U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
July 31, 2005 0-11088
For the fiscal year ended 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 07003
(Address of principal executive offices) (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 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 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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
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, 2005 was approximately $103,176,000. As of October 10, 2005
there were 36,652,872 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 19, 2006, 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
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Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 17
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
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 33
Item 9B. Other Information 35
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 35
Item 13. Certain Relationships and Related Transactions 35
Item 14. Principal Accounting Fees and Services 35
PART IV
Item 15. Exhibits and Financial Statement Schedules 35
The following trademarks appear in this Annual Report: ONCONASE(R) is the
registered trademark of Alfacell Corporation, exclusively for the anti-cancer
indications; Alimta(R) and Gemzar(R) are registered trademarks of Eli Lilly;
Navelbine(R) is a registered trademark of Glaxo Smith Kline.
All information on this Form 10-K is as of October 14, 2005 and we undertake no
obligation to update this information.
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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, its 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/info.htm, or through the
SEC's website by clicking the direct link from our website at
www.alfacell.com/investinfo.htm 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 that is applicable
to all of our directors, officers and employees. Any material changes made to
our Code of Business Conduct 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 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 19, 2006. In addition,
copies of our Code of Business Conduct 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/info.htm.
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 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 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.
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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 Phase III trial. The first part of the trial
has been completed. The second confirmatory part of the trial is ongoing. In
September 2005, we reported that nearly 90% of the patients required per the
study design for full patient accrual were now enrolled. We have also conducted
other randomized and non-randomized trials with patients with advanced stages of
solid tumors in other types of cancers.
The primary endpoint of the Phase III trial is survival, and as such, a
sufficient number of deaths must occur in order to perform the required
statistical analyses to determine the efficacy of ONCONASE(R) in patients with
unresectable malignant mesothelioma. If the results of the clinical trials are
positive, we expect to file for marketing registrations (NDA in the U.S. and MAA
in Europe) for ONCONASE(R) within six months of completion of the statistical
analyses. However, at this time, we cannot predict with certainty when a
sufficient number of deaths will occur to achieve statistical significance.
Hence, the timing of when we will be able to file for marketing registrations in
the US and EU 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.
In December 2002, we received Fast Track Designation from the FDA for
ONCONASE(R) for the treatment of malignant mesothelioma. Fast Track Designation
is an FDA program designed to expedite the review of new drugs that are intended
to treat serious or life threatening conditions and that demonstrate the
potential to address unmet medical needs. In February 2001, we received an
Orphan Medicinal Product Designation for ONCONASE(R) 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,
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 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 March 2005, we received Orphan Drug Designation for malignant
mesothelioma in Australia from the Therapeutics Goods Administration (TGA). This
designation in Australia also entitles us to five years of marketing
exclusivity, a 100% waiver of filing fees and regulatory guidance from the TGA.
These FDA, EMEA and TGA designations for ONCONASE(R) may serve to expedite
its regulatory review, assuming the clinical trials yield a positive result.
Future clinical trials, however, may not demonstrate that ONCONASE(R) is
effective. Thus, our applications for FDA, EMEA or TGA approval to market
ONCONASE(R), which are dependent upon the success of our clinical trials, may be
affected. The efficacy and safety of ONCONASE(R) for malignant mesothelioma will
ultimately be determined by these regulatory agencies. In the interim, our Fast
Track Designation allows us to continue to have meetings and discussions with
the FDA to establish mutually agreed upon parameters for the NDA to obtain
marketing approval for ONCONASE(R), based on the assumption that the clinical
trials will continue to yield favorable results.
Our drug discovery program forms the basis for the development of specific
recombinant RNases for chemically linking drugs and other compounds such as
monoclonal antibodies, growth factors, etc. and gene fusion products with the
goal of targeting various molecular functions. This program provides for joint
design and generation of new products with outside partners. We may own these
new products along with a partner(s), or we may grant an exclusive license to
the collaborating partner(s).
We have established a number of scientific collaborations with 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 NCI has
manufactured RN321 (the conjugate) according to Good Manufacturing Practices, or
GMP regulations in preparation for commencing
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clinical trials for the treatment of patients with non-Hodgkin's lymphoma with
RN321. Prior to commencing human clinical trials with RN321, additional funding
approval from the Drug Development Group of the NIH is required.
We have also discovered another series of proteins, collectively named
amphinases that may have therapeutic uses. These proteins are bioactive in that
they have an effect on living cells and organisms and have both anti-cancer and
anti-viral activity. All of the proteins characterized to date are RNases. These
products are currently undergoing preclinical testing by the National Institute
of Allergy and Infectious Diseases (NIAID) against various RNA viruses and by
outside collaborators. One of these compounds, AC-03-636 has been determined to
be active against yellow fever and Hepatitis C. The same compound is being
evaluated at Johns Hopkins University in a sustained time release formulation
for the treatment of brain tumors (gliomas). We are currently in discussions
with potential pharmaceutical partners for the development of these new
compounds as conjugates and fusion proteins.
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.
We have entered into a commercial evaluation license with the NIH to
evaluate a humanized single-chain monoclonal antibody. Under the agreement, we
receive 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 entered into a research and development collaboration with a major
US privately held stent and drug delivery company. ONCONASE(R) is being
evaluated in stents and other delivery platforms to treat cardiovascular disease
and cancer via direct site delivery.
We have signed confidentiality agreements and have entered into
discussions and due diligence with a number of companies for US or non-US
marketing rights for ONCONASE(R) and for out-licensing some of our early stage
drug candidates. We are engaged in the research, development and clinical trials
of our products both independently and through research collaborations. We have
financed our operations since inception 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. These funds provide us with
the resources to acquire staff, facilities, capital equipment, finance our
technology, product development, manufacturing and clinical trials. We have
incurred losses since inception and to date we have not consummated any
licensing, or marketing agreements for ONCONASE(R) or any of our early stage
drug candidates. As of July 31, 2005, we believe our cash balance is sufficient
to fund our operations at least through July 31, 2006 based on our expected
level of expenditures in relation to activities in preparing ONCONASE(R) for an
NDA and MAA filings and other ongoing operations of the company. However, we
will continue to seek additional financing through equity or debt financings and
the sale of net operating loss carryforwards but 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 the amount of
capital we will receive, if any. If we are unable to raise sufficient capital,
our operations will be severely curtailed and our business and financial
condition will be adversely affected.
Research and Development Programs
Research and development expenses for the fiscal years ended July 31,
2005, 2004, and 2003 were $5,082,000, $3,353,000, and $1,700,000, 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.
5
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.
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.
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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 and New Zealand. Major US
cancer center participating have included Columbia-Presbyterian, University of
Chicago, M.D. Anderson, Cedars-Sinai Cancer Centers and Johns Hopkins
University. Additional clinical sites were approved recently in countries such
as Canada, Australia and New Zealand.
ONCONASE(R) has been tested as a single agent in patients with a variety
of solid tumors. It has also been tested in combination with tamoxifen in
patients with prostate cancer, advanced pancreatic cancer and renal cell
carcinoma as well as with doxorubicin in patients with malignant mesothelioma.
We have collaborated with NIH, NCI, 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. The
combination of ONCONASE(R) and tamoxifen, an anti-cancer drug, resulted in a
significant cell kill in pancreatic, prostate, and ovarian tumor cell lines as
compared to each drug alone. Similar results were found with respect to the
following:
o ONCONASE(R) + 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.
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
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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:
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
We are currently conducting a two-part Phase III clinical trial of
ONCONASE(R) as a treatment for malignant mesothelioma. The first part of the
Phase III trial compares ONCONASE(R) alone to doxorubicin. Doxorubicin has been
considered by opinion leaders to be the most effective drug for the treatment of
malignant mesothelioma. The second part of the trial compares the combination of
ONCONASE(R) and doxorubicin versus doxorubicin alone. The trial is an open
label, centrally randomized, controlled study. The patient enrollment for the
first part of the clinical trial has been completed and the trial is on-going.
The second part is currently nearing completion of the patient enrollment stage
and is being conducted in the United States, Europe, Canada, New Zealand and
Australia.
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.
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Phase III Single Agent Results
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) treated
patients with an MST 23.3 versus 14.4 months for doxorubicin treated patients as
well as the 2 year survival rates of 40% for ONCONASE(R) and 9% for doxorubicin.
Preliminary results were presented at the 2000 American Society of Clinical
Oncologists, or ASCO, meeting.
These survival advantages were recognized as clinically important in this
patient population by opinion leaders and the FDA. Therefore, the FDA has
requested confirmation of the survival results in the 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 also 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.
In part two of the ongoing Phase III trial, interim analyses based on the
occurrence of 105 deaths and at 210 deaths are planned. Based upon the results
of these analyses, we may be able to file an NDA and an MAA within six months
after the completion of the analyses. However, we cannot assure you that
marketing approval for ONCONASE(R) as a treatment for malignant mesothelioma
will be granted by the FDA, EMEA or the TGA.
9
Based on Phase II trial results after meeting with the FDA, we had
initiated a Phase III trial in patients with advanced pancreatic cancer in 1995.
In the Phase II trial, the median survival time of 5.5 months for 47 patients
with stage 4 disease and liver involvement treated with the combination of
ONCONASE(R) weekly and tamoxifen daily was more than double the median survival
of such patients reported in previously published trials treated with a variety
of other systemic therapies (published median survival times ranged from 2.0 to
2.5 months). The Phase III trial was a multicenter randomized trial designed to
evaluate an ONCONASE(R) and tamoxifen regimen in untreated patients as well as
patients who had failed GEMZAR(R), an approved drug for pancreatic cancer. The
primary endpoint of both segments of this Phase III trial was survival, however,
early survival analyses of both segments did not reveal a significant survival
advantage of ONCONASE(R) over the controls. Thus, due to the negative results of
the Phase III trial, despite favorable results produced in Phase II, competitive
pressures and our inability to accrue qualified patients in the clinical trials,
we made a decision that further evaluation of this end-stage patient population
was not warranted at that time and our resources were refocused on the ongoing
malignant mesothelioma program.
ONCONASE(R) Phase II Clinical Trials
ONCONASE(R) as a single agent, demonstrated objective clinical activity in
105 patients with uresectable, or inoperable, malignant mesothelioma that
included many heavily pretreated patients with refractory tumors, which are
tumors that did not readily yield to the treatment. Analysis of the TTG
population confirmed the importance of the 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.
A multicenter Phase II Broad Eligibility trial designed to evaluate
ONCONASE(R) as a single agent has been conducted and results of the findings for
patients with non-small cell lung cancer, or NSCLC, and advanced breast cancer
were published.
ONCONASE(R) as a single agent, demonstrated objective clinical activity in
patients with advanced NSCLC and breast cancer. The median survival time of 30
patients with advanced NSCLC was greater than that in 19 of 20 regimens when
supportive care, a placebo or another single agent was given. Furthermore it was
greater than 75% of the reported MSTs in combination chemotherapy trials. The
MST and 1 year survival rates of 7.7 months and 27%, respectively, for
ONCONASE(R) treated patients compared favorably to 7.2 months and 30% for
patients treated with Navelbine(R) (an approved drug for this indication) as a
single agent.
Thirty percent of 17 patients with advanced breast cancer demonstrated
objective clinical activity, which included, one partial response, two minor
responses, the significant reduction in bone pain in one patient, and the
control of uncontrollable malignant fluid in the lungs of another patient.
A series of pilot Phase II studies to evaluate ONCONASE(R) as a single
agent, and ONCONASE(R) and tamoxifen in previously treated patients with
unresectable, or inoperable, renal cell cancer were conducted. The results of
both the Phase II single agent and ONCONASE(R) and tamoxifen were published.
Although the single agent study did not demonstrate evidence of clinical
activity, the regimen of ONCONASE(R) and tamoxifen did demonstrate evidence of
clinical activity which indicated further evaluation in untreated patients was
warranted.
