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
January 31, 2005 0-11088
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For the quarterly period ended Commission file number
ALFACELL CORPORATION
--------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2369085
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
organization)
225 Belleville Avenue, Bloomfield, New Jersey 07003
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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 has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES X NO
--- ---
The number of shares of common stock, $.001 par value, outstanding as
of March 8, 2005 was 35,245,445 shares.
ALFACELL CORPORATION
(A Development Stage Company)
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
January 31, 2005 and July 31, 2004
January 31, July 31,
ASSETS 2005 2004
------ (UNAUDITED) (SEE NOTE 1)
Current assets:
Cash and cash equivalents $ 5,630,955 $ 10,147,694
Short-term investments at market which approximates cost 1,978,189 -
Other current assets 228,120 64,771
------------ ------------
Total current assets 7,837,264 10,212,465
Property and equipment, net
83,715 56,783
Loan receivable, related party 156,612 151,815
------------ ------------
Total assets $ 8,077,591 $ 10,421,063
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable, net of discount of $4,059 at January 31, 2005 and $34,120 at July
31, 2004 $ 195,941 $ 372,611
Accounts payable 659,748 541,600
Accrued expenses 894,228 625,205
------------ ------------
Total liabilities 1,749,917 1,539,416
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value;
Authorized and unissued, 1,000,000 shares at January 31, 2005 and July 31, 2004 - -
Common stock, $.001 par value;
Authorized 100,000,000 shares at January 31, 2005 and July 31, 2004;
Issued and outstanding, 35,245,445 shares at January 31, 2005 and
34,347,885 shares at July 31, 2004 35,245 34,348
Capital in excess of par value 78,373,105 77,891,815
Deficit accumulated during development stage (72,080,676) (69,044,516)
------------ ------------
Total stockholders' equity 6,327,674 8,881,647
------------ ------------
Total liabilities and stockholders' equity $ 8,077,591 $ 10,421,063
============ ============
See accompanying notes to condensed financial statements.
-2-
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
Three months and six months ended January 31,
2005 and 2004, and the Period from
August 24, 1981
(Date of Inception) to January 31, 2005
(Unaudited)
Three Months Ended Six Months Ended August 24, 1981
January 31, January 31, (Date of
------------ ----------- Inception) to
2005 2004 2005 2004 January 31, 2005
---- ---- ---- ---- ----------------
Revenue:
Sales $ - $ - $ - $ - $ 553,489
Investment income 33,704 4,530 62,882 8,230 1,491,995
Other income - - - - 90,103
------------ ------------ ------------ ------------ ------------
Total revenue 33,704 4,530 62,882 8,230 2,135,587
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales - - - - 336,495
Research and development 1,554,443 674,089 2,475,592 1,311,286 47,430,504
General and administrative 422,406 420,243 868,003 648,188 24,734,212
Interest:
Related parties, net - - - - 1,147,547
Others 12,165 109,786 43,422 228,401 2,869,665
------------ ------------ ------------ ------------ ------------
Total costs and expenses 1,989,014 1,204,118 3,387,017 2,187,875 76,518,423
------------ ------------ ------------ ------------ ------------
Loss before state tax benefit (1,955,310) (1,199,588) (3,324,135) (2,179,645) (74,382,836)
State tax benefit - - 287,975 221,847 2,302,160
------------ ------------ ------------ ------------ ------------
Net loss $ (1,955,310) $ (1,199,588) $ (3,036,160) $ (1,957,798) $(72,080,676)
============ ============ ============ ============ ============
Loss per basic and diluted common
share $ (0.06) $ (0.04) $ (0.09) $ (0.07)
============ ============ ============ ============
Weighted average number of shares
outstanding 35,211,954 28,439,372 34,936,198 27,675,584
============ ============ ============ ============
See accompanying notes to condensed financial statements.
-3-
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
Six months ended January 31, 2005 and 2004,
and the Period from August 24, 1981
(Date of Inception) to January 31, 2005
(Unaudited)
Six Months Ended August 24, 1981
January 31, (Date of Inception)
------------ to
2005 2004 January 31, 2005
---- ---- ----------------
Cash flows from operating activities:
Net loss $(3,036,160) $(1,957,798) $(72,080,676)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities - - (25,963)
Depreciation and amortization 14,220 3,414 1,570,987
Loss on disposal of property and equipment - - 18,926
Noncash operating expenses 13,500 147,893 6,700,224
Amortization of debt discount 30,061 174,039 590,160
Amortization of deferred compensation - - 11,442,000
Amortization of organization costs - - 4,590
Changes in operating assets and liabilities:
Increase in other current assets (163,349) (238,950) (287,987)
Increase in loan receivable-related party (4,797) (6,055) (60,561)
Increase in interest payable-related party - - 744,539
Increase (decrease) in accounts payable 118,148 (92,846) 1,166,383
Increase in accrued payroll and
expenses, related parties - - 2,348,145
Increase (decrease) in accrued expenses 293,544 (658,520) 1,573,134
----------- ----------- ------------
Net cash used in operating activities (2,734,833) (2,628,823) (46,296,099)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of marketable equity securities - - (290,420)
Purchase of short-term investments (1,978,189) - (1,978,189)
Proceeds from sale of marketable equity securities - - 316,383
Purchase of property and equipment (41,153) (2,251) (1,501,526)
Patent costs - - (97,841)
----------- ----------- ------------
Net cash used in investing activities (2,019,342) (2,251) (3,551,593)
----------- ----------- ------------
(continued)
-4-
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS, Continued
Six months ended January 31, 2005 and 2004
and the Period from August 24, 1981
(Date of Inception) to January 31, 2005
(Unaudited)
August 24, 1981
Six Months Ended (Date of
January 31, Inception) to
2005 2004 January 31, 2005
---- ---- ---------------
Cash flows from financing activities:
Proceeds from short-term borrowings $ - $ - $ 874,500
Payment of short-term borrowings - - (653,500)
Increase in loans payable - related party, net - - 2,628,868
Proceeds from bank debt and other long-term debt, net of
costs - - 3,667,460
Reduction of bank debt and long-term debt (6,730) (3,943) (2,966,567)
Proceeds from issuance of common stock, net - 1,527,925 40,750,316
Proceeds from exercise of stock options and warrants, net 244,166 2,626,452 10,463,577
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 237,436 4,150,434 55,478,647
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (4,516,739) 1,519,360 5,630,955
Cash and cash equivalents at beginning of period 10,147,694 330,137
------------ ------------
Cash and cash equivalents at end of period $ 5,630,955 $ 1,849,497 $ 5,630,955
============ ============ ============
Supplemental disclosure of cash flow information - interest
paid $ 305 $ - $ 1,714,018
============ ============ ============
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
============ ============ ============
Accounts payable settled in common stock $ - $ 42,729 $ 506,725
============ ============ ============
Conversion of notes payable, bank and accrued interest
to long-term debt $ - $ - $ 1,699,072
============ ============ ============
Conversion of loans and interest payable, related party and accrued
payroll and expenses, related parties to long-term
accrued payroll and other, related party $ - $ - $ 1,863,514
============ ============ ============
Issuance of common stock upon the conversion of convertible
subordinated debentures, other $ 224,520 $ - $ 1,344,385
============ ============ ============
------------
Issuance of common stock for services rendered $ - $ - $ 2,460
============ ============ ============
Issuance of warrants with notes payable $ - $ - $ 594,219
============ ============ ============
See accompanying notes to condensed financial statements.
-5-
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's financial position as of
January 31, 2005 and its results of operations and cash flows for the three and
six month periods ended January 31, 2005 and 2004 and the period from August 24,
1981 (date of inception) to January 31, 2005. The results of operations for the
three and six months ended January 31, 2005 are not necessarily indicative of
the results to be expected for the full year. The condensed balance sheet
presented herein has been derived from the audited financial statements included
in the Form 10-K for the fiscal year ended July 31, 2004, filed with the
Securities and Exchange Commission.
