alfacell_10q-103109.htm
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, 2009
|
|
[ ] 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)
|
|
300 Atrium Drive, Somerset,
NJ 08873
(Address
of principal executive
offices) (Zip
Code)
(Registrant’s
telephone number, including area code): (732)
652-4525
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [ ] 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
[ ] Non-accelerated Filer
[ ] Smaller Reporting Company [ X ]
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
16, 2009 was 47,313,880 shares.
ALFACELL
CORPORATION
(A
Development Stage Company)
FORM
10-Q
INDEX
Part
I. Financial Information
|
|
Item
1. Financial Statements
|
|
|
|
|
Condensed
Balance Sheets
|
3
|
|
|
|
Condensed
Statements of Operations
|
4
|
|
|
|
Condensed
Statement of Stockholders’ Deficiency
|
5
|
|
|
|
Condensed
Statements of Cash Flows
|
6
|
|
|
|
Notes
to Condensed Financial Statements
|
9
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Conditon
and
Results of Operations
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
25
|
|
|
Item
4T. Controls and Procedures
|
25
|
|
|
|
|
|
|
Part
II. Other Information
|
|
|
|
Item
1. Legal Procedings
|
25
|
|
|
Item
1A. Risk Factors
|
26
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
26
|
|
|
Item
3. Defaults Upon Senior Securities
|
26
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
27
|
|
|
Item
5. Other Information
|
27
|
|
|
Item
6. Exhibits
|
27
|
|
|
|
|
|
|
Signature
Page
|
28
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
ALFACELL
CORPORATION
(A
Development Stage Company)
CONDENSED
BALANCE SHEETS
October
31, 2009 and July 31, 2009
|
|
|
October
31,
2009
(Unaudited)
|
|
|
July
31,
2009
(See Note 1)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,558,453 |
|
|
$ |
129,194 |
|
|
Prepaid
expenses
|
|
|
150,523 |
|
|
|
54,494 |
|
|
Total
current assets
|
|
|
1,708,976 |
|
|
|
183,688 |
|
|
Property
and equipment, net of accumulated depreciation and amortization of
$385,133 at October 31, 2009 and $377,134 at July 31, 2009
|
|
|
100,019 |
|
|
|
108,018 |
|
|
Restricted
cash
|
|
|
1,801,805 |
|
|
|
266,280 |
|
|
Total
assets
|
|
$ |
3,610,800 |
|
|
$ |
557,986 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
758,092 |
|
|
$ |
407,273 |
|
|
Accrued
clinical trial expenses
|
|
|
430,081 |
|
|
|
459,911 |
|
|
Accrued
professional service fees
|
|
|
367,465 |
|
|
|
350,486 |
|
|
Accrued
compensation expense
|
|
|
186,437 |
|
|
|
207,245 |
|
|
Derivative
liability
|
|
|
13,400,703 |
|
|
|
- |
|
|
Current
portion of obligations under capital lease
|
|
|
4,542 |
|
|
|
4,299 |
|
|
Convertible
debt, less debt discount of $3,214,384
|
|
|
35,616 |
|
|
|
- |
|
|
Other
accrued expenses
|
|
|
631 |
|
|
|
2,890 |
|
|
Total
current liabilities
|
|
|
15,183,567 |
|
|
|
1,432,104 |
|
|
Other
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable, net of current portion
|
|
|
444,223 |
|
|
|
444,223 |
|
|
Obligations
under capital lease, net of current portion
|
|
|
11,411 |
|
|
|
12,641 |
|
|
Accrued
retirement benefits
|
|
|
296,250 |
|
|
|
335,250 |
|
|
Accrued
interest, related party
|
|
|
5,342 |
|
|
|
- |
|
|
Deferred
rent
|
|
|
281,648 |
|
|
|
284,134 |
|
|
Deferred
revenue
|
|
|
5,200,000 |
|
|
|
5,200,000 |
|
|
Total
other liabilities
|
|
|
6,238,874 |
|
|
|
6,276,248 |
|
|
Total
liabilities
|
|
|
21,422,441 |
|
|
|
7,708,352 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficiency:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value. Authorized and unissued, 1,000,000
shares at October 31, 2009 and July 31, 2009
|
|
|
– |
|
|
|
– |
|
|
Common
stock $.001 par value. Authorized 100,000,000 shares at October
31, 2009 and July 31, 2009; issued and outstanding 47,313,880 shares at
October 31, 2009 and July 31, 2009
|
|
|
47,314 |
|
|
|
47,314 |
|
|
Capital
in excess of par value
|
|
|
101,062,222 |
|
|
|
101,734,572 |
|
|
Deficit
accumulated during development stage
|
|
|
(118,921,177 |
) |
|
|
(108,932,252 |
) |
|
Total
stockholders’ deficiency
|
|
|
(17,811,641 |
) |
|
|
(7,150,366 |
) |
|
Total
liabilities and stockholders’ deficiency
|
|
$ |
3,610,800 |
|
|
$ |
557,986 |
|
See
accompanying notes to condensed financial statements.
