UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
0-11088
Commission file number
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2369085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Belleville Avenue, Bloomfield, New Jersey
(Address of principal executive offices)
07003
(Zip Code)
Registrant's telephone number, including area code: (973) 748-8082
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definitions of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one): Large Accelerated Filer |_| Accelerated Filer |X|
Non-accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X|
The aggregate market value of the common stock, par value $.001 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on January 31, 2006 was approximately $121,102,000. As of October 10, 2006
there were 44,405,717 shares of common stock, par value $.001 per share,
outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of the Stockholders scheduled to be held on January 25, 2007, to be
filed with the Commission not later than 120 days after the close of the
registrant's fiscal year, have been incorporated by reference, in whole or in
part, into Part III Items 10, 11, 12, 13 and 14 of this Annual Report on Form
10-K.
Table of Contents
PART I Page
----
Item 1. Business 4
Item 1A Risk Factors 18
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 26
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 33
Item 9A. Controls and Procedures 34
Item 9B. Other Information 36
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 36
Item 13. Certain Relationships and Related Transactions 36
Item 14. Principal Accounting Fees and Services 36
PART IV
Item 15. Exhibits and Financial Statement Schedules 36
The following trademarks appear in this Annual Report: ONCONASE(R) is the
registered trademark of Alfacell Corporation, exclusively for anti-cancer agent;
Alimta(R) and Gemzar(R) are registered trademarks of Eli Lilly; Navelbine(R) is
a registered trademark of Glaxo Smith Kline.
3
All information in this Form 10-K is as of October 12, 2006 and we undertake no
obligation to update this information.
We maintain a website at www.alfacell.com to provide information to the general
public and our stockholders on our products, resources and services along with
general information on Alfacell, our management, financial results and press
releases. Copies of our most recent Annual Report on Form 10-K, our Quarterly
Reports on Form 10-Q or our other reports filed with the Securities and Exchange
Commission, or SEC, can be obtained, free of charge as soon as reasonably
practicable after such material is electronically filed with, or furnished to
the SEC, from our Investor Relations Department by calling 973-748-8082, through
an e-mail request from our website at www.alfacell.com or through the SEC's
website by clicking the direct link from our website at www.alfacell.com or
directly from the SEC's website at www.sec.gov. Our website and the information
contained therein or connected thereto are not intended to be incorporated into
this Annual Report on Form 10-K.
Our Board of Directors has adopted a Code of Business Conduct and Ethics that is
applicable to all of our directors, officers and employees. Any material changes
made to our Code of Business Conduct and Ethics or any waivers granted to any of
our directors and executive officers will be publicly disclosed by filing a
current report on Form 8-K within five business days of such material change or
waiver. We make the Code of Business Conduct and Ethics available on our website
at www.alfacell.com. Although our Board of Directors has not established a
nominating committee, our formal nominating procedures will be described in our
definitive proxy statement for the Annual Meeting of Stockholders to be held on
January 25, 2007. In addition, copies of our Code of Business Conduct and Ethics
are available to our shareholders upon request either by contacting our Investor
Relations Department at 973-748-8082 or through an e-mail request from our
website at www.alfacell.com.
Information contained herein 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 forward-looking terms and phrases such as "anticipates," "believes,"
"estimates," "expects," "intends," "may," "seeks," "should," or "will" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Actual future results may vary from expectations set
forth in these forward-looking statements. The matters set forth herein under
the caption "Risk Factors" constitute cautionary statements identifying
important factors with respect to these forward-looking statements, including
certain risks and uncertainties, that could cause actual results to vary
significantly from the future results indicated in these forward-looking
statements. Other factors could also cause actual results to differ
significantly from the future results indicated in these forward-looking
statements.
Part I
Item 1. 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. Our proprietary drug
discovery and development program consists of novel therapeutics which are being
developed from amphibian ribonucleases (RNases). RNases are biologically active
enzymes that split RNA molecules. RNases are enzymes which play important roles
in nature, among which is the development of an organism and in cell 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. ONCONASE(R), the trademark name of our lead investigational
drug candidate, is a novel amphibian ribonuclease, unique among the superfamily
of pancreatic ribonuclease isolated from the eggs of the Rana pipiens (the
Northern Leopard frog). 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
4
cancer cells. Unlike most anti-cancer agents that attack all cells regardless of
phenotype (malignant versus normal) and cause severe toxicities, ONCONASE(R) is
not an indiscriminate cytotoxic drug (cell killing agent). ONCONASE(R) affects
primarily exponentially growing malignant cells, with activity controlled
through unique and specific molecular mechanisms. An extensive compendium of in
vitro (in cells), in vivo (in animals) and clinical data in man shows that
ONCONASE(R) destroys cancer cells.
ONCONASE(R), is currently being evaluated as a treatment for unresectable
(inoperable) malignant mesothelioma, a rare cancer primarily affecting the
pleura (lining of the lungs) usually caused by exposure to asbestos, in an
international, centrally randomized, confirmatory Phase IIIb registration trial.
The first part of the trial which compared ONCONASE(R) alone to doxorubicin
alone, has been completed. The second confirmatory part of the trial is ongoing.
The confirmatory Phase IIIb registration trial is designed to evaluate the
efficacy, safety and tolerability of the combination of ONCONASE(R) and
doxorubicin as compared to doxorubicin alone. The primary endpoint of the trial
is overall survival. The first interim analysis results of the confirmatory
registration trial, based on one third of the required events (deaths) of the
study, have been reported. The overall median survival time (MST) demonstrated a
trend favoring the ONCONASE(R) + doxorubicin treatment group (12 months) over
the doxorubicin group (10 months). A two month improvement in median survival
had previously been observed in the Treatment Target Group ("TTG") (n=104)
analysis from the completed Phase III single agent study that favored patients
treated with ONCONASE(R) alone compared with patients treated with doxorubicin
(11.6 months vs. 9.6 months). The Company's Phase IIIb confirmatory registration
trial was designed based on the conclusions drawn from the TTG analysis but
powered to reach a statistically significant difference in MST between the
ONCONASE(R) + doxorubicin treatment group and the doxorubicin treatment group at
316 events. These results of the first interim analysis of the confirmatory
registration trial were consistent with the results from the first part of the
trial and were the basis for our decision to continue the confirmatory
registration trial.
We have also conducted other randomized and non-randomized trials with
patients with advanced stages of solid tumors in other types of cancers.
In February 2001, we received an Orphan Medicinal Product Designation for
ONCONASE(R) for malignant mesothelioma from the European Agency for the
Evaluation of Medicinal Products (EMEA). Orphan Medicinal Product Designation is
a program designed to provide marketing, 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 five in
10,000 persons in the European Community. Orphan designation in Europe entitles
the Company to ten years of marketing exclusivity, reduced filing fees and
regulatory guidance from the EMEA.
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 March 2005, we received Orphan Drug Designation for malignant
mesothelioma in Australia from the Therapeutics Goods Administration (TGA). This
designation in Australia also entitles the company to five years of marketing
exclusivity, a 100% waiver of filing fees and regulatory guidance from the TGA.
The FDA, EMEA and TGA designations for ONCONASE(R) may serve to expedite
its regulatory review, assuming the clinical trials yield a positive result for
malignant mesothelioma. The efficacy and safety of ONCONASE(R) for malignant
mesothelioma will ultimately be determined by these regulatory agencies based on
the results of our ongoing clinical trial. 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
5
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 industry
partners, academic and research institutions including the National Cancer
Institute (NCI) that are designed to develop new therapeutic applications for
ONCONASE(R). One collaboration has produced RN321, a conjugate of ranpirnase,
with a monoclonal 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 positive results of the initial NCI studies have been independently
confirmed. As a result of these findings and the conclusion of the Cooperative
Research and Development Agreement (CRADA) between the Company and NIH, Alfacell
has entered into a new collaborative agreement with the West German Cancer
Center at the University of Duisburg-Essen for the development, characterization
and large-scale production of a novel fusion protein for non-Hodgkin's lymphoma
(NHL). The fusion protein consists of ONCONASE(R) and a humanized anti-CD22
monoclonal antibody for non-Hodgkin's lymphoma. The new research collaboration
involves using a recombinant anti-CD22 antibody fragment that is genetically
linked to ONCONASE, hereby creating a homogeneous product and second-generation
drug.
This humanized single chain anti-CD22 monoclonal antibody was acquired by
the Company under a commercial evaluation license with the NIH in 2004. Under
the agreement, we received the right to evaluate commercial applications for
this antibody, such as immunotherapeutics derived from the combination of the
antibody with Alfacell's proprietary family of cytotoxic RNases, including
ONCONASE(R).
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. One
of these compounds, AC-03-636 has been determined to be active against yellow
fever, Hepatitis C and Dengue Fever. The same compound has been evaluated at
Johns Hopkins University in a sustained time release formulation for the
treatment of brain tumors (gliomas) and the manuscripts have been submitted for
publication.
In July 2005, we entered into a research collaboration agreement with the
Novartis Institute for Tropical Diseases for the evaluation of AC-03-636 against
Dengue fever. In August 2006, we announced new data highlighting the definitive
antiviral activity of AC 03-636. The in vitro studies were conducted using a
cell-based infection assay based on immunodetection of the Dengue fever antigen.
The researchers found that AC 03-636 displayed meaningful antiviral activity in
both animal and human cell lines, and that its potency was quite considerable
compared to the reference compounds. The objectives of this collaboration have
been successfully completed.
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 primarily through the sale of our equity
securities and convertible debentures in registered offerings and private
placements. Additionally, we have raised capital through other 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
ended July 31, 2006, we received net proceeds of approximately $12.3 million as
a result of private placements of common stock and warrants and exercises of
stock options and warrants. These proceeds will be used for general corporate
purposes and, most importantly, to support our strategic plan, including the
anticipated filing of an NDA of ONCONASE(R) (ranpirnase) for malignant
mesothelioma, assuming satisfactory results from the ongoing clinical trial, the
expansion of the ONCONASE oncology franchise, and the development of other
pipeline products. We have incurred losses since inception and to date we have
not consummated any licensing or marketing agreements for ONCONASE(R) or any of
our early stage drug candidates.
6
Research and Development Programs
Research and development expenses for the fiscal years ended July 31,
2006, 2005, and 2004 were $5,230,000, $5,082,000, and $3,353,000, 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 anti-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 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 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.
7
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.
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, in
Europe since 2000 and recently, in Canada, Australia, New Zealand, Mexico and
Turkey.
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.
Some of our long standing key pre-clinical collaborations include NIH,
NCI, Johns Hopkins University, University of Bath 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 ONCONASE(R) was used as a single agent and in combination with
other agents.
In Vitro Studies
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 and
the results have been published. The combination of ONCONASE(R) and a number of
anti-cancer drugs, resulted in a significant cell kill as compared to each drug
alone with respect to the following:
o ONCONASE(R) + tamoxifen in pancreatic, prostate, and ovarian tumor;
o ONCONASE(R) + cisplatin for non-small cell lung cancer and ovarian
cancer;
o ONCONASE(R) + carboplatin 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) + 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.
8
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 and other academic collaborators and results published:
o vincristine
o doxorubicin
o tamoxifen
o cisplatin
o carboplatin
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.
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.
Research being conducted at Small Animal Imaging and Animal Model Core,
Department of Radiology, University of Pennsylvania, has shown that ONCONASE(R)
exhibits tumoricidal effects on cell cultures and animals for the treatment of
Non-Small Cell Lung Cancer (NSCLC). Animal studies have shown that ONCONASE(R)
alone effectively kills cancer cells with manageable toxicity. ONCONASE(R)
improves radiation response and enhances the efficacy of commonly used
chemotherapeutic agents (cisplatin and carboplatin) in human NSCLC xenographs of
nude mice.
Clinical Trials
Onconase(R) Phase III Randomized Clinical Trials (Malignant Mesothelioma)
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. The second part of
the trial compares the combination of ONCONASE(R) and doxorubicin versus
doxorubicin alone. The trial is an international, centrally randomized,
confirmatory Phase IIIb registration trial. The first part of the trial has been
completed. The second confirmatory part of the trial is ongoing.
9
The confirmatory Phase IIIb registration trial is designed to evaluate the
efficacy, safety and tolerability of the combination of ONCONASE(R) and
doxorubicin as compared to doxorubicin alone. The primary endpoint of the trial
is overall survival. The first interim analysis results of the confirmatory
registration trial, based on one third of the required events (deaths) of the
study, have been reported. The overall median survival time (MST) demonstrated a
trend favoring the ONCONASE(R) + doxorubicin treatment group (12 months) over
the doxorubicin group (10 months). A two month improvement in median survival
had previously been observed in the Treatment Target Group ("TTG") (n=104)
analysis from the completed Phase III single agent study that favored patients
treated with ONCONASE(R) alone compared with patients treated with doxorubicin
(11.6 months vs. 9.6 months). The Company's Phase IIIb confirmatory registration
trial was designed based on the conclusions drawn from the TTG analysis but
powered to reach a statistically significant difference in MST between the
ONCONASE(R) + doxorubicin treatment group and the doxorubicin treatment group at
316 events. These results of the first interim analysis of the confirmatory
registration trial were consistent with the results from the first part of the
trial and were the basis for our decision to continue the confirmatory
registration trial.
Other results of this interim analysis included:
o At one-year, 47% of the ONCONASE + doxorubicin-treated
patients were alive as compared to 36% of the patients treated
with doxorubicin.
o Of the patients evaluable for clinical response, more ONCONASE
+ doxorubicin -treated patients showed evidence of tumor
regression or stabilization of disease (minimum of 3 months)
and there was a seven-month difference in the MST (17 vs. 10
months) for the ONCONASE + doxorubicin group vs. the
doxorubicin group.
o The analysis of safety data revealed that ONCONASE when given
with doxorubicin did not increase the number or severity of
known doxorubicin-associated side effects. The most frequent
side effects reported for both treatment groups included
nausea, fatigue and alopecia. The incidence of these events
was comparable for both treatment groups.
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 seek marketing approval for ONCONASE(R), assuming the
Phase III clinical trial yields favorable results. We have completed the
chemistry, manufacturing and controls (CMC) section of the NDA and will submit
it after completion of a review by external regulatory consultants.
Phase III Single Agent Results(Malignant Mesothelioma)
An interim subset analysis of the results of this Phase III clinical trial
according to the Cancer Adult Leukemia Group B, or CALGB, prognostic groups
revealed a marked excess of poor prognosis patients (groups 5 and 6) in the
ONCONASE(R) arm of the trial (32 patients or 38.1% of the patients treated with
ONCONASE(R)) as compared to the doxorubicin arm of the trial (12 patients or 17%
of the patients treated with doxorubicin). By excluding these patients and the
10 patients whose central pathology review did not confirm a diagnosis of
malignant mesothelioma (N=5) from the 154 intent-to-treat patients, we defined a
target treatment group, or TTG, consisting of 104 patients who met the criteria
for CALGB prognostic groups 1-4. Of these patients, 47 were treated with
ONCONASE(R) and 57 were treated with doxorubicin. The single agent Phase III
results of the TTG 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 in the TTG, 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 evaluable patients (which included a baseline and follow-up
radiological assessment) revealed evidence of objective clinical activity in 17
patients in each treatment arm. Four partial responses and 13 stabilization of
previously progressive disease were reported in the ONCONASE(R) treated patients
and 7 partial responses and 10 stabilization of previously progressive disease
were reported 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)
10
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.
Phase II Single Agent Results (Malignant Mesothelioma)
ONCONASE(R) as a single agent, demonstrated objective clinical activity in
105 patients with unresectable, 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 Cancer and Leukemia Group B (CALGB)
prognostic groups and their utility for evaluating systemic therapies in this
patient population.
Of the 105 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 and patients who failed prior
therapies. The presentation of this data to the FDA resulted in the design of
our Phase III malignant mesothelioma trial.
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 TTG population in the
second part of the ongoing trial.
In March 2005, we received an Orphan Drug Designation for malignant
mesothelioma for ONCONASE(R) in Australia from the Therapeutics Goods
Administration, or TGA. This designation in Australia entitles us to five years
of marketing exclusivity for ONCONASE(R) (for the treatment of malignant
mesothelioma), a 100% waiver of filing fees and regulatory guidance from the
TGA.
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 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 are making use of this designation to
attempt 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.
ONCONASE(R) Clinical Trials (Other Tumor Types)
A Phase II program to evaluate a new dose and schedule of ONCONASE(R) was
initiated in 2005 and is ongoing. The first indication under evaluation is in
patients with refractory non-small cell lung cancer. New Phase II trials are
planned in 2006 in patients with esophageal cancer and in patients with advanced
breast cancer.
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.
11
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, the significant reduction in bone pain in one patient, and the
control of uncontrollable malignant fluid in the lungs of another patient.
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.
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 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 positive
results of the initial NCI studies have been independently confirmed. As a
result of these findings and the conclusion of the Cooperative Research and
Development Agreement (CRADA) between the Company and NIH, Alfacell has entered
into a new collaborative agreement with the West German Cancer Center at the
University of Duisburg-Essen for the development, characterization and
large-scale production of a novel fusion protein for non-Hodgkin's lymphoma
(NHL). The fusion protein consists of ONCONASE(R) and a humanized anti-CD22
monoclonal
12
antibody for non-Hodgkin's lymphoma. The new research collaboration involves
using a recombinant anti-CD22 antibody fragment that is genetically linked to
ONCONASE, hereby creating a homogeneous product and second-generation drug.
This humanized single chain anti-CD22 monoclonal antibody was acquired by
Alfacell under a commercial evaluation license with the NIH in 2004. Under the
agreement, we received the right to evaluate commercial applications for this
antibody, such as immunotherapeutics derived from the combination of the
antibody with Alfacell's proprietary family of cytotoxic RNases, including
ONCONASE(R).
Other conjugates under preclinical evaluation with outside collaborators
include a variety of uniquely designed versions of ONCONASE and amphinases.
These compounds target the EGF receptors and neo-vascularization (tumor blood
vessel formation) which have potential clinical application in a broad spectrum
of solid tumors.
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.
These products are currently undergoing preclinical testing by the
National Institute of Allergy and Infectious Diseases against various RNA
viruses and by outside collaborators. One of these compounds, AC-03-636 has been
determined to be active in yellow fever, Hepatitis C and Dengue fever. The same
compound has been evaluated at Johns Hopkins University in a sustained time
release formulation for the treatment of brain tumors (gliomas) and the
manuscripts have been submitted for publication.
