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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, 1997 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. [ ]
The aggregate market value of the Common Stock, par value $.001 per share,
held by non-affiliates based upon the average of the bid and asked prices as
reported by the Nasdaq SmallCap Market on October 10, 1997 was $48,764,742. As
of October 10, 1997 there were 14,847,793 shares of Common Stock, par value
$.001 per share, outstanding.
The Index to Exhibits appears on page 12.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 9, 1997, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year ended July 31, 1997, has been incorporated by reference, in whole or in
part, into Part III Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.
Table of Contents
Page
----
PART I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security
Holders 7
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 11
PART III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners
and Management 12
Item 13. Certain Relationships and Related Transactions 12
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 12
The following trademarks appear in this Annual Report: ONCONASE(R) is a
registered trademark of Alfacell Corporation; Gemzar(R) is a registered
trademark of Eli Lilly & Co.
(i)
Part I
Item 1. BUSINESS.
Overview
Alfacell Corporation ("Alfacell" or the "Company") is a biopharmaceutical
company organized in 1981 to engage in the discovery, investigation and
development of a new class of anti-cancer drugs isolated from leopard frog eggs
and early embryos. The Company's first product under development is ONCONASE(R)
which targets solid tumors, most of which are known to become resistant to other
chemotherapeutic drugs. To date, the most significant clinical results with
ONCONASE have been observed in advanced pancreatic cancer, non-small cell lung
cancer, malignant mesothelioma and metastatic breast cancer. According to the
American Cancer Society, in 1997, approximately 386,000 people in the United
States will be diagnosed with pancreatic, lung, and breast cancer and
approximately 233,000 will die.
ONCONASE has been used to treat patients with advanced stages of pancreatic
cancer, malignant mesothelioma, non-small cell lung cancer and metastatic breast
cancer on a weekly basis. Encouraging results have been observed in Phase I and
II clinical trials in patients with these tumor types, warranting further
trials, some of which are underway. Side effects associated with ONCONASE have
been modest, are primarily renal and are reversible upon reduction of dose, or
temporary or permanent discontinuation of treatment. Patients treated with
ONCONASE have shown no evidence of myelosuppression (bone marrow suppression),
alopecia (hair loss) or other severe toxicities frequently observed after
treatment with most other chemotherapeutic drugs. In November 1995, Alfacell
began a randomized multicenter Phase III clinical trial to test the combination
of ONCONASE and tamoxifen versus 5-fluorouracil ("5-FU") in approximately 120
patients with advanced pancreatic cancer. A subsequent Phase III clinical trial
was initiated in August 1996, to compare the combination of ONCONASE and
tamoxifen with Eli Lilly & Co.'s Gemzar(R) ("Gemzar"), a Food and Drug
Administration ("FDA") approved drug for pancreatic cancer, in approximately 120
patients. In June 1997, a Phase III clinical trial was initiated comparing
ONCONASE as a single agent to doxorubicin in patients with malignant
mesothelioma.
The Company believes that ONCONASE may also be used as an anti-viral agent. The
National Institutes of Health ("NIH") has performed an independent in vitro
screen of ONCONASE against the HIV virus type 1 ("HIV virus"). The results
showed ONCONASE to inhibit replication of the HIV virus 99.9% after a four day
incubation period at concentrations not toxic to uninfected H9 leukemic cells.
In addition, in vitro findings by NIH scientists revealed that ONCONASE
significantly inhibited production of the HIV virus in several persistently
infected human cell lines, preferentially degrading viral RNA while not
affecting normal cellular ribosomal RNA and messenger RNAs. The NIH has
indicated interest in pursuing this line of research. Although the Company plans
to conduct further research concerning ONCONASE's anti-viral activity, there can
be no assurance that ONCONASE will show any level of anti-HIV activity in
humans.
Beyond the development of ONCONASE, Alfacell has also discovered a series of
biologically active proteins from the same natural source from which ONCONASE
was discovered. These proteins appear to be involved in the regulation of both
early embryonic and malignant cell growth. However, significant additional
research will be required in order to develop them into therapeutics. ONCONASE
is a novel compound and represents a new class of therapeutic compounds whose
mechanism of action may be important in treating resistant solid tumors, as well
as potentially having anti-viral applications. There can be no assurance that
development of these proteins into effective and approvable therapeutics will be
accomplished.
1
Information contained herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The matters set forth in Exhibit
99.1 hereto constitute cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results indicated in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results indicated
in such forward-looking statements.
ONCONASE(R)
Originally, the Company developed a biological extract from early stage leopard
frog embryos and eggs. This extract was found to possess a unique bioactive
profile. In 1987, the Company isolated a specific protein, P-30 Protein (herein
referred to by its registered trade name ONCONASE). Based upon the complete
amino acid sequence analysis (comparison of the amino acid sequence of ONCONASE
with that of over 10,000 protein sequences registered with the National
Biomedical Research Foundation Protein Identification Resource, Georgetown
University, Washington, DC), it has been established that ONCONASE has a novel
structure. It has also been determined that, thus far, ONCONASE is the smallest
protein belonging to the superfamily of pancreatic ribonucleases.
Postulated Mechanism of Action
Although the mechanism of ONCONASE's anti-tumor activity has not been fully
delineated, the following processes have been identified experimentally:
Binding of ONCONASE to cell surface receptors followed by:
o Cellular internalization;
o Ribonucleolytic degradation of RNAs;
o Inhibition of protein synthesis;
o Inhibition of the cell growth; and
o Cell death.
Pre-clinical and clinical data to date have shown that ONCONASE has the capacity
to enter chemotherapy resistant cells, overcomes multiple drug resistance
("MDR") and other mechanisms of drug resistance, and is synergistic with many
other chemotherapies against numerous tumor cell lines.
Clinical Trials
ONCONASE was tested as a single agent in patients with a variety of solid tumors
and in combination with tamoxifen in advanced pancreatic carcinoma patients. In
vitro results showed ONCONASE to be synergistic with tamoxifen in inhibiting
pancreatic carcinoma tumor cell growth.
2
Reported toxicities in Phase I and II clinical trials, were primarily renal,
dose-related and reversible. There has been no evidence of myelosuppression
(bone marrow suppression), alopecia (hair loss) or other severe toxicities
frequently observed after treatment with most other chemotherapeutic drugs.
Alfacell has two on-going Phase III clinical trials in advanced pancreatic
cancer patients. The Company began a randomized multicenter Phase III clinical
trial in November 1995. In May 1996, the FDA approved Gemzar for the treatment
of advanced pancreatic cancer. Therefore, in August 1996, the Company broadened
the criteria for inclusion in its study to include patients previously treated
with Gemzar. The trial is designed to compare the survival and quality of life
of patients treated with the combination of ONCONASE and tamoxifen versus
5-fluorouracil (5-FU), an FDA approved chemotherapy. Additionally, Alfacell
initiated a new Phase III multicenter clinical trial in August 1996, comparing
ONCONASE plus tamoxifen with Gemzar in newly diagnosed pancreatic cancer
patients.
In June 1997, Alfacell initiated a Phase III clinical trial for malignant
mesothelioma comparing ONCONASE with doxorubicin, an FDA approved chemotherapy.
No standard therapy exists to treat this deadly cancer, and most advanced
malignant mesothelioma patients die of progressive disease within 6-12 months of
diagnosis. Phase I/II clinical trial results to date have been encouraging;
however, there can be no assurance that previous clinical trial results will be
reflective of future clinical results or will be sufficient to obtain FDA
approval.
Research and Development
Research and development expenses for the fiscal years ended July 31, 1997,
1996, and 1995 were $3,862,716, $2,188,890 and $1,205,523, respectively. During
fiscal 1997, the Company's research and development efforts were primarily
focused on conducting the two Phase III clinical trials in pancreatic cancer and
completing the Phase II clinical trial in malignant mesothelioma.
The Company has a Cooperative Research and Development Agreement ("CRADA") with
the NIH. Areas of research include studies of anti-HIV activity; the study of
the mechanism of action of ONCONASE at the cellular and subcellular levels;
tests of the anti-tumor activities of ONCONASE conjugates; ONCONASE gene therapy
and investigation of anti-tumor activity of ONCONASE against primary brain
tumors.
The Company also has a CRADA with the National Cancer Institute ("NCI"). Areas
of research include characterization of the inhibition of tumor cell growth by
ONCONASE in animal models and in vitro and in vivo studies of chemical
conjugates of ONCONASE with anti-tumor antibodies.
Collaborative research is being conducted at The Cancer Research Institute, New
York Medical College regarding synergistic interactions of ONCONASE with other
chemotherapeutic agents and further studies of ONCONASE'S mechanism of action.
At the University of Medicine and Dentistry of New Jersey, ONCONASE is being
studied as a radiation sensitizer and an agent capable of lowering tumor
interstitial fluid pressure. This latter effect may facilitate tumor tissue
penetration by various anti-cancer agents..
The Company is further developing other proteins from the same natural source as
ONCONASE which may play a role in inducing cell maturation, differentiation
and/or cell death and which may become additional products for the treatment of
cancer. At present, the Company is characterizing these proteins.
Raw Materials
The major active ingredient derived from early stage leopard frog eggs and
embryos is the protein, ONCONASE. Although Alfacell currently acquires its
natural source material from a single supplier, management believes that it is
abundantly available from other sources. The Company believes it has sufficient
3
egg inventory on hand to produce enough ONCONASE to complete the current
clinical trials and supply ONCONASE for up to two years after commercialization.
In addition, the Company is conducting research concerning the alternative of
manufacturing ONCONASE through recombinant technology. However, there can be no
assurance that alternative manufacturing methods will be viable.
Manufacturing
The Company has signed an agreement with Scientific Protein Laboratories
("SPL"), a subsidiary of a division of American Home Products Corp., which will
perform the intermediary manufacturing process which entails purifying ONCONASE.
Subsequently, the intermediate product is sent to a contract filler for the
final manufacturing step and vial filling. Other than these arrangements, no
specific arrangements have been made for the manufacture of the Company's
product. Compliance with Current Good Manufacturing Practices ("cGMP") is a
requirement for product manufactured for use in Phase III clinical trials and
for commercial sale. Both SPL, and the contract filler to whom the intermediate
product is sent for the final manufacturing step and vial filling, manufacture
in accordance with cGMP. For the foreseeable future, the Company intends to rely
on these manufacturers, or substitute manufacturers, if necessary, to
manufacture its product. If the Company were to establish a manufacturing
facility, which it currently does not intend to do, the Company would require
substantial additional funds and would be required to hire and retain
significant additional personnel to comply with the extensive cGMP regulations
of the FDA applicable to such a facility. No assurance can be given that the
Company would be able to make the transition successfully to commercial
production, if it chose, or were required, to do so.
Marketing
Neither the Company nor any of its officers or employees has pharmaceutical
marketing experience. If the Company were to market its products itself,
significant additional expenditures and management resources would be required
to develop an internal sales force and there can be no assurance that the
Company would be successful in penetrating the markets for any products
developed or that internal marketing capabilities would be developed at all. The
Company intends, in some instances, to enter into development and marketing
agreements with third parties. The Company expects that under such arrangements
it would act as a co-marketing partner or would grant exclusive marketing rights
to its corporate partners in return for up-front fees, milestone payments and
royalties on sales. Under these agreements, the Company's marketing partner may
have the responsibility for a significant portion of development of the product
and regulatory approval. In the event that the marketing partner fails to
develop a marketable product or fails to market a product successfully, the
Company's 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 agencies are required in most foreign countries.