ALFACELL
CORPORATION
(A
Development Stage Company)
CONDENSED
STATEMENTS OF OPERATIONS
Three
months ended October 31, 2009 and 2008,
and the
Period from August 24, 1981
(Date of
Inception) to October 31, 2009
(Unaudited)
|
|
|
Three
Months Ended
October 31,
|
|
|
August
24, 1981
(Date
of Inception)
to
|
|
|
|
|
2009
|
|
|
2008
|
|
|
October 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
18,750 |
|
|
$ |
- |
|
|
$ |
572,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
- |
|
|
|
- |
|
|
|
336,495 |
|
|
Research
and development
|
|
|
160,881 |
|
|
|
1,727,381 |
|
|
|
72,742,761 |
|
|
General
and administrative
|
|
|
399,473 |
|
|
|
1,093,473 |
|
|
|
41,363,362 |
|
|
Total
operating expenses
|
|
|
560,354 |
|
|
|
2,820,854 |
|
|
|
114,442,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(541,604 |
) |
|
|
(2,820,854 |
) |
|
|
(113,870,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income
|
|
|
251 |
|
|
|
18,563 |
|
|
|
2,302,332 |
|
|
Other
income
|
|
|
- |
|
|
|
- |
|
|
|
99,939 |
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
parties, net
|
|
|
(6,727 |
) |
|
|
- |
|
|
|
(1,154,274 |
) |
|
Fair
value adjustment – derivative liability
|
|
|
(9,439,084 |
) |
|
|
- |
|
|
|
(9,439,084 |
) |
|
Others
|
|
|
(1,761 |
) |
|
|
(1,112 |
) |
|
|
(
2,884,967 |
) |
|
Loss
before state tax benefit
|
|
|
(9,988,925 |
) |
|
|
(2,803,403 |
) |
|
|
(124,946,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
tax benefit
|
|
|
- |
|
|
|
- |
|
|
|
6,025,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(9,988,925 |
) |
|
$ |
(2,803,403 |
) |
|
$ |
(118,921,177 |
) |
|
Loss
per common share - basic and diluted
|
|
$ |
(0.21 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
Weighted
average number of common shares outstanding – basic and
diluted
|
|
|
47,313,880 |
|
|
|
47,310,510 |
|
|
|
|
|
|
|
|
See
accompanying notes to condensed financial statements.
ALFACELL
CORPORATION
(A
Development Stage Company)
CONDENSED
STATEMENT OF STOCKHOLDERS' DEFICIENCY
Period
from July 31, 2009 to October 31, 2009
(Unaudited)
|
|
|
Common
Stock
|
|
|
|
|
|
Deficit
Accumulated
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Amount
|
|
|
Capital
In
Excess
of par
Value
|
|
|
During
Development
Stage
|
|
|
Total
Stockholders’
Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at July 31, 2009
|
|
|
47,313,880 |
|
|
$ |
47,314 |
|
|
$ |
101,734,572 |
|
|
$ |
(108,932,252 |
) |
|
$ |
(7,150,366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
74,885 |
|
|
|
— |
|
|
|
74,885 |
|
|
Derivative
liability
|
|
|
— |
|
|
|
— |
|
|
|
(747,235 |
) |
|
|
— |
|
|
|
(747,235 |
) |
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,988,925 |
) |
|
|
(9,988,925 |
) |
|
Balance
at October 31, 2009
|
|
|
47,313,880 |
|
|
$ |
47,314 |
|
|
$ |
101,062,222 |
|
|
$ |
(118,921,177 |
) |
|
$ |
(17,811,641 |
) |
See
accompanying notes to condensed financial statements.
