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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
July 31, 1998 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. [X ]
The aggregate market value of the Common Stock, par value $.001 per share,
held by non-affiliates based upon the average of the high and low sale prices as
reported by the Nasdaq SmallCap Market on October 21, 1998 was $8,725,354. As of
October 21, 1998 there were 17,253,610 shares of Common Stock, par value $.001
per share, outstanding.
The Index to Exhibits appears on page 15.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on January 21, 1999 to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year ended July 31, 1998, 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
PART I Page
----
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 15
The following trademarks appear in this Annual Report: ONCONASE(R) and
VIRONASE(R) are registered trademarks of Alfacell Corporation
(i)
Part I
Item 1. BUSINESS.
Overview
Alfacell Corporation ("Alfacell" or the "Company") is a biopharmaceutical
company organized in 1981 and is primarily engaged in the discovery and
development of a new class of anti-cancer drugs from amphibian ribonucleases
("RNases"). RNases degrade ribonucleic acids ("RNA") causing an interruption in
protein synthesis resulting in inhibition of cell growth and induction of
apoptosis (programmed cell death). 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.
ONCONASE has been used to treat patients with advanced stages of solid tumors on
a weekly basis. Based upon Phase II clinical data, the most significant clinical
results to date with ONCONASE have been observed in unresectable malignant
mesothelioma, advanced pancreatic cancer, non-small cell lung cancer, and
metastatic breast cancer. According to the American Cancer Society, in 1998,
approximately 365,100 people in the United States will be diagnosed with
pancreatic, lung, and breast cancer and approximately 232,500 will die.
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 June 1997, a Phase III clinical trial was initiated comparing ONCONASE as a
single agent to doxorubicin in patients with unresectable malignant
mesothelioma. Unresectable malignant mesothelioma is a cancer often linked to
asbestos exposure and afflicts approximately 2,500-3,500 newly-diagnosed
patients in the U.S. each year. The disease is often found in the lining of the
lungs or the abdomen. There is currently no standard Food and Drug
Administration ("FDA") approved drug for this disease. In July 1998, the Company
discontinued two Phase III clinical trials testing ONCONASE in combination with
tamoxifen in pancreatic cancer. This drug combination did not demonstrate a
statistically significant survival benefit in this indication.
Alfacell has established two major scientific collaborations with the National
Institutes of Health (the "NIH"): i) in 1989, a collaboration with the National
Institute of Neurological Disorders and Stroke (the "NINDS") and ii) in 1992, a
collaboration with the National Cancer Institute (the "NCI"). Research primarily
focuses on ONCONASE mechanism of action studies, in vivo synergisms of ONCONASE
with other anti-cancer agents, conjugates and other routes of administration.
Alfacell has produced a modified recombinant version of ONCONASE which enables
other moieties to be attached to it. This has resulted in an ONCONASE conjugate
produced by the NINDS being developed for primary brain tumors. The NINDS is
also in preclinical testing of ONCONASE as a single agent in primary brain
tumors. The NCI collaboration has produced a conjugate of ONCONASE with a
monoclonal antibody which has demonstrated preclinical activity in Non-Hodgkin's
lymphoma. Further preclinical testing by the NINDS and NCI is ongoing in
preparation for commencing clinical trials.
The Company believes that ONCONASE may also be used as an anti-viral agent. The
National Institutes of Health has performed an independent in vitro screen of
ONCONASE against the HIV virus type 1 ("HIV"). The results showed ONCONASE to
inhibit replication of HIV by up to 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 HIV in several persistently infected human cell lines,
preferentially degrading viral RNA and cellular transfer RNA while not affecting
normal cellular ribosomal RNA and messenger RNAs. In addition, the NIH -
Division of AIDS found ONCONASE to have in vitro anti-viral activity. Although
the Company plans to conduct further research concerning anti-viral activity,
there can be no assurance that ONCONASE will show any level of anti-HIV activity
in humans.
1
Beyond the development of ONCONASE, Alfacell has also discovered a series of
biologically active proteins from the same natural source from which ONCONASE
was isolated. All of the proteins characterized to date are RNases. These
proteins appear to be involved in the regulation of both early embryonic and
malignant cell growth. However, significant additional research and funding will
be required in order to develop them into therapeutics.
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 which demonstrated potent anti-tumor activity. 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. The Company retains all commercial
rights to ONCONASE.
Postulated Mechanism of Action
Anti-Tumor Activity
Although the mechanism of action of ONCONASE has not been fully elucidated, a
series of studies have been performed and the results imply that ONCONASE has
several mechanisms of action. The enzymatic activity of ONCONASE appears to be
essential for its broad spectrum of biological activities. In the 9L glioma cell
system, ONCONASE is able to induce a chain of events that lead to inhibition of
tumor cell proliferation and tumor cell destruction. ONCONASE:
binds to tumor cell surface receptors
|
becomes internalized by energy-dependent endocytosis
|
reaches the cytosol
|
degrades various species of intracellular RNA (preferentially tRNA)
|
inhibits protein synthesis
|
inhibits cell growth and proliferation (primarily blocking the
G1 phase of the cell cycle)
|
may induce tumor cell differentiation and/or programmed cell death (apoptosis)
2
The inhibitory effects of ONCONASE in the G1 phase of the cell cycle appear to
be due to its inhibition of the expression of cyclin D3 and an increase in the
expression of several inhibitors of cyclin-dependent kinases ("CDKs") such as
p16INK4A, p21WAF1, p27KIP1 and hypophosphorylated form of pRb protein, as
demonstrated in the human U937 lymphoma cell line. Inhibiting cell cycle
progression in the G1 phase prevents cells from entering the proliferative
DNA-synthetic (S-phase) phase of the cell cycle. The parallel ONCONASE-induced
cell differentiation and apoptosis observed in this model may reflect a shift in
growth signal transduction pathways from primarily anti-apoptotic to
differentiation-inducing and pro-apoptotic.
Preclinical research
Preclinical data to date have shown that ONCONASE has the capacity to enter
cancer cells and overcome multiple drug resistance ("MDR") and is synergistic
with many other anti-cancer agents against numerous tumor cell lines.
Collaborative research is being conducted at Brander Cancer Research Institute,
New York Medical College regarding further studies of the mechanism of action of
ONCONASE and synergistic interactions of ONCONASE with other anti-cancer agents.
At the University of Medicine and Dentistry of New Jersey, ONCONASE is being
studied as a radiation sensitizer, a co-antiangiogenic agent and an agent
capable of lowering tumor interstitial fluid pressure. This latter effect may
facilitate tumor tissue penetration by various anti-cancer agents.
Clinical Trials
ONCONASE has been tested as a single agent in patients with a variety of solid
tumors and in combination with tamoxifen in prostate cancer and advanced
pancreatic and renal cell carcinoma patients. In vitro results showed ONCONASE
to be synergistic with tamoxifen in inhibiting tumor cell growth in the tumor
cell lines originating from these types of cancers.
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. Due
to its limited funding, the Company has had to be very selective in designing
its Phase III regulatory strategy for gaining FDA approval. Therefore, the
selection criteria focused on those tumor types, which in addition to showing
evidence of preclinical and clinical efficacy that: i) have small patient
populations, resulting in the number of patients treated in the Phase III study
being small; ii) generally cause patients to die in less than one year from
diagnosis, resulting in the duration of the study being two years or less, and
iii) are life-threatening with limited competition. The two indications that met
all of the above criteria were advanced unresectable malignant mesothelioma and
advanced pancreatic cancer.
In June 1997, Alfacell initiated a Phase III clinical trial for unresectable
malignant mesothelioma comparing ONCONASE with doxorubicin, an FDA approved
chemotherapy. No standard FDA approved therapy exists to treat this deadly
cancer, and most advanced unresectable malignant mesothelioma patients die of
progressive disease within 6-12 months of diagnosis. The disease is often found
in the lining of the lungs or the abdomen. Phase II clinical trial results for
this indication 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. In July 1998, the Company
discontinued two Phase III clinical trials testing ONCONASE in combination with
tamoxifen in pancreatic cancer. This drug combination did not demonstrate a
statistically significant survival benefit in this indication.
Phase I/II clinical studies testing ONCONASE in combination with tamoxifen in
prostate cancer and renal cell carcinoma have been completed. Further clinical
trials are warranted however, due to lack of resources, the Company is unable to
pursue additional studies in these two tumor types at this time.
3
Research and Development Programs
Research and development expenses for the fiscal years ended July 31, 1998,
1997, and 1996 were $5,265,000, $3,863,000 and $2,189,000, respectively.
Alfacell's research and development programs focus primarily on the development
of therapeutics from amphibian ribonucleases. These proteins have been shown to
be involved in the regulation of cell proliferation, maturation, differentiation
and apoptosis. Therefore, they may be ideal candidates for development as
therapeutics, such as treatments for cancer and other life-threatening diseases
(including HIV infections), that require anti-proliferative and apoptotic
properties.
The following table outlines the various programs in the Company's research and
development portfolio. Alfacell is pursuing some of these programs
independently, while others are being undertaken in collaboration with the NIH.