In July 2005, we entered into a research collaboration agreement with the
Novartis Institute for Tropical Diseases for the evaluation of AC-03-636 against
Dengue fever. In August 2006, the Company announced new data highlighting the
definitive antiviral activity of AC 03-636. The in vitro studies were conducted
using a cell-based infection assay based on immunodetection of the Dengue fever
antigen. The researchers found that AC 03-636 displayed meaningful antiviral
activity in both animal and human cell lines, and that its potency was quite
considerable compared to the reference compounds. The objectives of this
collaboration have been successfully completed.
Research Collaborations
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.
The results of the following preclinical research have been presented at a
number of scientific meetings as well as have either been published or
manuscripts submitted for publication.
Evaluation Of ONCONASE(R) As A Radiation Enhancer
The p53 gene is a tumor-suppressor gene which means 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.
13
The University of Pennsylvania Medical Center, Metabolic Magnetic
Resonance Research and Computing Center has evaluated ONCONASE(R) in combination
therapies such as with radiation, cisplatinum and carboplatinum in a series of
animal studies bearing human lung adecarcinoma (a form of NSCLC lung cancer).
They also studied the effects of ONCONASE(R) in the inhibition of sub-lethal
damage repair (SLDR) and potentially lethal damage repair (PLDR).
ONCONASE(R), when combined with radiation therapy, enhanced the
radiation-sensitivity to treatment in NSCLC tumor cells without causing the
common radiation-induced tissue damage to non-tumor cells. ONCONASE(R) inhibited
SLDR and PLDR in these animal models.
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
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 confirmed the earlier NIH findings of ONCONASE(R)
(ranpirnase) anti-HIV activity, and reported new findings of potent inhibition
of the replication of two enteroviruses, the Coxsackie A and ECHO type. These
viruses affect primarily children under 10 years of age and are known to cause
myocarditis, encephalitis and aseptic meningitis.
Commercial Collaborations
We have signed confidentiality agreements and are presently in discussions with
a number of companies regarding the U.S. and/or international marketing rights
for ONCONASE(R) and other related products in our pipeline.
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
14
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 Ben Venue Laboratories Inc. for vial filling and with Apptuit and
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, LLC, Ben Venue Laboratories Inc. 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 expect to enter into development and marketing agreements with third
parties. We have entered into a number of confidentiality agreements and are
currently in various stages of active discussions with several major and
mid-size pharmaceutical and biotechnology companies as potential commercial
partners for our lead product ONCONASE(R) and other related products in our
pipeline.
We anticipate that under such arrangements we would grant certain
exclusive rights to our corporate partners in return for assuming further
research and development cost, upfront licensing 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.
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
in Europe and with TGA regulations in Australia is required to gain marketing
approval. 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.
15
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 sought to protect our technology 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 to certain U.S. patent applications. Generally, we apply for patent
protection in the United States, Europe, Japan, and other foreign countries.
We own the following U.S. patents:
-------------------------------------------------------------------------------------------------------------------
Patent No. Issue Date Subject Matter 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
-------------------------------------------------------------------------------------------------------------------
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) June 2013
-------------------------------------------------------------------------------------------------------------------
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 June 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. Alfacell does not
pay maintenance fees to keep this patent in force.
We own the following foreign patents in Europe and Japan (European patents
are validated in selected European nations):
16
---------------------------------------------------------------------------------------------------------------
Patent No. Subject Matter 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 July 2013
JP 3655628 pharmaceuticals
---------------------------------------------------------------------------------------------------------------
EP 0 837 878 covers a variant of ONCONASE(R) June 2016
JP 3779999
---------------------------------------------------------------------------------------------------------------
**Assumes timely payment of all applicable maintenance fees and annuities;
excludes term extensions that do or may apply.
We also have patent applications pending in the United States, Europe,
Japan, and other foreign countries.
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 not
to have been infringed by products that compete with our products. Patents owned
by others may adversely affect our ability to do business. Furthermore, others
may independently develop products that are similar to our products or that
duplicate our products, and may design around the claims of our patents.
Although we believe that our patents and patent applications are of substantial
value to us, we cannot assure you that such patents and patent applications will
be of commercial benefit to us, will adequately protect us from competing
products or will not be challenged, declared invalid, or found not to have been
infringed by competing products. 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 July 31, 2006, we had fourteen full time employees, of whom seven
were engaged in research and development activities and seven were engaged in
administration and management. We had five employees who
17
held Ph.D. degrees. All of our employees are covered by confidentiality
agreements. We consider relations with our employees to be good. None of our
employees is covered by a collective bargaining agreement.
Environmental Matters
Our operations are subject to comprehensive regulation with respect to
environmental, safety and similar matters by the United States Environmental
Protection Agency and similar state and local agencies. Failure to comply with
applicable laws, regulations and permits can result in injunctive actions,
damages and civil and criminal penalties. If we expand or change our existing
operations or propose any new operations, we may need to obtain additional or
amend existing permits or authorizations. We spend time, effort and funds in
operating our facilities to ensure compliance with environmental and other
regulatory requirements.
Such efforts and expenditures are common throughout the biotechnology
industry and generally should have no material adverse effect on our financial
condition. The principal environmental regulatory requirements and matters known
to us requiring or potentially requiring capital expenditures by us do not
appear likely, individually or in the aggregate, to have a material adverse
effect on our financial condition. We believe that we are in compliance with all
current laws and regulations.
Item 1A. 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 Form 10-K 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.
Risks related to our business.
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 one of the
principal sources of our working capital has been private sales of our common
stock. We incurred net losses of approximately $7,810,000, $6,462,000 and
$5,070,000 for the fiscal years ended July 31, 2006, 2005 and 2004,
respectively. We have continued to incur losses since July 31, 2006. We may
never achieve revenue sufficient for us to attain profitability.
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 Misuse of our products and unfavorable publicity that could result;
and
o The occurrence of manufacturing or distribution disruptions.
18
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.
We may need additional financing to continue operations, which may not be
available on acceptable terms, if it is available at all.
We may need additional financing in order to continue operations,
including completion of our current clinical trials and filing marketing
registrations for ONCONASE(R) with the FDA in the United States, with the EMEA
in Europe and with the TGA in Australia. 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 and approved, we may need additional financing to continue operations if
we are unable to generate sufficient cash flow to support our operations prior
to the time our current cash reserves are depleted. During the fiscal year ended
July 31, 2006, we received approximately $12.3 million in net proceeds as a
result of private placements of common stock and warrants, and exercises of
stock options and warrants. We expect that such net proceeds together with our
cash reserves, will be sufficient to fund our operations through July 31, 2008
based on our expected level of expenditures. However, to assure our ability to
continue our operations beyond this date, we may continue to seek additional
financing through equity or debt financings but we cannot be sure that we will
be able to raise capital on favorable terms or at all. We may also obtain
additional capital through the exercise of outstanding options and warrants,
although we cannot provide any assurance of such exercises or estimate the
amount of capital we will receive, if any. If we are required to raise
additional capital to fund further operations and are unable to do so, our
operations will be severely curtailed and our business and financial condition
will be materially adversely affected.
We cannot predict how long it will take us nor how much it will cost us to
complete part two of our Phase III trial because it is a survival study.
We currently have ongoing a two-part Phase III trial of ONCONASE(R) as a
treatment for malignant mesothelioma. The first part of the clinical trial has
been completed and the second confirmatory part is still ongoing for which we
have exceeded the full enrollment target of 316 patients. The first interim
analysis results based on the 105 events (deaths) showed a two-month survival
advantage of ONCONASE(R) + doxorubicin (12 months) vs. doxorubicin (10 months).
These results were consistent with the results from the first part of the trial
and were the basis for our decision to continue the trial. The primary endpoint
of the Phase III clinical trial is survival, which tracks the length of time
patients enrolled in the study live. According to the protocol, a sufficient
number of patient deaths must occur in order to perform the required statistical
analyses to determine the efficacy of ONCONASE(R) in patients with unresectable
(inoperable) malignant mesothelioma. Since it is impossible to predict with
certainty when these patient deaths in the Phase III trial will occur, we do not
have the capability of reasonably determining when a sufficient number of deaths
will occur, nor when we will be able to file for marketing registrations with
the FDA, EMEA and TGA.
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. Although we believe we could modify some of our
expenditures to reduce our cash outlays in relation to our clinical trials and
other NDA related expenditures, we cannot quantify the amount by which such
expenditures might be modified. Hence, a delay in the commercial sale of
ONCONASE(R) would increase the time frame of our cash expenditure outflows and
may require us to seek additional financing. Such capital financing may not be
available on favorable terms or at all.
19
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. We cannot apply
for FDA, EMEA or TGA approval to market ONCONASE(R) until the clinical trials
and all other registration requirements have been met. Drugs in late stages of
clinical development may fail to show the desired safety and efficacy results
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
company 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, EMEA or TGA approval to
market ONCONASE(R) until pre-clinical and clinical trials have been 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 that the product is safe and effective in
humans. Also if safety concerns develop, the FDA, EMEA and TGA could stop our
trials before completion.
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 you 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 required manufacturing facilities to manufacture our
product. 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 Laboratories, LLC for the
manufacturing of ranpirnase (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 Ben
Venue Corporation for the manufacturing of ONCONASE(R) and with Cardinal Health
and Apptuit for the labeling, storage and shipping of ONCONASE(R) for clinical
trial use. We utilize the services of these third party manufacturers solely on
an as needed basis with terms and prices customary for our industry.
We use FDA GMP licensed manufacturers for ranpirnase and ONCONASE(R). We
have identified several alternative service providers for the manufacturing
services for which we may 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.
20
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 or non US
approval, we expect to rely on established third party strategic partners to
perform these functions. To date, we have not entered into any marketing or
licensing agreements for ONCONASE(R). We cannot assure you we will be able to
establish or maintain 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, on acceptable terms, if at all.
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
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.
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.
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.
21
We do not have employment contracts with Kuslima Shogen or any of our
other management and scientific personnel.
Our proprietary technology and patents may offer only limited protection against
infringement and the development by our competitors of competitive products.
We own two patents jointly with the United States government. These
patents expire in 2016. We also own ten United States patents with expiration
dates ranging from 2006 to 2019, four European patents with expiration dates
ranging from 2009 to 2016 and three Japanese patents with expiration dates
ranging from 2010 to 2016. We also own patent applications that are pending in
the United States, Europe, Japan, and other foreign countries. 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
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 are more
experienced and have greater clinical, marketing and regulatory capabilities and
managerial and financial resources than we do. This may enable them to develop
products to treat the same medical conditions our products are intended to treat
before we are able to complete the development of our competing product.
Our business is very competitive and involves rapid changes in the
technologies involved in developing new drugs. If others experience rapid
technological development, our products may become obsolete before we are able
to recover expenses incurred in developing our products. We will probably face
new competitors as new technologies develop. Our success depends on our ability
to remain competitive in the development of new drugs 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.
22
As of July 31, 2006, we had a material weakness in our internal control over
financial reporting. If we fail to maintain an effective system of internal
control, we may not be able to provide timely and accurate financial statements.
As more fully described in Item 9A, the Company's management assessed the
effectiveness of the Company's internal control over financial reporting as of
July 31, 2006. In making this assessment, it used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control - Integrated Framework. As a result of management's assessment,
management has concluded that, as of July 31, 2006, the Company did not maintain
effective internal control over financial reporting.
The Public Company Accounting Oversight Board has defined a material
weakness as a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Accordingly, a material weakness increases the risk that the
financial information we report contains material errors.
Management, with oversight by our Audit Committee, is in the process of
implementing changes to the Company's internal control systems and procedures
which are described in detail in Item 9A. The steps we are taking to address the
material weakness may not be effective, however. If we are unable to implement
these changes effectively or if other material weaknesses develop and we are
unable to effectively address these matters, there could be a material adverse
effect on our business, financial condition and results of operations.
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 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.
23
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 provides a Medicare prescription drug benefit that began
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 our common stock.
We were relisted on the Nasdaq Capital Market after being delisted in 1999; our
stock is thinly traded and you may not be able to sell our stock when you want
to do so.
From April 1999, when we were delisted from Nasdaq, until September 9,
2004, when we were relisted on the Nasdaq Capital Market, there was no
established trading market for our common stock. During that time, our common
stock was quoted on the OTC Bulletin Board and was thinly traded. There is no
assurance that we will be able to comply with all of the listing requirements
necessary to remain listed on the Nasdaq Capital Market. In addition, our stock
remains thinly traded and you may be unable to sell our common stock during
times when the trading market is 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 $1.25
to a high of $10.07. The market price of our common stock could be impacted by a
variety of factors, including:
o announcements of technological innovations or new commercial
products by us or our competitors,
o disclosure of the results of pre-clinical testing and clinical
trials by us or our competitors,
o disclosure of the results of regulatory proceedings,
o changes in government regulation,
o developments in the patents or other proprietary rights owned or
licensed by us or our competitors,
o public concern as to the safety and efficacy of products developed
by us or others,
o litigation, and
o general market conditions in our industry.
In addition, the stock market continues to experience extreme price and
volume fluctuations. These fluctuations have especially affected the market
price of many biotechnology companies. Such fluctuations have often been
unrelated to the operating performance of these companies. Nonetheless, these
broad market fluctuations may negatively affect the market price of our common
stock.
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 44,289,161 shares of common stock outstanding
24
as of July 31, 2006. The following securities that may be exercised into shares
of our common stock were issued and outstanding as of July 31, 2006:
o Options. Stock options to purchase 3,830,350 shares of our common
stock at a weighted average exercise price of approximately $3.10
per share.
o Warrants. Warrants to purchase 18,119,598 shares of our common stock
at a weighted average exercise price of approximately $1.91 per
share.
The shares of our common stock that may be issued under the options and
warrants 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.
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 our Form 10-K, nor have
we been able to obtain AHC's consent to the use of such report herein.
Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act")
provides that any person acquiring or selling a security in reliance upon
statements set forth in a Form 10-K may assert a claim against every accountant
who has with its consent been named as having prepared or certified any part of
the Form 10-K, or as having prepared or certified any report or valuation that
is used in connection with the Form 10-K, if that part of the Form 10-K at the
time it is filed contains a false or misleading 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 the Form 10-K for the fiscal year ended July
31, 2006 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 18 of the Exchange 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 18 of the Exchange
Act for any purchases of the Company's Common Stock made in reliance upon
statements set forth in the Form 10-K for the fiscal year ended July 31, 2006.
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.
Item 2. PROPERTIES.
We lease a total of approximately 17,000 square feet in an industrial
office building located in Bloomfield, New Jersey 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.
25
Item 3. LEGAL PROCEEDINGS.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the The Nasdaq Capital Market, or Nasdaq,
and has traded under the symbol "ACEL" since September 9, 2004. Prior to
September 9, 2004, our common stock was traded on the OTC Bulletin Board
(OTCBB). As of October 12, 2006, there were approximately 1,010 stockholders of
record of our common stock.
The following table sets forth the range of high and low sale prices of
our common stock for the two fiscal years ended July 31, 2006 and 2005. The
prices were obtained from Nasdaq and OTCBB and are believed to be representative
of inter-dealer quotations, without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.
High Low
---- ---
Year Ended July 31, 2006:
First Quarter $ 2.60 $ 1.54
Second Quarter 4.99 1.25
Third Quarter 4.49 2.95
Fourth Quarter 3.94 1.90
Year Ended July 31, 2005:
First Quarter 7.50 3.06
Second Quarter 5.43 3.33
Third Quarter 3.70 1.50
Fourth Quarter 2.80 1.73
We have not paid dividends on our common stock since inception and we do
not plan to pay dividends in the foreseeable future. Any earnings we may realize
will be retained to finance our growth.
The following table provides additional information on the Company's
equity based compensation plans as of July 31, 2006:
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
------------- ------------------- ------------------- ------------------------
(a) (b) (c)
Equity compensation plans approved by
security holders 3,830,350 $ 3.10 7,673,750
Equity compensation plans not approved
by security holders 12,500 (1) $ 3.10 - 0 -
26
(1) During the fiscal year ended July 31, 2005, we issued 12,500
warrants to a vendor in consideration for services to be rendered.
5,000 of these warrants vested immediately and have an exercise
price of $2.50 per share and 7,500 warrants vested on the 91st day
from the grant date and have an exercise price of $3.50 per share.
These warrants will expire twenty-four months from the date the
registration statement registering the shares underlying warrants is
declared effective or thirty-six months from the date of grant,
whichever comes first.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
We did not repurchase any shares of our common stock during the fiscal
year 2006.
Item 6. SELECTED FINANCIAL DATA.
Set forth below is the selected financial data for our company for the
five fiscal years ended July 31, 2006:
Year Ended July 31,
-------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Investment Income $ 107,386 $ 141,708 $ 42,113 $ 9,877 $ 4,838
Other Income -- 9,836 -- 30,000 --
Net Loss (1) (7,810,175) (6,461,920) (5,070,307) (2,411,532) (2,591,162)
Dividends None None None None None
Total Assets 11,826,428 4,901,624 10,421,063 495,322 228,871
Long-term Debt -- -- -- 242,516 315,929
Total Equity
(Deficiency) 9,233,003 3,221,670 8,881,647 (2,491,681) $(1,885,437)
(1) Included in the net loss of $7,810,175, $6,461,920 and $5,070,307
for fiscal years ended July 31, 2006, 2005 and 2004, respectively,
are tax benefits of $317,382, $287,975 and $221,847, respectively,
related to the sale of certain state tax operating loss
carryforwards.
27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Since our inception, we have devoted the vast 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 from the Food and Drug
Administration, or FDA, 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 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.
We received an Orphan Drug Designation for ONCONASE(R) for malignant
mesothelioma in Australia from the Therapeutics Goods Administration, or TGA.
This designation in Australia entitles us to five years of marketing
exclusivity, a 100% waiver of filing fees and regulatory guidance from the TGA.
