UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: January 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number: 0-11088
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2369085
(State or other jurisdiction of (I.R.S. Employer Identification No.)
organization)
225 Belleville Avenue, Bloomfield, New Jersey 07003
(Address of principal executive offices) (Zip Code)
(973) 748-8082
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant has (1) 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 whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |_| Accelerated Filer |X| Non-accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of common stock, $.001 par value, outstanding as of
March 8, 2005 was 37,390,062 shares.
ALFACELL CORPORATION
(A Development Stage Company)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED BALANCE SHEETS
January 31, 2006 and July 31, 2005
January 31, July 31,
2006 2005
(Unaudited) (See Note 1)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,917,146 $ 4,462,951
Other current assets 80,036 196,936
------------ ------------
Total current assets 2,997,182 4,659,887
Property and equipment, net 75,007 80,395
Loan receivable, related party 166,106 161,342
------------ ------------
Total assets $ 3,238,295 $ 4,901,624
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 833,502 $ 396,263
Accrued expenses 1,553,052 1,283,691
------------ ------------
Total liabilities 2,386,554 1,679,954
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value;
Authorized and unissued, 1,000,000 shares at January 31, 2006 and July 31, 2005 -- --
Common stock, $.001 par value;
Authorized 100,000,000 shares at January 31, 2006 and July 31, 2005;
Issued and outstanding, 37,103,095 shares at January 31, 2006 and 36,534,235
shares at July 31, 2005 37,103 36,534
Capital in excess of par value 80,006,819 78,691,572
Deficit accumulated during development stage (79,192,181) (75,506,436)
------------ ------------
Total stockholders' equity 851,741 3,221,670
------------ ------------
Total liabilities and stockholders' equity $ 3,238,295 $ 4,901,624
============ ============
See accompanying notes to condensed financial statements.
- 2 -
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
Three and six months ended January 31, 2006 and 2005,
and the Period from August 24, 1981
(Date of Inception) to January 31, 2006
(Unaudited)
Three Months Ended Six Months Ended August 24, 1981
January 31, January 31, (Date of
----------- ----------- Inception) to
2006 2005 2006 2005 January 31, 2006
------------ ------------ ------------ ------------ ----------------
Revenue:
Sales $ -- $ -- $ -- $ -- $ 553,489
Investment income 24,053 33,704 56,048 62,882 1,626,869
Other income -- -- -- -- 99,939
------------ ------------ ------------ ------------ ------------
Total revenue 24,053 33,704 56,048 62,882 2,280,297
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales -- -- -- -- 336,495
Research and development 1,430,041 1,554,443 2,589,431 2,475,592 52,626,682
General and administrative 879,914 422,406 1,469,724 868,003 27,107,312
Interest:
Related parties, net -- -- -- -- 1,147,547
Others 10 12,165 20 43,422 2,873,984
------------ ------------ ------------ ------------ ------------
Total costs and expenses 2,309,965 1,989,014 4,059,175 3,387,017 84,092,020
------------ ------------ ------------ ------------ ------------
Loss before state tax benefit (2,285,912) (1,955,310) (4,003,127) (3,324,135) (81,811,723)
State tax benefit -- -- 317,382 287,975 2,619,542
------------ ------------ ------------ ------------ ------------
Net loss $ (2,285,912) $ (1,955,310) $ (3,685,745) $ (3,036,160) $(79,192,181)
============ ============ ============ ============ ============
Loss per basic and diluted common
share $ (0.06) $ (0.06) $ (0.10) $ (0.09)
============ ============ ============ ============
Weighted average number of shares
outstanding 36,734,042 35,211,954 36,663,531 34,936,198
============ ============ ============ ============
See accompanying notes to condensed financial statements.
- 3 -
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
Six months ended January 31, 2006 and 2005,
and the Period from August 24, 1981
(Date of Inception) to January 31, 2006
(Unaudited)
Six Months Ended August 24, 1981
January 31, (Date of Inception)
----------- to
2006 2005 January 31, 2006
------------ ------------ -------------------
Cash flows from operating activities:
Net loss $ (3,685,745) $ (3,036,160) $(79,192,181)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities -- -- (25,963)
Depreciation and amortization 13,892 14,220 1,599,576
Loss on disposal of property and equipment -- -- 18,926
Issuance of common stock, stock options and
warrants for services rendered 644,330 13,500 7,361,343
Amortization of debt discount -- 30,061 594,219
Amortization of deferred compensation -- -- 11,442,000
Amortization of organization costs -- -- 4,590
Changes in assets and liabilities:
Decrease (increase) in other current assets 116,900 (163,349) (139,903)
Increase in loan receivable-related party (4,764) (4,797) (70,055)
Increase in interest payable-related party -- -- 744,539
Increase in accounts payable 437,239 118,148 1,340,137
Increase in accrued payroll and expenses,
related parties -- -- 2,348,145
Increase in accrued expenses 269,361 293,544 2,271,936
------------ ------------ ------------
Net cash used in operating activities (2,208,787) (2,734,833) (51,702,691)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of marketable equity securities -- -- (290,420)
Purchase of short-term investments -- (1,978,189) (1,978,189)
Proceeds from sale of marketable equity securities -- -- 2,294,572
Purchase of property and equipment (8,503) (41,153) (1,521,405)
Patent costs -- -- (97,841)
------------ ------------ ------------
Net cash used in investing activities (8,503) (2,019,342) (1,593,283)
------------ ------------ ------------
(continued)
See accompanying notes to condensed financial statements.