The FDA has established mandatory procedures and safety standards which apply to
the clinical testing, manufacture and marketing of pharmaceutical products.
Obtaining FDA approval for a new therapeutic may take many years and involve
substantial expenditures. Pharmaceutical manufacturing facilities are also
regulated by state, local and other authorities.
As an initial step in the FDA regulatory approval process, pre-clinical studies
are conducted in animal models to assess the drug's efficacy and to identify
potential safety problems. The results of these studies are submitted to the FDA
as a part of the Investigational New Drug Application ("IND"), which is filed to
obtain approval to begin human clinical testing. The human clinical testing
program may involve up to three phases. Data from
4
human trials are submitted to the FDA in a New Drug Application ("NDA") or
Product License Application ("PLA"). Preparing an NDA or PLA involves
considerable data collection, verification and analysis.
The Company has not received FDA or other marketing approval for any products.
Difficulties or unanticipated costs may be encountered by the Company in its
effort to secure necessary governmental approvals, which could delay or preclude
the Company from marketing its products. There can be no assurance that any of
the Company's products will be approved by the FDA or any foreign country.
With respect to patented products, delays imposed by the governmental approval
process may materially reduce the period during which the Company may have the
exclusive right to exploit them. See --"Patents."
Patents
The Company believes it is important to develop new technology and to improve
its existing technology. When appropriate, the Company files patent applications
to protect inventions in which it has an ownership interest.
The Company owns five U.S. Patents:
a) U.S. Patent No. 4,888,172 issued in 1989, which covers a
pharmaceutical produced from fertilized frog eggs and methodology for
so producing it.
b) U.S. Patent No. 5,559,212 issued in 1996, which covers the amino acid
sequence of ONCONASE.
c) U.S. Patents Nos. 5,529,775, 5,540,925 issued in 1996 and U.S. Patent
No. 5,595,734 issued in 1997, which cover combinations of ONCONASE
with certain other chemotherapeutic agents.
The Company also owns U.S. Patent No. 4,882,421, which has now been disclaimed
and is therefore legally unenforceable. This disclaimer permitted the Company to
obtain U.S. Patents Nos. 5,529,775, 5,540,925 and 5,559,212.
The Company owns three European patents, which have been validated in selected
European states. These European patents cover ONCONASE, process technology for
making ONCONASE, and combinations of ONCONASE with certain other
chemotherapeutics. The Company also owns other patent applications, which are
pending in the United States, Europe, and Japan. The Company owns an undivided
interest in each of two applications that are pending in the United States. Each
such application relates to a Subject Invention (as that term is defined in
CRADAs to which the Company and the NIH are parties). One of these applications
has also been filed as an international application.
Patents covering biotechnological inventions have an uncertain scope, and the
Company is subject to this uncertainty. The Company's patent applications may
not issue as patents. Moreover, the Company's patents may not provide the
Company with competitive advantages and may not withstand challenges by others.
Likewise, patents owned by others may adversely affect the ability of the
Company to do business. Furthermore, others may independently develop similar
products, may duplicate the Company's products, and may design around patents
owned by the Company.
The Company also relies on proprietary know-how and on trade secrets to develop
and maintain its competitive position. Others may independently develop such
know-how or trade secrets or may otherwise obtain access thereto. Although
Company employees and consultants having access to proprietary information they
are
5
required to sign agreement which require them to keep such information
confidential, such agreements may be breached or held to be unenforceable.
Competition
There are several companies, universities, research teams and scientists, both
private and government-sponsored, which engage in research similar, or
potentially similar, to that performed by the Company. Many of such entities and
associations have far greater financial resources, larger research staffs and
more extensive physical facilities than the Company. These competitors may
succeed in their research and development of products which are more effective
than any developed by the Company and may be more successful than the Company in
their production and marketing of such products. The Company is not aware,
however, of any product currently being marketed which has the same mechanism of
action as the Company's proposed anti-tumor agent, ONCONASE. A search by the
Company of scientific literature reveals no published information which would
indicate that others are currently employing its methods or producing such an
anti-tumor agent. There are several chemotherapeutic agents currently used to
treat the forms of cancer which ONCONASE is being used to treat. There can be no
assurance that ONCONASE will prove to be as safe and as effective as currently
used drugs or that new treatments will not be developed which are more effective
than ONCONASE.
Employees
As of October 10, 1997, Alfacell employed seventeen persons, of whom eleven were
engaged in research and development activities and six were engaged in
administration and management. The Company has four employees who hold Ph.D. or
M.D. degrees. All of the Company's employees are covered by confidentiality
agreements. Alfacell considers relations with its employees to be very good.
None of the Company's employees are covered by a collective bargaining
agreement.
Environmental Matters
The Company's operations are subject to comprehensive regulation with respect to
environmental, safety and similar matters by the United States Environmental
Protection Agency ("EPA") 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 the Company expands or
changes its existing operations or proposes any new operations, it may be
required to obtain additional or amended permits or authorizations. The Company
spends time, effort and funds in operating its 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 the Company. The principal
environmental regulatory requirements and matters known to the Company requiring
or potentially requiring capital expenditures by the Company do not appear
likely, individually or in the aggregate, to have a material adverse effect on
the Company's financial condition. The Company believes that it is in compliance
with all current laws and regulations.
Item 2. PROPERTIES.
The Company owns no real property. The Company leases a total of approximately
17,000 square feet in an industrial and office building located in Bloomfield,
New Jersey. The Company leases its facility under a five year operating lease
which is due to expire December 31, 2001. The annual rental obligation, which
commenced January 1, 1997 is $96,775 and is subject to escalation amounts. The
Company believes that the facility is sufficient for its needs in the
foreseeable future.
6
Item 3. LEGAL PROCEEDINGS.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded under the symbol "ACEL". The Company's
Common Stock has been quoted on the Nasdaq SmallCap Market since December 5,
1996. As of October 10, 1997, there were approximately 1,513 stockholders of
record of the Company's Common Stock.
The following table sets forth the range of high and low bid quotations of the
Common Stock for the two fiscal years ended July 31, 1997 and 1996. The
quotation for the periods commencing December 5, 1996 were obtained from the
Nasdaq SmallCap Market and the quotation for the periods prior to such date were
obtained from the National Quotation Bureau. These quotes are believed to be
representative of inter-dealer quotations, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
High Low
---- ---
Year Ended July 31, 1997:
First Quarter 5-5/16 4-5/16
Second Quarter 8-3/8 4-1/4
Third Quarter 7 4-5/8
Fourth Quarter 6-5/8 4
Year Ended July 31, 1996:
First Quarter 6-13/16 2-1/8
Second Quarter 5-5/8 2-7/8
Third Quarter 5-3/8 3-3/16
Fourth Quarter 5-7/8 3-7/8
The Company has paid no dividends on its Common Stock since its inception and
does not plan to pay dividends on its Common Stock in the foreseeable future.
Any earnings which the Company may realize will be retained to finance the
growth of the Company.
7
Recent Sales of Unregistered Securities
On May 1997, 70,300 warrants received in connection with certain private
placement transactions were exercised to purchase Common Stock, for an aggregate
consideration of $351,500. This transaction was consummated as a private sale
pursuant to Section 4 (2) of the Securities Act of 1933, as amended.
On June 1997, 6,150 warrants received in connection with certain private
placement transactions were exercised to purchase Common Stock, for an aggregate
consideration of $30,750. This transaction was consummated as a private sale
pursuant to Section 4 (2) of the Securities Act of 1933, as amended.
Item 6. SELECTED FINANCIAL DATA.
Set forth below is the selected financial data for the Company for the five
fiscal years ended July 31, 1997.
Year Ended July 31,
- ---------- ------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenue $442,572 $184,250 $20,992 $6,064 $489
Net Loss $(5,018,867) $(2,942,152) $(1,993,123) $(2,234,428) $(2,357,350)
Net Loss Per Share $(.34) $(.25) $(.21) $(.26) $(.31)
Dividends None None None None None
At Year End:
- ------------
Total Assets $8,034,954 $8,487,711 $1,616,170 $779,763 $335,332
Long-term Obligations $15,902 $1,398,760 $7,129 $1,593,976 $5,439,531
Total Equity
(Deficiency) $5,566,091 $6,650,266 $(832,566) $(1,774,418) $(6,647,124)
8
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Fiscal Years Ended July 31, 1997, 1996 and 1995
Revenues
The Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 7.
As such, the Company is devoting substantially all of its present efforts to
establishing a new business and developing new drug products. The Company's
planned principal operations of marketing and/or licensing of new drugs have not
commenced and, accordingly, no significant revenue has been derived therefrom.
The Company focuses most of its productive and financial resources on the
development of ONCONASE and as such has not had any sales in fiscal 1997, 1996
and 1995. Investment income for fiscal 1997 was $443,000 compared to $184,000
for fiscal 1996, an increase of $259,000. This increase was due to higher
balances of cash and cash equivalents. Investment income for fiscal 1996 was
$184,000 compared to $21,000 for fiscal 1995, an increase of $163,000.
Research and Development
Research and development expense for fiscal 1997 was $3,863,000 compared to
$2,189,000 for fiscal 1996, an increase of $1,674,000 or 76%. This increase was
primarily due to increases in costs in support of on-going clinical trials,
including the Phase III clinical trials for pancreatic cancer and the Phase II
and III clinical trials for malignant mesothelioma, costs associated with the
purchase of raw materials for anticipated future production of ONCONASE,
regulatory costs in preparation for an NDA for ONCONASE, and hiring of
additional personnel.
Research and development expense for fiscal 1996 was $2,189,000 compared to
$1,206,000 for fiscal 1995, an increase of $983,000 or 82%. This increase was
primarily due to an increase in costs associated with manufacturing clinical
supplies of ONCONASE and costs in support of on-going clinical trials, including
the initial Phase III clinical trial for pancreatic cancer and the Phase II
clinical trial for malignant mesothelioma.
General and Administrative
General and administrative expense for fiscal 1997 was $1,476,000 compared to
$807,000 for fiscal 1996, an increase of $669,000 or 83%. This increase was
primarily due to hiring of additional personnel, an increase in legal fees,
public relations activities and insurance expense.
General and administrative expense for fiscal 1996 was $807,000 compared to
$664,000 for fiscal 1995, an increase of $143,000 or 22%. This increase was
primarily due to an increase in public relations activities and legal and
accounting fees.
Interest
Interest expense for fiscal 1997 was $123,000 compared to $131,000 in fiscal
1996, a decrease of $8,000 or 6%. The decrease was primarily due to a reduction
in the principal balance of the Company's Term Loan (as defined herein) and
reductions in related party and other short term payables.
9
Interest expense for fiscal 1996 was $131,000 compared to $144,000 in fiscal
1995, a decrease of $13,000 or 9%. The decrease in fiscal 1996 was primarily due
to the conversion of convertible subordinated debentures to common stock and a
reduction in short-term loans payable over the prior period.