Almost all of the $55,267,000 of research and development expenses we have
incurred since our inception has gone toward the development of ONCONASE(R) and
related drug candidates. For the fiscal years 2006, 2005 and 2004 our research
and development expenses were $5,230,000, $5,082,000 and $3,353,000,
respectively, almost all of which were used for the development of ONCONASE(R)
and related drug candidates. ONCONASE(R) is currently in an international,
centrally randomized, confirmatory Phase IIIb registration trial. The first part
of the trial has been completed. The second confirmatory part of the trial is
ongoing. The primary endpoint of the trial is overall survival. The first
interim analysis results based on one third of the required events (deaths) of
the study, which evaluates the efficacy, safety and tolerability of the
combination of ONCONASE + doxorubicin as compared to doxorubicin alone have been
reported. The overall median survival time (MST) demonstrated a trend favoring
the ONCONASE + doxorubicin treatment group (12 months) over the doxorubicin
group (10 months). A two month improvement in median survival had previously
been observed in the Treatment Target Group (n=104) analysis from the completed
Phase III single agent study that favored the ONCONASE over doxorubicin
treatments (11.6 months vs. 9.6 months). The Company's Phase IIIb confirmatory
registration trial was designed based on the conclusions drawn from the TTG
analysis but powered to reach a statistically significant difference in MST
between the ONCONASE + doxorubicin treatment group and the doxorubicin treatment
group at 316 events. The interim data which represented only one third of the
planned number of events was sufficient for us to continue the trial as planned,
but was not sufficient for supporting the filing for marketing approvals at that
time. At this time, we cannot predict with certainty when a sufficient number of
deaths will occur to achieve statistical significance. The timing of when we
will be able to file for marketing registrations in the US, EU and Australia is
data driven. Therefore, we cannot predict with certainty what our total cost
associated with obtaining marketing approvals will be, or when and if such
approvals will be granted, or when actual sales will occur. We have completed
the chemistry, manufacturing and controls (CMC) section of the NDA and will
submit it after completion of a review by external regulatory consultants.
We fund the research and development of our products primarily 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 other 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 ended July 31, 2006, we received net
proceeds of approximately $12.3 million as a result of private placements of
common stock and warrants and from exercises of stock options and warrants.
These proceeds will be used to support our strategic plan, including
28
the anticipated filing of an NDA of ONCONASE(R) for malignant mesothelioma,
assuming satisfactory results from the ongoing clinical trial, the expansion of
the ONCONASE oncology franchise, and the development of other pipeline products.
We have incurred losses since inception and to date we have not consummated any
licensing, or marketing agreements for ONCONASE(R) or any of our early drug
candidates.
Results of Operations
Fiscal Years Ended July 31, 2006, 2005 and 2004
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 2006, 2005 and 2004. Investment income for fiscal 2006
was $107,000 compared to $142,000 for fiscal 2005, a decrease of $35,000 due to
lower balances of cash and cash equivalents during the fiscal year 2006.
Investment income for fiscal 2005 was $142,000 compared to $42,000 for fiscal
2004, an increase of $100,000 due to higher balances of cash and cash
equivalents.
Research and Development
Research and development expense for fiscal 2006 was $5,230,000 compared
to $5,082,000 for fiscal 2005, an increase of $148,000, or 3%. The increase was
primarily due to the compensation expense of approximately $458,000 which is
primarily related to share-based compensation; and non-cash expense related to
stock options issued to consultants of approximately $93,000. The share-based
compensation expense is expected to continue as a result of the adoption of SFAS
123(R), which requires us to charge compensation expense for all employee stock
options. These increases were offset by a decrease in patent expenses of
approximately $170,000; completion of key toxicology requirements and key
requirements for chemistry, manufacturing and controls resulting in a decrease
in expenses of approximately $116,000; a decrease in pre-clinical sponsored
research and development expenses of approximately $82,000; and a reduction in
costs related to clinical trials of approximately $35,000.
Research and development expense for fiscal 2005 was $5,082,000 compared
to $3,353,000 for fiscal 2004, an increase of $1,729,000, or 52%. The increase
was primarily due to expenses in connection with preparing our NDA for
ONCONASE(R), including the completion of key toxicology requirements and key
requirements for chemistry, manufacturing and controls, including the
ONCONASE(R) stability program of approximately $1,040,000. This increase also
resulted from pre-clinical sponsored research and development expenses; the new
Phase II program for non-small cell lung, including consulting fees of
approximately $292,000; expansion of the confirmatory Phase IIIb clinical trial
in countries outside of the European Union, including the retention of another
clinical research organization to assure regulatory compliance in the conduct of
the trial in these countries; grant payments; clinical monitoring and data
management fees related to our pivotal Phase III clinical trial for malignant
mesothelioma of approximately $264,000; increases in patent expenses of
approximately $190,000; personnel costs of approximately $71,000 and
depreciation expense and equipment repairs and maintenance of approximately
$21,000; offset by a decrease in the non-cash expense related to stock options
issued for consulting services of approximately $149,000.
General and Administrative
General and administrative expense for fiscal 2006 was $3,005,000 compared
to $1,771,000 for fiscal 2005, an increase of $1,234,000, or 70%. This increase
was primarily due to an increase in compensation expense of approximately
$710,000 which is primarily related to share-based compensation. The share-based
compensation expense is expected to continue as a result of the adoption of SFAS
123(R). The increase in general and administrative expense also resulted from
legal fees of approximately $287,000; non-cash share-based compensation expense
related to stock options issued to a consultant and board members of
approximately $253,000; and
29
consultant and board of directors fees of approximately $83,000; offset by
decreases in expenses related to investor relations activities of approximately
$45,000; Nasdaq re-listing fees and insurance expense of approximately $32,000
and $22,000, respectively.
General and administrative expense for fiscal 2005 was $1,771,000 compared
to $1,578,000 for fiscal 2004, an increase of $193,000, or 12%. The increase was
due primarily to increases in personnel expenses of approximately $441,000;
professional fees related to board of directors fees and Sarbanes Oxley
compliance fees of approximately $177,000; Nasdaq relisting membership fees of
approximately $70,000; accounting fees of $38,000 and depreciation expense of
$5,000; offset by decreases in non-cash expense related to stock and stock
options issued for consulting services of approximately $367,000; legal expenses
of approximately $141,000 and expenses related to computer repairs and
maintenance of approximately $30,000.
Interest
Interest expense for fiscal 2006 was lower by $48,000 as compared to
fiscal 2005. Interest expense for fiscal 2005 was $48,000 compared to $403,000
in fiscal 2004, a decrease of $355,000 or 88%. These decreases were primarily
due to the maturity and conversion of convertible notes payable into common
stock. The interest expense was based on the value of the warrants using the
Black-Scholes option 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 a portion of its state tax loss carryforwards and
state research and development credits in order to obtain tax benefits. For the
state fiscal year 2006 (July 1, 2005 to June 30, 2006), we had approximately
$1,903,000 of total available tax benefits that were saleable; of which New
Jersey permitted us to sell approximately $356,000. In December 2005, we
received approximately $317,000 from the sale of the $356,000 of tax benefits,
which we recognized as tax benefits for the fiscal year ended July 31, 2006.
For the state fiscal year 2005 (July 1, 2004 to June 30, 2005), we had
approximately $1,335,000 total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately $339,000. In December 2004,
we received approximately $288,000 from the sale of the $339,000 of tax
benefits, which we recognized as tax benefits for the fiscal year ended July 31,
2005.
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 saleable; of
which New Jersey permitted us to sell approximately $261,000. In December 2003,
we received approximately $222,000 from the sale of the $261,000 of tax
benefits, which we recognized as tax benefits for the fiscal year ended July 31,
2004.
If still available under New Jersey law, we will attempt to sell the
remaining $1,547,000 of our tax benefits between July 1, 2006 and June 30, 2007
(state fiscal year 2007). This amount, which is a carryover of our remaining tax
benefits from state fiscal year 2006 and earlier, may increase if we incur
additional tax losses during state fiscal year 2007. We cannot estimate,
however, what percentage of our saleable 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 fiscal 2006 was $7,810,000 as compared to $6,462,000 in fiscal 2005
and $5,070,000 in fiscal 2004. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 2006 amounted to $83,317,000. 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.
30
Liquidity and Capital Resources
We have reported net losses of approximately $7,810,000, $6,462,000,
and $5,070,000 for the fiscal years ended July 31, 2006, 2005 and 2004,
respectively. The net losses from date of inception, August 24, 1981, to July
31, 2006, amounts to $83,317,000.
We have financed our operations since inception primarily through the
sale of our equity securities and convertible debentures in registered offerings
and private placements. Additionally, we have raised capital through other debt
financings, the sale of our tax benefits and research products, and interest
income and financing received from our Chief Executive Officer. During the
fiscal year 2006, we had a net increase in cash and cash equivalents of
$7,056,000, which resulted from net cash provided by financing activities of
$12,332,000, primarily from private placement of common stock and warrants of
$10,984,000 and from exercises of stock options and warrants of $1,348,000;
offset by net cash used in operating activities of $5,257,000, principally for
research and development activities; and net cash used in investing activities
due to the purchase of property and equipment of $19,000. Total cash resources
as of July 31, 2006 were $11,519,000 compared to $4,463,000 at July 31, 2005.
Our current liabilities as of July 31, 2006 were $2,593,000 compared to
$1,680,000 at July 31, 2005, an increase of $913,000. The increase was primarily
due an increase in accounts payable of approximately $890,000 mainly due to the
manufacturing of ONCONASE(R) of approximately $362,000, pre-clinical studies and
clinical trial of approximately $351,000 and $92,000, respectively; and legal
fees of approximately $85,000 and a decrease in accruals of approximately
$23,000.
The following transactions occurred after July 31, 2006:
o In August 2006, we issued an aggregate of 28,000 shares of common
stock upon the exercise of stock options by an officer and an
employee at an exercise price of $0.85 per share. We realized gross
proceeds of $23,800 from these exercises.
Until and unless our operations generate significant revenues, we
expect to continue to fund operations from equity financing. There can be no
assurance that we will be able to raise the capital we need on terms which are
acceptable, if at all. During the fiscal year ended July 31, 2006, we received
net proceeds of approximately $12.3 million as a result of private placements of
common stock and warrants and from exercises of stock options and warrants. We
expect that such net proceeds together with our cash reserves, will be
sufficient to fund our operations through July 31, 2008 based on our expected
level of expenditures. These proceeds will be used to support our strategic
plan, including the anticipated filing of an NDA of ONCONASE(R) for malignant
mesothelioma, assuming satisfactory results from the ongoing clinical trial, the
expansion of the ONCONASE oncology franchise, and the development of other
pipeline products. We may also obtain additional capital through the exercise of
outstanding options and warrants and the sale of our tax benefits, although we
cannot provide any assurance of such exercises or the amount of capital we will
receive, if any.
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 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.
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 marketing 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, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.
31
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. The
accounting policies set forth below have been considered critical because
changes to certain judgments, estimates and assumptions could significantly
affect our financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures during the reporting
period. Since some of those estimates are subjective and complex, actual results
could differ from those estimates.
Research and Development
Research and development costs are expensed as incurred.
Accounting For Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"), which amends SFAS 123 and was effective
beginning with our fiscal year ended July 31, 2006. The new standard requires
all share-based payments, including stock option grants to employees, to be
recognized as an operating expense in the statement of operations. The cost is
recognized over the requisite service period based on fair values measured on
the date of grant. We adopted SFAS 123(R) effective August 1, 2005 using the
modified prospective method and, accordingly, prior period amounts have not been
restated. Under the modified prospective method, the fair value of all new stock
options issued after July 31, 2005 and the unamortized fair value of unvested
outstanding stock options at August 1, 2005 are recognized as expense as
services are rendered. As of July 31, 2006, there was approximately $2,318,000
of total unrecognized compensation cost related to unvested options granted that
is expected to be recognized over a weighted average period of 1.16 years.
Prior to the adoption of SFAS 123(R), Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"),
provided for the use of a fair value-based method of accounting for employee
stock compensation. However, SFAS 123 also allowed 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 required charges to compensation expense for the excess, if
any, of the fair value of the underlying stock at the date a stock option was
granted (or at an appropriate subsequent measurement date) over the amount the
employee had to pay to acquire the stock, if such amounts differed materially
from the historical amounts. Prior to our adoption of SFAS 123(R), employee
stock options were accounted for using the intrinsic value method under APB 25.
Pursuant to SFAS 123, shares, warrants or options issued to non-employees
for services are accounted for based on their fair market value determined using
the Black-Scholes option pricing model and in accordance with SFAS 123 and
Emerging Issues Task Force (EITF) Issue No. 96-18, "Accounting for Equity
Instruments that are Issued To Other Than Employees for Acquiring of in
Conjunction with Selling Goods or Services."
Accounting Changes and Error Corrections
The FASB has issued FASB Statement No. 154, Accounting Changes and Error
Corrections ("FAS 154"). The new standard replaces APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements. Among other changes, FAS 154 provides for
correction of errors in previously issued financial statements should be termed
"restatement". The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made for fiscal years beginning after June 1, 2005. We
adopted FAS 154 on August 1, 2005.
Income Taxes
We account for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". 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. 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.
32
Recently Issued Accounting Pronouncements.
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109." FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in a company's financial statements in accordance with
Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement of a tax position taken or expected to be taken in a
company's tax return. The provisions of FIN 48 will be effective for our fiscal
year ended July 31, 2007. We are currently evaluating the impact of the adoption
of FIN 48 will have, if any, on our financial statements.
Contractual Obligations and Commercial Commitments
Our major outstanding contractual obligations relate to our equipment
operating lease. During the fiscal year ended July 31, 2006, we entered into an
equipment operating lease, which obligates us to pay approximately $630 per
month for forty-eight months. Below is a table that presents our contractual
obligations and commercial commitments as of July 31, 2006:
Payments Due by Fiscal Year
----------------------------------------------------------
2012 and
Total 2007 2008 2009 2010 2011 Thereafter
----- ---- ---- ---- ---- ---- -----------
Operating lease $ 61,392 $16,743 $16,743 $16,743 $11,163 $ -- $ --
--------- ------- ------- ------- ------- ----- --------
Total contractual cash
obligations $ 61,392 $16,743 $16,743 $16,743 $11,163 $ -- $ --
========= ======= ======= ======= ======= ===== ========
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted as a separate section of this
report commencing on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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, 2006 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 18 of the Exchange Act on the basis of the use
of such report in any Form 10-K 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 Form 10-K,
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 18 of the Exchange 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.
33
Item 9A. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's "disclosure controls
and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934 ("The Exchange Act") as of the end of the period covered by this report.
Based on this evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures were not
effective as of July 31, 2006 due to the material weakness in internal control
over financial reporting described below.
(b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. The Company's
internal control over financial reporting includes those policies and procedures
that:
o pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and
o provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of July 31, 2006. In making this assessment, management
used the criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management's assessment included an evaluation of the design of our internal
control over financial reporting and testing of the operational effectiveness of
our internal control over financial reporting. Management reviewed the results
of its assessment with the Audit Committee of our Board of Directors, and based
on this assessment has determined that as of July 31, 2006, there was a material
weakness in its internal control due to lack of personnel with financial
reporting expertise sufficient to properly record and report non-routine and
complex transactions and accounting pronouncements. Such matters were related to
the recording of share-based compensation costs pursuant to Statement of
Financial Accounting Standards No. 123(R), "Share-Based Payment" and the
timeliness of consideration of the guidance of Emerging Issues Task Force Issue
No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, A Company's Own Stock". Such weakness in controls
resulted in an understatement of the amount recorded as compensation expense
during the first three interim periods of the fiscal year ended July 31, 2006,
offset by a charge during the final fiscal quarter of 2006. Management believes
the amount applicable to the non-cash compensation expense in each of the
affected interim periods is not material and that restatement of its interim
quarterly reports is not required.
Steps and adjustments that the Company will be taking to remediate this weakness
after discovery include:
(i) Forming an accounting oversight committee ("Oversight Committee"),
comprising members of our senior management and a third party GAAP advisor,
charged with the task of discussing and reviewing all significant transactions
that have financial recognition, either to be recorded or disclosed.
Additionally, the Oversight Committee will consult with our outside corporate
counsel;
34
(ii) Retaining a third party GAAP advisor to assist as well as advise the CFO
and Audit Committee on a timely basis, including quarter end and year end review
of proposed accounting for and disclosure of significant financial transactions
and changes in GAAP; and
(iii) Enhancing staff training, including relevant continuing education seminars
for financial staff on newly issued technical accounting pronouncements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alfacell Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Alfacell
Corporation (A Development Stage Company) maintained effective internal control
over financial reporting as of July 31, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Alfacell Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. This material weakness was considered in determining
the nature, timing, and extent of audit tests applied in our audit of the 2006
financial statements, and this report does not affect our report dated October
10, 2006, on those financial statements.
The Company lacks personnel with financial reporting expertise sufficient to
properly record and report non-routine and complex transactions and accounting
pronouncements.
35
In our opinion, management's assessment that Alfacell Corporation did not
maintain effective internal control over financial reporting as of July 31,
2006, is fairly stated, in all material respects, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, because
of the effects of the material weakness described above in the achievement of
the objective of the control criteria, the Company has not maintained effective
internal control over financial reporting as of July 31, 2006, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Trading Commission (COSO).
We do not express an opinion or any other form of assurance on management's
statements relating to new controls being implemented and tested.
/s/ J.H. Cohn LLP
Roseland, New Jersey
October 10, 2006
(c) CHANGES IN INTERNAL CONTROLS
There has been no change in the Company's internal control over financial
reporting during the quarter ended July 31, 2006 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting subsequent to the date of the evaluation referred to
above.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of July 31, 2006 has been audited by J.H. Cohn LLP,
an independent registered public accounting firm, as stated in their report
which is included herein.
Item 9B. OTHER INFORMATION.
On October 5, 2006, Kuslima Shogen, the Company's Chief Executive Officer, was
granted a ten-year option pursuant to the Company's 2004 Stock Incentive Plan to
purchase 120,000 shares of the Company's common stock with an exercise price of
$1.29 per share, the closing price of the Company's common stock on the date of
grant. The stock option will vest as to 24,000 shares on April 5, 2007, and then
in four equal annual installments of 24,000 shares on each anniversary of the
date of grant beginning on October 5, 2007.
On October 5, 2006, Robert Love, the Company's Chief Financial Officer, was
granted a ten-year option pursuant to the Company's 2004 Stock Incentive Plan to
purchase 50,000 shares of the Company's common stock with an exercise price of
$1.29 per share, the closing price of the Company's common stock on the date of
grant. The stock option will vest as to 10,000 shares on April 5, 2007, and then
in four equal annual installments of 10,000 shares on each anniversary of the
date of grant beginning on October 5, 2007.