- 4 -
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS, Continued
Six months ended January 31, 2006 and 2005
and the Period from August 24, 1981
(Date of Inception) to January 31, 2006
(Unaudited)
Six Months Ended August 24, 1981
January 31, (Date of
----------- Inception) to
2006 2005 January 31, 2006
------------ ------------ ----------------
Cash flows from financing activities:
Proceeds from short-term borrowings $ -- $ -- $ 874,500
Payment of short-term borrowings -- -- (653,500)
Increase in loans payable - related party, net -- -- 2,628,868
Proceeds from bank debt and other long-term debt, net of
costs -- -- 3,667,460
Reduction of bank debt and long-term debt -- (6,730) (2,966,568)
Proceeds from issuance of common stock, net -- -- 40,750,316
Proceeds from exercise of stock options and warrants, net 671,485 244,166 11,198,051
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 671,485 237,436 56,213,120
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,545,805) (4,516,739) 2,917,146
Cash and cash equivalents at beginning of period 4,462,951 10,147,694 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,917,146 $ 5,630,955 $ 2,917,146
============ ============ ============
Supplemental disclosure of cash flow information - interest
paid $ 20 $ 305 $ 1,714,038
============ ============ ============
Noncash financing activities:
Issuance of convertible subordinated debenture for loan payable
to officer $ -- $ -- $ 2,725,000
============ ============ ============
Issuance of common stock upon the conversion of convertible
subordinated debentures, related party $ -- $ -- $ 3,242,000
============ ============ ============
Conversion of short-term borrowings to common stock $ -- $ -- $ 226,000
============ ============ ============
Conversion of accrued interest, payroll and expenses by related
parties to stock options $ -- $ -- $ 3,194,969
============ ============ ============
Repurchase of stock options from related party $ -- $ -- $ (198,417)
============ ============ ============
Conversion of accrued interest to stock options $ -- $ -- $ 142,441
============ ============ ============
Conversion of accounts payable to common stock $ -- $ -- $ 506,725
============ ============ ============
Conversion of notes payable, bank and accrued interest
to long-term debt $ -- $ -- $ 1,699,072
============ ============ ============
Conversion of loans and interest payable, related party and
accrued payroll and expenses, related parties to long-term
accrued payroll and other, related party $ -- $ -- $ 1,863,514
============ ============ ============
Issuance of common stock upon the conversion of convertible
subordinated debentures, other $ -- $ 224,520 $ 1,584,364
============ ============ ============
Issuance of common stock for services rendered $ -- $ -- $ 2,460
============ ============ ============
Issuance of warrants with notes payable $ -- $ -- $ 594,219
============ ============ ============
See accompanying notes to condensed financial statements.
- 5 -
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's financial position as of
January 31, 2006 and its results of operations and cash flows for the three and
six month periods ended January 31, 2006 and 2005 and the period from August 24,
1981 (date of inception) to January 31, 2006. The results of operations for the
three and six months ended January 31, 2006 are not necessarily indicative of
the results to be expected for the full year. The condensed balance sheet as of
July 31, 2005 presented herein has been derived from the audited financial
statements included in the Form 10-K for the fiscal year ended July 31, 2005,
filed with the Securities and Exchange Commission.
Certain footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted in accordance with the published
rules and regulations of the Securities and Exchange Commission. The condensed
financial statements in this report should be read in conjunction with the
financial statements and notes thereto included in the Form 10-K for the fiscal
year ended July 31, 2005.
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 developing new drug products. Its planned principal
operations have not commenced and, accordingly, no significant revenue has been
derived therefrom.
The Company has reported net losses 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 January
31, 2006 amounts to approximately $79,192,000.
The Company's long-term continued operations will depend on its ability to
raise additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of tax benefits,
revenues from the commercial sale of ONCONASE(R), licensing of its proprietary
RNase technology and its ability to realize revenues from its technology and its
drug candidates via out-licensing agreements with other companies. Such
additional funds may not become available as the Company may need them or may
not be available on acceptable terms. Through January 31, 2006, 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. As of January 31, 2006, management believes that the
Company's cash
6
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION, Continued
balance is sufficient to fund its operations 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, to assure the Company's ability to continue
its operations beyond this date, the Company continues 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 estimate the amount of capital it
will receive, if any. If the Company is unable to raise additional funds in the
future on acceptable terms, or at all, 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, it cannot be sure that any such alliances will materialize.
2. EARNINGS (LOSS) PER COMMON SHARE
"Basic" earnings (loss) per common share equals net income (loss) divided
by weighted average common shares outstanding during the period. "Diluted"
earnings 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 January 31, 2006 would be
anti-dilutive. The number of outstanding options and warrants that could dilute
earnings per share in future periods was 16,199,993 and 15,208,029 at January
31, 2006 and 2005, respectively.
3. STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), provides for the use of a fair
value-based method of accounting for employee stock compensation. However, SFAS
123 also allowed an entity to continue to measure compensation cost for stock
options granted to employees and directors using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), which only required charges to
compensation expense for the excess, if any, of the fair value of the underlying
stock at the date a stock option was granted (or at an appropriate subsequent
measurement date) over the amount the employee had to pay to acquire the stock,
if such amounts differed materially from the historical amounts. Prior to August
1, 2005, the Company had elected to continue to account for employee stock
options using the intrinsic value method under APB 25. As the exercise price of
all options granted under the stock option plans was equal to the market value
of the underlying common stock on the grant date, no stock-based employee
compensation cost had been recognized in the condensed statement of operations
for the three and six months ended January 31, 2005.
