock at the date a stock option is
granted (or at an appropriate subsequent measurement date) over the amount
the employee must pay to acquire the stock, if such amounts differ
materially from the historical amounts. The Company has elected to
continue to account for employee stock options using the intrinsic value
method under Opinion 25.
Pursuant to SFAS 123, shares, warrants or options issued in connection
with debt financing agreements or to non-employees for services are
accounted for based on their fair market value determined using the Black-
Scholes option pricing model.
Pro forma net loss and loss per share reflecting approximate compensation
cost for the fair value of stock options awarded to employees using the
Black-Scholes option pricing model are as follows:
2003 2002 2001
----------- ----------- -----------
Net Loss:
As reported $(2,411,532) $(2,591,162) $(2,294,936)
Less total stock-based employee
compensation expense determined under
a fair value based method for all awards,
net of related tax effects (152,598) (169,708) (227,720)
----------- ----------- -----------
Pro forma $(2,564,130) $(2,760,870) $(2,522,656)
=========== =========== ===========
Loss per common share:
As reported $ (0.10) $ (0.12) $ (0.12)
Pro forma (0.11) (0.13) (0.13)
F-18
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
Accounting For Warrants Issued With Convertible Debt
The Company accounts for the intrinsic value of beneficial conversion
rights arising from the issuance of convertible debt instruments with
nondetachable conversion rights that are in-the-money at the commitment
date pursuant to the consensuses for EITF Issue No. 98-5 and EITF Issue
No. 00-27. Such value is allocated to additional paid-in capital and the
resulting debt discount is charged to interest expense over the terms of
the notes payable. Such value is determined after first allocating an
appropriate portion of the proceeds received to warrants or any other
detachable instruments included in the exchange.
(2) Liquidity
The Company has reported net losses of approximately $2,412,000,
$2,591,000, and $2,295,000 for the fiscal years ended July 31, 2003, 2002
and 2001, respectively. The loss from date of inception, August 24, 1981,
to July 31, 2003 amounts to $63,974,000. Also, the Company has a working
capital deficit and limited liquid resources. These factors raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts
or classification of liabilities which might result from the outcome of
this uncertainty.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of tax
benefits, revenues from the commercial sale of ONCONASE(R), the primary
anti-cancer product being developed by the Company, licensing its
proprietary RNase technology and its ability to realize the full potential
of its technology and its drug candidates via out-licensing agreements
with other companies. Such additional funds may not become available or be
available on acceptable terms. Through July 31, 2003, 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. During the fiscal year ended
July 31, 2003, the Company received gross proceeds of approximately
$2,241,000 from long-term and short-term borrowings from unrelated
parties, from the private placement of Common Stock and warrants, proceeds
from the exercise of warrants and options and from the sale of its tax
benefits. 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 as well as its proprietary technology. 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.
F-19
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
The Company's Common Stock was delisted from The Nasdaq SmallCap Market
effective at the close of business April 27, 1999 for failing to meet the
minimum bid price requirements set forth in the NASD Marketplace Rules. As
of April 28, 1999, the Company's Common Stock trades on the OTC Bulletin
Board under the symbol "ACEL". Delisting of the Company's Common Stock
from Nasdaq could have a material adverse effect on its ability to raise
additional capital, its stockholders' liquidity and the price of its
Common Stock.
(3) Property and Equipment
Property and equipment, at cost, consists of the following at July 31:
2003 2002
---------- ----------
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 and amortization 1,136,183 1,120,371
---------- ----------
Property and equipment, net $ 12,795 $ 28,607
========== ==========
(4) Long-term Debt
Long-term debt consists of the following at July 31:
2003 2002
-------- --------
Notes payable, unsecured, unrelated party at 8% and 8.5% interest, net
of debt discount of $350,808 at July 31, 2003 with maturity dates
during fiscal years July 31, 2004 and 2005 $564,192 $ --
Notes payable, unsecured, unrelated party at 8% interest and due as
follows: $100,000 due December 4, 2003, $100,000 due February 17,
2004 and $100,000 Due March 29, 2004 300,000 300,000
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 15,404 24,108
-------- --------
879,596 324,108
Less current portion 637,080 8,179
-------- --------
$242,516 $315,929
======== ========
During the fiscal year ended July 31, 2003, the Company issued 8%
convertible notes payable to unrelated parties with principal balances
totaling an aggregate of $915,000. These notes payable are scheduled to
mature on various dates from April 2004 through May 2005 and are
convertible into the Company's Common Stock at exercise prices ranging
from $0.20 to $0.50 per share. Additionally, with the issuance of the
notes payable, the Company issued to the unrelated parties warrants to
purchase an aggregate of 665,000 shares of the Company's Common Stock,
expiring five years from the date of issuance at an exercise price of
$0.60 per share. In addition, the Company will issue on the due date of
the notes payable warrants to purchase an aggregate of 915,000 shares of
the Company's Common Stock expiring five years from the date of issuance
at per share exercise prices of $1.00 and $1.10. The Company valued these
warrants at a total of $219,259 based on the fair value determined by
using the Black-Scholes method. At the issuance dates of the notes
payable, the fair market values of the Company's shares exceeded the
effective conversion prices. Accordingly, the Company initially increased
additional paid-in capital by $219,259 for the fair value of the
F-20
ALFACELL CORPORATION
(A Development Stage Company)
warrants and reduced the carrying value of the notes payable for the same
amount for the debt discount attributable to the fair value of the
warrants. The Company is amortizing the debt discount over the terms of
the notes payable.
Pursuant to the applicable guidance in the consensus for EITF Issue No.
00-27, the Company valued the beneficial conversion feature using the
effective conversion price. Accordingly, the Company first allocated
$219,259 to the detachable warrants and decreased the carrying value of
the notes payable. Based on the effective conversion prices, the Company
recorded a beneficial conversion charge of $374,960 which was allocated to
additional paid-in capital and debt discount which is being amortized as
interest expense over the terms of the notes payable. At July 31, 2003,
the notes were convertible into 4,157,143 shares of Common Stock.
F-21
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
(4) Long-term Debt, (Continued)
The notes require principal payments in each of the years subsequent to
July 31, 2003 as follows:
Year Ending July 31, Amount
-------------------- ------
2004 $ 815,000
2005 400,000
----------
Total $1,215,000
==========
(5) Related Party
During the fiscal year ended July 31, 2003, the Company's CEO has made
loans to the Company payable on demand bearing interest at 8% per annum.
As of July 31, 2002, the Company owed $139,794 which was classified as a
current liability included in Loan payable, related party. During the
fiscal year ended July 31, 2003, the amount owed was repaid. Amounts due
from the Company's CEO totaled $142,287 and $68,667 at July 31, 2003 and
2002, respectively, are classified as a long-term asset in Loan
receivable, related party as the Company does not expect repayment of
these amounts within one year. The Company earned approximately $9,500
interest on the unpaid balance. At July 31, 2003, the Company owed
approximately $81,000 of salary to its CEO.
(6) 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) days unless the lenders elect to
exercise an option to convert the note into the Company's 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
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 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 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 accretes as interest expense over the one hundred twenty
day note term through October 31, 2001. In October 2001, an aggregate of
$64,993 notes payable were converted which resulted in the issuance of
72,214 shares of the Company's Common Stock. In addition, upon conversion,
the Company issued the agreed five-year warrants to purchase an aggregate
of 72,214 shares of Common Stock at an exercise price of $1.50 per share.
Also, in October 2001, the Company's Board of Directors approved the
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, to conform with the
private placements to unrelated parties.
(7) Leases
The Company leased its facility under a five-year operating lease which
expired on December 31, 2001. The Company has been leasing the property on
a month-to-month basis. Rent expense charged to operations was $136,000,
$136,000, and $136,000 in 2003, 2002 and 2001, respectively.
F-22
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
(8) 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-23
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
(8) 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-24
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
(8) 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.
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
F-25
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
(8) Stockholders' Equity, (Continued)
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.
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
F-26
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) Stockholders' Equity, (Continued)
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. The options expired during the
fiscal year ended July 31, 2002.