Certain footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted in accordance with the published
rules and regulations of the Securities and Exchange Commission. The condensed
financial statements in this report should be read in conjunction with the
financial statements and notes thereto included in the Form 10-K for the year
ended July 31, 2004.
The Company is a development stage company as defined in Statement of
Financial Accounting Standards No. 7. The Company is devoting substantially all
of its present efforts to developing new drug products. Its planned principal
operations have not commenced and, accordingly, no significant revenue has been
derived therefrom.
The Company has reported net losses of approximately $5,070,000,
$2,411,000, and $2,591,000 for the fiscal years ended July 31, 2004, 2003 and
2002, respectively. The loss from date of inception, August 24, 1981 to January
31, 2005 amounts to $72,081,000.
The Company's long-term continued operations will depend on its ability
to raise additional funds through various potential sources such as equity and
debt financing, collaborative agreements, strategic alliances, sale of net
operating loss carryforwards, 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. Through February 28, 2005, a
significant portion of the Company's financing has been through the sale of
equity securities and convertible debentures in registered offerings and private
placements and exercise of stock options and warrants. Additionally, the Company
has raised capital through debt financings, sale of net operating loss
carryforwards, research products, interest income and financing received from
its Chief Executive Officer. Until and unless the Company's operations generate
significant revenues, the Company expects to continue to fund its operations
from the sources of capital previously described. There can be no assurance that
the Company will be able to raise the capital needed on acceptable terms, if at
all. As of January 31, 2005, management believes that the Company's cash balance
is sufficient to fund its expanded operations at least through February 28, 2006
based on our expected level of expenditures in relation to activities in
preparing ONCONASE(R) for marketing registrations in the US and Europe and other
ongoing operations of the Company. However, the Company will continue to seek
additional financing through equity or debt financings and the sale of net
operating loss carryforwards but
6
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED
cannot be sure that it will be able to raise capital on favorable terms or at
all. The Company may also obtain additional capital through the exercise of
outstanding options and warrants, although it cannot provide any assurance of
such exercises or the amount of capital it will receive, if any.
The Company will continue to incur costs in conjunction with its U.S.
and foreign registrations for marketing approval of ONCONASE(R). The Company is
currently in discussions with potential strategic alliance partners to further
the development and marketing of ONCONASE(R) and other related products in its
pipeline. However, it cannot be sure that any such alliances will materialize.
2. EARNINGS (LOSS) PER COMMON SHARE
"Basic" earnings (loss) per common share equals net income (loss)
divided by weighted average common shares outstanding during the period.
"Diluted" earnings per common share equals net income divided by the sum of
weighted average common shares outstanding during the period, adjusted for the
effects of potentially dilutive securities. The Company's basic and diluted per
share amounts are the same since the Company is in a loss position and the
assumed exercise of stock options and warrants and conversion of convertible
notes would be anti-dilutive. The number of shares subject to outstanding
options and warrants that could dilute earnings per share in future periods was
15,208,029 and 9,543,637 at January 31, 2005 and 2004, respectively. These also
exclude the potential dilution that could occur upon the conversion of
convertible notes into 1,199,890 and 4,787,795 shares of common stock and
additional warrants to purchase 1,399,890 and 5,778,817 shares of common stock
at January 31, 2005 and 2004, respectively.
3. STOCK-BASED COMPENSATION
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 Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123" (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. 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.
7
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. STOCK-BASED COMPENSATION, CONTINUED
Three Months Ended Six Months Ended
January 31, January 31,
----------- -----------
2005 2004 2005 2004
---- ---- ---- ----
Net loss applicable to common shares
As reported $ (1,955,310) $ (1,199,588) $ (3,036,160) $ (1,957,798)
Less total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects
(604,671) (109,184) (1,223,942) (180,363)
------------- ------------- -------------- -------------
Pro forma $ (2,559,981) $ (1,308,772) $ (4,260,102) $ (2,138,161)
============= ============= ============= =============
Basic and diluted loss per common
share
As reported $ (0.06) $ (0.04) $ (0.09) $ (0.07)
Pro forma (0.07) (0.05) (0.12) (0.08)
The fair value was estimated using the Black-Scholes options pricing
model based on the following assumptions:
Six Months Ended
January 31,
2005 2004
---- ----
Expected dividend yield 0% 0%
Risk-free interest rate 4.25% 2% - 6%
Expected stock price volatility 100% 40.79% - 114.54%
Expected term until exercise (years) 8.67 5.82
As a result of amendments to SFAS 123, the Company will be required to
expense the fair value of employee stock options beginning with its fiscal
quarter ending September 30, 2005.
4. LOAN RECEIVABLE, RELATED PARTY
Amounts due from the Company's CEO totaling $156,612 and $151,815 at
January 31, 2005 and July 31, 2004, respectively, are classified as a long-term
asset as the loans have no specified due dates, and the Company does not expect
repayment of these amounts within one year. As of January 31, 2005, the Company
earned interest at 8% per annum (approximately $4,800 for the six months then
ended) on the unpaid principal balance.
8
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
5. CAPITAL STOCK
During the quarter ended October 31, 2004, the Company issued 320,157
shares of restricted common stock and five-year warrants to purchase 420,157
shares of common stock with an exercise price of $1.00 per share upon the
conversion of notes payable and accrued interest in the amount of $112,055 by an
unrelated party.
During the quarter ended October 31, 2004, the Company also issued an
aggregate of 326,472 shares of common stock upon the exercise of warrants and
stock options by unrelated parties, employees and a director at per share
exercise prices ranging from $0.29 to $1.50. The Company realized aggregate net
proceeds of $209,545 from these exercises.
During the quarter ended January 31, 2005, the Company issued 224,931
shares of restricted common stock and five-year warrants to purchase 224,931
shares of common stock with an exercise price of $1.00 per share upon the
conversion of notes payable and accrued interest in the amount of $112,465 by an
unrelated party.
During the quarter ended January 31, 2005, the Company also issued an
aggregate of 23,000 shares of common stock upon the exercise of warrants and
stock options by an unrelated party and an employee at per share exercise prices
ranging from $0.26 to $1.25. The Company realized aggregate net proceeds of
$34,621 from these exercises.
During the quarter ended January 31, 2005, the Company also issued
3,000 shares of restricted common stock as payment for services rendered. A
non-cash expense of $13,500 was recorded by the Company for these shares, based
upon the fair value of the common stock at the date of issuance.
6. SALE OF NET OPERATING LOSS CARRYFORWARDS
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 net operating loss carryforwards, in order to obtain
tax benefits. For the state fiscal year 2005 (July 1, 2004 to June 30, 2005),
the Company had approximately $1,335,000 of total available net operating loss
carryforwards that were saleable; of which New Jersey permitted the Company to
sell approximately $339,000. In December 2004, the Company received
approximately $288,000 from the sale of the $339,000 of net operating loss
carryforwards, which was recognized as a tax benefit for the six months ended
January 31, 2005.
For the state fiscal year 2004 (July 1, 2003 to June 30, 2004), the
Company had approximately $1,378,000 of total available net operating loss
carryforwards that were saleable; of which New Jersey permitted the Company to
sell approximately $261,000. In December 2003, the Company received
approximately $222,000 from the sale of the $261,000 of net operating loss
carryforwards, which was recognized as a tax benefit for the six months ended
January 31, 2004.