7
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. STOCK-BASED COMPENSATION, Continued
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R) (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which amends SFAS
123. The new standard requires all share-based payments, including stock option
grants to employees, to be recognized as an operating expense in the statement
of operations. The cost is recognized over the requisite service period based on
fair values measured on the date of grant. The Company adopted SFAS 123(R)
effective August 1, 2005 using the modified prospective method and accordingly,
prior period amounts have not been restated. Under the modified prospective
method, the fair value of all new stock options issued after July 31, 2005 and
unvested outstanding stock options at August 1, 2005 will be recognized as
expense as services are rendered. The Company recorded $305,441 or $0.01 per
basic and diluted common share and $514,026 or $.01 per basic and diluted common
share of stock-based compensation expense for employees under SFAS 123R for the
three and six month periods ended January 31, 2006, respectively. Had the
Company accounted for its stock-based awards under the fair value method for the
three and six months ended January 31, 2005 the impact to its financial
statements would have been as follows:
Three Months Six Months
Ended Ended
January 31, January 31,
----------- -----------
2005 2005
----------- -----------
Net loss applicable to common shares
As reported $(1,955,310) $(3,036,160)
Less total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects (604,671) (1,223,942)
----------- -----------
Pro forma $(2,559,981) $(4,260,102)
=========== ===========
Basic and diluted loss per common share
As reported $ (0.06) $ (0.09)
Pro forma (0.07) (0.12)
For options granted during the six months ended January 31, 2006, the
weighted-average fair value at the grant date was $1.27 per option and the
weighted average exercise price was $1.69 per option. The fair value of the
stock options was estimated using the Black-Scholes options pricing model based
on the following weighted-average assumptions:
Six Months Ended
January 31,
-----------
2006 2005
---- ----
Expected dividend yield 0% 0%
Risk-free interest rate 4.47% 4.25%
Expected stock price volatility 84.79% 100%
Expected term until exercise (years) 5.86 8.67
Forfeiture rate 36.61% N/A
8
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. STOCK-BASED COMPENSATION, Continued
The total intrinsic value of options exercised by employees during the six
months ended January 31, 2006 was $120,894. As of January 31, 2006, there was
approximately $2,319,000 of total unrecognized compensation cost related to
unvested share-based compensation arrangements granted under the Company's stock
option plans, which is to be recognized over a weighted average period of 1.62
years.
Shares, warrants and options issued to non-employees for services are
accounted for in accordance with SFAS 123(R) 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. Such securities are recorded in expense and additional paid-in capital
in stockholders' equity (deficiency) over the applicable service periods using
variable accounting through the vesting date based on the fair value of the
securities at the end of each period.
4. LOAN RECEIVABLE, RELATED PARTY
Amounts due from the Company's CEO totaling $166,106 at January 31, 2006
and $161,342 at July 31, 2005, 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 six months ended January 31, 2006 and
2005, the Company earned 8% interest in the amount of approximately $4,800 on
the unpaid principal balance.
5. CAPITAL STOCK
During the quarter ended October 31, 2005, the Company issued an aggregate
of 132,082 shares of common stock upon the exercise of warrants and stock
options by an unrelated party, an employee and an executive officer at per share
exercise prices ranging from $0.54 to $0.85. The Company realized aggregate
gross proceeds of $96,738 from these exercises.
During the quarter ended January 31, 2006, the Company issued an aggregate
of 436,778 shares of common stock upon the exercise of warrants and stock
options by unrelated parties, employees and directors at per share exercise
prices ranging from $0.26 to $1.50. The Company realized aggregate gross
proceeds of $574,747 from these exercises.
During the quarter ended January 31, 2006, the Company issued 25,000
ten-year stock options to a consultant as payment for services rendered. The
options vested immediately and have an exercise price of $1.32 per share. The
Company recorded a total of $23,166 of non-cash expense for these options.
During the quarter ended January 31, 2006, the Company issued 50,000
five-year stock options to a consultant as payment for services to be rendered.
These options vest over a one year period, 50% of which vested immediately and
12.5% will vest equally for the next four quarters following the grant date. The
stock options have an exercise price of $2.04 per share. The fair value of these
options
9
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
5. CAPITAL STOCK, Continued
is being expensed over the service period using the provisions of EITF 96-18.
During the six months ended January 31, 2006, the Company recorded under EITF
96-18, a total of $86,006 of non-cash expense for these options.
During the six months ended January 31, 2006, the Company recorded under
EITF 96-18, a total of $21,132 non-cash expense for options issued to
consultants during the fiscal year ended July 31, 2005.
6. SALE OF NET OPERATING LOSS CARRYFORWARDS
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell a portion of its state tax loss carryforwards and state
research and development credits in order to obtain tax benefits. For the state
fiscal year 2006 (July 1, 2005 to June 30, 2006), the Company had approximately
$1,903,000 of total available net operating loss carryforwards that were
saleable, of which New Jersey permitted the Company to sell approximately
$356,000. In December 2005, the Company received approximately $317,000 from the
sale of the $356,000 of net operating loss carryforwards, which was recognized
as a tax benefit for the six months ended January 31, 2006.
For the state fiscal year 2005 (July 1, 2004 to June 30, 2005), the
Company had approximately $1,335,000 of total available net operating loss
carryforwards 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 net operating loss
carryforwards, which was recognized as a tax benefit for the six months ended
January 31, 2005.