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 a total research and development expense of $353,400,
which was the fair value on the date of issuance of that portion of the
stock options that had vested as of July 31, 2002. Of these options,
20,000 expired as of the fiscal year ended July 31, 2003.
During the fiscal year ended July 31, 1997, 639,500 stock options were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $2.6 million to the Company. The exercise prices of the
options ranged from $2.45 to $4.00 per share.
During the fiscal year ended July 31, 1997, 147,450 warrants were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $737,250 to the Company. The exercise price of the
warrants was $5.00 per share.
In October 1997, the Company issued 75,000 stock options to a director
with an exercise price of $3.66 per share as payment for non-board related
services to be rendered. These options will vest as follows provided he
has been serving continuously on the Company's Board of Directors at the
time of vesting: 10,000 vested immediately; 10,000 after one full calendar
year; 10,000 annually for each of the following three years; and 25,000 on
October 31, 2002. The vesting and exercisability of the 25,000 options,
which vest in October 2002 may be accelerated upon the good faith
determination of the Company's Board of Directors that a substantive
collaborative agreement with a major pharmaceutical/biotechnology company
F-27
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) Stockholders' Equity, (Continued)
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, 2003, the expense
was fully amortized and recorded, 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. Of these options, 10,000 expired during
the fiscal year ended July 31, 2003.
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. These options expired during the fiscal year ended
July 31, 2003.
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 was
declared effective in February 2002.
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
F-28
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) Stockholders' Equity, (Continued)
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, 2003, the expense was fully amortized and recorded, 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. Of these
options, 10,000 expired during the fiscal year ended July 31, 2003.
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 was declared
effective in February 2002.
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.
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.
F-29
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) Stockholders' Equity, (Continued)
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. The remaining 50,000 options were exercised in September 2003,
which resulted in gross proceeds of $50,000 to the Company.
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.
These options were exercised during the fiscal year ended July 31, 2000,
which resulted in gross proceeds of $7,150 to the Company.
During the fiscal year ended July 31, 1999, the Company issued 40,701
shares of Common Stock for payment of legal services. The fair value of
the Common Stock in the amount of $16,631 was charged to operations.
During the fiscal year ended July 31, 1999, the Company issued 6,000
shares of Common Stock for payment of services rendered. The fair value of
the Common Stock in the amount of $2,460 was charged to operations.
During the fiscal year ended July 31, 2000, the Company issued 174,965
shares of Common Stock for payment of services rendered. The fair value of
the Common Stock in the amount of $92,184 was charged to operations.
During the fiscal year ended July 31, 2000, the Company issued 95,000
shares of Common Stock upon the exercise of stock options by unrelated
parties which resulted in gross proceeds of $45,850 to the Company. The
exercise prices of the options ranged from $0.43 to $1.43.
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
F-30
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) Stockholders' Equity, (Continued)
in the private placements received substantially the same securities, at
per share exercise prices ranging from $1.03 to $4.55. Of these warrants,
437,500 expired in May 2003 and the balance will expire 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 at $0.90 per share. 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. In October 2001, the board of directors approved a change
of the 330,000 warrants from three-year warrants to five-year warrants and
the exercise price from $2.50 per share to $1.50 per share to conform with
the private placements to unrelated parties.
During the fiscal year ended July 31, 2002, the Company issued 72,214
shares of Common Stock upon the conversion of convertible notes from
unrelated parties at $0.90 per share. In addition, upon conversion, the
unrelated parties were granted five-year warrants to purchase an aggregate
of 72,214 shares of Common Stock at an exercise price of $1.50 per share.
The estimated value of these warrants in the amount of $32,200 was
recorded by the Company as interest expense during the fiscal year ended
July 31, 2002.
During the fiscal year ended July 31, 2002, the Company issued 78,340
shares of Common Stock in settlement of accounts payable in the amount of
$64,126. In addition, one of the vendors 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 amount was credited to equity as the
value of the Common Stock and warrants.
During the fiscal year ended July 31, 2002, the Company issued an
aggregate of 85,221 five-year stock options as payment for services
rendered. The options vested immediately and have a per share exercise
prices of $0.75 as to 70,000 stock options and $0.94 as to 15,221 stock
options. The Company recorded an aggregate total of $40,747 non-cash
expenses for these options, based upon the fair value on the date of the
issuance as estimated by the Black-Scholes options-pricing model.
F-31
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 2002, the Company sold an aggregate
of 2,622,122 shares of Common Stock to private investors at prices ranging
from $0.35 to $0.90 per share resulting in net proceeds of $1,050,000 to
the Company. In addition, the private investors were granted warrants to
purchase an aggregate of 2,673,422 shares of Common Stock at per share
exercise prices ranging from $0.75 to $1.50. The warrants will expire
during the period commencing August 2006 and ending in June 2007.
During the fiscal year ended July 31, 2002, the Company 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 an aggregate of 226,000 shares of
Common Stock as of the fiscal year ended July 31, 2003 with an exercise
price of $0.50 per share, resulting in gross proceeds of $112,500 to the
Company. Warrants to purchase an additional 274,000 shares were
exercisable as of July 31, 2003 of which 24,000 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 the Company 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. The Company
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 pricing model ($153,300), less the $1,500
received from the sale of the warrants. The additional warrants vest
contingent upon capital being raised and were to be accounted for as part
of the capital transaction. However, Roan Meyers Associates L.P. was not
successful in its attempt in raising additional capital. During the fiscal
year ended July 31, 2003, the vesting of the 600,000 warrants was amended
to vest immediately and the exercise price was amended from $1.50 to $0.50
per share due to the price of the Company's Common Stock, which resulted
in the issuance of 600,000 shares of Common Stock upon the exercise of
warrants. The Company realized gross proceeds of $300,000 in this capital
raising transaction.
During the fiscal year ended July 31, 2002, the Company issued an
aggregate of 186,000 shares of Common Stock upon the exercise of warrants
by an unrelated party, which resulted in gross proceeds of $93,000 to the
Company.
During the fiscal year ended July 31, 2002, the Company issued an
aggregate of 75,000 five-year stock options to unrelated parties as an
incentive for lending the Company an aggregate of $75,000, which was
repaid during the quarter. The options vested immediately and have an
exercise price of $1.50 per share. The total non-cash interest expense
recorded for these options was $25,615, based upon the fair value of such
option on the date of issuance as estimated by the Black-Scholes
options-pricing model.
During the fiscal year ended July 31, 2002, the Company issued a notes
payable to an unrelated party in an aggregate amount of $300,000. The note
was due thirty days bearing interest at 8% per annum. In addition, the
lender received warrants to purchase 350,000 shares of Common Stock at an
exercise price of $0.60 per share. The total non-cash interest expense
recorded for these warrants was $40,690, based upon the fair value of such
option on the date of issuance as estimated by the Black-Scholes
options-pricing model. The notes were either extended for eighteen months
or the lenders can convert the notes at a conversion price of $0.40 per
share plus a five-year warrant for each share of the Company's Common
Stock issued upon conversion at an exercise price of $1.00 per share.
During the fiscal year ended July 31, 2003, the Company issued an
aggregate of 764,000 shares of Common Stock upon the exercise of warrants
and stock options by unrelated parties which resulted in gross proceeds of
approximately $378,000 to the Company.
F-32
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 2003, the Company issued an
aggregate 186,208 shares of Common Stock in settlement of accounts payable
in the aggregate amount of $94,223. In addition, one of the vendors was
granted five-year options to purchase 50,000 shares of Common Stock at an
exercise price of $1.25 per share. The Company recorded $17,581 non-cash
research and development expenses for these options, based upon the fair
value on the date of the issuance as estimated by the Black-Scholes
options-pricing model. The settled accounts payable amount was credited to
equity as the value of the Common Stock and options.
