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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
April 30, 2003 0-11088
For the quarterly period 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 Identification No.)
incorporation)
225 Belleville Avenue, Bloomfield, New Jersey 07003
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (973) 748-8082
NOT APPLICABLE
(Former name, former address, and former fiscal year, if
changed since last report.)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X|
The number of shares of common stock, $.001 par value, outstanding as of
June 12, 2003 was 23,795,300 shares.
ALFACELL CORPORATION
(A Development Stage Company)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
April 30, 2003 and July 31, 2002
April 30,
2003 July 31,
ASSETS (Unaudited) 2002
----------- ----
Current assets:
Cash and cash equivalents $ 44,586 $ 85,843
Other assets 6,984 45,754
------------ ------------
Total current assets 51,570 131,597
Property and equipment, net of accumulated depreciation and amortization
of $1,133,985 at April 30, 2003 and $1,120,371 at July 31, 2002 14,993 28,607
Loan receivable, related party 72,843 68,667
------------ ------------
Total assets $ 139,406 $ 228,871
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
Current liabilities:
Current portion of long-term debt $ 8,680 $ 8,179
Notes payable, net of debt discount of $4,067 at April 30, 2003 345,933 --
Loan payable, related party 106,114 139,794
Accounts payable 659,926 796,128
Accrued expenses 1,291,411 854,278
------------ ------------
Total current liabilities 2,412,064 1,798,379
Long-term debt, less current portion, net of debt discount of $200,053 at April 30, 2003 509,334 315,929
------------ ------------
Total liabilities 2,921,398 2,114,308
------------ ------------
Stockholders' (deficiency):
Preferred stock, $.001 par value
Authorized and unissued, 1,000,000 shares at April 30, 2003 and July 31, 2002 -- --
Common stock $.001 par value
Authorized 40,000,000 shares at April 30, 2003 and July 31, 2002;
Issued and outstanding, 23,422,958 shares at April 30, 2003 and 22,760,921
shares at July 31, 2002 23,423 22,761
Capital in excess of par value 60,392,339 59,654,479
Deficit accumulated during the development stage (63,197,754) (61,562,677)
------------ ------------
Total stockholders' (deficiency) (2,781,992) (1,885,437)
------------ ------------
Total liabilities and stockholders' (deficiency) $ 139,406 $ 228,871
============ ============
See accompanying notes to financial statements.
- 2 -
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Three months and nine months ended April 30, 2003 and 2002,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2003
(Unaudited)
August 24, 1981
Three Months Ended Nine Months Ended (Date of
April 30, April 30, Inception) to
--------- --------- -------------
2003 2002 2003 2002 April 30, 2003
---- ---- ---- ---- --------------
Revenue:
Sales $ -- $ -- $ -- $ -- $ 553,489
Investment income 43 125 277 282 1,377,400
Other income -- -- 30,000 -- 90,103
------------ ------------ ------------ ------------ ------------
Total revenue 43 125 30,277 282 2,020,992
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales -- -- -- -- 336,495
Research and development 374,183 531,904 1,173,552 1,539,885 41,075,525
General and administrative 138,131 192,991 426,206 576,605 22,089,652
Interest:
Related parties, net 653 -- 1,939 -- 1,149,486
Others 54,831 67,999 293,116 105,517 2,358,028
------------ ------------ ------------ ------------ ------------
Total costs and expenses 567,798 792,894 1,894,813 2,222,007 67,009,186
------------ ------------ ------------ ------------ ------------
Loss before state tax benefit (567,755) (792,769) (1,864,536) (2,221,725) (64,988,194)
State tax benefit -- -- 229,459 353,730 1,790,440
------------ ------------ ------------ ------------ ------------
Net loss $ (567,755) $ (792,769) $ (1,635,077) (1,867,995) $(63,197,754)
============ ============ ============ ============ ============
Loss per basic common share $ (.02) $ (.04) $ (.07) $ (.09)
============ ============ ============ ============
Weighted average number of shares
outstanding 23,079,250 21,020,967 22,911,335 20,553,185
============ ============ ============ ============
See accompanying notes to financial statements.