If still available under New Jersey law, the Company will attempt to sell
the remaining $1,547,000 of its net operating loss carryforwards between July 1,
2006 and June 30, 2007 (state fiscal year 2007). This amount, which is a
carryover of the Company's remaining net operating loss carryforwards from state
fiscal year 2006, may increase if the Company incurs additional net losses and
research and development credits during state fiscal year 2007. The Company
cannot estimate, however, what percentage of its saleable net operating loss
carryforwards New Jersey will permit it to sell, how much money will be received
in connection with the sale, if the Company will be able to find a buyer for its
net operating loss carryforwards or if such funds will be available in a timely
manner.
7. LITIGATION
Shogen v. Global Aggressive Growth Fund, Ltd. et al.
Kuslima Shogen, the Company's Chief Executive Officer and Chairman of the
Board of Directors, filed this action on November 18, 2004, in the US District
Court, District of New Jersey. The Company was not a party to this action.
Several defendants, however, sought permission to name the Company and another
defendant in a third-party complaint seeking payment from the Company of any
sums which may be assessed against them as a result of Ms. Shogen's claims. On
December 2, 2005, the Court denied that request. Accordingly, the Company
continues not to be a party to this action.
10
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
7. LITIGATION, Continued
Shogen v. Pisani et al.
This action was commenced by Ms. Shogen in May 2005 in New Jersey Superior
Court, Essex County. The Company was not a party to this action. Defendants
filed counterclaims against Ms. Shogen, and in conjunction with those
counterclaims named the Company as a third-party defendant, but they
subsequently withdrew their claims against the Company. At this time, the
Company continues not to be a party to this action.
8. SUBSEQUENT EVENTS
In February 2006, the Company issued an aggregate of 286,967 shares of
common stock upon the exercise of warrants by unrelated parties at exercise
prices ranging from $0.75 to $1.50 per share. The Company realized gross
proceeds of $310,223 from these exercises.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information 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 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. We cannot assure you that the future results covered by
these forward-looking statements will be achieved. The matters set forth in Item
1A. "Risk Factors" in this quarterly report on Form 10-Q 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.
Overview
Since our inception, we have devoted the vast majority of our resources to
the research and development of ONCONASE(R) and related drug candidates. We have
focused our resources towards the completion of the clinical program for
unresectable, or inoperable, malignant mesothelioma.
Since ONCONASE(R) has Fast Track Designation from the Food and Drug
Administration, or FDA, for the treatment of malignant mesothelioma patients, we
continue to have meetings and discussions with the FDA to establish mutually
agreed upon parameters for the New Drug Application, or NDA to obtain marketing
approval for ONCONASE(R), assuming the Phase III clinical trial for the
treatment of malignant mesothelioma yields favorable results.
We received an Orphan Medicinal Product Designation for ONCONASE(R) from
the European Agency for the Evaluation of Medicinal Products, or EMEA. We
continue to fulfill the EMEA requirements regarding the Marketing Authorization
Application, or MAA registration requirements for ONCONASE(R) for the treatment
of malignant mesothelioma.
We received Orphan Drug Designation for malignant mesothelioma in
Australia from the Therapeutics Goods Administration, or 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.
Almost all of our research and development expenses since our inception of
$52,627,000 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 the full
enrollment target of 316 patients has now been reached. 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 in the U.S. and MAA in Europe and Australia) 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. The timing of when we
will be able to file for marketing registrations in the US, EU and Australia is
data driven. Therefore, we cannot predict with
12
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 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. As of January
31, 2006, we believe our cash balance is sufficient to fund our operations
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. To assure our ability to continue our
operations beyond this date, we continue to seek additional financing through
equity or debt financings and the sale of net operating loss carryforwards, but
we cannot be sure that we will be able to raise capital on favorable terms or at
all. We may also obtain additional capital through the exercise of outstanding
options and warrants, although we cannot provide any assurance of such exercises
or estimate the amount of capital we will receive, if any. If we are unable to
raise sufficient capital, our operations will be severely curtailed and our
business and financial condition will be adversely affected.
Results of Operations
Three and six month periods ended January 31, 2006 and 2005
Revenues. We are a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 7.
We are devoting substantially all of our present efforts to establishing a new
business and developing new drug products. Our planned principal operations of
marketing and/or licensing new drugs have not commenced and, accordingly, we
have not derived any significant revenue from these operations. We focus most of
our productive and financial resources on the development of ONCONASE(R) and as
such we have not had any sales in the three and six month periods ended January
31, 2006 and 2005. For the three and six month periods ended January 31, 2006,
our investment income was $24,000 and $56,000 compared to $34,000 and $63,000
for the same period last year, a decrease of $10,000 and $7,000, respectively.
These decreases were due to lower balances of cash and cash equivalents.
Research and Development. Research and development expense for the three
months ended January 31, 2006 was $1,430,000 compared to $1,554,000 for the same
period last year, a decrease of $124,000, or 8%. The decrease resulted from
decreases in pre-clinical sponsored research and development expenses; patent
expenses of approximately $91,000; near completion of key toxicology
requirements and key requirements for chemistry, manufacturing and controls,
including the ONCONASE(R) stability program of approximately $79,000; and costs
related to clinical trials of approximately $67,000. This decrease was offset by
an increase in compensation expense of approximately $160,000 which is related
to share-based compensation; non-cash expense related to stock options issued to
consultants of approximately $41,000; and insurance expense of approximately
$12,000. The share-based compensation expense is expected to continue as a
result of the adoption of SFAS 123(R), which requires us to charge compensation
expense for all employee stock options.