During the fiscal year ended July 31, 2003, the Company issued 25,000
five-year stock options to an unrelated party as an incentive for lending
the Company an aggregate of $25,000, which was fully paid as of April 30,
2003. The stock options vested immediately and have an exercise price of
$0.23 per share. The total non-cash interest expense recorded for these
stock options was $2,503. In addition, the Company issued 140,000
five-year stock options for services rendered. These stock options vested
immediately and have exercise prices of $0.84 and $1.25 per share. The
total non-cash charge relating to these options was $55,437. The total
value of these options was based upon the fair value of such options on
the date of issuance as estimated by the Black-Scholes options-pricing
model.
During the fiscal year ended July 31, 2003, the Company issued 8%
convertible notes payable to unrelated parties with principal balances
totaling an aggregate of $915,000. These notes payable are scheduled to
mature on various dates from April 2004 through May 2005 and are
convertible into the Company's Common Stock at exercise prices ranging
from $0.20 to $0.50 per share. Additionally, with the issuance of the
notes payable, the Company issued to the unrelated parties warrants to
purchase an aggregate of 665,000 shares of the Company's Common Stock,
expiring five years from the date of issuance at an exercise price of
$0.60 per share. In addition, the Company will issue on the due date of
the notes payable warrants to purchase an aggregate of 915,000 shares of
the Company's Common Stock expiring five years from the date of issuance
at per share exercise prices of $1.00 and $1.10. The Company valued these
warrants at a total of $219,259 based on the fair value determined by
using the Black-Scholes method. At the issuance dates of the notes
payable, the fair market values of the Company's shares exceeded the
effective conversion prices. Accordingly, the Company initially increased
additional paid-in capital by $219,259 for the fair value of the warrants
and reduced the carrying value of the notes payable for the same amount
for the debt discount attributable to the fair value of the warrants. The
Company also increased its additional paid-in capital and debt discount by
$374,960 for beneficial conversion rights issued in connection with the
issuances of these notes (see note 4).
During the fiscal year ended July 31, 2003, the Company sold an aggregate
of 1,315,000 shares of Common Stock to private investors at prices ranging
from $0.20 to $0.73 per share resulting in net proceeds of $653,627 to the
Company. In addition, the private investors were granted warrants to
purchase an aggregate of 1,315,000 shares of Common Stock at per share
exercise prices ranging from $1.00 to $1.50. The warrants will expire
during the period commencing January 2008 and ending in October 2008.
(9) 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 have since expired.
The following table summarizes the activity of Common Stock warrants
issued in connection with the Private Placements completed in fiscal years
1994 through 2003:
F-33
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(9) 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
Sold in June 1996 Private Placement 313,800 7.50 8/29/99 to 9/10/99
---------
Outstanding and exercisable at July 31, 1996 1,508,251 4.00 - 7.50 3/21/97 to 9/10/99
Exercised (147,450) 5.00 3/21/97 to 6/21/97
Expired (652,550) 5.00 3/21/97 to 6/21/97
---------
Outstanding and exercisable at July 31, 1997 708,251 4.00 - 7.50 12/9/97 to 9/10/99
Sold in February 1998 Private Placement 1,168,575 2.50 8/17/01
Issued to the Placement Agent in connection with
the February 1998 Private placement (see note 8) 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 1.50 7/07/06
---------
Outstanding and exercisable at July 31, 2001 3,415,864 1.03 - 4.55 8/17/01 to 10/30/06
Expired (1,514,199) 2.20 - 2.50 8/17/01
Sold in various private placements 2,673,422 0.75 - 1.50 11/03/06 to 9/10/07
Issued to vendor upon settlement of accounts
payable 55,556 1.50 8/15/06
F-34
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(9) Common Stock Warrants, (Continued)
Warrants Exercise Price Expiration
-------- -------------- ----------
Issued to unrelated party for advisory services 1,500,000 0.50 - 1.50 2/6/07
Exercised (186,000) 0.50 2/6/07
Issued to unrelated parties upon conversion of
notes payable 72,214 1.50 10/31/06
Issued to unrelated parties in connection with
notes payable 300,000 0.60 11/13/06 - 7/29/07
----------
Outstanding and exercisable at July 31, 2002 6,316,857 0.50 - 4.55 5/28/03 to 9/10/07
Expired (437,500) 1.03 - 3.25 5/28/03
Sold in various private placements 1,315,000 1.00 - 1.50 1/24/08 to 10/31/08
Exercised (640,000) 0.50 2/6/07
Issued to unrelated parties in connection with
notes payable 665,000 0.60 9/6/07 - 3/14/08
----------
Outstanding and exercisable at July 31, 2003 7,219,357 $ 0.50 - 4.55 5/28/05 to 10/31/08
========== =============
(10) 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. Our plan will expire on November
11, 2003 except to the extent there are outstanding options.
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, 2003:
Shares Available Number of Weighted Average
for Grant Shares Exercise 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
F-35
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(10) Stock Options, (Continued)
Shares Available Number of Weighted Average
for Grant Shares Exercise Price Per Share
--------- ------ ------------------------
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
Granted (544,221) 544,221 0.69
Exercised -- -- --
Canceled 655,840 (900,081) 2.31
---------- ----------
Balance July 31, 2002 2,326,661 2,674,024 1.90
Granted (630,000) 630,000 0.50
Exercised -- (124,000) 0.47
Canceled 485,118 (736,359) 3.09
---------- ----------
Balance July 31, 2003 2,181,779 2,443,665 1.26
========== ========== ====
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 the Company through the date of the
achievement of the milestones. 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 2001
and 2002. An aggregate 50,000 options issued to the Company's outside
Board of Directors were exercised during the fiscal year 2001. The 350,000
stock options issued to the employees expired during the fiscal year ended
July 31, 2002. The options outstanding at July 31, 2003 will expire
between August 1, 2002 and October 4, 2010.
The weighted-average fair value per option at the date of grant for
options granted during the fiscal years 2003, 2002 and 2001 were $0.21,
$0.40 and $0.74, respectively. The fair value was estimated using the
Black-Scholes options pricing model based on the following assumptions:
2003 2002 2001
---- ---- ----
Expected dividend yield 0% 0% 0%
Risk-free interest rate 2.00% 5.50% 5.50%
Expected stock price volatility 77.79% 88.71% 104.25%
Expected term until exercise (years) 5.50 5.60 6.00
F-36
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(10) Stock Options, (Continued)
The following table summarizes information concerning options outstanding
at July 31, 2003:
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 1,968,666 4.06 $ 0.64 1,320,066 $ 0.73
2.00 - 2.99 85,000 3.64 2.72 65,000 2.80
3.00 - 3.99 206,500 1.25 3.27 206,500 3.27
4.00 - 4.99 73,500 1.43 4.58 73,500 4.58
5.00 - 5.99 110,000 2.55 5.17 110,000 5.17
=========== --------- ==== ======== --------- =======
2,443,666 1,775,066
========= =========
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
F-37
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(10) Stock Options, (Continued)
Shares Price Range
------ -----------
Granted pursuant to conversion of certain liabilities:
Related party 1,324,014 $ 3.20
Unrelated party 73,804 3.20
Repurchased stock options (102,807) 3.20
---------
Balance at July 31, 1994 2,045,011 $ 3.20-3.87
========= ===========
In connection with certain private placements, the Board of Directors had
included in the agreements, options to purchase additional shares of the
Company's Common Stock as follows:
Shares Price Range
------ -----------
Granted (42,167 options were repriced and extended) 894,887 $ 2.50-7.00
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 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.
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.
(11) 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:
F-38
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(11) Stock Grant and Compensation Plans, (Continued)
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.
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 10). 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
F-39
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(11) Stock Grant and Compensation Plans, (Continued)
Year ended Amount of
July 31, Shares Fair Value Compensation
-------- ------ ---------- ------------
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.
(12) 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 2003 (July
1, 2002 to June 30, 2003), the Company had $1,373,000 total available tax
benefits of which $273,000 was allocated to be sold between July 1, 2002
to June 30, 2003. In December 2002, the Company received $231,000 from the
sale of an aggregate of $273,000 tax benefits which was recognized as a
tax benefit for the fiscal year 2003. In December 2001 and 2000, the
Company received $354,000 and $451,000 from the sale of its allocated tax
benefits, which was recognized as tax benefits for the fiscal years 2002
and 2001, respectively. The Company will attempt to sell the remaining
balance of its tax benefits in the amount of approximately $1,100,000
between July 1, 2003 and June 30, 2004, subject to all existing laws of
the State of New Jersey. However, there is no assurance that the Company
will be able to find a buyer for its tax benefits or that such funds will
be available in a timely manner.