9
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
6. SALE OF NET OPERATING LOSS CARRYFORWARDS, CONTINUED
If still available under New Jersey law, the Company will attempt to
sell the remaining $996,000 of its net operating loss carryforwards between July
1, 2005 and June 30, 2006. This amount, which is a carryover of the Company's
remaining net operating loss carryforwards from state fiscal year 2005, may
increase if the Company incurs additional net losses and research and
development credits during state fiscal year 2006. The Company cannot estimate,
however, what percentage of its saleable net operating loss carryforwards New
Jersey will permit it to sell, how much money will be received in connection
with the sale, if the Company will be able to find a buyer for its net operating
loss carryforwards or if such funds will be available in a timely manner.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information herein contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. All statements,
other than statements of historical fact, regarding our financial position,
potential, business strategy, plans and objectives for future operations are
"forward-looking statements." These statements are commonly identified by the
use of forward-looking terms and phrases such as "anticipates," "believes,"
"estimates," "expects," "intends," "may," "seeks," "should," or "will' or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. We cannot assure you that the future results covered by
these forward-looking statements will be achieved. The matters set forth herein
under the caption "Risk Factors" constitute cautionary statements identifying
important factors with respect to these forward-looking statements, including
certain risks and uncertainties, that could cause actual results to vary
significantly from the future results indicated in these forward-looking
statements. Other factors could also cause actual results to differ
significantly from the future results indicated in these forward-looking
statements.
OVERVIEW
Since our inception, we have devoted the vast majority of our resources
to the research and development of ONCONASE(R) and related drug candidates. We
have focused our resources towards the completion of the clinical program for
unresectable, or inoperable, malignant mesothelioma.
Since ONCONASE(R) has Fast Track Designation for the treatment of
malignant mesothelioma, we continue to have meetings and discussions with the
FDA to establish mutually agreed upon parameters for the New Drug Application,
or NDA to obtain marketing approval for ONCONASE(R), assuming the Phase III
clinical trial for the treatment of malignant mesothelioma yields favorable
results.
We received an Orphan Medicinal Product Designation for ONCONASE(R)
from the European Agency for the Evaluation of Medicinal Products, or the EMEA.
We continue to fulfill the EMEA requirements regarding the Marketing
Authorization Application, or MAA, registration requirements for ONCONASE(R) for
the treatment of malignant mesothelioma.
Almost all of our research and development expenses since our inception
of $47,431,000 have gone toward the development of ONCONASE(R) and related drug
candidates. For the six months ended January 31, 2005 and fiscal years 2004,
2003 and 2002, our research and development expenses were $2,476,000,
$3,353,000, $1,700,000 and $2,033,000, respectively. ONCONASE(R) is currently in
an international, centrally randomized Phase III trial. The first part of the
trial has been completed and the second confirmatory part of the trial is
ongoing. The primary endpoint of the trial is survival, and as such, a
sufficient number of deaths must occur in order to perform the required
statistical analyses to determine the efficacy of ONCONASE(R) in patients with
unresectable malignant mesothelioma. If the results of the clinical trials are
positive, we expect to file for marketing registrations (NDA and MAA) for
ONCONASE(R) within six months of completion of the statistical analyses.
However, at this time, we cannot predict with certainty when a sufficient number
of deaths will occur to achieve statistical significance. Hence, the timing of
the filing is data driven as to when we will be able to file for marketing
registrations in the US and EU. Therefore, we cannot predict with certainty what
our total cost will be associated with obtaining marketing approvals, or when
and if such approvals will be granted, and when actual sales will occur.
We fund the research and development of our products from cash receipts
resulting primarily from the sale of our equity securities and convertible
debentures in registered offerings and private placements. Additionally, we have
raised capital through debt financings, the sale of our net operating
11
loss carryforwards, research products, interest income and financing received
from our Chief Executive Officer. Presently, we believe that our cash balance is
sufficient to fund our expanded operations at least through February 28, 2006
based on our expected level of expenditures in relation to activities in
preparing ONCONASE(R) for marketing registrations and other ongoing operations
of the Company. However, we will continue to seek additional financing through
equity or debt financings and the sale of our net operating loss carryforwards
but cannot be sure that we will be able to raise capital on favorable terms or
at all. We may also obtain additional capital through the exercise of
outstanding options and warrants, although we cannot provide any assurance of
such exercises or the amount of capital we will receive, if any.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JANUARY 31, 2005 AND 2004
REVENUES. We are a development stage company as defined in the
Statement of Financial Accounting Standards No. 7. We are devoting substantially
all of our present efforts to establishing 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 six month periods ended January 31, 2005 and 2004. Our investment income for
the three months ended January 31, 2005 was $34,000 compared to $5,000 for the
same period last year, an increase of $29,000. Investment income for the six
months ended January 31, 2005 was $63,000 compared to $8,000 for the same period
last year, an increase of $55,000. These increases were due to higher balances
of cash and cash equivalents and higher interest rates.
RESEARCH AND DEVELOPMENT. Research and development expense for the
three months ended January 31, 2005 was $1,554,000 compared to $674,000 for the
same period last year, an increase of $880,000, or 131%. Research and
development expense for the six months ended January 31, 2005 was $2,476,000
compared to $1,311,000 for the same period last year, an increase of $1,165,000,
or 89%. These increases were primarily due to increases in data management and
clinical trial consulting fees related to our pivotal Phase III clinical trial
for malignant mesothelioma of approximately $544,000, sponsored research and
development expenses of $240,000, expansion of our Phase III clinical trial for
malignant mesothelioma primarily in Europe of approximately $199,000, patent
expenses of approximately $146,000, and sponsored conferences related to
mesothelioma of approximately $36,000.
GENERAL AND ADMINISTRATIVE. General and administrative expense for the
three months ended January 31, 2005 was $422,000 compared to $420,000 for the
same period last year, an increase of $2,000. General and administrative expense
for the six months ended January 31, 2005 was $868,000 compared to $648,000 for
the same period last year, an increase of $220,000, or 34%. These increases were
primarily due to increases in personnel expenses of approximately $247,000,
Nasdaq re-listing and membership fees of approximately $72,000, professional
fees related to board of directors fees and Sarbanes Oxley compliance fees of
approximately $46,000, public relations and insurance expenses of approximately
$10,000 and $9,000, respectively, offset by a decrease in non-cash expense
related to stock and stock options issued for consulting services of
approximately $143,000 and decreases in legal expenses of approximately $21,000.
12
INTEREST. Interest expense for the three months ended January 31, 2005
was $12,000 compared to $110,000 for the same period last year, a decrease of
$98,000, or 89%. Interest expense for the six months ended January 31, 2005 was
$43,000 compared to $228,000 for the same period last year, a decrease of
$185,000, or 81%. These decreases were primarily due to the maturity and
conversion of convertible 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 net operating loss carryforwards, in
order to obtain tax benefits. For the state fiscal year 2005 (July 1, 2004 to
June 30, 2005), we had approximately $1,335,000 of total available net operating
loss carryforwards that were saleable; of which New Jersey permitted us to sell
approximately $339,000. In December 2004, we received approximately $288,000
from the sale of the $339,000 of net operating loss carryforwards, which was
recognized as a tax benefit for the six months ended January 31, 2005.
For the state fiscal year 2004 (July 1, 2003 to June 30, 2004), we had
approximately $1,378,000 of total available net operating loss carryforwards
that were saleable; of which New Jersey permitted us to sell approximately
$261,000. In December 2003, we received approximately $222,000 from the sale of
the $261,000 of net operating loss carryforwards, which we recognized as a tax
benefit for the six months ended January 31, 2004.
If still available under New Jersey law, we will attempt to sell the
remaining $996,000 of our net operating loss carryforwards between July 1, 2005
and June 30, 2006. This amount, which is a carryover of our remaining net
operating loss carryforwards from state fiscal year 2005, may increase if we
incur additional net losses and research and development credits during state
fiscal year 2006. We cannot estimate, however, what percentage of our saleable
net operating loss carryforwards New Jersey will permit us to sell, how much
money we will receive in connection with the sale, if we will be able to find a
buyer for our net operating loss carryforwards or if such funds will be
available in a timely manner.