Research and development expense for the six months ended January 31, 2006
was $2,589,000 compared to $2,476,000 for the same period last year, an increase
of $113,000, or 5%. The increase was primarily due to compensation expense of
approximately $291,000 of which approximately $261,000 is related to share-based
compensation and non-cash expense related to stock options issued to consultants
of approximately $44,000 and insurance expense of approximately $20,000. The
share-based
13
compensation expense is expected to continue as a result of the adoption of SFAS
123(R). This increase was offset by a decreases in patent expenses of
approximately $109,000; costs related to clinical trials of approximately
$73,000; pre-clinical sponsored research and development expenses and 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
$21,000.
General and Administrative. General and administrative expense for the
three months ended January 31, 2006 was $880,000 compared to $422,000 for the
same period last year, an increase of $458,000, or 109%. This increase was
primarily due to an increase in compensation expense of approximately $122,000
which is related to share-based compensation. The share-based compensation
expense is expected to continue as a result of the adoption of SFAS 123(R). The
increase in general and administrative expense also resulted from legal fees of
approximately $210,000; non-cash expense related to stock options issued to a
consultant of approximately $86,000; board of directors fees of approximately
$24,000 which is related to share-based compensation and Sarbanes-Oxley
compliance and auditing fees of approximately $16,000.
General and administrative expense for the six months ended January 31,
2006 was $1,470,000 compared to $868,000 for the same period last year, an
increase of $602,000, or 69%. This increase was primarily due to increase in
compensation expense of approximately $263,000 of which approximately $229,000
is related to share-based compensation. The share-based compensation expense is
expected to continue as a result of the adoption of SFAS 123(R). The increase in
general and administrative expense also resulted from legal fees of
approximately $221,000; non-cash expense related to stock options issued to a
consultant of approximately $86,000; Sarbanes-Oxley compliance and auditing fees
of approximately $68,000; board of directors fees of approximately $35,000 of
which approximately $24,000 is related to share-based compensation; offset by
decreases in Nasdaq membership fees of approximately $35,000; public relation
related expenses of approximately $21,000 and insurance expense of approximately
$15,000.
Interest. Interest expense for the three and six months ended January 31,
2006 decreased by $12,000, or 100% and $43,000, or 100%, respectively; primarily
due to the maturity and conversion of convertible notes payable into common
stock during the last fiscal year ended July 31, 2005.
Income Taxes. New Jersey has enacted legislation permitting certain
corporations located in New Jersey to sell a portion of our state tax loss
carryforwards and state research and development credits, or net operating loss
carryforwards, in order to obtain tax benefits. For the state fiscal year 2006
(July 1, 2005 to June 30, 2006), we had approximately $1,903,000 of total
available net operating loss carryforwards that were saleable, of which New
Jersey permitted us to sell approximately $356,000. In December 2005, we
received approximately $317,000 from the sale of the $356,000 of net operating
loss carryforwards, which was recognized as a tax benefit for the six months
ended January 31, 2006.
For the state fiscal year 2005 (July 1, 2004 to June 30, 2005), we had
approximately $1,335,000 of total available net operating loss carryforwards
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 net operating loss carryforwards, which we recognized as a tax
benefit for the six months ended January 31, 2005.
If still available under New Jersey law, we will attempt to sell the
remaining $1,547,000 of our net operating loss carryforwards between July 1,
2006 and June 30, 2007 (state fiscal year 2007). This amount, which is a
carryover of our remaining net operating loss carryforwards from state fiscal
year
14
2006, may increase if we incur additional net losses and research and
development credits during state fiscal year 2007. We cannot estimate, however,
what percentage of our saleable net operating loss carryforwards 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 net operating loss carryforwards or
if such funds will be available in a timely manner.
Net Loss. We have incurred net losses during each year since our
inception. The net loss for the three months ended January 31, 2006 was
$2,286,000 as compared to $1,955,000 for the same period last year, an increase
of $331,000. The net loss for the six months ended January 31, 2006 was
$3,686,000 as compared to $3,036,000 for the same period last year, an increase
of $650,000. The cumulative loss from the date of inception, August 24, 1981 to
January 31, 2006, amounted to $79,192,000. Such losses are attributable to the
fact that we are still in the development stage and, accordingly, have not
derived sufficient revenues from operations to offset the development stage
expenses.
Liquidity and Capital Resources
We have financed our operations since inception 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 debt financings, the sale of our net operating loss
carryforwards and research products, interest income and financing received from
our Chief Executive Officer. During the six months ended January 31, 2006, we
had a net decrease in cash and cash equivalents of $1,546,000, which resulted
primarily from net cash used in operating activities of $2,209,000 and net cash
used in investing activities of $8,000, offset by net cash receipts of $671,000
from warrant and stock option exercises. Total cash resources as of January 31,
2006 were $2,917,000 compared to $4,463,000 at July 31, 2005.
Our current liabilities as of January 31, 2006 were $2,387,000 compared to
$1,680,000 at July 31, 2005, an increase of $707,000. The increase was primarily
due an increase in accounts payable of approximately $437,000 and accrued
expenses of approximately $269,000. These increases were mainly for expenses
related to clinical trials of approximately $466,000; pre-clinical studies of
approximately $182,000; professional fees of approximately $33,000 and payroll
accruals of approximately $25,000.