At July 31, 2003 and 2002, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
2003 2002
---- ----
Deferred tax assets:
Excess of book over tax depreciation and amortization $ 46,605 $ 71,018
Accrued expenses 392,838 146,843
Federal and state net operating loss carryforwards 14,433,485 14,787,041
Research and experimentation and investment tax credit
carryforwards 1,185,883 1,259,070
------------ ------------
Total gross deferred tax assets 16,058,811 16,263,972
Valuation allowance (16,058,811) (16,263,972)
------------ ------------
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 the actual benefits reflected on the statements of operations
due principally to the aforementioned valuation allowance. In July 2003,
2002 and 2001 the valuation allowance decreased by $205,000, increased by
$178,000 and increased by $80,000, respectively.
F-40
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(12) Income Taxes, (Continued)
At July 31, 2003, the Company has federal net operating loss carryforwards
of approximately $39,600,000 that expire in the years 2004 to 2023. The
Company also has research and experimentation tax credit carryforwards of
approximately $1,186,000 that expire in the years 2004 to 2023. 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.
(13) Other Financial Information
Accrued expenses as of July 31, consist of the following:
2003 2002
---- ----
Payroll and payroll taxes $ 884,808 $ 351,575
Professional fees 38,351 27,000
Clinical trial grants 379,342 374,522
Other 105,477 101,181
---------- ----------
$1,407,978 $ 854,278
========== ==========
Other current assets as of July 31, consist of the following:
2003 2002
---- ----
Prepaid insurance $ 9,518 $ 45,450
Other 585 304
---------- ----------
$ 10,103 $ 45,754
========== ==========
(14) Commitments and Contingencies
On July 23, 1991, the Board of Directors authorized the Company to pay
Kuslima Shogen, the Company's CEO, 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
$3,000,000 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.
Included in accrued expenses as of July 31, 2003, is $884,807 of unpaid
payroll and payroll taxes (see note 18).
F-41
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(14) Commitments and Contingencies, (Continued)
Below is a table that presents our contractual obligations and commercial
commitments as of July 31, 2003:
Payments Due by Fiscal Year
----------------------------------
2006 and
Total 2004 2005 Thereafter
----- ---- ---- ----------
Research and development
commitments $ -0- $ -0- $ -0- $ -0-
Operating lease 30,600 17,500 13,100 -0-
------- ------- ------- ------
Total contractual cash obligations $30,600 $17,500 $13,100 $ -0-
======= ======= ======= ======
(15) Research and Development Agreement
In October 2002, the Company entered into a research collaboration with
Wyeth Pharmaceuticals to co-develop a number of designer drugs such as
conjugates and fusion proteins for a variety of indications using the
Company's proprietary technology. This collaboration may result in a
licensing agreement between the companies however, there is no assurance
that such agreement will be reached.
In August 1995, the Company entered into a Cooperative Research and
Development Agreement ("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 for the fiscal year ended July 31, 2000.
(16) 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, 2003, 2002 and 2001, the Company's contribution to the Plan amounted
to $24,956, $25,717 and $23,826, respectively.
(17) Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------------------------------------------------
First Second Third Fourth Totals First Second Third Fourth Totals
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ .1 $ .1 $ -- $ 9.7 $ 9.9 $ -- $ .1 $ .1 $ 4.6 $ 4.8
Other income 30.0 -- -- -- 30.0 -- -- -- -- --
Operating loss (559.4) (737.4) (567.7) (778.4) (2,642.9) (731.1) (697.9) (792.8) (723.2) (2,945.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (a) (329.9) (737.4) (567.7) (776.5) (2,411.5) (377.4) (697.9) (792.8) (723.1) (2,591.2)
F-42
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(17) Quarterly Financial Data (Unaudited), (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------------------------------------------------
First Second Third Fourth Totals First Second Third Fourth Totals
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per share
- - basic and
diluted $ (0.01) $(0.03) $(0.02) $(0.04) $(0.10) $(0.02) $(0.03) $(0.04) $(0.03) $(0.12)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Included in the net loss of $329.9 and $377.4 for first quarter 2003 and
2002, are tax benefits of $231.4 and $353.7, respectively, related to the
sale of certain state tax operating loss carryforwards.
(18) Subsequent Events
In August 2003, the Company issued an aggregate of 120,000 shares of
Common Stock to private investors resulting in aggregate gross proceeds of
$60,000 to the Company. In addition, the private investors were granted
five-year warrants to purchase 120,000 shares of Common Stock at an
exercise of price of $1.25 per share.
From August 2003 through October 14, 2003, the Company issued to unrelated
parties, an aggregate of 1,165,773 shares of Common Stock upon the
exercise of warrants and stock options at per share exercise prices
ranging from $0.43 to $1.00. The Company realized aggregate gross proceeds
of $861,225.
In September 2003, the Company issued 1,704,546 shares of Common Stock to
an institutional investor resulting in gross proceeds of $1,500,000 to the
Company. In addition, the private investors were granted five-year
warrants to purchase 852,273 shares of Common Stock at an exercise price
of $1.50 per share. The Company also issued 38,710 shares of restricted
Common Stock to a third party as finder's fee.
As of September 30, 2003 all payroll taxes have been fully paid (see note
14).
In September 2003, the terms of the Company's notes payable were amended
such that (i) they are convertible into shares of Series A Preferred Stock
rather than Common Stock, and (ii) the warrants to be issued upon the due
date of the notes are warrants to purchase shares of Series A Preferred
Stock rather than Common Stock. In the event the stockholders approve an
increase in the number of shares of Common Stock authorized, the terms of
the notes will revert to the original terms to the extent the notes have
not been converted.
In September 2003, the Company's Board of Directors designated 200,000 of
the 1,000,000 shares of preferred stock as Series A Preferred Stock.
105,666 shares of its Series A Preferred Stock has been reserved for
issuance upon the conversion of certain of its outstanding notes.
F-43
ALFACELL CORPORATION
(A Development Stage Company)
BALANCE SHEETS
January 31, 2004 and July 31, 2003
January 31,
2004 July 31,
ASSETS (Unaudited) 2003
------------ ------------
Current assets:
Cash and cash equivalents $ 1,849,497 $ 330,137
Other current assets 249,053 10,103
------------ ------------
Total current assets 2,098,550 340,240
Property and equipment, net 11,632 12,795
Loan receivable, related party 148,342 142,287
------------ ------------
Total assets $ 2,258,524 $ 495,322
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
Current liabilities:
Current portion of long-term debt, net of debt discount of $156,476 at January 31,
2004 and $187,121 at July 31, 2003 $ 868,256 $ 637,080
Accounts payable 563,854 699,429
Accrued expenses 749,458 1,407,978
------------ ------------
Total current liabilities 2,181,568 2,744,487
Long-term debt, less current portion, net of debt discount of $20,293 at January 31,
2004 and $163,687 at July 31, 2003 181,436 242,516
------------ ------------
Total liabilities 2,363,004 2,987,003
------------ ------------
Stockholders' (deficiency):
Preferred stock, $.001 par value
Authorized and unissued, 1,000,000 shares at January 31, 2004 and July 31, 2003 -- --
Common stock $.001 par value
Authorized 100,000,000 shares at January 31, 2004 and 40,000,000 shares
at July 31, 2003; Issued and outstanding, 28,958,315 at January 31,
2004 and 25,026,129 shares
at July 31, 2003 28,958 25,026
Capital in excess of par value 65,798,569 61,457,502
Deficit accumulated during the development stage (65,932,007) (63,974,209)
------------ ------------
Total stockholders' (deficiency) (104,480) (2,491,681)
------------ ------------
Total liabilities and stockholders' (deficiency) $ 2,258,524 $ 495,322
============ ============
See accompanying notes to financial statements.