Part III
The information required by Item 10 - Directors and Executive Officers of the
Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters; Item
13 - Certain Relationships and Related Transactions and Item 14 - Principal
Accounting Fees and Services is incorporated into Part III of this Annual Report
on Form 10-K by reference to the Proxy Statement for our Annual Meeting of
Stockholders scheduled to be held on January 25, 2007.
Part IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) and (2) The response to these portions of Item 15 is submitted
as a separate section of this report commencing on page
F-1.
36
(a)(3) Exhibits (numbered in accordance with Item 601 of Regulation
S-K).
Filed Herewith
Exhibit or Incorporated
No. Item Title by Reference
--- ---------- ---------------
3.1 Certificate of Incorporation, dated June 12, 1981 (incorporated by reference to
Exhibit 3.1 to the Company'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 the Company'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 the Company'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 the Company'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 the Company'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 the Company'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) *
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) *
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 the
Company'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 the
Company'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
the Company'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) *
37
Filed Herewith
Exhibit or Incorporated
No. Item Title by Reference
--- ---------- ---------------
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) *
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 the Company'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 the Company'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
The Company's Annual Report on Form 10-K, filed on October 29, 2003) *
10.18 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 the Company's Annual Report on Form 10-K, filed on October 29,
2003) *
38
Filed Herewith
Exhibit or Incorporated
No. Item Title by Reference
--- ---------- ---------------
10.19 Registration Rights Agreement used in September 2003 private placement with SF
Capital Partners Ltd. (incorporated by reference to Exhibit 10.26 to the
Company's Annual Report on Form 10-K, filed on October 29, 2003) *
10.20 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 (incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-1, File No. 333-112865, filed on May 18, 2004) *
10.21 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 (incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-1, File No. 333-112865, filed on May 18, 2004) *
10.22 Form of Warrant Certificate issued on May 11, 2004 to Knoll Capital Fund II,
Europa International, Inc. and Clifford and Phyllis Kalista JTWROS (incorporated
by reference to Exhibit 4.5 to Registration Statement on Form S-1, File No.
333-112865, filed on May 18, 2004) *
10.23 Form of Stock Option Agreement issued to the Company's Board of Directors under
the Company's 1997 Stock Option Plan (incorporated by reference to Exhibit 10.23
to the Company's quarterly report on Form 10-Q filed on June 9, 2005) *
10.24 Form of Stock Option Agreement issued to the Company's Executive Officers under
the Company's 1997 Stock Option Plan (incorporated by reference to Exhibit 10.24
to the Company's quarterly report on Form 10-Q filed on June 9, 2005) *
10.25 Separation Agreement and General Release with Andrew Savadelis dated May 26, 2005
(incorporated by reference to Exhibit 10.25 to the Company's Annual Report on *
Form 10-K, filed on October 15, 2005)
10.26 Securities Purchase Agreement used in May 2005 private placement with Jeffrey +
D'Onofrio dated May 1, 2006
10.27 Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K, filed on July 19, 2006) *
10.28 Registration Rights Agreement dated July 17, 2006 (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K, filed on July 19, 2006) *
10.29 Agreement to Amend Knoll Warrant dated July 17, 2006 (incorporated by reference
to Exhibit 4.3 to the Company's Current Report on Form 8-K, filed on July 19, *
2006)
10.30 Form of Amended Knoll Warrant (incorporated by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K, filed on July 19, 2006) *
10.31 Agreement to Amend SF Capital Warrant dated July 17, 2006 (incorporated by
reference to Exhibit 4.5 to the Company's Current Report on Form 8-K, filed on *
July 19, 2006)
10.32 Form of Amended Warrant for SF Capital Partners, Ltd. (incorporated by reference
to Exhibit 4.6 to the Company's Current Report on Form 8-K, filed on *
39
Filed Herewith
Exhibit or Incorporated
No. Item Title by Reference
--- ---------- ---------------
July 19, 2006)
10.33 Securities Purchase Agreement dated July 17, 2006 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on July 19, 2006) *
21.1 Subsidiaries of Registrant +
23.1 Consent of J.H. Cohn LLP +
23.2 Consent of KPMG LLP +
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 +
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 +
32.1 Certification of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 +
32.2 Certification of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 +
* Previously filed; incorporated herein by reference
+ Filed herewith
40
Signature
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: October 16, 2006 By: /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: October 16, 2006 /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief Executive Officer
and Chairman of the Board (Principal
Executive Officer)
Dated: October 16, 2006 /s/ ROBERT D. LOVE
Robert D. Love, Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Dated: October 16, 2006 /s/ JOHN P. BRANCACCIO
John P. Brancaccio, Director
Dated: October 16, 2006 /s/ STEPHEN K. CARTER
Stephen K. Carter, M.D., Director
Dated: October 16, 2006 /s/ DONALD R. CONKLIN
Donald R. Conklin, Director
Dated: October 16, 2006 /s/ JAMES J. LOUGHLIN
James J. Loughlin, Director
Dated: October 16, 2006 /s/ DAVID SIDRANSKY
David Sidransky, M.D., Director
Dated: October 16, 2006 /s/ PAUL M. WEISS
Paul M. Weiss, Ph.D., Director
41
Alfacell Corporation
Index to Financial Statements
Page
----
Audited Financial Statements:
Report of Independent Registered Public Accounting Firm: J.H. Cohn LLP..............F-2
Report of Independent Registered Public Accounting Firm: KPMG LLP...................F-3
Independent Auditors' Report of Armus, Harrison & Co.................................F-4
Balance Sheets - July 31, 2006 and 2005..............................................F-6
Statements of Operations - Years ended July 31, 2006, 2005,
and 2004 and the Period from August 24, 1981
(Date of Inception) to July 31, 2006.............................................F-7
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2006.............................................F-8
Statements of Cash Flows - Years ended July 31, 2006, 2005,
and 2004 and Period from August 24, 1981
(Date of Inception) to July 31, 2006............................................F-14
Notes to Financial Statements - Years ended July 31, 2006,
2005 and 2004 and the Period from August 24, 1981
(Date of Inception) to July 31, 2006............................................F-17
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Alfacell Corporation
We have audited the accompanying balance sheets of ALFACELL CORPORATION (A
Development Stage Company) as of July 31, 2006 and 2005, and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
each of the years in the three-year period ended July 31, 2006 and for the
period from August 24, 1981 (date of inception) to July 31, 2006. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2006 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, 2006 and 2005, and its
results of operations and cash flows for each of the years in the three-year
period ended July 31, 2006 and for the period from August 24, 1981 to July 31,
2006, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, the Company changed the
manner in which it accounts for share-based compensation in fiscal year 2006.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Alfacell
Corporation's internal control over financial reporting as of July 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated October 10, 2006, expressed an adverse opinion thereon.
/s/ J.H. Cohn LLP
Roseland, New Jersey
October 10, 2006
F-2
Report Of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Alfacell Corporation:
We have audited the statements of operations, stockholders' equity (deficiency),
and cash flows for the period from August 24, 1981 (date of inception) to July
31, 2002 (not presented herein) of Alfacell Corporation (a development stage
company). 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 audit. The financial statements of Alfacell Corporation
for the period from August 24, 1981 to July 31, 1992 were audited by other
auditors who have ceased operations and 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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, based on our audit 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 who have ceased operations, the
financial statements referred to above present fairly, in all material respects,
the results of operations and cash flows for the period from August 24, 1981 to
July 31, 2002 (not presented herein) of Alfacell Corporation in conformity with
U.S. generally accepted accounting principles.
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-3
On December 1, 1993, certain shareholders of Armus Harrison & Co. ("AHC")
terminated their association with AHC (the "AHC termination"), and AHC ceased
performing accounting and auditing services, except for limited accounting
services to be performed on behalf of the Company. In June 1996, AHC dissolved
and ceased all operations. The report of AHC with respect to the financial
statements of the Company from inception to July 31, 1992 is included herein,
although AHC has not consented to the use of such report herein and will not be
available to perform any subsequent review procedures with respect to such
report. Accordingly, investors will be barred from asserting claims against AHC
under Section 11 of the Securities Act of 1933, as amended (the "Securities
Act") on the basis of the use of such report in any registration statement of
the Company into which such report is incorporated by reference. In addition, in
the event any persons seek to assert a claim against AHC for false or misleading
financial statements and disclosures in documents previously filed by the
Company, such claim will be adversely affected and possibly barred. Furthermore,
as a result of the lack of a consent from AHC to the use of its audit report
herein, or, to its incorporation by reference into a registration statement or
other filings, 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.
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.
F-4
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 or 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)
Balance Sheets
July 31, 2006 and 2005
2006 2005
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,518,540 $ 4,462,951
Other assets 67,090 196,936
------------ ------------
Total current assets 11,585,630 4,659,887
Property and equipment, net of accumulated depreciation and
amortization of $1,090,715 in 2006 and $1,061,012 in 2005 69,928 80,395
Loan receivable, related party 170,870 161,342
------------ ------------
Total assets $ 11,826,428 $ 4,901,624
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,286,170 $ 396,263
Accrued expenses 1,307,255 1,283,691
------------ ------------
Total liabilities 2,593,425 1,679,954
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 2006 and 2005 -- --
Common stock $.001 par value. Authorized 100,000,000
shares at July 31, 2006 and 2005; issued and outstanding
44,289,161 shares and 36,534,235 shares at July 31, 2006
and 2005, respectively 44,289 36,534
Capital in excess of par value 92,505,325 78,691,572
Deficit accumulated during development stage (83,316,611) (75,506,436)
------------ ------------
Total stockholders' equity 9,233,003 3,221,670
------------ ------------
Total liabilities and stockholders' equity $ 11,826,428 $ 4,901,624
============ ============
See accompanying notes to financial statements.
F-6
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 2006, 2005 and 2004
and the Period from August 24, 1981
(Date of Inception) to July 31, 2006
August 24, 1981
(date of
inception)
2006 2005 2004 to July 31, 2006
------------ ------------ ------------ ----------------
Revenues:
Sales $ -- $ -- $ -- $ 553,489
Investment income 107,386 141,708 42,113 1,678,207
Other income -- 9,836 -- 99,939
------------ ------------ ------------ ----------------
107,386 151,544 42,113 2,331,635
------------ ------------ ------------ ----------------
Cost and expenses:
Cost of sales -- -- -- 336,495
Research and development 5,229,996 5,082,339 3,352,977 55,267,247
General and administrative 3,004,835 1,771,379 1,578,357 28,642,423
Interest:
Related parties -- -- -- 1,147,547
Others 112 47,721 402,933 2,874,076
------------ ------------ ------------ ----------------
8,234,943 6,901,439 5,334,267 88,267,788
------------ ------------ ------------ ----------------
Loss before state tax benefit (8,127,557) (6,749,895) (5,292,154) (85,936,153)
State tax benefit 317,382 287,975 221,847 2,619,542
------------ ------------ ------------ ----------------
Net loss $ (7,810,175) $ (6,461,920) $ (5,070,307) $ (83,316,611)
============ ============ ============ ================
Loss per basic and diluted common share $ (0.21) $ (0.18) $ (0.17)
============ ============ ============
Weighted average number of shares
outstanding 37,308,000 35,379,000 29,438,000
============ ============ ============
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, 2006
Common Stock
---------------------
Deficit
Accumulated
Capital In Common During
Number of Excess of par Stock to be Development
Shares Amount Value Issued Stage
---------- ------- ------------- ----------- -----------
Issuance of shares to officers and stockholders
for equipment, research and development, and
expense reimbursement 712,500 $ 713 $ 212,987 -- $ --
Issuance of shares for organizational legal
service 50,000 50 4,950 -- --
Sale of shares for cash, net 82,143 82 108,418 -- --
Adjustment for 3 for 2 stock split declared
September 8, 1982 422,321 422 (422) -- --
Net loss -- -- -- -- (121,486)
---------- ------- ------------- --------- -----------
Balance at July 31, 1982 1,266,964 1,267 325,933 -- (121,486)
Issuance of shares for equipment 15,000 15 13,985 -- --
Sale of shares to private investors 44,196 44 41,206 -- --
Sale of shares in public offering, net 660,000 660 1,307,786 -- --
Issuance of shares under stock grant program 20,000 20 109,980 -- --
Exercise of warrants, net 1,165 1 3,494 -- --
Net loss -- -- -- -- (558,694)
---------- ------- ------------- --------- -----------
Balance at July 31, 1983 2,007,325 2,007 1,802,384 -- (680,180)
Exercise of warrants, net 287,566 287 933,696 -- --
Issuance of shares under stock grant program 19,750 20 101,199 -- --
Issuance of shares under stock bonus plan for
directors and consultants 130,250 131 385,786 -- --
Net loss -- -- -- -- (1,421,083)
---------- ------- ------------- --------- -----------
Balance at July 31, 1984 2,444,891 2,445 3,223,065 -- (2,101,263)
Issuance of shares under stock grant program 48,332 48 478,057 -- --
Issuance of shares under stock bonus plan for
directors and consultants 99,163 99 879,379 -- --
Shares canceled (42,500) (42) (105,783) -- --
Exercise of warrants, net 334,957 335 1,971,012 --
Net loss -- -- -- -- (2,958,846)
---------- ------- ------------- --------- -----------
Balance at July 31, 1985 2,884,843 2,885 6,445,730 -- (5,060,109)
Issuance of shares under stock grant program 11,250 12 107,020 -- --
Issuance of shares under stock bonus plan for
directors and consultants 15,394 15 215,385 -- --
Exercise of warrants, net 21,565 21 80,977 -- --
Net loss -- -- -- -- (2,138,605)
---------- ------- ------------- --------- -----------
Balance at July 31, 1986 (carried forward) 2,933,052 2,933 6,849,112 -- (7,198,714)
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- -------------
Issuance of shares to officers and stockholders
for equipment, research and development, and
expense reimbursement $ -- $ -- $ 213,700
Issuance of shares for organizational legal
service -- -- 5,000
Sale of shares for cash, net -- -- 108,500
Adjustment for 3 for 2 stock split declared
September 8, 1982 -- -- --
Net loss -- -- (121,486)
------------ ----------- -------------
Balance at July 31, 1982 -- -- 205,714
Issuance of shares for equipment -- -- 14,000
Sale of shares to private investors -- -- 41,250
Sale of shares in public offering, net -- -- 1,308,446
Issuance of shares under stock grant program -- -- 110,000
Exercise of warrants, net -- -- 3,495
Net loss -- -- (558,694)
------------ ----------- -------------
Balance at July 31, 1983 -- -- 1,124,211
Exercise of warrants, net -- -- 933,983
Issuance of shares under stock grant program -- -- 101,219
Issuance of shares under stock bonus plan for
directors and consultants -- -- 385,917
Net loss -- -- (1,421,083)
------------ ----------- -------------
Balance at July 31, 1984 -- -- 1,124,247
Issuance of shares under stock grant program -- -- 478,105
Issuance of shares under stock bonus plan for
directors and consultants -- -- 879,478
Shares canceled -- -- (105,825)
Exercise of warrants, net -- -- 1,971,347
Net loss -- -- (2,958,846)
------------ ----------- -------------
Balance at July 31, 1985 -- -- 1,388,506
Issuance of shares under stock grant program -- -- 107,032
Issuance of shares under stock bonus plan for
directors and consultants -- -- 215,400
Exercise of warrants, net -- -- 80,998
Net loss -- -- (2,138,605)
------------ ----------- -------------
Balance at July 31, 1986 (carried forward) -- -- (346,669)
F-8
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
-------------------
Deficit
Accumulated
Capital In Common During
Number of Excess of par Stock to be Development
Shares Amount Value Issued Stage
---------- ------- ------------- ----------- ------------
Balance at July 31, 1986 (brought forward) 2,933,052 $ 2,933 $ 6,849,112 -- $ (7,198,714)
Exercise of warrants,net 14,745 15 147,435 -- --
Issuance of shares under stock bonus plan for
directors and consultants 5,000 5 74,995 -- --
Issuance of shares for services 250,000 250 499,750 -- --
Sale of shares to private investors, net 5,000 5 24,995 -- --
Net loss -- -- -- -- (2,604,619)
---------- ------- ------------- --------- ------------
Balance at July 31, 1987 3,207,797 3,208 7,596,287 -- (9,803,333)
Issuance of shares for legal and consulting
services 206,429 207 724,280 -- --
Issuance of shares under employment incentive
program 700,000 700 2,449,300 -- --
Issuance of shares under stock grant program 19,000 19 66,481 -- --
Exercise of options, net 170,000 170 509,830 -- --
Issuance of shares for litigation settlement 12,500 12 31,125 -- --
Exercise of warrants,net 63,925 64 451,341 -- --
Sale of shares to private investors 61,073 61 178,072 -- --
Amortization of deferred compensation,
restricted stock -- -- -- -- --
Net loss -- -- -- -- (3,272,773)