Our long-term 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 may not be
available on acceptable terms. As of January 31, 2006, we believe our cash
balance is sufficient to fund our operations 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, to assure our ability to continue our operations beyond this
date, we 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 estimate 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
15
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 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
variable interest entities or VIE, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of January 31, 2006, we are not involved in any
unconsolidated VIE transactions.
Critical Accounting Policies and Estimates
Critical accounting policies are those that involve subjective or complex
judgments, often as a result of the need to make estimates. The following areas
all require the use of judgments and estimates: research and development
expenses, accounting for stock-based compensation, accounting for warrants
issued with convertible debt and deferred income taxes. Estimates in each of
these areas are based on historical experience and various assumptions that we
believe are appropriate. Actual results may differ from these estimates. Our
accounting practices are discussed in more detail in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1 of
"Notes to Consolidated Financial Statements" in our Annual Report on Form 10-K
for the year ended July 31, 2005.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004),
"Share-Based Payment", which amends SFAS Statement No. 123. The new standard
requires the cost of all share-based payments, including stock option grants to
employees, to be recognized as an operating expense in the income statement. The
cost is recognized over the requisite service period based on fair values
measured on the date of grant. We adopted SFAS 123(R) effective August 1, 2005
using the modified prospective method and accordingly, prior period amounts have
not been restated. Under the modified prospective method, the fair value of all
new stock options issued after July 31, 2005 and unvested outstanding stock
options at August 1, 2005, will be recognized as services are rendered. The
impact of the adoption of SFAS 123(R) on future period earnings cannot be
determined at this time because it will depend on the level of share-based
payments that may be granted in the future. Prior to August 1, 2005, we
accounted for stock-based awards to employees using the intrinsic value method
in accordance with APB 25.
Contractual Obligations and Commercial Commitments
Our outstanding contractual obligations relate to our equipment operating
lease. Since July 31, 2005, there has been no material change with respect to
our contractual obligations as disclosed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Contractual
Obligations and Commercial Commitments" in our annual report on Form 10-K for
the fiscal year ended July 31, 2005.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. 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 January 31, 2006, the end of the period covered by this report
(the "evaluation date"). Based upon the evaluation, the 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) Changes in internal controls.
There were no significant changes made in our internal controls over
financial reporting during the three months ended January 31, 2006 or, to our
knowledge, in other factors that have materially affected, or are reasonably
likely to materially affect, these controls.
PART II. OTHER INFORMATION
Item 1. 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 this action on November 18, 2004, in the US District Court,
District of New Jersey. This case relates to shares of Alfacell common stock Ms.
Shogen had posted as collateral to secure a loan she had taken from certain of
the defendants in this litigation. Ms. Shogen alleges that her shares were sold
unlawfully in violation of the terms of the loan. Among other things, Ms. Shogen
seeks damages of $9 million plus costs and attorneys' fees. Alfacell was not a
party to this action. Several defendants, however, sought permission to name
Alfacell and another defendant in a third-party complaint seeking payment from
Alfacell of any sums which may be assessed against them as a result of Ms.
Shogen's claims. On December 2, 2005, the Court denied that request.
Accordingly, Alfacell continues not to be a party to this action.
Shogen v. Pisani et al.
This action was commenced by Ms. Shogen in May 2005 in New Jersey Superior
Court, Essex County. This lawsuit relates to a loan taken by Ms. Shogen from the
defendants in this litigation that was secured by varying amounts of Ms.
Shogen's Alfacell common stock. Ms. Shogen alleges, among other things, that the
loan was usurious and therefore should be voided. Alfacell was not a party to
this action. Defendants filed counterclaims against Ms. Shogen, and in
conjunction with those counterclaims named Alfacell as a third-party defendant,
but they subsequently withdrew their claims against Alfacell. At this time, the
Company continues not to be a party to this action.
17
Item 1A. Risk Factors
An investment in our common stock is speculative and involves a high
degree of risk. You should carefully consider the risks and uncertainties
described below and the other information in this Form 10-Q 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 $3,686,000 for the six months
ended January 31, 2006 and 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. We have continued to incur losses since July 31, 2005. We may
never achieve revenue sufficient for us to attain profitability.
Our profitability will depend on our ability to develop, obtain regulatory
approvals for, and effectively market ONCONASE(R) as well as entering into
strategic alliances for the development of new drug candidates from the
out-licensing of our proprietary RNase technology. The commercialization of our
pharmaceutical products involves a number of significant challenges. In
particular our ability to commercialize ONCONASE(R) depends on the success of
our clinical development programs, our efforts to obtain regulatory approval and
our sales and marketing efforts or those of our marketing partners, if any,
directed at physicians, patients and third-party payors. A number of factors
could affect these efforts including:
o Our ability to demonstrate clinically that our products have utility
and are safe;
o Delays or refusals by regulatory authorities in granting marketing
approvals;
o Our limited financial resources relative to our competitors;
o Our ability to obtain an appropriate marketing partner;
o The availability and level of reimbursement for our products by
third party payors;
o Incidents of adverse reactions to our products;
o 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.
18
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) with the FDA in the United States, with the EMEA in Europe and with
the TGA in Australia. If the results from our current clinical trial do not
demonstrate the efficacy and safety of ONCONASE(R) for malignant mesothelioma,
our ability to raise additional capital will be adversely affected. Even if
regulatory applications for marketing approvals are filed, we will need
additional financing to continue operations. As of January 31, 2006, we believe
that our cash balance is sufficient to fund our operations through July 31,
2006, based on our expected level of expenditures. However, to assure our
ability to continue our operations beyond this date, we continue to seek
additional financing through equity or debt financings and the sale of net
operating loss carryforwards but we cannot be sure that we will be able to raise
capital on favorable terms or at all. We may also obtain additional capital
through the exercise of outstanding options and warrants, although we cannot
provide any assurance of such exercises or estimate the amount of capital we
will receive, if any. If we are 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 and our cash flows 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 and our
cash flows will be negatively impacted.