================================================================================
Program Indication
================================================================================
Cancer:
ONCONASE(R) (ranpirnase) Unresectable malignant mesothelioma
(lining of the lungs and abdomen)
ONCONASE (1) Primary Brain Tumors
AC-RD-3002 (2) Non-Hodgkin's Lymphoma ("NHL")
AC-RD-3003 (1) Primary Brain Tumors
Novel Amphibian Ribonucleases Solid Tumors
Proteasome Inhibitors Solid Tumors and NHL
================================================================================
Viral Disease:
VIRONASE(R) (ranpirnase) HIV Infection
================================================================================
(1) In collaboration with the NIH - NINDS
(2) In collaboration with the NIH - NCI
ONCONASE Conjugates and Fusion Proteins: AC-RD-3002 and AC-RD-3003
In addition to use in its native form, ONCONASE is being conjugated to targeting
molecules to improve its specificity. Several conjugates are being developed by
the NIH in collaboration with Alfacell scientists and have demonstrated
significant activity. In addition, several genes of ONCONASE, its variants and
other amphibian ribonucleases are being synthesized for making fusion genes. The
Company intends to focus its efforts on developing novel therapeutics from these
genes that selectively target specific tumors. Production of these engineered
genes may also lead to their use in gene therapy.
AC-RD-3002 is comprised of ONCONASE conjugated to an anti-CD22 monoclonal
antibody for the treatment of Non-Hodgkin's Lymphoma. The Company, in
collaboration with the NCI, is developing this product. AC- RD-3002 is in
preclinical testing at the NCI.
AC-RD-3003 is a recombinant variant of ONCONASE conjugated to transferrin.
Transferrin receptors tend to be expressed at higher concentrations in
proliferating cells, such as tumor cells. Studies have shown that transferrin
targets malignant glial cells on primary brain tumors. The Company, in
collaboration with the NINDS, is developing this product. AC-RD-3003 is in
preclinical testing at the NINDS. In preclinical studies performed by the NINDS,
ONCONASE as a single agent has shown activity in primary brain tumors.
4
Novel Amphibian Ribonucleases
In addition to ONCONASE, Alfacell has isolated several other proteins from eggs
of the leopard frog (Rana pipiens). All of the proteins characterized to date
are RNases. RNases are enzymes that catalyze the cleavage of phosphodiester
bonds of RNAs. RNases mediate several important biological functions in nature
including regulation of angiogenesis, anti-viral and anti-parasitic defenses. In
addition to taking advantage of the natural biological functions of RNases,
amphibian ribonucleases may be more therapeutically effective in humans than
mammalian RNases as they do not appear to be inhibited by endogenous mammalian
RNAs inhibitors. Therefore, developing amphibian ribonucleases into
therapeutics, and thereby taking advantage of the natural role of RNases, may
result in a new class of compounds for anti-proliferative diseases such as
cancer and AIDS. The Company retains all commercial rights to compounds
resulting from this program.
Proteasome Inhibitors
Cyclins and CDKs are two major groups of protein regulators of cell cycle
progression. Cancer can be defined as the uncontrolled growth and proliferation
of cells often associated with a de-regulated pattern of expression of cyclins
and other regulatory proteins, and the deficient elimination of cells by
apoptosis. In vitro studies of ONCONASE have shown its ability to perturb cell
cycle progression by decreasing expression of cyclin D3 and by increasing
expression of several inhibitors of CDKs.
Cell growth and viability are dependent on the function of the proteasome.
Proteasomal activity is necessary for cell growth by regulating the entry and
exit to and from the mitotic cycle through timely degradation of cyclins and
CDKs. Proteasome inhibitors interfere with normal proteasome function, resulting
in interruption of cell cycle progression and induction of apoptosis. Given that
ONCONASE and proteasome inhibitors have both shown in vitro to modulate
fundamental mechanisms governing tumor cell growth, proliferation and death,
Alfacell is testing these two classes of compounds in combination and has
discovered synergistic anti-tumor effects. The Company believes that a new class
of anti-cancer compounds can be developed combining ONCONASE and its variants
with proteasome inhibitors. The Company retains all commercial rights to
compounds resulting from this program.
HIV Infection
The drugs currently approved in the United States for treatment of HIV infection
consist primarily of reverse transcriptase inhibitors and protease inhibitors.
There is an extremely high rate of resistance developing to several of these
currently available anti-viral drugs, primarily due to the exponentially
increasing rate of mutations of HIV that occur during infection. In vitro
studies performed by independent scientific collaborators (including the NIH -
Division of AIDS) have demonstrated that ONCONASE, (trademarked VIRONASE(R) for
anti-viral applications):
o acts directly by degrading viral genomic RNA prior to its reverse
transcription (during the pre-integration complex phase), and indirectly by
degrading the tRNA(Lys3) isoform which functions as a primer for viral
reverse transcriptase;
o degrades viral RNA of HIV-1 intracellularly, with a dramatic reduction in
the levels of viral transcripts which is sustained for 2-4 days;
o inhibits replication of HIV-1 in a dose-dependent manner by up to 99.9%, as
measured by the p24 antigen capture assay, in acutely and persistently
infected cells, at concentrations that are only minimally cytotoxic to
uninfected H9 cells;
o was found to have highly significant anti-HIV activity in the
monocyte/macrophage system.
5
The Company retains all commercial rights to compounds resulting from this
program. However, the Company does not currently possess the funds necessary to
conduct further research for this indication.
Raw Materials
The major active ingredient derived from leopard frog eggs 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 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. There can be no assurance that the Company would be
able to find substitute manufacturers, if necessary. The Company is dependent
upon its contract manufacturers to comply with cGMPs and to meet production
requirements. There can be no assurance that the Company's contract
manufacturers will comply with cGMPs or timely deliver sufficient quantities of
the Company's products.
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.
6
As an initial step in the FDA regulatory approval process, preclinical 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 typically involves up to three phases. Data from human trials are
submitted to the FDA in a New Drug Application ("NDA") or Biologics License
Application ("BLA"). Preparing an NDA or BLA 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 and Trademarks
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 six U.S. Patents:
a) U.S. Patent No. 4,888,172 issued in 1989, which covers a pharmaceutical
produced from fertilized frog eggs (Rana pipiens) 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 and 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 pharmaceuticals.
d) U.S. Patent No. 5,728,805 issued in 1998 which covers a family of variants
of ONCONASE.
The Company owns three European patents, which have been validated in certain
European countries. 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. Additionally, the Company owns
an undivided interest in two applications that are pending in the United States.
Each of these applications relate to a Subject Invention (as that term is
defined in CRADAs to which the Company and the NIH are parties).
The generic name for ONCONASE is ranpirnase. The Company has applied to register
the mark VIRONASE in anticipation of the use of ranpirnase as an anti-viral
agent.
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.
7
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 required to sign agreements 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 21, 1998, Alfacell employed seventeen persons, of whom twelve were
engaged in research and development activities and five 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.
8
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 traded on the Nasdaq SmallCap Market ("Nasdaq") since
December 5, 1996. As of October 20, 1998, there were approximately 1,498
stockholders of record of the Company's Common Stock.
In October 1998, the Company received a notice from Nasdaq that the price data
of the prior thirty consecutive trade dates of the Company's common stock failed
to meet the minimum Nasdaq SmallCap requirement of a $1.00 bid price. Alfacell's
common stock will be subject to delisting, effective with the close of business
on January 6, 1999, if the Company is unable to demonstrate compliance with the
minimum $1.00 bid price requirement on or before the end of January 6, 1999. The
Company is exploring alternatives that might allow its stock to remain listed on
Nasdaq but there can be no assurance that Nasdaq will allow such listing to
continue if the common stock price does not trade above $1.00 bid.
The following table sets forth the range of high and low sale prices of the
Common Stock obtained from Nasdaq for the two fiscal years ended July 31, 1998
and 1997. These prices are believed to be representative of inter-dealer
quotations, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
High Low
---- ---
Year Ended July 31, 1998:
First Quarter 4-5/8 3
Second Quarter 3-25/32 2-1/4
Third Quarter 4-1/2 2-1/4
Fourth Quarter 4-5/8 3/8
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
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.
Recent Sales of Unregistered Securities
In October 1997, the Company issued 75,000 stock options to a director with an
exercise price of $3.66 per share as payment for non-board related services to
be rendered. These options will vest as follows provided he has been serving
continuously on the Company's board of directors at the time of vesting: 10,000
vested immediately; 10,000 after one full calendar year; 10,000 annually for
each of the following three years; and 25,000 on October 31, 2002. The vesting
and exercisability of the 25,000 options which vest in October 2002
9
may be accelerated upon the good faith determination of the Company's Board of
Directors that a substantive collaborative agreement with a major
pharmaceutical/biotechnology company was a direct result of the director's
efforts.