F-44
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Three months and six months ended January 31, 2004 and 2003,
and the Period from August 24, 1981
(Date of Inception) to January 31, 2004
(Unaudited)
Three Months Ended Six Months Ended August 24, 1981
January 31, January 31, (Date of
----------- ----------- Inception) to
2004 2003 2004 2003 January 31, 2004
---- ---- ---- ---- ----------------
Revenue:
Sales $ -- $ -- $ -- $ -- $ 553,489
Investment income 4,530 120 8,230 234 1,395,230
Other income -- -- -- 30,000 90,103
------------ ------------ ------------ ------------ ------------
Total revenue 4,530 120 8,230 30,234 2,038,822
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales -- -- -- -- 336,495
Research and development 674,089 379,866 1,311,286 799,370 42,913,221
General and administrative 420,243 152,320 648,188 288,076 22,936,040
Interest:
Related parties, net -- 1,286 -- 1,286 1,147,547
Others 109,786 204,056 228,401 238,284 2,651,711
------------ ------------ ------------ ------------ ------------
Total costs and expenses 1,204,118 737,528 2,187,875 1,327,016 69,985,014
------------ ------------ ------------ ------------ ------------
Loss before state tax benefit (1,199,588) (737,408) (2,179,645) (1,296,782) (67,946,192)
State tax benefit -- -- 221,847 229,459 2,014,185
------------ ------------ ------------ ------------ ------------
Net loss $ (1,199,588) $ (737,408) $ (1,957,798) $ (1,067,323) $(65,932,007)
============ ============ ============ ============ ============
Loss per basic common share $ (0.04) $ (0.03) $ (0.07) $ (0.05)
============ ============ ============ ============
Weighted average number of shares
outstanding 28,439,372 22,872,958 27,675,584 22,830,115
============ ============ ============ ============
See accompanying notes to financial statements.
F-45
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Six months ended January 31, 2004 and 2003,
and the Period from August 24, 1981
(Date of Inception) to January 31, 2004
(Unaudited)
Six Months Ended August 24, 1981
January 31, (Date of Inception)
----------- to
2004 2003 January 31, 2004
---- ---- ----------------
Cash flows from operating activities:
Net loss $ (1,957,798) $ (1,067,323) $(65,932,007)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities -- -- (25,963)
Depreciation and amortization 3,414 11,417 1,550,632
Loss on disposal of property and equipment -- -- 18,926
Noncash operating expenses 147,893 14,275 6,265,505
Charge for beneficial conversion rights -- 200,487 --
Amortization of debt discount 174,039 7,626 417,450
Amortization of deferred compensation -- -- 11,442,000
Amortization of organization costs -- -- 4,590
Changes in assets and liabilities:
(Increase) decrease in other current assets (238,950) 33,656 (308,920)
Increase in loan receivable, related party (6,055) (2,747) (52,291)
Increase in interest payable, related party -- -- 744,539
(Decrease) increase in accounts payable (92,846) (186,294) 1,061,042
Increase in accrued payroll and expenses,
related parties -- -- 2,348,145
(Decrease) increase in accrued expenses (658,520) 341,056 1,290,971
------------ ------------ ------------
Net cash used in operating activities (2,628,823) (647,847) (41,175,381)
------------ ------------ ------------
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 (2,251) -- (1,409,087)
Patent costs -- -- (97,841)
------------ ------------ ------------
Net cash used in investing activities (2,251) -- (1,480,965)
------------ ------------ ------------
(continued)
See accompanying notes to financial statements.
F-46
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Continued
Six months ended January 31, 2004 and 2003,
and the Period from August 24, 1981
(Date of Inception) to January 31, 2004
(Unaudited)
Six Months Ended August 24, 1981
January 31, (Date of
----------- Inception) to
2004 2003 January 31, 2004
---- ---- ----------------
Cash flows from financing activities:
Proceeds from short-term borrowings $ -- $ 25,000 $ 874,500
Payment of short-term borrowings -- (25,000) (653,500)
(Decrease) increase in loans payable - related party, net -- (35,761) 2,628,868
Proceeds from bank debt and other long-term debt, net of
deferred issuance costs -- 615,000 3,667,460
Reduction of bank debt and long-term debt (3,943) (3,965) (2,955,107)
Proceeds from issuance of common stock, net 1,527,925 5,693 31,476,739
Proceeds from exercise of stock options and warrants, net 2,626,452 -- 8,752,890
Proceeds from issuance of convertible debentures, related party -- -- 297,000
Proceeds from issuance of convertible debentures, unrelated party -- -- 416,993
---------- ---------- ------------
Net cash provided by financing activities 4,150,434 580,967 44,505,843
---------- ---------- ------------
Net increase (decrease) in cash and cash equivalents 1,519,360 (66,880) 1,849,497
Cash and cash equivalents at beginning of period 330,137 85,843 --
---------- ---------- ------------
Cash and cash equivalents at end of period $1,849,497 $ 18,963 $ 1,849,497
========== ========== ============
Supplemental disclosure of cash flow information - interest paid $ -- $ 3,846 $ 1,737,410
========== ========== ============
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 $ 42,729 $ 10,000 $ 497,278
========== ========== ============
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 $ -- $ -- $ 191,993
========== ========== ============
Issuance of common stock for services rendered $ -- $ -- $ 212,290
========== ========== ============
Issuance of warrants with notes payable $ -- $ 146,086 $ 594,219
========== ========== ============
See accompanying notes to financial statements.
F-47
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,
2004 and its results of operations and cash flows for the three and/or six month
periods ended January 31, 2004 and 2003 and the period from August 24, 1981
(date of inception) to January 31, 2004. The results of operations for the six
months ended January 31, 2004 are not necessarily indicative of the results to
be expected for the full year.
Certain footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted in accordance with the published rules and regulations of the Securities
and Exchange Commission. The financial statements in this report should be read
in conjunction with the audited financial statements and notes thereto included
elsewhere herein for the years ended July 31, 2003, 2002, and 2001.
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 developing
new drug products. Its planned principal operations have not commenced and,
accordingly, no significant revenue has been derived therefrom.
The Company has reported net losses since its inception and has limited
liquid resources. The report of the Company's independent public accountants on
the Company's July 31, 2003 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 Company has continued to incur
losses through January 31, 2004 and has a working capital deficiency as of
January 31, 2004. The financial statements at July 31, 2003 and January 31, 2004
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), licensing of its proprietary
RNase technology and its ability to realize the full potential of its technology
and its drug candidates via out-licensing agreements with other companies. Such
additional funds may not become available as needed or be available on
acceptable terms. Through January 31, 2004, a significant portion of the
Company's financing has been through private placements of Common Stock and
warrants, the issuance of Common Stock for stock options and warrants exercised
and for services rendered, debt financing and financing provided by the
Company's Chief Executive Officer. Additionally, the Company has raised capital
through the sale of its tax benefits. Until and unless the Company's operations
generate significant revenues, the Company will attempt to continue to fund its
operations from cash on hand and through the sources of capital previously
described. From August 1, 2003 through February 20, 2004, the Company received
gross proceeds of approximately $4,318,000 from long-term and short-term
borrowings from unrelated parties, the private placement of Common Stock and
warrants and other income. No assurances can be provided that the additional
capital will be sufficient to meet the Company's needs.
F-48
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
2. EARNINGS (LOSS) PER COMMON SHARE
"Basic" loss per common share equals net loss divided by weighted average
common shares outstanding during the period. "Diluted" loss per common share
equals net income divided by the sum of weighted average common shares
outstanding during the period plus the effect of potentially dilutive
securities. The Company's Basic and Diluted per share amounts are the same since
the effects of the assumed exercise of stock options and warrants and the
conversion of convertible notes are all anti-dilutive. The amount of options and
warrants excluded from the calculation was 9,543,637 and 10,139,294 at January
31, 2004 and 2003, respectively. This excludes the potential dilution that could
occur upon the conversion of convertible notes into Common Stock.