ALFACELL
CORPORATION
(A
Development Stage Company)
CONDENSED
STATEMENTS OF CASH FLOWS
Three
months ended October 31, 2009 and 2008,
and the
Period from August 24, 1981
(Date of
Inception) to October 31, 2009
(Unaudited)
|
|
|
Three
Months Ended
October 31,
|
|
|
August
24, 1981
(Date
of Inception)
to
|
|
|
|
|
2009
|
|
|
2008
|
|
|
October 31, 2009
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(9,988,925 |
) |
|
$ |
(2,803,403 |
) |
|
$ |
(118,921,177 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of marketable securities
|
|
|
- |
|
|
|
- |
|
|
|
(25,963 |
) |
|
Depreciation
and amortization
|
|
|
7,999 |
|
|
|
9,337 |
|
|
|
1,753,593 |
|
|
Loss
on disposal of property and equipment
|
|
|
- |
|
|
|
- |
|
|
|
18,926 |
|
|
Loss
on lease termination
|
|
|
- |
|
|
|
- |
|
|
|
30,964 |
|
|
Stock-based
compensation expense
|
|
|
74,885 |
|
|
|
633,274 |
|
|
|
13,938,817 |
|
|
Amortization
of deferred rent
|
|
|
(2,486 |
) |
|
|
14,222 |
|
|
|
183,684 |
|
|
Amortization
of debt discount
|
|
|
35,616 |
|
|
|
- |
|
|
|
629,835 |
|
|
Fair
value of derivative liability
|
|
|
9,403,468 |
|
|
|
- |
|
|
|
9,403,468 |
|
|
Amortization
of deferred compensation
|
|
|
- |
|
|
|
- |
|
|
|
11,442,000 |
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in
prepaid expenses
|
|
|
(96,029 |
) |
|
|
(63,492 |
) |
|
|
(210,390 |
) |
|
Decrease
in loan receivable-related party
|
|
|
- |
|
|
|
- |
|
|
|
96,051 |
|
|
Increase
in restricted cash
|
|
|
(1,535,525 |
) |
|
|
- |
|
|
|
(1,801,805 |
) |
|
Increase
in interest payable-related party
|
|
|
5,342 |
|
|
|
- |
|
|
|
749,881 |
|
|
Increase
(decrease) in accounts payable
|
|
|
350,819 |
|
|
|
(118,411 |
) |
|
|
1,708,950 |
|
|
Increase
in accrued payroll and expenses, related parties
|
|
|
- |
|
|
|
- |
|
|
|
2,348,145 |
|
|
(Decrease)
increase in accrued retirement benefits
|
|
|
(65,442 |
) |
|
|
- |
|
|
|
452,250 |
|
|
(Decrease)
increase in accrued expenses
|
|
|
(9,476 |
) |
|
|
(386,464 |
) |
|
|
1,547,497 |
|
|
Increase
in deferred revenue
|
|
|
- |
|
|
|
- |
|
|
|
5,200,000 |
|
|
Net
cash used in operating activities
|
|
|
(1,819,754 |
) |
|
|
(2,714,937 |
) |
|
|
(71,455,274 |
) |
|
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 |
|
|
Capital
expenditures
|
|
|
- |
|
|
|
- |
|
|
|
(1,605,066 |
) |
|
Patent
costs
|
|
|
- |
|
|
|
- |
|
|
|
(97,841 |
) |
|
Net
cash used in investing activities
|
|
|
- |
|
|
|
- |
|
|
|
(1,676,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
See
accompanying notes to condensed financial statements.
ALFACELL
CORPORATION
(A
Development Stage Company)
CONDENSED
STATEMENTS OF CASH FLOWS, Continued
Three
months ended October 31, 2009 and 2008
and the
Period from August 24, 1981
(Date of
Inception) to October 31, 2009
(Unaudited)
|
|
|
Three
Months Ended
October 31,
|
|
|
August
24, 1981
(Date
of Inception)
to
|
|
|
|
|
2009
|
|
|
2008
|
|
|
October 31, 2009
|
|
|
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 |
) |
|
Payment
of capital lease obligations
|
|
|
(987 |
) |
|
|
(793 |
) |
|
|
(7,825 |
) |
|
Proceeds
from issuance of common stock, net
|
|
|
- |
|
|
|
- |
|
|
|
53,102,893 |
|
|
Proceeds
from exercise of stock options and warrants, net
|
|
|
- |
|
|
|
13,220 |
|
|
|
14,080,850 |
|
|
Proceeds
from issuance of convertible debentures, related party
|
|
|
3,250,000 |
|
|
|
- |
|
|
|
3,547,000 |
|
|
Proceeds
from issuance of convertible debentures,
unrelated party
|
|
|
- |
|
|
|
- |
|
|
|
416,993 |
|
|
Net
cash provided by financing activities
|
|
|
3,249,013 |
|
|
|
12,427 |
|
|
|
74,690,671 |
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,429,259 |
|
|
|
(2,702,510 |
) |
|
|
1,558,453 |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
129,194 |
|
|
|
4,661,656 |
|
|
|
- |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
1,558,453 |
|
|
$ |
1,959,146 |
|
|
$ |
1,558,453 |
|
|
Supplemental
disclosure of cash flow information – interest paid
|
|
$ |
1,761 |
|
|
$ |
1,112 |
|
|
$ |
1,725,021 |
|
|
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.
