UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: October 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number: 0-11088
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2369085
(State or other jurisdiction of (I.R.S. Employer Identification No.)
organization)
225 Belleville Avenue, Bloomfield, New Jersey 07003
(Address of principal executive offices) (Zip Code)
(973) 748-8082
(Registrant's telephone number, including area code)
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 a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definitions of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |_| Accelerated Filer |X| Non-accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of Common Stock, $.001 par value, outstanding as of
December 7, 2006 was 45,008,401 shares.
ALFACELL CORPORATION
(A Development Stage Company)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED BALANCE SHEETS
October 31, 2006 and July 31, 2006
October 31, July 31,
2006 2006
ASSETS (Unaudited) (See Note 1)
------------ ------------
Current assets:
Cash and cash equivalents $ 9,041,532 $ 11,518,540
Other current assets 346,304 67,090
------------ ------------
Total current assets 9,387,836 11,585,630
Property and equipment, net 82,729 69,928
Loan receivable, related party 173,252 170,870
------------ ------------
Total assets $ 9,643,817 $ 11,826,428
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,215,996 $ 1,286,170
Accrued expenses 832,388 1,307,255
------------ ------------
Total liabilities 2,048,384 2,593,425
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value;
Authorized and unissued, 1,000,000 shares at October 31, 2006 and July 31, 2006 -- --
Common Stock, $.001 par value;
Authorized 100,000,000 shares at October 31, 2006 and July 31, 2006;
Issued and outstanding, 44,458,401 shares at October 31, 2006 and 44,289,161
shares at July 31, 2006 44,458 44,289
Capital in excess of par value 93,240,522 92,505,325
Deficit accumulated during development stage (85,689,547) (83,316,611)
------------ ------------
Total stockholders' equity 7,595,433 9,233,003
------------ ------------
Total liabilities and stockholders' equity $ 9,643,817 $ 11,826,428
============ ============
See accompanying notes to condensed financial statements.
2
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
Three months ended October 31, 2006 and 2005,
and the Period from August 24, 1981
(Date of Inception) to October 31, 2006
(Unaudited)
Three Months Ended August 24, 1981
October 31, (Date of Inception)
----------- to
2006 2005 October 31, 2006
---- ---- ----------------
(As restated)
-------------
Revenue:
Sales $ -- $ -- $ 553,489
Investment income 123,333 31,995 1,801,540
Other income -- -- 99,939
------------ ------------ ------------
Total revenue 123,333 31,995 2,454,968
------------ ------------ ------------
Costs and expenses:
Cost of sales -- -- 336,495
Research and development 1,570,185 1,222,012 56,837,432
General and administrative 926,038 666,348 29,568,461
Interest:
Related parties -- -- 1,147,547
Others 46 10 2,874,122
------------ ------------ ------------
Total costs and expenses 2,496,269 1,888,370 90,764,057
------------ ------------ ------------
Loss before state tax benefit (2,372,936) (1,856,375) (88,309,089)
State tax benefit -- 317,382 2,619,542
------------ ------------ ------------
Net loss $ (2,372,936) $ (1,538,993) $(85,689,547)
============ ============ ============
Loss per basic and diluted common share $ (0.05) $ (0.04)
============ ============
Weighted average common shares outstanding, basic
and diluted 44,345,739 36,593,020
============ ============
See accompanying notes to condensed financial statements.