3. STOCK-BASED COMPENSATION
During the third fiscal quarter of 2003, Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB Statement No. 123" became
effective for the Company.
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method. As the exercise price of
all options granted under these plans was equal to the fair market price of the
underlying Common Stock on the grant date, no stock-based employee compensation
cost is recognized in the condensed statements of operations.
In accordance with SFAS 148 and Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company's pro forma option expense is computed using the Black-Scholes option
pricing model. To comply with SFAS 148, the Company is presenting the following
table to illustrate the effect on the net loss and loss per share if it had
applied the fair value recognition provisions of SFAS 123, as amended, to
options granted under the stock-based employee compensation plans. For purposes
of this pro forma disclosure, the estimated value of the options is amortized
ratably to expense over the options' vesting periods.
Three Months Ended Six Months Ended
January 31, January 31,
----------- -----------
2004 2003 2004 2003
---- ---- ---- ----
Net loss
As reported $(1,199,588) $ (737,408) $(1,957,798) $(1,067,323)
Stock-based employee compensation
expense under fair value method (109,184) (38,389) (180,363) (76,539)
----------- ----------- ----------- -----------
Pro forma $(1,308,772) $ (775,797) $(2,138,161) $(1,143,862)
=========== =========== =========== ===========
Net loss per common share
As reported $ (0.04) $ (0.03) $ (0.07) $ (0.05)
Pro forma (0.05) (0.03) (0.08) (0.05)
F-49
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. LOAN RECEIVABLE, RELATED PARTY
Amounts due from the Company's CEO totaling $148,342 as of January 31,
2004 are classified as a long-term asset as the loans have no specified due
dates, and the Company does not expect repayment of these amounts within one
year. These loans were made prior to July 30, 2002 and have not since been
materially modified. The Company earns interest on these loans at a rate of 8%
per annum.
5. CAPITAL STOCK
In August 2003, the Company issued an aggregate of 120,000 shares of
Common Stock to private investors resulting in aggregate gross proceeds of
$60,000 to the Company. In addition, the private investors were granted
five-year warrants to purchase 120,000 shares of Common Stock at an exercise
price of $1.25 per share.
In August 2003, the Company issued 3,996 five-year stock options to a
consultant as payment for services rendered. The options vested immediately and
have a per share exercise price of $0.60. The Company recorded a total of $5,235
of non-cash expenses for these options, based upon the fair value on the date of
the issuance as estimated by the Black-Scholes options pricing model.
In September 2003, Alfacell entered into a two-part financing agreement
with SF Capital Partners, Ltd. for the initial private placement of 1,704,546
shares of Common Stock and warrants to purchase 852,273 shares of Common Stock,
at an exercise price of $1.50 per share. As consideration, Alfacell received
$1,500,000. In addition, the Company agreed to grant SF Capital Partners, Ltd. a
warrant to invest an additional $1,500,000 to purchase the Company's Common
Stock at an exercise price based upon a 20-day trailing average of the closing
price per share of the Company's Common Stock (the "Additional Warrants"). The
Company also issued 38,710 shares of restricted Common Stock to a third party as
finder's fee.
In November 2003, the Company issued 25,000 five-year stock options to a
board member as payment for non-board related services. The options vested
immediately and have a per share exercise price of $3.46. The Company recorded a
total of $52,658 of non-cash expenses for these options, based upon the fair
value on the date of the issuance as estimated by the Black-Scholes options
pricing model.
On January 16, 2004, the Company issued the Additional Warrants to SF
Capital. On January 29, 2004, SF Capital exercised the Additional Warrant and
invested an additional $1,500,000 to purchase the Company's Common Stock at a
20-day trailing average exercise price of $3.96. In exchange, SF Capital
received 379,170 shares of Common Stock and an Exercise Warrant to purchase an
additional 189,585 shares of Common Stock at a per share exercise price of
$4.75. Pursuant to the terms of the financing agreement entered into in the
September 2003 private placement, the Company is registering the resale by SF
Capital of 379,170 shares of Common Stock and 189,585 shares of Common Stock
underlying warrants. The Company also issued 15,166 shares of restricted Common
Stock to a third party as finder's fee.
F-50
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. CAPITAL STOCK, Continued
In December 2003, the Company issued 12,604 restricted shares of Common
Stock as payment of accounts payable in the amount of $42,729.
On January 14, 2004 at the Company's annual stockholders' meeting, the
Company's stockholders approved an amendment to the Company's Certificate of
Incorporation, as amended, to increase the number of shares of Common Stock
authorized. Since no notes payable had been converted as of such date, the
amended terms of the Company's notes payable relating to conversion and
exercise, reverted to their original terms so that they are again convertible
into shares of Common Stock, rather than shares of Series A Preferred Stock.
In January 2004, the Company issued an aggregate of 50,000 shares of
restricted Common Stock as payment for services rendered in an aggregate amount
of $90,000.
During the six months ended January 31, 2004, the Company issued, an
aggregate of 1,611,990 shares of Common Stock upon the exercise of warrants by
unrelated parties and stock options by unrelated parties, employees and a
director at per share exercise prices ranging from $0.26 to $3.12. The Company
realized aggregate gross proceeds of $1,228,321 from these exercises.
During the six months ended January 31, 2004, the Company incurred an
aggregate of $133,940 of costs relating to various private placements.
6. 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 2004 (July 1,
2003 to June 30, 2004), the Company had approximately $1,378,000 total available
tax benefits, of which approximately $261,000 was allocated and approximately
$222,000 was sold and recognized as tax benefits during the six months ended
January 31, 2004. In December 2002, the Company received approximately $231,000
from the sale of its allocated tax benefits, which was recognized as a tax
benefit during the six months ended January 31, 2003. The Company will attempt
to sell the remaining balance of its tax benefits in the amount of approximately
$1,117,000 between July 1, 2004 and June 30, 2005, 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.
7. SUBSEQUENT EVENTS
On February 4, 2004, the Company filed a Certificate of Elimination with
the Delaware Secretary of State to eliminate the class of Series A Preferred
Stock, which is no longer necessary due to the conversion of the Company's notes
payable into Common Stock.
In February 2004, the Company issued an aggregate of 47,000 shares of
Common Stock upon the exercise of stock options by an unrelated party and
employees at per share exercise prices ranging from $0.26 to $0.75. The Company
realized aggregate gross proceeds of $29,300 from these exercises.
51
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 $ 5,000
Blue Sky $ 2,000
Legal fees and expenses $ 50,000
Accounting fees and expenses $ 30,000
Printing expenses $ 10,000
Miscellaneous $ 8,000
--------
Total $105,000
========
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.
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. To conform with other private placements, 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
II - 2
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. To conform with other private
placements, 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 $277,000 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.
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, 1,100,000 were exercised at $0.50 per share from March
2002 to September 2003. The remaining 400,000 warrants were
II - 3
exercised from September 2003 to October 2003 at an exercise price of $1.00 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.
In April 2002, we issued warrants to purchase an aggregate 100,000 shares
of Common Stock in connection with notes payable to unrelated parties in an
aggregate amount of $100,000. The notes were due thirty days from the date of
issuance bearing interest at 8% per annum. The warrants to purchase shares of
Common Stock have an exercise price of $0.60 per share. The notes were either
extended for eighteen months or the lenders can convert the notes at a
conversion price of $0.40 per share plus a five-year warrant for each share of
Common Stock issued upon conversion at an exercise price of $1.00 per share.
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.
In June 2002, we completed a private placement resulting in the issuance
of 285,714 shares of restricted Common Stock and 285,714 five-year warrants to
purchase an aggregate of 285,714 shares of Common Stock at per share exercise
price of $1.00. We received an aggregate $100,000 from such private placement.
In June 2002, we issued warrants to purchase an aggregate 100,000 shares
of Common Stock in connection with notes payable to unrelated parties in an
aggregate amount of $100,000. The notes were due thirty days from the date of
issuance bearing interest at 8% per annum. The warrants to purchase shares of
Common Stock have an exercise price of $0.60 per share. The notes were either
extended for eighteen months or the lenders can convert the notes at a
conversion price of $0.35 per share plus a five-year warrant for each share of
Common Stock issued upon conversion at an exercise price of $1.00 per share.