A Phase II program to evaluate a new dose and schedule of ONCONASE(R) was
initiated in 2005. The first indication under evaluation is in patients with
refractory non-small cell lung cancer. Similar trials are planned in 2006 in
patients with esophageal cancer and in patients with advanced breast cancer.
10
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 NCI has
manufacturedRN321 (the conjugate) according to Good Manufacturing Practices, or
GMP regulations in preparation for commencing clinical trials for the treatment
of patients with non-Hodgkin's lymphoma with RN321. Prior to commencing human
clinical trials with RN321 additional funding approval from the Drug Development
Group of the NIH is required.
Although ranpirnase is active against a variety of human cancers, its
activity is not uniform across different tumor types. However, whether the tumor
is more or less sensitive to ranpirnase as a single agent, its anti-tumor
activity can be greatly augmented by conjugation to different targeting
moieties, or groups. One of these moieties is the epidermal growth factor, or
EGF, which is a ligand for the EGF receptor often hyperexpressed on malignant
cells. The genetically engineered ranpirnase conjugates with EGF (rRNP-EGF)
exerted significant anti-tumor activity in human cell types of the head and neck
and pancreatic carcinomas, and human D54MG glioblastoma, a cancerous brain tumor
cell. Other constructs target tumor blood vessel formation, which could be
potentially used in a broad spectrum of solid tumors. They are in pre-clinical
evaluation by our European collaborator.
Novel Amphibian Ribonucleases
All of the proteins characterized to date are RNases. Preclinical testing
of the new candidates collectively called amphinases showed them to be similarly
active to ranpirnase. Their chemical structure makes them ideal candidates for
genetic engineering of designer products.
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 and Hepatitis C. The same compound is
being evaluated at Johns Hopkins University in a sustained time release
formulation for the treatment of brain tumors (gliomas). 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.
Research Collaborations
In addition to the above programs, we are pursuing programs in
collaboration with the NIH, NCI, Johns Hopkins University, University of Bath,
University of Pennsylvania Medical Center, Metabolic Magnetic Resonance
11
Research and Computing Center and Novartis Institute for Tropical Diseases. The
objective of our collaborations is to develop new therapeutic applications and
formulations for ONCONASE(R) as well as our other drug candidates.
The multiple effects of biological activity of ONCONASE(R) led to research
in other areas of cancer biology. Two important areas associated with
significant market opportunities are radiation therapy and control of tumor
angiogenesis, or new tumor blood vessel formation. Many types of cancers undergo
radiation therapy at early stages of the disease; however, success of such
treatment is often limited. We believe any agent capable of enhancing tumor
radiosensitivity has great market potential. Moreover, since the growth of
essentially all types of cancer is dependent on new blood vessel formation, any
agent that has anti-angiogenic activity, we believe, is most desirable.
Evaluation Of ONCONASE(R) As A Radiation Enhancer
The p53 gene is a tumor-suppressor gene 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.
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
12
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
In July 2005, we entered in a research collaboration agreement with
Novartis Institute for Tropical Diseases for the evaluation of AC-03-636 against
Dengue fever. AC-03-636 is a novel compound from our proprietary family of
amphinase RNases
A research and development collaboration with a major US privately held
stent and drug delivery company is ongoing. ONCONASE(R) is being evaluated in
stents and other delivery platforms to treat cardiovascular disease and cancer
via direct site delivery. Our research and development collaboration with Wyeth
Pharmaceuticals to develop a number of designer drugs such as conjugates and
fusion proteins for a variety of indications using our proprietary technology
has been terminated by the Company for Wyeth's non-compliance with the terms of
the agreement.
Raw Materials
The major active ingredient derived from leopard frog eggs is the protein
ranpirnase. We have sufficient egg inventory on hand to produce enough
ONCONASE(R) to complete the current Phase III clinical trial for malignant
mesothelioma and supply ONCONASE(R) for up to two years after commercialization.
In addition, we can successfully produce ranpirnase by using recombinant
technology; however, it may not be more cost effective.
Manufacturing
We have signed an agreement with Scientific Protein Laboratories, which
will perform the intermediary manufacturing process of purifying ranpirnase. We
contract with BenVenue Corporation for vial filling and with Cardinal Health for
the labeling, storage and shipping of ONCONASE(R) during the Phase III trial
period. Other than these arrangements, we do not have specific arrangements for
the manufacture of our product. Products manufactured for use in Phase III
clinical trials and for commercial sale must be manufactured in compliance with
Current Good Manufacturing Practices. Scientific Protein Laboratories, BenVenue
Corporation and Cardinal Health all manufacture in accordance with Current Good
Manufacturing Practices. For the foreseeable future, we intend to rely on these
manufacturers, or substitute manufacturers, if necessary, to manufacture our
product. We believe, however, that there are substantial alternative service
providers for the services for which we contract. Because we have not yet
received drug approval, we utilize the services of these third party
manufacturers solely on an as needed basis with prices and terms customary for
companies in businesses that are similarly situated. In order to replace an
existing manufacturer, we must amend our Investigational New Drug application to
notify the FDA of the new manufacturer. We are dependent upon our contract
manufacturers to comply with Current Good Manufacturing Practices and to meet
our production requirements. It is possible that our contract manufacturers may
not comply with Current Good Manufacturing Practices or deliver sufficient
quantities of our products on schedule.
13
Marketing
We do not plan to market our products on our own at this time. We have
entered into a number of Confidential Disclosure 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), our proprietary RNA interference technology
pipeline, and other patented product candidates.
We intend to enter into development and marketing agreements with third
parties. We expect 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
is required to gain marketing approval in Europe and in Australia. Moreover, a
commercial entity must be established and approved by the EMEA in a member state
of the EU at least three months prior to filing the Marketing Authorization
Application, or MAA.
We have not received United States or other marketing approval for any of
our product candidates and may not receive any approvals. We may encounter
difficulties or unanticipated costs in our effort to secure necessary
governmental approvals, which could delay or preclude us from marketing our
products.
With respect to patented products, delays imposed by the governmental
approval process may materially reduce the period during which we may have the
exclusive right to exploit them.
Patents and Proprietary Technology
We have protected our business by applying for, and obtaining, patents and
trademark registrations. We have also relied on trade secrets and know-how to
protect our proprietary technology. We continue to develop our portfolio of
patents, trade secrets, and know how. We have obtained, and continue to apply
for, patents concerning our RNase-based technology.
In addition, we have filed (and we intend to continue to file) foreign
counterparts of certain U.S. patent applications. Generally, we apply for patent
protection in the United States, selected European countries, and Japan.
14
We own the following U.S. patents:
-------------------------------------------------------------------------------------------------------------
Patent No. Issue Date Expiration **
---------- ---------- -------------
-------------------------------------------------------------------------------------------------------------
6,423,515 B1 July 2002 covers methodology for synthesizing gene sequences of Sept. 2019
ranpirnase and a genetically engineered variant of
ranpirnase
-------------------------------------------------------------------------------------------------------------
6,290,951 B1 Sept. 2001 covers alteration of the cell cycle in vivo, Aug. 2018
particularly for inducing apoptosis of tumor cells
-------------------------------------------------------------------------------------------------------------
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.
We own the following foreign patents in Europe and Japan (European patents
are validated in selected European nations):
----------------------------------------------------------------------------------------------------------
Patent No. Expiration **
---------- -------------
----------------------------------------------------------------------------------------------------------
EP 0 440 633 covers ONCONASE(R) and process technology for making it Mar. 2009
----------------------------------------------------------------------------------------------------------
EP 0 500 589 cover combinations of ONCONASE(R) with certain other pharmaceuticals Oct. 2010
JP 2972334
----------------------------------------------------------------------------------------------------------
EP 0 656 783 covers combinations of ONCONASE(R) with certain other pharmaceuticals July 2013
JP 3655628
----------------------------------------------------------------------------------------------------------
EP 0 837 878 covers a variant of ONCONASE(R) June 2016
----------------------------------------------------------------------------------------------------------
**Assumes timely payment of all applicable maintenance fees and annuities;
excludes term extensions that do or may apply.
These patents cover ONCONASE(R), a variant of ONCONASE(R), process
technology for making ONCONASE(R), and combinations of ONCONASE(R) with certain
other chemotherapeutics. We also have patent applications pending in the United
States, Europe, and Japan.
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
15
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 September 30, 2005, we have 14 employees, of whom 7 were engaged in
research and development activities and 7 were engaged in administration and
management. We have 5 employees who hold 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.
16
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.
Item 3. LEGAL PROCEEDINGS.
Shogen v. Global Aggressive Growth Fund, Ltd. et al.
Kuslima Shogen, our Chief Executive Officer and Chairman of the Board of
Directors, filed the above-captioned case on November 18, 2004 against the
defendants, including the Witchel Defendants, in the US District Court, District
of New Jersey. This case relates to shares of Alfacell common stock that Ms.
Shogen had provided as collateral to secure a loan taken by Ms. Shogen from
certain of the defendants. Ms. Shogen alleges that these shares were unlawfully
sold by the defendants. Among other things, Ms. Shogen seeks damages of $9
million plus costs and attorneys' fees. Alfacell was not an original party to
this action. However, according to a letter to the Court dated September 21,
2005 and a draft, but unfiled, pleading provided to Ms. Shogen, defendants, Sam
Witchel, Greg Witchel and Scharf, Witchel & Co., Inc. (collectively "the Witchel
Defendants") are seeking leave of the Court to name Alfacell and American Stock
Transfer, Alfacell's transfer agent, in a third party complaint and to seek
payment from Alfacell of any sums assessed against them as a result of Ms.
Shogen's claims against them. Alfacell believes that any claims against the
Company, if permitted by the Court, would be without merit and intends to
vigorously defend against such claims.
Shogen v. Pisani et al.
This action was commenced by Ms. Shogen against the defendants in May 2005
in New Jersey Superior Court, Essex County and relates to a loan taken by Ms.
Shogen from the defendants that was secured by varying amounts of Ms. Shogen's
Alfacell common stock. Alfacell was not an original party to this action. On
August 31, 2005 the defendants in this matter filed a counterclaim against Ms.
Shogen, and named Alfacell as a third-party defendant, alleging that Alfacell
violated and conspired to violate certain securities laws. Defendants seek an
unidentified amount of compensatory, punitive and statutory damages as well as
attorneys' fees. Neither Alfacell nor Ms. Shogen has answered these
counterclaims. Alfacell believes the claims against the Company are without
merit and intends to vigorously defend against such claims.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the The Nasdaq SmallCap 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 10, 2005, there were approximately 999 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, 2005 and 2004. 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.
17
High Low
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
Year Ended July 31, 2004:
First Quarter 4.51 1.25
Second Quarter 5.14 2.65
Third Quarter 9.97 3.70
Fourth Quarter 10.07 5.50
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, 2005:
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 3,497,845 $ 3.35 8,247,500
Equity compensation plans not
approved by security holders 68,056(1)(2) $ 1.79 - 0 -
(1) In August 2001, we converted $50,000 of our accounts payable into
55,556 shares of common stock. In addition, we issued 55,556
five-year warrants to purchase 55,556 shares of common stock at an
exercise price of $1.50 per share.
(2) 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
The following is a summary of sales of our equity securities from May 1,
2005 to July 31, 2005 in transactions that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). Each of the following
was exempt from registration under Section 4(2) of the Securities Act based upon
the fact that each issuance was to an accredited investor. The net proceeds from
these transactions were used for general corporate purposes, including the
funding of research and development.
In May 2005, we issued 1,199,890 shares of restricted common stock and an
aggregate total of 1,399,890 shares of common stock underlying five-year
warrants with an exercise price of $1.00 per share upon the conversion of notes
payable by an unrelated party in the amount of $239,978.
18
Issuer Purchases of Equity Securities
We did not repurchase any shares of our common stock during the fiscal
year 2005:
Item 6. SELECTED FINANCIAL DATA.
Set forth below is the selected financial data for our company for the
five fiscal years ended July 31, 2005:
Year Ended July 31,
------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Investment Income $ 141,708 $ 42,113 $ 9,877 $ 4,838 $ 13,121
Other Income 9,836 -- 30,000 -- --
Net Loss(1) (6,461,920) (5,070,307) (2,411,532) (2,591,162) (2,294,936)
Net Loss Per Basic
and Diluted Share (.18) (.17) (.10) (.12) (.12)
Dividends None None None None None
Total Assets 4,901,624 10,421,063 495,322 228,871 201,609
Long-term Debt -- -- 242,516 315,929 23,663
Total Equity
(Deficiency) 3,221,670 8,881,647 (2,491,681) $(1,885,437) (740,378)
(1) Included in the net loss of $6,461,920, $5,070,307 and $2,411,532
for fiscal years ended July 31, 2005, 2004 and 2003, respectively,
are tax benefits of $287,975, $221,847 and $231,357, respectively,
related to the sale of certain state tax operating loss
carryforwards.
19
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 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 for the treatment of malignant mesothelioma yields
favorable results.
We received an Orphan Medicinal Product Designation for ONCONASE(R) from
the European Agency for the Evaluation of Medicinal Products, or the EMEA. We
continue to fulfill the EMEA requirements regarding the Marketing Authorization
Application, or MAA registration requirements for ONCONASE(R) for the treatment
of malignant mesothelioma.
Almost all of our research and development expenses since our inception of
$50,037,251 have gone toward the development of ONCONASE(R) and related drug
candidates. For the fiscal years 2005, 2004 and 2003 our research and
development expenses were $5,082,000, $3,353,000 and $1,700,000, 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 Phase III trial. The first part of the trial has been completed and
the second confirmatory part of the trial is ongoing for which nearly 90% of the
patients required per the study design for full patient accrual have now been
enrolled. The primary endpoint of the trial is survival, and as such, a
sufficient number of 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. If the results of the clinical
trials are positive, we expect to file for marketing registrations (NDA and MAA)
for ONCONASE(R) within six months of completion of the statistical analyses.
However, at this time, we cannot predict with certainty when a sufficient number
of deaths will occur to achieve statistical significance. Hence, the timing of
when we will be able to file for marketing registrations in the US and EU 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 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. As of July 31, 2005, we believe our cash balance is
sufficient to fund our operations at least through July 31, 2006 based on our
expected level of expenditures in relation to activities in preparing
ONCONASE(R) for marketing registrations and other ongoing operations of the
Company. However, we will continue to seek additional financing through equity
or debt financings and the sale of net operating loss carryforwards but 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 the
amount of capital we will receive, if any. If we are unable to raise sufficient
capital, our operations will be severely curtailed and our business and
financial condition will be adversely affected.
20
Results of Operations
Fiscal Years Ended July 31, 2005, 2004 and 2003
Revenues
We are a development stage company as defined in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 7. We are
devoting substantially all 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 2005, 2004 and 2003. Investment income for fiscal 2005
was $142,000 compared to $42,000 for fiscal 2004, an increase of $100,000.
Investment income for fiscal 2004 was $42,000 compared to $10,000 for fiscal
2003, an increase of $32,000. These increases were due to higher balances of
cash and cash equivalents.
Research and Development
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.
Research and development expense for fiscal 2004 was $3,353,000 compared
to $1,700,000 for fiscal 2003, an increase of $1,653,000, or 97%. This increase
was primarily due to increases in data management, clinical research
organization fees and clinical expenses related to our pivotal Phase III
clinical trial for malignant mesothelioma of approximately $1,302,000; sponsored
research and development expenses of approximately $236,000, consulting costs of
approximately $142,000; non cash expense related to stock options issued for
consulting services of approximately $94,000; offset by a decrease in personnel
and insurance expenses of approximately $121,000.
General and Administrative
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 computer repairs and maintenance of approximately
$30,000.
General and administrative expense for fiscal 2004 was $1,578,000 compared
to $624,000 for fiscal 2003, an increase of $954,000, or 153%. The increase was
due primarily to an increase in non-cash expense related to stock and stock
options issued for consulting services associated with business development
activities of approximately $402,000; increases in legal, public relations,
personnel, insurance, and accounting expenses of approximately $230,000,
$109,000, $106,000, $77,000 and $30,000, respectively.
21
Interest
Interest expense for fiscal 2005 was $48,000 compared to $403,000 in
fiscal 2004, a decrease of $355,000 or 88%. The decrease was primarily due to
the maturity and conversion of convertible notes payable into common stock.
Interest expense for fiscal 2004 was $403,000 compared to $358,000 in fiscal
2003, an increase of $45,000 or 12.6%. The increase was primarily due to the
interest expense on the beneficial conversion feature of the convertible notes
payable and its related warrants issued to unrelated parties. 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 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.
For the state fiscal year 2003 (July 1, 2002 to June 30, 2003), we had
approximately $1,373,000 in total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately $273,000. In December 2002,
we received approximately $231,000 from the sale of the $273,000 of tax
benefits, which we recognized as tax benefits for the fiscal year ended July 31,
2003.
If still available under New Jersey law, we will attempt to sell the
remaining $996,000 of our tax benefits between July 1, 2005 and June 30, 2006.
This amount, which is a carryover of our remaining tax benefits from state
fiscal year 2005 and earlier, may increase if we incur additional tax losses
during state fiscal year 2006. 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 2005 was $6,462,000 as compared to $5,070,000 in fiscal 2004 and
$2,411,000 in fiscal 2003. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 2005 amounted to $75,506,000. Such losses are
attributable to the fact that we are still in the development stage and,
accordingly, have not derived sufficient revenues from operations to offset the
development stage expenses.
Liquidity and Capital Resources
We have reported net losses of approximately $6,462,000, $5,070,000, and
$2,411,000 for the fiscal years ended July 31, 2005, 2004 and 2003,
respectively. The loss from date of inception, August 24, 1981, to July 31,
2005, amounts to $75,506,000.
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 2005, we had a net decrease in cash and cash equivalents of
$5,685,000, which resulted primarily from net cash used in operating activities
of $5,933,000, principally for
22
research and development activities, and net cash used in investing activities
due to the purchase of property and equipment of $52,000 offset by net cash
provided by financing activities of $300,000 from warrants and stock options
exercises of $307,000 less $7,000 reduction of debt. Total cash resources as of
July 31, 2005 were $4,463,000 compared to $10,148,000 at July 31, 2004.
Our current liabilities as of July 31, 2005 were $1,680,000 compared to
$1,539,000 at July 31, 2004, an increase of $141,000. The increase was primarily
due to an increase in accrued expenses of approximately $659,000, mainly for
pre-clinical studies and clinical trial of approximately $409,000 and $290,000,
respectively; payroll and payroll taxes of approximately $41,000 and
professional fees of approximately $30,000 and a decrease in other accruals of
approximately $111,000; offset by the maturity and conversion of convertible
notes payable of approximately $373,000 and a decrease in accounts payable of
approximately $145,000.
The following transactions occurred after July 31, 2005:
o In August and September 2005, we issued an aggregate of 118,637
shares of common stock upon the exercise of warrants by an unrelated
party and stock options by an employee at exercise prices ranging
from $0.75 to $0.85 per share. We realized gross proceeds of $89,478
from these exercises.
Our continued operations will depend on our ability to raise additional
funds through various potential sources such as equity and debt financing,
collaborative agreements, strategic alliances, sale of tax benefits, revenues
from the commercial sale of ONCONASE(R), licensing of our proprietary RNase
technology and our ability to realize revenues from our technology and our drug
candidates via out-licensing agreements with other companies. Such additional
funds may not become available as we need them or be available on acceptable
terms. Through July 31, 2005, a significant portion of our financing has been
through the sale of our equity securities and convertible debentures in
registered offerings and private placements and the exercise of stock options
and warrants. 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. Until and unless our
operations generate significant revenues, we expect to continue to fund
operations from the sources of capital previously described. There can be no
assurance that we will be able to raise the capital we need on terms which are
acceptable, if at all. If we are unable to raise additional funds in the future
on acceptable terms, or at all, we may need to delay certain development
activities over the next twelve months. As of July 31, 2005, we believe our cash
balance is sufficient to fund our operations at least through July 31, 2006,
based on our expected level of expenditures in relation to activities in
preparing ONCONASE(R) for marketing registrations and other ongoing operations
of the Company. However, we will continue to seek additional financing through
equity or debt financings and the sale of net operating loss carryforwards but
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 the amount of capital we will receive, if any. If we are unable to raise
sufficient capital, our operations will be severely curtailed and our business
and financial condition will be adversely affected.
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
23
arrangements or other contractually narrow or limited purposes. As of July 31,
2005, we are not involved in any material unconsolidated SPE transactions.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. 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
Statements of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), provides for the use of a fair value
based method of accounting for employee stock compensation. However, SFAS 123
also allows an entity to continue to measure compensation cost for stock options
granted to employees and directors using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), which only requires charges to
compensation expense for the excess, if any, of the fair value of the underlying
stock at the date a stock option is granted (or at an appropriate subsequent
measurement date) over the amount the employee must pay to acquire the stock, if
such amounts differ materially from the historical amounts. We have elected to
continue to account for employee stock options using the intrinsic value method
under Opinion 25.
Pursuant to SFAS 123, shares, warrants or options issued 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."
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.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"), which amends SFAS 123 and will be
effective for the Company beginning with the fiscal quarter ending October 31,
2005. The new standard will require us to expense employee stock options and
other share-based payments over the vesting period. The new standard may be
adopted in one of three ways - the modified prospective transition method, a
variation of the modified prospective transition method or the modified
retrospective transition
24
method. We are currently evaluating how we will adopt the standard and
evaluating the effect that the adoption of SFAS 123(R) will have on our
financial position and results of operations, although we believe such adoption
will increase recorded compensation costs in the future.
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.
Contractual Obligations and Commercial Commitments
Our major outstanding contractual obligations relate to our equipment
operating lease. Below is a table that presents our contractual obligations and
commercial commitments as of July 31, 2005:
Payments Due by Fiscal Year
----------------------------------------------------------------
2011 and
Total 2006 2007 2008 2009 2010 Thereafter
----- ---- ---- ---- ---- ---- ----------
Operating lease $ 42,799 $ 9,171 $ 9,171 $ 9,171 $ 9,171 $ 6,115 $ --
-------- ------- ------- ------- ------- ------- -----
Total contractual
cash obligations $ 42,799 $ 9,171 $ 9,171 $ 9,171 $ 9,171 $ 6,115 $ --
======== ======= ======= ======= ======= ======= =====
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.
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 a net loss of approximately $6,462,000 for the fiscal year
ended July 31, 2005. We have continued to incur losses since July 2005. We may
never achieve revenue sufficient for us to attain profitability.
We incurred net losses of approximately $6,462,000, $5,070,000 and
$2,411,000 for the fiscal years ended July 31, 2005, 2004 and 2003,
respectively.
Our profitability will depend on our ability to develop, obtain regulatory
approvals for, and effectively market ONCONASE(R) as well as entering into
strategic alliances for the development of new drug candidates from the
out-licensing of our proprietary RNase technology. The commercialization of our
pharmaceutical products involves a number of significant challenges. In
particular our ability to commercialize ONCONASE(R) depends on the success of
our clinical development programs, our efforts to obtain regulatory approval and
our sales and marketing efforts or those of our marketing partners, if any,
directed at physicians, patients and third-party payors. A number of factors
could affect these efforts including:
o Our ability to demonstrate clinically that our products have utility
and are safe;
o Delays or refusals by regulatory authorities in granting marketing
approvals;
o Our limited financial resources relative to our competitors;
o Our ability to obtain an appropriate marketing partner;
o The availability and level of reimbursement for our products by
third party payors;
o Incidents of adverse reactions to our products;
25
o Side effects or misuse of our products and unfavorable publicity
that could result; and
o The occurrence of manufacturing or distribution disruptions.
We will seek to generate revenue through licensing, marketing and
development arrangements prior to receiving revenue from the sale of our
products. To date we have not consummated any licensing or marketing
arrangements and we may not be able to successfully consummate any such
arrangements. We have entered into several development arrangements, which have
resulted in limited revenues for us. However, we cannot ensure that these
arrangements or future arrangements, if any, will result in significant amounts
of revenue for us. We, therefore, are unable to predict the extent of any future
losses or the time required to achieve profitability, if at all.
We will need additional financing to continue operations, which may not be
available on acceptable terms, if it is available at all.
We need additional financing in order to continue operations, including
completion of our current clinical trials and filing marketing registrations for
ONCONASE(R) in the United States with the FDA and in Europe with the EMEA. If
the results from our current clinical trial do not demonstrate the efficacy and
safety of ONCONASE(R) for malignant mesothelioma, our ability to raise
additional capital will be adversely affected. Even if regulatory applications
for marketing approvals are filed, we will need additional financing to continue
operations. As of July 31, 2005, we believe that our cash balance is sufficient
to fund our operations at least through July 31, 2006, based on our expected
level of expenditures. However, we will continue to seek additional financing
through equity or debt financings and the sale of net operating loss
carryforwards but 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 the amount of capital we will receive, if any. If
we are unable to raise sufficient capital, our operations will be severely
curtailed and our business and financial condition will be materially adversely
affected.
We may be unable to sell certain state tax benefits in the future and if we are
unable to do so, it would eliminate a source of financing that we have relied on
in the past.
At July 31, 2005, we had federal net operating loss carryforwards of
approximately $52,823,000 that expire from 2006 to 2025 (approximately
$8,675,000 expires in the years 2006 to 2010). We also had research and
experimentation tax credit carryforwards of approximately $1,955,000 that expire
from 2006 to 2025 (approximately $152,000 expires in the years 2006 to 2010).
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. The aggregate
amount of tax benefits that New Jersey allows corporations to sell each state
fiscal year (July 1st through June 30th) is determined annually and if New
Jersey reduces such aggregate amount in any fiscal year we may be unable to sell
some or all of our available tax benefits as we have in the past. In addition,
there is a limited market for these types of sales and we may not be able to
find someone to purchase our tax benefits for a reasonable price. Our historical
results of operations have been improved by our sale of tax benefits and if we
continue to generate a limited amount of revenue and are unable in the future to
sell our tax benefits, our results of operations will be negatively impacted.
For the state fiscal year 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 $996,000 of our tax benefits between July 1, 2005 and June 30, 2006.
This amount, which is a carryover of our remaining tax benefits from state
fiscal year 2005 and earlier, may increase if we incur additional tax losses
during state fiscal year 2006. We can not estimate, however, what percentage of
our saleable tax benefits New Jersey will permit us to sell, how much money
26
we will receive in connection with the sale, if we will be able to find a buyer
for our tax benefits or if such funds will be available in a timely manner.
We cannot predict how long it will take us nor how much it will cost us to
complete our Phase III trial because it is a survival study and we are still in
patient enrollment in part two of this Phase III trial.
We currently have ongoing a two-part 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. 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. Delays in patient enrollment, could delay
achieving a sufficient number of deaths required for statistical analyses, which
therefore may delay the marketing registrations. 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 which or
the amount 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.
The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the type, 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.
If we fail to obtain the necessary regulatory approvals, we will not be allowed
to commercialize our drugs and will not generate product revenue.
The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the level of complexity and novelty of the product. Drugs in late
stages of clinical development may fail to show the desired safety and efficacy
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 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.
27
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
products. We presently rely on third parties to perform certain of the
manufacturing processes for the production of ONCONASE(R) for use in clinical
trials. Currently, we contract with Scientific Protein 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
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.
Our use of manufacturers for ranpirnase and ONCONASE(R) have been approved
by the FDA. We have identified substantial alternative service providers for the
manufacturing services for which we contract. In order to replace an existing
service provider we must amend our IND to notify the FDA of the new
manufacturer. Although the FDA generally will not suspend or delay a clinical
trial as a result of replacing an existing manufacturer, the FDA has the
authority to suspend or delay a clinical trial if, among other grounds, human
subjects are or would be exposed to an unreasonable and significant risk of
illness or injury as a result of the replacement manufacturer.
We intend to rely on third parties to manufacture our products if they are
approved for sale by the appropriate regulatory agencies and are commercialized.
Third party manufacturers may not be able to meet our needs with respect to the
timing, quantity or quality of our products or to supply products on acceptable
terms.
Because we do not have marketing, sales or distribution capabilities, we expect
to contract with third parties for these functions and we will therefore be
dependent upon such third parties to market, sell and distribute our products in
order for us to generate revenues.
We currently have no sales, marketing or distribution capabilities. In
order to commercialize any product candidates for which we receive FDA approval,
we expect to rely on established third party strategic partners to perform these
functions. For example, if we are successful in our Phase III clinical trials
with ONCONASE(R), and are granted marketing approval for the commercialization
of ONCONASE(R), we will be unable to introduce the product to market without
establishing a marketing collaboration with a partner with marketing and
distribution capabilities. 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.
Further, it is likely that we will have limited or no control over the manner in
which our product candidates are marketed or the resources devoted to such
marketing efforts.
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;
28
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. While our other employees have substantial
experience and have made significant contributions to our business, Kuslima
Shogen is our senior executive and also our primary supporter because she
represents the Company's primary means of accessing the capital markets.
Because of the specialized scientific nature of our business, our
continued success also is dependent upon our ability to attract and retain
qualified management and scientific personnel. There is intense competition for
qualified personnel in the pharmaceutical field. As our company grows our
inability to attract qualified management and scientific personnel could
materially adversely affect our research and development programs, the
commercialization of our products and the potential revenue from product sales.
We do not have employment contracts with Kuslima Shogen or any of our
other management and scientific personnel.
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 one Japanese patent that expires in 2010. We also
own patent applications that are pending in the United States, Europe and Japan.
The scope of protection afforded by patents for biotechnological inventions is
uncertain, and such uncertainty applies to our patents as well. Therefore, our
patents may not give us competitive advantages or afford us adequate protection
from competing products. Furthermore, others may independently develop products
that are similar to our products, and may design around the claims of our
patents. Patent litigation and intellectual property litigation are expensive
and our resources are limited. If we were to become involved in litigation, we
might not have the funds or other resources necessary to conduct the litigation
effectively. This might prevent us from protecting our patents, from defending
against claims of infringement, or both. To date, we have not received any
threats of litigation, legal actions or negotiations regarding patent issues.
29
Developments by competitors may render our products obsolete or non-competitive.
In February 2004, the Food and Drug Administration granted Eli Lilly &
Company approval to sell its Alimta(R) medication as an orphan drug to treat
patients with pleural mesothelioma. Alimta is a multi-targeted antifolate that
is based upon a different mechanism of action than ONCONASE(R). To our
knowledge, no other company is developing a product with the same mechanism of
action as ONCONASE(R). However, there may be other companies, universities,
research teams or scientists who are developing products to treat the same
medical conditions our products are intended to treat. Eli Lilly is, and some of
these other companies, universities, research teams or scientists may be more
experienced and have greater clinical, marketing and regulatory capabilities and
managerial and financial resources than we do. This may enable them to develop
products to treat the same medical conditions our products are intended to treat
before we are able to complete the development of our competing product.
Our business is very competitive and involves rapid changes in the
technologies involved in developing new drugs. If others experience rapid
technological development, our products may become obsolete before we are able
to recover expenses incurred in developing our products. We will probably face
new competitors as new technologies develop. Our success depends on our ability
to remain competitive in the development of new drugs or we may not be able to
compete successfully.
We may be sued for product liability.
Our business exposes us to potential product liability that may have a
negative effect on our financial performance and our business generally. The
administration of drugs to humans, whether in clinical trials or commercially,
exposes us to potential product and professional liability risks which are
inherent in the testing, production, marketing and sale of new drugs for humans.
Product liability claims can be expensive to defend and may result in large
judgments or settlements against us, which could have a negative effect on our
financial performance and materially adversely affect our business. We maintain
product liability insurance to protect our products and product candidates in
amounts customary for companies in businesses that are similarly situated, but
our insurance coverage may not be sufficient to cover claims. Furthermore,
liability insurance coverage is becoming increasingly expensive and we cannot be
certain that we will always be able to maintain or increase our insurance
coverage at an affordable price or in sufficient amounts to protect against
potential losses. A product liability claim, product recall or other claim, as
well as any claim for uninsured liabilities or claim in excess of insured
liabilities, may significantly harm our business and results of operations. Even
if a product liability claim is not successful, adverse publicity and time and
expense of defending such a claim may significantly interfere with our business.
If we are unable to obtain favorable reimbursement for our product candidates,
their commercial success may be severely hindered.
Our ability to sell our future products may depend in large part on the
extent to which reimbursement for the costs of our products is available from
government entities, private health insurers, managed care organizations and
others. Third-party payors are increasingly attempting to contain their costs.
We cannot predict actions third-party payors may take, or whether they will
limit the coverage and level of reimbursement for our products or refuse to
provide any coverage at all. Reduced or partial reimbursement coverage could
make our products less attractive to patients, suppliers and prescribing
physicians and may not be adequate for us to maintain price levels sufficient to
realize an appropriate return on our investment in our product candidates or
compete on price.
In some cases, insurers and other healthcare payment organizations try to
encourage the use of less expensive generic brands and over-the-counter, or OTC,
products through their prescription benefits coverage and reimbursement
policies. These organizations may make the generic alternative more attractive
to the patient by providing different amounts of reimbursement so that the net
cost of the generic product to the patient is less than the net cost of a
prescription brand product. Aggressive pricing policies by our generic product
competitors and the prescription benefits policies of insurers could have a
negative effect on our product revenues and profitability.
Many managed care organizations negotiate the price of medical services
and products and develop formularies for that purpose. Exclusion of a product
from a formulary can lead to its sharply reduced usage in the
30
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.
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 new Medicare prescription drug benefit
beginning in 2006 and mandates other reforms. Although we cannot predict the
full effects on our business of the implementation of this new legislation, it
is possible that the new benefit, which will be managed by private health
insurers, pharmacy benefit managers and other managed care organizations, will
result in decreased reimbursement for prescription drugs, which may further
exacerbate industry-wide pressure to reduce the prices charged for prescription
drugs. This could harm our ability to market our products and generate revenues.
It is also possible that other proposals will be adopted. As a result of the new
Medicare prescription drug benefit or any other proposals, we may determine to
change our current manner of operation, provide additional benefits or change
our contract arrangements, any of which could harm our ability to operate our
business efficiently, obtain collaborators and raise capital.
We have only recently been relisted on the Nasdaq SmallCap Market and 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 SmallCap 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 relisted on the Nasdaq SmallCap 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 $0.18
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,
31
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 36,534,235 shares of common stock outstanding as of
July 31, 2005. The following securities that may be exercised into shares of our
common stock were issued and outstanding as of July 31, 2005:
o Options. Stock options to purchase 3,497,845 shares of our common
stock at a weighted average exercise price of approximately $3.35
per share.
o Warrants. Warrants to purchase 12,744,674 shares of our common stock
at a weighted average exercise price of approximately $2.30 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 this 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, 2005 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
32
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, 2005. 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 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, 2005 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.
Item 9A. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of July 31, 2005, the evaluation date. Based upon the evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that, as of
the evaluation date, our disclosure controls and procedures are effective in
timely alerting them to the material information relating to us required to be
included in our periodic SEC filings.
(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:
33
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, 2005. 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).
Based on our assessment and those criteria, management believes that the Company
maintained effective internal control over financial reporting as of July 31,
2005.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of July 31, 2005 has been audited by J.H. Cohn LLP,
an independent registered public accounting firm, as stated in their report
which is included herein.
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 Report of
Management on Internal Control over Financial Reporting, that Alfacell
Corporation (A Development Stage Company) maintained effective internal control
over financial reporting as of July 31, 2005, 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
34
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.
In our opinion, management's assessment that Alfacell Corporation maintained
effective internal control over financial reporting as of July 31, 2005, 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 Trading Commission (COSO). Also in our opinion, Alfacell
Corporation maintained, in all material respects, effective internal control
over financial reporting as of July 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Trading Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets and the related
statements of operations, stockholders' equity (deficiency) and cash flows of
Alfacell Corporation and our report dated October 4, 2005 expressed an
unqualified opinion.
/s/ J.H. Cohn LLP
Roseland, New Jersey
October 4, 2005
(c) CHANGES IN INTERNAL CONTROLS
There were no significant changes made in our internal controls during the three
months ended July 31, 2005 or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
Item 9B. OTHER INFORMATION.
None
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 19, 2006.
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.
(a)(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
35
Filed Herewith
or Incorporated
Exhibit 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) *
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) *
36
Filed Herewith
or Incorporated
Exhibit No. Item Title by Reference
----------- ---------- ------------
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) *
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) *
37
Filed Herewith
or Incorporated
Exhibit No. Item Title by Reference
----------- ---------- ------------
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. +
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 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
38
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 14, 2005 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 14, 2005 /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
Dated: October 14, 2005 /s/ ROBERT D. LOVE
Robert D. Love, Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
Dated: October 14, 2005 /s/ JOHN P. BRANCACCIO
John P. Brancaccio, Director
Dated: October 14, 2005 /s/ STEPHEN K. CARTER
Stephen K. Carter, M.D., Director
Dated: October 14, 2005 /s/ DONALD R. CONKLIN
Donald R. Conklin, Director
Dated: October 14, 2005 /s/ JAMES J. LOUGHLIN
James J. Loughlin, Director
Dated: October 14, 2005 /s/ ANDREW P. SAVADELIS
Andrew P. Savadelis, Director
Dated: October 14, 2005 /s/ DAVID SIDRANSKY
David Sidransky, M.D., Director
Dated: October 14, 2005 /s/ PAUL M. WEISS
Paul M. Weiss, Ph.D., Director
39
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, 2005 and 2004......................................F-6
Statements of Operations - Years ended July 31, 2005, 2004, and 2003
and the Period from August 24, 1981
(Date of Inception) to July 31, 2005....................................F-7
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2005....................................F-8
Statements of Cash Flows - Years ended July 31, 2005, 2004, and 2003
and Period from August 24, 1981
(Date of Inception) to July 31, 2005...................................F-14
Notes to Financial Statements - Years ended July 31, 2005, 2004 and
2003 and the Period from August 24, 1981
(Date of Inception) to July 31, 2005...................................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, 2005 and 2004, 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, 2005 and for the
period from August 24, 1981 (date of inception) to July 31, 2005. 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, 2005 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, 2005 and 2004, and its
results of operations and cash flows for each of the years in the three year
period ended July 31, 2005 and for the period from August 24, 1981 to July 31,
2005, in conformity with accounting principles generally accepted in the United
States of America.
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, 2005,
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 4, 2005, expressed an unqualified opinion thereon.
/s/ J.H. Cohn LLP
Roseland, New Jersey
October 4, 2005
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, 2005 and 2004
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,462,951 $ 10,147,694
Other assets 196,936 64,771
------------ ------------
Total current assets 4,659,887 10,212,465
Property and equipment, net of accumulated depreciation and
amortization of $1,061,012 in 2005 and $1,095,412 in 2004 80,395 56,783
Loan receivable, related party 161,342 151,815
------------ ------------
Total assets $ 4,901,624 $ 10,421,063
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable, net of debt discount of
$34,120 at July 31, 2004 $ -- $ 372,611
Accounts payable 396,263 541,600
Accrued expenses 1,283,691 625,205
------------ ------------
Total liabilities 1,679,954 1,539,416
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 2005 and 2004 -- --
Common stock $.001 par value. Authorized 100,000,000
shares at July 31, 2005 and 2004; issued and outstanding
36,534,235 shares and 34,347,885 shares at July 31, 2005
and 2004, respectively 36,534 34,348
Capital in excess of par value 78,691,572 77,891,815
Deficit accumulated during development stage (75,506,436) (69,044,516)
------------ ------------
Total stockholders' equity 3,221,670 8,881,647
------------ ------------
Total liabilities and stockholders' equity $ 4,901,624 $ 10,421,063
============ ============
See accompanying notes to financial statements.
F-6
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 2005, 2004 and 2003
and the Period from August 24, 1981
(Date of Inception) to July 31, 2005
August 24, 1981
(date of
inception)
to July 31, 2005 2005 2004 2003
---------------- ------------ ------------ ------------
Revenues:
Sales $ 553,489 $ -- $ -- $ --
Investment income 1,570,821 141,708 42,113 9,877
Other income 99,939 9,836 -- 30,000
------------ ------------ ------------ ------------
2,224,249 151,544 42,113 39,877
------------ ------------ ------------ ------------
Cost and expenses:
Cost of sales 336,495 -- -- --
Research and development 50,037,251 5,082,339 3,352,977 1,699,962
General and administrative 25,637,588 1,771,379 1,578,357 624,406
Interest:
Related parties 1,147,547 -- -- --
Others 2,873,964 47,721 402,933 358,398
------------ ------------ ------------ ------------
80,032,845 6,901,439 5,334,267 2,682,766
------------ ------------ ------------ ------------
Loss before state tax benefit (77,808,596) (6,749,895) (5,292,154) (2,642,889)
State tax benefit 2,302,160 287,975 221,847 231,357
------------ ------------ ------------ ------------
Net loss $(75,506,436) $ (6,461,920) $ (5,070,307) $ (2,411,532)
============ ============ ============ ============
Loss per basic and diluted common share $ (0.18) $ (0.17) $ (0.10)
============ ============ ============
Weighted average number of shares
outstanding 35,379,000 29,438,000 23,166,000
============ ============ ============
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, 2005
Common Stock
----------------------
Capital In Common
Number of Excess of par Stock to be
Shares Amount Value Issued
---------- ------- ------------- -----------
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 -- -- -- --
---------- ------- ----------- ----------
Balance at July 31, 1982 1,266,964 1,267 325,933 --
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 -- -- -- --
---------- ------- ----------- ----------
Balance at July 31, 1983 2,007,325 2,007 1,802,384 --
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 -- -- -- --
---------- ------- ----------- ----------
Balance at July 31, 1984 2,444,891 2,445 3,223,065 --
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 -- -- -- --
---------- ------- ----------- ----------
Balance at July 31, 1985 2,884,843 2,885 6,445,730 --
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 -- -- -- --
---------- ------- ----------- ----------
Balance at July 31, 1986 (carried forward) 2,933,052 2,933 6,849,112 --
Deficit
Accumulated Total
During Deferred Stockholders'
Development Subscription compensation, Equity
Stage 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) -- -- (121,486)
----------- ---------- ---------- -----------
Balance at July 31, 1982 (121,486) -- -- 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) -- -- (558,694)
----------- ---------- ---------- -----------
Balance at July 31, 1983 (680,180) -- -- 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) -- -- (1,421,083)
----------- ---------- ---------- -----------
Balance at July 31, 1984 (2,101,263) -- -- 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) -- -- (2,958,846)
----------- ---------- ---------- -----------
Balance at July 31, 1985 (5,060,109) -- -- 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) -- -- (2,138,605)
----------- ---------- ---------- -----------
Balance at July 31, 1986 (carried forward) (7,198,714) -- -- (346,669)
F-8
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
------------------------
Capital In Common
Number of Excess of par Stock to be
Shares Amount Value Issued
--------- ---------- ------------- -----------
Balance at July 31, 1986 (brought forward) 2,933,052 $ 2,933 $ 6,849,112 --
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 -- -- -- --
--------- ---------- ----------- -----------
Balance at July 31, 1987 3,207,797 3,208 7,596,287 --
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 -- -- -- --
--------- ---------- ----------- -----------
Balance at July 31, 1988 4,440,724 4,441 12,006,716 --
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 -- -- -- --
--------- ---------- ----------- -----------
Balance at July 31, 1989 5,595,897 5,596 17,803,899 --
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 --
Deficit
Accumulated Deferred Total
During compensation, Stockholders'
Development Subscription restricted Equity
Stage Receivable stock (Deficiency)
------------ ------------ ------------- -------------
Balance at July 31, 1986 (brought forward) $ (7,198,714) $ -- $ -- $ (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) -- -- (2,604,619)
------------ ---------- ----------- -----------
Balance at July 31, 1987 (9,803,333) -- -- (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) -- -- (3,272,773)
------------ ---------- ----------- -----------
Balance at July 31, 1988 (13,076,106) -- (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) -- -- (2,952,869)
------------ ---------- ----------- -----------
Balance at July 31, 1989 (16,028,975) -- (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
------------------------
Capital In Common
Number of Excess of par Stock to be
Shares Amount Value Issued
--------- ---------- ------------- ----------
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 -- -- -- --
--------- ---------- ----------- ----------
Balance at July 31, 1990 6,799,829 6,800 23,699,631 --
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 -- -- -- --
--------- ---------- ----------- ----------
Balance at July 31, 1991 7,022,549 7,022 24,642,803 --
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 -- -- -- --
--------- ---------- ----------- ----------
Balance at July 31, 1992 7,338,014 7,338 25,778,877 --
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 -- -- -- --
--------- ---------- ----------- ----------
Balance at July 31, 1993 7,862,281 7,863 26,890,082 --
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 --
Deficit
Accumulated Deferred Total
During compensation, Stockholders'
Development Subscription restricted Equity
Stage Receivable 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) -- -- (4,860,116)
------------ ---------- ----------- -----------
Balance at July 31, 1990 (20,889,091) -- (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) -- -- (5,202,302)
------------ ---------- ----------- -----------
Balance at July 31, 1991 (26,091,393) -- (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) -- -- (4,772,826)
------------ ---------- ----------- -----------
Balance at July 31, 1992 (30,864,219) -- (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) -- -- (2,357,350)
------------ ---------- ----------- -----------
Balance at July 31, 1993 (33,221,569) -- (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
-------------------------
Capital In Common
Number of Excess of par Stock to be
Shares Amount Value Issued
---------- ---------- ------------- -----------
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 -- -- -- --
---------- ---------- ------------ ----------
Balance at July 31, 1994 9,124,681 9,125 33,680,954 50,000
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 -- -- -- --
---------- ---------- ------------ ----------
Balance at July 31, 1995 10,319,187 10,319 36,262,427 343,808
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 -- -- -- --
---------- ---------- ------------ ----------
Balance at July 31, 1996 13,859,209 13,859 47,023,529 258,335
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 -- -- -- --
---------- ---------- ------------ ----------
Balance at July 31, 1997 (carried forward) 14,847,793 14,848 50,961,382 --
Deficit
Accumulated Deferred Total
During compensation, Stockholders'
Development Subscription restricted Equity
Stage Receivable 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) -- -- (2,234,428)
------------ ---------- ---------- -----------
Balance at July 31, 1994 (35,455,997) -- (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) -- -- (1,993,123)
------------ ---------- ---------- -----------
Balance at July 31, 1995 (37,449,120) -- -- (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) -- -- (2,942,152)
------------ ---------- ---------- -----------
Balance at July 31, 1996 (40,391,272) (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) -- -- (5,018,867)
------------ ---------- ---------- -----------
Balance at July 31, 1997 (carried forward) (45,410,139) -- -- 5,566,091
F-11
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
-------------------------
Capital In Common
Number of Excess of par Stock to be
Shares Amount Value Issued
---------- ---------- ------------- -----------
Balance at July 31, 1997 (brought forward) 14,847,793 $ 14,848 $50,961,382 --
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 -- -- -- --
---------- ---------- ----------- -----------
Balance at July 31, 1998 17,239,893 17,240 55,472,243 --
Issuance of options for services -- -- 205,593 --
Issuance of shares for services, net 46,701 46 16,359 --
Net loss -- -- -- --
---------- ---------- ----------- -----------
Balance at July 31, 1999 17,286,594 17,286 55,694,195 --
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 -- -- -- --
---------- ---------- ----------- -----------
Balance at July 31, 2000 18,431,559 18,431 56,526,288 --
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 -- -- -- --
---------- ---------- ----------- -----------
Balance at July 31, 2001 19,802,245 19,802 58,211,335 --
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 -- -- -- --
---------- ---------- ----------- -----------
Balance at July 31, 2002 (carried forward) 22,760,921 22,761 59,654,479 --
Deficit
Accumulated Deferred Total
During compensation, Stockholders'
Development Subscription restricted Equity
Stage Receivable stock (Deficiency)
------------ ------------ ------------- -------------
Balance at July 31, 1997 (brought forward) $(45,410,139) $ -- $ -- $ 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) -- -- (6,387,506)
------------ ---------- ---------- -----------
Balance at July 31, 1998 (51,797,645) -- -- 3,691,838
Issuance of options for services -- -- -- 205,593
Issuance of shares for services, net -- -- -- 16,405
Net loss (3,156,636) -- -- (3,156,636)
------------ ---------- ---------- -----------
Balance at July 31, 1999 (54,954,281) -- -- 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) -- -- (1,722,298)
------------ ---------- ---------- -----------
Balance at July 31, 2000 (56,676,579) -- -- (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) -- -- (2,294,936)
------------ ---------- ---------- -----------
Balance at July 31, 2001 (58,971,515) -- -- (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) -- -- (2,591,162)
------------ ---------- ---------- -----------
Balance at July 31, 2002 (carried forward) (61,562,677) -- -- (1,885,437)
F-12
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
-------------------------
Capital In Common
Number of Excess of par Stock to be
Shares Amount Value Issued
---------- ---------- ------------- -----------
Balance at July 31, 2002 (brought forward) 22,760,921 $ 22,761 $59,654,479 --
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 -- -- -- --
---------- ---------- ----------- -----------
Balance at July 31, 2003 25,026,129 25,026 61,457,502 --
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, other 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 -- -- -- --
---------- ---------- ----------- -----------
Balance at July 31, 2004 34,347,885 34,348 77,891,815 --
Exercise of stock options and warrants, net 438,372 438 306,717 --
Issuance of shares and warrants for conversion of
subordinated debentures, other 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 -- -- -- --
---------- ---------- ----------- -----------
Balance at July 31, 2005 36,534,235 $ 36,534 $78,691,572 --
========== ========== =========== ===========
Deficit
Accumulated Deferred Total
During compensation, Stockholders'
Development Subscription restricted Equity
Stage Receivable stock (Deficiency)
------------ ------------ ------------- -------------
Balance at July 31, 2002 (brought forward) $(61,562,677) $ -- $ -- $ (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) -- -- (2,411,532)
------------ ----------- ----------- ------------
Balance at July 31, 2003 (63,974,209) -- -- (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, other -- -- -- 927,872
Issuance of shares for services rendered -- -- -- 288,500
Issuance of options for services rendered -- -- -- 280,612
Net loss (5,070,307) -- -- (5,070,307)
------------ ----------- ----------- ------------
Balance at July 31, 2004 (69,044,516) -- -- 8,881,647
Exercise of stock options and warrants, net -- -- -- 307,155
Issuance of shares and warrants for conversion of
subordinated debentures, other -- -- -- 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) -- -- (6,461,920)
------------ ----------- ----------- ------------
Balance at July 31, 2005 $(75,506,436) $ -- $ -- $ 3,221,670
============ =========== =========== ============
See accompanying notes to financial statements.
F-13
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 2005, 2004 and 2003
and the Period from August 24, 1981
(Date of Inception) to July 31, 2005
August 24, 1981
(date of inception)
to
July 31,
2005 2005 2004 2003
------------------- ----------- ----------- -----------
Cash flows from operating activities:
Net loss $(75,506,436) $(6,461,920) $(5,070,307) $(2,411,532)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of marketable securities (25,963) -- -- --
Depreciation and amortization 1,585,684 28,917 9,549 15,812
Loss on disposal of property and equipment 18,926 -- -- --
Issuance of common stock, stock options and warrants for
services rendered 6,717,013 30,289 569,112 85,559
Amortization of debt discount 594,219 34,120 316,688 243,411
Amortization of deferred compensation 11,442,000 -- -- --
Amortization of organization costs 4,590 -- -- --
Changes in assets and liabilities:
(Increase) decrease in other current assets (256,803) (132,165) (54,668) 35,651
Increase in loans receivable, related party (65,291) (9,527) (9,528) (73,620)
Increase in loans and interest payable, related party 744,539 -- -- --
(Decrease) increase in accounts payable 902,898 (145,337) (105,653) (2,476)
Increase in accrued payroll and expenses, related parties 2,348,145 -- -- --
Increase (decrease) in accrued expenses 2,002,575 722,985 (669,901) 553,700
------------ ----------- ----------- -----------
Net cash used in operating activities (49,493,904) (5,932,638) (5,014,708) (1,553,495)
------------ ----------- ----------- -----------
Cash flows from investing activities:
Purchase of marketable securities (290,420) -- -- --
Proceeds from sale of marketable equity securities 316,383 -- -- --
Purchase of property and equipment (1,512,902) (52,529) (53,537) --
Patent costs (97,841) -- -- --
------------ ----------- ----------- -----------
Net cash used in investing activities (1,584,780) (52,529) (53,537) --
------------ ----------- ----------- -----------
F-14
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24, 1981
(date of inception)
to
July 31,
2005 2005 2004 2003
------------------ ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings $ 874,500 $ -- $ -- $ 25,000
Payment of short-term borrowings (653,500) -- -- (25,000)
Increase (decrease) in loans payable, related party, net 2,628,868 -- -- (139,794)
Proceeds from bank debt and other long-term debt, net of
deferred debt costs 3,667,460 -- -- 915,000
Reduction of bank debt and long-term debt (2,966,568) (6,731) (8,673) (8,704)
Proceeds from issuance of common stock, net 40,750,316 -- 10,735,978 653,627
Proceeds from exercise of stock options and warrants, net 10,526,566 307,155 4,158,497 377,660
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 55,541,635 300,424 14,885,802 1,797,789
------------ ----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents 4,462,951 (5,684,743) 9,817,557 244,294
Cash and cash equivalents at beginning of period -- 10,147,694 330,137 85,843
------------ ----------- ----------- -----------
Cash and cash equivalents at end of period $ 4,462,951 $ 4,462,951 $10,147,694 $ 330,137
============ =========== =========== ===========
Supplemental disclosure of cash flow information - interest paid $ 1,714,018 $ 305 $ 6,375 $ 24,697
============ =========== =========== ===========
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,
2005 2005 2004 2003
------------------ ----------- ----------- ----------
Conversions of accounts payable to common stock $ 506,725 $ -- $ 52,176 $ 94,223
========== =========== =========== ==========
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 $1,584,364 $ 464,499 $ 927,872 $ --
========== =========== =========== ==========
Issuance of common stock for services rendered $ 2,460 $ -- $ -- $ --
========== =========== =========== ==========
Issuance of warrants with notes payable $ 594,219 $ -- $ -- $ 594,219
========== =========== =========== ==========
See accompanying notes to financial statements.
F-16
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Years ended July 31, 2005, 2004 and 2003
and the Period From August 24, 1981
(Date of Inception) to July 31, 2005
(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.
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. Debt instruments have been
issued at rates which represent prevailing market rates for similar
financings.
F-17
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
Earnings (Loss) Per Common Share
"Basic" earnings (loss) per common share equals net income (loss) divided
by weighted average common shares outstanding during the period. "Diluted"
earnings per common share equals net income divided by the sum of weighted
average common shares outstanding during the period, adjusted for the
effects of potentially dilutive securities. The Company's Basic and
Diluted per share amounts are the same since the Company is in a loss
position and the assumed exercise of stock options and warrants prior to
July 31, 2005 would be anti-dilutive. The number of outstanding options
and warrants that could dilute earnings per share in future periods was
16,242,519, 14,329,413 and 9,663,023 at July 31, 2005, 2004 and 2003,
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 ("SFAS") No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), provides for the use of a fair
value based method of accounting for employee stock compensation. However,
SFAS 123 also allows an entity to continue to measure compensation cost
for stock options granted to employees and directors using the intrinsic
value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), which
only requires charges to compensation expense for the excess, if any, of
the fair value of the underlying stock at the date a stock option is
granted (or at an appropriate subsequent measurement date) over the amount
the employee must pay to acquire the stock, if such amounts differ
materially from the historical amounts. The Company has elected to
continue to account for employee stock options using the intrinsic value
method under Opinion 25. As the exercise price of all options granted
under these plans was equal to the fair market price of the underlying
common stock on the grant date, no stock-based employee compensation cost
has been recognized in the statements of operations.
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 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
or In Conjunction with Selling Goods or Services."
In accordance with SFAS 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement
No. 123" ("SFAS 148"), the Company's pro forma option expense is computed
using the Black-Scholes option pricing model using the assumptions set
forth in Note 9. To comply with SFAS 148, the Company is presenting the
following table to illustrate the effect on the net loss and loss per
share if it had applied the fair value recognition provisions of SFAS 123,
as amended, to options granted under the stock-based employee compensation
plans. For purposes of this pro forma disclosure, the estimated value of
the options is amortized ratably to expense over the options' vesting
periods.
F-18
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
Net Loss: 2005 2004 2003
---- ---- ----
As reported $(6,461,920) $(5,070,307) $(2,411,532)
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) (152,598)
----------- ----------- -----------
Pro forma $(9,740,002) $(6,560,028) $(2,564,130)
=========== =========== ===========
Basic and diluted loss per common share:
As reported $ (0.18) $ (0.17) $ (0.10)
Pro forma (0.28) (0.22) (0.11)
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"), which amends SFAS 123 and will be
effective for the Company beginning with the fiscal quarter ending October
31, 2005. The new standard will require us to expense employee stock
options and other share-based payments over the vesting period. The new
standard may be adopted in one of three ways - the modified prospective
transition method, a variation of the modified prospective transition
method or the modified retrospective transition method. We are currently
evaluating how we will adopt the standard and evaluating the effect that
the adoption of SFAS 123(R) will have on our financial position and
results of operations, although the Company believes such adoption will
increase recorded compensation costs in the future.
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.
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 $6,462,000,
$5,070,000, and $2,411,000 for the fiscal years ended July 31, 2005, 2004
and 2003, respectively. The loss from date of inception, August 24, 1981
to July 31, 2005, amounts to $75,506,000.
F-19
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Liquidity, (Continued)
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. Through
July 31, 2005, a significant portion of the Company's financing has been
through the sale of its equity securities and convertible debentures in
registered offerings and private placements and the exercise of stock
options and warrants. Additionally, the Company has raised capital through
debt financings, the sale of tax benefits and research products, interest
income and financing received from its Chief Executive Officer. Until and
unless the Company's operations generate significant revenues, the Company
expects to continue to fund operations from the sources of capital
previously described. 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. If the Company is unable to raise additional funds in the future on
acceptable terms, or at all, the Company may need to delay certain
development activities over the next twelve months. As of July 31, 2005,
management believes that the Company's cash balance is sufficient to fund
its operations at least through July 31, 2006, based on its expected level
of expenditures in relation to activities in preparing ONCONASE(R) for
marketing registrations in the U.S. and Europe and other ongoing
operations of the Company. However, the Company will continue to seek
additional financing through equity or debt financings and the sale of net
operating loss carryforwards but cannot be sure that it will be able to
raise capital on favorable terms or at all. The Company may also obtain
additional capital through the exercise of outstanding options and
warrants, although it cannot provide any assurance of such exercises or
the amount of capital it will receive, if any. If the Company is unable to
raise sufficient capital, its operations will be severely curtailed and
its business and financial condition will be adversely affected.
The Company will continue to incur costs in conjunction with its U.S. and
foreign registrations for marketing approval of ONCONASE(R). The Company
is currently in discussions with potential strategic alliance partners to
further the development and marketing of ONCONASE(R) and other related
products in its pipeline. However, the Company cannot be sure that any
such alliances will materialize.
(3) Property and Equipment
Property and equipment, at cost, consists of the following at July 31:
2005 2004
---- ----
Laboratory equipment $ 769,760 $ 794,123
Office equipment 273,814 260,239
Leasehold improvements 97,833 97,833
---------- ----------
Total 1,141,407 1,152,195
Less accumulated depreciation and amortization 1,061,012 1,095,412
---------- ----------
Property and equipment, net $ 80,395 $ 56,783
========== ==========
(4) Long-term Debt
Long-term debt consists of the following at July 31:
2005 2004
---- ----
Convertible notes payable, unsecured, unrelated party at 8% interest, net of
debt discount of $34,120 at July 31, 2004 with maturity during fiscal 2005 $ -- $365,880
Note payable, in monthly installments of $1,459, including principal and
interest commencing April 2000 and each month thereafter until March 2005. -- 6,731
-------- --------
-- 372,611
Less current portion -- 372,611
-------- --------
$ -- $ --
======== ========
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, 2003, the Company issued 8%
convertible notes payable to unrelated parties with principal balances
totaling an aggregate of $915,000. These notes payable matured 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 at 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 has issued 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. At the issuance dates of the
notes payable, the fair market values of the Company's shares exceeded the
effective conversion prices.
Accordingly, the Company initially increased additional paid-in capital by
$219,259 for the fair value of the warrants and reduced the carrying value
of the notes payable for the same amount for the debt discount
attributable to the fair value of the warrants. The Company amortized the
debt discount over the terms of the notes payable.
Pursuant to the applicable guidance in the consensus for EITF Issue No.
00-27, the Company valued the beneficial conversion feature using the
effective conversion price. Accordingly, the Company first allocated
$219,259 to the detachable warrants and decreased the carrying value of
the notes payable.
Based on the effective conversion prices, the Company recorded a
beneficial conversion charge of $374,960 which was allocated to additional
paid-in capital and debt discount which was amortized as interest expense
over the terms of the notes payable.
During the fiscal year ended July 31, 2004, the principal and accrued
interest of the notes payable 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.
During the fiscal year ended July 31, 2005, the principal and accrued
interest of the notes payable 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
Amounts due from the Company's CEO totaling $161,342, $151,815 and
$142,287 at July 31, 2005, 2004 and 2003, 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, 2005, 2004 and 2003, 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. Rent expense
charged to operations was $136,000 in each of 2005, 2004 and 2003.
F-21
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity
On September 1, 1981, the Company issued 712,500 shares of common stock
(1,068,750 shares adjusted for the stock split on September 8, 1982) to
officers and stockholders in exchange for equipment, research and
development services, stock registration costs, reimbursement of expenses
and other miscellaneous services. The common stock issued for services was
recorded at the estimated fair value of services rendered based upon the
Board of Directors' determination and ratification of the value of
services. Equipment received in exchange for common stock was recorded at
the transferor's cost. Common stock issued for reimbursement of expenses
was recorded based upon expenses incurred. All values assigned for
expenses and services rendered 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.
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.
F-22
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
On January 2, 1987, the Company issued 250,000 shares of common stock to
officers and stockholders, including the President and Chief Executive
Officer, in recognition of services performed for the Company. The fair
value of such shares was recorded as compensation expense.
On February 3, 1987, the Company sold 5,000 shares of common stock to a
private investor for $5.00 per share, resulting in net proceeds to the
Company of approximately $25,000.
On September 1, 1987, the Board of Directors approved new wage contracts
for three officers. The contracts provided for the issuance of 700,000
shares of common stock as an inducement for signing. The fair value of
these shares was recorded as deferred compensation and was amortized over
the term of the employment agreements. The contracts also provided for the
issuance of 1,500,000 shares of common stock in 750,000 increments upon
the occurrence of certain events. These shares were issued during the
fiscal years ended July 31, 1989 and 1990 and the fair value of such
shares was recorded as deferred compensation and was amortized over the
remaining term of the employment agreements. The contracts also provided
for five-year options to purchase 750,000 shares of common stock at $3.00
per share; options for the purchase of 170,000 shares were exercised on
June 16, 1988 and the remaining options for the purchase of 580,000 shares
expired on September 2, 1992.
During the fiscal year ended July 31, 1988, the Company issued 206,429
shares of common stock for payment of legal and consulting services. The
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.
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.
F-23
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 1992, the Company sold 70,731 shares
of common stock to private investors at $2.75 to $3.50 per share resulting
in net proceeds to the Company of approximately $219,900.
During the fiscal year ended July 31, 1992, the Company issued 45,734
shares of common stock as payment for services rendered to the Company.
The fair value of the common stock was charged to operations.
During the fiscal years ended July 31, 1992 and 1990, 94,000 and 50,000
shares of common stock, respectively, were issued to the Company's Chief
Executive Officer upon the conversion of outstanding debentures.
During the fiscal year ended July 31, 1993, the Company sold 352,667
shares of common stock to private investors at prices ranging from $2.00
to $3.00 per share resulting in net proceeds to the Company of
approximately $735,500. In addition, the private investors were granted
options to purchase common stock totaling 587,167 shares at prices ranging
from $3.00 to $7.00. During the fiscal years ended July 31, 1995 and 1996,
322,500 and 228,833 options expired, respectively. A total of 42,167
options due to expire on July 31, 1995 were extended to July 31, 1996 and
their exercise price was reduced to $2.50. During the fiscal year ended
July 31, 1996, 35,834 options were exercised resulting in net proceeds to
the Company of approximately $89,600.
During the fiscal year ended July 31, 1993, the Company issued 54,600
shares of common stock as payment for legal and other services performed
for the Company. The fair value of 49,600 shares was charged to
operations. The remaining 5,000 shares were recorded as deferred
compensation and were amortized over a one-year period, beginning in
February 1993, in accordance with the agreement entered into with the
recipient.
During the fiscal year ended July 31, 1994, the Company issued 7,000
shares of common stock as payment for services performed for the Company.
The fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1994, the Company sold 25,000 shares
of common stock to a private investor at $2.00 per share resulting in net
proceeds to the Company of $50,000. In addition, the private investor was
granted options to purchase common stock totaling 25,000 shares at $4.00
per common share. These options were exercised in September 1996 resulting
in net proceeds to the Company of $100,000.
During the fiscal year ended July 31, 1994, the Company sold 800,000
shares of common stock to private investors at $2.50 per share resulting
in net proceeds to the Company of $1,865,791. In addition, the private
investors were granted warrants to purchase common stock totaling 800,000
shares at $5.00 per common share. Warrants for the purchase of 147,450
shares were exercised during fiscal 1997 resulting in net proceeds to the
Company of $737,250. The remaining 652,550 warrants expired during fiscal
1997.
During the fiscal year ended July 31, 1994, 400,000 shares of common stock
were issued to the Company's Chief Executive Officer upon the conversion
of outstanding debentures.
During the fiscal year ended July 31, 1994, 25,400 shares of common stock
were issued upon the conversion of other outstanding debentures.
F-24
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
In September 1994, the Company completed a private placement resulting in
the issuance of 288,506 shares of common stock and three-year warrants to
purchase 288,506 shares of common stock at an exercise price of $5.50 per
share. The warrants expired during fiscal 1998. The common stock and
warrants were sold in units consisting of 20,000 shares of common stock
and warrants to purchase 20,000 shares of common stock. The price per unit
was $50,000. The Company received proceeds of approximately $545,000, net
of costs associated with the placement of approximately $55,000 and the
conversion of certain debt by creditors of $121,265 into equivalent
private placement units of 17,600 shares for conversion of short-term
borrowings and 30,906 shares issued for services rendered. In October
1994, an additional two units at $50,000 per unit were sold to a private
investor under the same terms as the September 1994 private placement
resulting in the issuance of 40,000 shares of common stock and warrants to
purchase 40,000 shares of common stock. The warrants expired during fiscal
1998.
During the fiscal year ended July 31, 1995, 185,000 shares of common stock
were issued upon the exercise of stock options by unrelated parties,
resulting in net proceeds to the Company of $437,200. The exercise prices
of the options ranged from $2.27 to $2.50, which had been reduced from
$3.50 and $5.00, respectively, during fiscal 1995.
During the fiscal year ended July 31, 1995, the Company sold 681,000
shares of common stock to private investors resulting in net proceeds to
the Company of approximately $1,379,000. The shares were sold at prices
ranging from $2.00 to $2.25.
During the fiscal year ended July 31, 1995, the Company sold 139,080
shares of common stock and 47,405 three-year warrants to purchase shares
of common stock at an exercise price of $4.00 per share to private
investors. The stock and warrants were sold at prices ranging from $2.25
to $2.73 per share and resulted in net proceeds to the Company of
$343,808, of which $4,800 was for services rendered. The common shares
were issued to the investors subsequent to July 31, 1995.
On August 4, 1995, the Company issued 6,060 shares of common stock as
payment for services rendered to the Company. The fair value of the common
stock was charged to operations.
On September 29, 1995, the Company completed a private placement resulting
in the issuance of 1,925,616 shares of common stock and three-year
warrants to purchase an aggregate of 55,945 shares of common stock at an
exercise price of $4.00 per share. Of these shares 1,935 were issued for
services rendered to the Company. The common stock was sold alone at per
share prices ranging from $2.00 to $3.70, and in combination with warrants
at per unit prices ranging from $4.96 to $10.92, which related to the
number of warrants contained in the unit. The Company received proceeds of
approximately $4.1 million, including $1,723,000 for approximately 820,000
shares received during the fiscal year ended July 31, 1995. The warrants
expired in October 1998.
As consideration for the extension of the Company's term loan agreement
with its bank, the Company granted the bank a warrant to purchase 10,000
shares of common stock at an exercise price of $4.19. The warrants were
issued as of October 1, 1995 and expired on August 31, 1997.
In June 1996, the Company sold in a private placement 1,515,330 shares of
common stock and three-year warrants to purchase 313,800 shares of common
stock at an exercise price of $7.50 per share. Of these shares, 12,000
were issued for services rendered to the Company. The common stock was
sold alone at a per share price of $3.70, in combination with warrants at
a per unit price of $12.52 and warrants were sold alone at a per warrant
price of $1.42. Each unit consisted of three shares of common stock and
one warrant. The Company received proceeds of approximately $5.7 million.
The warrants expired during the fiscal 2000.
F-25
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
In June 1996, the Company issued 10,000 five-year stock options as payment
for services rendered. The options vested immediately and 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.
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.
F-26
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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.
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
F-27
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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.
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.
F-28
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 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.
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. As of July 31, 2005, 110,000 of
these warrants were exercised.
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.
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 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, 2005, 797,545 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-30
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 matured 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. At the issuance dates of the notes payable, the fair market values
of the Company's shares exceeded the effective conversion prices.
Accordingly, the Company initially increased additional paid-in capital by
$219,259 for the fair value of the warrants and reduced the carrying value
of the notes payable for the same amount for the debt discount
attributable to the fair value of the warrants. The Company also increased
its additional paid-in capital and debt discount by $374,960 for
beneficial conversion rights issued in connection with the issuances of
these notes (see note 4).
During the fiscal year ended July 31, 2003, the Company sold an aggregate
of 1,315,000 shares of common stock to private investors at prices ranging
from $0.20 to $0.73 per share resulting in net proceeds of $653,627 to the
Company. In addition, the private investors were granted warrants to
purchase an aggregate of 1,315,000 shares of common stock at per share
exercise prices ranging from $1.00 to $1.50. The warrants will expire
during the period commencing January 2008 and ending in October 2008. As
of July 31, 2005, 680,000 of these warrants were exercised.
F-31
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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, 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.
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.
F-32
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 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, 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.
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.