3
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
Three months ended October 31, 2006 and 2005,
and the Period from August 24, 1981
(Date of Inception) to October 31, 2006
(Unaudited)
Three Months Ended August 24, 1981
October 31, (Date of Inception)
----------- to
2006 2005 October 31, 2006
---- ---- ----------------
(As restated)
-------------
Cash flows from operating activities:
Net loss $(2,372,936) $(1,538,993) $(85,689,547)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities -- -- (25,963)
Depreciation and amortization 9,085 6,830 1,629,062
Loss on disposal of property and equipment -- -- 18,926
Issuance of common stock, stock options and
warrants for services rendered 584,326 350,756 8,790,603
Amortization of debt discount -- -- 594,219
Amortization of deferred compensation -- -- 11,442,000
Changes in assets and liabilities:
Increase in receivable from the sale of net
operating loss carryforwards -- (317,382) --
(Increase) decrease in other current assets (279,214) 106,934 (406,171)
Increase in loan receivable-related party (2,382) (2,382) (77,201)
Increase in interest payable-related party -- -- 744,539
(Decrease) increase in accounts payable (70,174) 178,000 1,722,631
Increase in accrued payroll and expenses,
related parties -- -- 2,348,145
(Decrease) increase in accrued expenses (474,867) 129,398 1,551,272
----------- ----------- ------------
Net cash used in operating activities (2,606,162) (1,086,839) (57,357,485)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of marketable equity securities -- -- (290,420)
Purchase of short-term investments -- -- (1,993,644)
Proceeds from sale of marketable equity securities -- -- 316,383
Proceeds from sale of short-term investments -- -- 1,993,644
Purchase of property and equipment (21,886) (2,461) (1,554,024)
Patent costs -- -- (97,841)
----------- ----------- ------------
Net cash used in investing activities (21,886) (2,461) (1,625,902)
----------- ----------- ------------
(continued)
See accompanying notes to condensed financial statements.
4
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS, Continued
Three months ended October 31, 2006 and 2005
and the Period from August 24, 1981
(Date of Inception) to October 31, 2006
(Unaudited)
Three Months Ended August 24, 1981
October 31, (Date of Inception)
----------- to
2006 2005 October 31, 2006
---- ---- ----------------
(As restated)
-------------
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 -- -- (2,966,568)
Proceeds from issuance of common stock, net (29,210) -- 51,705,026
Proceeds from exercise of stock options and warrants, net 180,250 53,048 12,055,140
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 151,040 53,048 68,024,919
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (2,477,008) (1,036,252) 9,041,532
Cash and cash equivalents at beginning of period 11,518,540 4,462,951 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 9,041,532 $ 3,426,699 $ 9,041,532
============ ============ ============
Supplemental disclosure of cash flow information - Interest Paid $ 46 $ 10 $ 1,714,176
============ ============ ============
Noncash financing activities:
Issuance of convertible subordinated debenture for loan
payable to officer $ -- $ -- $ 2,725,000
============ ============ ============
Issuance of Common Stock upon the conversion of
convertible subordinated debentures, related party $ -- $ -- $ 3,242,000
============ ============ ============
Conversion of short-term borrowings to Common Stock $ -- $ -- $ 226,000
============ ============ ============
Conversion of accrued interest, payroll and expenses by
related parties to stock options $ -- $ -- $ 3,194,969
============ ============ ============
Repurchase of stock options from related party $ -- $ -- $ (198,417)
============ ============ ============
Conversion of accrued interest to stock options $ -- $ -- $ 142,441
============ ============ ============
Conversion of accounts payable to Common Stock $ -- $ -- $ 506,725
============ ============ ============
(continued)
See accompanying notes to condensed financial statements.
5
ALFACELL CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS, Continued
Three months ended October 31, 2006 and 2005
and the Period from August 24, 1981
(Date of Inception) to October 31, 2006
(Unaudited)
Three Months Ended August 24, 1981
October 31, (Date of
----------- Inception) to
2006 2005 October 31, 2006
---- ---- ----------------
(As restated)
-------------
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 $ -- $ -- $1,584,364
========= ========= ==========
Issuance of Common Stock for services rendered $ -- $ -- $ 2,460
========= ========= ==========
Issuance of warrants with notes payable $ -- $ -- $ 594,219
========= ========= ==========
See accompanying notes to condensed financial statements.
6
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 of Alfacell Corporation ("Alfacell" or the "Company") have
been prepared in accordance with accounting principles generally accepted in the
United States of America and contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the Company's financial
position as of October 31, 2006 and its results of operations and cash flows for
the three month periods ended October 31, 2006 and 2005 and the period from
August 24, 1981 (date of inception) to October 31, 2006. The results of
operations for the three months ended October 31, 2006 are not necessarily
indicative of the results to be expected for the full year. The July 31, 2006
condensed balance sheet presented herein has been derived from the audited
financial statements included in the Company's Form 10-K for the fiscal year
ended July 31, 2006, 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 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 fiscal year ended
July 31, 2006.