NET LOSS. We have incurred net losses during each year since our
inception. The net loss for the three months ended January 31, 2005 was
$1,955,000 as compared to $1,200,000 for the same period last year, an increase
of $755,000. The net loss for the six months ended January 31, 2005 was
$3,036,000 as compared to $1,958,000 for the same period last year, an increase
of $1,078,000. The cumulative loss from the date of inception, August 24, 1981
to January 31, 2005, amounted to $72,081,000. Such losses are attributable to
the fact that we are still in the development stage and, accordingly, we have
not derived sufficient revenues from operations to offset the development stage
expenses.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception through the sale of our
equity securities and convertible debentures in registered offerings and private
placements. Additionally, we have raised capital through debt financings, the
sale of our net operating loss carryforwards, research products, interest income
and financing received from our Chief Executive Officer. During the six months
ended January 31, 2005, we had a net decrease in cash and cash equivalents of
$4,517,000, which resulted primarily from net cash used in operating activities
of $2,735,000 and net cash used in investing activities due to the purchase of
short-term investments of $1,978,000 and purchase of property and equipment of
$41,000, offset by net cash provided by financing activities of $237,000 from
warrant and stock option exercises for $244,000 net of a $7,000 reduction of
debt. Total cash resources as of January 31, 2005 were $5,631,000 compared to
$10,148,000 at July 31, 2004.
13
Our current liabilities as of January 31, 2005 were $1,750,000 compared
to $1,539,000 at July 31, 2004, an increase of $211,000. The increase was
primarily due to increases in accrued expenses of approximately $269,000 and
accounts payable of approximately $118,000, offset by maturity and conversion of
convertible notes payable of approximately $176,000.
Our long-term continued operations will depend on our ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of net operating
loss carryforwards, revenues from the commercial sale of ONCONASE(R), licensing
of our proprietary RNase technology and our ability to realize revenues from our
technology and our drug candidates via out-licensing agreements with other
companies. Such additional funds may not become available as we need them or be
available on acceptable terms. To date, a significant portion of our financing
has been through the sale of our equity securities and convertible debentures in
registered offerings and private placements and exercise of stock options and
warrants. Additionally, we have raised capital through debt financings, the sale
of our net operating loss carryforwards, research products, interest income and
financing received from our Chief Executive Officer. Until and unless our
operations generate significant revenues, we expect to continue to fund
operations from the sources of capital previously described. There can be no
assurance that we will be able to raise the capital we need on acceptable terms,
if at all. Presently, we believe that our cash balance is sufficient to fund our
expanded operations at least through February 28, 2006 based on our expected
level of expenditures in relation to activities in preparing ONCONASE(R) for
marketing registrations and other ongoing operations of the Company. However, we
will continue to seek additional financing through equity or debt financings and
the sale of our net operating loss carryforwards but cannot be sure that we will
be able to raise capital on favorable terms or at all. We may also obtain
additional capital through the exercise of outstanding options and warrants,
although we cannot provide any assurance of such exercises or the amount of
capital we will receive, if any.
We will continue to incur costs in conjunction with our U.S. and
foreign registrations for marketing approval of ONCONASE(R). We are currently in
discussions with potential strategic alliance partners to further the
development and marketing of ONCONASE(R) and other related products in our
pipeline. However, we cannot be sure that any such alliances will materialize.
The market price of our common stock is volatile, and the price of the
stock could be dramatically affected one way or another depending on numerous
factors. The market price of our common stock could also be materially affected
by the marketing approval or lack of approval of ONCONASE(R).
OFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
variable interest entities or VIE, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of January 31, 2005, we are not involved in any
material unconsolidated VIE transactions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those that involve subjective or
complex judgments, often as a result of the need to make estimates. The
following areas all require the use of judgments and estimates: research and
development expenses, accounting for stock-based compensation, accounting for
warrants issued with convertible debt and deferred income taxes. Estimates in
each of these areas are based on
14
historical experience and various assumptions that we believe are appropriate.
Actual results may differ from these estimates. Our accounting practices are
discussed in more detail in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 1 of "Notes to Consolidated
Financial Statements" in our Annual Report on Form 10-K for the year ended July
31, 2004.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our outstanding contractual obligations relate to our equipment
operating lease. The following table presents our contractual obligations and
commercial commitments as of January 31, 2005:
PAYMENTS DUE BY
FISCAL
YEAR
-------------------
2006 AND
TOTAL 2005 THEREAFTER
------- ------- --------
Operating lease $ 8,760 $ 8,760 $ - 0 -
------- ------- --------
Total contractual cash obligations $ 8,760 $ 8,760 $ - 0 -
======= ======= ========
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FORM 10-Q AND OUR OTHER SEC
FILINGS BEFORE DECIDING WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS AND OPERATING RESULTS COULD
BE HARMED. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE,
AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND ANTICIPATE THAT WE WILL INCUR
CONTINUED LOSSES FOR THE FORESEEABLE FUTURE. WE DO NOT HAVE A CURRENT SOURCE OF
PRODUCT REVENUE AND MAY NEVER BE PROFITABLE.
We are a development stage company and since inception our source of
working capital has been public and private sales of our stock. We incurred a
net loss of approximately $3,036,000 for the six months ended January 31, 2005
and our cumulative loss from the date of inception amounted to approximately
$72,081,000. We have continued to incur losses since July 2004. We may never
achieve revenue sufficient for us to attain profitability.
We incurred net losses of approximately $5,070,000, $2,411,000 and
$2,591,000 for the fiscal years ended July 31, 2004, 2003 and 2002,
respectively.
Our profitability will depend on our ability to develop, obtain
regulatory approvals for, and effectively market ONCONASE(R) as well as entering
into strategic alliances for the development of new drug candidates from the
out-licensing of our proprietary RNase technology. The commercialization of our
pharmaceutical products involves a number of significant challenges. In
particular our ability to commercialize ONCONASE(R) depends on the success of
our clinical development programs, our efforts to obtain regulatory approval and
our sales and marketing efforts or those of our marketing partners, if any,
directed at physicians, patients and third-party payors. A number of factors
could affect these efforts including:
o Our ability to demonstrate clinically that our products have utility
and are safe;
o Delays or refusals by regulatory authorities in granting marketing
approvals;
15
o Our limited financial resources relative to our competitors;
o Our ability to obtain an appropriate marketing partner;
o The availability and level of reimbursement for our products by third
party payors;
o Incidents of adverse reactions to our products;
o Side effects or misuse of our products and unfavorable publicity that
could result; and
o The occurrence of manufacturing or distribution disruptions.
We will seek to generate revenue through licensing, marketing and
development arrangements prior to receiving revenue from the sale of our
products. To date we have not consummated any licensing or marketing
arrangements and we may not be able to successfully consummate any such
arrangements. We have entered into several development arrangements, which have
resulted in limited revenues for us. However, we cannot ensure that these
arrangements or future arrangements, if any, will result in significant amounts
of revenue for us. We, therefore, are unable to predict the extent of any future
losses or the time required to achieve profitability, if at all.
WE NEED ADDITIONAL FINANCING TO CONTINUE OPERATIONS, WHICH MAY NOT BE AVAILABLE
ON ACCEPTABLE TERMS, IF IT IS AVAILABLE AT ALL.
We need additional financing in order to continue operations, including
completion of our current clinical trials and filing marketing registrations for
ONCONASE(R) in the United States with the FDA and in Europe with the EMEA. If
the results from our current clinical trial do not demonstrate the efficacy and
safety of ONCONASE(R) for malignant mesothelioma, our ability to raise
additional capital will be adversely affected. Even if regulatory applications
for marketing approvals are filed, we will need additional financing to continue
operations. Presently, we believe that our cash balance is sufficient to fund
our expanded operations at least through February 28, 2006, based on our
expected level of expenditures. However, taking into consideration all of the
uncertainties related to drug development and our industry, we will continue to
seek additional financing through equity or debt financings and the sale of our
net operating loss carryforwards but cannot be sure that we will be able to
raise capital on favorable terms or at all. We may also obtain additional
capital through the exercise of outstanding options and warrants, although we
cannot provide assurance of such exercises or the amount of capital we will
receive, if any.