---------- ------- ------------- --------- ------------
Balance at July 31, 1988 4,440,724 4,441 12,006,716 -- (13,076,106)
Sale of shares for litigation settlement 135,000 135 1,074,703 -- --
Conversion of debentures, net 133,333 133 399,867 -- --
Sale of shares to private investors 105,840 106 419,894 -- --
Exercise of options, net 1,000 1 3,499 -- --
Issuance of shares under employment agreement 750,000 750 3,749,250 -- --
Issuance of shares under the 1989 Stock Plan 30,000 30 149,970 -- --
Amortization of deferred compensation,
restricted stock -- -- -- -- --
Net loss -- -- -- -- (2,952,869)
---------- ------- ------------- --------- ------------
Balance at July 31, 1989 5,595,897 5,596 17,803,899 -- (16,028,975)
Issuance of shares for legal and consulting
services 52,463 52 258,725 -- --
Issuance of shares under the 1989 Stock Plan 56,000 56 335,944 -- --
Sale of shares for litigation settlement 50,000 50 351,067 -- --
Exercise of options at, net 105,989 106 345,856 -- --
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- -------------
Balance at July 31, 1986 (brought forward) $ -- $ -- $ (346,669)
Exercise of warrants,net -- -- 147,450
Issuance of shares under stock bonus plan for
directors and consultants -- -- 75,000
Issuance of shares for services -- -- 500,000
Sale of shares to private investors, net -- -- 25,000
Net loss -- -- (2,604,619)
---------- ---------------- -------------
Balance at July 31, 1987 -- -- (2,203,838)
Issuance of shares for legal and consulting
services -- -- 724,487
Issuance of shares under employment incentive
program -- (2,450,000) --
Issuance of shares under stock grant program -- -- 66,500
Exercise of options, net -- -- 510,000
Issuance of shares for litigation settlement -- -- 31,137
Exercise of warrants,net -- -- 451,405
Sale of shares to private investors -- -- 178,133
Amortization of deferred compensation,
restricted stock -- 449,167 449,167
Net loss -- -- (3,272,773)
---------- ---------------- -------------
Balance at July 31, 1988 -- (2,000,833) (3,065,782)
Sale of shares for litigation settlement -- -- 1,074,838
Conversion of debentures, net -- -- 400,000
Sale of shares to private investors -- -- 420,000
Exercise of options, net -- -- 3,500
Issuance of shares under employment agreement -- (3,750,000) --
Issuance of shares under the 1989 Stock Plan -- (150,000) --
Amortization of deferred compensation,
restricted stock -- 1,050,756 1,050,756
Net loss -- -- (2,952,869)
---------- ---------------- -------------
Balance at July 31, 1989 -- (4,850,077) (3,069,557)
Issuance of shares for legal and consulting
services -- -- 258,777
Issuance of shares under the 1989 Stock Plan -- (336,000) --
Sale of shares for litigation settlement -- -- 351,117
Exercise of options at, net -- -- 345,962
F-9
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------
Deficit
Accumulated
Capital In Common During
Number of Excess of par Stock to be Development
Shares Amount Value Issued Stage
---------- ------- ------------- ----------- ------------
Sale of shares to private investors 89,480 $ 90 $ 354,990 -- $ --
Issuance of shares under employment agreement 750,000 750 3,749,250 -- --
Conversion of debentures, net 100,000 100 499,900 -- --
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, net 16,720 16 108,664 -- --
Issuance of shares for legal consulting
services 87,000 87 358,627 -- --
Issuance of shares under the 1989 Stock Plan 119,000 119 475,881 -- --
Amortization of deferred compensation,
restricted stock -- -- -- -- --
Net loss -- -- -- -- (5,202,302)
---------- ------- ------------- --------- ------------
Balance at July 31, 1991 7,022,549 7,022 24,642,803 -- (26,091,393)
Exercise of options at, net 1,000 1 3,499 -- --
Sale of shares to private investors 70,731 71 219,829 -- --
Conversion of debentures, net 94,000 94 469,906 -- --
Issuance of shares for services 45,734 46 156,944 -- --
Issuance of shares under the 1989 Stock Plan 104,000 104 285,896 -- --
Amortization of deferred compensation,
restricted stock -- -- -- -- --
Net loss -- -- -- -- (4,772,826)
---------- ------- ------------- --------- ------------
Balance at July 31, 1992 7,338,014 7,338 25,778,877 -- (30,864,219)
Sale of shares to private investors 352,667 353 735,147 -- --
Issuance of shares for legal services 49,600 50 132,180 -- --
Issuance of shares for services 5,000 5 9,995 -- --
Issuance of shares under the 1989 Stock Plan 117,000 117 233,883 -- --
Amortization of deferred compensation,
restricted stock -- -- -- -- --
Net loss -- -- -- -- (2,357,350)
---------- ------- ------------- --------- ------------
Balance at July 31, 1993 7,862,281 7,863 26,890,082 -- (33,221,569)
Conversion of debentures, net 425,400 425 1,701,575 -- --
Sale of shares to private investors, net 743,000 743 1,710,048 -- --
Conversion of short-term borrowings 72,800 73 181,927 -- --
Issuance of shares for services 16,200 16 43,334 -- --
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- -------------
Sale of shares to private investors $ -- $ -- $ 355,080
Issuance of shares under employment agreement -- (3,750,000) --
Conversion of debentures, net -- -- 500,000
Amortization of deferred compensation,
restricted stock -- 3,015,561 3,015,561
Net loss -- -- (4,860,116)
------------ ---------------- -------------
Balance at July 31, 1990 -- (5,920,516) (3,103,176)
Exercise of options, net -- -- 108,680
Issuance of shares for legal consulting
services -- -- 358,714
Issuance of shares under the 1989 Stock Plan -- (476,000) --
Amortization of deferred compensation,
restricted stock -- 2,891,561 2,891,561
Net loss -- -- (5,202,302)
------------ ---------------- -------------
Balance at July 31, 1991 -- (3,504,955) (4,946,523)
Exercise of options at, net -- -- 3,500
Sale of shares to private investors -- -- 219,900
Conversion of debentures, net -- -- 470,000
Issuance of shares for services -- -- 156,990
Issuance of shares under the 1989 Stock Plan -- (286,000) --
Amortization of deferred compensation,
restricted stock -- 3,046,726 3,046,726
Net loss -- -- (4,772,826)
------------ ---------------- -------------
Balance at July 31, 1992 -- (744,229) (5,822,233)
Sale of shares to private investors -- -- 735,500
Issuance of shares for legal services -- -- 132,230
Issuance of shares for services -- (10,000) --
Issuance of shares under the 1989 Stock Plan -- (234,000) --
Amortization of deferred compensation,
restricted stock -- 664,729 664,729
Net loss -- -- (2,357,350)
------------ ---------------- -------------
Balance at July 31, 1993 -- (323,500) (6,647,124)
Conversion of debentures, net -- -- 1,702,000
Sale of shares to private investors, net -- -- 1,710,791
Conversion of short-term borrowings -- -- 182,000
Issuance of shares for services -- -- 43,350
F-10
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------
Deficit
Accumulated
Capital In Common During
Number of Excess of par Stock to be Development
Shares Amount Value Issued Stage
---------- ------- ------------- ----------- ------------
Issuance of shares under the 1989 Stock Plan,
for services 5,000 $ 5 $ 14,995 -- $ --
Issuance of options to related parties upon
conversion of accrued interest, payroll and
expenses -- -- 3,194,969 -- --
Repurchase of stock options from related party -- -- (198,417) -- --
Issuance of options upon conversion of accrued
interest -- -- 142,441 -- --
Common stock to be issued -- -- -- 50,000 --
Amortization of deferred compensation,
restricted stock -- -- -- -- --
Net loss -- -- -- -- (2,234,428)
---------- ------- ------------- ----------- ------------
Balance at July 31, 1994 9,124,681 9,125 33,680,954 50,000 (35,455,997)
Sale of shares to private investors, net 961,000 961 2,023,241 (50,000) --
Conversion of short-term borrowings 17,600 17 43,983 -- --
Issuance of shares for services 30,906 31 77,234 -- --
Exercise of options, net 185,000 185 437,015 -- --
Common stock to be issued -- -- -- 339,008 --
Common stock to be issued, for services -- -- -- 4,800 --
Amortization of deferred compensation,
restricted stock -- -- -- -- --
Net loss -- -- -- -- (1,993,123)
---------- ------- ------------- ----------- ------------
Balance at July 31, 1995 10,319,187 10,319 36,262,427 343,808 (37,449,120)
Sale of shares to private investors, net 2,953,327 2,953 8,969,655 (339,008) --
Issuance of shares for services 19,995 20 70,858 (4,800) --
Exercise of options, net 566,700 567 1,657,633 -- --
Sale of warrants -- -- 12,084 -- --
Issuance of options/warrants for services -- -- 50,872 -- --
Common stock to be issued -- -- -- 258,335 --
Subscription receivable -- -- -- -- --
Net loss -- -- -- -- (2,942,152)
---------- ------- ------------- ----------- ------------
Balance at July 31, 1996 13,859,209 13,859 47,023,529 258,335 (40,391,272)
Sale of shares to private investors, net 112,000 112 503,888 -- --
Issuance of options for services -- -- 76,504 -- --
Exercise of options, net 729,134 729 2,620,359 (258,335) --
Exercise of warrants, net 147,450 148 737,102 -- --
Net loss -- -- -- -- (5,018,867)
---------- ------- ------------- ----------- ------------
Balance at July 31, 1997 (carried forward) 14,847,793 14,848 50,961,382 -- (45,410,139)
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------ ---------------- -------------
Issuance of shares under the 1989 Stock Plan,
for services $ -- $ -- $ 15,000
Issuance of options to related parties upon
conversion of accrued interest, payroll and
expenses -- -- 3,194,969
Repurchase of stock options from related party -- -- (198,417)
Issuance of options upon conversion of accrued
interest -- -- 142,441
Common stock to be issued -- -- 50,000
Amortization of deferred compensation,
restricted stock -- 265,000 265,000
Net loss -- -- (2,234,428)
------------ ------------ -------------
Balance at July 31, 1994 -- (58,500) (1,774,418)
Sale of shares to private investors, net -- -- 1,974,202
Conversion of short-term borrowings -- -- 44,000
Issuance of shares for services -- -- 77,265
Exercise of options, net -- -- 437,200
Common stock to be issued -- -- 339,008
Common stock to be issued, for services -- -- 4,800
Amortization of deferred compensation,
restricted stock -- 58,500 58,500
Net loss -- -- (1,993,123)
------------ ------------ -------------
Balance at July 31, 1995 -- -- (832,566)
Sale of shares to private investors, net -- -- 8,633,600
Issuance of shares for services -- -- 66,078
Exercise of options, net -- -- 1,658,200
Sale of warrants -- -- 12,084
Issuance of options/warrants for services -- -- 50,872
Common stock to be issued -- -- 258,335
Subscription receivable (254,185) -- (254,185)
Net loss -- -- (2,942,152)
------------ ------------ -------------
Balance at July 31, 1996 (254,185) -- 6,650,266
Sale of shares to private investors, net -- -- 504,000
Issuance of options for services -- -- 76,504
Exercise of options, net 254,185 -- 2,616,938
Exercise of warrants, net -- -- 737,250
Net loss -- -- (5,018,867)
------------ ------------ -------------
Balance at July 31, 1997 (carried forward) -- -- 5,566,091
F-11
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------
Deficit
Accumulated
Capital In Common During
Number of Excess of par Stock to be Development
Shares Amount Value Issued Stage
---------- ------- ------------- ----------- ------------
Balance at July 31, 1997 (brought forward) 14,847,793 $14,848 $ 50,961,382 -- $(45,410,139)
Sale of shares to private investors, net 2,337,150 2,337 4,199,877 -- --
Issuance of options for services -- -- 199,954 -- --
Exercise of warrants, net 4,950 5 11,080 -- --
Issuance of shares for services, net 50,000 50 99,950 -- --
Net loss -- -- -- -- (6,387,506)
---------- ------- ------------- ----------- ------------
Balance at July 31, 1998 17,239,893 17,240 55,472,243 -- (51,797,645)
Issuance of options for services -- -- 205,593 -- --
Issuance of shares for services, net 46,701 46 16,359 -- --
Net loss -- -- -- -- (3,156,636)
---------- ------- ------------- ----------- ------------
Balance at July 31, 1999 17,286,594 17,286 55,694,195 -- (54,954,281)
Sale of shares to private investors, net 875,000 875 547,417 -- --
Exercise of options, net 95,000 95 45,755 -- --
Issuance of shares for services, net 174,965 175 92,009 -- --
Vesting of options previously issued for
services -- -- 146,912 -- --
Net loss -- -- -- -- (1,722,298)
---------- ------- ------------- ----------- ------------
Balance at July 31, 2000 18,431,559 18,431 56,526,288 -- (56,676,579)
Sale of shares to private investors, net 863,331 863 955,561 -- --
Exercise of options, net 165,555 166 83,565 -- --
Issuance of shares for services, net 11,800 12 10,018 -- --
Exercise of convertible debentures, net 330,000 330 296,670 -- --
Issuance of warrants with convertible debt -- -- 178,807 -- --
Issuance of options for services -- -- 160,426 -- --
Net loss -- -- -- -- (2,294,936)
---------- ------- ------------- ----------- ------------
Balance at July 31, 2001 19,802,245 19,802 58,211,335 -- (58,971,515)
Sale of shares to private investors, net 2,622,122 2,623 1,047,925 -- --
Exercise of stock options and warrants 186,000 186 92,814 -- --
Issuance of shares for services, net 78,340 78 64,048 -- --
Exercise of convertible debentures, net 72,214 72 64,921 -- --
Vesting of options previously issued for
services -- -- 173,436 -- --
Net loss -- -- -- -- (2,591,162)
---------- ------- ------------- ----------- ------------
Balance at July 31, 2002 (carried forward) 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 (brought forward) $ -- $ -- $ 5,566,091
Sale of shares to private investors, net -- -- 4,202,214
Issuance of options for services -- -- 199,954
Exercise of warrants, net -- -- 11,085
Issuance of shares for services, net -- -- 100,000
Net loss -- -- (6,387,506)
------------ ---------- -------------
Balance at July 31, 1998 -- -- 3,691,838
Issuance of options for services -- -- 205,593
Issuance of shares for services, net -- -- 16,405
Net loss -- -- (3,156,636)
------------ ---------- -------------
Balance at July 31, 1999 -- -- 757,200
Sale of shares to private investors, net -- -- 548,292
Exercise of options, net -- -- 45,850
Issuance of shares for services, net -- -- 92,184
Vesting of options previously issued for
services -- -- 146,912
Net loss -- -- (1,722,298)
------------ ---------- -------------
Balance at July 31, 2000 -- -- (131,860)
Sale of shares to private investors, net -- -- 956,424
Exercise of options, net -- -- 83,731
Issuance of shares for services, net -- -- 10,030
Exercise of convertible debentures, net -- -- 297,000
Issuance of warrants with convertible debt -- -- 178,807
Issuance of options for services -- -- 160,426
Net loss -- -- (2,294,936)
------------ ---------- -------------
Balance at July 31, 2001 -- -- (740,378)
Sale of shares to private investors, net -- -- 1,050,548
Exercise of stock options and warrants -- -- 93,000
Issuance of shares for services, net -- -- 64,126
Exercise of convertible debentures, net -- -- 64,993
Vesting of options previously issued for
services -- -- 173,436
Net loss -- -- (2,591,162)
------------ ---------- -------------
Balance at July 31, 2002 (carried forward) -- -- (1,885,437)
F-12
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------
Deficit
Accumulated
Capital In Common During
Number of Excess of par Stock to be Development
Shares Amount Value Issued Stage
---------- ------- ------------- ----------- ------------
Balance at July 31, 2002 (brought forward) 22,760,921 $22,761 $ 59,654,479 -- $(61,562,677)
Sale of shares to private investors, net 1,315,000 1,315 652,312 -- --
Exercise of stock options and warrants 764,000 764 376,896 -- --
Issuance of shares for payment of accounts
payable 186,208 186 94,037 -- --
Issuance of options for services rendered -- -- 75,521 -- --
Vesting of options previously issued for
services -- -- 10,038 -- --
Issuance of warrants in connection with
debt issuances -- -- 594,219 -- --
Net loss -- -- -- -- (2,411,532)
---------- ------- ------------- ------- ------------
Balance at July 31, 2003 25,026,129 25,026 61,457,502 -- (63,974,209)
Sale of shares to private investors, net 3,035,200 3,036 10,732,942 -- --
Exercise of stock options and warrants 3,100,160 3,100 4,155,397 -- --
Issuance of shares for payment of accounts
payable 14,703 15 52,161 -- --
Issuance of shares for conversion of
subordinated debentures 3,042,817 3,043 924,829 -- --
Issuance of shares for services rendered 128,876 128 288,372 -- --
Issuance of options for services rendered -- -- 280,612 -- --
Net loss -- -- -- -- (5,070,307)
---------- ------- ------------- ------- ------------
Balance at July 31, 2004 34,347,885 34,348 77,891,815 -- (69,044,516)
Exercise of stock options and warrants, net 438,372 438 306,717 -- --
Issuance of shares and warrants for conversion
of subordinated debentures 1,744,978 1,745 462,754 -- --
Issuance of shares for services rendered 3,000 3 13,497 -- --
Issuance of options and warrants for
services rendered -- -- 16,789 -- --
Net loss -- -- -- -- (6,461,920)
---------- ------- ------------- ------- ------------
Balance at July 31, 2005 36,534,235 36,534 78,691,572 -- (75,506,436)
Sale of shares to private investors, net 6,632,099 6,632 10,977,288 -- --
Exercise of stock options and warrants, net 1,122,827 1,123 1,347,201 -- --
Issuance of stock options and warrants for
services rendered -- -- 1,489,264 -- --
Net loss -- -- -- -- (7,810,175)
---------- ------- ------------- ------- ------------
Balance at July 31, 2006 44,289,161 $44,289 $ 92,505,325 -- $(83,316,611)
========== ======= ============= ======= ============
Total
Deferred Stockholders'
Subscription compensation, Equity
Receivable restricted stock (Deficiency)
------------- ----------------- -------------
Balance at July 31, 2002 (brought forward) $ -- $ -- $ (1,885,437)
Sale of shares to private investors, net -- -- 653,627
Exercise of stock options and warrants -- -- 377,660
Issuance of shares for payment of accounts
payable -- -- 94,223
Issuance of options for services rendered -- -- 75,521
Vesting of options previously issued for
services -- -- 10,038
Issuance of warrants in connection with
debt issuances -- -- 594,219
Net loss -- -- (2,411,532)
------------- ----------- -------------
Balance at July 31, 2003 -- -- (2,491,681)
Sale of shares to private investors, net -- -- 10,735,978
Exercise of stock options and warrants -- -- 4,158,497
Issuance of shares for payment of accounts
payable -- -- 52,176
Issuance of shares for conversion of
subordinated debentures -- -- 927,872
Issuance of shares for services rendered -- -- 288,500
Issuance of options for services rendered -- -- 280,612
Net loss -- -- (5,070,307)
------------- ----------- -------------
Balance at July 31, 2004 -- -- 8,881,647
Exercise of stock options and warrants, net -- -- 307,155
Issuance of shares and warrants for conversion
of subordinated debentures -- -- 464,499
Issuance of shares for services rendered -- -- 13,500
Issuance of options and warrants for
services rendered -- -- 16,789
Net loss -- -- (6,461,920)
------------- ----------- -------------
Balance at July 31, 2005 -- -- 3,221,670
Sale of shares to private investors, net -- -- 10,983,920
Exercise of stock options and warrants, net -- -- 1,348,324
Issuance of stock options and warrants for
services rendered -- -- 1,489,264
Net loss -- -- (7,810,175)
------------- ----------- -------------
Balance at July 31, 2006 $ -- $ -- $ 9,233,003
============= =========== =============
See accompanying notes to financial statements.