The Company is a development stage company as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises". 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 $2,373,000,
$7,810,000, $6,462,000 and $5,070,000 for the three months ended October 31,
2006 and the fiscal years ended July 31, 2006, 2005 and 2004, respectively. The
loss from date of inception, August 24, 1981, to October 31, 2006 amounts to
approximately $85,690,000.
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 tax benefits,
revenues from the commercial sale of ONCONASE(R), licensing of its proprietary
RNase technology and its ability to realize revenues from its technology and its
drug candidates via out-licensing agreements with other companies. Such
additional funds may not become available as the Company may need them or be
available on acceptable terms. Until and unless the Company's operations
generate significant revenues, the Company expects to continue to fund
operations primarily from equity financing and through the exercise of
outstanding options and warrants and the sale of its tax benefits. There can be
no assurance that the Company will be able to raise the capital it needs on
terms which are acceptable, if at all. As of October 31, 2006, management
believes that the Company's cash balance will be sufficient to fund its
operations through its fiscal year ending July 31, 2008 based on its expected
level of expenditures.
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.
7
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
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 had losses in all periods and the assumed exercise of
stock options and warrants prior to October 31, 2006 would be anti-dilutive. The
number of outstanding options and warrants that could dilute earnings per share
in future periods was 21,853,487 and 16,093,437 at October 31, 2006 and 2005,
respectively.
3. STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R) (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which amended SFAS
123. The new standard requires all share-based payments, including stock option
grants to employees, to be recognized as an operating expense in the statement
of operations. The cost is recognized over the requisite service period based on
fair values measured on the date of grant. The Company adopted SFAS 123(R)
effective August 1, 2005 using the modified prospective method and, accordingly,
prior period amounts have not been restated. Under the modified prospective
method, the fair value of all new stock options issued after July 31, 2005 and
the unamortized fair value of unvested outstanding stock options at August 1,
2005 are recognized as expense as services are rendered. The Company recorded
approximately $581,000 or $0.01 per basic and diluted common share and
approximately $348,000 (as restated) or $0.01 per basic and diluted common share
of stock-based compensation expense for employees under SFAS 123(R) for the
three months ended October 31, 2006 and 2005, respectively, based on the fair
value of stock options.
The fair value of the stock options at the grant date was estimated using
the Black-Scholes option pricing model based on the weighted-average assumptions
as noted in the following table. The risk-free interest rate for periods
approximating the expected life of the option is based on the U.S. Treasury
yield curve in effect at the time of grant. The expected stock price volatility
is based on historical volatility of the Company's stock price. For post July
31, 2005 grants, the expected term until exercise is derived using the
"simplified" method as allowed under the provisions of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 107, "Disclosures about Fair
Value of Financial Instruments" and represents the period of time that options
granted are expected to be outstanding. As of October 31, 2006, there was
approximately $2,363,000 of total unrecognized compensation cost related to
unvested options granted that is expected to be recognized over a weighted
average period of 1.77 years. The total intrinsic value of options exercised by
employees during the three months ended October 31, 2006 and 2005 was
approximately $68,000 and $21,000, respectively.
8
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. STOCK-BASED COMPENSATION, (continued)
Three Months Ended
October 31,
-----------
2006 2005
---- ----
Expected dividend yield 0% 0%
Risk-free interest rate 4.61% 4.49%
Expected stock price volatility 113.60% 82.01%
Expected term (years) 6.06 7.02
The following table summarizes the stock option activity for the period
August 1, 2006 to October 31, 2006:
Weighted Average
Stock Options Exercise
Outstanding Price Per Share
----------- ---------------
Balance August 1, 2006 3,830,350 $3.10
Granted 335,000 1.29
Exercised (84,000) 0.62
Expired/Cancelled (10,000) 3.66
----------
Balance October 31, 2006 4,071,350 3.00
==========
Exercisable as of October 31, 2006 2,334,800 3.23
==========
The remaining weighted average contractual term for options granted during
the three months ended October 31, 2006 is 10 years.