Net Loss
The Company has incurred net losses during each year since its inception. The
net loss for fiscal 1997 was $5,019,000 as compared to $2,942,000 in fiscal 1996
and $1,993,000 in fiscal 1995. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 1997 amounted to $45,410,000. Such losses are
attributable to the fact that the Company is still in the development stage and
accordingly has not derived sufficient revenues from operations to offset the
development stage expenses.
Liquidity and Capital Resources
During fiscal 1997, the Company had a net decrease in cash of $589,000. This
decrease resulted from net cash used in operating activities of $4,107,000 and
net cash used in investing activities of $252,000, principally due to the
purchase of property and equipment, offset by the net cash provided by financing
activities of $3,770,000, primarily from proceeds from the exercise of stock
options and warrants and the private placement of common stock. Total cash
resources as of July 31, 1997 were $7,542,000 compared to $8,131,000 at July 31,
1996.
The Company's term loan agreement with its bank, (the "Term Loan") matured on
August 31, 1997. The entire principal amount outstanding on the Term Loan as of
July 31, 1997 was reflected as a current liability. This is the primary reason
for a significant increase in current liabilities as of July 31, 1997 compared
to July 31, 1996 and a significant decrease in long-term debt as of July 31,
1997 compared to July 31, 1996. The Company had a verbal agreement with the bank
to extend the maturity date of the loan until December 1, 1997, provided the
Company deposited a compensating balance in the amount of the principal balance
as of the date the extension was negotiated with the bank. On October 3, 1997,
the Company elected to pay the entire loan balance, including accrued interest,
in the amount of $1,376,646 out of its cash resources.
The Company's continued operations will depend on its ability to raise
additional funds through several potential sources such as equity or debt
financing, collaborative agreements, strategic alliances and revenues from the
commercial sale of ONCONASE. The Company is in discussions with several
potential collaborative partners for further development and marketing of
ONCONASE, however there can be no assurance that any such arrangements will be
consummated. In addition, the Company expects that its cash needs in the future
will increase due to the on-going clinical trials. The Company believes that its
cash and cash equivalents as of July 31, 1997, after giving effect to the
repayment of the Term Loan, will be sufficient to meet its anticipated cash
needs through the fiscal year ending July 31, 1998. To date, a significant
portion of the Company's financing has been through private placements of common
stock and warrants, the issuance of common stock for stock options exercised and
services rendered, debt financing and financing provided by the Company's Chief
Executive Officer. The Company's long-term liquidity will depend on its ability
to raise substantial additional funds. There can be no assurance that such funds
will be available to the Company on acceptable terms, if at all.
The Company's working capital and capital requirements may depend upon numerous
factors including the progress of the Company's research and development
programs, the timing and cost of obtaining regulatory approvals, and the levels
of resources that the Company devotes to the development of manufacturing and
marketing capabilities.
10
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". The new statement
replaces the calculations currently used with "basic earnings per share" that
includes only actual weighted shares outstanding and "diluted earnings per
share" that includes the effect of any common stock equivalents or other items
that dilute earnings per share. The new rules are effective for the Company in
the upcoming year and are retroactively applied to the previous quarterly
periods. The adoption of this statement is not expected to be material.
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 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 KPMG Peat Marwick LLP with respect to
the financial statements of the Company from inception to July 31, 1997 is based
on the report of AHC for the period from inception to July 31, 1992, although
AHC has not consented to the use of such report herein and will not be available
to perform any subsequent review procedures with respect to such report.
Accordingly, investors will be barred from asserting claims against AHC under
Section 11 of the Securities Act of 1933, as amended (the "Securities Act") on
the basis of the use of such report in any registration statement of the Company
into which such report is incorporated by reference. In addition, in the event
any persons seek to assert a claim against AHC for false or misleading financial
statements and disclosures in documents previously filed by the Company, such
claim will be adversely affected and possibly barred. Furthermore, as a result
of the lack of a consent from AHC to the use of its audit report herein, or to
its incorporation by reference into a registration statement, the officers and
directors of the Company will be unable to rely on the authority of AHC as
experts in auditing and accounting in the event any claim is brought against
such persons under Section 11 of the Securities Act based on alleged false and
misleading Financial Statements and disclosures attributable to AHC. The
discussion regarding certain effects of the AHC termination is not meant and
should not be construed in any way as legal advice to any party and any
potential purchaser should consult with his, her or its own counsel with respect
to the effect of the AHC termination on a potential investment in the Common
Stock of the Company or otherwise.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with regards to the Directors and Executive Officers of the Company
is incorporated herein by reference from the discussions under the headings
"Business Experience of Nominees" and "Compliance with Section 16(a) of the
Exchange Act" in the Company's Proxy Statement for its 1997 Annual Meeting of
Shareholders.
11
Item 11. EXECUTIVE COMPENSATION.
Information with regard to executive compensation is incorporated herein by
reference from the discussion under the heading "Executive Compensation" in the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with regard to security ownership of certain beneficial owners and
management is incorporated by reference from the discussion under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with regard to certain relationships and related transactions is
incorporated herein by reference from the discussion under the heading "Certain
Relationships and Related Transactions" in the Company's Proxy Statement for its
1997 Annual Meeting of Shareholders.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to these portions of Item 14 is submitted as a
separate section of this report commencing on page F-1.
(a)(3) and (4) Exhibits (numbered in accordance with Item 601 of Regulation
S-K).
Exhibit No.
or
Exhibit Incorporation
No. Item Title by Reference
----- ---------- ------------
3.1 Certificate of Incorporation *
3.2 By-Laws *
3.3 Amendment to Certificate of Incorporation #
10.1 Form of Stock and Warrant Purchase Agreements used in
private placements completed in April 1996 and June 1996 ##
10.2 Lease Agreement - 225 Belleville Avenue, Bloomfield, New
Jersey ###
10.3 Form of Stock Purchase Agreement and Certificate used in
connection with various private placements ***
10.4 Form of Stock and Warrant Purchase Agreement and Warrant
Agreement used in Private Placement completed on March 21,
1994 ***
10.5 1993 Stock Option Plan and Form of Option Agreement *****
10.6 Debt Conversion Agreement dated March 30, 1994 with Kuslima
Shogen ****
10.7 Accrued Salary Conversion Agreement dated March 30, 1994
with Kuslima Shogen ****
10.8 Accrued Salary Conversion Agreement dated March 30, 1994
with Stanislaw Mikulski ****
10.9 Option Agreement dated March 30, 1994 with Kuslima Shogen ****
12
Exhibit No.
or
Exhibit Incorporation
No. Item Title by Reference
----- ---------- ------------
10.10 Amendment No. 1 dated June 20, 1994 to Option Agreement
dated March 30, 1994 with Kuslima Shogen ****
10.11 Form of Amendment No. 1 dated June 20, 1994 to Option
Agreement dated March 30, 1994 with Kuslima Shogen *****
10.12 Form of Amendment No. 1 dated June 20, 1994 to Option
Agreement dated March 30, 1994 with Stanislaw Mikulski *****
10.13 Form of Stock and Warrant Purchase Agreement and Warrant
Agreement used in Private Placement completed on September
13, 1994 +
10.14 Form of Subscription Agreements and Warrant Agreement used
in Private Placements closed in October 1994 and September
1995. #
10.15 1997 Stock Option Plan. ###
21.1 Subsidiaries of Registrant **
23.1 Consent of KPMG Peat Marwick LLP ####
27.1 Financial Data Schedule ####
99.1 Factors to Consider in Connection with Forward-Looking
Statements ####
* Previously filed as exhibit to the Company's Registration Statement on
Form S-18 (File No. 2-79975-NY) and incorporated herein by reference
thereto.
** Previously filed as exhibits to the Company's Annual Report on Form 10-K
for the year ended July 31, 1993 and incorporated herein by reference
thereto.
*** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended January 31, 1994 and incorporated herein by
reference thereto.
**** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1994 and incorporated herein by
reference thereto.
***** Previously filed as exhibits to the Company's Registration Statement Form
SB-2 (File No. 33-76950) and incorporated herein by reference thereto.
+ Previously filed as exhibits to the Company's Registration Statement on
Form SB-2 (File No. 33-83072) and incorporated herein by reference
thereto.
# Previously filed as exhibits to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1995 and incorporated herein by
reference thereto.
## Previously filed as exhibits to the Company's Registration statement on
Form SB-2 (File No. 333- 11575) and incorporated herein by reference
thereto.
### Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1997 and incorporated herein by
reference thereto.
#### Filed herewith.
13
(b) Reports on Form 8-K.
None
14
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 29, 1997 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 29, 1997 /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief
Executive Officer (Principal Executive
Officer) and Chairman of the Board
Dated: October 29, 1997 /s/ GAIL E. FRASER
Gail E. Fraser, Chief Financial Officer,
Vice President of Finance, (Principal
Financial Officer and Principal Accounting
Officer) and Director
Dated: October 29, 1997 /s/ STANISLAW M. MIKULSKI
Stanislaw M. Mikulski, M.D., Executive
Vice President and Director
Dated: __________________
Alan Bell, Director
Dated: October 29, 1997 /s/ STEPHEN K. CARTER
Stephen K. Carter, M.D., Director
Dated: October 29, 1997 /s/ DONALD R. CONKLIN
Donald R. Conklin, Director
15
Dated: October 29, 1997 /s/ ROBERT R. HENRY
Robert R. Henry, Director
Dated: __________________
Allen Siegel, D.D.S., Director
16
ALFACELL CORPORATION
(A Development Stage Company)
Index
Page
----
Independent Auditors' Report of KPMG Peat Marwick LLP ................... F-2
Independent Auditors' Report of Armus, Harrison & Co. ................... F-3
Financial Statements:
Balance Sheets - July 31, 1997 and 1996 ...................... F-5
Statements of Operations - Years ended July 31, 1997, 1996
and 1995 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1997 ................................ F-6
Statement of Stockholders' Equity (Deficiency) - Period from
August 24, 1981 (Date of Inception) to July 31, 1997 ........ F-7
Statements of Cash Flows - Years ended July 31, 1997, 1996
and 1995 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1997 ................................. F-11
Notes to Financial Statements - Years ended July 31, 1997,
1996 and 1995 and the Period from August 24, 1981
(Date of Inception) to July 31, 1997 ........................ F-14
F-1
Independent Auditors' Report
The Stockholders and Board of Directors
Alfacell Corporation:
We have audited the accompanying balance sheets of Alfacell Corporation (a
development stage company) as of July 31, 1997 and 1996, 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, 1997 and the period
from August 24, 1981 (date of inception) to July 31, 1997. 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 (a development
stage company) for the period from August 24, 1981 (date of inception) to July
31, 1992 were audited by other auditors whose report dated December 9, 1992,
except as to note 18 which is July 19, 1993 and note 3 which is October 28,
1993, expressed an unqualified opinion on those statements with an explanatory
paragraph regarding the Company's ability to continue as a going concern.