ALFACELL
CORPORATION
(A
Development Stage Company)
CONDENSED
STATEMENTS OF CASH FLOWS, Continued
Three
months ended October 31, 2009 and 2008
and the
Period from August 24, 1981
(Date of
Inception) to October 31, 2009
(Unaudited)
|
|
|
Three
Months Ended
October 31,
|
|
|
August
24, 1981
(Date
of Inception)
to
|
|
|
|
|
2009
|
|
|
2008
|
|
|
October 31, 2009
|
|
|
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 |
|
|
Lease
incentive allowance
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
67,000 |
|
|
Issuance
of warrants with notes payable
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
594,219 |
|
|
Derivative
liability – warrant reclassification
|
|
$ |
747,235 |
|
|
$ |
- |
|
|
$ |
747,235 |
|
|
Acquisition
of equipment through capital lease obligation
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
23,778 |
|
|
|
|
See
accompanying notes to condensed financial statements.
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 U.S.
generally accepted accounting principles (“GAAP”) for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not contain all of the information and
notes required by U.S. GAAP for complete financial statements. In the
opinion of the management, the accompanying unaudited condensed interim
financial statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company’s financial position as of
October 31, 2009, the results of its operations for the three months ended
October 31, 2009 and 2008, and the period from August 24, 1981 (date of
inception) to October 31, 2009, the changes in stockholders’ deficiency for the
three months ended October 31, 2009, and its cash flows for the three months
ended October 31, 2009 and 2008, and the period from August 24, 1981 (date of
inception) to October 31, 2009. The results of operations for the three
months ended October 31, 2009 are not necessarily indicative of operating
results for fiscal year 2010 or future interim periods. The July 31,
2009 balance sheet presented herein has been derived from the audited financial
statements included in the Company’s Annual Report on Form 10-K for the fiscal
year ended July 31, 2009, 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 Company’s Annual Report on Form 10-K for the fiscal year ended July 31,
2009.
The
Company evaluated all events or transactions that occurred after October 31,
2009 through the date the financial statements were issued on December 21,
2009.
The Company is a development stage
company as defined in the Accounting Standards Codification (“ASC”),
“Development Stage Entities.” The Company is devoting substantially
all of its present efforts to establishing its business. Its planned
principal operations have not commenced and, accordingly, no significant revenue
has been derived therefrom.
The Company is continuing to develop
its drug product candidates which require substantial capital for research,
product development, and market development activities. The Company
has not yet initiated marketing of a commercial drug product. Future product
development will require clinical testing, regulatory approval, and substantial
additional investment prior to commercialization. The future success
of the Company is dependent on its ability to make progress in the development
of its drug product candidates and, ultimately, upon its ability to attain
future profitable operations through the successful manufacturing and marketing
of those drug product candidates. There can be no assurance that the
Company will be able to obtain the necessary financing or regulatory approvals
to be able to successfully develop, manufacture, and market its products, or
attain successful future operations. Accordingly, the Company’s
future success is uncertain.
2. LIQUIDITY
The Company has reported net losses of
approximately $9,989,000, $4,539,000, $12,321,000 and $8,755,000 for the three
months ended October 31, 2009 and the fiscal years ended July 31, 2009, 2008 and
2007, respectively. As of October 31, 2009, the Company had a working
capital deficit of $13,475,000 and cash and cash equivalents of
$1,558,000. The loss from date of inception, August 24, 1981 to
October 31, 2009, amounts to approximately $118,921,000.