WE MAY BE UNABLE TO SELL CERTAIN STATE TAX BENEFITS IN THE FUTURE AND IF WE ARE
UNABLE TO DO SO, IT WOULD ELIMINATE A SOURCE OF FINANCING THAT WE HAVE RELIED ON
IN THE PAST.
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 net operating loss carryforwards, in order to obtain
tax benefits. The aggregate amount of net operating loss carryforwards that New
Jersey allows corporations to sell each state fiscal year (July 1st through June
30th) is determined annually and if New Jersey reduces such aggregate amount in
any fiscal year we may be unable to sell some or all of our available net
operating loss carryforwards as we have in the past. In addition, there is a
limited market for these types of sales and we may not be able to find someone
to purchase our net operating loss carryforwards for a reasonable price. Our
historical results of operations have been improved by our sale of net operating
loss carryforwards and if we continue to generate a limited amount of revenue
and are unable in the future to sell our net operating loss carryforwards, our
results of operations will be negatively impacted.
16
For the state fiscal year 2005 (July 1, 2004 to June 30, 2005), we had
approximately $1,335,000 total available net operating loss carryforwards that
were saleable, of which New Jersey permitted us to sell approximately $339,000.
In December 2004, we received approximately $288,000 from the sale of the
$339,000 of net operating loss carryforwards, which we recognized as a tax
benefit for the six months ended January 31, 2005. For the state fiscal year
2004 (July 1, 2003 to June 30, 2004), we had approximately $1,378,000 of total
available net operating loss carryforwards that were saleable, of which New
Jersey permitted us to sell approximately $261,000. In December 2003, we
received approximately $222,000 from the sale of the $261,000 of net operating
loss carryforwards, which we recognized as a tax benefit for the six months
ended January 31, 2004.
If still available under New Jersey law, we will attempt to sell the
remaining $996,000 of our net operating loss carryforwards, between July 1, 2005
and June 30, 2006. This amount, which is a carryover of our remaining net
operating loss carryforwards from state fiscal year 2005, may increase if we
incur additional net losses and research and development credits during state
fiscal year 2006. We cannot estimate, however, what percentage of our saleable
net operating loss carryforwards New Jersey will permit us to sell, how much
money we will receive in connection with the sale, if we will be able to find a
buyer for our net operating loss carryforwards or if such funds will be
available in a timely manner.
WE CANNOT PREDICT HOW LONG IT WILL TAKE US NOR HOW MUCH IT WILL COST US TO
COMPLETE OUR PHASE III TRIAL BECAUSE IT IS A SURVIVAL STUDY AND WE ARE STILL IN
PATIENT ENROLLMENT IN PART TWO OF THIS PHASE III TRIAL.
We currently have ongoing a two-part Phase III trial of ONCONASE(R) as
a treatment for malignant mesothelioma. The first part of the clinical trial has
been completed and the second, confirmatory part is still ongoing. The primary
endpoint of the Phase III clinical trial is survival, which tracks the length of
time patients enrolled in the study live. According to the protocol, a
sufficient number of patient deaths must occur in order to perform the required
statistical analyses to determine the efficacy of ONCONASE(R) in patients with
unresectable (inoperable) malignant mesothelioma. Since it is impossible to
predict with certainty when these terminal events in the Phase III trial will
occur, we do not have the capability of reasonably determining when a sufficient
number of deaths will occur, nor when we will be able to file for marketing
registrations with the FDA and EMEA.
In addition, clinical trials are very costly and time consuming. The
length of time required to complete a clinical trial depends on several factors
including the size of the patient population, the ability of patients to get to
the site of the clinical study, and the criteria for determining which patients
are eligible to join the study. Delays in patient enrollment, could delay
achieving a sufficient number of deaths required for statistical analyses, which
therefore may delay the marketing registrations. Although we believe we could
modify some of our expenditures to reduce our cash outlays in relation to our
clinical trials and other NDA related expenditures, we cannot quantify which or
the amount such expenditures might be modified. Hence, a delay in the commercial
sale of ONCONASE(R) would increase the time frame of our cash expenditure
outflows and may require us to seek additional financing. Such capital financing
may not be available on favorable terms or at all.
The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the type, complexity and novelty of the product. We cannot apply
for FDA or EMEA approval to market ONCONASE(R) until the clinical trials and all
other registration requirements have been met.
17
IF WE FAIL TO OBTAIN THE NECESSARY REGULATORY APPROVALS, WE WILL NOT BE ALLOWED
TO COMMERCIALIZE OUR DRUGS AND WILL NOT GENERATE PRODUCT REVENUE.
The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the level of complexity and novelty of the product. Drugs in late
stages of clinical development may fail to show the desired safety and efficacy
results despite having progressed through initial clinical testing. While
limited trials with our product have produced certain favorable results, we
cannot be certain that we will successfully complete Phase I, Phase II or Phase
III testing of any compound within any specific time period, if at all.
Furthermore, the FDA or the company may suspend clinical trials at any time on
various grounds, including a finding that the subjects or patients are being
exposed to an unacceptable health risk. In addition, we cannot apply for FDA or
EMEA approval to market ONCONASE(R) until pre-clinical and clinical trials have
been completed. Several factors could prevent the successful completion or cause
significant delays of these trials including an inability to enroll the required
number of patients or failure to demonstrate the product is safe and effective
in humans. Also if safety concerns develop, the FDA and EMEA could stop our
trials before completion.
In December 2002, we received Fast Track Designation from the Food and
Drug Administration, or the FDA for ONCONASE(R) for the treatment of malignant
mesothelioma. In February 2001, we received an Orphan Medicinal Product
Designation for ONCONASE(R) from the European Agency for the Evaluation of
Medicinal Products, or the EMEA.
All statutes and regulations governing the conduct of clinical trials
are subject to change by various regulatory agencies, including the FDA, in the
future, which could affect the cost and duration of our clinical trials. Any
unanticipated costs or delays in our clinical studies would delay our ability to
generate product revenues and to raise additional capital and could cause us to
be unable to fund the completion of the studies.
We may not market or sell any product for which we have not obtained
regulatory approval. We cannot assure you that the FDA or other regulatory
agencies will ever approve the use of our products that are under development.
Even if we receive regulatory approval, such approval may involve limitations on
the indicated uses for which we may market our products. Further, even after
approval, discovery of previously unknown problems could result in additional
restrictions, including withdrawal of our products from the market.
If we fail to obtain the necessary regulatory approvals, we cannot
market or sell our products in the United States, or in other countries and our
long-term viability would be threatened. If we fail to achieve regulatory
approval or foreign marketing authorizations for ONCONASE(R) we will not have a
saleable product or product revenues for quite some time, if at all, and may not
be able to continue operations.
WE ARE AND WILL BE DEPENDENT UPON THIRD PARTIES FOR MANUFACTURING OUR PRODUCTS.
IF THESE THIRD PARTIES DO NOT DEVOTE SUFFICIENT TIME AND RESOURCES TO OUR
PRODUCTS OUR REVENUES AND PROFITS MAY BE ADVERSELY AFFECTED.
We do not have the required manufacturing facilities to manufacture our
products. We presently rely on third parties to perform certain of the
manufacturing processes for the production of ONCONASE(R) for use in clinical
trials. Currently, we contract with Scientific Protein Labs for the
18
manufacturing of ranpirnase (protein drug substance) from the oocytes, or the
unfertilized eggs, of the RANA PIPIENS frog, which is found in the Northwest
United States and is commonly called the leopard frog. We contract with Ben
Venue Corporation for the manufacturing of ONCONASE(R) and with Cardinal Health
for the labeling, storage and shipping of ONCONASE(R) for clinical trial use. We
utilize the services of these third party manufacturers solely on an as needed
basis with terms and prices customary for our industry.
Our use of manufacturers for ranpirnase and ONCONASE(R) have been
approved by the FDA. We have identified substantial alternative service
providers for the manufacturing services for which we contract. In order to
replace an existing service provider we must amend our IND to notify the FDA of
the new manufacturer. Although the FDA generally will not suspend or delay a
clinical trial as a result of replacing an existing manufacturer, the FDA has
the authority to suspend or delay a clinical trial if, among other grounds,
human subjects are or would be exposed to an unreasonable and significant risk
of illness or injury as a result of the replacement manufacturer.
We intend to rely on third parties to manufacture our products if they
are approved for sale by the appropriate regulatory agencies and are
commercialized. Third party manufacturers may not be able to meet our needs with
respect to the timing, quantity or quality of our products or to supply products
on acceptable terms.
BECAUSE WE DO NOT HAVE MARKETING, SALES OR DISTRIBUTION CAPABILITIES, WE EXPECT
TO CONTRACT WITH THIRD PARTIES FOR THESE FUNCTIONS AND WE WILL THEREFORE BE
DEPENDENT UPON SUCH THIRD PARTIES TO MARKET, SELL AND DISTRIBUTE OUR PRODUCTS IN
ORDER FOR US TO GENERATE REVENUES.
We currently have no sales, marketing or distribution capabilities. In
order to commercialize any product candidates for which we receive FDA approval,
we expect to rely on established third party strategic partners to perform these
functions. For example, if we are successful in our Phase III clinical trials
with ONCONASE(R), and are granted marketing approval for the commercialization
of ONCONASE(R), we will be unable to introduce the product to market without
establishing a marketing collaboration with a pharmaceutical company with those
resources. If we establish relationships with one or more biopharmaceutical or
other marketing companies with existing distribution systems and direct sales
forces to market any or all of our product candidates, we cannot assure you that
we will be able to enter into or maintain agreements with these companies on
acceptable terms, if at all. Further, it is likely that we will have limited or
no control over the manner in which product candidates are marketed or the
resources devoted to such markets.
In addition, we expect to begin to incur significant expenses in
determining our commercialization strategy with respect to one or more of our
product candidates. The determination of our commercialization strategy with
respect to a product candidate will depend on a number of factors, including:
o the extent to which we are successful in securing collaborative
partners to offset some or all of the funding obligations with respect
to product candidates;
o the extent to which our agreement with our collaborators permits us to
exercise marketing or promotion rights with respect to the product
candidate;
o how our product candidates compare to competitive products with
respect to labeling, pricing, therapeutic effect, and method of
delivery; and
o whether we are able to establish agreements with third party
collaborators, including large biopharmaceutical or other marketing
companies, with respect to any of our product candidates on terms that
are acceptable
19
A number of these factors are outside of our control and will be
difficult to determine.
OUR PRODUCT CANDIDATES MAY NOT BE ACCEPTED BY THE MARKET.
Even if approved by the FDA and other regulatory authorities, our
product candidates may not achieve market acceptance, which means we would not
receive significant revenues from these products. Approval by the FDA does not
necessarily mean that the medical community will be convinced of the relative
safety, efficacy and cost-effectiveness of our products as compared to other
products. In addition, third party reimbursers such as insurance companies and
HMOs may be reluctant to reimburse expenses relating to our products.
WE DEPEND UPON KUSLIMA SHOGEN AND OUR OTHER KEY PERSONNEL AND MAY NOT BE ABLE TO
RETAIN THESE EMPLOYEES OR RECRUIT QUALIFIED REPLACEMENT OR ADDITIONAL PERSONNEL,
WHICH WOULD HAVE A MATERIAL ADVERSE AFFECT ON OUR BUSINESS.
We are highly dependent upon our founder, Chairman and Chief Executive
Officer, Kuslima Shogen. Kuslima Shogen's talents, efforts, personality, vision
and leadership have been, and continue to be, critical to our success. The
diminution or loss of the services of Kuslima Shogen, and any negative market or
industry perception arising from that diminution or loss, would have a material
adverse effect on our business. While our other employees have substantial
experience and have made significant contributions to our business, Kuslima
Shogen is our senior executive and also our primary supporter because she
represents the Company's primary means of accessing the capital markets.
Because of the specialized scientific nature of our business, our
continued success also is dependent upon our ability to attract and retain
qualified management and scientific personnel. There is intense competition for
qualified personnel in the pharmaceutical field. As our company grows our
inability to attract qualified management and scientific personnel could
materially adversely affect our research and development programs, the
commercialization of our products and the potential revenue from product sales.
We do not have employment contracts with Kuslima Shogen or any of our
other management and scientific personnel.
OUR PROPRIETARY TECHNOLOGY AND PATENTS MAY OFFER ONLY LIMITED PROTECTION AGAINST
INFRINGEMENT AND THE DEVELOPMENT BY OUR COMPETITORS OF COMPETITIVE PRODUCTS.
We own two patents jointly with the United States government. These
patents expire in 2016. We also own ten United States patents with expiration
dates ranging from 2006 to 2019, four European patents with expiration dates
ranging from 2009 to 2016 and one Japanese patent that expires in 2010. We also
own patent applications that are pending in the United States, Europe and Japan.
The scope of protection afforded by patents for biotechnological inventions is
uncertain, and such uncertainty applies to our patents as well. Therefore, our
patents may not give us competitive advantages or afford us adequate protection
from competing products. Furthermore, others may independently develop products
that are similar to our products, and may design around the claims of our
patents. Patent litigation and intellectual property litigation are expensive
and our resources are limited. If we were to become involved in litigation, we
might not have the funds or other resources necessary to conduct the litigation
effectively. This might prevent us from protecting our patents, from defending
against claims of infringement, or both. To date, we have not received any
threats of litigation regarding patent issues.
20
DEVELOPMENTS BY COMPETITORS MAY RENDER OUR PRODUCTS OBSOLETE OR NON-COMPETITIVE.
In February 2004, the Food and Drug Administration granted Eli Lilly &
Company approval to sell its Alimta(R) medication as an orphan drug to treat
patients with pleural mesothelioma. Alimta is a multi-targeted antifolate that
is based upon a different mechanism of action than ONCONASE(R). To our
knowledge, no other company is developing a product with the same mechanism of
action as ONCONASE(R). However, there may be other companies, universities,
research teams or scientists who are developing products to treat the same
medical conditions our products are intended to treat. Eli Lilly is, and some of
these other companies, universities, research teams or scientists may be more
experienced and have greater clinical, marketing and regulatory capabilities and
managerial and financial resources than we do. This may enable them to develop
products to treat the same medical conditions our products are intended to treat
before we are able to complete the development of our competing product.
Our business is very competitive and involves rapid changes in the
technologies involved in developing new drugs. If others experience rapid
technological development, our products may become obsolete before we are able
to recover expenses incurred in developing our products. We will probably face
new competitors as new technologies develop. Our success depends on our ability
to remain competitive in the development of new drugs or we may not be able to
compete successfully.
WE MAY BE SUED FOR PRODUCT LIABILITY.
Our business exposes us to potential product liability that may have a
negative effect on our financial performance and our business generally. The
administration of drugs to humans, whether in clinical trials or commercially,
exposes us to potential product and professional liability risks which are
inherent in the testing, production, marketing and sale of new drugs for humans.
Product liability claims can be expensive to defend and may result in large
judgments or settlements against us, which could have a negative effect on our
financial performance and materially adversely affect our business. We maintain
product liability insurance to protect our products and product candidates in
amounts customary for companies in businesses that are similarly situated, but
our insurance coverage may not be sufficient to cover claims. Furthermore,
liability insurance coverage is becoming increasingly expensive and we cannot be
certain that we will always be able to maintain or increase our insurance
coverage at an affordable price or in sufficient amounts to protect against
potential losses. A product liability claim, product recall or other claim, as
well as any claim for uninsured liabilities or claim in excess of insured
liabilities, may significantly harm our business and results of operations. Even
if a product liability claim is not successful, adverse publicity and time and
expense of defending such a claim may significantly interfere with our business.
IF WE ARE UNABLE TO OBTAIN FAVORABLE REIMBURSEMENT FOR OUR PRODUCT CANDIDATES,
THEIR COMMERCIAL SUCCESS MAY BE SEVERELY HINDERED.
Our ability to sell our future products may depend in large part on the
extent to which reimbursement for the costs of our products is available from
government entities, private health insurers, managed care organizations and
others. Third-party payors are increasingly attempting to contain their costs.
We cannot predict actions third-party payors may take, or whether they will
limit the coverage and level of reimbursement for our products or refuse to
provide any coverage at all. Reduced or partial reimbursement coverage could
make our products less attractive to patients, suppliers and prescribing
physicians and may not be adequate for us to maintain price levels sufficient to
realize an appropriate return on our investment in our product candidates or
compete on price.
21
In some cases, insurers and other healthcare payment organizations try to
encourage the use of less expensive generic brands and over-the-counter, or OTC,
products through their prescription benefits coverage and reimbursement
policies. These organizations may make the generic alternative more attractive
to the patient by providing different amounts of reimbursement so that the net
cost of the generic product to the patient is less than the net cost of a
prescription brand product. Aggressive pricing policies by our generic product
competitors and the prescription benefits policies of insurers could have a
negative effect on our product revenues and profitability.
Many managed care organizations negotiate the price of medical services
and products and develop formularies for that purpose. Exclusion of a product
from a formulary can lead to its sharply reduced usage in the managed care
organization patient population. If our products are not included within an
adequate number of formularies or adequate reimbursement levels are not
provided, or if those policies increasingly favor generic or OTC products, our
market share and gross margins could be negatively affected, as could our
overall business and financial condition.
The competition among pharmaceutical companies to have their products
approved for reimbursement may also result in downward pricing pressure in the
industry or in the markets where our products will compete. We may not be
successful in any efforts we take to mitigate the effect of a decline in average
selling prices for our products. Any decline in our average selling prices would
also reduce our gross margins.
In addition, managed care initiatives to control costs may influence
primary care physicians to refer fewer patients to oncologists and other
specialists. Reductions in these referrals could have a material adverse effect
on the size of our potential market and increase costs to effectively promote
our products.
We are subject to new legislation, regulatory proposals and managed
care initiatives that may increase our costs of compliance and adversely affect
our ability to market our products, obtain collaborators and raise capital.
There have been a number of legislative and regulatory proposals aimed
at changing the healthcare system and pharmaceutical industry, including
reductions in the cost of prescription products and changes in the levels at
which consumers and healthcare providers are reimbursed for purchases of
pharmaceutical products. For example, the Prescription Drug and Medicare
Improvement Act of 2003 which was recently enacted, provides a new Medicare
prescription drug benefit beginning in 2006 and mandates other reforms. Although
we cannot predict the full effects on our business of the implementation of this
new legislation, it is possible that the new benefit, which will be managed by
private health insurers, pharmacy benefit managers and other managed care
organizations, will result in decreased reimbursement for prescription drugs,
which may further exacerbate industry-wide pressure to reduce the prices charged
for prescription drugs. This could harm our ability to market our products and
generate revenues. It is also possible that other proposals will be adopted. As
a result of the new Medicare prescription drug benefit or any other proposals,
we may determine to change our current manner of operation, provide additional
benefits or change our contract arrangements, any of which could harm our
ability to operate our business efficiently, obtain collaborators and raise
capital.
WE HAVE ONLY RECENTLY BEEN RELISTED ON THE NASDAQ SMALLCAP MARKET AND OUR STOCK
IS THINLY TRADED AND YOU MAY NOT BE ABLE TO SELL OUR STOCK WHEN YOU WANT TO DO
SO.
From April 1999, when we were delisted from Nasdaq, until September 9,
2004, when we were relisted on the Nasdaq SmallCap Market, there was no
established trading market for our common stock.
22
During that time, our common stock was quoted on the OTC Bulletin Board and was
thinly traded. There is no assurance that we will be able to comply with all of
the listing requirements necessary to remain relisted on the Nasdaq SmallCap
Market. In addition, our stock remains thinly traded and you may be unable to
sell our common stock during times when the trading market is limited.
THE PRICE OF OUR COMMON STOCK HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
The market price of our common stock, like that of the securities of
many other development stage biotechnology companies, has fluctuated over a wide
range and it is likely that the price of our common stock will fluctuate in the
future. Over the past three years, the sale price for our common stock, as
reported by Nasdaq and the OTC Bulletin Board has fluctuated from a low of $0.18
to a high of $10.07. The market price of our common stock could be impacted by a
variety of factors, including:
o announcements of technological innovations or new commercial products
by us or our competitors,
o disclosure of the results of pre-clinical testing and clinical trials
by us or our competitors,
o disclosure of the results of regulatory proceedings,
o changes in government regulation,
o developments in the patents or other proprietary rights owned or
licensed by us or our competitors,
o public concern as to the safety and efficacy of products developed by
us or others,
o litigation, and
o general market conditions in our industry.
In addition, the stock market continues to experience extreme price and
volume fluctuations. These fluctuations have especially affected the market
price of many biotechnology companies. Such fluctuations have often been
unrelated to the operating performance of these companies. Nonetheless, these
broad market fluctuations may negatively affect the market price of our common
stock.
EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Sales of substantial amounts of our common stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our common stock. We had 35,245,445 shares of common stock outstanding as of
January 31, 2005. The following securities that may be exercised for, or are
convertible into, shares of our common stock were issued and outstanding as of
January 31, 2005:
o Stock options to purchase 3,438,245 shares of our common stock at a
weighted average exercise price of approximately $3.59 per share.
o Warrants to purchase 11,769,784 shares of our common stock at a
weighted average exercise price of approximately $2.50 per share.
o Convertible Notes which will convert into 1,199,890 shares of our
common stock at an average conversion price of $0.20 per share and
warrants which are exercisable for 1,399,890 shares of our common
stock at an exercise price of $1.00 per share.
The shares of our common stock that may be issued under the options,
warrants and upon conversion of the notes are currently registered with the SEC
or are eligible for sale without any volume limitations pursuant to Rule 144(k)
under the Securities Act.
23
OUR INCORPORATION DOCUMENTS MAY DELAY OR PREVENT (I) THE REMOVAL OF OUR CURRENT
MANAGEMENT OR (II) A CHANGE OF CONTROL THAT A STOCKHOLDER MAY CONSIDER
FAVORABLE.
We are currently authorized to issue 1,000,000 shares of preferred
stock. Our Board of Directors is authorized, without any approval of the
stockholders, to issue the preferred stock and determine the terms of the
preferred stock. This provision allows the board of directors to affect the
rights of stockholders, since the board of directors can make it more difficult
for common stockholders to replace members of the board. Because the board of
directors is responsible for appointing the members of our management, these
provisions could in turn affect any attempt to replace current management by the
common stockholders. Furthermore, the existence of authorized shares of
preferred stock might have the effect of discouraging any attempt by a person,
through the acquisition of a substantial number of shares of common stock, to
acquire control of our company. Accordingly, the accomplishment of a tender
offer may be more difficult. This may be beneficial to management in a hostile
tender offer, but have an adverse impact on stockholders who may want to
participate in the tender offer or inhibit a stockholder's ability to receive an
acquisition premium for his or her shares.
THE ABILITY OF OUR STOCKHOLDERS TO RECOVER AGAINST ARMUS HARRISON & CO., OR AHC,
MAY BE LIMITED BECAUSE WE HAVE NOT BEEN ABLE TO OBTAIN THE REISSUED REPORTS OF
AHC WITH RESPECT TO THE FINANCIAL STATEMENTS INCLUDED IN OUR FORM 10-K FOR THE
FISCAL YEAR ENDED JULY 31, 2004, NOR HAVE WE BEEN ABLE TO OBTAIN AHC'S CONSENT
TO THE USE OF SUCH REPORT THEREIN.
Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act")
provides that any person acquiring or selling a security in reliance upon
statements set forth in a Form 10-K may assert a claim against every accountant
who has with its consent been named as having prepared or certified any part of
the Form 10-K, or as having prepared or certified any report or valuation that
is used in connection with the Form 10-K, if that part of the Form 10-K at the
time it is filed contains a false or misleading statement of a material fact, or
omits a material fact required to be stated therein or necessary to make the
statements therein not misleading (unless it is proved that at the time of such
acquisition such acquiring person knew of such untruth or omission).
In June 1996, AHC dissolved and ceased all operations. Therefore, we
have not been able to obtain the reissued reports of AHC with respect to the
financial statements included in the Form 10-K for the fiscal year ended July
31, 2004 nor have we been able to obtain AHC's consent to the use of such report
herein. As a result, in the event any persons seek to assert a claim against AHC
under Section 18 of the Exchange Act for any untrue statement of a material fact
contained in these financial statements or any omissions to state a material
fact required to be stated therein, such persons will be barred. Accordingly,
you may be unable to assert a claim against AHC under Section 18 of the Exchange
Act for any purchases of the Company's Common Stock made in reliance upon
statements set forth in the Form 10-K for the fiscal year ended July 31, 2004.
In addition, the ability of AHC to satisfy any claims properly brought against
it may be limited as a practical matter due to AHC's dissolution in 1996.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
24
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of January 31, 2005, the end of the period covered by this report
(the "evaluation date"). Based upon the evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of the evaluation date, our
disclosure controls and procedures are effective in timely alerting them to the
material information relating to us required to be included in our periodic SEC
filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls over
financial reporting during the three months ended January 31, 2005 or, to our
knowledge, in other factors that have materially affected, or are materially
likely to affect, these controls.
We are currently undergoing a comprehensive effort to ensure compliance
with Section 404 of the Sarbanes-Oxley Act of 2002. As an accelerated filer with
a fiscal year end of July 31, we must first begin to comply with the
requirements of Section 404 for the fiscal year ending July 31, 2005. We believe
that our present internal control program has been effective at a reasonable
assurance level to ensure that our financial reporting has not been materially
misstated. Nonetheless, during the remaining periods through July 31, 2005, we
will continue to review, and where necessary, enhance our internal control
design and documentation, management review, and ongoing risk assessment as part
of our internal control program.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
The following transactions were exempt from registrations under Section
4(2) of the Securities Act of 1933, as amended. The net proceeds from these
transactions will be used for general corporate purposes.
During the quarter ended January 31, 2005, we issued 224,931 shares of
restricted common stock and five-year warrants to purchase 224,931 shares of
common stock with an exercise price of $1.00 per share upon the conversion of
notes payable in the amount of $112,465 by an unrelated party.
During the quarter ended January 31, 2005, we issued 20,000 shares of
common stock upon the exercise of warrants by an unrelated party, which resulted
in aggregate gross proceeds of $25,000 to us. We have previously registered the
resale of these shares by the stockholders on a Form S-1 registration statement.
During the quarter ended January 31, 2005, we issued 3,000 shares of
restricted common stock as payment for services rendered. A non-cash expense of
$13,500 was recorded by the Company for these shares, based upon the fair value
of the common stock at the date of issuance.
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ISSUER PURCHASES OF EQUITY SECURITIES
We did not repurchase any shares of our common stock during the second
quarter of fiscal 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of stockholders was held on January 27, 2005.
(b) All of our current directors, Kuslima Shogen, John P. Brancaccio,
Stephen K. Carter, Donald R. Conklin, James J. Loughlin, Andrew
P. Savadelis, David Sidransky and Paul M. Weiss, were elected at
the annual meeting.
(c) The matters voted upon at the annual meeting and the results of
the voting, including broker non-votes where applicable, are set
forth below:
(i) For the election of directors
----------------------------------------------------------------------------------------------------------------
Number of Shares of Number of Shares of Common Number of Broker
Director Common Stock Voted For Stock Withheld Non-Votes
----------------------------------------------------------------------------------------------------------------
Kuslima Shogen 27,595,108 108,339 0
----------------------------------------------------------------------------------------------------------------
John P. Brancaccio 27,611,830 91,617 0
----------------------------------------------------------------------------------------------------------------
Stephen K. Carter 27,615,260 88,187 0
----------------------------------------------------------------------------------------------------------------
Donald R. Conklin 27,594,430 109,017 0
----------------------------------------------------------------------------------------------------------------
James J. Loughlin 27,594,350 109,097 0
----------------------------------------------------------------------------------------------------------------
Andrew P. Savadelis 27,567,458 135,989 0
----------------------------------------------------------------------------------------------------------------
David Sidransky 27,615,500 87,947 0
----------------------------------------------------------------------------------------------------------------
Paul M. Weiss 27,593,652 109,795 0
----------------------------------------------------------------------------------------------------------------
(ii) Proposal to ratify the appointment of J.H. Cohn LLP as
Alfacell's independent registered public accounting
firm for the year ending July 31, 2005.
----------------------------------------------------------------------------------------------------------------
Number of Shares of Common Number of Shares of Number of Shares of Common Number of Broker
Stock Voted For Common Stock Voted Against which Abstained from Voting Non-Votes
----------------------------------------------------------------------------------------------------------------
27,599,247 93,687 10,513 0
----------------------------------------------------------------------------------------------------------------
ITEM 6. EXHIBITS
Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
------ ---------- -----------------
3.1 Certificate of Incorporation, dated June 12, 1981 (incorporated by reference to
Registration Statement on Form S-1, File No. 333-112865, filed on February 17,
2004) *
3.2 Amendment to Certificate of Incorporation, dated February 18, 1994 (incorporated
by reference to Registration Statement on Form S-1, File No. 333-112865, filed on
February 17, 2004) *
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Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
------ ---------- -----------------
3.3 Amendment to Certificate of Incorporation, dated December 26, 1997 (incorporated
by reference to Registration Statement on Form S-1, File No. 333-112865, filed on
February 17, 2004) *
3.4 Amendment to Certificate of Incorporation, dated January 14, 2004 (incorporated by
reference to Registration Statement on Form S-1, File No. 333-112865, filed on
February 17, 2004) *
3.5 Certificate of Designation for Series A Preferred Stock, dated September 2, 2003
(incorporated by reference to Registration Statement on Form S-1, File No.
333-112865, filed on February 17, 2004) *
3.6 Certificate of Elimination of Series A Preferred Stock, dated February 3, 2004
(incorporated by reference to Registration Statement on Form S-1, File No.
333-112865, filed on February 17, 2004) *
3.7 By-Laws (incorporated by reference to Exhibit 3.4 to Registration Statement on
Form S-1, File No. 333-111101, filed on December 11, 2003) *
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 +
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 +
32.1 Certification Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 +
32.2 Certification Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 +
* Previously filed; incorporated herein by reference.
+ Filed herewith.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ALFACELL CORPORATION
---------------------
(Registrant)
March 11, 2005 /s/ Andrew P. Savadelis
-----------------------
Chief Financial Officer (Principal
Financial Officer and Chief Accounting
Officer)
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