In March 1998, the Company issued 75,000 stock options to a director with an
exercise price of $2.80 per share as payment for non-board related services to
be rendered. These options will vest as follows provided he has been serving
continuously on the Company's board of directors at the time of vesting: 10,000
vested immediately; 10,000 after one full calendar year; 10,000 annually for
each of the following three years; and 25,000 on March 24, 2003. The vesting and
exercisability of the 25,000 options which vest in March 2003 may be accelerated
upon the good faith determination of the Company's Board of Directors that a
substantive collaborative agreement and licensing or financing arrangement with
a major pharmaceutical/biotechnology company was a direct result of the
director's efforts.
During the fiscal year ended July 31, 1998, 4,950 warrants received in
connection with certain private placement transactions were exercised to
purchase Common Stock, for an aggregate consideration of $11,085. This
transaction was consummated as a private sale pursuant to Section 4 (2) of the
Securities Act.
Item 6. SELECTED FINANCIAL DATA.
Set forth below is the selected financial data for the Company for the five
fiscal years ended July 31, 1998.
Year Ended July 31,
- ---------- -----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Revenue $ 311,822 $ 442,572 $ 184,250 $ 20,992 $ 6,064
Net Loss $(6,387,506) $(5,018,867) $(2,942,152) $(1,993,123) $(2,234,428)
Net Loss Per Basic
and Diluted Share $ (.40) $ (.34) $ (.25) $ (.21) $ (.26)
Dividends None None None None None
At Year End: July 31,
- ------------ -----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Total Assets $ 5,516,678 $ 8,034,954 $ 8,487,711 $ 1,616,170 $ 779,763
Long-term $ 6,727 $ 15,902 $ 1,398,760 $ 7,129 $ 1,593,976
Obligations
Total Equity
(Deficiency) $ 3,691,838 $ 5,566,091 $ 6,650,266 $ (832,566) $(1,774,418)
10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Alfacell has focused the majority of its resources since inception on the
research and development of ONCONASE. After it obtained the results of its
preliminary analysis of the Phase III clinical trial results for advanced
pancreatic cancer, the Company closed the pancreatic cancer trials and
redirected its resources towards the completion of the ongoing Phase III
clinical trial for unresectable malignant mesothelioma. The Company is now in
the process of re-evaluating its operations to conserve cash and to direct its
efforts towards the rapid completion of the Phase III clinical trial for
unresectable malignant mesothelioma. The Company is also exploring various
strategic alternatives for its business and research and development operations.
The Company is currently funding research and development of its products from
cash reserves. The termination of the Phase III clinical trials for advanced
pancreatic cancer is expected to have a significant and detrimental impact on
the Company's ability to raise additional capital for future operations. See
"Management's Discussion and Analysis - Liquidity and Capital Resources."
Results of Operations
Fiscal Years Ended July 31, 1998, 1997 and 1996
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 1998, 1997
and 1996. Investment income for fiscal 1998 was $312,000 compared to $443,000
for fiscal 1997, a decrease of $131,000. This decrease was due to lower balances
of cash and cash equivalents. Investment income for fiscal 1997 was $443,000
compared to $184,000 for fiscal 1996, an increase of $259,000.
Research and Development
Research and development expense for fiscal 1998 was $5,265,000 compared to
$3,863,000 for fiscal 1997, an increase of $1,402,000 or 36%. This increase was
primarily due to a 74% increase in costs in support of on-going clinical trials,
including the Phase III clinical trials for pancreatic cancer which were closed
in July 1998 and the Phase II and III clinical trials for unresectable malignant
mesothelioma, a 42% increase in costs related to the manufacture of clinical
supplies of ONCONASE and an 86% increase in expenses in preparation for an NDA
for ONCONASE, offset by a 5% decrease in personnel costs.
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 a 135% increase 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 unresectable malignant mesothelioma, a 269%
increase in costs associated with the purchase of raw materials for anticipated
future production of ONCONASE, a 394% increase in regulatory costs in
preparation for an NDA for ONCONASE, and a 49% increase in personnel costs.
11
General and Administrative
General and administrative expense for fiscal 1998 was $1,413,000 compared to
$1,476,000 for fiscal 1997, a decrease of $63,000 or 4%. This decrease was
primarily due to a 28% decrease in personnel costs and a 28% decrease in public
relations activities, offset by a 26% increase in legal costs and a 72% increase
in insurance expense.
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 an 84% increase in personnel costs, a 34% increase in legal
fees, a 139% increase in public relations expenses and a 330% increase in
insurance expense.
Interest
Interest expense for fiscal 1998 was $22,000 compared to $123,000 in fiscal
1997, a decrease of $101,000 or 82%. The decrease was primarily due to the
payment of the entire principal amount of the Company's Term Loan (as defined
herein) on October 3, 1997.
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.
Net Loss
The Company has incurred net losses during each year since its inception. The
net loss for fiscal 1998 was $6,388,000 as compared to $5,019,000 in fiscal 1997
and $2,942,000 in fiscal 1996. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 1998 amounted to $51,798,000. 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.
Year 2000
The Company is in the process of reviewing its business systems, including its
computer systems and computer controlled equipment, and is in the process of
querying its suppliers and vendors as to their progress in identifying and
addressing problems that their systems may face in correctly interpreting and
processing date information as the Year 2000 approaches and is reached. Based on
this review, the Company has implemented a plan to achieve Year 2000 compliance.
While there may be other areas that may affect the Company's operations upon
commercialization of the Company's products under development, the Company has
identified three major areas where Year 2000 compliance is critical for the
normal functioning of the Company's business: Business and Accounting Computer
Systems, Clinical Data Management Systems and Product Manufacturing Systems.
Business and Accounting Computer Systems
The Company utilizes standard, widely-available software packages to perform its
word processing, spreadsheet and accounting duties. Preliminary inquiries have
revealed that software upgrades are or will be available to ensure Year 2000
compliance. The Company expects to upgrade its Business and Accounting Computer
Systems by the third quarter of 1999. While there is no assurance at this time
that such upgrades will be Year 2000 compliant, the Company does not believe
that non-compliance would have a material effect on the Company's business.
Since the risks of non-compliance are minimal, the Company does not plan to
create a contingency plan for these systems at this time.
12
Clinical Data Management Systems
The Company utilizes the services of an outside vendor to handle all of its data
management needs with regard to collection and reporting of its clinical trial
data. Two major software systems are utilized to process the data, one of which
has been validated and is Year 2000 compliant. The other system, which handles
collection of the Company's ongoing clinical trial data, is expected to be Year
2000 compliant with some minor modifications. The vendor believes that these
modifications deal only with display and not storage of the dates. While it
appears that the computer systems utilized to process the Company's clinical
trial data is or will be Year 2000 compliant, non-compliance could have a
material impact on the Company's ability to process the data in a timely manner
for submission to the FDA, if necessary. Since the likelihood of non-compliance
is minimal, the Company does not plan to create a contingency plan for these
systems at this time.
Product Manufacturing Systems
The Company utilizes the services of outside suppliers to manufacture ONCONASE
and perform many of the FDA-required related testing of such product. The
Company has sent written requests to such suppliers in an effort to determine
the status of Year 2000 compliance. Responses are expected through the first
quarter of 1999. The Company will develop contingency plans, if necessary,
during the first half of 1999 in response to assessments of the Year 2000
readiness of these suppliers.
Year 2000 Summary
The Company has determined that Year 2000 compliance should not have a material
adverse effect on the Company, including the Company's financial condition,
results of operations or cash flow. The Company estimates the cost of its Year
2000 efforts to be approximately $50,000. The total cost estimate is based on
management's current assessment and is subject to change.
The Company may encounter problems with vendors and suppliers which could
adversely affect the Company's financial condition, results of operations or
cash flow. The Company cannot accurately predict the occurrence and or outcome
of any such problems, nor can the cost of such problems be estimated. In
addition, there can be no assurance that the failure to ensure Year 2000
compliance by a third party would not have a material effect on the Company.
Liquidity and Capital Resources
During fiscal 1998, the Company had a net decrease in cash and cash equivalents
of $2,443,000. This decrease resulted from net cash used in operating activities
of $5,200,000 and net cash used in investing activities of $75,000, principally
due to the purchase of property and equipment, offset by the net cash provided
by financing activities of $2,832,000, primarily from the private placement of
common stock and warrants and proceeds from the exercise of warrants, reduced by
the payment of the entire balance of the Company's term loan agreement with its
bank (the "Term Loan") and reduction of long-term debt. Total cash resources as
of July 31, 1998 were $5,099,000 compared to $7,542,000 at July 31, 1997.
The Term Loan matured on August 31, 1997. On October 3, 1997, the Company paid
the entire loan balance, including accrued interest, in the amount of $1,376,646
out of its cash resources. This is the primary reason for a $635,000 decrease in
current liabilities as of July 31, 1998 compared to July 31, 1997, offset by a
$399,000 increase in the Company's accrued expenses and a $338,000 increase in
accounts payable, primarily due to increased patient enrollment in on-going
clinical trials, increased costs related to the manufacture of clinical supplies
of ONCONASE and increased regulatory costs in preparation of an NDA for
ONCONASE.