- 3 -
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Nine months ended April 30, 2003 and 2002,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2003
(Unaudited)
Nine Months Ended August 24, 1981
April 30, (Date of Inception)
--------- to
2003 2002 April 30, 2003
---- ---- --------------
Cash flows from operating activities:
Net loss $(1,635,077) $(1,867,995) $(63,197,754)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities -- -- (25,963)
Depreciation and amortization 13,615 31,564 1,545,021
Loss on disposal of property and equipment -- -- 18,926
Noncash operating expenses 20,161 190,783 6,052,214
Charge for beneficial conversion rights 204,603 -- 204,603
Amortization of debt discount 37,849 -- 37,849
Amortization of deferred compensation -- -- 11,442,000
Amortization of organization costs -- -- 4,590
Changes in assets and liabilities:
Decrease (increase) other current assets 38,770 4,812 (66,851)
(Increase) decrease in other assets (4,176) (17,927) 23,208
Increase in interest payable-related party -- -- 744,539
(Decrease) increase in accounts payable (126,202) 423,164 1,030,162
Increase in accrued payroll and expenses,
related parties -- -- 2,348,145
Increase in accrued expenses 437,133 179,871 1,832,924
----------- ----------- ------------
Net cash used in operating activities (1,013,324) (1,055,728) (38,006,387)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of marketable equity securities -- -- (290,420)
Proceeds from sale of marketable equity
securities -- -- 316,383
Purchase of property and equipment -- -- (1,406,836)
Patent costs -- -- (97,841)
----------- ----------- ------------
Net cash used in investing activities -- -- (1,478,714)
----------- ----------- ------------
(continued)
See accompanying notes to financial statements.
- 4 -
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Continued
Nine months ended April 30, 2003 and 2002,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2003
(Unaudited)
Nine Months Ended August 24, 1981
April 30, (Date of Inception)
--------- to
2003 2002 April 30, 2003
---- ---- --------------
Cash flows from financing activities:
Proceeds from short-term borrowings $ 25,000 $ -- $ 874,500
Payment of short-term borrowings (25,000) (5,000) (653,500)
(Decrease) increase in loans payable - related party, net (33,680) 126,553 2,734,982
Proceeds from bank debt and other borrowings, net of
deferred issuance costs 750,000 100,000 3,502,460
Reduction of long-term debt (6,041) (4,719) (2,948,501)
Proceeds from issuance of common stock, net 241,788 789,629 29,602,499
Proceeds from exercise of stock options and warrants, net 20,000 50,000 5,703,254
Proceeds from issuance of convertible debentures, related party -- -- 297,000
Proceeds from issuance of convertible debentures, unrelated party -- -- 416,993
--------- --------- ------------
Net cash provided by financing activities 972,067 1,056,463 39,529,687
--------- --------- ------------
Net (decrease) increase in cash and cash equivalents (41,257) 735 44,586
Cash and cash equivalents at beginning of period 85,843 44,781 --
--------- --------- ------------
Cash and cash equivalents at end of period $ 44,586 $ 45,516 $ 44,586
========= ========= ============
Supplemental disclosure of cash flow information - interest paid $ 4,416 $ 6,971 $ 1,687,057
========= ========= ============
Noncash financing activities:
Issuance of convertible subordinated debenture for loan payable
to officer $ -- $ -- $ 2,725,000
========= ========= ============
Issuance of common stock upon the conversion of convertible
subordinated debentures, related party $ -- $ -- $ 3,242,000
========= ========= ============
Conversion of short-term borrowings to common stock $ -- $ -- $ 226,000
========= ========= ============
Conversion of accrued interest, payroll and expenses by related
parties to stock options $ -- $ -- $ 3,194,969
========= ========= ============
Repurchase of stock options from related party $ -- $ -- $ (198,417)
========= ========= ============
Conversion of accrued interest to stock options $ -- $ -- $ 142,441
========= ========= ============
Conversion of accounts payable to common stock $ 10,000 $ 50,000 $ 370,326
========= ========= ============
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 $ -- $ 64,993 $ 191,993
========= ========= ============
Issuance of common stock for services rendered $ -- $ -- $ 2,460
========= ========= ============
Issuance of warrants with notes payable $ 196,686 $ -- $ 196,686
========= ========= ============
See accompanying notes to financial statements.