The Company expects that its cash
balances and the $1.6 million restricted cash intended to be used for future
clinical trials as of October 31, 2009, will be sufficient to support its
activities into the fourth quarter of its fiscal year 2010, based on its reduced
level of operations. 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, convertible debentures, collaborative
agreements, strategic alliances, sale of tax benefits, revenues from the
commercial sale and named-patient basis sale of ONCONASE®,
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. The Company may pursue
available strategic alternatives which focus on, but not limited to, strategic
partnership transactions. Such additional funds and various
alternatives may not become available as the Company may need them or be
available on terms acceptable to the Company, if at all. Insufficient
funds could require the Company to delay, scale back, or eliminate one or more
of its research and development programs or to out-license to third parties drug
product candidates or technologies that the Company would otherwise seek to
develop and commercialize without relinquishing its rights
thereto. Unless and until the Company’s operations generate
significant revenues and cash flow, the Company will attempt to continue to fund
operations from cash on hand and through the sources of capital described
above. 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.
The audit report of the Company’s
independent registered public accounting firm on the Company’s fiscal year ended
July 31, 2009 financial statements expressed that there was substantial doubt
about the Company’s ability to continue as a going concern. Continued
operations are dependent on the Company’s ability to raise additional capital
from various sources such as those described above. Such capital
raising opportunities may not be available or may not be available on reasonable
terms. The Company’s financial statements do not include any
adjustments that may result from the outcome of this uncertainty.
3. LOSS PER COMMON
SHARE
The
following table sets forth the computation of basic and diluted net loss per
common share:
|
|
|
Three
Months Ended
October 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(9,988,925 |
) |
|
$ |
(2,803,403 |
) |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
47,313,880 |
|
|
|
47,310,510 |
|
|
Loss
per common share - basic and diluted
|
|
$ |
(0.21 |
) |
|
$ |
(0.06 |
) |
|
Potentially
dilutive securities:
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
51,408,821 |
|
|
|
13,810,261 |
|
|
Stock
options
|
|
|
4,064,767 |
|
|
|
5,176,150 |
|
|
Total
potentially dilutive securities
|
|
|
55,473,588 |
|
|
|
18,986,411 |
|
As the
Company has incurred a net loss for all periods presented, basic and diluted per
common share amounts are the same, since the inclusion of all potentially
dilutive securities would be anti-dilutive.
4. STOCK-BASED
COMPENSATION
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued amended
guidance on accounting for “Stock Compensation”. The amended guidance
requires all share-based payments, including stock option grants to employees,
to be recognized as an operating expense in the statement of
operations. The expense is recognized over the requisite service
period based on fair values measured on the date of grant. The
Company adopted the amended guidance on Stock Compensation 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.
Shares, warrants and options have been
issued to non-employees for services. The fair value of such
securities is recorded as an 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.
The
Company recorded the following stock-based compensation expense based on the
fair value of stock options:
|
|
|
Three
Months Ended
October 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
| |
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
20,673 |
|
|
$ |
241,216 |
|
|
General
and administrative
|
|
|
54,212 |
|
|
|
392,058 |
|
|
Total
stock-based compensation expense
|
|
$ |
74,885 |
|
|
$ |
633,274 |
|
|
Basic
and diluted loss per common share
|
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
The fair
value of the stock options at the grant dates 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 the 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 SAB 107 and SAB 110 and represents the period of time that options
granted are expected to be outstanding. The “simplified” method was
used since the Company does not have sufficient historical data to provide a
basis to estimate a justifiable expected term. There were no stock
options granted during the three months ended October 31, 2008.