F-13
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 2006, 2005 and 2004
and the Period from August 24, 1981
(Date of Inception) to July 31, 2006
August 24, 1981
(date of inception)
to
July 31,
2006 2005 2004 2006
----------- ----------- ----------- -------------------
Cash flows from operating activities:
Net loss $(7,810,175) $(6,461,920) $(5,070,307) $ (83,316,611)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on sale of marketable equity securities -- -- -- (25,963)
Depreciation and amortization 29,703 28,917 9,549 1,619,977
Loss on disposal of property and equipment -- -- -- 18,926
Issuance of common stock, stock options
and warrants for services rendered 1,489,264 30,289 569,112 8,206,277
Amortization of debt discount -- 34,120 316,688 594,219
Amortization of deferred compensation -- -- -- 11,442,000
Changes in assets and liabilities:
(Increase) decrease in other current assets 129,846 (132,165) (54,668) (126,957)
Increase in loans receivable, related party (9,528) (9,527) (9,528) (74,819)
Increase in loans and interest payable,
related party -- -- -- 744,539
Increase (decrease) in accounts payable 889,907 (145,337) (105,653) 1,792,805
Increase in accrued payroll and
expenses, related parties -- -- -- 2,348,145
Increase (decrease) in accrued expenses 23,564 722,985 (669,901) 2,026,139
----------- ----------- ----------- -------------------
Net cash used in operating activities (5,257,419) (5,932,638) (5,014,708) (54,751,323)
----------- ----------- ----------- -------------------
Cash flows from investing activities:
Purchase of marketable equity securities -- -- -- (290,420)
Purchase of short-term investments -- -- -- (1,993,644)
Proceeds from sale of marketable
equity securities -- -- -- 316,383
Proceeds from sale of short-term investments -- -- -- 1,993,644
Purchase of property and equipment (19,236) (52,529) (53,537) (1,532,138)
Patent costs -- -- -- (97,841)
----------- ----------- ----------- -------------------
Net cash used in investing activities (19,236) (52,529) (53,537) (1,604,016)
----------- ----------- ----------- -------------------
F-14
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24, 1981
(date of inception)
to
July 31,
2006 2005 2004 2006
----------- ----------- ----------- -------------------
Cash flows from financing activities:
Proceeds from short-term borrowings $ -- $ -- $ -- $ 874,500
Payment of short-term borrowings -- -- -- (653,500)
Increase in loans payable, related party, net -- -- -- 2,628,868
Proceeds from bank debt and other long-term
debt, net of deferred debt costs -- -- -- 3,667,460
Reduction of bank debt and long-term debt -- (6,731) (8,673) (2,966,568)
Proceeds from issuance of common stock, net 10,983,920 -- 10,735,978 51,734,236
Proceeds from exercise of stock options
and warrants, net 1,348,324 307,155 4,158,497 11,874,890
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 12,332,244 300,424 14,885,802 67,873,879
----------- ----------- ----------- -------------------
Net increase (decrease) in cash and cash
equivalents 7,055,589 (5,684,743) 9,817,557 11,518,540
Cash and cash equivalents at beginning of period 4,462,951 10,147,694 330,137 --
----------- ----------- ----------- -------------------
Cash and cash equivalents at end of period $11,518,540 $ 4,462,951 $10,147,694 $ 11,518,540
=========== =========== =========== ===================
Supplemental disclosure of cash flow
information - interest paid $ 112 $ 305 $ 6,375 $ 1,714,130
=========== =========== =========== ===================
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
=========== =========== =========== ===================
F-15
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24, 1981
(date of inception)
to
July 31,
2006 2005 2004 2006
----------- ----------- ----------- -------------------
Conversions of accounts payable to common stock $ -- $ -- $ 52,176 $ 506,725
=========== =========== =========== ===================
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 and warrants upon the
conversion of convertible subordinated
debentures and accrued interest, other $ -- $ 464,499 $ 927,872 $ 1,584,364
=========== =========== =========== ===================
Issuance of common stock for services rendered $ -- $ -- $ -- $ 2,460
=========== =========== =========== ===================
Issuance of warrants with notes payable $ -- $ -- $ -- $ 594,219
=========== =========== =========== ===================
See accompanying notes to financial statements.
F-16
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Years ended July 31, 2006, 2005 and 2004
and the Period From August 24, 1981
(Date of Inception) to July 31, 2006
(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 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.
Cash equivalents are in excess of the federally insured amount.
Research and Development
Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
For all financial instruments, carrying value approximates fair value due
to the short maturity of those instruments.
F-17
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
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 has net losses in
all periods and the assumed exercise of stock options and warrants prior
to July 31, 2006 would be anti-dilutive. The number of outstanding options
and warrants that could dilute earnings per share in future periods was
21,949,948, 16,242,519 and 14,329,413 at July 31, 2006, 2005 and 2004,
respectively.
Long-Lived Assets
The Company reviews long-lived assets for impairment annually or 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.
Stock Option Plans
Statement 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 allowed 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 required charges to compensation expense for the excess, if
any, of the fair value of the underlying stock at the date a stock option
was granted (or at an appropriate subsequent measurement date) over the
amount the employee had to pay to acquire the stock, if such amounts
differed materially from the historical amounts. Prior to August 1, 2005,
the Company had elected to continue to account for employee stock options
using the intrinsic value method under APB 25. As the exercise price of
all options granted under the stock option plans was equal to the market
value of the underlying common stock on the grant date, no stock-based
employee compensation cost had been recognized in the statement of
operations for the years ended July 31, 2005 and 2004.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R) (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which amends
SFAS 123. The new standard requires all share-based payments, including
stock option grants to employees, to be recognized as an operating expense
in the statement of operations. The cost is recognized over the requisite
service period based on fair values measured on the date of grant. The
Company adopted SFAS 123(R) effective August 1, 2005 using the modified
prospective method and, accordingly, prior period amounts have not been
restated. Under the modified prospective method, the fair value of all new
stock options issued after July 31, 2005 and the unamortized fair value of
unvested outstanding stock options at August 1, 2005 are recognized as
expense as services are rendered. The Company recorded approximately
$1,318,000 or $.04 per basic and diluted common share of stock-based
compensation expense for employees under SFAS 123R for the fiscal year
ended July 31, 2006. Had the Company accounted for its stock-based awards
under the fair value method for the fiscal years ended July 31, 2005 and
2004 the pro forma impact to its financial statements would have been as
follows:
F-18
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
1) Summary of Significant Accounting Policies, (Continued)
Net loss: 2005 2004
---- ----
As reported $(6,461,920) $(5,070,307)
Total stock-based employee compensation expense
determined under a fair value based method for all
awards, net of related tax effects (3,278,082) (1,489,721)
----------- -----------
Pro forma $(9,740,002) $(6,560,028)
============ ============
Basic and diluted loss per common share:
As reported $ (0.18) $ (0.17)
Pro forma (0.28) (0.22)
For options granted to employees during the fiscal years ended 2006, 2005
and 2004, the per option weighted-average fair value at the grant date was
$1.27, $3.87 and $4.36, respectively, and the per option weighted average
exercise price was $1.69, $4.40 and $5.26, respectively. The fair value of
the stock options at the grant date was estimated using the Black-Scholes
options pricing model based on the weighted-average assumptions as noted
in the following table. The risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve
in effect at the time of grant. The expected stock price volatility is
based on historical volatility of the Company's stock price. The expected
term until exercise is derived using the "simplified" method as allowed
under the provisions of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 107 and represents the period of time that options
granted are expected to be outstanding. As of July 31, 2006, there was
approximately $2,318,000 of total unrecognized compensation cost related
to unvested options granted that is expected to be recognized over a
weighted average period of 1.16 years.
2006 2005 2004
---- ---- ----
Expected dividend yield 0% 0% 0%
Risk-free interest rate 4.4% 4.25% 4.00%
Expected stock price volatility 95.6% 95.2% 78.0%
Expected term until exercise (years) 5.33 9.56 6.86
Shares, warrants or options issued to non-employees for services are
accounted for through charges to expense over the service period based on
their fair market value determined using the Black-Scholes option pricing
model in accordance with SFAS 123R and Emerging Issues Task Force ("EITF")
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring or In Conjunction with Selling Goods or
Services."
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
non-detachable conversion rights that are in-the-money at the commitment
date pursuant to the consensuses of 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.
F-19
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
Accounting Changes and Error Corrections
The FASB has issued FASB Statement No. 154, Accounting Changes and Error
Corrections ("FAS 154"). The new standard replaces APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes
in Interim Financial Statements. Among other changes, FAS 154 provides for
correction of errors in previously issued financial statements should be
termed "restatement". The new standard is effective for accounting changes
and correction of errors made in fiscal years beginning after December 15,
2005. Early adoption of this standard is permitted for accounting changes
and correction of errors made for fiscal years beginning after June 1,
2005. The Company adopted FAS 154 on August 1, 2005.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under this method, deferred tax assets and liabilities are
determined based on temporary differences 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. 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.
(2) Liquidity
The Company has reported net losses of approximately $7,810,000,
$6,462,000, and $5,070,000 for the fiscal years ended July 31, 2006, 2005
and 2004, respectively. The loss from date of inception, August 24, 1981
to July 31, 2006, amounts to $83,317,000.
The Company's long-term 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 revenues
from its technology and its drug candidates via out-licensing agreements
with other companies. Such additional funds may not become available as
the Company may need them or be available on acceptable terms. Until and
unless the Company's operations generate significant revenues, the Company
expects to continue to fund operations from equity financing. There can be
no assurance that the Company will be able to raise the capital it needs
on terms which are acceptable, if at all. During the fiscal year ended
July 31, 2006, the Company received net proceeds of approximately $12.3
million as a result of private placements of common stock and warrants and
from exercises of stock options and warrants. The Company expects that
such net proceeds together with its cash reserves, will be sufficient to
fund its operations through July 31, 2008 based on its expected level of
expenditures. The Company may also obtain additional capital through the
exercise of outstanding options and warrants and the sale of its tax
benefits, although it cannot provide any assurance of such exercises or
sale or the amount of capital it will receive, if any.
(3) Property and Equipment
Property and equipment, at cost, consists of the following at July 31:
2006 2005
---- ----
Laboratory equipment $ 774,757 $ 769,760
Office equipment 288,053 273,814
Leasehold improvements 97,833 97,833
--------- ---------
Total 1,160,643 1,141,407
Less accumulated depreciation and amortization 1,090,715 1,061,012
--------- ---------
Property and equipment, net $ 69,928 $ 80,395
========= =========
(4) Long-term Debt
During the fiscal year ended July 31, 2004, the principal and accrued
interest on 8% convertible notes payable (see Note 7) in an aggregate
amount of $927,872 were converted resulting in the issuance of 3,042,817
shares of common stock and 3,733,839 five year warrants with exercise
prices ranging from $1.00 to $1.10 per share.
F-20
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(4) Long-term Debt, (Continued)
During the fiscal year ended July 31, 2005, the principal and accrued
interest on 8% convertible notes payable (see Note 7) in an aggregate
amount of $464,499 were converted resulting in the issuance of 1,744,978
shares of common stock and 2,044,978 five year warrants with an exercise
price of $1.00 per share.
(5) Related Party Transactions
Amounts due from the Company's CEO totaling $170,870 and $161,342 at July
31, 2006 and 2005, 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. In each of the fiscal years ended July 31,
2006, 2005 and 2004, the Company earned 8% interest in the amount of
approximately $9,500 on the unpaid principal balance.
(6) Leases
The Company leases its facility on a month-to-month basis and its office
equipment for five years pursuant to a lease which expires in 2010. Rent
expense charged to operations was $148,000, $139,000 and $136,000 in each
of fiscal years ended July 31, 2006, 2005 and 2004, respectively.
(7) Stockholders' Equity
On September 1, 1981, the Company issued 712,500 shares of common stock
(1,068,750 shares adjusted for the stock split on September 8, 1982) to
officers and stockholders in exchange for equipment, research and
development services, stock registration costs, reimbursement of expenses
and other miscellaneous services. The common stock issued for services was
recorded at the estimated fair value of services rendered based upon the
Board of Directors' determination and ratification of the value of
services. Equipment received in exchange for common stock was recorded at
the transferor's cost. Common stock issued for reimbursement of expenses
was recorded based upon expenses incurred. All values assigned for
expenses and services rendered were 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 were restated in accordance with the
stock split.
On September 8, 1982, the Company issued 15,000 shares of common stock to
an officer and stockholder in exchange for equipment. The equipment
received in exchange for the common stock was recorded at the transferor's
cost.
On November 1, 1982 and January 3, 1983, the Company sold 28,125 and
16,071 shares of common stock, respectively, to private investors at $.93
per share, resulting in net proceeds to the Company of approximately
$41,250.
On January 17, 1983, the Company sold 660,000 shares of its common stock
and 330,000 common stock purchase warrants in a public offering at a price
of $2.50 per share, resulting in net proceeds to the Company of
approximately $1,308,446. The warrants were to expire 12 months after
issuance; however, the Company extended the expiration date to July 16,
1984. During the fiscal years ended July 31, 1983 and 1984, the net
proceeds to the Company from the exercise of the warrants amounted to
$934,000. Each common stock purchase warrant was not detachable from its
common stock or exercisable until six months after the issuance date of
January 17, 1983. Each warrant entitled the holder to purchase one share
of common stock at an exercise price of $3.00 after six months and prior
to nine months after issuance. The exercise price increased to $3.50 after
nine months and prior to 12 months after issuance.
F-21
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
In connection with the public offering, the Company sold 60,000 five-year
purchase warrants to the underwriters at a price of $.001 per warrant.
Each warrant entitled the holder to purchase one share of common stock at
an exercise price of $3.00. Pursuant to the antidilution provisions of the
warrants, the underwriters received warrants to purchase 67,415 shares at
an exercise price of $2.67 per share. By July 31, 1986, all such warrants
were exercised and the Company received proceeds of approximately
$180,000.
On February 22, 1984, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of two series of new
warrants, each to purchase an aggregate of 330,000 shares (hereinafter
referred to as one-year warrants and two-year warrants). The one-year
warrants had an exercise price of $6.50 per share and expired July 17,
1985. The two-year warrants had an exercise price of $10.00 per share and
were to expire July 17, 1986. However, the Company extended the expiration
date to August 31, 1987. The one-year warrants and two-year warrants were
issued as of July 17, 1984 on a one-for-one basis to those public offering
warrant holders who exercised their original warrants, with the right to
oversubscribe to any of the warrants not exercised. During the fiscal
years ended July 31, 1985, 1986, 1987 and 1988, the Company received net
proceeds of approximately $2,471,000 as a result of the exercise of the
warrants.
On January 2, 1987, the Company issued 250,000 shares of common stock to
officers and stockholders, including the President and Chief Executive
Officer, in recognition of services performed for the Company. The fair
value of such shares was recorded as compensation expense.
On February 3, 1987, the Company sold 5,000 shares of common stock to a
private investor for $5.00 per share, resulting in net proceeds to the
Company of approximately $25,000.
On September 1, 1987, the Board of Directors approved new wage contracts
for three officers. The contracts provided for the issuance of 700,000
shares of common stock as an inducement for signing. The fair value of
these shares was recorded as deferred compensation and was amortized over
the term of the employment agreements. The contracts also provided for the
issuance of 1,500,000 shares of common stock in 750,000 increments upon
the occurrence of certain events. These shares were issued during the
fiscal years ended July 31, 1989 and 1990 and the fair value of such
shares was recorded as deferred compensation and was amortized over the
remaining term of the employment agreements. The contracts also provided
for five-year options to purchase 750,000 shares of common stock at $3.00
per share; options for the purchase of 170,000 shares were exercised on
June 16, 1988 and the remaining options for the purchase of 580,000 shares
expired on September 2, 1992.
During the fiscal year ended July 31, 1988, the Company issued 206,429
shares of common stock for payment of legal and consulting services. The
Company also issued 12,500 shares of common stock in connection with the
settlement of certain litigation. The fair value of such 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.
F-22
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 and
50,000 shares of common stock in connection with the settlement of certain
litigation. The fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company sold 89,480 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $355,080.
During the fiscal year ended July 31, 1991, the Company issued 87,000
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1992, the Company sold 70,731 shares
of common stock to private investors at $2.75 to $3.50 per share resulting
in net proceeds to the Company of approximately $219,900.
During the fiscal year ended July 31, 1992, the Company issued 45,734
shares of common stock as payment for services rendered to the Company.
The fair value of the common stock was charged to operations.
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.
F-23
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 price of $5.50 per
share. The warrants expired during fiscal 1998. The common stock and
warrants were sold in units consisting of 20,000 shares of common stock
and warrants to purchase 20,000 shares of common stock. The price per unit
was $50,000. The Company received proceeds of approximately $545,000, net
of costs associated with the placement of approximately $55,000 and the
conversion of certain debt by creditors of $121,265 into equivalent
private placement units of 17,600 shares for conversion of short-term
borrowings and 30,906 shares issued for services rendered. In October
1994, an additional two units at $50,000 per unit were sold to a private
investor under the same terms as the September 1994 private placement
resulting in the issuance of 40,000 shares of common stock and warrants to
purchase 40,000 shares of common stock. The warrants expired during fiscal
1998.
During the fiscal year ended July 31, 1995, 185,000 shares of common stock
were issued upon the exercise of stock options by unrelated parties,
resulting in net proceeds to the Company of $437,200. The exercise prices
of the options ranged from $2.27 to $2.50, which had been reduced from
$3.50 and $5.00, respectively, during fiscal 1995.
During the fiscal year ended July 31, 1995, the Company sold 681,000
shares of common stock to private investors resulting in net proceeds to
the Company of approximately $1,379,000. The shares were sold at prices
ranging from $2.00 to $2.25.
During the fiscal year ended July 31, 1995, the Company sold 139,080
shares of common stock and 47,405 three-year warrants to purchase shares
of common stock at an exercise price of $4.00 per share to private
investors. The stock and warrants were sold at prices ranging from $2.25
to $2.73 per share and resulted in net proceeds to the Company of
$343,808, of which $4,800 was for services rendered. The common shares
were issued to the investors subsequent to July 31, 1995.
On August 4, 1995, the Company issued 6,060 shares of common stock as
payment for services rendered to the Company. The fair value of the common
stock was charged to operations.