Shares, warrants and options issued to non-employees for services are
accounted for in accordance with SFAS 123(R) and Emerging Issues Task Force
Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring or In Conjunction with Selling
Goods or Services". The fair value of such securities is recorded in expense and
additional paid-in capital in stockholders' equity over the applicable service
periods using variable accounting through the vesting date based on the fair
value of the securities at the end of each period or the vesting date.
4. LOAN RECEIVABLE, RELATED PARTY
Amounts due from the Company's Chief Executive Officer totaling $173,252
at October 31, 2006 and $170,870 at July 31, 2006, are classified as a long-term
asset in loan receivable, related party as the Company does not expect repayment
of these amounts within one year. In each of the three months ended October 31,
2006 and 2005, the Company accrued 8% interest in the amount of approximately
$2,400 on the unpaid principal balance.
9
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
5. CAPITAL STOCK
During the quarter ended October 31, 2006, the Company issued an aggregate
of 169,240 shares of its Common Stock upon the exercise of warrants and stock
options by unrelated parties and employees at per share exercise prices ranging
from $0.49 to $1.50. The Company realized aggregate gross proceeds of $180,250
from these exercises.
During the quarter ended October 31, 2006, the Company recorded under EITF
96-18, an aggregate total of $3,645 of non-cash expense for options issued to
consultants during the fiscal years 2006 and 2005.
6. SALE OF NET OPERATING LOSS CARRYFORWARDS
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell a portion of their 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 2007 (July 1, 2006 to June 30,
2007), the Company had approximately $2,338,000 of total available net operating
loss carryforwards that were saleable, of which New Jersey permitted the Company
to sell approximately $574,000. Based on an agreement the Company entered into,
the Company will receive approximately $510,000 from the sale of the $574,000 of
net operating loss carryforwards, which will be recognized as a tax benefit when
the funds are received.
For the state fiscal year 2006 (July 1, 2005 to June 30, 2006), the
Company had approximately $1,903,000 of total available net operating loss
carryforwards that were saleable; of which New Jersey permitted the Company to
sell approximately $356,000. In December 2005, the Company received
approximately $317,000 from the sale of the $356,000 of net operating loss
carryforwards, which was recognized as a tax benefit for the quarter ended
October 31, 2005.
If still available under New Jersey law, the Company will attempt to sell
the remaining $1,764,000 of its net operating loss carryforwards between July 1,
2007 and June 30, 2008 (state fiscal year 2008). This amount, which is a
carryover of the Company's remaining net operating loss carryforwards from state
fiscal year 2007, may increase if the Company incurs additional net losses and
research and development credits during state fiscal year 2008. The Company can
not 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 any, 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.
7. RESTATEMENT OF UNAUDITED QUARTERLY FINANCIAL DATA
As previously reported in the Form 10-K for the fiscal year ended July 31,
2006, in connection with its audit of the Company's financial statements for the
fiscal year ended July 31, 2006, the Company's independent registered public
accounting firm brought to the attention of the Company's management that the
Company's estimate of the impact of forfeitures on non-cash compensation cost
was, as a percentage, significantly higher than the historical rate of such
pre-vesting forfeitures and that the true-up of the value of options vesting
during the reporting period was not recorded. After reviewing
10
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
(Unaudited)
7. RESTATEMENT OF UNAUDITED QUARTERLY FINANCIAL DATA, (continued)
the matter, the Company's management agreed to calculate the forfeiture rate
using primarily historical experience and record the value of the options that
vested during the reporting period. The original computation had understated
non-cash compensation costs and net losses in the Company's unaudited Condensed
Financial Statements included in Form 10-Q for the quarter ended October 31,
2005. The Company's management believes that the adjustment to the amount of
non-cash compensation expense in the affected quarterly period is not material
and that the quarterly report for the period ended October 31, 2005 does not
require refiling.
Although management believes that the changes in the affected quarterly
report were not material, the Company is presenting certain restated unaudited
statement of operations information. Presented in the following table are the
total costs and expenses, the net loss and the loss per basic and diluted common
share as originally reported and the restated amounts for the quarter.