|
|
|
Three
Months Ended
October 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
0 |
% |
|
|
- |
|
|
Risk-free
interest rate
|
|
|
2.64 |
% |
|
|
- |
|
|
Expected
stock price volatility
|
|
|
111.39 |
% |
|
|
- |
|
|
Expected
term (years)
|
|
|
5.89 |
|
|
|
- |
|
|
Weighted
average grant date fair value
|
|
$ |
0.28 |
|
|
|
- |
|
The
following table summarizes the stock option activity for the period August 1,
2009 to October 31, 2009:
|
|
|
Stock
Options
Outstanding
|
|
|
Weighted
Average Exercise Price
Per Share
|
|
|
Weighted
Average Remaining Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
August 1, 2009
|
|
|
4,771,650 |
|
|
$ |
2.64 |
|
|
|
3.84 |
|
|
$ |
12,230 |
|
|
Granted
|
|
|
511,667 |
|
|
|
0.34 |
|
|
|
9.86 |
|
|
|
- |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,210,550 |
) |
|
|
2.67 |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(8,000 |
) |
|
|
1.29 |
|
|
|
|
|
|
|
|
|
|
Balance
October 31, 2009
|
|
|
4,064,767 |
|
|
$ |
2.34 |
|
|
|
5.43 |
|
|
$ |
2,300 |
|
|
Exercisable
as of October 31, 2009
|
|
|
2,360,767 |
|
|
$ |
3.02 |
|
|
|
3.05 |
|
|
$ |
1,400 |
|
As of
October 31, 2009, there was approximately $912,000 of total unrecognized
compensation expense related to unvested options granted that is expected to be
recognized over a weighted average period of 3.24 years.
5. RESTRICTED
CASH
|
Lease
security deposit held by a bank as collateral for a standby letter of
credit in favor of the Company. The cash held by the bank is
restricted as to use for the term of the standby letter of
credit.
|
$
201,805
|
|
Escrow
agreement held by bank which can be disbursed only to satisfy obligations
of the Company owed to clinical research organizations, hospitals, doctors
and other vendors and service providers associated with the clinical
trials which the Company intends to conduct for its ONCONASE®
product. The escrow agreement shall terminate on the earlier of the date
that all funds have been disbursed from the escrow account and April 19,
2011, at which time any remaining funds will be disbursed to the
Company.
|
1,600,000 |
|
Total
|
$1,801,805
|
6. CONVERTIBLE NOTES AND
WARRANTS
On
October 19, 2009, the Company completed a sale of 65 units (the “Units”) in a
private placement (the “Offering”) to certain investors pursuant to a securities
purchase agreement (the “Securities Purchase Agreement”) entered into on October
19, 2009. Each Unit consists of (i) $50,000 principal amount of
5% Senior Secured Convertible Promissory Notes (collectively, the “Notes”)
convertible into shares of the Company’s common stock, par value $.001 per share
(“Common Stock”), (ii) Series A Common Stock Purchase Warrants (the “Series
A Warrants”) to purchase in the aggregate that number of shares of Common Stock
initially issuable upon conversion of the aggregate amount of Notes issued as
part of the Unit, at an exercise price of $0.15 per share with a three year term
and (iii) Series B Common Stock Purchase Warrants (the “Series B Warrants”,
together with the Series A Warrants, the “Warrants”) to purchase in the
aggregate that number of shares of Common Stock initially issuable upon
conversion of the aggregate amount of Notes issued as part of the Unit, at an
exercise price of $0.25 per share with a five year term. The closing of the
Offering occurred on October 19, 2009 (the “Closing”) and the Company received
an aggregate of $3,250,000 in gross proceeds.
The Notes
mature on the earlier of (i) October 19, 2012; (ii) the closing of a public or
private offering of the Company’s debt or equity securities subsequent to the
date of issuance resulting in gross proceeds of at least $8,125,000 other than a
transaction involving a stockholder who holds 5% or more of the Company’s
outstanding capital stock as of the date of issuance; or (iii) on the demand of
the holder of the Note upon the Company’s consummation of a merger, sale of
substantially all of its assets, or the acquisition by any entity, person or
group of 50% or more of the voting power of the Company. Interest accrues on the
principal amount outstanding under the Notes at 5% per annum, and is due upon
maturity. Upon an event of default under the Notes, the interest rate shall
increase to 7%, provided that if the Company is unable to obtain stockholder
approval by April 1, 2010 to amend its certificate of incorporation to increase
its authorized capital stock, the interest rate shall increase to 15% and such
failure will be an Event of Default under the Notes. The Notes are convertible
into Common Stock at the option of the holder of the Note at a price of $0.15
per share at any time prior to the date on which the Company makes payment in
full of all amounts outstanding under the Note. The Notes are not prepayable for
a period of one year following the issuance thereof. The Notes are
secured by a senior security interest and lien on all of the Company’s right,
title and interest to all of the assets owned by the Company as of the Closing
or thereafter acquired pursuant to the terms of a security agreement (the
“Security Agreement”) entered into by the Company with each of the investors.
The Warrants are exercisable immediately following the Closing.