For the state fiscal year 2006 (July 1, 2005 to June 30, 2006), we had
approximately $1,903,000 total available tax benefits that were saleable, of
which New Jersey permitted us to sell approximately $356,000. In December 2005,
we received approximately $317,000 from the sale of the $356,000 of tax
benefits, which we recognized as tax benefits for the six months ended January
31, 2006. For the state fiscal year 2005 (July 1, 2004 to June 30, 2005), we had
approximately $1,335,000 total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately $339,000. In December 2004,
we received approximately $288,000 from the sale of the $339,000 of tax
benefits, which we recognized as a tax benefit for the six months ended January
31, 2006.
19
If still available under New Jersey law, we will attempt to sell the
remaining $1,547,000 of our tax benefits between July 1, 2006 and June 30, 2007
(state fiscal year 2007). This amount, which is a carryover of our remaining tax
benefits from state fiscal year 2006 and earlier, may increase if we incur
additional tax losses during state fiscal year 2007. We cannot estimate,
however, what percentage of our saleable tax benefits New Jersey will permit us
to sell, how much money we will receive in connection with the sale, if we will
be able to find a buyer for our tax benefits or if such funds will be available
in a timely manner.
We cannot predict how long it will take us nor how much it will cost us to
complete part two of our Phase III trial because it is a survival study.
We currently have ongoing a two-part Phase III trial of ONCONASE(R) as a
treatment for malignant mesothelioma. The first part of the clinical trial has
been completed and the second confirmatory part for which the full enrollment
target of 316 patients has now been reached 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.
If we fail to obtain the necessary regulatory approvals, we will not be allowed
to commercialize our drugs and will not generate product revenue.
The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the level of complexity and novelty of the product. We cannot apply
for FDA, EMEA or TGA approval to market ONCONASE(R) until the clinical trials
and all other registration requirements have been met. Drugs in late stages of
clinical development may fail to show the desired safety and efficacy results
despite having progressed through initial clinical testing. While limited trials
with our product have produced certain favorable results, we cannot be certain
that we will successfully complete Phase I, Phase II or Phase III testing of any
compound within any specific time period, if at all. Furthermore, the FDA or the
company may suspend clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an unacceptable
health risk. In addition, we cannot apply for FDA, EMEA or TGA approval to
market ONCONASE(R) until pre-clinical and clinical trials have been completed.
Several factors could prevent the successful completion or cause significant
delays of these trials including an
20
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.
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
and Apptuit for the labeling, storage and shipping of ONCONASE(R) for clinical
trial use. We utilize the services of these third party manufacturers solely on
an as needed basis with terms and prices customary for our industry.
We use FDA GMP licensed manufacturers for ranpirnase and ONCONASE(R). We
have identified substantial alternative service providers for the manufacturing
services for which we may contract. In order to replace an existing service
provider we must amend our IND to notify the FDA of the new manufacturer.
Although the FDA generally will not suspend or delay a clinical trial as a
result of replacing an existing manufacturer, the FDA has the authority to
suspend or delay a clinical trial if, among other grounds, human subjects are or
would be exposed to an unreasonable and significant risk of illness or injury as
a result of the replacement manufacturer.
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.
21
Because we do not have marketing, sales or distribution capabilities, we expect
to contract with third parties for these functions and we will therefore be
dependent upon such third parties to market, sell and distribute our products in
order for us to generate revenues.
We currently have no sales, marketing or distribution capabilities. In
order to commercialize any product candidates for which we receive FDA or non US
approval, we expect to rely on established third party strategic partners to
perform these functions. 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;
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
22
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, one Japanese patent that expires in 2010, and one
Japanese patent that expires in 2013. 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 regarding patent
issues.
Developments by competitors may render our products obsolete or non-competitive.
In February 2004, the Food and Drug Administration granted Eli Lilly &
Company approval to sell its Alimta(R) medication as an orphan drug to treat
patients with pleural mesothelioma. Alimta is a multi-targeted antifolate that
is based upon a different mechanism of action than ONCONASE(R). To our
knowledge, no other company is developing a product with the same mechanism of
action as ONCONASE(R). However, there may be other companies, universities,
research teams or scientists who are developing products to treat the same
medical conditions our products are intended to treat. Eli Lilly is, and some of
these other companies, universities, research teams or scientists may be more
experienced 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.
23
We may be sued for product liability.
Our business exposes us to potential product liability that may have a
negative effect on our financial performance and our business generally. The
administration of drugs to humans, whether in clinical trials or commercially,
exposes us to potential product and professional liability risks which are
inherent in the testing, production, marketing and sale of new drugs for humans.
Product liability claims can be expensive to defend and may result in large
judgments or settlements against us, which could have a negative effect on our
financial performance and materially adversely affect our business. We maintain
product liability insurance to protect our products and product candidates in
amounts customary for companies in businesses that are similarly situated, but
our insurance coverage may not be sufficient to cover claims. Furthermore,
liability insurance coverage is becoming increasingly expensive and we cannot be
certain that we will always be able to maintain or increase our insurance
coverage at an affordable price or in sufficient amounts to protect against
potential losses. A product liability claim, product recall or other claim, as
well as any claim for uninsured liabilities or claim in excess of insured
liabilities, may significantly harm our business and results of operations. Even
if a product liability claim is not successful, adverse publicity and time and
expense of defending such a claim may significantly interfere with our business.
If we are unable to obtain favorable reimbursement for our product candidates,
their commercial success may be severely hindered.
Our ability to sell our future products may depend in large part on the
extent to which reimbursement for the costs of our products is available from
government entities, private health insurers, managed care organizations and
others. Third-party payors are increasingly attempting to contain their costs.
We cannot predict actions third-party payors may take, or whether they will
limit the coverage and level of reimbursement for our products or refuse to
provide any coverage at all. Reduced or partial reimbursement coverage could
make our products less attractive to patients, suppliers and prescribing
physicians and may not be adequate for us to maintain price levels sufficient to
realize an appropriate return on our investment in our product candidates or
compete on price.
In some cases, insurers and other healthcare payment organizations try to
encourage the use of less expensive generic brands and over-the-counter, or OTC,
products through their prescription benefits coverage and reimbursement
policies. These organizations may make the generic alternative more attractive
to the patient by providing different amounts of reimbursement so that the net
cost of the generic product to the patient is less than the net cost of a
prescription brand product. Aggressive pricing policies by our generic product
competitors and the prescription benefits policies of insurers could have a
negative effect on our product revenues and profitability.
Many managed care organizations negotiate the price of medical services
and products and develop formularies for that purpose. Exclusion of a product
from a formulary can lead to its sharply reduced usage in the managed care
organization patient population. If our products are not included 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.
24
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 listed 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 $0.39
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,
25
o public concern as to the safety and efficacy of products developed
by us or others,
o litigation, and
o general market conditions in our industry.
In addition, the stock market continues to experience extreme price and
volume fluctuations. These fluctuations have especially affected the market
price of many biotechnology companies. Such fluctuations have often been
unrelated to the operating performance of these companies. Nonetheless, these
broad market fluctuations may negatively affect the market price of our common
stock.
Events with respect to our share capital could cause the price of our common
stock to decline.
Sales of substantial amounts of our common stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our common stock. We had 37,103,095 shares of common stock outstanding as of
January 31, 2006. The following securities that may be exercised into shares of
our common stock were issued and outstanding as of January 31, 2006:
o Options. Stock options to purchase 4,073,400 shares of our common
stock at a weighted average exercise price of approximately $3.13
per share.
o Warrants. Warrants to purchase 12,126,593 shares of our common stock
at a weighted average exercise price of approximately $2.33 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
26
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 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Recent Sales of Unregistered Securities
The following transactions were exempt from registrations under Section
4(2) of the Securities Act of 1933, as amended. The net proceeds from these
transactions will be used for general corporate purposes.
During the quarter ended January 31, 2006, we issued an aggregate total of
337,778 shares of common stock upon the exercise of warrants at an exercise
price of $1.50 per share by an unrelated party, which resulted in gross proceeds
of $506,667 to us. We have previously registered the resale of these shares by
the stockholders on a Form S-3 registration statement.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of stockholders was held on January 19, 2006.
(b) All of our current directors, Kuslima Shogen, John P. Brancaccio,
Stephen K. Carter, Donald R. Conklin, James J. Loughlin, David
Sidransky and Paul M. Weiss, were elected at the annual meeting.
(c) The matters voted upon at the annual meeting and the results of the
voting, including broker non-votes where applicable, are set forth
below:
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(i) For the election of directors
--------------------------------------------------------------------------------------------------
Number of Shares of Number of Shares of Common Number of Broker
Director Common Stock Voted For Stock Withheld Non-Votes
--------------------------------------------------------------------------------------------------
Kuslima Shogen 30,126,920 484,709 0
--------------------------------------------------------------------------------------------------
John P. Brancaccio 30,443,046 168,583 0
--------------------------------------------------------------------------------------------------
Stephen K. Carter 30,524,266 87,363 0
--------------------------------------------------------------------------------------------------
Donald R. Conklin 30,437,866 173,763 0
--------------------------------------------------------------------------------------------------
James J. Loughlin 30,527,766 83,863 0
--------------------------------------------------------------------------------------------------
David Sidransky 30,498,276 113,353 0
--------------------------------------------------------------------------------------------------
Paul M. Weiss 30,336,516 275,113 0
--------------------------------------------------------------------------------------------------
(ii) Proposal to ratify the appointment of J.H. Cohn LLP as
Alfacell's independent registered public accounting firm for
the year ending July 31, 2006.
-------------------------------------------------------------------------------------------------------------
Number of Shares of Common Number of Shares of Number of Shares of Common Number of Broker
Stock Voted For Common Stock Voted Against which Abstained from Voting Non-Votes
-------------------------------------------------------------------------------------------------------------
30,386,781 62,720 162,128 0
-------------------------------------------------------------------------------------------------------------
Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
--- ---------- ---------
3.1 Certificate of Incorporation, dated June 12, 1981 (incorporated by
reference to 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 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 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 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 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 Registration
Statement on Form S-1, File No. 333-112865, filed on February 17,
2004) *
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Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
--- ---------- ---------
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) *
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 +
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 +
32.1 Certification Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 +
32.2 Certification Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 +
* Previously filed; incorporated herein by reference.
+ Filed herewith.
29
SIGNATURES
Pursuant to the requirements 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
(Registrant)
March 13, 2006 /s/ Robert D. Love
------------------
Robert D. Love
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
30