As Originally As Restated for the
Reported for the Three Months
Three Months Ended Ended
Quarter Ended October 31, 2005 October 31, 2005 October 31, 2005
---------------- ----------------
Statement of Operations:
Research and development $ 1,159,000 $ 1,222,000
General and administrative 590,000 666,000
----------- -----------
Total costs and expenses $ 1,749,000 $ 1,888,000
=========== ===========
Net loss $(1,400,000) $(1,539,000)
=========== ===========
Loss per basic and diluted common share $ (0.04) $ (0.04)
=========== ===========
8. SUBSEQUENT EVENTS
In November and December 2006, the Company issued an aggregate total of
50,000 and 500,000 shares of restricted common stock upon the exercise of
warrants by unrelated parties at per share exercise prices of $0.60 and $1.00,
respectively. The Company realized aggregate gross proceeds of $530,000 from
these exercises.
11
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 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 in Part
I, Item 1A. "Risk Factors" in our annual report on Form 10-K, filed on October
16, 2006, 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. There have been no material
changes to the discussion of risk factors included in our most recent annual
report on Form 10-K.
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 from the Food and Drug
Administration, or FDA, for the treatment of malignant mesothelioma patients, we
continue to have 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 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. This designation in the European Union entitles us to
several financial incentives such as registration fee reductions and a ten-year
marketing exclusivity for the therapeutic indication for which it was granted.
We received an Orphan Drug Designation for ONCONASE(R) for malignant
mesothelioma in Australia from the Therapeutics Goods Administration, or TGA.
This designation in Australia entitles us to five years of marketing
exclusivity, a 100% waiver of filing fees and regulatory guidance from the TGA.
Almost all of the approximately $56,837,000 of research and development
expenses we have incurred since our inception has gone toward the development of
ONCONASE(R) and related drug candidates. For the three months ended October 31,
2006 and the fiscal years 2006, 2005 and 2004 our research and development
expenses were approximately $1,570,000, $5,230,000, $5,082,000 and $3,353,000,
respectively, almost all of which were used for the development of ONCONASE(R)
and related drug candidates. ONCONASE(R) is currently in an international,
centrally randomized, confirmatory Phase IIIb registration trial. The first part
of the trial has been completed. The second confirmatory part of the trial is
ongoing. The primary endpoint of the trial is overall survival. The first
interim analysis results based on one third of the required events (deaths) of
the study, which evaluates the efficacy, safety and tolerability of the
combination of
12
ONCONASE(R) + doxorubicin as compared to doxorubicin alone have been reported.
The overall median survival time (MST) demonstrated a trend favoring the
ONCONASE(R) + doxorubicin treatment group (12 months) over the doxorubicin group
(10 months). A two month improvement in median survival had previously been
observed in the Treatment Target Group (n=104) analysis from the completed Phase
III single agent study that favored the ONCONASE(R) over doxorubicin treatments
(11.6 months vs. 9.6 months). The Company's Phase IIIb confirmatory registration
trial was designed based on the conclusions drawn from the TTG analysis but
powered to reach a statistically significant difference in MST between the
ONCONASE(R) + doxorubicin treatment group and the doxorubicin treatment group at
316 events. The interim data which represented only one third of the planned
number of events was sufficient for us to continue the trial as planned, but was
not sufficient for supporting the filing for marketing approvals at that time.
At this time, we cannot predict with certainty when a sufficient number of
deaths will occur to achieve statistical significance. The timing of when we
will be able to file for marketing registrations in the US, EU and Australia is
data driven. Therefore, we cannot predict with certainty what our total cost
associated with obtaining marketing approvals will be, or when and if such
approvals will be granted, or when actual sales will occur. We have completed
the chemistry, manufacturing and controls (CMC) section of the NDA and will
submit it after receipt of the Pharmaceutical Drug User Fee Application (PDUFA)
waiver for small business exemption.
We fund the research and development of our products primarily from cash
receipts resulting from the sale of our equity securities and convertible
debentures in registered offerings and private placements. Additionally, we have
raised capital through other debt financings, the sale of our tax benefits and
research products, interest income and financing received from our Chief
Executive Officer. During the fiscal year ended July 31, 2006, we received net
proceeds of approximately $12.3 million as a result of private placements of
Common Stock and warrants and from exercises of stock options and warrants.
These proceeds will be used to support our strategic plan, including the
anticipated filing of an NDA of ONCONASE(R) for malignant mesothelioma, assuming
satisfactory results from the ongoing clinical trial, the expansion of the
ONCONASE(R) oncology franchise, and the development of other pipeline products.
We have incurred losses since inception and to date we have not consummated any
licensing, or marketing agreements for ONCONASE(R) or any of our early drug
candidates.
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 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, 2006.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB Statement No. 109." FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in a company's financial statements
in accordance with Statement No. 109, "Accounting for Income Taxes." FIN 48
prescribes a recognition threshold and measurement of a tax position taken or
expected to be taken in a company's tax return. The provisions of FIN 48 will be
effective for our fiscal year ended July 31, 2008. We are currently evaluating
the impact of the adoption of FIN 48 will have, if any, on our financial
statements.
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Results of Operations
Three month periods ended October 31, 2006 and 2005
Revenues. We are a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development Stage Enterprises." We are devoting
substantially all of our present efforts to establishing a new business and
developing new drug products. Our planned principal operations of marketing
and/or licensing 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 months ended October 31, 2006 and 2005.
For the three months ended October 31, 2006, our investment income was
approximately $123,000 compared to $32,000 for the same period last year, an
increase of $91,000 due to higher balances of cash and cash equivalents.
Research and Development. Research and development expense for the three
months ended October 31, 2006 was $1,570,000 compared to $1,222,000 (as
restated) for the same period last year, an increase of $348,000, or 28%. The
increase was primarily due to an increase in expenses in connection with
preparing our NDA for ONCONASE(R) of approximately $336,000. The research and
development increase also resulted from an increase in compensation expense
related to share-based compensation of approximately $54,000; offset by a
decreases in patent expenses of approximately $21,000 and pre-clinical sponsored
research and development expenses of approximately $21,000.
General and Administrative. General and administrative expense for the
three months ended October 31, 2006 was $926,000 compared to $666,000 (as
restated) for the same period last year, an increase of $260,000, or 39%. The
increase was due primarily to an increase in compensation expense of
approximately $170,000 of which approximately $144,000 is related to share-based
compensation. General and administrative increase also resulted from board of
directors fees and consulting fees of approximately $48,000; non-cash expense
related to stock options issued to board members and consultant of approximately
$35,000; accounting and auditing fees of $33,000; public relations related
expenses of approximately $16,000; and Sarbanes-Oxley compliance and auditing
fees of approximately $8,000; offset by a reduction in legal fees of
approximately $39,000; and a decrease in NASDAQ membership fees of approximately
$11,000.
Income Taxes. New Jersey has enacted legislation permitting certain
corporations located in New Jersey to sell a portion of our 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 2007
(July 1, 2006 to June 30, 2007), we had approximately $2,338,000 of total
available net operating loss carryforwards that were saleable, of which New
Jersey permitted us to sell approximately $574,000. Based on an agreement we
entered into, we will receive approximately $510,000 from the sale of the
$574,000 of net operating loss carryforwards, which will be recognized as a tax
benefit when the funds are received.
For the state fiscal year 2006 (July 1, 2005 to June 30, 2006), we had
approximately $1,903,000 of total available net operating loss carryforwards
that were saleable; of which New Jersey permitted us to sell approximately
$356,000. In December 2005, we received approximately $317,000 from the sale of
the $356,000 of net operating loss carryforwards, which we recognized as a tax
benefit for the quarter ended October 31, 2005.
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If still available under New Jersey law, we will attempt to sell the
remaining $1,764,000 of our net operating loss carryforwards between July 1,
2007 and June 30, 2008 (state fiscal year 2008). This amount, which is a
carryover of our remaining net operating loss carryforwards from state fiscal
year 2007, may increase if we incur additional net losses and research and
development credits during state fiscal year 2008. We can not 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 any, 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 October 31, 2006 was
$2,373,000 as compared to $1,539,000 (as restated) for the same period last
year, an increase of $834,000. The cumulative loss from the date of inception,
August 24, 1981 to October 31, 2006, amounted to $85,690,000. Such losses are
attributable to the fact that we are still in the development stage and,
accordingly, have not derived sufficient revenues from operations to offset the
development stage expenses.
Liquidity and Capital Resources
We have financed our operations since inception 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 and research products, interest
income and financing received from our Chief Executive Officer. During the three
months ended October 31, 2006, we had a net decrease in cash and cash
equivalents of $2,477,000, which resulted primarily from net cash used in
operating activities of $2,606,000 and net cash used in investing activities of
$22,000, offset by net cash provided by financing activities of $151,000
primarily from warrant and stock option exercises. Total cash resources as of
October 31, 2006 were $9,042,000 compared to $11,519,000 at July 31, 2006.
Our current liabilities as of October 31, 2006 were $2,048,000 compared to
$2,593,000 at July 31, 2006, a decrease of $545,000. The decrease was primarily
due to the payment of accrued expenses related to pre-clinical studies.
Until and unless our operations generate significant revenues, we expect
to continue to fund operations primarily from equity financing and through the
exercise of outstanding options and warrants and the sale of our tax benefits.
There can be no assurance that we will be able to raise the capital we need on
terms which are acceptable, if at all. As of October 31, 2006, we believe our
cash balance is sufficient to fund our operations through our fiscal year ending
July 31, 2008 based on our expected level of expenditures. These proceeds will
be used to support our strategic plan, including the anticipated filing of an
NDA of ONCONASE(R) for malignant mesothelioma, assuming satisfactory results
from the ongoing clinical trial, the expansion of the ONCONASE oncology
franchise, and the development of other pipeline products.
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.
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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 October 31, 2006, we are not involved in any
unconsolidated VIE transactions.
Contractual Obligations and Commercial Commitments
Our outstanding contractual obligations relate to our equipment operating
lease. Since July 31, 2006, there has been no material change with respect to
our contractual obligations as disclosed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Contractual
Obligations and Commercial Commitments" in our annual report on Form 10-K for
the fiscal year ended July 31, 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls And Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our "disclosure controls and
procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 ("The Exchange Act") as of October 31, 2006, the end of the period covered
by this report. Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were not effective as of October 31, 2006 since we have not yet
completed the remediation of the material weakness discussed in Item 9A,
"Controls and Procedures", of our Annual Report on Form 10-K ("2006 Form 10-K")
for the year ended July 31, 2006 filed with the SEC on October 16, 2006.
Management's internal control assessment as of July 31, 2006, as detailed
in our 2006 Form 10-K, identified a material weakness due to lack of personnel
with financial reporting expertise sufficient to properly record and report
non-routine and complex transactions and accounting pronouncements. Our
management is treating the material weakness identified above very seriously and
in response, plans to continue to review and make necessary changes to the
overall design of our control environment. We have begun to remediate the
material weakness described above and as a result management has undertaken and
plans to undertake the following steps to remediate this weakness:
(i) We plan to form an accounting oversight committee ("Oversight
Committee"), comprised of members of our senior management and a third party
GAAP advisor, charged with the task of discussing
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and reviewing all significant transactions that have financial recognition,
either to be recorded or disclosed. Additionally, the Oversight Committee will
consult with our outside corporate counsel;
(ii) We have retained a third party GAAP advisor to assist and advise the
CFO and Audit Committee on a timely basis on tasks including quarter end and
year end review of proposed accounting for and disclosure of significant
financial transactions and changes in GAAP. Members of the accounting staff of
the third party advisory firm will work under the supervision of the CFO and the
firm, and we can retain the third party advisory firm to provide additional
resources, for example, to provide a technical accounting expert to assist us
with current and future GAAP analysis, on an as needed basis; and
(iii) We plan to enhance staff training, including relevant continuing
education seminars for financial staff on newly issued technical accounting
pronouncements.
Management is committed to the execution of this remediation plan. We will
continue to monitor the improvements in the internal control over financial
reporting to ensure the remediation of this material weakness.
(b) Changes in internal controls.
There were no changes in our internal controls over financial reporting
during the three months ended October 31, 2006 or, to our knowledge, in other
factors that have materially affected, or are reasonably likely to materially
affect, these controls.
PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
--- ---------- ---------
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 +
+ Filed herewith.
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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)
December 11, 2006 /s/ Robert D. Love
------------------
Chief Financial Officer (Principal
Financial Officer and Chief Accounting
Officer)
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