Pursuant
to the terms of the Securities Purchase Agreement, certain investors party
thereto are permitted to appoint a designee to the Company’s Board of Directors
(the “Board”) within a reasonable period of time following the
Closing. In addition, as a condition to Closing, each member of the
Board other than David Sidransky, Chairman of the Board, and Charles Muniz,
President, Chief Executive Officer and Chief Financial Officer, agreed to resign
from the Board upon the request of Dr. Sidransky made at any time following the
Closing and December 31, 2009.
In
connection with the Offering, the Company entered into an investor rights
agreement (the “Investor Rights Agreement”) with each of the investors.
The Investor Rights Agreement provides that the Company will file a “resale”
registration statement (the “Initial Registration Statement”) covering all of
the shares issuable upon conversion of the Notes (the “Note Shares”) and the
shares issuable upon exercise of the Warrants (the “Warrant Shares”, together
with the Note Shares, the “Securities”), up to the maximum number of shares able
to be registered pursuant to applicable Securities and Exchange Commission
(“SEC”) regulations, within 120 days of the Closing. If any Securities are
unable to be included on the Initial Registration Statement, the Company has
agreed to file subsequent registration statements until all the Securities have
been registered. Under the terms of the Investor Rights Agreement, the
Company is obligated to maintain the effectiveness of the “resale” registration
statement until all securities therein are sold or otherwise can be sold
pursuant to Rule 144, without any restrictions. A cash penalty at 1%
per month will be triggered in the event the Company fails to file or obtain the
effectiveness of a registration statement prior to the deadlines set forth in
the Investor Rights Agreement or if the Company ceases to be current in filing
its periodic reports with the SEC. The aggregate penalty accrued with respect to
each investor may not exceed 6% of the original purchase price paid by that
investor, or 12% if the only effectiveness failure is the Company’s failure to
be current in its periodic reports with the SEC.
In
connection with the Offering, the Company also entered into an escrow agreement
(the “Escrow Agreement”) whereby certain investors placed $1,600,000 of the
proceeds paid for their Units in an escrow account pursuant to the terms of the
Securities Purchase Agreement. Such amounts can be disbursed from the
escrow account only to satisfy obligations of the Company owed to clinical
research organizations, hospitals, doctors and other vendors and service
providers associated with the clinical trials which the Company intends to
conduct for its ONCONASE® product.
The Escrow Agreement shall terminate on the earlier of the date that all funds
have been disbursed from the escrow account and April 19, 2011, at which time
any remaining funds will be disbursed to the Company.
Charles
Muniz, the Company’s President, Chief Executive Officer and Chief Financial
Officer, subscribed for 20 Units, certain trusts and individuals related to
James O. McCash, a beneficial owner of more than five percent of the Company’s
voting securities, subscribed for an aggregate of 20 Units, Europa International
Inc., a beneficial owner of more than five percent of the Company’s voting
securities, subscribed for 15 Units and Unilab LP, an affiliate of US Pharmacia,
an affiliate of the Company’s distributor for ONCONASE® in
Eastern Europe and a current stockholder, subscribed for 10 units. These
investors are party to the Securities Purchase Agreement, the Investor Rights
Agreement, the Security Agreement and the Escrow Agreement. The Company’s entry
into an employment agreement with Mr. Muniz upon terms reasonably acceptable to
the investors in the Offering was a condition to the Closing.
The
Company concluded that it should account for the warrants and conversion options
embedded in the Notes in accordance with ASC Topic 815, “Derivatives and
Hedging”. Accordingly, the Company determined that the warrants and
the conversion options embedded in the Notes should be accounted for as free
standing derivatives that will be measured at fair value and classified as
liabilities at the closing of the Offering. Each subsequent reporting
period, the Company will mark to market the warrants and conversion feature of
Notes with any change in fair value recorded through the statement of
operations. This accounting treatment is due to the fact that the
settlement terms of the warrants and conversion feature of the Notes do not
allow them to qualify for equity presentation. Accordingly, on
October 19, 2009, in connection with the closing of the Offering, the
convertible feature of the Notes were recorded as a derivative liability of
approximately $6.1 million and the Series A and Series B warrants were recorded
as a derivative liability of approximately $6.1 million each,
respectively.
At the
closing for the Offering, the fair value of the conversion feature,
approximately $6.1 million, exceeded the proceeds of $3.25 million. The
difference of approximately $2.9 million was charged to expense as the change in
the fair market value of the conversion liability. Accordingly, the Company
recorded an initial discount of $3.25 million equal to the face value of
the Notes, which will be amortized over the three-year term, using the
straight-line method.
At
October 31, 2009, the Company accounted for the conversion feature using
the fair value method, with the resultant gain recognition recorded in the
statement of operations. At October 31, 2009, the fair value of the conversion
feature liability was approximately $4.3 million, comprised of the $6.1
million recorded at the closing for the Offering and $1.8 million gain recorded
to mark to market the liability at October 31, 2009. The conversion feature was
valued at October 19, 2009 and October 31, 2009 using the Black-Scholes
valuation model and the following assumptions:
|
|
October 19, 2009
|
|
October 31, 2009
|
|
|
|
|
|
|
Volatility
|
126%
|
|
126.2%
|
|
Risk-free
interest rate
|
1.50%
|
|
1.43%
|
|
Remaining
contractual life (years)
|
3.0
|
|
2.97
|
At the closing, the Company
recorded the Series A and Series B warrants as liabilities at their fair values
of approximately $6.1 million each, based upon the Black-Scholes valuation
model. The warrants will be accounted for using mark-to-market accounting and
charged to the statement of operations in a manner similar to the conversion
feature at each reporting date.
At
October 31, 2009, the Company accounted for the warrant liabilities using the
fair value method, with the resultant gain recognition recorded in the statement
of operations. At October 31, 2009, the fair value of the Series A and Series B
warrant liabilities were approximately $4.3 million and $4.4 million,
respectively. The fair value of the Series A warrant is comprised of
the $6.1 million recorded at the closing for the Offering and approximately
$1.8 million gain recorded to mark to market the liability at October 31,
2009. The fair value of the Series B warrant is comprised of the $6.1 million
recorded at the closing for the Offering and approximately $1.7 million
gain recorded to mark to market the liability at October 31,
2009.
The
Series A and Series B warrant liabilities were valued at October 19, 2009
and October 31, 2009 using the Black-Scholes valuation model and the
following assumptions:
|
|
Series A Warrants
|
|
Series B Warrants
|
|
|
October 19, 2009
|
|
October 31, 2009
|
|
October 19, 2009
|
|
October 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
126%
|
|
126.2%
|
|
113.17%
|
|
113.26%
|
|
Risk-free
interest rate
|
1.50%
|
|
1.43%
|
|
2.36%
|
|
2.31%
|
|
Remaining
contractual life (years)
|
3.0
|
|
2.97
|
|
5.0
|
|
4.97
|
In
addition, the Company evaluated the classification of all non-employee share
commitments issued outside of the plans which existed prior to the Offering (the
“Prior Non-Employee Commitments”). As a result, at October 19, 2009, the Company
reclassified $747,235 from equity to liability for all Prior Non-Employee
Commitments and has included this amount as a part of derivative
liability. The Company marked to market the Prior Non-Employee
Commitments at October 31, 2009 and recorded a gain of $292,366 for the change
in fair value from October 19 to October 31, 2009. Once stockholders
approve an increase in the amount of authorized shares to cover all existing
share commitments, the marked-to-market liabilities for Prior Non-Employee
Commitments will be reclassified to equity.
7. REVENUE
RECOGNITION
The Company recognizes revenue in
accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB
104”) issued by the staff of the SEC. Under SAB 104, revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred and/or services have been rendered, the sales price is fixed or
determinable, and collectability is reasonably assured.
The Company enters into marketing and
distribution agreements, which contain multiple deliverables. The
Company evaluates whether these deliverables constitute separate units of
accounting to which total arrangement consideration is allocated. A
deliverable qualifies as a separate unit of accounting when the item delivered
to the customer has standalone value, there is objective and reliable evidence
of fair value of items that have not been delivered to the customer and if there
is a general right of return for the items delivered to the customer, delivery
or performance of the undelivered items is considered probable and substantially
in the control of the Company. Arrangement consideration is allocated
to units of accounting on a relative fair-value basis or the residual method if
the Company is unable to determine the fair value of all deliverables in the
arrangement. Consideration allocated to a unit of accounting is limited to the
amount that is not contingent upon future performance by the
Company. Upon determination of separate units of accounting and
allocated consideration, the general criteria for revenue recognition is applied
to each unit of accounting.
In
January 2008, the Company entered into a U.S. License Agreement for
ONCONASE® with Par
Pharmaceutical, