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, 1998 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
incorporation or organization) Identification No.)
225 Belleville Avenue, Bloomfield, New Jersey 07003
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (973) 748-8082
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Shares of Common Stock, $.001 par value outstanding as of June 11, 1998:
17,239,893
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
April 30, 1998 and July 31, 1997
<TABLE>
<CAPTION>
April 30,
1998 July 31,
ASSETS (Unaudited) 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,120,425 $ 7,542,289
Prepaid expenses 183,730 165,106
------------ ------------
Total current assets 6,304,155 7,707,395
------------ ------------
Property and equipment, net of accumulated depreciation and amortization
of $816,254 at April 30, 1998 and $742,319 at July 31, 1997 327,382 326,003
------------ ------------
Other assets:
Deferred debt costs, net -- 1,556
------------ ------------
Total assets $ 6,631,537 $ 8,034,954
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,955 $ 1,381,416
Accounts payable 701,512 377,704
Accrued expenses 706,516 693,841
------------ ------------
Total current liabilities 1,416,983 2,452,961
------------ ------------
Long-term debt, less current portion 9,105 15,902
------------ ------------
Total liabilities 1,426,088 2,468,863
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value
Authorized and unissued, 1,000,000 shares at April 30, 1998
and July 31, 1997 -- --
Common stock $.001 par value
Authorized 40,000,000 shares at April 30, 1998 and
25,000,000 shares at July 31, 1997;
Issued and outstanding 17,234,943 shares at April 30, 1998
and 14,847,793 shares at July 31, 1997 17,235 14,848
Capital in excess of par value 55,430,487 50,961,382
Deficit accumulated during development stage (50,242,273) (45,410,139)
------------ ------------
Total stockholders' equity 5,205,449 5,566,091
------------ ------------
Total liabilities and stockholders' equity $ 6,631,537 $ 8,034,954
============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Three months and nine months ended April 30, 1998 and 1997,
and the Period from August 24, 1981
(Date of Inception) to April 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended August 24, 1981
April 30, April 30, (Date of Inception)
---------------------------- ---------------------------- to
1998 1997 1998 1997 April 30, 1998
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Sales $ -- $ -- $ -- $ -- $ 553,489
Investment income 81,806 109,232 226,332 338,280 1,054,158
Other income -- -- -- -- 60,103
------------ ------------ ------------ ------------ ------------
TOTAL REVENUE 81,806 109,232 226,332 338,280 1,667,750
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales -- -- -- -- 336,495
Research and development 1,300,507 677,007 3,907,807 2,370,768 30,329,913
General and administrative 413,146 285,863 1,129,304 840,290 18,310,710
Interest:
Related parties -- -- -- -- 1,033,960
Others 479 29,757 21,355 92,800 1,898,945
------------ ------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 1,714,132 992,627 5,058,466 3,303,858 51,910,023
------------ ------------ ------------ ------------ ------------
NET LOSS $ (1,632,326) $ (883,395) $ (4,832,134) $ (2,965,578) $(50,242,273)
============ ============ ============ ============ ============
Loss per basic and diluted common
share $ (.10) $ (.06) $ (.31) $ (.20) $ (7.65)
============ ============ ============ ============ ============
Weighted average number of shares
outstanding 16,727,344 14,668,354 15,484,248 14,517,375 6,566,770
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Nine months ended April 30, 1998 and 1997,
and the Period from August 24, 1981
(Date of Inception) to April 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 24, 1981
April 30, (Date of Inception)
---------------------------- to
1998 1997 April 30, 1998
------------ ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $ (4,832,134) $ (2,965,578) $(50,242,273)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities -- -- (25,963)
Depreciation and amortization 75,491 50,130 1,195,519
Loss on disposal of property and equipment -- -- 18,926
Noncash operating expenses 159,914 27,900 5,124,379
Amortization of deferred compensation -- -- 11,442,000
Amortization of organization costs -- -- 4,590
Changes in assets and liabilities:
Decrease in loan receivable, related party -- 112,250 --
Increase in prepaid expenses (18,624) (137,693) (183,730)
Decrease in other assets -- 7,196 36,184
Increase in interest payable, related party -- -- 744,539
Increase (decrease) in accounts payable 323,808 (54,177) 778,777
Increase in accrued payroll and expenses, related parties -- -- 2,348,145
Increase (decrease) in accrued expenses 12,675 (118,137) 1,248,029
------------ ------------ ------------
Net cash used in operating activities (4,278,870) (3,078,109) (27,510,878)
------------ ------------ ------------
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 (75,314) (170,197) (1,369,260)
Patent costs -- -- (97,841)
------------ ------------ ------------
Net cash used in investing activities (75,314) (170,197) (1,441,138)
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements. (continued)
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<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Continued
Nine months ended April 30, 1998 and 1997,
and the Period from August 24, 1981
(Date of Inception) to April 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 24, 1981
April 30, (Date of Inception)
-------------------------- to
1998 1997 April 30, 1998
------------ ------------ --------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from short-term borrowings $ -- $ -- $ 849,500
Payment of short-term borrowings -- -- (623,500)
Increase in loans payable - related party, net -- -- 2,628,868
Proceeds from bank debt and other long-term debt, net of
deferred debt costs -- 4,200 2,410,883
Reduction of bank debt and long-term debt (1,379,258) (71,638) (2,907,395)
Proceeds from issuance of common stock, net 4,311,578 504,000 26,917,497
Proceeds from exercise of stock options and warrants, net -- 3,002,874 5,449,588
Proceeds from issuance of convertible debentures -- -- 347,000
----------- ------------ ------------
Net cash provided by financing activities 2,932,320 3,439,436 35,072,441
----------- ------------ ------------
Net increase (decrease) in cash (1,421,864) 191,130 6,120,425
Cash and cash equivalents at beginning of period 7,542,289 8,131,442 --
----------- ------------ ------------
Cash and cash equivalents at end of period $ 6,120,425 $ 8,322,572 $ 6,120,425
=========== ============ ============
Supplemental disclosure of cash flow information -
interest paid $ 21,355 $ 104,546 $ 1,645,928
=========== ============ ============
Noncash financing activities:
Issuance of convertible subordinated
debenture for loan payable to officer $ -- $ -- $ 2,725,000
=========== ============ ============
Issuance of common stock upon the conversion of
convertible subordinated debentures, related party $ -- $ -- $ 2,945,000
=========== ============ ============
Conversion of short-term borrowings to common stock $ -- $ -- $ 226,000
=========== ============ ============
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 $ 100,000 $ -- $ 177,265
=========== ============ ============
Conversion of notes payable, bank and accrued interest to
long-term debt $ -- $ -- $ 1,699,072
=========== ============ ============
Conversion of loans and interest payable, related party
and accrued payroll and expenses, related parties to
long-term accrued payroll and other, related party $ -- $ -- $ 1,863,514
=========== ============ ============
Issuance of common stock upon the conversion of
convertible subordinated debentures, other $ -- $ -- $ 127,000
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
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,
1998 and the results of operations for the nine month periods ended April 30,
1998 and 1997 and the period from August 24, 1981 (date of inception) to April
30, 1998. The results of operations for the nine months ended April 30, 1998 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.
2. EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
became effective for financial statements for periods ending after December 31,
1997, and requires presentation of two calculations of earnings per common
share. "Basic" earnings per common share equals net income divided by weighted
average common shares outstanding during the period. "Diluted" earnings per
common share equals net income divided by the sum of weighted average common
shares outstanding during the period plus common stock equivalents. The
Company's Basic and Diluted per share amounts are the same since the assumed
exercise of stock options and warrants are all anti-dilutive. The amount of
options and warrants excluded from the calculation was 5,921,357 at April 30,
1998 and 5,532,976 at April 30, 1997. The Company restated all prior period
amounts to reflect these calculations.
3. CAPITAL STOCK
The Company issued 833 three-year stock options as payment for services
rendered in August 1997. The options vested thirty days from the issuance date
and have an exercise price of $4.47 per share. The total general and
administrative expense recorded for these options was $1,700, based upon the
fair value of such options on the date of issuance.
In September 1997, the Company issued 15,000 three-year stock options with
an exercise price of $4.15 per share as payment for services to be rendered. An
equal portion of these options vest monthly and a total general and
administrative expense of $30,000 is being amortized over a one-year period
which commenced September 1997. The Company also issued 5,000 three-year stock
options with an exercise price of $4.15 per share as payment for services to be
rendered. Of these options, 833 vest monthly for
- 6 -
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, continued
(Unaudited)
3. CAPITAL STOCK (continued)
five months commencing September 30, 1997 and 835 vest on the last day of the
sixth month. Total general and administrative expense of $9,700 is being
amortized over a six-month period which commenced September 1997. As of April
30, 1998, the Company recorded general and administrative expense of $29,300,
based upon the fair value of the 20,000 stock options on the date of the
issuance, amortized on a straight-line basis over the vesting periods of the
grants.
In October 1997, the Company issued 12,000 five-year stock options (the
"Options") with an exercise price of $3.91 per share as payment for services to
be rendered. An equal portion of these options vest monthly and a total research
and development expense of $27,500 is being amortized over a one-year period
which commenced in October 1997. As of April 30, 1998, the Company recorded
research and development expense of $18,100, based upon the fair value of such
options on the date of issuance, amortized on a straight-line basis over the
vesting period of the grant.
In October 1997, the Company issued 75,000 stock options to a director with
an exercise price of $3.66 per share as payment for non-board related services
to be rendered. These options will vest as follows provided he has been serving
continuously on the Company's board of directors at the time of vesting: 10,000
vested immediately; 10,000 after one full calendar year; 10,000 annually for
each of the following three years; and 25,000 on October 31, 2002. The vesting
and exercisability of the 25,000 options which vest in October 2002 may be
accelerated upon the good faith determination of the Company's Board of
Directors that a substantive collaborative agreement with a major
pharmaceutical/biotechnology company was a direct result of the director's
efforts. A total general and administrative expense of $185,600 is being
amortized over a five-year period which commenced in October 1997. As of April
30, 1998, the Company recorded general and administrative expense of $39,500,
based upon the fair value of such 75,000 options on the date of issuance,
amortized on a straight-line basis over the vesting period of the grant.
On December 9, 1997, the stockholders authorized the amendment of the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock, par value $.001 from 25,000,000 shares to 40,000,000
shares.
On December 9, 1997, the stockholders approved the 1997 Stock Option Plan
(the "1997 Plan"). The total number of shares of common stock authorized for
issuance upon exercise of options granted under the 1997 Plan is 2,000,000.
Options are granted at fair market value on the date of the grant and generally
are exercisable in 20% increments annually over five years starting one year
after the date of grant and terminate five years from their initial exercise
date.
- 7 -
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, continued
(Unaudited)
3. CAPITAL STOCK (continued)
On January 23, 1998 the Securities and Exchange Commission (the "SEC")
declared effective a registration statement for the offer and sale by certain
stockholders of up to 3,734,541 shares of common stock. Of these shares (i) an
aggregate of 2,737,480 shares were issued to private placement investors in
private placement transactions which were completed during the period from March
1994 through June 1996 (the "Earlier Private Placements"), (ii) an aggregate of
409,745 shares are issuable upon exercise of warrants which were issued to
private placement investors in the Earlier Private Placements and (iii) an
aggregate of 587,316 shares may be issued, or have been issued, upon exercise of
options which were issued to option holders in certain other private
transactions.
On February 20, 1998, the Company completed a private placement (the
"February 1998 Private Placement") primarily to institutional investors which
resulted in the issuance of 1,168,575 units (the "Units") at a unit price of
$4.00. Each Unit consisted of two (2) shares of the Company's common stock, par
value $.001 per share (the "Common Stock") and one (1) three-year warrant to
purchase one (1) share of common stock (the "Warrants") at an exercise price of
$2.50 per share. The Company received proceeds of approximately $4,300,000, net
of the placement agent's commission and expenses of $365,000. The placement
agent also received warrants (the "Placement Agent Warrant") to purchase an
additional 116,858 units comprised of the same securities sold to investors at
an exercise price of $4.40 per unit as part of its compensation.
In March 1998, the Company entered into a conversion agreement with one of
its raw material suppliers (the "Supplier") for the conversion of an outstanding
payable (the "Conversion Agreement") into 50,000 shares of the Company's Common
Stock. Pursuant to the Conversion Agreement, the Company issued 50,000 shares of
Common Stock to the Supplier. The fair value of the Common Stock approximated
the outstanding payable amount of $100,000.
In March 1998, the Company issued 75,000 stock options to a director with
an exercise price of $2.80 per share as payment for non-board related services
to be rendered. These options will vest as follows provided he has been serving
continuously on the Company's board of directors at the time of vesting: 10,000
vested immediately; 10,000 after one full calendar year; 10,000 annually for
each of the following three years; and 25,000 on March 24, 2003. The vesting and
exercisability of the 25,000 options which vest in March 2003 may be accelerated
upon the good faith determination of the Company's Board of Directors that a
substantive collaborative agreement and licensing or financing arrangement with
a major pharmaceutical/biotechnology company was a direct result of the
director's efforts. A total general and administrative expense of $139,900 is
being amortized over a five-year period which commenced in March 1998. As of
April 30, 1998, the Company recorded general and administrative expense of
$17,600, based upon the fair value of such 75,000 options on the date of
issuance, amortized on a straight-line basis over the vesting period of the
grant.
- 8 -
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, continued
(Unaudited)
3. CAPITAL STOCK (continued)
On April 20, 1998 the SEC declared effective a registration statement for
the offer and sale by certain stockholders of up to 3,918,299 shares of common
stock. Of these shares (i) an aggregate of 2,337,150 shares of Common Stock are
currently outstanding and were issued to the private placement investors in the
February 1998 Private Placement, (ii) an aggregate of 1,168,575 shares may be
issued upon exercise of the Warrants which were issued to the private placement
investors in the February 1998 Private Placement, (iii) 350,574 shares may be
issued upon the exercise of the Placement Agent Warrant which was issued to the
placement agent in the February 1998 Private Placement and the Warrants issuable
upon exercise of the Placement Agent Warrant, (iv) 50,000 shares of Common Stock
are currently outstanding and were issued to the Supplier in connection with the
Conversion Agreement, and (v) 12,000 shares may be issued upon the exercise of
Options which were issued as payment for services to be rendered.
- 9 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information contained herein contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The matters set forth in Exhibit
99.1 hereto constitute cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results indicated in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results indicated
in such forward-looking statements.
Results of Operations
Three and nine month periods ended April 30, 1998 and 1997
Revenues. The Company is a development stage company as defined in the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 7. As such, the Company is devoting substantially all of its
present efforts to establishing a new business and developing new drug products.
The Company's planned principal operations of marketing and/or licensing of new
drugs have not commenced and, accordingly, no significant revenue has been
derived therefrom. The Company focuses most of its productive and financial
resources on the development of ONCONASE and as such has not had any sales in
the nine months ended April 30, 1998 and 1997. Investment income for the nine
months ended April 30, 1998 was $226,000 compared to $338,000 for the same
period last year, a decrease of $112,000. This decrease was due to lower
balances of cash and cash equivalents.
Research and Development. Research and development expense for the three
months ended April 30, 1998 was $1,301,000 compared to $677,000 for the same
period last year, an increase of $624,000 or 92%. This increase was primarily
due to a 243% increase in costs associated with increased patient enrollment in
on-going clinical trials, including the two Phase III clinical trials for
pancreatic cancer and the Phase II and III clinical trials for malignant
mesothelioma, a 274% increase in costs related to the manufacture of clinical
supplies of ONCONASE, and a 96% increase in expenses in preparation of a New
Drug Application ("NDA") for ONCONASE.
Research and development expense for the nine months ended April 30, 1998
was $3,908,000 compared to $2,371,000 for the same period last year, an increase
of $1,537,000 or 65%. This increase was primarily due to a 159% increase in
costs associated with increased patient enrollment in on-going clinical trials,
including the two Phase III clinical trials for pancreatic cancer and the Phase
II and III clinical trials for malignant mesothelioma, a 55% increase in costs
related to the manufacture of clinical supplies of ONCONASE and a 161% increase
in expenses in preparation of an NDA for ONCONASE.
General and Administrative. General and administrative expense for the
three months ended April 30, 1998 was $413,000 compared to $286,000 for the same
period last year, an increase of $127,000 or 44%. This increase was primarily
due to a $139,000 increase in legal costs primarily for SEC and related matters,
offset by an $18,000 decrease in costs related to administrative personnel.
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<PAGE>
General and administrative expense for the nine months ended April 30, 1998
was $1,129,000 compared to $840,000 for the same period last year, an increase
of $289,000 or 34%. This increase was primarily due to a $245,000 increase in
legal costs primarily for SEC and related matters and a $42,000 increase in
insurance expenses, offset by a $38,000 decrease in costs related to
administrative personnel.
Interest. Interest expense for the three months ended April 30, 1998 was
$500 compared to $30,000 for the same period last year, a decrease of $29,500 or
98%. Interest expense for the nine months ended April 30, 1998 was $21,000
compared to $93,000 for the same period last year, a decrease of $72,000 or 77%.
This decrease was primarily due to the payment of the entire principal amount of
the Company's $1.4 million term loan on October 3, 1997.
Net Loss. The Company has incurred net losses during each year since its
inception. The net loss for the three months ended April 30, 1998 was $1,632,000
as compared to $883,000 for the same period last year, an increase of $749,000
or 85%. The net loss for the nine months ended April 30, 1998 was $4,832,000 as
compared to $2,966,000 for the same period last year, an increase of $1,866,000
or 63%. The cumulative loss from the date of inception, August 24, 1981 to April
30, 1998, amounted to $50,242,000. Such losses are attributable to the fact that
the Company is still in the development stage and accordingly has not derived
sufficient revenues from operations to offset the development stage expenses.
Liquidity and Capital Resources
Alfacell has financed its operations since inception primarily through
equity and debt financing, research product sales and interest income. During
the nine months ended April 30, 1998, the Company had a net decrease in cash and
cash equivalents of $1,422,000, which resulted primarily from net cash used in
operating activities of $4,279,000 and purchase of property and equipment of
$75,000, offset by net cash provided by financing activities of $2,932,000,
primarily from a private placement of common stock and warrants completed in
February 1998 which resulted in net proceeds received of $4,311,000, less
payment of bank debt in October 1997 and reduction of long-term debt of
$1,379,000.
The Company's accounts payable balance at April 30, 1998 was $701,000
compared to $378,000 on July 31, 1997. The increase is primarily due to
increased legal costs, increased regulatory and manufacturing costs in
preparation of an NDA for ONCONASE and higher costs associated with increased
patient enrollment in on-going clinical trials.
The Company's accrued expenses at April 30, 1998 were $706,000 compared to
$694,000 on July 31, 1997. The increase was primarily due to increased patient
enrollment in on-going clinical trials.
The Company's term loan with its bank, matured on August 31, 1997. On
October 3, 1997, the Company paid the entire loan balance, including accrued
interest, in the amount of $1,376,646 out of its cash resources. This is the
primary reason for a significant decrease in current liabilities as of April 30,
1998 compared to July 31, 1997.
On February 20, 1998 the Company completed a private placement primarily to
institutional investors which resulted in the issuance of 1,168,575 Units at a
unit price of $4.00. Each Unit consisted of two (2) shares of the Company's
Common Stock, par value $.001 per share and one (1) three-year warrant to
purchase one (1) share of Common Stock at an exercise price of $2.50 per share.
The Company
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<PAGE>
received proceeds of approximately $4,300,000, net of the placement agent's
commission and expenses of approximately $365,000. The placement agent also
received warrants to purchase an additional 116,858 units comprised of the same
securities sold to investors at an exercise price of $4.40 per unit as part of
its compensation.
The Company's continued operations will depend on its ability to raise
additional funds through several potential sources such as equity or debt
financing, collaborative agreements, strategic alliances and revenues from the
commercial sale of ONCONASE. Alfacell continues to incur costs in conjunction
with the preparation of an anticipated NDA for ONCONASE. The Company is in the
process of collecting and analyzing the data from its Phase III pancreatic
cancer clinical trials to determine the appropriateness of filing such NDA. The
Company expects that its cash needs in the future may increase due to costs
associated with on-going clinical trials and preparation of an NDA for ONCONASE.
The Company believes that its cash and cash equivalents as of April 30, 1998,
will be sufficient to meet its anticipated cash needs through the fiscal year
ending July 31, 1999. 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 upon the exercise of stock options and warrants and for services
rendered, debt financing and financing provided by the Company's Chief Executive
Officer. The Company's long-term liquidity will depend on its ability to raise
substantial additional funds. There can be no assurance that such funds will be
available to the Company on acceptable terms, if at all.
The Company's working capital and capital requirements may depend upon
numerous factors including, the progress of the Company's research and
development programs, the timing and cost of obtaining regulatory approvals, and
the levels of resources that the Company devotes to the development of
manufacturing and marketing capabilities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 2. (c) Recent Sales of Unregistered Securities
On February 20, 1998, the Company sold in a private placement primarily to
institutional investors an aggregate of 1,168,575 units at a price of $4.00 per
unit. Each unit consisted of two (2) shares of Common Stock and one (1)
three-year warrant to purchase one (1) share of Common Stock at an exercise
price of $2.50 per share. Aggregate gross proceeds from the offering were
approximately $4,674,000 and the aggregate commissions payable to the placement
agent were approximately $327,000. The placement agent also received warrants to
purchase 116,858 units comprised of the same securities as the units sold to the
investors at an exercise price of $4.40 per unit. This private placement was
effected in accordance with the exemptions from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act") contained in
Section 4(2) of the Securities Act and Rule 506 under the Securities Act.
In March 1998, the Company converted a $100,000 account payable owed to one
of its suppliers into 50,000 shares of Common Stock in a private transaction
effected in accordance with the exemption from the registration requirements of
the Securities Act contained in Section 4(2) of the Securities Act.
- 12 -
<PAGE>
Item 5. Other Information
In March 1998 the SEC approved the settlement previously disclosed in the
Company's November 1997 Proxy Statement of allegations by the SEC of violations
of Sections 13 and 16 of the Securities Exchange Act of 1934 (the "Exchange
Act") by Kuslima Shogen, Chairman and Chief Executive Officer, Stanislaw
Mikulski, Executive Vice President and director and Allen Siegel, former
director. Ms. Shogen and Doctors Mikulski and Siegel agreed to the entry of a
cease and desist order and the payment of monetary penalties totaling $40,000
(payable by the Company under its indemnity agreements with these individuals)
without admitting or denying any of the SEC's allegations concerning certain
allegedly late filings required to be made by them pursuant to Sections 13 and
16 of the Exchange Act with respect to changes in beneficial ownership of the
Company's securities. With the exception of one late filing by Ms. Shogen in
1996, each of the allegedly unreported transactions occurred during the years
1983 to 1994. The alleged reporting violations relate solely to the filings of
required forms. There was no allegation by the SEC of any fraudulent or willful
misconduct. No action was brought against the Company. Since mid- 1994, when the
Company and its officers and directors, with the assistance of its securities
counsel, fully implemented a comprehensive Section 16(a) compliance program, all
changes of beneficial ownership which have occurred for these individuals have
been reported under Section 16(a) on a timely basis, except for one Form 4
reporting changes in beneficial ownership occurring in 1996 which Ms. Shogen
filed one month late, as disclosed in the Company's November 1997 Proxy
Statement.
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
No. Item Title by Reference
----- ---------- ------------
3.1 Certificate of Incorporation *
3.2 By-Laws *
3.3 Amendment to Certificate of Incorporation #
3.4 Amendment to Certificate of Incorporation +++
4.1 Form of Convertible Debenture **
10.1 Form of Stock and Warrant Purchase Agreements used in private
placements completed 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 ****
- 13 -
<PAGE>
Exhibit No. or
Exhibit Incorporation
No. Item Title by Reference
----- ---------- ------------
10.8 Accrued Salary Conversion Agreement dated
March 30, 1994 with Stanislaw Mikulski ****
10.9 Debt Conversion Agreement dated March 30, 1994 with John
Schierloh ****
10.10 Option Agreement dated March 30, 1994 with Kuslima Shogen ****
10.11 Option Agreement dated March 30, 1994 with Kuslima Shogen ****
10.12 Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Kuslima Shogen ****
10.13 Form of Amendment No. 1 dated June 20, 1994 to Option
Agreement dated March 30, 1994 with Kuslima Shogen *****
10.14 Form of Amendment No. 1 dated June 20, 1994 to Option
Agreement dated March 30, 1994 with Stanislaw Mikulski *****
10.15 Form of Stock and Warrant Purchase Agreement and Warrant
Agreement used in Private Placement completed on September 13,
1994 +
10.16 Form of Subscription Agreements and Warrant Agreement used in
Private Placements closed in October 1994 and September 1995 #
10.17 1997 Stock Option Plan. ###
10.18 Separation Agreement with Michael C. Lowe dated as of October 9,
1997 ++
10.19 Form of Subscription Agreement and Warrant Agreement used in
Private Placement completed on February 20, 1998. +++
10.20 Form of Warrant Agreement issued to the Placement Agent in
connection with the Private Placement completed on
February 20, 1998. +++
10.21 Placement Agent Agreement dated December 15, 1997. +++
27.1 Financial Data Schedule #####
99.1 Factors to Consider in Connection with Forward-Looking Statements #####
* Previously filed as exhibit to the Company's Registration Statement on
Form S-18 (File No. 2-79975-NY) and incorporated herein by reference
thereto.
** Previously filed as exhibits to the Company's Annual Report on Form 10-K
for the year ended July 31, 1993 and incorporated herein by reference
thereto.
*** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended January 31, 1994 and incorporated herein by
reference thereto.
**** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1994 and incorporated herein by
reference thereto.
- 14 -
<PAGE>
***** Previously filed as exhibits to the Company's Registration Statement
Form SB-2 (File No. 33-76950) and incorporated herein by reference
thereto.
+ Previously filed as exhibits to the Company's Registration Statement on
Form SB-2 (File No. 33-83072) and incorporated herein by reference
thereto.
++ Previously filed as exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended October 31, 1997 and incorporated herein by
reference thereto.
+++ Previously filed as exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 1998 and incorporated herein by
reference thereto.
# Previously filed as exhibits to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1995 and incorporated herein by
reference thereto.
## Previously filed as exhibits to the Company's Registration Statement on
Form SB-2 (File No. 333-11575) and incorporated herein by reference
thereto.
### Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1997 and incorporated herein by
reference thereto.
#### Previously filed as exhibits to the Company's Annual Report on Form 10-K
for the year ended July 31, 1997 and incorporated herein by reference
thereto.
##### Filed herewith.
(b) Reports on Form 8-K.
On February 24, 1998 the Company filed a report on Form 8-K which reported
under Item 5 thereof that on February 20, 1998 the Company completed a private
placement primarily to institutional investors which resulted in the issuance of
1,168,575 units at a unit price of $4.00. Each Unit consisted of two (2) shares
of the Company's Common Stock, par value $.001 per share and one (1) three-year
warrant to purchase one (1) share of Common Stock at an exercise price of $2.50
per share. The Company received proceeds of approximately $4,300,000, net of the
placement agent's commission and expenses of approximately $365,000. The
placement agent also received warrants to purchase an additional 116,858 similar
Units at an exercise price of $4.40 per unit as part of its compensation.
- 15 -
<PAGE>
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 12, 1998 /s/ GAIL E. FRASER
------------------
Gail E. Fraser
Vice President, Finance and Chief
Financial Officer (Duly Authorized
Officer, Principal Accounting Officer
and Principal Financial Officer)
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Alfacell Corporation Balance Sheet as of April 30, 1998 and the Statements of
Operations for the nine months ended April 30, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Jul-31-1998
<PERIOD-END> Apr-30-1998
<CASH> 6,120,425
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,304,155
<PP&E> 1,143,636
<DEPRECIATION> 816,254
<TOTAL-ASSETS> 6,631,537
<CURRENT-LIABILITIES> 1,416,983
<BONDS> 0
0
0
<COMMON> 17,235
<OTHER-SE> 5,188,214
<TOTAL-LIABILITY-AND-EQUITY> 6,631,537
<SALES> 0
<TOTAL-REVENUES> 226,332
<CGS> 0
<TOTAL-COSTS> 5,037,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,355
<INCOME-PRETAX> (4,832,134)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,832,134)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,832,134)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
Exhibit 99.1
FACTORS TO CONSIDER IN CONNECTION WITH FORWARD LOOKING STATEMENTS
Development Stage Company, Accumulated Deficit, Stockholders' Deficiency and
Uncertainty of Future Profitability. The Company is a development stage company
which is subject to all of the risks and uncertainties of such a company,
including uncertainties of product development, constraints on financial and
personnel resources and dependence upon and need for third party financing. The
Company's profitability will depend primarily upon its success in developing,
obtaining regulatory approvals for, and effectively marketing ONCONASE. ONCONASE
has not been approved by the United States Food and Drug Administration ("FDA").
Potential investors should be aware of the difficulties a development stage
enterprise encounters, especially in view of the intense competition in the
pharmaceutical industry in which the Company competes. There can be no assurance
that the Company's plans will either materialize or prove successful, that its
products under development will be successfully developed or that such products
will generate revenues sufficient to enable the Company to earn a profit. Since
the Company's incorporation in 1981, a significant source of cash for the
Company has been public and private placements of its securities. At April 30,
1998, the Company had an accumulated deficit of approximately $50,242,000, and a
total stockholders' equity of approximately $5,205,000. The Company anticipates
that it will continue to incur substantial losses in the future. The Company is
pursuing licensing, marketing and development arrangements that may result in
contract revenue to the Company prior to its receiving revenues from commercial
sales of ONCONASE. To date, the Company has not received any such revenues.
There can be no assurance, however, that the Company will be able to
successfully consummate any such arrangements.
Need for, and Uncertainty of, Future Financing. The Company will be required to
expend significant funds on the further development of ONCONASE and its
continued operations will depend on its ability to raise additional funds
through several potential sources such as equity or debt financing,
collaborative agreements, strategic alliances and revenues from the commercial
sale of ONCONASE. The Company believes that its cash and cash equivalents as of
April 30, 1998, will be sufficient to meet its anticipated cash needs through
the fiscal year ending July 31, 1999. The Company will be required to raise
additional funds to meet its cash needs upon exhaustion of its current cash
resources. The Company continues to be primarily financed by proceeds from
private placements of Common Stock and investments in its equity securities. If
the Company is unable to secure sufficient future financing it may be necessary
for the Company to curtail or discontinue its research and development
activities.
Government Regulation; No Assurance of FDA Approval. The pharmaceutical industry
in the United States is subject to stringent governmental regulation and the
sale of ONCONASE for use in humans in the United States will require the prior
approval of the FDA. Similar approvals by comparable agencies are required in
most foreign countries. The FDA has established mandatory procedures and safety
standards which apply to the clinical testing, manufacture and marketing of
pharmaceutical products. Pharmaceutical manufacturing facilities are also
regulated by state, local and other authorities. Obtaining FDA approval for a
new therapeutic drug may take several years and involve substantial
expenditures. ONCONASE has not been approved for sale in the United States or
elsewhere. The Company is in the process of collecting and analyzing the data
from its Phase III pancreatic cancer clinical trials to determine the
appropriateness of filing an NDA for ONCONASE for such indication with the FDA.
There can be no assurance that such NDA will be filed or if filed, that the
Company will be able to obtain FDA approval for ONCONASE or any of its future
products. Failure to obtain requisite governmental approvals or failure to
obtain approvals of the scope requested will delay or preclude the Company from
marketing its products while under patent protection, or limit the commercial
use of the products, and thereby may have a material adverse effect on the
Company's liquidity and financial condition. Further, even if governmental
approval is obtained, new drugs are subject to continual review and a later
discovery of previously unknown problems may result in restrictions on the
particular product, including withdrawal of such product from the market.
- 1 -
<PAGE>
Uncertain Ability to Protect Patents and Proprietary Technology. The Company
believes it is important to develop new technology and improve its existing
technology. When appropriate, the Company files patent applications to protect
inventions made by its personnel. The Company owns six U.S. Patents: (i) U.S.
Patent No. 4,888,172 issued in 1989, which covers a pharmaceutical produced from
fertilized frog eggs and the methodology for producing it; (ii) U.S. Patent No.
5,559,212 issued in 1996 which covers the amino acid sequence of ONCONASE; (iii)
U.S. Patents Nos. 5,529,775 and 5,540,925 issued in 1996 and U.S. Patent No.
5,595,734 issued in 1997, which cover combinations of ONCONASE with certain
other pharmaceuticals; and (iv) U.S. Patent No. 5,728,805 issued in 1998 which
covers a family of variants of ONCONASE. The Company owns three European patents
which have been validated in certain European countries. These European patents
cover ONCONASE, process technology for making ONCONASE, and combinations of
ONCONASE with certain other chemotherapeutics. The Company also owns other
patent applications, which are pending in the United States, Europe, and Japan.
Additionally, the Company owns an undivided interest in two applications that
are pending in the United States. Each of these applications relate to a Subject
Invention (as that term is defined in cooperative research and development
agreements to which the Company and the National Institutes of Health (the
"NIH") are parties). Patents covering biotechnological inventions have an
uncertain scope, and the Company is subject to this uncertainty. The Company's
patent applications may not issue as patents. Moreover, the Company's patents
may not provide the Company with competitive advantages and may not withstand
challenges by others. Likewise, patents owned by others may adversely affect the
ability of the Company to do business. Furthermore, others may independently
develop similar products, may duplicate the Company's products, and may design
around patents owned by the Company. The Company's patent protection is limited
to that afforded under the claims of its issued patents, unless and until other
patent protection is available to the Company. Although the Company believes
that its patents and patent applications are of substantial value to the
Company, there can be no assurance that such patents will be of substantial
commercial benefit to the Company, will afford the Company adequate protection
from competing products or will not be challenged or declared invalid. The
Company expects that there will continue to be significant litigation in the
industry regarding patents and other proprietary rights and, if the Company were
to become involved in such litigation, there could be no assurance that the
Company would have the resources necessary to litigate the contested issues
effectively.
Intense Competition and Technological Obsolescence. There are several companies,
universities, research teams and scientists, both private and
government-sponsored, which engage in developing products for the same
indications as the Company. Many of these entities and associations have far
greater financial resources, larger research staffs and more extensive physical
facilities than the Company. Several competitors are more experienced and have
substantially greater clinical, marketing and regulatory capabilities and
managerial resources than the Company. Such competitors may succeed in their
research and development of products for the same indications as the Company
prior to the Company achieving any measure of success in its efforts.
The number of persons skilled in the research and development of pharmaceutical
products is limited and significant competition exists for such individuals. As
a result of this competition and the Company's limited resources, the Company
may find it difficult to attract skilled individuals to research, develop and
investigate anti-cancer drugs in the future.
The business in which the Company is engaged is highly competitive and involves
rapid changes in the technologies of discovering, investigating and developing
new drugs. Rapid technological development by others may result in the Company's
products becoming obsolete before the Company recovers a significant portion of
the research, development and commercialization expenses incurred with respect
to those products. Competitors of the Company are numerous and are expected to
increase as new technologies become available. The Company's success depends
upon developing and maintaining a competitive position in the development of new
drugs and technologies in its area of focus. There can be no assurance that, if
attained, the Company will be able to maintain a competitive position in the
pharmaceutical industry.
- 2 -
<PAGE>
Uncertain Availability of Health Care Reimbursement. The Company's ability to
commercialize its product candidates may depend in part on the extent to which
reimbursement for the costs of such product will be available from government
health administration authorities, private health insurers and others.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance of the availability of adequate
third-party insurance reimbursement coverage that enables the Company to
establish and maintain price levels sufficient for realization of an appropriate
return on its investment in developing its products. Government and other
third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products approved for marketing by the FDA and by refusing, in some cases, to
provide any coverage for uses of approved products for disease indications for
which the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of the Company's product candidates, the market acceptance of these
products would be adversely affected.
Potential Product Liability. The use of the Company's products during testing or
after regulatory approval entails an inherent risk of adverse effects which
could expose the Company to product liability claims. The Company maintains
product liability insurance coverage in the total amount of $6,000,000 for
claims arising from the use of its products in clinical trials prior to FDA
approval. There can be no assurance that the Company will be able to maintain
its existing insurance coverage or obtain coverage for the use of its products
in the future. Management believes that the Company maintains adequate insurance
coverage for the operation of its business at this time, however, there can be
no assurance that such insurance coverage and the resources of the Company would
be sufficient to satisfy any liability resulting from product liability claims.
Dependence Upon Key Personnel. The Company is currently managed by a small
number of key management and operating personnel, whose efforts will largely
determine the Company's success. The loss of key management personnel,
particularly Kuslima Shogen, the Company's Chairman and Chief Executive Officer,
would likely have a material adverse effect on the Company. The Company carries
key person life insurance on the life of Ms. Shogen with a face value of
$1,000,000.
Dependence on Third Parties for Manufacturing. The Company does not currently
have facilities capable of manufacturing its product in commercial quantities
and, for the foreseeable future, the Company intends to rely on third parties to
manufacture its product. If the Company were to establish a manufacturing
facility, which it currently does not intend to do, the Company would require
substantial additional funds and would be required to hire and retain
significant additional personnel to comply with the extensive current Good
Manufacturing Practices regulations of the FDA applicable to such a facility. No
assurance can be given that the Company would be able to make the transition
successfully to commercial production, if it chose to do so.
Dependence on Third Parties for Marketing; No Marketing Experience. Neither the
Company nor any of its officers or employees has pharmaceutical marketing
experience. The Company intends to enter into development and marketing
agreements with third parties. The Company expects that under such arrangements
it would act as a co-marketing partner or would grant exclusive marketing rights
to its corporate partners in return for upfront fees, milestone payments and
royalties on sales. Under these agreements, the Company's marketing partner may
have the responsibility for a significant portion of development of the product
and regulatory approval. In the event that the marketing partner fails to
develop a marketable product or fails to market a product successfully, the
Company's business may be adversely affected. If the Company were to market its
products itself, significant additional expenditures and management resources
would be required to develop an internal sales force and there can be no
assurance that the Company would be successful in penetrating the markets for
any products developed or that internal marketing capabilities would be
developed at all.
- 3 -