F-33
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(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 2005:
Warrants Exercise Price Expiration
-------- -------------- ----------
Sold in March 1994 Private Placement 800,000 $ 5.00 3/21/97 to 6/21/97
---------
Outstanding at July 31, 1994 800,000 5.00 3/21/97 to 6/21/97
Sold in September 1994 Private Placement 288,506 5.50 12/9/97 to 12/14/97
Sold in October 1994 Private Placement 40,000 5.50 1/21/98
Sold in September 1995 Private Placement 47,405 4.00 10/1/98
---------
Outstanding and exercisable at July 31, 1995 1,175,911 4.00 - 5.50 3/21/97 to 10/1/98
Issued to bank in connection with an amendment
to the Company's term loan 10,000 4.19 8/31/97
Sold in September 1995 Private Placement 8,540 4.00 10/1/98
Sold in June 1996 Private Placement 313,800 7.50 8/29/99 to 9/10/99
---------
Outstanding and exercisable at July 31, 1996 1,508,251 4.00 - 7.50 3/21/97 to 9/10/99
Exercised (147,450) 5.00 3/21/97 to 6/21/97
Expired (652,550) 5.00 3/21/97 to 6/21/97
---------
Outstanding and exercisable at July 31, 1997 708,251 4.00 - 7.50 12/9/97 to 9/10/99
Sold in February 1998 Private Placement 1,168,575 2.50 8/17/01
Issued to the Placement Agent in connection with
the February 1998 Private placement
(see note 7) 350,574 2.20 - 2.50 8/17/01
Exercised (4,950) 2.20 - 2.50 5/19/01
Expired (338,506) 4.19 - 5.50 8/31/97 to 1/21/98
---------
Outstanding and exercisable at July 31, 1998 1,883,944 2.20 - 7.50 10/1/98 to 8/17/01
Expired (55,945) 4.00 10/1/98
Sold in February 2000 Private Placement 875,000 1.03 - 4.55 5/28/03 to 5/28/05
Expired (313,800) 7.50 8/30/99 to 9/11/99
---------
Outstanding and exercisable at July 31, 2000 2,389,199 1.03 - 4.55 5/19/01 to 5/28/05
Sold in various private placements 696,665 1.50 - 3.00 7/07/04 to 10/30/06
Issued to related parties upon conversion of note
payable 330,000 1.50 7/07/06
---------
Outstanding and exercisable at July 31, 2001 3,415,864 1.03 - 4.55 8/17/01 to 10/30/06
Expired (1,514,199) 2.20 - 2.50 8/17/01
Sold in various private placements 2,673,422 0.75 - 1.50 11/03/06 to 9/10/07
Issued to vendor upon settlement of accounts
payable 55,556 1.50 8/15/06
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
F-34
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Common Stock Warrants, (Continued)
Warrants Exercise Price Expiration
-------- -------------- ----------
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
=========== ============== ==================
(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 common stock on the date of the grant. The
term, 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.
F-35
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
As of July 31, 1994, 1,703,159 options were granted under the 1993 stock
option plan.
The following table summarizes stock option activity for the period August
1, 1994 to July 31, 2005:
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
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
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
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
========== ========== =====
F-36
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
The options outstanding at July 31, 2005 will expire between August 21,
2005 and July 26, 2015.
The weighted-average fair value per option at the date of grant for
options granted during the fiscal years 2005, 2004 and 2003 were $3.87,
$4.36 and $0.21, respectively. The fair value was estimated using the
Black-Scholes option pricing model based on the following assumptions:
2005 2004 2003
---- ---- ----
Expected dividend yield 0% 0% 0%
Risk-free interest rate 4.25% 4.00% 2.00%
Expected stock price volatility 95.2% 78.0% 77.8%
Expected term until exercise (years) 9.56 6.86 5.50
The following table summarizes information concerning options outstanding
at July 31, 2005:
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Term (Years) Price Shares Price
--------------- ------ ------------ ----- ------ -----
$ 0.23 - 1.87 1,875,845 4.78 $ 1.04 1,134,045 $ 0.76
2.05 - 2.16 70,000 9.95 2.13 10,000 2.16
3.46 - 3.78 266,250 3.18 3.59 266,250 3.59
4.38 - 4.75 279,500 2.75 4.58 159,500 4.73
5.10 - 5.20 70,000 1.42 5.19 70,000 5.19
6.73 475,000 8.88 6.73 147,400 6.73
8.10 - 8.38 461,250 7.10 8.28 253,500 8.21
============= --------- ==== ==== --------- ====
3,497,845 2,040,695
========= =========
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.
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
========== ===========
F-37
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
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
========== ===========
(10) Stock Grant and Compensation Plans
The Company had adopted a stock grant program effective September 1, 1981,
and pursuant to said plan, had reserved 375,000 shares of its common stock
for issuance to key employees. The stock grant program was superseded by
the 1989 Stock Plan, and no further grants will be given pursuant to the
grant plan. The following stock transactions occurred under the Company's
stock grant program:
Year ended Fair Amount of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1983 20,000 $ 5.50 $110,000
1984 19,750 5.125 101,219
1985 48,332 5.125-15.00 478,105
1986 11,250 5.125-15.00 107,032
1988 19,000 3.50 6,500
F-38
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) Stock Grant and Compensation Plans, (Continued)
On January 26, 1984, the Company adopted a stock bonus plan for directors
and consultants. The plan was amended on October 6, 1986 to reserve
500,000 shares for issuance under the plan and to clarify a requirement
that stock issued under the Plan could not be transferred until three
years after the date of the grant. The stock bonus plan for directors and
consultants was superseded by the 1989 Stock Plan and no further grants
will be given pursuant to the stock bonus plan for directors and
consultants. The following stock transactions occurred under the Company's
stock bonus plan:
Year ended Fair Amount of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1984 130,250 $ 2.50-3.88 $ 385,917
1985 99,163 3.50-15.00 879,478
1985 (42,500) 2.50 (105,825)*
1986 15,394 9.65-15.00 215,400
1987 5,000 15.00 75,000
* Shares granted in 1984 were renegotiated in 1985 and canceled as a
result of the recipient's termination.
1989 Stock Plan
Under the 1989 Stock Plan, one million shares of the Company's common
stock were reserved for issuance as awards to employees. The 1989 Stock
Plan also provides for the granting of options to purchase common stock of
the Company (see note 9). 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
Compensation expense is recorded for the fair value of all stock awards
and grants over the vesting period. The 1994 stock award was immediately
vested. There were no stock awards in fiscal 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.
F-39
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) Income Taxes, (Continued)
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 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.
For the state fiscal year 2003 (July 1, 2002 to June 30, 2003), the
Company had approximately $1,373,000 total available tax benefits that
were saleable, of which New Jersey permitted the Company to sell
approximately $273,000. In December 2002, the Company received
approximately $231,000 from the sale of the $273,000 of tax benefits,
which the Company recognized as tax benefits for fiscal 2003.
If still available under New Jersey law, the Company will attempt to sell
the remaining $996,000 of its tax benefits between July 1, 2005 and June
30, 2006. This amount, which is a carryover of its remaining tax benefits
from state fiscal year 2005 and earlier, may increase if the Company
incurs additional tax losses during state fiscal year 2006. 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, 2005 and 2004, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
Deferred tax assets: 2005 2004
---- ----
Excess of book over tax depreciation and amortization $ 27,499 $ 27,016
Accrued expenses and other 167,324 120,910
Federal and state net operating loss carryforwards 19,413,740* 17,322,364*
Research and experimentation and investment tax credit
carryforwards 1,955,172* 1,425,860*
------------ ------------
Total gross deferred tax assets 21,563,735 18,896,150
Valuation allowance (21,563,735) (18,896,150)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
* Net of amount sold pursuant to New Jersey state tax legislation.
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 2005 and
2004 the valuation allowance increased by $2,668,000, and $2,837,000,
respectively, and decreased by $205,000 in 2003.
F-40
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) Income Taxes, (Continued)
At July 31, 2005, the Company has federal net operating loss carryforwards
of approximately $52,823,000 that expire in the years 2006 to 2025
(approximately $8,675,000 expires in the years 2006 to 2010). The Company
also has research and experimentation tax credit carryforwards of
approximately $1,955,000 that expire in the years 2006 to 2025
(approximately $152,000 expires in the years 2006 to 2010). 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.
(12) Other Financial Information
Accrued expenses as of July 31, consist of the following:
2005 2004
---- ----
Payroll and payroll taxes $ 85,181 $ 44,112
Professional fees 123,200 92,768
Clinical trial 609,382 319,338
Pre-clinical studies 460,859 52,011
Other 5,069 116,976
---------- ----------
$1,283,691 $ 625,205
========== ==========
(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 in the amount of
$3,000,000 for clinical trials in the U.S. Additionally, the Company also
maintains product liability insurance in Europe in the amount of
DM20,000,000, AU$10,000,000 in Australia and in Romania (euro)10,000 per
patient for death and permanent disability and limit of indemnity for
medical expenses of (euro)3,000 per patient. 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, 2005:
Payments Due by Fiscal Year
------------------------------------------------------------------
2011 and
Total 2006 2007 2008 2009 2010 Thereafter
----- ---- ---- ---- ----------
Operating lease $ 42,799 $ 9,171 $ 9,171 $ 9,171 $ 9,171 $ 6,115 $ -
-------- ------- ------- ------- ------- ------- -----
Total contractual cash
obligations $ 42,799 $ 9,171 $ 9,171 $ 9,171 $ 9,171 $ 6,115 $ -
======== ======= ======= ======= ======= ======= -----
(14) Research and Development Agreement
In July 2005, the Company entered in a research collaboration agreement
with Novartis Institute for Tropical Diseases for the evaluation of
AC-03-636 against Dengue fever. AC-03-636 is a novel compound from our
proprietary family of amphinase RNases.
The research collaboration with Wyeth Pharmaceuticals to co-develop a
number of designer drugs such as conjugates and fusion proteins for a
variety of indications using the Company's proprietary technology has been
terminated by the Company for Wyeth's non-compliance with the terms of the
agreement.
(15) 401(k) Savings Plan
Effective October 1, 1998, the Company adopted a 401(k) Savings Plan (the
"Plan"). Qualified employees may participate by contributing 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, 2005, 2004 and 2003, the
Company's contributions to the Plan amounted to $29,231, $15,690 and
$24,956, respectively.
(16) Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Totals First Second Third Fourth Totals
------------------------------------------------------------------------------------------------------------------------------------
Investment
income $ 29.2 $ 33.7 $ 41.0 $ 37.8 $ 141.7 $ 3.7 $ 4.5 $ 3.1 $ 30.8 $ 42.1
Other income -- -- 9.8 -- 9.8 -- -- -- -- --
Operating
loss (1,368.8) (1,955.3) (1,674.6) (1,751.2) (6,749.9) (980.0) (1,199.6) (1,350.5) (1,762.0) (5,292.1)
------------------------------------------------------------------------------------------------------------------------------------
Net loss(a) (1,080.8) (1,955.3) (1,674.6) (1,751.2) (6,461.9) (758.2) (1,199.6) (1,350.5) (1,762.0) (5,070.3)
------------------------------------------------------------------------------------------------------------------------------------
Loss per share
- basic and
diluted $ (0.03) $ (0.06) $ (0.05) $ (0.05) $ (0.18) $ (0.03) $ (0.04) $ (0.05) $ (0.05) $ (0.17)
------------------------------------------------------------------------------------------------------------------------------------
(a) Included in the net loss of $1,080.8 and $758.2 for first quarter of 2005
and 2004 are tax benefits of $288.0 and $221.8, respectively, related to
the sale of certain state tax operating loss carryforwards.
F-42
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(17) Subsequent Events
From August 1, 2005 through September 19, 2005, the Company issued an
aggregate of 118,637 shares of common stock upon the exercise of warrants
by an unrelated party and stock options by an employee at exercise prices
ranging from $0.75 to $0.85 per share. The Company realized gross proceeds
of $89,478 from these exercises.
F-43