On September 29, 1995, the Company completed a private placement resulting
in the issuance of 1,925,616 shares of common stock and three-year
warrants to purchase an aggregate of 55,945 shares of common stock at an
exercise price of $4.00 per share. Of these shares 1,935 were issued for
services rendered to the Company. The common stock was sold alone at per
share prices ranging from $2.00 to $3.70, and in combination with warrants
at per unit prices ranging from $4.96 to $10.92, which related to the
number of warrants contained in the unit. The Company received proceeds of
approximately $4.1 million, including $1,723,000 for approximately 820,000
shares received during the fiscal year ended July 31, 1995. The warrants
expired in October 1998.
As consideration for the extension of the Company's term loan agreement
with its bank, the Company granted the bank a warrant to purchase 10,000
shares of common stock at an exercise price of $4.19. The warrants were
issued as of October 1, 1995 and expired on August 31, 1997.
F-24
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
In June 1996, the Company sold in a private placement 1,515,330 shares of
common stock and three-year warrants to purchase 313,800 shares of common
stock at an exercise price of $7.50 per share. Of these shares, 12,000
were issued for services rendered to the Company. The common stock was
sold alone at a per share price of $3.70, in combination with warrants at
a per unit price of $12.52 and warrants were sold alone at a per warrant
price of $1.42. Each unit consisted of three shares of common stock and
one warrant. The Company received proceeds of approximately $5.7 million.
The warrants expired during the fiscal 2000.
In June 1996, the Company issued 10,000 five-year stock options as payment
for services rendered. The options vested immediately and had an exercise
price of $4.95 per share. The Company recorded research and development
expense of $28,260, which was the fair value of the stock options on the
date of issuance. The options expired during the fiscal year ended July
31, 2001.
During the fiscal year ended July 31, 1996, 207,316 shares of common stock
were sold from October 1995 to April 1996 at per share prices ranging from
$3.60 to $4.24 resulting in proceeds of approximately $808,000.
During the fiscal year ended July 31, 1996, 656,334 stock options were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $1.9 million to the Company. Of these shares, 89,634 were
issued subsequent to July 31, 1996. The exercise prices of the options
ranged from $2.50 to $3.87 per share.
In August 1996, the Company issued 10,000 stock options with an exercise
price of $4.69 per share exercisable for five years as payment for
services to be rendered. An equal portion of these options vested monthly
for one year commencing September 1, 1996. The Company recorded general
and administrative expense of $27,900, which was the fair value of the
stock options on the date of issuance. 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 an investor resulting in net proceeds
of $504,000 to the Company.
In May 1997, the Company issued 100,000 stock options to Dr. Stephen
Carter, 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 vested as follows: 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 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, 40,000 expired as of the fiscal year
ended July 31, 2005.
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 vested as follows: 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. A total
general and administrative expense of $185,600 was amortized on a straight
-line basis over a five-year period, which commenced in October 1997. Of
these options, 30,000 expired as of the fiscal year ended July 31, 2005.
F-25
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 vested monthly
and were 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 was
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 were 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 a 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 net proceeds of approximately
$4,202,000. The placement agent 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 converted an outstanding payable into 50,000
shares of the Company's Common Stock. 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 rendered. These options vested as follows: 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. A total
general and administrative expense of $138,100 was amortized on a
straight-line basis over a five-year period, which commenced in March
1998. As of July 31, 2003, the expense was fully. Of these options, 10,000
expired during the fiscal year ended July 31, 2003 and 65,000 were
exercised during the fiscal year ended July 31, 2004.
F-26
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
On April 20, 1998 the SEC declared effective a registration statement on
Form S-3 for the offer and sale by certain stockholders of up to 3,918,299
shares of common stock. Of these shares (i) an aggregate of 2,337,150
shares of common stock were issued to the private placement investors in
the February 1998 Private Placement, (ii) an aggregate of 1,168,575 shares
may be issued upon exercise of the Warrants which were issued to the
private placement investors in the February 1998 Private Placement, (iii)
350,574 shares may be issued upon the exercise of the Placement Agent
Warrant which was issued to the placement agent in the February 1998
Private Placement and the Warrants issuable upon exercise of the Placement
Agent Warrant, (iv) 50,000 shares of common stock were issued to a
Supplier in connection with conversion of an outstanding accounts payable,
and (v) 12,000 shares may be issued upon the exercise of options which
were issued as payment for services to be rendered. As a result of the
delisting of the Company's common stock from the Nasdaq SmallCap Market,
the Company no longer qualified for the use of a Form S-3 registration
statement for this offering when it filed its Annual Report on Form 10-K
for the fiscal year ended July 31, 1999 and thus, this registration
statement was no longer effective. The Company filed a registration
statement on Form S-1 to register these shares, which 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 had 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. An equal portion of these options vested monthly and
a total general and administrative expense of $30,000 was 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. 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 they
vested.
During the fiscal year ended July 31, 1998, 4,950 shares of common stock
were issued upon the exercise of warrants by unrelated parties, resulting
in net proceeds of approximately $11,100 to the Company. The exercise
prices of the warrants ranged from $2.20 to $2.50 per share.
On October 1, 1998 (the "Effective Date"), the Company entered into an
agreement with a consultant (the "Agreement"), resulting in the issuance
of 200,000 five-year stock options with an exercise price of $1.00 per
share as payment for services to be rendered. These options vested as
follows: an aggregate of 20,000 vested on October 1, 1999; an aggregate of
2,500 of such options vested on the last day of each month over the first
twelve months after the Effective Date of the Agreement; the remaining
150,000 options vested on the third anniversary of the Effective Date of
the Agreement. The Company recorded approximately $49,300 of general and
administrative expense based upon the fair value of the vested options
through July 31, 2000. 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 during the fiscal
year ended July 31, 2004, 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 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.
F-27
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 in the private placements
received substantially the same securities, at per share exercise prices
ranging from $1.03 to $4.55. These warrants expired in May 2003 and 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. As of
July 31, 2006, 166,666 of these warrants expired and 222,222 were
exercised.
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 had 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. These options
were exercised during the fiscal year ended July 31, 2004.
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
private placements to unrelated parties. These warrants were exercised as
of July 31, 2006.
F-28
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 had 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. These
options were exercised as of July 31, 2005.
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. As of
July 31, 2006, 1,032,819 of these warrants were exercised.
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. Of these warrants,
250,000 were exercisable at $.50 per share, 650,000 were exercisable at
$1.00 per share and 600,000 were exercisable at $1.50 per share. In
February 2002, the Company recorded an expense equal to the fair market
value of the first 500,000 warrants which vested immediately, 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 remaining 1,000,000 warrants were to become exercisable if Roan Meyers
was successful in helping the Company raise capital. However, Roan Meyers
was not successful in raising additional capital from a third party.
During the fiscal year ended July 31, 2002, Roan Meyers exercised warrants
to purchase an aggregate of 186,000 shares of common stock, at an exercise
price of $0.50 per share, resulting in aggregate gross proceeds of $93,000
to the Company. 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 change of
the Company's common stock. Roan Meyers exercised these warrants and was
issued 600,000 shares of common stock. The Company also issued 40,000
shares of common stock upon the exercise of warrants by Roan Meyers at an
exercise price of $.50 per share. The Company realized aggregate gross
proceeds of $320,000 from these capital raising transactions. During the
fiscal year ended July 31, 2004, the exercise price of 250,000 warrants
was amended from $1.00 to $0.50 per share due to the price change of the
Company's common stock and the vesting of the 400,000 warrants was amended
to vest immediately. Roan Meyers exercised the remaining 674,000 warrants
which resulted in the issuance of 674,000 shares of common stock by the
Company. The Company realized gross proceeds of $537,000 in this capital
raising transaction.
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. As of July 31, 2005, 25,000 of these options were
exercised.
F-29
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 2002, the Company issued a note
payable to an unrelated party in an aggregate amount of $300,000. The note
was due in thirty days bearing interest at 8% per annum. In addition, the
lender received warrants to purchase 300,000 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 extended for eighteen months 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. These notes were converted into shares of the
Company's common stock and warrants in fiscal year 2004.
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.
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. Of these options, 20,000 were exercised during the fiscal year
ended July 31, 2004.
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 were due to mature
on various dates from April 2004 through May 2005 and were convertible
into the Company's common stock at conversion prices ranging from $0.20 to
$0.50 per share and an equal number of five year warrants with an exercise
price of $1.00 per share. With the issuance of the notes payable, the
Company issued to the unrelated parties five year warrants to purchase an
aggregate of 665,000 shares of the Company's common stock, at an exercise
price of $0.60 per share. In addition, the Company issued on the due date
of the notes payable five year warrants to purchase an aggregate of
915,000 shares of the Company's common stock 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 relative to the fair value of the notes payable. 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
relative 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.
F-30
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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. As
of July 31, 2006, 820,000 of these warrants were exercised.
On January 14, 2004, at the Company's annual meeting of stockholders, 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 from 40,000,000 to 100,000,000. Since no notes payable
had been converted as of such date, the terms of the Company's notes
payable relating to conversion and exercise which were amended to
authorize conversion to Series A Preferred Stock because there were an
insufficient number of authorized shares of common stock available for
issuance upon conversion, reverted to their original terms so that they
were again convertible into shares of common stock, rather than shares of
Series A Preferred Stock.
On January 14, 2004, at the Company's annual meeting of stockholders, the
Company's stockholders approved the 2004 Stock Incentive Plan (the "2004
Plan"). The total number of shares of common stock authorized for issuance
under the 2004 Plan is 8,500,000.
During the fiscal year ended July 31, 2004, 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.
During the fiscal year ended July 31, 2004, 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. These options were
exercised during the fiscal year ended July 31, 2004 resulting in gross
proceeds of $2,398 to the Company.
During the fiscal year ended July 31, 2004, the Company entered into a
two-part financing agreement with SF Capital Partners, Ltd. for the
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, the Company received $1,500,000. In addition, the
Company granted 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").
During the fiscal year ended July 31, 2004, SF Capital Partners, Ltd.
exercised the Additional Warrants at a 20-day trailing average exercise
price of $3.96 which resulted in gross proceeds of $1,500,000 and the
issuance of 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. The Company also issued an aggregate of 53,876
shares of restricted common stock to a third party as finder's fee. During
the fiscal year ended July 31, 2006, the exercise price of the Exercise
Warrant to purchase an additional 189,585 shares of common stock was
reduced from $4.75 to $2.88 per share. As of July 31, 2006, none of these
options were exercised.
During the fiscal year ended July 31, 2004, the Company issued 25,000
five-year stock options to a board member as payment for non-board related
services and 110,000 five-year stock options to various consultants for
services rendered. The options vested immediately and have a per share
exercise price of $3.46. The Company recorded a total of $275,377 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. As of
July 31, 2006, 5,000 of these options were exercised.
F-31
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 2004, the Company issued an
aggregate of 14,703 restricted shares of common stock as payment of
accounts payable in the amount of $52,176.
During the fiscal year ended July 31, 2004, the Company issued an
aggregate of 75,000 restricted shares of common stock as payment for
services rendered in an aggregate amount of $288,500.
During the fiscal year ended July 31, 2004, the Company issued 1,210,654
shares of common stock to an existing institutional investor, resulting in
gross proceeds of $10,000,000 to the Company. 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.
The Company 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. During
the fiscal year ended July 31, 2006, the exercise price of the warrants to
purchase an aggregate of 1,185,000 shares of common stock was reduced from
$12.39 to $2.88 per share.
During the fiscal year ended July 31, 2004, the Company increased its
outstanding shares by 40,000 shares of common stock for replacement of
previously issued stock.
During the fiscal year ended July 31, 2004, the Company issued an
aggregate of 3,042,817 shares of restricted common stock and five-year
warrants to purchase 3,733,839 shares of common stock with exercise prices
ranging from $1.00 to $1.10 per share upon the conversion of notes payable
and accrued interest in the amount of approximately $927,872.
During the fiscal year ended July 31, 2004, the Company issued an
aggregate of 2,676,994 shares of common stock upon the exercise of
warrants by unrelated parties and stock options by unrelated parties,
employees, a director and former director at per share exercise prices
ranging from $0.26 to $4.74. The Company realized aggregate gross proceeds
of $2,656,099 from these exercises.
During the fiscal year ended July 31, 2004, the Company incurred an
aggregate of $824,022 of costs relating to various private placements.
During the fiscal year ended July 31, 2005, the Company issued an
aggregate of 1,744,978 shares of common stock and five-year warrants to
purchase an aggregate of 2,044,978 shares of common stock with an exercise
price of $1.00 per share upon the conversion of notes payable and its
accrued interest in an aggregate amount of $464,499.
During the fiscal year ended July 31, 2005, the Company issued an
aggregate of 438,372 shares of common stock upon the exercise of stock
options and warrants by unrelated parties, employees and a director at per
share exercise prices ranging from $0.26 to $1.91. The Company realized
aggregate net proceeds of $307,155 from these exercises.
During the fiscal year ended July 31, 2005, the Company issued 3,000
shares of restricted common stock as payment for services rendered. A
non-cash expense of $13,500 was recorded by the Company for these shares,
based upon the fair value of the common stock at the date of issuance.
During the fiscal year ended July 31, 2005, the Company issued 12,500
warrants to a vendor in consideration for services to be rendered. 5,000
of these warrants which vested immediately have an exercise price of $2.50
per share and 7,500 warrants which vested on the 91st day from the grant
date have an exercise price of $3.50 per share. These warrants will expire
24 months from the date the registration statement registering the shares
underlying the warrants is declared effective or 36 months from the date
of grant, whichever comes first. The Company recorded a total of $13,552
of non-cash expense for these warrants, based upon the fair value at July
31, 2005 as estimated by the Black-Scholes option pricing model.
F-32
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 2005, the Company issued an
aggregate of 20,000 ten-year stock options to consultants as payment for
continuing services. The options will vest 25% each year starting on the
first anniversary of the commencement of the services of the consultants
provided they remain as consultants on the relevant vesting dates. The
stock options have an exercise price of $2.05 per share. The Company
recorded a total of $3,237 of non-cash expense for these options, based
upon the fair value at July 31, 2005 as estimated by the Black-Scholes
option pricing model. During the fiscal year ended July 31, 2006, the
Company recorded under EITF 96-18, a total of $15,066 of non-cash expense
for these options.
During the fiscal year ended July 31, 2006, the Company issued an
aggregate of 1,122,827 shares of common stock upon the exercise of
warrants and stock options by unrelated parties, consultants, employees,
directors and an executive officer at per share exercise prices ranging
from $0.26 to $3.46. The Company realized aggregate gross proceeds of
$1,348,324 from these exercises.
During the fiscal year ended July 31, 2006, the Company issued 25,000
ten-year stock options to a consultant as payment for services rendered.
The options vested immediately and have an exercise price of $1.32 per
share. The Company recorded a total of $23,166 of non-cash expense for
these options.
During the fiscal year ended July 31, 2006, the Company issued 50,000
five-year stock options to a consultant as payment for services to be
rendered. These options vest over a one year period, 50% of which vested
immediately and 12.5% will vest equally for the next four quarters
following the grant date. The stock options have an exercise price of
$2.04 per share and are subject to variable accounting under EITF 96-18.
The fair value of these options is being expensed over the service period.
During the fiscal year ended July 31, 2006, the Company recorded a total
of $74,253 of non-cash expense for these options.
During the fiscal year ended July 31, 2006, the Company issued 25,000
ten-year stock options to a consultant as payment for services rendered.
The options vested immediately and have an exercise price of $3.37 per
share. The Company recorded a total of $58,387 of non-cash expense for
these options.
During the fiscal year ended July 31, 2006, the Company issued 174,927
shares of restricted common stock to a private investor resulting in gross
proceeds of $600,000 to the Company for a purchase price of $3.43 per
share.
During the fiscal year ended July 31, 2006, the Company completed a
private placement to various institutional investors which resulted in the
issuance of an aggregate of 6,457,172 shares of restricted common stock
for a purchase price of $1.75 per share. The institutional investors also
received warrants to purchase up to an additional 6,457,172 shares of
common stock of the Company. The fair value of the warrants at the grant
date was approximately $12,962,000 as estimated using the Black-Scholes
options pricing model. The warrants have a term of five years and were
issued in two separate series. The first series of warrants (to purchase
3,228,590 shares of common stock) are exercisable beginning on January 19,
2007, and the second series of warrants (to purchase 3,228,582 shares of
common stock) are also exercisable beginning on January 19, 2007. Both
sets of warrants have an exercise price equal to $2.88 per share. If the
Company enters into a strategic corporate collaboration as outlined in the
second series of warrants by December 31, 2006, the second series of
warrants will be cancelled upon notification by the Company to the holders
of the warrants that it has entered into such an agreement prior to such
date. The Company received net proceeds of approximately $10,384,000 from
this private placement. The Company filed a registration statement on Form
S-3 to register the resale of the shares and the shares issuable upon
exercise of the warrants, which was declared effective in August 2006. If
the Company had failed to file the registration statement, request
effectiveness of the registration statement, respond to comments of the
Securities and Exchange Commission, or cause the registration statement to
be declared effective in a timely manner in accordance with the provisions
of the registration rights agreement between the Company and the
investors, or if the registration statement ceases to remain effective, or
the investors are otherwise not permitted to utilize the prospectus in the
registration statement to resell the
F-33
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
securities for more than 15 consecutive calendar days or more than an
aggregate of 25 calendar days during any 12-month period (which need not
be consecutive calendar days), then the Company must pay to each investor
an amount, in cash, as partial liquidated damages and not as a penalty,
equal to 2% of the aggregate purchase price paid by such investor for any
securities registered on the registration statement that are then held by
such investor monthly until the failure is cured. However, the Company
shall not be required to pay partial liquidated damages to the investor in
excess of 10% of the purchase price such investor paid for the registered
securities. If the Company fails to pay any partial liquidated damages in
full within seven days after the date payable, the Company will pay
interest thereon to the investor at a rate of 18% per annum (or such
lesser maximum amount that is permitted to be paid by applicable law),
accruing daily from the date such partial liquidated damages are due until
such amounts, plus all such interest thereon, are paid in full.
(8) Common Stock Warrants
During the fiscal years 1988 and 1991, the Board of Directors granted
stock purchase warrants to acquire a maximum of 400,000 shares of common
stock at $5.00 per share which were not exercised and have since expired.