13
Until the Company's operations generate significant revenues, cash reserves will
continue to fund operations. 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. Based
upon reduced spending levels as described below, the Company believes that its
cash and cash equivalents as of July 31, 1998 will be sufficient to meet its
anticipated cash needs through the fiscal year ending July 31, 1999. However,
there can be no assurance that the Company will be able to successfully
implement the reduced spending measures. The report of the Company's independent
auditors on the Company's financial statements, included elsewhere herein,
includes an explanatory paragraph which states that the Company's recurring
losses and limited liquid resources raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The Company is currently taking steps to significantly reduce the amount of cash
used to fund ongoing operations. These steps include postponement of certain
clinical and regulatory costs associated with preparation of an NDA for
ONCONASE, closing its Phase III program for advanced pancreatic cancer and
postponement of planned clinical trials for ONCONASE in indications other than
unresectable malignant mesothelioma. The Company's continued operations will
depend on its ability to raise additional funds through various sources,
including collaborative agreements or strategic alliances. However, there can be
no assurance that such additional funds will become available. The Company does
not anticipate it will be able to raise additional capital through equity
markets in the near future because of the termination of its Phase III clinical
trials for pancreatic cancer. Over the longer term, the ability of the Company
to raise additional capital through the sale of its securities will primarily be
dependent on the outcome of the Phase III clinical trial for unresectable
malignant mesothelioma. However, the ability to raise funding at that time may
be dependent upon other factors including without limitation market conditions,
and there can be no assurance that such funds will be available. Preliminary
results of the Phase III trial are expected in the second calendar quarter of
1999. The Company is currently exploring various strategic alternatives for its
business and research and development operations.
The market price of the Company's common stock is volatile, and the price of the
stock could be dramatically affected one way or another depending on numerous
factors. Following the Company's announcement on July 15, 1998 of the
termination of the Phase III clinical trials for pancreatic cancer, the price of
the Company's stock price dropped by approximately 70 percent. The market price
of the Company's common stock could also be materially affected by the results
of the Phase III clinical trial for unresectable malignant mesothelioma.
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, 1998 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
14
any subsequent review procedures with respect to such report. Accordingly,
investors will be barred from asserting claims against AHC under Section 11 of
the Securities Act on the basis of the use of such report in any registration
statement 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 regard 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 1998 Annual Meeting of
Shareholders.
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 1998 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 1998 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
1998 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).
15
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 #
3.4 Amendment to Certificate of Incorporation +++
4.1 Form of Convertible Debenture **
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 ****
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 ###
10.16 Separation Agreement with Michael C. Lowe dated
October 9, 1997 ++
10.17 Form of Subscription Agreement and Warrant Agreement
used in Private Placement completed on February 20,
1998 +++
10.18 Form of Warrant Agreement issued to the Placement
Agent in connection with the Private Placement
completed on February 20, 1998 +++
10.19 Placement Agent Agreement dated December 15, 1997 +++
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.
16
** 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 Quarterly Report on Form
10-Q for the quarter ended October 31, 1997 and incorporated herein by
reference thereto.
+++ Previously filed as exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 1998 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.
(b) Reports on Form 8-K.
On July 15, 1998 the Company filed a report on Form 8-K which reported
under Item 5 thereof that preliminary analyses of the Company's randomized
Phase III trials for ONCONASE in pancreatic cancer did not demonstrate a
survival benefit over GEMZAR or 5-fluorouracil (5-FU). Based upon the
results of the pancreatic cancer trials, the Company has closed its Phase
III program for pancreatic cancer and will not be filing a New Drug
Application for this indication.
17
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, 1998 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, 1998 /s/ KUSLIMA SHOGEN
-------------------------------------------
Kuslima Shogen, Chief Executive Officer
(Principal Executive Officer) and Chairman
of the Board
Dated: October 29, 1998 /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, 1998 /s/ STANISLAW M. MIKULSKI
-------------------------------------------
Stanislaw M. Mikulski, M.D., Executive Vice
President and Director
Dated: October 29, 1998 /s/ STEPHEN K. CARTER
-------------------------------------------
Stephen K. Carter, M.D., Director
Dated: October 29, 1998 /s/ DONALD R. CONKLIN
-------------------------------------------
Donald R. Conklin, Director
Dated: October 29, 1998 /s/ MARTIN F. STADLER
-------------------------------------------
Martin F. Stadler, Director
18
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, 1998 and 1997 ........................ F-5
Statements of Operations - Years ended July 31, 1998, 1997
and 1996 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1998 .................................. F-6
Statement of Stockholders' Equity (Deficiency) - Period from
August 24, 1981 (Date of Inception) to July 31, 1998 .......... F-7
Statements of Cash Flows - Years ended July 31, 1998, 1997
and 1996 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1998 ................................... F-11
Notes to Financial Statements - Years ended July 31, 1998,
1997 and 1996 and the Period from August 24, 1981
(Date of Inception) to July 31, 1998 .......................... 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, 1998 and 1997, 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, 1998 and the period
from August 24, 1981 (date of inception) to July 31, 1998. 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, 1998 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended July 31, 1998 and the period from August 24, 1981 (date of inception) to
July 31, 1998 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has limited liquid resources which raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
October 7, 1998
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.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in all
material respects, the financial position of Alfacell Corporation as of July 31,
1992 and 1991, as restated, and for the three years ended July 31, 1992, as
restated, and for the period from inception August 24, 1981 to July 31, 1992, as
restated, and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
F-3
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, 1998 and 1997
ASSETS 1998 1997
------------ ------------
Current assets:
Cash and cash equivalents $ 5,099,453 $ 7,542,289
Prepaid expenses 117,187 165,106
------------ ------------
Total current assets 5,216,640 7,707,395
Property and equipment, net of accumulated depreciation and
amortization of $843,599 in 1998 and $742,319 in 1997 300,038 326,003
Deferred debt costs, net -- 1,556
------------ ------------
Total assets $ 5,516,678 $ 8,034,954
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,175 $ 1,381,416
Accounts payable 716,040 377,704
Accrued expenses 1,092,898 693,841
------------ ------------
Total current liabilities 1,818,113 2,452,961
Long-term debt, less current portion 6,727 15,902
------------ ------------
Total liabilities 1,824,840 2,468,863
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 1998 and 1997 -- --
Common stock $.001 par value. Authorized 40,000,000 shares
and 25,000,000 shares at July 31, 1998 and 1997, respectively;
issued and outstanding 17,239,893 shares and 14,847,793
shares at July 31, 1998 and 1997, respectively 17,240 14,848
Capital in excess of par value 55,472,243 50,961,382
Deficit accumulated during development stage (51,797,645) (45,410,139)
------------ ------------
Total stockholders' equity 3,691,838 5,566,091
------------ ------------
Total liabilities and stockholders' equity $ 5,516,678 $ 8,034,954
============ ============
See accompanying notes to financial statements.
F-5
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 1998, 1997 and 1996,
and the Period from August 24, 1981
(Date of Inception) to July 31, 1998
August 24,
1981
(date of
inception)
to
July 31,
1998 1998 1997 1996
------------ ------------ ------------ ------------
Revenues:
Sales $ 553,489 -- -- --
Investment income 1,139,648 311,822 442,572 184,250
Other income 60,103 -- -- --
------------ ------------ ------------ ------------
1,753,240 311,822 442,572 184,250
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 336,495 -- -- --
Research and development 31,686,684 5,264,578 3,862,716 2,188,890
General and administrative 18,594,374 1,412,968 1,475,624 806,962
Interest:
Related parties 1,033,960 -- -- 1,801
Others 1,899,372 21,782 123,099 128,749
------------ ------------ ------------ ------------
53,550,885 6,699,328 5,461,439 3,126,402
------------ ------------ ------------ ------------
Net loss $(51,797,645) (6,387,506) (5,018,867) (2,942,152)
============ ============ ============ ============
Loss per basic and diluted
common share $ (7.97) (0.40) (0.34) (0.25)
============ ============ ============ ============
Weighted average number of shares
outstanding 6,496,000 15,926,000 14,597,000 11,969,000
============ ============ ============ ============
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, 1998
Common Stock
--------------------------- Capital in Common
Number of excess of par stock to be
Shares Amount value issued
---------- ---------- ---------- ----------
Issuance of shares to officers and stockholders for
equipment, research and development, and expense reimbursement 712,500 $ 713 212,987 --
Issuance of shares for organizational legal 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 Deferred
accumulated compen- Total
during sation, stockholders'
development Subscription restricted equity
stage Receivable 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) -- -- (121,486)
---------- ---------- ---------- ----------
Balance at July 31, 1982 (121,486) -- -- 205,714
Issuance of shares for equipment -- -- -- 14,000
Sale of shares to private investors -- -- -- 41,250
Sale of shares in public offering, net -- -- -- 1,308,446
Issuance of shares under stock grant program -- -- -- 110,000
Exercise of warrants, net -- -- -- 3,495
Net loss (558,694) -- -- (558,694)
---------- ---------- ---------- ----------
Balance at July 31, 1983 (680,180) -- -- 1,124,211
Exercise of warrants, net -- -- -- 933,983
Issuance of shares under stock grant program -- -- -- 101,219
Issuance of shares under stock bonus plan for
directors and consultants -- -- -- 385,917
Net loss (1,421,083) -- -- (1,421,083)
---------- ---------- ---------- ----------
Balance at July 31, 1984 (2,101,263) -- -- 1,124,247
Issuance of shares under stock grant program -- -- -- 478,105
Issuance of shares under stock bonus plan
for directors and consultants -- -- -- 879,478
Shares canceled -- -- -- (105,825)
Exercise of warrants, net -- -- -- 1,971,347
Net loss (2,958,846) -- -- (2,958,846)
---------- ---------- ---------- ----------
Balance at July 31, 1985 (5,060,109) -- -- 1,388,506
Issuance of shares under stock grant program -- -- -- 107,032
Issuance of shares under stock bonus plan for
directors and consultants -- -- -- 215,400
Exercise of warrants, net -- -- -- 80,998
Net loss (2,138,605) -- -- (2,138,605)
---------- ---------- ---------- ----------
Balance at July 31, 1986 (carried forward) (7,198,714) -- -- (346,669)
(Continued)
F-7
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
---------------------------- Capital in Common
Number of excess of par stock to be
Shares Amount value issued
----------- ----------- ----------- -----------
Balance at July 31, 1986 (brought forward) 2,933,052 $ 2,933 6,849,112 --
Exercise of warrants 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 Deferred
accumulated compen- Total
during sation, stockholders'
development Subscription restricted equity
stage Receivable stock (deficiency)
----------- ----------- ----------- -----------
Balance at July 31, 1986 (brought forward) (7,198,714) -- -- (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) -- -- (2,604,619)
----------- ----------- ----------- -----------
Balance at July 31, 1987 (9,803,333) -- -- (2,203,838)
Issuance of shares for legal and consulting services -- -- -- 724,487
Issuance of shares under employment incentive program -- -- (2,450,000) --
Issuance of shares under stock grant program -- -- -- 66,500
Exercise of options 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) -- -- (3,272,773)
----------- ----------- ----------- -----------
Balance at July 31, 1988 (13,076,106) -- (2,000,833) (3,065,782)
Sale of shares for litigation settlement -- -- -- 1,074,838
Conversion of debentures 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) -- -- (2,952,869)
----------- ----------- ----------- -----------
Balance at July 31, 1989 (16,028,975) -- (4,850,077) (3,069,557)
Issuance of shares for legal and consulting services -- -- -- 258,777
Issuance of shares under the 1989 Stock Plan -- -- (336,000) --
Sale of shares for litigation settlement -- -- -- 351,117
Exercise of options at $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) -- -- (4,860,116)
----------- ----------- ----------- -----------
Balance at July 31, 1990 (carried forward) (20,889,091) -- (5,920,516) (3,103,176)
F-8
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
-------------------------- Capital in Common
Number of excess of par stock to be
Shares Amount value issued
---------- ---------- ---------- ----------
Balance at July 31, 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 -- -- -- 50,000
Amortization of deferred compensation, restricted stock -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at July 31, 1994 (carried forward) 9,124,681 9,125 33,680,954 50,000
Deficit Deferred
accumulated compen- Total
during sation, stockholders'
development Subscription restricted equity
stage Receivable stock (deficiency)
---------- ---------- ---------- -----------
Balance at July 31, 1990 (brought forward) (20,889,091) -- (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) -- -- (5,202,302)
---------- ---------- ---------- ----------
Balance at July 31, 1991 (26,091,393) -- (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) -- -- (4,772,826)
---------- ---------- ---------- ----------
Balance at July 31, 1992 (30,864,219) -- (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) -- -- (2,357,350)
---------- ---------- ---------- ----------
Balance at July 31, 1993 (33,221,569) -- (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) -- -- (2,234,428)
---------- ---------- ---------- ----------
Balance at July 31, 1994 (carried forward) (35,455,997) -- (58,500) (1,774,418)
(Continued)
F-9
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Common Stock
-------------------------- Capital in Common
Number of excess of par stock to be
Shares Amount value issued
---------- ---------- ---------- ----------
Balance at July 31, 1994 (brought forward) 9,124,681 $ 9,125 33,680,954 50,000
Sale of shares to private investors, net 961,000 961 2,023,241 (50,000)
Conversion of short-term borrowings 17,600 17 43,983 --
Issuance of shares for services 30,906 31 77,234 --
Exercise of options 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 -- -- -- --
---------- ---------- ---------- ----------
Balance at July 31, 1995 10,319,187 10,319 36,262,427 343,808
Sale of shares to private investors, net 2,953,327 2,953 8,969,655 (339,008)
Issuance of shares for services 19,995 20 70,858 (4,800)
Exercise of options 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 -- -- -- --
---------- ---------- ---------- ----------
Balance at July 31, 1996 13,859,209 13,859 47,023,529 258,335
Sale of shares to private investors, net 112,000 112 503,888 --
Issuance of options for services -- -- 76,504 --
Exercise of options 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 -- -- -- --
---------- ---------- ---------- ----------
Balance at July 31, 1997 14,847,793 14,848 $50,961,382 --
Sale of shares to private investors, net 2,337,150 2,337 4,199,877 --
Issuance of options for services -- -- 199,954 --
Exercise of warrants at $2.20 - $2.50 per share 4,950 5 11,080 --
Issuance of shares for services 50,000 50 99,950 --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at July 31, 1998 17,239,893 $ 17,240 $55,472,243 $ --
========== ========== ========== ==========
Deficit Deferred
accumulated compen- Total
during sation, stockholders'
development Subscription restricted equity
stage Receivable stock (deficiency)
------------ ------------ ------------ ------------
Balance at July 31, 1994 (brought forward) (35,455,997) -- (58,500) (1,774,418)
Sale of shares to private investors, net -- -- -- 1,974,202
Conversion of short-term borrowings -- -- -- 44,000
Issuance of shares for services -- -- -- 77,265
Exercise of options 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) -- -- (1,993,123)
------------ ------------ ------------ ------------
Balance at July 31, 1995 (37,449,120) -- -- (832,566)
Sale of shares to private investors, net -- -- -- 8,633,600
Issuance of shares for services -- -- -- 66,078
Exercise of options 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) -- -- (2,942,152)
------------ ------------ ------------ ------------
Balance at July 31, 1996 (40,391,272) (254,185) -- 6,650,266
Sale of shares to private investors, net -- -- -- 504,000
Issuance of options for services -- -- -- 76,504
Exercise of options 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) -- -- (5,018,867)
------------ ------------ ------------ ------------
Balance at July 31, 1997 (45,410,139) -- -- 5,566,091
Sale of shares to private investors, net -- -- -- 4,202,214
Issuance of options for services -- -- -- 199,954
Exercise of warrants at $2.20 - $2.50 per share -- -- -- 11,085
Issuance of shares for services -- -- -- 100,000
Net loss (6,387,506) -- -- (6,387,506)
------------ ------------ ------------ ------------
Balance at July 31, 1998 $(51,797,645) $ -- $ -- $ 3,691,838
============ ============ ============ ============
See accompanying notes to financial statements.
F-10
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 1998, 1997
and 1996, and the Period from
August 24, 1981
(Date of Inception) to July 31, 1998
August 24,
1981 (date
of incep-
tion) to
July 31,
1998 1998 1997 1996
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $(51,797,645) (6,387,506) (5,018,867) (2,942,152)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of marketable securities (25,963) -- -- --
Depreciation and amortization 1,222,864 102,836 72,799 69,236
Loss on disposal of property and equipment 18,926 -- -- --
Noncash operating expenses 5,164,419 199,954 76,504 116,950
Amortization of deferred compensation 11,442,000 -- -- --
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 (117,187) 47,919 (101,256) (25,243)
(Increase) decrease in other assets 36,184 -- 31,877 (24,176)
Increase (decrease) in loans and
interest payable, related party 744,539 -- -- (138,638)
Increase in accounts payable 893,305 438,336 188,168 6,314
Increase (decrease) in accrued payroll
and expenses, related parties 2,348,145 -- -- (414,996)
Increase in accrued expenses 1,634,411 399,057 531,628 60,436
------------ ------------ ------------ ------------
Net cash used in operating
activities (28,431,412) (5,199,404) (4,106,897) (3,404,519)
------------ ------------ ------------ ------------
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 (1,369,261) (75,315) (252,066) (45,693)
Patent costs (97,841) -- -- --
------------ ------------ ------------ ------------
Net cash used in investing
activities (1,441,139) (75,315) (252,066) (45,693)
------------ ------------ ------------ ------------
(Continued)
F-11
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24,
1981 (date
of incep-
tion) to
July 31,
1998 1998 1997 1996
------------ ------------ ------------ ------------
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
Reduction of bank debt and long-term debt (2,909,553) (1,381,416) (92,578) (153,947)
Proceeds from common stock to be issued 433,358 -- -- 44,350
Proceeds from issuance of common stock, net 26,374,775 4,202,214 504,000 8,605,484
Proceeds from exercise of stock options and warrants, net 5,460,673 11,085 3,354,188 1,658,200
Proceeds from issuance of convertible debentures 347,000 -- -- --
------------ ------------ ------------ ------------
Net cash provided by financing
activities 34,972,004 2,831,883 3,769,810 10,183,627
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 5,099,453 (2,442,836) (589,153) 6,733,415
Cash and cash equivalents at beginning of period -- 7,542,289 8,131,442 1,398,027
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,099,453 5,099,453 7,542,289 8,131,442
============ ============ ============ ============
Supplemental disclosure of cash flow information - interest paid $ 1,646,355 21,782 134,845 130,224
============ ============ ============ ============
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 -- -- --
============ ============ ============ ============
(Continued)
F-12
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24,
1981 (date
of incep-
tion) to
July 31,
1998 1998 1997 1996
------------ ------------ ------------ ------------
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 $ 177,265 100,000 -- --
============ ============ ============ ============
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, 1998, 1997 and 1996
and the Period From August 24, 1981
(Date of Inception) to July 31, 1998
(1) Summary of Significant Accounting Policies
Business Description
Alfacell Corporation (the "Company") was incorporated in Delaware on August
24, 1981 for the purpose of engaging in the discovery, investigation and
development of a new class of anti-cancer drugs and anti-viral agents. The
Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 7. The Company is devoting substantially all of its present efforts to
establishing its business. Its planned principal operations have not
commenced and, accordingly, no significant revenue has been derived
therefrom.
The Company's current operations encompass all the risks inherent in
discovering and developing a new drug, including: an uncertainty regarding
the timing and amount of future revenues to be derived from the Company's
technology; obtaining future capital as needed; attracting and retaining
key personnel; and a business environment with heightened competition,
rapid technological change and strict government regulations.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect reported amounts and disclosures in
these financial statements. Actual results could differ from those
estimates.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets ranging from three to seven years. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in
operations for the period.
The cost of repairs and maintenance is charged to operations as incurred;
significant renewals and betterments are capitalized.
Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less, at the time of purchase, to be cash equivalents.
(Continued)
F-14
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies (Continued)
Research and Development
Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
For all financial instruments, their carrying value approximates fair value
due to the short maturity of those instruments.
Earnings Per Common Share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," became effective for financial statements for periods ending after
December 15, 1997, and requires presentation of two calculations of
earnings per common share. "Basic" earnings per common share equals net
income divided by weighted average common shares outstanding during the
period. "Diluted" earnings per common share equals net income divided by
the sum of weighted average common shares outstanding during the period
plus common stock equivalents. The Company's Basic and Diluted per share
amounts are the same since the assumed exercise of stock options and
warrants are all anti-dilutive. The amount of options and warrants excluded
from the calculation was 5,911,557, 4,592,631 and 5,584,476 at July 31,
1998, 1997 and 1996, respectively. The Company restated all prior period
amounts to reflect these calculations.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of long-lived assets held and to be used based on
undiscounted cash flows, and measures the impairment, if any, using
discounted cash flows. SFAS No. 121 has not had 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.
(Continued)
F-15
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Liquidity
The Company has reported net losses of $6,387,506, $5,018,867, and
$2,942,152 for the fiscal years ended July 31, 1998, 1997 and 1996,
respectively. The loss from date of inception, August 24, 1981, to July 31,
1998 amounts to $51,797,645. Also, the Company has limited liquid
resources. These factors raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of reported
asset amounts or the amounts or classification of liabilities which might
result from the outcome of this uncertainty.
Until the Company's operations generate significant revenues, cash reserves
will continue to fund operations. 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. Based upon reduced spending levels as described
below, the Company believes that its cash and cash equivalents as of July
31, 1998 will be sufficient to meet its anticipated cash needs through the
fiscal year ending July 31, 1999. However, there can be no assurance that
the Company will be able to successfully implement these reduced spending
measures.
The Company is currently taking steps to significantly reduce the amount of
cash used to fund ongoing operations. These steps include postponement of
certain clinical and regulatory costs associated with preparation of an NDA
for ONCONASE, closing its Phase III program for advanced pancreatic cancer
and postponement of planned clinical trials for ONCONASE in indications
other than unresectable malignant mesothelioma. The Company's continued
operations will depend on its ability to raise additional funds through
various sources, including collaborative agreements or strategic alliances.
However, there can be no assurance that such additional funds will become
available. The Company does not anticipate it will be able to raise
additional capital through equity markets in the near future because of the
termination of its Phase III clinical trials for pancreatic cancer. Over
the longer term, the ability of the Company to raise additional capital
through the sale of its securities will primarily be dependent on the
outcome of the Phase III clinical trial for unresectable malignant
mesothelioma. However, the ability to raise funding at that time may be
dependent upon other factors including without limitation market
conditions, and there can be no assurance that such funds will be
available. Preliminary results of the Phase III trial are expected in the
second calendar quarter of 1999. The Company is currently exploring various
strategic alternatives for its business and research and development
operations.
(3) Property and Equipment
Property and equipment, at cost, consists of the following at July 31:
1998 1997
---------- ----------
Laboratory equipment $ 755,040 702,481
Office equipment 290,764 271,866
Leasehold improvements 97,833 93,975
---------- ----------
$1,143,637 1,068,322
========== ==========
(Continued)
F-16
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(4) Long-term Debt
Long-term debt consists of the following at July 31:
1998 1997
---------- ----------
First Union National Bank, New Jersey, interest of 8.375% $ -- $1,373,090
Notes payable, interest at 8.45%, maturing through
July 1999, secured by equipment 1,520 2,916
Note payable in monthly installments of $729, including
principal and interest commencing April 1996 and each month
thereafter until May 2000, secured by equipment 14,382 21,312
---------- ----------
15,902 1,397,318
Less current portion 9,175 1,381,416
---------- ----------
$ 6,727 $ 15,902
========== ==========
Principal maturities for the next two years ending July 31, are as follows:
1999 $ 9,175
2000 6,727
---------------
$ 15,902
===============
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.
(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 $97,000, $76,000, and
$66,000 in 1998, 1997 and 1996, respectively.
Future minimum lease payments under noncancellable leases for the next four
years ending July 31 are as follows:
Operating
leases
-----------
1999 $ 107,754
2000 127,497
2001 136,000
2002 56,667
(Continued)
F-17
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(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 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.
(Continued)
F-18
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
On February 22, 1984, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of two series of new
warrants each to purchase an aggregate of 330,000 shares (hereinafter
referred to as one-year warrants and two-year warrants). The one-year
warrants had an exercise price of $6.50 per share and expired July 17,
1985. The two-year warrants had an exercise price of $10.00 per share and
were to expire July 17, 1986. However, the Company extended the expiration
date to August 31, 1987. The one-year warrants and two-year warrants were
issued as of July 17, 1984 on a one-for-one basis to those public offering
warrant holders who exercised their original warrants, with the right to
oversubscribe to any of the warrants not exercised. During the fiscal years
ended July 31, 1985, 1986, 1987 and 1988, the Company received net proceeds
of approximately $2,471,000 as a result of the exercise of the warrants.
On January 2, 1987, the Company issued 250,000 shares of common stock to
officers and stockholders, including the President and Chief Executive
Officer, in recognition of services performed for the Company. The fair
value of such shares was recorded as compensation expense.
On February 3, 1987, the Company sold 5,000 shares of common stock to a
private investor for $5.00 per share, resulting in net proceeds to the
Company of approximately $25,000.
On September 1, 1987, the Board of Directors approved new wage contracts
for three officers. The contracts provided for the issuance of 700,000
shares of common stock as an inducement for signing. The fair value of
these shares was recorded as deferred compensation and was amortized over
the term of the employment agreements. The contracts also provided for the
issuance of 1,500,000 shares of common stock in 750,000 increments upon the
occurrence of certain events. These shares were issued during the fiscal
years ended July 31, 1989 and 1990 and the fair value of such shares was
recorded as deferred compensation and was amortized over the remaining term
of the employment agreements. The contracts also provided for five-year
options to purchase 750,000 shares of common stock at $3.00 per share;
options for the purchase of 170,000 shares were exercised on June 16, 1988
and the remaining options for the purchase of 580,000 shares expired on
September 2, 1992.
During the fiscal year ended July 31, 1988, the Company issued 206,429
shares of common stock for payment of legal and consulting services. The
fair value of such shares was charged to operations.
During the fiscal year ended July 31, 1988, the Company issued 12,500
shares of common stock in connection with the settlement of certain
litigation. The fair value of these shares was charged to operations.
During the fiscal year ended July 31, 1988, the Company sold 61,073 shares
of common stock to private investors at $2.92 per share resulting in net
proceeds to the Company of approximately $178,133.
(Continued)
F-19
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
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.
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.
(Continued)
F-20
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
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 expired during fiscal 1998. The common stock and
warrants were sold in units consisting of 20,000 shares of common stock and
warrants to purchase 20,000 shares of common stock. The price per unit was
$50,000. The Company received proceeds of approximately $545,000, net of
costs associated with the placement of approximately $55,000 and the
conversion of certain debt by creditors of $121,265 into equivalent private
placement units of 17,600 shares for conversion of short-term borrowings
and 30,906 shares issued for services rendered. In October 1994, an
additional two units at $50,000 per unit were sold to a private investor
under the same terms as the September 1994 private placement resulting in
the issuance of 40,000 shares of common stock and warrants to purchase
40,000 shares of common stock. The warrants expired during fiscal 1998.
During the fiscal year ended July 31, 1995, 185,000 shares of common stock
were issued upon the exercise of stock options by unrelated parties
resulting in net proceeds to the Company of $437,200. The exercise prices
of the options ranged from $2.27 to $2.50, which had been reduced from
$3.50 and $5.00, respectively, during fiscal 1995.
(Continued)
F-21
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
During the fiscal year ended July 31, 1995, the Company sold 681,000 shares
of common stock to private investors resulting in net proceeds to the
Company of approximately $1,379,000. The shares were sold at prices ranging
from $2.00 to $2.25.
During the fiscal year ended July 31, 1995, the Company sold 139,080 shares
of common stock and 47,405 three-year warrants to purchase shares of common
stock at an exercise price of $4.00 per share to private investors. The
stock and warrants were sold at prices ranging from $2.25 to $2.73 per
share and resulted in net proceeds to the Company of $343,808, of which
$4,800 was for services rendered. The common shares were issued to the
investors subsequent to July 31, 1995.
On August 4, 1995, the Company issued 6,060 shares of common stock as
payment for services rendered to the Company. The fair value of the common
stock was charged to operations.
On September 29, 1995, the Company completed a private placement resulting
in the issuance of 1,925,616 shares of common stock and three-year warrants
to purchase an aggregate of 55,945 shares of common stock at an exercise
price of $4.00 per share. Of these shares 1,935 were issued for services
rendered to the Company. The common stock was sold alone at per share
prices ranging from $2.00 to $3.70, and in combination with warrants at per
unit prices ranging from $4.96 to $10.92, which related to the number of
warrants contained in the unit. The Company received proceeds of
approximately $4.1 million, including $1,723,000 for approximately 820,000
shares received during the fiscal year ended July 31, 1995. The warrants
expired in October 1998.
As consideration for the extension of the Company's term loan agreement
with its bank, the Company granted the bank a warrant to purchase 10,000
shares of common stock at an exercise price of $4.19. The warrants were
issued as of October 1, 1995 and expired on August 31, 1997.
In June 1996, the Company sold in a private placement 1,515,330 shares of
common stock and three-year warrants to purchase 313,800 shares of common
stock at an exercise price of $7.50 per share. Of these shares, 12,000 were
issued for services rendered to the Company. The common stock was sold
alone at a per share price of $3.70, in combination with warrants at a per
unit price of $12.52 and warrants were sold alone at a per warrant price of
$1.42. Each unit consisted of three shares of common stock and one warrant.
The Company received proceeds of approximately $5.7 million. The warrants
will expire in August and September 1999.
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.
(Continued)
F-22
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
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.
During the fiscal year ended July 31, 1997, 639,500 stock options were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $2.6 million to the Company. The exercise prices of the
options ranged from $2.45 to $4.00 per share.
During the fiscal year ended July 31, 1997, 147,450 warrants were exercised
by both related and unrelated parties resulting in net proceeds of
approximately $737,250 to the Company. The exercise price of the warrants
was $5.00 per share.
In October 1997, the Company issued 75,000 stock options to a director with
an exercise price of $3.66 per share as payment for non-board related
services to be rendered. These options will vest as follows provided he has
been serving continuously on the Company's board of directors at the time
of vesting: 10,000 vested immediately; 10,000 after one full calendar year;
10,000 annually for each of the following three years; and 25,000 on
October 31, 2002. The vesting and exercisability of the 25,000 options
which vest in October 2002 may be accelerated upon the good faith
determination of the Company's Board of Directors that a substantive
collaborative agreement with a major pharmaceutical/biotechnology company
was a direct result of the director's efforts. A total general and
administrative expense of $185,600 is being amortized over a five-year
period which commenced in October 1997. As of July 31, 1998, the Company
recorded general and administrative expense of $48,900, based upon the fair
value of such 75,000 options on the date of issuance, amortized on a
straight-line basis over the vesting period of the grant.
(Continued)
F-23
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
In October 1997, the Company issued 12,000 five-year stock options to a
consultant with an exercise price of $3.91 per share as payment for
services to be rendered. An equal portion of these options vest monthly and
are to be amortized over a one-year period which commenced in October 1997.
In May 1998, the Company terminated the services of the consultant which
resulted in the cancellation of 5,000 options. The Company recorded a total
research and development expense for the remaining 7,000 options in the
amount of $15,800, based upon the fair value of such options on the date of
issuance, amortized on a straight-line basis over the vesting period of the
grant.
On December 9, 1997, the stockholders authorized the amendment of the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock, par value $.001 from 25,000,000 shares to
40,000,000 shares.
On December 9, 1997, the stockholders approved the 1997 Stock Option Plan
(the "1997 Plan"). The total number of shares of common stock authorized
for issuance upon exercise of options granted under the 1997 Plan is
2,000,000. Options are granted at fair market value on the date of the
grant and generally are exercisable in 20% increments annually over five
years starting one year after the date of grant and terminate five years
from their initial exercise date.
On January 23, 1998 the Securities and Exchange Commission (the "SEC")
declared effective a registration statement for the offer and sale by
certain stockholders of up to 3,734,541 shares of common stock. Of these
shares (i) an aggregate of 2,737,480 shares were issued to private
placement investors in private placement transactions which were completed
during the period from March 1994 through March 1997 (the "Earlier Private
Placements"), (ii) an aggregate of 409,745 shares are issuable upon
exercise of warrants which were issued to private placement investors in
the Earlier Private Placements and (iii) an aggregate of 587,316 shares may
be issued, or have been issued, upon exercise of options which were issued
to option holders in certain other private transactions.
In February 1998, the Company completed the February 1998 Private Placement
primarily to institutional investors which resulted in the issuance of
1,168,575 units at a unit price of $4.00. Each unit consisted of two (2)
shares of the Company's common stock, par value $.001 per share and one (1)
three-year warrant to purchase one (1) share of common stock at an exercise
price of $2.50 per share. The Company received proceeds of approximately
$4,202,000, net of costs associated with the private placement of
approximately $472,000. The placement agent also received warrants to
purchase an additional 116,858 units comprised of the same securities sold
to investors at an exercise price of $4.40 per unit as part of its
compensation.
In March 1998, the Company entered into a conversion agreement with one of
its raw material suppliers (the "Supplier") for the conversion of an
outstanding payable (the "Conversion Agreement") into 50,000 shares of the
Company's Common Stock. Pursuant to the Conversion Agreement, the Company
issued 50,000 shares of Common Stock to the Supplier. The fair value of the
Common Stock approximated the outstanding payable amount of $100,000.
In March 1998, the Company issued 75,000 stock options to a director with
an exercise price of $2.80 per share as payment for non-board related
services to be rendered. These options will vest as follows provided he has
been serving continuously on the Company's board of directors at the time
of vesting: 10,000 vested immediately; 10,000 after one full calendar year;
10,000 annually for each of the following three years; and 25,000 on March
24, 2003. The vesting and exercisability of the 25,000 options which
(Continued)
F-24
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Continued)
vest in March 2003 may be accelerated upon the good faith determination of
the Company's Board of Directors that a substantive collaborative agreement
and licensing or financing arrangement with a major
pharmaceutical/biotechnology company was a direct result of the director's
efforts. A total general and administrative expense of $138,100 is being
amortized over a five-year period which commenced in March 1998. As of July
31, 1998, the Company recorded general and administrative expense of
$24,700, based upon the fair value of such 75,000 options on the date of
issuance, amortized on a straight-line basis over the vesting period of the
grant.
On April 20, 1998 the SEC declared effective a registration statement for
the offer and sale by certain stockholders of up to 3,918,299 shares of
common stock. Of these shares (i) an aggregate of 2,337,150 shares of
Common Stock were issued to the private placement investors in the February
1998 Private Placement, (ii) an aggregate of 1,168,575 shares may be issued
upon exercise of the Warrants which were issued to the private placement
investors in the February 1998 Private Placement, (iii) 350,574 shares may
be issued upon the exercise of the Placement Agent Warrant which was issued
to the placement agent in the February 1998 Private Placement and the
Warrants issuable upon exercise of the Placement Agent Warrant, (iv) 50,000
shares of Common Stock were issued to a Supplier in connection with
conversion of an outstanding accounts payable, and (v) 12,000 shares may be
issued upon the exercise of options which were issued as payment for
services to be rendered.
During the fiscal year ended July 31, 1998, the Company issued 833
three-year stock options as payment for services rendered in August 1997.
The options vested thirty days from the issuance date and have an exercise
price of $4.47 per share. The total general and administrative expense
recorded for these options was $1,700, based upon the fair value of such
options on the date of issuance.
During the fiscal year ended July 31, 1998, the Company issued 15,000
three-year stock options with an exercise price of $4.15 per share as
payment for services to be rendered. An equal portion of these options vest
monthly and a total general and administrative expense of $30,000 is being
amortized over a one-year period which commenced September 1997. The
Company also issued 5,000 three-year stock options with an exercise price
of $4.15 per share as payment for services to be rendered. Of these
options, 833 vested monthly for five months commencing September 30, 1997
and 835 vested on the last day of the sixth month. Total general and
administrative expense of $9,700 is being amortized over a six-month period
which commenced September 1997. As of July 31, 1998, the Company recorded
general and administrative expense of $37,100, based upon the fair value of
the 20,000 stock options on the date of the issuance, amortized on a
straight-line basis over the vesting periods of the grants.
During the fiscal year ended July 31, 1998, 4,950 shares of Common Stock
were issued upon the exercise of warrants by unrelated parties resulting in
net proceeds of approximately $11,100 to the Company. The exercise prices
of the warrants ranged from $2.20 to $2.50 per share.
(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.
(Continued)
F-25
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Common Stock Warrants (Continued)
The following table summarizes the activity of common stock warrants issued
in connection with the Private Placements completed in fiscal years 1994
through 1998:
Warrants Exercise Price Expiration
-------- -------------- ----------
Sold in March 1994 Private Placement 800,000 $ 5.00 3/21/97 to 6/21/97
Outstanding at July 31, 1994 800,000 5.00 3/21/97 to 6/21/97
Sold in September 1994 Private Placement 288,506 5.50 12/9/97 to 12/14/97
Sold in October 1994 Private Placement 40,000 5.50 1/21/98
Sold in September 1995 Private Placement 47,405 4.00 10/1/98
----------
Outstanding and exercisable at July 31, 1995 1,175,911 4.00 - 5.50 3/21/97 to 10/1/98
Issued to bank in connection with an amendment to the
Company's term loan 10,000 4.19 8/31/97
Sold in September 1995 Private Placement 8,540 4.00 10/1/98
Sold in June 1996 Private Placement 313,800 7.50 8/29/99 to 9/10/99
----------
Outstanding and exercisable at July 31, 1996 1,508,251 4.00 - 7.50 3/21/97 to 9/10/99
Exercised 147,450 5.00 3/21/97 to 6/21/97
Expired 652,550 5.00 3/21/97 to 6/21/97
----------
Outstanding and exercisable at July 31, 1997 708,251 4.00 - 7.50 12/9/97 to 9/10/99
Sold in February 1998 Private Placement 1,168,575 2.50 5/19/01
Issued to the Placement Agent in connection with the
February 1998 Private Placement (see note 6) 350,574 2.20 - 2.50 5/19/01
Exercised 4,950 2.20 - 2.50 5/19/01
Expired 338,506 4.19 - 5.50 8/31/97 to 1/21/98
----------
Outstanding and exercisable at July 31, 1998 1,883,944 2.20 - 7.50 10/1/98 to 5/19/01
========== ============
(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 stockholders approved the 1997 stock option plan totaling
2,000,000 shares, which provide that options maybe 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.
(Continued)
F-26
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options (Continued)
The following table summarizes stock option activity for the period August
1, 1994 to July 31, 1998 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
Granted (234,333) 234,333 3.31
Canceled 91,100 (91,100) 3.81
---------- ----------
Balance July 31, 1998 2,227,398 4,027,613 3.54
========== ========== =====
The options outstanding at July 31, 1998 will expire between August 31,
1998 and July 6, 2008.
The weighted-average fair value per option at the date of grant for options
granted during the fiscal years 1998, 1997 and 1996 were $2.03, $3.02 and
$2.67, respectively. The fair value was estimated using the Black-Scholes
options pricing model based on the following assumptions:
1998 1997 1996
------- ------- -------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 6.00% 6.00% 6.00%
Expected stock price volatility 88.15% 59.78% 65.86%
Expected term until exercise (years) 6.17 6.20 5.44
(Continued)
F-27
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options (Continued)
Pro forma net loss and loss per share reflecting approximate compensation
cost for the fair value of stock options awarded in 1998 and 1997 are as
follows:
1998 1997 1996
------------- ------------- -------------
Net Loss:
As reported $ (6,387,506) $ (5,018,867) $ (2,942,152)
Pro forma (6,697,066) (5,724,076) (3,297,152)
Loss per common share:
As reported $ (0.40) $ (0.34) $ (0.25)
Pro forma (0.42) (0.39) (0.28)
The pro forma effects on net loss and loss per share for 1998, 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 extend beyond the reported years.
The following table summarizes information concerning options outstanding
at July 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------------------ --------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 7/31/98 Term (Years) Price at 7/31/98 Price
------------ ---------- ------------ ----- ------------ --------
$2.00 - 2.99 370,250 3.21 $2.63 282,750 $2.60
3.00 - 3.99 2,599,920 3.13 3.20 2,371,420 3.20
4.00 - 4.99 751,193 3.24 4.39 606,443 4.39
5.00 - 5.99 261,250 3.68 5.11 151,250 5.07
6.00 - 6.99 45,000 4.42 6.97 5,000 6.97
=========== ---------- ==== ==== ----------- ====
4,027,613 3,456,863
========== ===========
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.
(Continued)
F-28
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options (Continued)
Non-Qualified Stock Options
The Board of Directors issued non-qualified stock options which were not
part of the 1981 non-qualified stock option plan or the 1989 Stock Plan as
follows:
Shares Price Range
------ -----------
Granted 1,782,000 $3.00-3.87
Exercised (276,989) 3.00-3.50
Canceled (106,000) 3.00-3.50
Expired (649,011) 3.00-3.50
Granted pursuant to conversion of certain liabilities:
Related party 1,324,014 3.20
Unrelated party 73,804 3.20
Repurchased stock options (102,807) 3.20
----------
Balance at July 31, 1994 2,045,011 3.20-3.87
========== ==========
In connection with certain private placements, the Board of Directors had
included in the agreements, options to purchase additional shares of the
Company's common stock as follows:
Shares Price Range
------ -----------
Granted (42,167 options were repriced
and extended as described in note 8) 894,887 $2.50-7.00
Exercised (81,000) 3.97-6.50
Expired (201,720) 3.97-6.50
----------
Balance at July 31, 1994 612,167 2.50-7.00
========== ==========
1989 Stock Plan
On February 14, 1989, the Company adopted the Alfacell Corporation 1989
Stock Plan (the "1989 Stock Plan"), pursuant to which the Board of
Directors could issue awards, options and grants. The maximum number of
shares of common stock that could have been issued pursuant to the option
plan was 2,000,000.
No more options are being granted pursuant to this plan. The per share
option exercise price was determined by the Board of Directors. All options
and shares issued upon exercise were nontransferable and forfeitable in the
event employment was terminated within two years of the date of hire. In
the event the option was exercised and said shares were forfeited, the
Company would return to the optionee the lesser of the current market value
of the securities or the exercise price paid.
(Continued)
F-29
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options (Continued)
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:
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
======= =========== ==========
(Continued)
F-30
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Grant and Compensation Plans (Continued)
* 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 1998, 1997 or 1996.
(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.
At July 31, 1998 and 1997, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
(Continued)
F-31
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) Income Taxes (Continued)
1998 1997
------------ ------------
Deferred tax assets:
Excess of book over tax depreciation $ 21,035 $ 4,112
Accrued expenses 159,623 138,243
Federal and state net operating loss carryforwards 14,407,990 10,187,188
Research and experimentation and investment tax
credit carry forwards 753,314 443,064
------------ ------------
Total gross deferred tax assets 15,341,962 10,772,607
Valuation allowance (15,341,962) (10,772,607)
------------ ------------
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, 1998, the Company has federal net operating loss carryforwards
of approximately $38,140,000 that expire in the years 1999 to 2013. The
Company also has investment tax credit carryforwards of $51,634 and
research and experimentation tax credit carryforwards of $701,680 that
expire in the years 1999 to 2013. 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:
1998 1997
---------- ----------
Payroll and payroll taxes $ 38,147 $ 185,840
Professional fees 98,568 199,745
Clinical trial grants 781,883 290,887
Clinical supplies 171,600 --
Other 2,700 17,369
---------- ----------
$1,092,898 $ 693,841
========== ==========
Prepaid expenses as of July 31, consist of the following:
1998 1997
-------- --------
Insurance $ 65,661 $ 65,782
NIH research 31,625 37,198
Other 19,901 62,126
-------- --------
$117,187 $165,106
======== ========
(Continued)
F-32
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(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 to the
Chief Executive Officer 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 CRADA with the 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 for the
three years ended July 31, 1998, 1997 and 1996.
In August 1995, the Company entered into a CRADA with the 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 1999, the Company is
obligated to pay approximately $5,200 per month to the NCI. Total research
and development expenses under this arrangement amounted to $62,000 and
$58,000 during each of the fiscal years ended July 31, 1998 and 1997,
respectively.
F-33