- 5 -
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial position as of April 30,
2003 and its results of operations and cash flows for the three and/or nine
month periods ended April 30, 2003 and 2002 and the period from August 24, 1981
(date of inception) to April 30, 2003. The results of operations for the nine
months ended April 30, 2003 are not necessarily indicative of the results to be
expected for the full year.
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
a new business. Its planned principal operations have not commenced and,
accordingly, no significant revenue has been derived therefrom.
The Company has reported net losses since its inception. Also, the Company
has limited liquid resources. The report of the Company's former independent
accountants on the Company's July 31, 2002 financial statements included an
explanatory paragraph which states that the Company's recurring losses, working
capital deficit and limited liquid resources raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements at
July 31, 2002 and April 30, 2003 do not include any adjustments that might
result from the outcome of this uncertainty.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of tax benefits,
revenues from the commercial sale of ONCONASE(R), licensing of its proprietary
RNase technology and its ability to realize the full potential of its technology
and its drug candidates via out-licensing agreements with other companies. Such
additional funds may not become available as needed or be available on
acceptable terms. 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 and warrants exercised and for services rendered,
debt financing and financing provided by the Company's Chief Executive Officer.
Additionally, the Company has raised capital through the sale of its tax
benefits. Until and unless the Company's operations generate significant
revenues, the Company will attempt to continue to fund its operations from cash
on hand and through the sources of capital previously described. From August 1,
2002 through May 31, 2003, the Company received gross proceeds of approximately
$1,561,000 from long-term and short-term borrowings from unrelated parties, the
private placement of common stock and warrants, sale of tax benefits and other
income. No assurances can be provided that the additional capital will be
sufficient to meet the Company's needs.
2. LOSS PER COMMON SHARE
"Basic" loss per common share equals net loss divided by weighted average
common shares outstanding during the period. "Diluted" loss per common share
equals net income divided by the sum of weighted average common shares
outstanding during the period plus the effect of potentially dilutive
- 6 -
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
Unaudited
2. LOSS PER COMMON SHARE, Continued
securities. 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 10,070,773 and
8,458,511 at April 30, 2003 and 2002, respectively.
3. STOCK-BASED COMPENSATION
During the third fiscal quarter of 2003, Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB Statement No. 123" became
effective for the Company.
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method. As the exercise price of
all options granted under these plans was equal to the fair market price of the
underlying common stock on the grant date, no stock-based employee compensation
cost is recognized in the condensed statements of operations.
In accordance with SFAS 148 and Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company's pro forma option expense is computed using the Black-Scholes option
pricing model. This model was developed for use in estimating the value of
traded options that have no vesting restrictions and are fully transferable. The
Company's employee stock options have characteristics significantly different
from those of traded options; therefore, in the opinion of management, the
Black-Scholes option pricing model required by SFAS 148 and SFAS 123, does not
necessarily provide a reliable measure of the fair value of the Company's
options.
To comply with SFAS 148, the Company is presenting the following table to
illustrate the effect on the net loss and loss per share if it had applied the
fair value recognition provisions of SFAS 123, as amended, to options granted
under the stock-based employee compensation plans. For purposes of this pro
forma disclosure, the estimated value of the options is amortized ratably to
expense over the options' vesting periods.
Three Months Ended Nine Months Ended
April 30, April 30,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net loss applicable to common shares
As reported $567,755 $792,769 $1,635,077 $1,867,995
Pro forma 606,153 838,318 1,779,837 2,037,703
Net loss per common share
As reported $ 0.02 $ 0.04 $ 0.07 $ 0.09
Pro forma 0.03 0.04 0.08 0.10
- 7 -
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
Unaudited
4. RELATED PARTY INSTRUMENTS
The Company's CEO, Kuslima Shogen, has made loans to the Company repayable
upon demand bearing interest at 8% per annum. As of April 30, 2003, the Company
owes Ms. Shogen $106,114 classified as a current liability included in Loan
payable, related party. Amounts due from Ms. Shogen totaling $72,843 are
classified as a long term asset in Loan receivable, related party as the Company
does not expect repayment of these amounts within one year. The Company earns
interest at a rate of 8% per annum.