The following table summarizes the activity of common stock warrants
issued in connection with the private placements and conversion of notes
payable completed in fiscal years 1994 through 2006:
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 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
F-34
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Common Stock Warrants, (Continued)
Warrants Exercise Price Expiration
-------- -------------- ----------
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
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 to 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 to 3/14/08
-----------
Outstanding and exercisable at July 31, 2003 7,219,357 0.50 - 4.55 5/28/05 to 10/31/08
Sold in various private placements 2,372,512 1.25 - 12.39 9/3/08 to 5/9/09
Exercised (2,014,273) 0.50 - 1.50 2/6/07 to 10/31/08
Issued to third party as finder's fee 60,533 12.39 5/9/09
Issued to unrelated parties in connection
with conversion of notes payable 3,733,839 1.00 - 1.10 12/4/08 to 7/15/09
-----------
Outstanding and exercisable at July 31, 2004 11,371,968 0.60 - 12.39 5/28/05 to 7/15/09
Exercised (247,272) 0.75 - 1.25 7/16/07 to 8/5/08
Expired (437,500) 2.50 - 4.55 5/28/05
Issued to unrelated parties in connection with
conversion of notes payable 2,044,978 1.00 9/14/09 to 5/6/10
Issued to a vendor in connection with services
rendered 12,500 2.50 - 3.50 4/25/08
-----------
Outstanding and exercisable at July 31, 2005 12,744,674 0.60 - 12.39 11/29/05 to 5/6/10
Exercised (915,582) 0.75 - 1.50 7/7/06 to 9/2/08
Expired (166,666) 3.00 11/29/05 - 12/21/05
Sold in a private placement 6,457,172 2.88 7/17/11
-----------
Outstanding at July 31, 2006 18,119,598 $0.60 - $12.39 10/7/06 to 7/17/11
=========== ============== ===================
Exercisable at July 31,2006 11,662,426 $0.60 - $12.39 10/7/06 to 5/6/10
=========== ============== ===================
(9) Stock Options
2004 Stock Incentive Plan
The Company's stockholders approved the 2004 Stock Incentive Plan (the
"2004 Plan") for the issuance of up to 8,500,000 shares, which provides
that common stock and stock options may be granted to employees, directors
and consultants. The 2004 Plan provides for the granting of stock options,
stock appreciation rights, restricted shares, or other share based awards
to eligible employees and directors, as defined in the 2004 Plan. Options
granted under the 2004 Plan will have an exercise price equal to the
market value of the Company's
F-35
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
common stock on the date of the grant. The term, vesting period and time
and method of exercise of options granted under the 2004 Plan are fixed by
the Board of Directors or a committee thereof.
1997 Stock Option Plan
The Company's stockholders approved the 1997 stock option plan for the
issuance of options for up to 2,000,000 shares, which provides 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.
1993 Stock Option Plan
The Company's stockholders approved the 1993 stock option plan for the
issuance of options for up to 3,000,000 shares, which provides 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. This plan expired in November 2003 except to the extent
there are outstanding options.
Option Activity
As of July 31, 1994, 1,703,159 options were granted and outstanding under
the 1993 stock option plan.
The following table summarizes stock option activity for the period August
1, 1994 to July 31, 2006:
Shares Available Options Weighted Average Exercise
for Grant Outstanding 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/Expired -- (1,897,500) 4.30
--------- ---------
Balance August 1, 1995 1,107,991 4,671,687 3.39
Granted (296,205) 296,205 3.99
Exercised -- (656,334) 2.92
Canceled/Expired 6,500 (235,333) 4.89
--------- ---------
Balance July 31, 1996 818,286 4,076,225 3.43
Authorized by 1997 Plan 2,000,000 -- --
Granted (932,500) 932,500 4.90
Exercised -- (639,500) 3.82
Canceled/Expired 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/Expired 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/Expired 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/Expired 638,395 (1,031,880) 2.73
--------- ---------
Balance July 31, 2000 1,887,727 3,766,996 2.65
F-36
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
Shares Available Options Weighted Average Exercise
for Grant Outstanding Price Per Share
--------- ----------- ---------------
Granted (447,000) 447,000 0.85
Exercised -- (165,555) 0.51
Canceled/Expired 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
Canceled/Expired 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/Expired 485,118 (736,358) 3.09
--------- -----------
Balance July 31, 2003 2,181,779 2,443,666 1.26
Authorized by 2004 Stock
Incentive Plan 8,500,000 -- --
Granted (1,388,996) 1,388,996 5.03
Exercised -- (666,717) 0.98
Canceled/Expired (262,783) (208,500) 3.20
--------- -----------
Balance July 31, 2004 9,030,000 2,957,445 2.95
Granted (1,073,000) 1,073,000 4.36
Exercised -- (191,100) 0.75
Canceled/Expired 290,500 (341,500) 4.57
--------- -----------
Balance July 31, 2005 8,247,500 3,497,845 3.35
Granted (745,000) 745,000 1.76
Exercised -- (207,245) 0.90
Canceled/Expired 171,250 (205,250) 4.67
--------- -----------
Balance July 31, 2006 7,673,750 3,830,350 $ 3.10
========= =========== =======
The options outstanding at July 31, 2006 will expire between August 21,
2006 and March 7, 2016 and the weighted average remaining contractual term
is 5.61 years. The options exercisable at July 31, 2006 are 2,212,150
shares, the weighted average exercise price per share is $3.11 per share
and the weighted average remaining contractual term is 3.84 years.
At July 31, 2006 and 2005, the aggregate intrinsic value of stock options
outstanding was approximately $1,801,000 and $2,036,000, respectively and
the aggregate intrinsic value of stock options exercisable was
approximately $1,396,000 and $1,540,000, respectively. Total intrinsic
value of options exercised during the fiscal years ended July 31, 2006,
2005 and 2004 was approximately $320,000, $517,000 and $2,538,000,
respectively.
Stock option activity prior to adoption of SFAS 123 (see Note 1) 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.
F-37
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
Non-Qualified Stock Options
The Board of Directors issued non-qualified stock options which were not
part of the 1981 non-qualified stock option plan or the 1989 Stock Plan as
follows:
Shares Price Range
------ -----------
Granted 1,782,000 $ 3.00-3.87
Exercised (276,989) 3.00-3.50
Canceled (106,000) 3.00-3.50
Expired (649,011) 3.00-3.50
Granted pursuant to conversion of certain liabilities:
Related party 1,324,014 3.20
Unrelated party 73,804 3.20
Repurchased stock options (102,807) 3.20
----------
Balance at July 31, 1994 2,045,011 $ 3.20-3.87
========== ===========
In connection with certain private placements, the Board of Directors had
included in the agreements, options to purchase additional shares of the
Company's common stock as follows:
Shares Price Range
------ -----------
Granted (42,167 options were repriced and extended) 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.
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
========== ===========
F-38
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) Stock Grant and Compensation Plans
The Company had adopted a stock grant program effective September 1, 1981,
and pursuant to said program, had reserved 375,000 shares of its common
stock for issuance to key employees. The stock grant program was
superseded by the 1989 Stock Plan, and no further grants will be given
pursuant to the grant plan. The following stock transactions occurred
under the Company's stock grant program:
Year ended Fair Amount of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1983 20,000 $ 5.50 $110,000
1984 19,750 5.125 101,219
1985 48,332 5.125-15.00 478,105
1986 11,250 5.125-15.00 107,032
1988 19,000 3.50 6,500
On January 26, 1984, the Company adopted a stock bonus plan for directors
and consultants. The plan was amended on October 6, 1986 to reserve
500,000 shares for issuance under the plan and to clarify a requirement
that stock issued under the Plan could not be transferred until three
years after the date of the grant. The stock bonus plan for directors and
consultants was superseded by the 1989 Stock Plan and no further grants
will be given pursuant to the stock bonus plan for directors and
consultants. The following stock transactions occurred under the Company's
stock bonus plan:
Year ended Fair Amount of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1984 130,250 $ 2.50-3.88 $385,917
1985 99,163 3.50-15.00 879,478
1985 (42,500) 2.50 (105,825)*
1986 15,394 9.65-15.00 215,400
1987 5,000 15.00 75,000
* Shares granted in 1984 were renegotiated in 1985 and canceled as a
result of the recipient's termination.
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 provided for the granting of options to purchase common stock of
the Company. 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 Fair Amount of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1989 30,000 $5.00 $150,000
1990 56,000 6.00 336,000
1991 119,000 4.00 476,000
1992 104,000 2.75 286,000
1993 117,000 2.00 234,000
1994 5,000 3.00 15,000
F-39
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) Stock Grant and Compensation Plans, (Continued)
Compensation expense was 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 year ended 1999 and the plan
expired in 1999.
(11) Income Taxes
The Company accounts for income taxes under the provisions of SFAS 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 a portion of its state tax loss carryforwards and
state research and development credits in order to obtain tax benefits.
For the state fiscal year 2006 (July 1, 2005 to June 30, 2006), the
Company had approximately $1,903,000 total available tax benefits that
were saleable; of which New Jersey permitted the Company to sell
approximately $356,000. In December 2005, the Company received
approximately $317,000 from the sale of the $356,000 of tax benefits,
which the Company recognized as tax benefits for the fiscal year ended
July 31, 2006.
For the state fiscal year 2005 (July 1, 2004 to June 30, 2005), the
Company had approximately $1,335,000 total available tax benefits that
were saleable; of which New Jersey permitted the Company to sell
approximately $339,000. In December 2004, the Company received
approximately $288,000 from the sale of the $339,000 of tax benefits,
which the Company recognized as tax benefits for the fiscal year ended
July 31, 2005.
For the state fiscal year 2004 (July 1, 2003 to June 30, 2004), the
Company had approximately $1,378,000 total available tax benefits that
were saleable; of which New Jersey permitted the Company to sell
approximately $261,000. In December 2003, the Company received
approximately $222,000 from the sale of the $261,000 of tax benefits,
which the Company recognized as tax benefits for the fiscal year ended
July 31, 2004.
If still available under New Jersey law, the Company will attempt to sell
the remaining $1,547,000 of its tax benefits between July 1, 2006 and June
30, 2007 (state fiscal year 2007). This amount, which is a carryover of
its remaining tax benefits from state fiscal year 2006 and earlier, may
increase if the Company incurs additional tax losses during state fiscal
year 2007. The Company can not estimate, however, what percentage of its
saleable tax benefits New Jersey will permit it to sell, how much money it
will receive in connection with the sale, if it will be able to find a
buyer for its tax benefits or if such funds will be available in a timely
manner.
At July 31, 2006 and 2005, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
2006 2005
---- ----
Deferred tax assets:
Excess of book over tax depreciation and amortization $ 20,141 $ 27,499
Stock options 598,872 --
Temporary differences 282,712 167,324
Federal and state net operating loss carryforwards 21,015,985* 19,413,740*
Research and experimentation credit carryforwards 2,187,683* 1,955,172*
------------ ------------
Total gross deferred tax assets 24,105,393 21,563,735
Valuation allowance (24,105,393) (21,563,735)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
* Net of amount sold pursuant to New Jersey state tax legislation.
F-40
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) Income Taxes, (Continued)
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 2006, 2005
and 2004 the valuation allowance increased by $2,542,000, $2,668,000, and
$2,837,000, respectively.
At July 31, 2006, the Company has federal net operating loss carryforwards
of approximately $57,122,000 that expire in the years 2007 to 2026
(approximately $8,195,000 expires in the years 2007 to 2011) and state net
operating loss carryforwards of approximately $26,577,000 that expire in
years 2010 to 2015. The Company also has federal research and
experimentation tax credit carryforwards of approximately $1,510,000 that
expire in the years 2007 to 2026 (approximately $260,000 expires in the
years 2007 to 2011) and state research and experimentation tax credits of
approximately $678,000 that expire in the years 2014 to 2021. Ultimate
utilization/availability of such net operating losses and credits is
dependent upon the Company's ability to generate taxable income in future
periods and may be significantly curtailed if a significant change in
ownership occurs in accordance with the provisions of the Tax Reform Act
of 1986. For federal income tax purposes, the federal research tax credit
expired on December 31, 2005 for new research tax credits.
(12) Other Financial Information
Accrued expenses as of July 31, consist of the following:
2006 2005
---- ----
Payroll and payroll taxes $ 87,935 $ 85,181
Professional fees 217,764 123,200
Clinical trial 758,267 609,382
Pre-clinical studies 240,322 460,859
Other 2,967 5,069
---------- -----------
$1,307,255 $ 1,283,691
========== ===========
(13) 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 for clinical trials
in the U.S. Additionally, the Company also maintains product liability
insurance in Europe, in Australia and in Romania. 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.
The Company is, from time to time, involved in litigation as both
defendant and plaintiff arising in the ordinary course of business. In the
opinion of management, the results of any pending litigation should not
have a material adverse effect on the Company's financial position or
operating results.
F-41
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(13) Commitments and Contingencies, (Continued)
Below is a table that presents our contractual obligations and commercial
commitments as of July 31, 2006:
Payments Due by Fiscal Year
----------------------------------------------------------
2012 and
Total 2007 2008 2009 2010 2011 Thereafter
----- ---- ---- ---- ----------
Operating lease $ 61,392 $16,743 $16,743 $16,743 $11,163 $ -- $ --
--------- ------- ------- ------- ------- ----- ----------
Total contractual
cash obligations $ 61,392 $16,743 $16,743 $16,743 $11,163 $ -- $ --
========= ======= ======= ======= ======= ===== ----------
(14) 401(k) Savings Plan
Effective October 1, 1998, the Company adopted a 401(k) Savings Plan (the
"Plan"). Qualified employees may participate by contributing 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, 2006, 2005 and 2004, the
Company's contributions to the Plan amounted to $27,810, $29,231 and
$15,690, respectively.
(15) Unaudited Quarterly Financial Data
In connection with its audit of the Company's financial statements for the
fiscal year ended July 31, 2006, the Company's independent registered
public accounting firm brought to the attention of management that the
Company's estimate of the impact of forfeitures on non-cash compensation
cost was, as a percentage, significantly higher than the historical rate
of such forfeitures and that the true-up of the value of options vesting
during the reporting period was not recorded. After reviewing the matter,
management agreed to calculate the forfeiture rate using primarily
historical experience and record the value of the options that vested
during the reporting period. The original computation had understated
non-cash compensation costs and net losses in the Company's unaudited
condensed financial statements included in Forms 10-Q for the quarters
ended October 31, 2005, January 31, 2006 and April 30, 2006. Management
believes that the adjustment to the amount of non-cash compensation
expense in each of the affected quarterly periods is not material and that
the quarterly reports for those periods do not require restatement. The
Company recorded a charge of approximately $388,900 at year end to reflect
the adjustment to the interim cost of non-cash compensation expense in the
fourth quarter and fiscal year ended July 31, 2006. Additionally, during
the fourth quarter and fiscal year ended July 31, 2006, the Company
changed its estimated forfeiture rate on performance based stock options
issued during the fiscal year which resulted in the reduction of
approximately $213,400 in non-cash compensation expense for the fourth
quarter and fiscal year ended July 31, 2006.
Although management believes that the changes in each of the affected
quarterly reports are not material, the Company is presenting certain
restated unaudited statement of operations information. Presented in the
following table are the total costs and expenses, the net loss and the
loss per basic and diluted common share as originally reported and the
adjusted amounts for each quarter.
F-42
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(15) Unaudited Quarterly Financial Data, (Continued)
As Originally Reported for As Restated for the
the Three Months Ended Three Months Ended
Quarter Ended October 31, 2005 October 31, 2005 October 31, 2005
---------------- ----------------
Statement of Operations:
Total costs and expenses $ 1,749,000 $ 1,888,000
Net loss ( 1,400,000) (1,539,000)
Loss per basic and diluted common share $ (0.04) $ (0.04)
Three Months Ended Six Months Ended
Quarter Ended January 31, 2006 January 31, 2006 January 31, 2006
---------------- ----------------
As Originally As Originally
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
Statement of Operations:
Total costs and expenses $ 2,310,000 $ 2,468,000 $ 4,059,000 $ 4,356,000
Net loss (2,286,000) (2,444,000) (3,686,000) (3,983,000)
Loss per basic and diluted common share $ (0.06) $ (0.07) $ (0.10) $ (0.11)
Three Months Ended Nine Months Ended
Quarter Ended April 30, 2006 April 30, 2006 April 30, 2006
-------------- --------------
As Originally As Originally
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
Statement of Operations:
Total costs and expenses $ 1,658,000 $ 1,750,000 $ 5,717,000 $ 6,106,000
Net loss (1,638,000) (1,730,000) (5,323,000) (5,712,000)
Loss per basic and diluted common share $ (0.04) $ (0.05) $ (0.14) $ (0.15)
Below is the quarterly data for the two year period ended July 31, 2006.
Amounts for the first, second and third quarters of 2006 have been
restated as described above.
(In thousands, except per share amounts)
----------------------------------------------------------------------------------------------------------------------
2006 2005
-----------------------------------------------------------------------------------------------------
First Second Third Fourth Totals First Second Third
----------------------------------------------------------------------------------------------------------------------
Investment
income $ 32.0 $ 24.0 $ 20.1 $ 31.3 $ 107.4 $ 29.2 $ 33.7 $ 41.0
Other income -- -- -- -- -- -- -- 9.8
Operating loss (1,856.4) (2,443.8) (1,729.6) (2,486.8) (8,127.6) (1,368.8) (1,955.3) (1,674.6)
----------------------------------------------------------------------------------------------------------------------
Net loss (a) (1,539.0) (2,443.8) (1,729.6) (2,486.8) (7,810.2) (1,080.8) (1,955.3) (1,674.6)
----------------------------------------------------------------------------------------------------------------------
Loss per share
- basic and
diluted $ (0.04) $ (0.07) $ (0.05) $ (0.07) $ (0.21) $ (0.03) $ (0.06) $ (0.05)
----------------------------------------------------------------------------------------------------------------------
----------------------------------------
2005
-----------------------
Fourth Totals
----------------------------------------
Investment
income $ 37.8 $ 141.7
Other income -- 9.8
Operating loss (1,751.2) (6,749.9)
----------------------------------------
Net loss (a) (1,751.2) (6,461.9)
----------------------------------------
Loss per share
- basic and
diluted $ (0.05) $ (0.18)
----------------------------------------
(a) Included in the net loss of $1,539.0 and $1,080.8 for first quarter of
2006 and 2005 is net of tax benefits of $317.4 and $288.0, respectively,
related to the sale of certain state tax operating loss carryforwards.
F-43