In July and September 2002, we issued warrants to purchase an aggregate
150,000 shares of Common Stock in connection with notes payable to unrelated
parties in an aggregate amount of $150,000. The notes were due thirty days from
the date of issuance bearing interest at 8% per annum. The warrants to purchase
shares of Common Stock have an exercise price of $0.60 per share. The notes were
either extended for eighteen months or the lenders can convert the notes at a
conversion price of $0.30 per share plus a five-year warrant for each share of
Common Stock issued upon conversion at an exercise price of $1.00 per share.
In September and November 2002, we issued warrants to purchase an
aggregate 400,000 shares of Common Stock in connection with notes payable to
unrelated parties in an aggregate amount of $400,000. The notes were due thirty
days from the date of issuance bearing interest at 8% per annum.
II - 4
The warrants to purchase shares of Common Stock have an exercise price of $0.60
per share. The notes were either extended for eighteen months or the lenders can
convert the notes at a conversion price of $0.20 per share plus a five-year
warrant for each share of Common Stock issued upon conversion at an exercise
price of $1.00 per share.
In September 2002, we issued 40,000 shares of Common Stock upon the
exercise of warrants by an unrelated party, which resulted in net proceeds of
$10,000.
In October 2002, we issued 37,037 shares of Common Stock in settlement of
accounts payable in the amount of $10,000. The settled accounts payable amount
was credited to equity as the value of the Common Stock.
In October 2002, we completed a private placement resulting in the
issuance of 35,000 shares of restricted Common Stock and 35,000 five-year
warrants to purchase 35,000 shares of Common Stock at an exercise price of $1.00
per share. We received an aggregate of $7,000 from such private placement.
In December 2002, we issued warrants to purchase an aggregate 65,000
shares of Common Stock in connection with notes payable to unrelated parties in
an aggregate amount of $65,000. The notes were due thirty days from the date of
issuance bearing interest at 8% per annum. The warrants to purchase shares of
Common Stock have an exercise price of $0.60 per share. The notes were either
extended for eighteen months or the lenders can convert the notes at a
conversion price of $0.35 per share plus a five-year warrant for each share of
Common Stock issued upon conversion at an exercise price of $1.00 per share.
In February 2003, we completed a private placement resulting in the
issuance of an aggregate of 110,000 shares of restricted Common Stock and
five-year warrants to purchase 110,000 shares of Common Stock at an exercise
price of $1.25 per share. We received $55,000 from such private placement.
In March 2003, we issued a $100,000 8% note payable to an unrelated party,
which will become due in September 2004. In consideration for the loan, we
issued warrants to purchase 100,000 shares of Common Stock expiring five years
from the date of issuance at an exercise price of $0.60 per share. In addition,
we will issue on the due date of the note warrants to purchase 100,000 shares of
Common Stock at an exercise price of $1.00 per share, expiring five years from
the date of issuance. Additionally, the unrelated party can convert the note
into shares of our Common Stock at a conversion rate of $0.35 per share.
In April 2003, we completed several private placements resulting in the
issuance of an aggregate of 440,000 shares of restricted Common Stock and
five-year warrants to purchase 440,000 shares of Common Stock at an exercise
price of $1.25 per share. We received an aggregate of $220,000 from such private
placements.
In May 2003, we issued a $100,000 8% note payable to an unrelated party,
which will become due in November 2004. The unrelated party can convert the note
into shares of our Common Stock at a conversion rate of $0.50 per share. In
addition, upon conversion of the note, we will issue warrants to purchase an
equal number of shares of Common Stock at an exercise price of $1.00 per share,
expiring five years from the date of issuance.
From May 2003 to July 2003, we settled $84,223 of our accounts payable by
issuing 149,171 shares of restricted Common Stock.
II - 5
From May 2003 to July 2003, we issued to private investors an aggregate
730,000 shares of restricted Common Stock and five-year warrants to purchase an
aggregate 730,000 shares of Common Stock at exercise prices ranging from $1.25
to $1.50 per share. We received an aggregate of $411,000 from such private
placements.
From May 2003 to July 2003, we issued an aggregate of 724,000 shares of
Common Stock upon the exercise of warrants and options by unrelated parties,
which resulted in aggregate gross proceeds of $358,000 to us.
In August 2003, we issued an aggregate of 120,000 shares of Common Stock
to private investors resulting in aggregate gross proceeds of $60,000 to us. In
addition, the private investors were granted five-year warrants to purchase
120,000 shares of Common Stock at an exercise of price of $1.25 per share.
From August 2003 through October 2003, we issued an aggregate of 1,229,273
shares of Common Stock upon the exercise of warrants by unrelated parties at per
share exercise prices ranging from $0.50 to $1.00. We realized aggregate gross
proceeds of $953,455.
In September 2003, we issued 1,704,546 shares of Common Stock to an
institutional investor resulting in gross proceeds of $1,500,000 to us. In
addition, the institutional investor was granted five-year warrants to purchase
852,273 shares of Common Stock at an exercise price of $1.50 per share. We also
issued 38,710 shares of restricted Common Stock to a third party in connection
with the private placement as finder's fee.
In December 2003, we issued 12,604 shares of restricted Common Stock to an
unrelated party as payment for services rendered in the amount of $42,729.
In January 2004, we issued an Additional Warrant to an institutional
investor, permitting such institutional investor to invest an additional
$1,500,000 to purchase shares of Common Stock at an exercise priced based upon a
20-day trailing average of the closing price per share of our Common Stock. In
January 2004, the institutional investor exercised the Additional Warrant based
on a 20-day trailing average exercise price of $3.956. Upon exercise, the
institutional investor received 379,170 shares of Common Stock and an Exercise
Warrant to purchase an additional 189,585 shares of Common Stock at an exercise
price of $4.75 per share, all of which are being registered pursuant to this
registration statement. We also issued 15,166 shares of restricted Common Stock
to a third party as a finder's fee.
In January 2004, we issued an aggregate of 50,000 restricted shares of
Common Stock to unrelated parties as payment for services rendered in the amount
of $90,000.
From February 2004 through April 7, 2004, we issued an aggregate 1,468,393
shares of restricted Common Stock and 1,918,393 shares of Common Stock
underlying five-year warrants with an exercise price of $1.00 per share upon the
conversion of notes payable by unrelated parties. We realized aggregate proceeds
of $514,600.
In May 2004, we issued 1,210,654 shares of Common Stock to an existing
institutional investor, resulting in gross proceeds of $10,000,000 to us. In
addition, the institutional investor was granted five-year warrants to purchase
1,210,654 shares of Common Stock at an exercise price of $12.39 per share. We
paid a 5% finder's fee to a third party in connection with the private
placement, which included a five-year warrant to purchase 60,533 shares of
Common Stock at an exercise price of $12.39 per share.
II - 6
Item 16. Exhibits, Financial Statement Schedules
Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
--- ---------- ---------
3.1 Certificate of Incorporation, dated June 12, 1981 (incorporated by
reference to Exhibit 3.1 to Registrant's Registration Statement on
Form S-1, File No. 333-112865, filed on February 17, 2004) *
3.2 Amendment to Certificate of Incorporation, dated February 18, 1994
(incorporated by reference to Exhibit 3.2 to Registrant's
Registration Statement on Form S-1, File No. 333-112865, filed on
February 17, 2004) *
3.3 Amendment to Certificate of Incorporation, dated December 26, 1997
(incorporated by reference to Exhibit 3.3 to Registrant's
Registration Statement on Form S-1, File No. 333-112865, filed on
February 17, 2004) *
3.4 Amendment to Certificate of Incorporation, dated January 14, 2004
(incorporated by reference to Exhibit 3.4 to Registrant's
Registration Statement on Form S-1, File No. 333-112865, filed on
February 17, 2004) *
3.5 Certificate of Designation for Series A Preferred Stock, dated
September 2, 2003 (incorporated by reference to Exhibit 3.5 to
Registrant's Registration Statement on Form S-1, File No.
333-112865, filed on February 17, 2004) *
3.6 Certificate of Elimination of Series A Preferred Stock, dated
February 3, 2004 (incorporated by reference to Exhibit 3.6 to
Registrant's Registration Statement on Form S-1, File No.
333-112865, filed on February 17, 2004) *
3.7 By-Laws (incorporated by reference to Exhibit 3.4 to Registration
Statement on Form S-1, File No. 333-111101, filed on December 11,
2003) *
4.1 Securities Purchase Agreement and Warrant Agreement used in
September 2003 private placement and Form of Warrant Certificate
issued on January 16, 2004 and January 29, 2004 to SF Capital
Partners Ltd. (incorporated by reference to Exhibit 10.25 to
Registrant's Annual Report on Form 10-K, filed on October 29, 2003) *
4.2 Registration Rights Agreement used in September 2003 private
placement with SF Capital Partners Ltd. (incorporated by reference
to Exhibit 10.26 to Registrant's Annual Report on Form 10-K, filed
on October 29, 2003) *
4.3 Form of Securities Purchase Agreement used in May 2004 private
placement with Knoll Capital Fund II, Europa International, Inc. and
Clifford and Phyllis Kalista JTWROS +
4.4 Form of Registration Rights Agreement used in May 2004 private
placement with Knoll Capital Fund II, Europa International, Inc. and
Clifford and Phyllis Kalista JTWROS +
4.5 Form of Warrant Certificate issued on May 11, 2004 to Knoll Capital
Fund II, Europa International, Inc. and Clifford and Phyllis Kalista
JTWROS +
5.1 Opinion of Dorsey & Whitney LLP +
10.1 1993 Stock Option Plan and Form of Option Agreement (incorporated by
reference to Exhibit 10.10 to Registration Statement on Form SB-2,
File No. 33-76950, filed on August 1, 1994) *
II - 7
Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
--- ---------- ---------
10.2 1997 Stock Option Plan (incorporated by reference to Exhibit 10.2 to
Registration Statement on Form S-1, File No. 333-111101, filed on
December 11, 2003) *
10.3 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.3
to Registrant's Registration Statement on Form S-1, File No.
333-112865, filed on February 17, 2004) *
10.4 Form of Subscription Agreement and Warrant Agreement used in Private
Placements completed in February 2000 (incorporated by reference to
Exhibit 10.21 to Registrant's Annual Report on Form 10-K, filed on
October 30, 2000) *
10.5 Form of Subscription Agreement and Warrant Agreement used in the
August and September 2000 Private Placements (incorporated by
reference to Exhibit 10.24 to Registrant's Quarterly Report on Form
10-Q, filed on December 15, 2000) *
10.6 Form of Subscription Agreement and Warrant Agreement used in the
April 2001 Private Placements (incorporated by reference to Exhibit
10.23 to Registration Statement on Form S-1, File No. 333-38136,
filed on July 30, 2001) *
10.7 Form of Convertible Note entered into in April 2001 (incorporated by
reference to Exhibit 10.24 to Registration Statement on Form S-1,
File No. 333-38136, filed on July 30, 2001) *
10.8 Form of Subscription Agreement and Warrant Agreement used in the
July 2001 Private Placements (incorporated by reference to Exhibit
10.25 to Registration Statement on Form S-1, File No. 333-38136,
filed on July 30, 2001) *
10.9 Form of Subscription Agreement and Warrant Agreement used in the
August and October 2001 private placement (incorporated by reference
to Exhibit 10.26 to Registration Statement on Form S-1, File No.
333-38136, filed on December 14, 2001) *
10.10 Form of Subscription Agreement and Warrant Agreement used in the
September 2001, November 2001 and January 2002 private placements
(incorporated by reference to Exhibit 10.27 to Registration
Statement on Form S-1, File No. 333-38136, filed on February 21,
2002) *
10.11 Warrant issued in the February 2002 private placement (incorporated
by reference to Exhibit 10.28 to Registration Statement on Form S-1,
File No. 333-38136, filed on February 21, 2002) *
10.12 Form of Subscription Agreement and Warrant Agreement used in the
March 2002, April 2002 and May 2002 private placements (incorporated
by reference to Exhibit 10.29 to Registration Statement on Form S-1,
File No. 333-89166, filed on May 24, 2002) *
10.13 Form of Subscription Agreement and Warrant Agreement used in the
June 2002 and October 2002 private placements (incorporated by
reference to Exhibit 10.30 to the Post-Effective Amendment to
Registration Statement on Form S-1, File No. 333-38136, filed on
March 3, 2003) *
II - 8
Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
--- ---------- ---------
10.14 Form of Note Payable and Warrant Certificate entered into April,
June, July, September, November and December 2002 (incorporated by
reference to Exhibit 10.31 to the Post-Effective Amendment to
Registration Statement on Form S-1, File No. 333-38136, filed on
March 3, 2003) *
10.15 Form of Note Payable and Warrant Certificate entered into November
2001, January, March and May 2003 (incorporated by reference to
Exhibit 10.23 to Registrant's Annual Report on Form 10-K, filed on
October 29, 2003) *
10.16 Form of Subscription Agreement and Warrant Agreement used in the
February 2003 and April through August 2003 private placements
(incorporated by reference to Exhibit 10.24 to Registrant's Annual
Report on Form 10-K, filed on October 29, 2003) *
10.17 Form of Amended Notes Payable which amends the November 2001, April
2002, June 2002, July 2002, September 2002, November 2002 December
2002, January 2003, March 2003 and May 2003 notes payable
(incorporated by reference to Exhibit 10.27 to Registrant's Annual
Report on Form 10-K, filed on October 29, 2003) *
21.1 Subsidiaries of Registrant (incorporated by reference to Exhibit
21.1 to Registrant's Registration Statement on Form S-1, File No.
333-112865, filed on February 17, 2004) *
23.1 Consent of J.H. Cohn LLP +
23.2 Consent of KPMG LLP +
23.3 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1) +
* Previously filed; incorporated herein by reference
+ Filed herewith
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
II - 9
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 with or furnished to the Securities and
Exchange Commission 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.
(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 - 10
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 18, 2004
By: /s/ Kuslima Shogen
----------------------------------------
Kuslima Shogen, Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the indicated capacities
on May 18, 2004.
/s/ Kuslima Shogen
- ----------------------------------------
Kuslima Shogen, Chief Executive
Officer, Principal Executive Officer and
Chairman of the Board
*
- ----------------------------------------
John P. Brancaccio, C.P.A., Director
*
- ----------------------------------------
Stephen K. Carter, M.D., Director
*
- ----------------------------------------
Donald R. Conklin, Director
*
- ----------------------------------------
James J. Loughlin, Director
/s/ Andrew P. Savadelis
- ----------------------------------------
Andrew P. Savadelis, Director,
Chief Financial Officer and Principal Financial Officer
*
- ----------------------------------------
Paul M. Weiss, Ph.D., Director
* The undersigned by signing her name hereto, does hereby sign this Registration
Statement or amendment thereto on behalf of the above indicated directors and
officers of Alfacell Corporation pursuant to the power of attorney executed on
behalf of each such director.
/s/ Kuslima Shogen
- ----------------------------------------
Kuslima Shogen, Chief Executive Officer
and Chairman of the Board
II - 11
Exhibit Index
4.3 Form of Securities Purchase Agreement used in May 2004 private placement
with Knoll Capital Fund II, Europa International, Inc. and Clifford and
Phyllis Kalista JTWROS
4.4 Form of Registration Rights Agreement used in May 2004 private placement
with Knoll Capital Fund II, Europa International, Inc. and Clifford and
Phyllis Kalista JTWROS
4.5 Form of Warrant Certificate issued on May 11, 2004 to Knoll Capital Fund
II, Europa International, Inc. and Clifford and Phyllis Kalista JTWROS
5.1 Opinion of Dorsey & Whitney LLP
23.1 Consent of J.H. Cohn LLP
23.2 Consent of KPMG LLP
23.3 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)