We conducted our audits in accordance with 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 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 (date of inception) to July 31, 1997 of the amounts for the
period from August 24, 1981 (date of inception) to July 31, 1992, on the report
of other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of Alfacell Corporation (a
development stage company) as of July 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended July 31, 1997 and the period from August 24, 1981 (date of inception) to
July 31, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
October 10, 1997
F-2
ON DECEMBER 1, 1993, CERTAIN SHAREHOLDERS OF ARMUS HARRISON & CO. ("AHC")
TERMINATED THEIR ASSOCIATION WITH AHC (THE "AHC TERMINATION"), AND AHC CEASED
PERFORMING ACCOUNTING AND AUDITING SERVICES, EXCEPT FOR LIMITED ACCOUNTING
SERVICES TO BE PERFORMED ON BEHALF OF THE COMPANY. IN JUNE 1996, AHC DISSOLVED
AND CEASED ALL OPERATIONS. THE REPORT OF AHC WITH RESPECT TO THE FINANCIAL
STATEMENTS OF THE COMPANY FROM INCEPTION TO JULY 31, 1992 IS INCLUDED HEREIN,
ALTHOUGH AHC HAS NOT CONSENTED TO THE USE OF SUCH REPORT HEREIN AND WILL NOT BE
AVAILABLE TO PERFORM ANY SUBSEQUENT REVIEW PROCEDURES WITH RESPECT TO SUCH
REPORT. ACCORDINGLY, INVESTORS WILL BE BARRED FROM ASSERTING CLAIMS AGAINST AHC
UNDER SECTION 11 OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") ON THE BASIS OF THE USE OF SUCH REPORT IN ANY REGISTRATION STATEMENT OF
THE COMPANY INTO WHICH SUCH REPORT IS INCORPORATED BY REFERENCE. IN ADDITION, IN
THE EVENT ANY PERSONS SEEK TO ASSERT A CLAIM AGAINST AHC FOR FALSE OR MISLEADING
FINANCIAL STATEMENTS AND DISCLOSURES IN DOCUMENTS PREVIOUSLY FILED BY THE
COMPANY, SUCH CLAIM WILL BE ADVERSELY AFFECTED AND POSSIBLY BARRED. FURTHERMORE,
AS A RESULT OF THE LACK OF A CONSENT FROM AHC TO THE USE OF ITS AUDIT REPORT
HEREIN, OR, TO ITS INCORPORATION BY REFERENCE INTO A REGISTRATION STATEMENT, THE
OFFICERS AND DIRECTORS OF THE COMPANY WILL BE UNABLE TO RELY ON THE AUTHORITY OF
AHC AS EXPERTS IN AUDITING AND ACCOUNTING IN THE EVENT ANY CLAIM IS BROUGHT
AGAINST SUCH PERSONS UNDER SECTION 11 OF THE SECURITIES ACT BASED ON ALLEGED
FALSE AND MISLEADING FINANCIAL STATEMENTS AND DISCLOSURES ATTRIBUTABLE TO AHC.
THE DISCUSSION REGARDING CERTAIN EFFECTS OF THE AHC TERMINATION IS NOT MEANT AND
SHOULD NOT BE CONSTRUED IN ANY WAY AS LEGAL ADVICE TO ANY PARTY AND ANY
POTENTIAL PURCHASER SHOULD CONSULT WITH HIS, HER OR ITS OWN COUNSEL WITH RESPECT
TO THE EFFECT OF THE AHC TERMINATION ON A POTENTIAL INVESTMENT IN THE COMMON
STOCK OF THE COMPANY OR OTHERWISE.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Alfacell Corporation
Bloomfield, New Jersey
We have audited the balance sheets of Alfacell Corporation (a Development Stage
Company) as of July 31, 1992 and 1991, as restated, and the related statements
of operations, stockholders' deficiency, and cash flows for the three years
ended July 31, 1992, as restated, and for the period from inception August 24,
1981 to July 31, 1992, as restated. In connection with our audit of the 1992 and
1991 financial statements, we have also audited the 1992, 1991 and 1990
financial statement schedules as listed in the accompanying index. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
F-3
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in all
material respects, the financial position of Alfacell Corporation as of July 31,
1992 and 1991, as restated, and for the three years ended July 31, 1992, as
restated, and for the period from inception August 24, 1981 to July 31, 1992, as
restated, and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities 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 of the
Notes to Financial Statements, indicates the uncertainties about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts and the amount of classification of liabilities that might be
necessary should the Company be unable to continue its existence.
-------------------------
Armus, Harrison & Co.
Mountainside, New Jersey
December 9, 1992
Except as to Note 18 which
is July 19, 1993 and Note 3
which is October 28, 1993
F-4
ALFACELL CORPORATION
(A Development Stage Company)
Balance Sheets
July 31, 1997 and 1996
ASSETS 1997 1996
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 7,542,289 $ 8,131,442
Loan receivable, related party -- 112,250
Prepaid expenses 165,106 63,850
------------ ------------
Total current assets 7,707,395 8,307,542
------------ ------------
Property and equipment, net of accumulated depreciation and
amortization of $742,319 in 1997 and $688,325 in 1996 326,003 127,930
------------ ------------
Other assets:
Deferred debt costs, net 1,556 20,362
Other -- 31,877
------------ ------------
1,556 52,239
------------ ------------
Total assets $ 8,034,954 $ 8,487,711
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,381,416 $ 86,936
Accounts payable 377,704 189,536
Accrued expenses 693,841 162,213
------------ ------------
Total current liabilities 2,452,961 438,685
Long-term debt, less current portion 15,902 1,398,760
------------ ------------
Total liabilities 2,468,863 1,837,445
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 1997 and 1996 -- --
Common stock $.001 par value. Authorized 25,000,000 shares;
issued and outstanding 14,847,793 shares in 1997 and
13,859,209 shares in 1996 14,848 13,859
Capital in excess of par value 50,961,382 47,023,529
Common stock to be issued, 89,634 shares in 1996 -- 258,335
Subscription receivable, 89,634 shares in 1996 -- (254,185)
Deficit accumulated during development stage (45,410,139) (40,391,272)
------------ ------------
5,566,091 6,650,266
------------ ------------
Total stockholders' equity
Total liabilities and stockholders' equity $ 8,034,954 $ 8,487,711
============ ============
See accompanying notes to financial statements.
F-5
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 1997, 1996 and 1995,
and the Period from August 24, 1981
(Date of Inception) to July 31, 1997
August 24,
1981
(date of
inception)
to
July 31,
1997 1997 1996 1995
------------ ------------ ------------ ------------
Revenues:
Sales $ 553,489 -- -- --
Investment income 827,826 442,572 184,250 14,992
Other income 60,103 -- -- 6,000
------------ ------------ ------------ ------------
1,441,418 442,572 184,250 20,992
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 336,495 -- -- --
Research and development 26,422,106 3,862,716 2,188,890 1,205,523
General and administrative 17,181,406 1,475,624 806,962 664,435
Interest:
Related parties 1,033,960 -- 1,801 14,982
Others 1,877,590 123,099 128,749 129,175
------------ ------------ ------------ ------------
46,851,557 5,461,439 3,126,402 2,014,115
------------ ------------ ------------ ------------
Net loss $(45,410,139) (5,018,867) (2,942,152) (1,993,123)
============ ============ ============ ============
Loss per common share $ (7.69) (0.34) (0.25) (0.21)
============ ============ ============ ============
Weighted average number of shares
outstanding 5,907,000 14,597,000 11,969,000 9,598,000
============ ============ ============ ============
See accompanying notes to financial statements.
F-6
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 1997
Common Stock
--------------------------------- Capital in
Number of excess of par
Shares Amount value
------------- ----------- -------------
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 services 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
Common during
stock to be development Subscription
issued stage Receivable
----------- ------------- -------------
Issuance of shares to officers and stockholders for equipment, research and
development, and expense reimbursement -- -- --
Issuance of shares for organizational legal services -- -- --
Sale of shares for cash, net -- -- --
Adjustment for 3 for 2 stock split declared September 8, 1982 -- -- --
Net loss -- (121,486) --
----------- ------------- -------------
Balance at July 31, 1982 -- (121,486) --
Issuance of shares for equipment -- -- --
Sale of shares to private investors -- -- --
Sale of shares in public offering, net -- -- --
Issuance of shares under stock grant program -- -- --
Exercise of warrants, net -- -- --
Net loss -- (558,694) --
----------- ------------- -------------
Balance at July 31, 1983 -- (680,180) --
Exercise of warrants, net -- -- --
Issuance of shares under stock grant program -- -- --
Issuance of shares under stock bonus plan for directors and consultants -- -- --
Net loss -- (1,421,083) --
----------- ------------- -------------
Balance at July 31, 1984 -- (2,101,263) --
Issuance of shares under stock grant program -- -- --
Issuance of shares under stock bonus plan for directors and consultants -- -- --
Shares canceled -- -- --
Exercise of warrants, net -- -- --
Net loss -- (2,958,846) --
----------- ------------- -------------
Balance at July 31, 1985 -- (5,060,109) --
Issuance of shares under stock grant program -- -- --
Issuance of shares under stock bonus plan for directors and consultants -- -- --
Exercise of warrants, net -- -- --
Net loss -- (2,138,605) --
----------- ------------- -------------
Balance at July 31, 1986 (carried forward) -- (7,198,714) --
Deferred
compen- Total stock-
sation, holders'
restricted equity
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 services -- 5,000
Sale of shares for cash, net -- 108,500
Adjustment for 3 for 2 stock split declared September 8, 1982 -- --
Net loss -- (121,486)
---------------- -------------
Balance at July 31, 1982 -- 205,714
Issuance of shares for equipment -- 14,000
Sale of shares to private investors -- 41,250
Sale of shares in public offering, net -- 1,308,446
Issuance of shares under stock grant program -- 110,000
Exercise of warrants, net -- 3,495
Net loss -- (558,694)
---------------- -------------
Balance at July 31, 1983 -- 1,124,211
Exercise of warrants, net -- 933,983
Issuance of shares under stock grant program -- 101,219
Issuance of shares under stock bonus plan for directors and consultants -- 385,917
Net loss -- (1,421,083)
---------------- -------------
Balance at July 31, 1984 -- 1,124,247
Issuance of shares under stock grant program -- 478,105
Issuance of shares under stock bonus plan for directors and consultants -- 879,478
Shares canceled -- (105,825)
Exercise of warrants, net -- 1,971,347
Net loss -- (2,958,846)
---------------- -------------
Balance at July 31, 1985 -- 1,388,506
Issuance of shares under stock grant program -- 107,032
Issuance of shares under stock bonus plan for directors and consultants -- 215,400
Exercise of warrants, net -- 80,998
Net loss -- (2,138,605)
---------------- -------------
Balance at July 31, 1986 (carried forward) -- (346,669)
(Continued)
F-7
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------------------- Capital in
Number of excess of par
Shares Amount value
------------- ----------- -------------
Balance at July 31, 1986 (brought forward) 2,933,052 2,933 6,849,112
Exercise of warrants at $10.00 per share 14,745 15 147,435
Issuance of shares under stock bonus plan for directors and consultants 5,000 5 74,995
Issuance of shares for services 250,000 250 499,750
Sale of shares to private investors, net 5,000 5 24,995
Net loss -- -- --
------------- ----------- -------------
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 at $3.00 per share 170,000 170 509,830
Issuance of shares for litigation settlement 12,500 12 31,125
Exercise of warrants at $7.06 per share 63,925 64 451,341
Sale of shares to private investors 61,073 61 178,072
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------- ----------- -------------
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 at $3.00 per share 133,333 133 399,867
Sale of shares to private investors 105,840 106 419,894
Exercise of options at $3.50 per share 1,000 1 3,499
Issuance of shares under employment agreement 750,000 750 3,749,250
Issuance of shares under the 1989 Stock Plan 30,000 30 149,970
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------- ----------- -------------
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 $3.00--$3.50 per share 105,989 106 345,856
Sale of shares to private investors 89,480 90 354,990
Issuance of shares under employment agreement 750,000 750 3,749,250
Conversion of debentures at $5.00 per share 100,000 100 499,900
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------- ----------- -------------
Balance at July 31, 1990 (carried forward) 6,799,829 6,800 23,699,631
Deficit
accumulated
Common during
stock to be development Subscription
issued stage Receivable
----------- ------------- -------------
Balance at July 31, 1986 (brought forward) -- (7,198,714) --
Exercise of warrants at $10.00 per share -- -- --
Issuance of shares under stock bonus plan for directors and consultants -- -- --
Issuance of shares for services -- -- --
Sale of shares to private investors, net -- -- --
Net loss -- (2,604,619) --
----------- ------------- -------------
Balance at July 31, 1987 -- (9,803,333) --