5. ACCOUNTING FOR WARRANTS ISSUED WITH CONVERTIBLE DEBT
The Company accounts for the intrinsic value of beneficial conversion
rights arising from the issuance of convertible debt instruments with
nondetachable conversion rights that are in-the money at the commitment date
pursuant to the consensuses for EITF Issue No. 98-5 and EITF Issue No. 00-27.
Such value is allocated to additional paid-in capital and the resulting debt
discount is charged to interest expense using the effective yield method over
the period to the debt instrument's earliest conversion date. Such value is
determined after first allocating an appropriate portion of the proceeds
received to warrants or any other detachable instruments included in the
exchange. The Company is amortizing the interest expense over the terms of the
notes payable.
6. LONG TERM DEBT, NOTES PAYABLE
From August 2002 through April 30, 2003, the Company issued 8% convertible
notes payable to unrelated parties with principal balances totaling an aggregate
of $750,000. These notes payable are scheduled to mature on various dates from
April 2004 through May 2005. Additionally, with the issuance of the notes
payable, the Company issued to the unrelated parties warrants to purchase an
aggregate of 615,000 shares of the Company's common stock, expiring five years
from the date of issuance at an exercise price of $0.60 per share. In addition,
the Company will issue on the due date of the notes payable warrants to purchase
an aggregate of 815,000 shares of the Company's common stock expiring five years
from the date of issuance at per share exercise prices of $1.00 and $1.10. The
Company valued these warrants in an aggregate of $196,686 based on the fair
value determined by using the Black-Scholes method. At the issuance dates of the
notes payable, the fair market values of the Company's shares exceeded the
effective conversion prices. Accordingly, the Company initially increased
additional paid-in capital by $196,686 for the fair value of the warrants and
reduced the carrying value of the notes payable for the same amount for the debt
discount attributable to the fair value of the warrants. The Company is
amortizing the debt discount over the terms of the notes payable.
Pursuant to the applicable guidance in the consensus for EITF Issue No.
00-27, the Company valued the beneficial conversion feature using the effective
conversion price. Accordingly, the Company first allocated $196,686 to the
detachable warrants and decreased the carrying value of the notes payable. Based
on the effective conversion prices, the Company recorded a beneficial conversion
charge of $249,897 which was allocated to additional paid-in capital and the
resulting debt discount is charged to interest expense amortized over the terms
of the notes payable.
- 8 -
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
Unaudited
7. CAPITAL STOCK
In September 2002, the Company issued 40,000 shares of common stock upon
the exercise of warrants by an unrelated party, which resulted in gross proceeds
of $20,000 to the Company.
In October 2002, the Company issued 37,037 shares of common stock in
settlement of accounts payable in the amount of $10,000. The settled accounts
payable amount was credited to equity as the value of the common stock.
In October 2002, the Company sold 35,000 shares of common stock to a
private investor resulting in proceeds of $7,000 to the Company. In addition,
the private investor was granted five-year warrants to purchase 35,000 shares of
common stock at an exercise price of $1.00 per share.
In October 2002, the Company issued five-year stock options to purchase
25,000 shares of common stock to an unrelated party as an incentive for lending
the Company an aggregate of $25,000, which was fully paid as of April 30, 2003.
The stock options vested immediately and have an exercise price of $0.23 per
share. The total non-cash interest expense recorded for these stock options was
$2,503, based upon the fair value of such options on the date of issuance, as
estimated by the Black-Scholes options-pricing model.
During the quarter ended April 30, 2003, the Company sold 550,000 shares
of common stock to various private investors resulting in proceeds of $275,000
to the Company. In addition, the various private investors were granted
five-year warrants to purchase 550,000 shares of common stock at an exercise
price of $1.25 per share.
During the nine months ended April 30, 2003, the Company incurred an
aggregate $40,212 of expenses relating to the registration of shares issued in
various private placements.
8. SALE OF NET OPERATING LOSSES
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits, or tax benefits. For the state fiscal year 2003 (July 1,
2002 to June 30, 2003), the Company has approximately $1,372,000 total available
tax benefits of which approximately $273,000 was allocated to be sold between
July 1, 2002 and June 30, 2003. In December 2002, the Company received
approximately $229,000 from the sale of its allocated tax benefits which was
recognized as a tax benefit for the nine months ended April 30, 2003. In
December 2001, the Company received approximately $354,000 from the sale of its
allocated tax benefits which was recognized as a tax benefit for the fiscal year
ended July 31, 2002. The Company will attempt to sell the remaining balance of
its tax benefits in the amount of approximately $1,099,000 between July 1, 2003
and June 30, 2004, subject to all existing laws of the State of New Jersey.
- 9 -
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
Unaudited
8. SALE OF NET OPERATING LOSSES, Continued
However, there is no assurance that the Company will be able to find a buyer for
its tax benefits or that such funds will be available in a timely manner.
9. ACCRUED EXPENSES
Included in accrued expenses as of April 30, 2003 is $789,200 of unpaid
payroll and payroll taxes. The Company is currently negotiating a payment plan
with the taxing authorities for the payment of payroll taxes with interest and
penalties, to be determined. The Company believes that any interest and
penalties assessed will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
10. SUBSEQUENT EVENTS
In May 2003, the Company issued an 8% convertible note payable to an
unrelated party with a principal balance of $100,000. This note payable is
scheduled to mature in November 2004. In addition, the Company will issue on the
due date of the note payable warrants to purchase of 200,000 shares of the
Company's common stock expiring five years from the date of issuance at a per
share exercise price of $1.10. The Company will value these warrants based on
the fair value determined by using the Black-Scholes method.
In May 2003, the Company issued 200,000 shares of common stock upon the
exercise of warrants by an unrelated party, which resulted in gross proceeds of
$100,000 to the Company.
In May and June 2003, the Company issued an aggregate of 120,000 shares of
common stock to private investors resulting in proceeds of $60,000 to the
Company. In addition, the private investors were granted five-year warrants to
purchase 120,000 shares of common stock at an exercise price of $1.25 per share.
- 10 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information contained herein contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
All statements, other than statements of historical fact, regarding our
financial position, potential, business strategy, plans and objectives for
future operations are "forward-looking statements." These statements are
commonly identified by the use of forward-looking terms and phrases as
"anticipates," "believes," "estimates," "expects," "intends," "may," "seeks,"
"should," or "will' or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. We cannot be sure that
the future results covered by these forward-looking statements will be achieved.
The matters set forth in Exhibit 99.1 hereto constitute cautionary statements
identifying important factors with respect to these forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
vary significantly from the future results indicated in these forward-looking
statements. Other factors could also cause actual results to differ
significantly from the future results indicated in these forward-looking
statements.
Results of Operations
Three and nine month periods ended April 30, 2003 and 2002
Revenues. We are a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 7.
We are devoting substantially all of our present efforts to establishing a new
business and developing new drug products. Our planned principal operations of
marketing and/or licensing of new drugs have not commenced and, accordingly, we
have not derived any significant revenue from these operations. We focus most of
our productive and financial resources on the development of ONCONASE(R) and as
such we have not had any sales in the three and nine month periods ended April
30, 2003 and 2002. For the nine months ended April 30, 2003, our other income
was $30,000.
Research and Development. Research and development expense for the three
months ended April 30, 2003 was $374,000 compared to $532,000 for the same
period last year, a decrease of $158,000, or 30%. This decrease was primarily
due to a decrease in personnel costs, a decrease in regulatory consulting costs
and a reduction of a non-cash expense related to stock options issued for
consulting services. These decreases were partially offset by an increase in
costs related to our Phase III clinical trial for malignant mesothelioma.
Research and development expense for the nine months ended April 30, 2003
was $1,174,000 compared to $1,540,000 for the same period last year, a decrease
of $366,000, or 24%. This decrease was primarily due to a decrease in personnel
costs, decrease in regulatory consulting costs and reduction of a non-cash
expense related to stock options issued for consulting services partially offset
by an increase in costs related to our Phase III clinical trial for malignant
mesothelioma.
General and Administrative. General and administrative expense for the
three months ended April 30, 2003 was $138,000 compared to $193,000 for the same
period last year, a decrease of $55,000, or 28%. This decrease was primarily due
to decreases in public relations and legal expenses and a reduction of a
non-cash expense related to stock options issued for consulting services.
- 11 -
General and administrative expense for the nine months ended April 30,
2003 was $426,000 compared to $577,000 for the same period last year, a decrease
of $151,000, or 26%. This decrease was primarily due to decreases in public
relations and legal expenses and a reduction of a non-cash expense related to
stock options issued for consulting services.
Interest. Interest expense for the three months ended April 30, 2003 was
$55,000 compared to $68,000 for the same period last year, a decrease of
$13,000. Interest expense for the nine months ended April 30, 2003 was $295,000
compared to $105,000 for the same period last year, an increase of $190,000. The
net increase was primarily due to the interest expense on the beneficial
conversion feature of the notes payable issued to unrelated parties, the related
warrants and the increase in total borrowing levels. The interest expense was
based on the fair value of the warrants using the Black-Scholes method,
amortized over the terms of the notes payable.
Income Taxes. New Jersey has enacted legislation permitting certain
corporations located in New Jersey to sell state tax loss carryforwards and
state research and development credits or tax benefits. For the state fiscal
year 2003 (July 1, 2002 to June 30, 2003), we have approximately $1,372,000
total available tax benefits of which approximately $273,000 was allocated to be
sold between July 1, 2002 and June 30, 2003. In December 2002, we received
approximately $229,000 from the sale of the allocated tax benefits which was
recognized as a tax benefit for the nine months ended April 30, 2003. In
December 2001, we received approximately $354,000 from the sale of the allocated
tax benefits which was recognized as a tax benefit for the fiscal year ended
July 31, 2002. We will attempt to sell the remaining balance of our tax benefits
in the amount of approximately $1,099,000 between July 1, 2003 and June 30,
2004, subject to all existing laws of the State of New Jersey. However, we
cannot assure you that we will be able to find a buyer for our tax benefits or
that such funds will be available in a timely manner.
Net Loss. We have incurred net losses during each year since our
inception. The net loss for the three months ended April 30, 2003 was $568,000
as compared to $793,000 for the same period last year, a decrease of $225,000.
The net loss for the nine months ended April 30, 2003 was $1,635,000 as compared
to $1,868,000 for the same period last year, a decrease of $233,000. The
cumulative loss from the date of inception, August 24, 1981, to April 30, 2003,
amounted to $63,198,000. Such losses are attributable to the fact that we are
still in the development stage and accordingly have not derived sufficient
revenues from operations to offset the development stage expenses.
Liquidity and Capital Resources
We have financed our operations since inception primarily through equity
and debt financing, research product sales and interest income. During the nine
months ended April 30, 2003, we had a net decrease in cash and cash equivalents
of $41,000, which resulted primarily from net cash used in operating activities
of $1,013,000, offset by net cash provided by financing activities of $972,000,
primarily from the proceeds from long-term borrowings and from the issuance of
common stock and warrants. Total cash resources as of April 30, 2003 were
$45,000 compared to $86,000 at July 31, 2002.
Our current liabilities as of April 30, 2003 were $2,412,000 compared to
$1,798,000 at July 31, 2002, an increase of $614,000. The increase was primarily
due to an increase in the current portion of long-term notes payable and
increased accrued expenses partially offset by a decrease in accounts payable.
As of April 30, 2003 our current liabilities exceeded our current assets and we
had a working capital deficit of $2,360,000.
- 12 -
Our continued operations will depend on our ability to raise additional
funds through various potential sources such as equity and debt financing,
collaborative agreements, strategic alliances, sale of tax benefits, revenues
from the commercial sale of ONCONASE(R), licensing of our proprietary RNase
technology and our ability to realize the full potential of our technology and
our drug candidates via out-licensing agreements with other companies. Such
additional funds may not become available as we need them or be available on
acceptable terms. To date, a significant portion of our financing has been
through private placements of common stock and warrants, the issuance of common
stock for stock options and warrants exercised and for services rendered, debt
financing and financing provided by our Chief Executive Officer. Additionally,
we have raised capital through the sale of our tax benefits. Until and unless
our operations generate significant revenues, we will attempt to continue to
fund operations from the sources of capital previously described. However, there
can be no assurance that we will be able to raise the capital needed. After
taking into account the net proceeds we received from the sale of our tax
benefits in December 2002, we believe that our cash and cash equivalents as of
April 30, 2003 will be sufficient to meet our anticipated cash needs through
April 30, 2004. We are continuing our fund raising efforts and anticipate
securing required financing by the end of our fiscal year 2003. The report of
our former independent auditors on our July 31, 2002 financial statements
included an explanatory paragraph which states that our recurring losses,
working capital deficit and limited liquid resources raise substantial doubt
about our ability to continue as a going concern. As of April 30, 2003, we
continued to incur losses, had a working capital deficiency and limited liquid
resources which raise substantial doubt about the Company's ability to continue
as a going concern. Our financial statements at April 30, 2003 and July 31, 2002
do not include any adjustments that might result from the outcome of this
uncertainty.
We will continue to incur costs in conjunction with our U.S. and foreign
registrations for marketing approval of ONCONASE(R). We are currently in
discussions with several potential strategic alliance partners, including major
international biopharmaceutical companies, to further the development and
marketing of ONCONASE(R) and other related products in our pipeline. However, we
cannot be sure that any such alliances will materialize.
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits or tax benefits. For the state fiscal year 2003 (July 1,
2002 to June 30, 2003), we have approximately $1,372,000 total available tax
benefits of which approximately $273,000 was allocated to be sold between July
1, 2002 and June 30, 2003. In December 2002, we received approximately $229,000
from the sale of the allocated tax benefits which was recognized as a tax
benefit for the nine months ended April 30, 2003. In December 2001, we received
approximately $354,000 from the sale of the allocated tax benefits which was
recognized as a tax benefit for the fiscal year ended July 31, 2002. We will
attempt to sell the remaining balance of our tax benefits in the amount of
approximately $1,099,000 between July 1, 2003 and June 30, 2004, subject to all
existing laws of the State of New Jersey. However, we cannot assure you that we
will be able to find a buyer for our tax benefits or that such funds will be
available in a timely manner.
Our common stock was delisted from The Nasdaq SmallCap Market effective at
the close of business April 27, 1999 for failing to meet the minimum bid price
requirements set forth in the NASD Marketplace Rules. As of April 28, 1999, our
common stock trades on the OTC Bulletin Board under the symbol "ACEL.OB".
Delisting of our common stock from Nasdaq could have a material adverse effect
on our ability to raise additional capital, our stockholders' liquidity and the
price of our common stock.
The market price of our common stock is volatile, and the price of the
stock could be dramatically affected one way or another depending on numerous
factors. The market price of our
- 13 -
common stock could also be materially affected by the marketing approval or lack
of approval of ONCONASE(R).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls And Procedures.
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and acting Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of June 13, 2003, the evaluation date. Based upon the
evaluation, the Chief Executive Officer and acting Chief Financial Officer
concluded that, as of the evaluation date, our disclosure controls and
procedures are effective in timely alerting her to the material information
relating to us required to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
In March 2003, we issued a $100,000 8% note payable to an unrelated
party, which will become due in September 2004. In consideration for the loan,
we issued warrants to purchase 100,000 shares of common stock expiring five
years from the date of issuance at an exercise price of $0.60 per share. In
addition, we will issue on the due date of the note warrants to purchase 100,000
shares of common stock at an exercise price of $1.00 per share, expiring five
years from the date of issuance. Additionally, the unrelated party can convert
the note into shares of our common stock at a conversion rate of $0.35 per
share. This transaction was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
In April 2003, we completed several private placements resulting in the
issuance of an aggregate of 440,000 shares of restricted common stock and
five-year warrants to purchase 440,000 shares of common stock at an exercise
price of $1.25 per share. We received an aggregate of $220,000 from such private
placements. These transactions were exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended.
The net proceeds from the above mentioned transactions will be used for
general corporate purposes.
- 14 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
--- ---------- ---------
3.1 Certificate of Incorporation *
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 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 The Company's 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 ****
10.9 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 as of October 9,
1997 ++
10.17 Form of Subscription Agreement and Warrant Agreement used in Private
Placement completed on February 20, 1998 +++
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Exhibit Incorporation by
No. Item Title Reference
--- ---------- ---------
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 +++
10.20 Separation Agreement with Gail Fraser dated August 31, 1999 ####
10.21 Form of Subscription Agreement and Warrant Agreement used in the
February 2000 Private Placement ++++
10.22 Form of Subscription Agreement and Warrant Agreement used in the
August and September 2000 Private Placement +++++
10.23 Form of Subscription Agreement and Warrant Agreement used in the
April 2001 Private Placements ^
10.24 Form of Convertible Note entered into in April 2001 ^
10.25 Form of Subscription Agreement and Warrant Agreement used in the
July 2001 Private Placements ^
10.26 Form of Subscription Agreement and Warrant Agreement used in the
August and October 2001 Private Placements ^
10.27 Form of Subscription Agreement and Warrant Agreement used in the
September 2001, November 2001 and January 2002 Private Placements ^
10.28 Warrant issued in the February 2002 Private Placement ^
10.29 Form of Subscription Agreement and Warrant Agreement used in the
March 2002 and April 2002 Private Placements ^^
10.30 Form of Subscription Agreement and Warrant Agreement used in the
June 2002 and October 2002 Private Placements ^
10.31 Form of Note Payable and Warrant Certificate entered into April,
June, July, September, November and December 2002 ^
99.1 Factors to Consider in Connection with Forward-Looking Statements #####
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 #####
99.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 #####
* Previously filed as exhibit to the Company's Registration
Statement on Form S-18 (File No. 2-79975-NY) and incorporated
herein by reference thereto.
** Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the year ended July 31, 1993 and incorporated herein
by reference thereto.
*** Previously filed as exhibits to the Company's Quarterly Report on
Form 10-QSB for the quarter ended January 31, 1994 and
incorporated herein by reference thereto.
**** Previously filed as exhibits to the Company's Quarterly Report on
Form 10-QSB for the quarter ended April 30, 1994 and incorporated
herein by reference thereto.
***** Previously filed as exhibits to the Company's Registration
Statement Form SB-2 (File No. 33-76950) and incorporated herein by
reference thereto.
- 16 -
+ 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-K for the year ended July 31, 2000 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, 2000 and incorporated
herein by reference thereto.
^ Previously filed as exhibits to the Company's Registration
Statement on Form S-1 (File No. 333-38136) and incorporated herein
by reference thereto.
^^ Previously filed as exhibits to the Company's Registration
Statement on Form S-1 (File No. 333-89166) 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.
#### Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the year ended July 31, 1999 and incorporated herein
by reference thereto.
##### Filed herewith.
(b) Reports on Form 8-K.
None
- 17 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALFACELL CORPORATION
(Registrant)
June 16, 2003 /s/ KUSLIMA SHOGEN
--------------------------------------
Kuslima Shogen, Chief Executive
Officer, Acting Chief Financial
Officer (Principal Executive Officer,
Principal Accounting Officer) and
Chairman of the Board
- 18 -
CERTIFICATIONS
I, Kuslima Shogen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alfacell Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 16, 2003
/s/ Kuslima Shogen
----------------------------------
Name: Kuslima Shogen
Title: Chief Executive Officer and
Chairman of the Board
- 19 -
CERTIFICATIONS
I, Kuslima Shogen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alfacell Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 16, 2003
/s/ Kuslima Shogen
-------------------------------------
Name: Kuslima Shogen
Title: Acting Chief Financial Officer
- 20 -