Issuance of shares for legal and consulting services -- -- --
Issuance of shares under employment incentive program -- -- --
Issuance of shares under stock grant program -- -- --
Exercise of options at $3.00 per share -- -- --
Issuance of shares for litigation settlement -- -- --
Exercise of warrants at $7.06 per share -- -- --
Sale of shares to private investors -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (3,272,773) --
----------- ------------- -------------
Balance at July 31, 1988 -- (13,076,106) --
Sale of shares for litigation settlement -- -- --
Conversion of debentures at $3.00 per share -- -- --
Sale of shares to private investors -- -- --
Exercise of options at $3.50 per share -- -- --
Issuance of shares under employment agreement -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (2,952,869) --
----------- ------------- -------------
Balance at July 31, 1989 -- (16,028,975) --
Issuance of shares for legal and consulting services -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Sale of shares for litigation settlement -- -- --
Exercise of options at $3.00--$3.50 per share -- -- --
Sale of shares to private investors -- -- --
Issuance of shares under employment agreement -- -- --
Conversion of debentures at $5.00 per share -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (4,860,116) --
----------- ------------- -------------
Balance at July 31, 1990 (carried forward) -- (20,889,091) --
Deferred
compen- Total stock-
sation, holders'
restricted equity
stock (deficiency)
---------------- -------------
Balance at July 31, 1986 (brought forward) -- (346,669)
Exercise of warrants at $10.00 per share -- 147,450
Issuance of shares under stock bonus plan for directors and consultants -- 75,000
Issuance of shares for services -- 500,000
Sale of shares to private investors, net -- 25,000
Net loss -- (2,604,619)
---------------- -------------
Balance at July 31, 1987 -- (2,203,838)
Issuance of shares for legal and consulting services -- 724,487
Issuance of shares under employment incentive program (2,450,000) --
Issuance of shares under stock grant program -- 66,500
Exercise of options at $3.00 per share -- 510,000
Issuance of shares for litigation settlement -- 31,137
Exercise of warrants at $7.06 per share -- 451,405
Sale of shares to private investors -- 178,133
Amortization of deferred compensation, restricted stock 449,167 449,167
Net loss -- (3,272,773)
---------------- -------------
Balance at July 31, 1988 (2,000,833) (3,065,782)
Sale of shares for litigation settlement -- 1,074,838
Conversion of debentures at $3.00 per share -- 400,000
Sale of shares to private investors -- 420,000
Exercise of options at $3.50 per share -- 3,500
Issuance of shares under employment agreement (3,750,000) --
Issuance of shares under the 1989 Stock Plan (150,000) --
Amortization of deferred compensation, restricted stock 1,050,756 1,050,756
Net loss -- (2,952,869)
---------------- -------------
Balance at July 31, 1989 (4,850,077) (3,069,557)
Issuance of shares for legal and consulting services -- 258,777
Issuance of shares under the 1989 Stock Plan (336,000) --
Sale of shares for litigation settlement -- 351,117
Exercise of options at $3.00--$3.50 per share -- 345,962
Sale of shares to private investors -- 355,080
Issuance of shares under employment agreement (3,750,000) --
Conversion of debentures at $5.00 per share -- 500,000
Amortization of deferred compensation, restricted stock 3,015,561 3,015,561
Net loss -- (4,860,116)
---------------- -------------
Balance at July 31, 1990 (carried forward) (5,920,516) (3,103,176)
(Continued)
F-8
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
--------------------------------- Capital in
Number of excess of par
Shares Amount value
------------- ----------- -------------
Balance at July 31, 1990 (brought forward) 6,799,829 6,800 23,699,631
Exercise of options at $6.50 per share 16,720 16 108,664
Issuance of shares for legal consulting services 87,000 87 358,627
Issuance of shares under the 1989 Stock Plan 119,000 119 475,881
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------- ----------- -------------
Balance at July 31, 1991 7,022,549 7,022 24,642,803
Exercise of options at $3.50 per share 1,000 1 3,499
Sale of shares to private investors 70,731 71 219,829
Conversion of debentures at $5.00 per share 94,000 94 469,906
Issuance of shares for services 45,734 46 156,944
Issuance of shares under the 1989 Stock Plan 104,000 104 285,896
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------- ----------- -------------
Balance at July 31, 1992 7,338,014 7,338 25,778,877
Sale of share to private investors 352,667 353 735,147
Issuance of shares for legal services 49,600 50 132,180
Issuance of shares for services 5,000 5 9,995
Issuance of shares under the 1989 Stock Plan 117,000 117 233,883
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------- ----------- -------------
Balance at July 31, 1993 7,862,281 7,863 26,890,082
Conversion of debentures at $2.75 per share to $6.00 per share 425,400 425 1,701,575
Sale of shares to private investors, net 743,000 743 1,710,048
Conversion of short-term borrowings 72,800 73 181,927
Issuance of shares for services 16,200 16 43,334
Issuance of shares under the 1989 Stock Plan, for services 5,000 5 14,995
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- -- 3,194,969
Repurchase of stock options from related party -- -- (198,417)
Issuance of options upon conversion of accrued interest -- -- 142,441
Common stock to be issued -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------- ----------- -------------
Balance at July 31, 1994 (carried forward) 9,124,681 9,125 33,680,954
Deficit
accumulated
Common during
stock to be development Subscription
issued stage Receivable
----------- ------------- -------------
Balance at July 31, 1990 (brought forward) -- (20,889,091) --
Exercise of options at $6.50 per share -- -- --
Issuance of shares for legal consulting services -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (5,202,302) --
---------------- ------------- -----------
Balance at July 31, 1991 -- (26,091,393) --
Exercise of options at $3.50 per share -- -- --
Sale of shares to private investors -- -- --
Conversion of debentures at $5.00 per share -- -- --
Issuance of shares for services -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (4,772,826) --
---------------- ------------- -----------
Balance at July 31, 1992 -- (30,864,219) --
Sale of share to private investors -- -- --
Issuance of shares for legal services -- -- --
Issuance of shares for services -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (2,357,350) --
---------------- ------------- -----------
Balance at July 31, 1993 -- (33,221,569) --
Conversion of debentures at $2.75 per share to $6.00 per share -- -- --
Sale of shares to private investors, net -- -- --
Conversion of short-term borrowings -- -- --
Issuance of shares for services -- -- --
Issuance of shares under the 1989 Stock Plan, for services -- -- --
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- -- --
Repurchase of stock options from related party -- -- --
Issuance of options upon conversion of accrued interest -- -- --
Common stock to be issued 50,000 -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (2,234,428) --
---------------- ------------- -----------
Balance at July 31, 1994 (carried forward) 50,000 (35,455,997) --
Deferred
compen- Total stock-
sation, holders'
restricted equity
stock (deficiency)
---------------- -------------
Balance at July 31, 1990 (brought forward) (5,920,516) (3,103,176)
Exercise of options at $6.50 per share -- 108,680
Issuance of shares for legal consulting services -- 358,714
Issuance of shares under the 1989 Stock Plan (476,000) --
Amortization of deferred compensation, restricted stock 2,891,561 2,891,561
Net loss -- (5,202,302)
---------------- -------------
Balance at July 31, 1991 (3,504,955) (4,946,523)
Exercise of options at $3.50 per share -- 3,500
Sale of shares to private investors -- 219,900
Conversion of debentures at $5.00 per share -- 470,000
Issuance of shares for services -- 156,990
Issuance of shares under the 1989 Stock Plan (286,000) --
Amortization of deferred compensation, restricted stock 3,046,726 3,046,726
Net loss -- (4,772,826)
---------------- -------------
Balance at July 31, 1992 (744,229) (5,822,233)
Sale of share to private investors -- 735,500
Issuance of shares for legal services -- 132,230
Issuance of shares for services (10,000) --
Issuance of shares under the 1989 Stock Plan (234,000) --
Amortization of deferred compensation, restricted stock 664,729 664,729
Net loss -- (2,357,350)
---------------- -------------
Balance at July 31, 1993 (323,500) (6,647,124)
Conversion of debentures at $2.75 per share to $6.00 per share -- 1,702,000
Sale of shares to private investors, net -- 1,710,791
Conversion of short-term borrowings -- 182,000
Issuance of shares for services -- 43,350
Issuance of shares under the 1989 Stock Plan, for services -- 15,000
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- 3,194,969
Repurchase of stock options from related party -- (198,417)
Issuance of options upon conversion of accrued interest -- 142,441
Common stock to be issued -- 50,000
Amortization of deferred compensation, restricted stock 265,000 265,000
Net loss -- (2,234,428)
---------------- -------------
Balance at July 31, 1994 (carried forward) (58,500) (1,774,418)
(Continued)
F-9
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Deficit
Common Stock accumulated
--------------------------- Capital in Common during
Number of excess of par stock to be development
Shares Amount value issued stage
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1994 (brought forward) 9,124,681 9,125 33,680,954 50,000 (35,455,997)
Sale of shares to private investors, net 961,000 961 2,023,241 (50,000) --
Conversion of short-term borrowings 17,600 17 43,983 -- --
Issuance of shares for services 30,906 31 77,234 -- --
Exercise of options at $2.27 - $2.50 per share 185,000 185 437,015 -- --
Common stock to be issued -- -- -- 339,008 --
Common stock to be issued, for services -- -- -- 4,800 --
Amortization of deferred compensation, restricted stock -- -- -- -- --
Net loss -- -- -- -- (1,993,123)
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1995 10,319,187 10,319 36,262,427 343,808 (37,449,120)
Sale of shares to private investors, net 2,953,327 2,953 8,969,655 (339,008) --
Issuance of shares for services 19,995 20 70,858 (4,800) --
Exercise of options at $2.50 - $3.87 per share 566,700 567 1,657,633 -- --
Sale of warrants -- -- 12,084 -- --
Issuance of options/warrants for services -- -- 50,872 -- --
Common stock to be issued -- -- -- 258,335 --
Subscription receivable -- -- -- -- --
Net loss -- -- -- -- (2,942,152)
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1996 13,859,209 13,859 47,023,529 258,335 (40,391,272)
Sale of shares to private investors, net 112,000 112 503,888 -- --
Issuance of options for services -- -- 76,504 -- --
Exercise of options at $2.45 - $4.00 per share, net 729,134 729 2,620,359 (258,335) --
Exercise of warrants at $5.00 per share, net 147,450 148 737,102 -- --
Net loss -- -- -- -- (5,018,867)
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1997 14,847,793 $ 14,848 $ 50,961,382 $ -- $(45,410,139)
============ ============ ============ ============ ============
Deferred
compen- Total stock-
sation, holders'
Subscription restricted equity
Receivable stock (deficiency)
------------ ------------ ------------
Balance at July 31, 1994 (brought forward) -- (58,500) (1,774,418)
Sale of shares to private investors, net -- -- 1,974,202
Conversion of short-term borrowings -- -- 44,000
Issuance of shares for services -- -- 77,265
Exercise of options at $2.27 - $2.50 per share -- -- 437,200
Common stock to be issued -- -- 339,008
Common stock to be issued, for services -- -- 4,800
Amortization of deferred compensation, restricted stock -- 58,500 58,500
Net loss -- -- (1,993,123)
------------ ------------ ------------
Balance at July 31, 1995 -- -- (832,566)
Sale of shares to private investors, net -- -- 8,633,600
Issuance of shares for services -- -- 66,078
Exercise of options at $2.50 - $3.87 per share -- -- 1,658,200
Sale of warrants -- -- 12,084
Issuance of options/warrants for services -- -- 50,872
Common stock to be issued -- -- 258,335
Subscription receivable (254,185) -- (254,185)
Net loss -- -- (2,942,152)
------------ ------------ ------------
Balance at July 31, 1996 (254,185) -- 6,650,266
Sale of shares to private investors, net -- -- 504,000
Issuance of options for services -- -- 76,504
Exercise of options at $2.45 - $4.00 per share, net 254,185 -- 2,616,938
Exercise of warrants at $5.00 per share, net -- -- 737,250
Net loss -- -- (5,018,867)
------------ ------------ ------------
Balance at July 31, 1997 $ -- $ -- $ 5,566,091
============ ============ ============
(Continued)
See accompanying notes to financial statements.
F-10
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 1997, 1996 and 1995,
and the Period from August 24, 1981
(Date of Inception) to July 31, 1997
August 24,
1981 (date
of incep-
tion) to
July 31,
1997 1997 1996 1995
------------ ----------- ----------- ----------
Cash flows from operating activities:
Net loss $(45,410,139) (5,018,867) (2,942,152) (1,993,123)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of marketable securities (25,963) -- -- --
Depreciation and amortization 1,120,028 72,799 69,236 69,699
Loss on disposal of property and equipment 18,926 -- -- --
Noncash operating expenses 4,964,465 76,504 116,950 4,800
Amortization of deferred compensation 11,442,000 -- -- 58,500
Amortization of organization costs 4,590 -- -- --
Changes in assets and liabilities:
(Increase) decrease in loan receivable, related party -- 112,250 (112,250) --
(Increase) decrease in prepaid expenses (165,106) (101,256) (25,243) 30,060
(Increase) decrease in other assets 36,184 31,877 (24,176) 39,877
Increase (decrease) in loans and interest payable, related party 744,539 -- (138,638) (65,085)
Increase (decrease) in accounts payable 454,969 188,168 6,314 (152,538)
Increase (decrease) in accrued payroll and expenses, related parties 2,348,145 -- (414,996) 256,731
Increase in accrued expenses 1,235,354 531,628 60,436 48,944
------------ ----------- ----------- ----------
Net cash used in operating
activities (23,232,008) (4,106,897) (3,404,519) (1,702,135)
------------ ----------- ----------- ----------
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 (1,293,946) (252,066) (45,693) (31,879)
Patent costs (97,841) -- -- --
------------ ----------- ----------- ----------
Net cash used in investing
activities (1,365,824) (252,066) (45,693) (31,879)
------------ ----------- ----------- ----------
(Continued)
F-11
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24,
1981 (date
of incep-
tion) to
July 31,
1997 1997 1996 1995
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from short-term borrowings $ 849,500 -- -- --
Payment of short-term borrowings (623,500) -- -- --
Increase in loans payable, related party, net 2,628,868 -- -- --
Proceeds from bank debt and other long-term debt,
net of deferred debt costs 2,410,883 4,200 29,540 17,595
Reduction of bank debt and long-term debt (1,528,137) (92,578) (153,947) (89,827)
Proceeds from common stock to be issued 433,358 -- 44,350 339,008
Proceeds from issuance of common stock, net 22,172,561 504,000 8,605,484 1,974,202
Proceeds from exercise of stock options and warrants, net 5,449,588 3,354,188 1,658,200 437,200
Proceeds from issuance of convertible debentures 347,000 -- -- --
------------ ------------ ------------ ------------
Net cash provided by financing
activities 32,140,121 3,769,810 10,183,627 2,678,178
------------ ------------ ------------ ------------
Net increase (decrease) in cash 7,542,289 (589,153) 6,733,415 944,164
Cash and cash equivalents at beginning of period -- 8,131,442 1,398,027 453,863
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 7,542,289 7,542,289 8,131,442 1,398,027
============ ============ ============ ============
Supplemental disclosure of cash flow information - interest paid $ 1,624,573 134,845 130,224 129,477
============ ============ ============ ============
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 $ 2,945,000 -- -- --
============ ============ ============ ============
Conversion of short-term borrowings to common stock $ 226,000 -- -- 44,000
============ ============ ============ ============
(Continued)
F-12
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24,
1981 (date
of incep-
tion) to
July 31,
1997 1997 1996 1995
---------- ---------- ---------- ----------
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 $ 77,265 -- -- 77,265
========== ========== ========== ==========
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 $ 127,000 -- -- --
========== ========== ========== ==========
See accompanying notes to financial statements.
F-13
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
Years ended July 31, 1997, 1996 and 1995
and the Period From August 24, 1981
(Date of Inception) to July 31, 1997
(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 anticancer drugs and antiviral agents. The
Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 7. The Company is devoting substantially all of its present efforts to
establishing its business. Its planned principal operations have not
commenced and, accordingly, no significant revenue has been derived
therefrom.
The Company's current operations encompass all the risks inherent in
discovering and developing a new drug, including: an uncertainty regarding
the timing and amount of future revenues to be derived from the Company's
technology; obtaining future capital as needed; attracting and retaining
key personnel; and a business environment with heightened competition,
rapid technological change and strict government regulations.
Basis of Financial Statements
As shown in the financial statements, the Company has reported net losses
of $5,018,867, $2,942,152, and $1,993,123 for the fiscal years ended July
31, 1997, 1996 and 1995, respectively. The loss from date of inception,
August 24, 1981, to July 31, 1997 amounts to $45,410,139.
The Company's continued operations will depend on its ability to raise
additional funds through several potential sources such as equity or debt
financings, collaborative agreements, strategic alliances and revenues from
the commercial sale of ONCONASE. The Company believes that its current
resources will be sufficient to meet its anticipated cash needs through the
fiscal year ending July 31, 1998. To date, a significant portion of the
Company's financing has been through private placements of common stock and
warrants to purchase common stock, the issuance of common stock for
services rendered, debt financing and financing provided by the Company's
Chief Executive Officer.
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.
Certain reclassifications to the prior year financial information were made
to conform with the July 31, 1997 presentation.
(Continued)
F-14
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies (Continued)
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.
Patents
Costs related to patents are expensed when incurred. Previously, costs
related to approved patents were capitalized and were amortized using the
straight line method over the life of the patent, usually 17 years. As a
result of this change in policy, the Company wrote-off $76,807 of
capitalized patent costs during the fiscal year ended July 31, 1995.
Deferred Debt Costs
Deferred debt costs associated with the Company's long-term debt are being
amortized using the straight line method over the life of the debt
agreement. Accumulated amortization as of July 31, 1997 and 1996 was
$156,394 and $137,588, respectively.
Research and Development
Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
The fair value of the long-term debt approximates its carrying value due to
its short term maturity and the interest rate approximates current market
rates. For all other financial instruments, their carrying value
approximates fair value due to the short maturity of those instruments.
(Continued)
F-15
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies (Continued)
Net Loss Per Share
Net loss per share is based on the weighted average number of common shares
outstanding during the period and shares to be issued at the end of the
period. Common stock equivalents are not included in the computations since
the effect would be antidilutive for all periods presented.
Long-Lived Assets
Effective August 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In
accordance with SFAS No. 121, the Company reviews long-lived assets for
impairment whenever events or changes in business circumstances occur that
indicate that the carrying amount of the assets may not be recoverable. The
Company assesses the recoverability of long-lived assets held and to be
used based on undiscounted cash flows, and measures the impairment, if any,
using discounted cash flows. Adoption of SFAS No. 121 did not have a
material impact on the Company's financial position, operating results or
cash flows.
Stock Option Plans
Prior to August 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On August 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma disclosure in accordance with the provisions of SFAS No. 123.
(2) Property and Equipment
Property and equipment consists of the following at July 31:
1997 1996
---------- ----------
Laboratory equipment $ 702,481 593,408
Office equipment 271,866 169,871
Leasehold improvements 93,975 52,976
---------- ----------
$1,068,322 816,255
========== ==========
(Continued)
F-16
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(3) Long-term Debt
Long-term debt consists of the following at July 31:
1997 1996
---------- ----------
First Union National Bank, New Jersey, interest of 8.375% $1,373,090 $1,453,290
Notes payable, interest at 6.3%-10.4%, maturing through
June 1999, secured by equipment 2,916 4,822
Note payable in monthly installments of $729, including
principal and interest commencing April 1996 and each month
thereafter until May 2000, secured by equipment 21,312 27,584
---------- ----------
1,397,318 1,485,696
Less current portion 1,381,416 86,936
---------- ----------
$ 15,902 $1,398,760
========== ==========
Principal maturities for the next four years ending July 31, are as
follows:
1998 $1,381,416
1999 9,175
2000 6,727
----------
$1,397,318
==========
On October 3, 1997, the entire principal balance of the term loan including
accrued interest was paid in full in the amount of $1,376,646.
(4) Loans Receivable, Related Party
In July 1996, the Company advanced its Chief Executive Officer $112,250 in
anticipation of proceeds due her from the exercise of stock options. The
principal amount plus interest were repaid in full in October 1996.
(5) Leases
The Company leases its facility under a five-year operating lease which is
due to expire on December 31, 2001. The annual rental obligation, which
commenced January 1, 1997, is $96,775 and is subject to annual escalation
amounts. Rent expense charged to operations was $76,000, $66,000, and
$66,000 in 1997, 1996 and 1995, respectively.
Future minimum lease payments under noncancellable leases for the next five
years ending July 31 are as follows:
(Continued)
F-17
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(5) Leases, Continued
Operating
leases
------
1998 $ 96,778
1999 107,754
2000 127,497
2001 136,000
2002 56,667
(6) Stockholders' Equity
On September 1, 1981, the Company issued 712,500 shares of common stock
(1,068,750 shares adjusted for the stock split on September 8, 1982) to
officers and stockholders in exchange for equipment, research and
development services, stock registration costs, reimbursement of expenses
and other miscellaneous services. The common stock issued for services was
recorded at the estimated fair value of services rendered based upon the
Board of Directors' determination and ratification of the value of
services. Equipment received in exchange for common stock was recorded at
the transferor's cost. Common stock issued for reimbursement of expenses
was recorded based upon expenses incurred. All values assigned for expenses
and services rendered have been charged to operations except for stock
registration costs which were charged against proceeds.
On July 30, 1982, the Company sold 82,143 shares of common stock (123,214
shares adjusted to reflect the stock split on September 8, 1982) to a
private investor at a price of $1.40 per share, resulting in net proceeds
to the Company of approximately $108,500.
On September 8, 1982, the Company declared a 3-for-2 stock split. Shares
previously issued by the Company have been restated in accordance with the
stock split.
On September 8, 1982, the Company issued 15,000 shares of common stock to
an officer and stockholder in exchange for equipment. The equipment
received in exchange for the common stock was recorded at the transferor's
cost.
On November 1, 1982 and January 3, 1983, the Company sold 28,125 and 16,071
shares of common stock, respectively, to private investors at $.93 per
share, resulting in net proceeds to the Company of approximately $41,250.
On January 17, 1983, the Company sold 660,000 shares of its common stock
and 330,000 common stock purchase warrants in a public offering at a price
of $2.50 per share, resulting in net proceeds to the Company of
approximately $1,308,446. The warrants were to expire 12 months after
issuance; however, the Company extended the expiration date to July 16,
1984. During the fiscal years ended July 31, 1983 and 1984, the net
proceeds to the Company from the exercising 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
(Continued)
F-18
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
of common stock at an exercise price of $3.00 after six months and prior to
nine months after issuance. The exercise price increased to $3.50 after
nine months and prior to 12 months after issuance.
In connection with the public offering, the Company sold 60,000 five-year
purchase warrants to the underwriters at a price of $.001 per warrant. Each
warrant entitled the holder to purchase one share of common stock at an
exercise price of $3.00. Pursuant to the antidilution provisions of the
warrants, the underwriters received warrants to purchase 67,415 shares at
an exercise price of $2.67 per share. As of July 31, 1986, all such
warrants were exercised and the Company received proceeds of approximately
$180,000.
On February 22, 1984, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of two series of new
warrants each to purchase an aggregate of 330,000 shares (hereinafter
referred to as one-year warrants and two-year warrants). The one-year
warrants had an exercise price of $6.50 per share and expired July 17,
1985. The two-year warrants had an exercise price of $10.00 per share and
were to expire July 17, 1986. However, the Company extended the expiration
date to August 31, 1987. The one-year warrants and two-year warrants were
issued as of July 17, 1984 on a one-for-one basis to those public offering
warrant holders who exercised their original warrants, with the right to
oversubscribe to any of the warrants not exercised. During the fiscal years
ended July 31, 1985, 1986, 1987 and 1988, the Company received net proceeds
of approximately $2,471,000 as a result of the exercise of the warrants.
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 has been 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 on
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
has been recorded as deferred compensation and was amortized over the
remaining term of the employment agreements. The contracts also provided
for five-year options to purchase 750,000 shares of common stock at $3.00
per share; options for the purchase of 170,000 shares were exercised on
June 16, 1988 and the remaining options for the purchase of 580,000 shares
expired on September 2, 1992.
During the fiscal year ended July 31, 1988, the Company issued 206,429
shares of common stock for payment of legal and consulting services. The
fair value of such shares was charged to operations.
(Continued)
F-19
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
During the fiscal year ended July 31, 1988, the Company issued 12,500
shares of common stock in connection with the settlement of certain
litigation. The fair value of these shares was charged to operations.
During the fiscal year ended July 31, 1988, the Company sold 61,073 shares
of common stock to private investors at $2.92 per share resulting in net
proceeds to the Company of approximately $178,133.
On September 21, 1988, the Company entered into a stipulation of settlement
arising from a lawsuit wherein it agreed to pay a total of $250,000 in 12
monthly installments. Under the agreement, the Company authorized the
issuance on September 7, 1988 and October 18, 1988 of 85,000 and 50,000
shares, respectively, to an escrow account to secure payment of the
$250,000 due under the stipulation of settlement. During the fiscal year
ended July 31, 1989, the Company issued and sold the 135,000 shares of
common stock for $1,074,838. On February 14, 1989, the Board of Directors
authorized the issuance of an additional 50,000 shares. During the year
ended July 31, 1990, the shares were sold for $351,117. The proceeds from
the above transactions were used to pay the settlement and related legal
costs, reduce loans from and interest due to the Company's Chief Executive
Officer, and for working capital.
During the fiscal year ended July 31, 1989, the Company sold 105,840 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $420,000.
During the fiscal year ended July 31, 1990, the Company issued 52,463
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company issued 50,000
shares of common stock in connection with the settlement of certain
litigation. The fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company sold 89,480 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $355,080.
During the fiscal year ended July 31, 1991, the Company issued 87,000
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1992, the Company sold 70,731 shares
of common stock to private investors at $2.75 to $3.50 per share resulting
in net proceeds to the Company of approximately $219,900.
During the fiscal year ended July 31, 1992, the Company issued 45,734
shares of common stock as payment for services rendered to the Company. The
fair value of the common stock was charged to operations.
(Continued)
F-20
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
During the fiscal years ended July 31, 1992 and 1990, 94,000 and 50,000
shares of common stock, respectively, were issued to the Company's Chief
Executive Officer upon the conversion of outstanding debentures.
During the fiscal year ended July 31, 1993, the Company sold 352,667 shares
of common stock to private investors at prices ranging from $2.00 to $3.00
per share resulting in net proceeds to the Company of approximately
$735,500. In addition, the private investors were granted options to
purchase common stock totaling 587,167 shares at prices ranging from $3.00
to $7.00. During the fiscal years ended July 31, 1995 and 1996, 322,500 and
228,833 options expired, respectively. A total of 42,167 options due to
expire on July 31, 1995 were extended to July 31, 1996 and their exercise
price was reduced to $2.50. During the fiscal year ended July 31, 1996,
35,834 options were exercised resulting in net proceeds to the Company of
approximately $89,600.
During the fiscal year ended July 31, 1993, the Company issued 54,600
shares of common stock as payment for legal and other services performed
for the Company. The fair value of 49,600 shares was charged to operations.
The remaining 5,000 shares were recorded as deferred compensation and were
amortized over a one-year period, beginning in February 1993, in accordance
with the agreement entered into with the recipient.
During the fiscal year ended July 31, 1994, the Company issued 7,000 shares
of common stock as payment for services performed for the Company. The fair
value of the common stock was charged to operations.
During the fiscal year ended July 31, 1994, the Company sold 25,000 shares
of common stock to a private investor at $2.00 per share resulting in net
proceeds to the Company of $50,000. In addition, the private investor was
granted options to purchase common stock totaling 25,000 shares at $4.00
per common share. These options were exercised in September 1996 resulting
in net proceeds to the Company of $100,000.
During the fiscal year ended July 31, 1994, the Company sold 800,000 shares
of common stock to private investors at $2.50 per share resulting in net
proceeds to the Company of $1,865,791. In addition, the private investors
were granted warrants to purchase common stock totaling 800,000 shares at
$5.00 per common share. Warrants for the purchase of 147,450 shares were
exercised during fiscal 1997 resulting in net proceeds to the Company of
$737,250. The remaining 652,550 warrants expired during fiscal 1997.
During the fiscal year ended July 31, 1994, 400,000 shares of common stock
were issued to the Company's Chief Executive Officer upon the conversion of
outstanding debentures.
During the fiscal year ended July 31, 1994, 25,400 shares of common stock
were issued upon the conversion of other outstanding debentures.
In September 1994, the Company completed a private placement resulting in
the issuance of 288,506 shares of common stock and three-year warrants to
purchase 288,506 shares of common stock at an exercise price of $5.50 per
share. The warrants expire during fiscal 1998. The common stock and
(Continued)
F-21
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
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.
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.
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.
(Continued)
F-22
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
In June 1996, the Company sold in a private placement 1,515,330 shares of
common stock and three-year warrants to purchase 313,800 shares of common
stock at an exercise price of $7.50 per share. Of these shares, 12,000 were
issued for services rendered to the Company. The common stock was sold
alone at a per share price of $3.70, in combination with warrants at a per
unit price of $12.52 and warrants were sold alone at a per warrant price of
$1.42. Each unit consisted of three shares of common stock and one warrant.
The Company received proceeds of approximately $5.7 million.
In June 1996, the Company issued 10,000 five-year stock options as payment
for services rendered. The options vested immediately and have an exercise
price of $4.95 per share. The Company recorded research and development
expense of $28,260 which was the fair value of the stock options on the
date of issuance.
During the fiscal year ended July 31, 1996, 207,316 shares of common stock
were sold from October 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.
In March 1997, the Company issued 112,000 shares of common stock at $4.50
per share in a private placement to a single investor resulting in net
proceeds of $504,000 to the Company.
In May 1997, the Company issued 100,000 stock options to a director with an
exercise price of $5.20 per share as payment for serving as Chairman of the
Scientific Advisory Board (the "SAB"). These options will vest as follows
provided the director is then serving as Chairman of the SAB at the time of
vesting, 10,000 vested immediately, 10,000 after one full calendar year,
10,000 annually for each of the following three years and 50,000 on May 13,
2002. The vesting of the 50,000 options which vest in May 2002 may be
accelerated upon the occurrence of the following events: 25,000 options
upon the good faith determination by the Company's Board of Directors that
a substantive collaborative agreement with a major biopharmaceutical
company was a result of Dr. Carter's efforts and 25,000 options upon the
good faith determination by the Company's Board of Directors that Dr.
Carter made a material contribution towards the approval by the United
States Food and Drug Administration of a New Drug Application for the
marketing of ONCONASE in the United States. The Company recorded research
and development expense of $48,604 which was the fair value on the date of
issuance of that portion of the stock options that had vested as of July
31, 1997.
(Continued)
F-23
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
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.
On September 9, 1997 the Company filed an amendment to a registration
statement previously filed on June 16, 1997 for the offer and sale by
certain stockholders of up to 4,232,577 shares of common stock. Of these
shares (i) an aggregate of 2,936,010 shares were issued to the private
placement investors in the private placement transactions which were
completed during the period from March 1994 through June 1996 (the "Earlier
Private Placements"), (ii) an aggregate of 698,251 shares are issuable upon
exercise of the warrants which were issued to the private placement
investors in the Earlier Private Placements and (iii) an aggregate of
588,316 shares may be issued, or have been issued, upon exercise of the
options which were issued to the option holders in certain other private
transactions. As of October 1997, the Securities and Exchange Commission
had not declared this registration statement effective.
(7) Common Stock Warrants
During the fiscal years 1988 and 1991, the Board of Directors granted stock
purchase warrants to acquire a maximum of 400,000 shares of common stock at
$5.00 per share which were not exercised and expired.
The following table summarizes the activity of common stock warrants issued
in connection with the Private Placements completed in fiscal years 1994,
1995 and 1996:
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
(Continued)
F-24
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Common Stock Warrants, Continued
Warrants Exercise Price Expiration
-------- -------------- ----------
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
========== ============
(8) Stock Options
1993 Stock Option Plan
The Company's stockholders approved the 1993 stock option plan totaling
3,000,000 shares, which provide that options may be granted to employees,
directors and consultants. Options are granted at market value on the date
of the grant and generally are exercisable in 20% increments annually over
five years starting one year after the date of grant and terminate five
years from their initial exercise date.
1997 Stock Option Plan
The Company's Board of Directors adopted the 1997 Stock Option Plan (the
"Plan") in May 1997. The total number of shares of common stock authorized
for issuance upon exercise of options granted under the Plan is 2,000,000.
Options are granted at market value on the date of the grant and generally
are exercisable in 20% increments annually over five years starting one
year after the date of grant and terminate five years from their initial
exercise date.
The following table summarizes stock option activity for the period August
1, 1994 to July 31, 1997 including options issued under the 1997 and 1993
stock option plans and the 1989 stock plan:
Weighted Average
Shares Available Exercise Price Per
for Grant Shares Share
--------- ------ -----
Balance August 1, 1994 1,926,841 5,935,337 $3.76
Granted (818,850) 818,850 2.60
Exercised -- (185,000) 2.36
Canceled -- (1,897,500) 4.30
---------- ---------- -----
Balance July 31, 1995 1,107,991 4,671,687 3.39
Granted (296,205) 296,205 3.99
Exercised -- (656,334) 2.92
Canceled 6,500 (235,333) 4.89
---------- ---------- -----
Balance July 31, 1996 818,286 4,076,225 3.43
1997 Plan 2,000,000 -- --
Granted (932,500) 932,500 4.90
Exercised -- (639,500) 3.82
Canceled 484,845 (484,845) 4.70
---------- ---------- -----
Balance July 31, 1997 2,370,631 3,884,380 $3.56
========== ========== =====
(Continued)
F-25
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options (Continued)
The options outstanding at July 31, 1997 will expire between November 10,
1997 and April 28, 2007.
The weighted-average fair value per option at the date of grant for options
granted during the fiscal years 1997 and 1996 were $3.02 and $2.67,
respectively. The fair value was estimated using the Black-Scholes options
pricing model based on the following assumptions:
1997 1996
---- ----
Expected dividend yield 0% 0%
Risk-free interest rate 6.00% 6.00%
Expected stock price volatility 59.78% 65.86%
Expected term until exercise (years) 6.20 5.44
Pro forma net loss and loss per share reflecting approximate compensation
cost for the fair value of stock options awarded in 1997 and 1996 are as
follows:
1997 1996
---- ----
Net Loss:
As reported $ (5,018,867) $ (2,942,152)
Pro forma (5,724,076) (3,297,152)
Loss per common share:
As reported $ (0.34) $ (0.25)
Pro forma (0.39) (0.28)
The pro forma effects on net loss and loss per share for 1997 and 1996 may
not be representative of the pro forma effects in future years since
compensation cost is allocated on a straight-line basis over the vesting
periods of the grants, which extends beyond the reported years.
The following table summarizes information concerning options outstanding
at July 31, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------- -----------------------------
Weighted Average Weighted
Number Remaining Weighted Number Average
Range of Outstanding at Contractual Term Average Exercisable at Exercise
Exercise Prices 7/31/97 (Years) Exercise Price 7/31/97 Price
- ----------------- ------- ------- -------------- ------- -----
$ 2.00 - 2.99 297,600 3.00 $ 2.58 277,600 $ 2.59
3.00 - 3.99 2,519,170 3.88 3.19 1,958,648 3.20
4.00 - 4.99 736,360 4.32 4.39 413,523 4.39
5.00 - 5.99 286,250 4.95 5.10 113,750 5.03
6.00 - 6.99 45,000 5.42 6.97 0 --
(Continued)
F-26
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options (Continued)
Stock option activity prior to adoption of SFAS No. 123 is as follows:
1981 Non-Qualified Stock Option Plan
In 1981, the Board of Directors adopted a non-qualified stock option plan
and had reserved 300,000 shares for issuance to key employees or
consultants. Options were nontransferable and expired if not exercised
within five years. Option grants of 60,000 shares expired unexercised by
July 31, 1991.
Non-Qualified Stock Options
The Board of Directors issued non-qualified stock options which were not
part of the 1981 non-qualified stock option plan or the 1989 Stock Plan as
follows:
Shares Price Range
------ -----------
Granted 1,782,000 $3.00-3.87
Exercised (276,989) 3.00-3.50
Canceled (106,000) 3.00-3.50
Expired (649,011) 3.00-3.50
Granted pursuant to conversion of certain liabilities:
related party 1,324,014 3.20
unrelated party 73,804 3.20
Repurchased stock options (102,807) 3.20
--------- ----------
Balance at July 31, 1994 2,045,011 3.20-3.87
========= ==========
In connection with certain private placements, the Board of Directors had
included in the agreements, options to purchase additional shares of the
Company's common stock as follows:
Shares Price Range
------ -----------
Granted (42,167 options were repriced and extended 894,887 $2.50-7.00
as described in note 8)
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
========== ==========
1989 Stock Plan
On February 14, 1989, the Company adopted the Alfacell Corporation 1989
Stock Plan (the "1989 Stock Plan"), pursuant to which the Board of
Directors could issue awards, options and grants. The maximum amount of
shares of common stock that could have been issued pursuant to the option
plan was 2,000,000.
(Continued)
F-27
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options (Continued)
No more options are being granted pursuant to this plan. The per share
option exercise price was determined by the Board of Directors. All options
and shares issued upon exercise were nontransferable and forfeitable in the
event employment was terminated within two years of the date of hire. In
the event the option was exercised and said shares were forfeited, the
Company would return to the optionee the lesser of the current market value
of the securities or the exercise price paid.
The stock option activity is as follows:
Shares Price Range
------ -----------
Granted, February 14, 1989 3,460,000 $3.50-5.00
Options issued in connection with share
purchase 36,365 2.75
Expired (1,911,365) 2.75-5.00
Canceled (10,000) 5.00
---------- ----------
Balance at July 31, 1994 1,575,000 3.50-5.00
========== ==========
As of fiscal year ended July 31, 1994, 1,703,159 options were granted under
the 1993 stock option plan.
(9) 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 Amount
ended Fair of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1983 20,000 $ 5.50 $110,000
1984 19,750 5.125 101,219
1985 48,332 5.125-15.00 478,105
1986 11,250 5.125-15.00 107,032
1988 19,000 $ 3.50 $ 6,500
====== ============== ========
On January 26, 1984, the Company adopted a stock bonus plan for directors
and consultants. The plan was amended on October 6, 1986, to reserve
500,000 shares for issuance under the plan and to clarify a requirement
that stock issued under the Plan could not be transferred until three years
after the date of the grant. The stock bonus plan for directors and
consultants was superseded by the 1989 Stock Plan and no further grants
will be given pursuant to the stock bonus plan for directors and
consultants. The following stock transactions occurred under the Company's
stock bonus plan:
(Continued)
F-28
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Grant and Compensation Plans, Continued
Year Amount
ended Fair 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 8). In addition, the 1989 Stock Plan provided for the
issuance of 1,000,000 shares of the Company's common stock as grants. To be
eligible for a grant, grantees must have made substantial contributions and
shown loyal dedication to the Company.
Awards and grants were authorized under the 1989 Stock Plan during the
following fiscal years:
Year Amount
ended Fair 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 1997, 1996 or 1995.
(10) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
No. 109). Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect for all years in which the temporary differences are expected to
reverse.
(Continued)
F-29
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) Income Taxes, Continued
At July 31, 1997 and 1996, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
1997 1996
------------ ------------
Deferred tax assets:
Excess of book over tax depreciation $ 4,112 $ 23,141
Accrued expenses 138,243 1,032
Federal and state net operating loss carry forwards 10,187,188 8,988,988
Research and experimentation and investment tax
credit carry forwards 443,064 479,287
------------ ------------
Total gross deferred tax assets 10,772,607 9,492,448
Valuation allowance (10,772,607) (9,492,448)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
At July 31, 1997, the Company has federal net operating loss carry forwards
of approximately $27,700,000 that expire in the years 1998 to 2012. The
Company also has investment tax credit carry forwards of $51,634 and
research and experimentation tax credit carry forwards of $391,430 that
expire in the years 1998 to 2012. Ultimate utilization/availability of such
net operating losses and credits may be significantly curtailed if a
significant change in ownership occurs in accordance with the provisions of
the Tax Reform Act of 1986.
(11) Other Financial Information
Accrued expenses as of July 31, consist of the following:
1997 1996
-------- --------
Payroll and payroll taxes $185,840 $ 90,347
Interest -- 10,496
Professional fees 199,745 23,581
Clinical trial grants 290,887 --
Other 17,369 37,789
-------- --------
$693,841 $162,213
======== ========
(Continued)
F-30
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) Other Financial Information, Continued
Prepaid expenses as of July 31, consist of the following:
1997 1996
-------- --------
Insurance $ 65,782 $ 31,092
NIH research 37,198 4,824
Other 62,126 27,934
-------- --------
$165,106 $ 63,850
======== ========
(12) Commitments and Contingencies
On July 23, 1991, the Board of Directors authorized the Company to pay to
the Chief Executive Officer of the Company 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, 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 patent. If the Company
manufactures and markets its own drugs, then the Company will pay an amount
equal to 5% of gross sales from any products sold during the life of the
patents. In addition, the agreement provides for a reduction of any
indebtedness to the Chief Executive Officer in the amount of $200,000 upon
the Company entering into a licensing agreement for its principal product.
The Company has product liability insurance coverage in the amount of
$6,000,000 for clinical trials. 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.
(13) Research and Development Agreement
In November 1992, the Company entered into a Cooperative Research and
Development Agreement (CRADA) with the National Institutes of Health (NIH).
In accordance with this CRADA, the NIH will perform research for the
Company on potential uses for its drug technology. During the term of this
research and development agreement, which expires in January 1999, the
Company is obligated to pay approximately $5,000 per month to the NIH.
Total research and development expenses under this arrangement amounted to
$64,000, $64,000, and $43,000 during the years ended July 31, 1997, 1996,
and 1995, respectively.
In August 1995, the Company entered into a CRADA with the National Cancer
Institute (NCI). In accordance with this CRADA, the NCI will perform
research for the Company on potential uses for its drug technology. During
the term of this research and development agreement, which expires in
August 1998, the Company is obligated to pay approximately $4,825 per month
to the NCI. Total research and development expenses under this arrangement
amounted to $58,000 during each of the fiscal years ended July 31, 1997 and
1996.
F-31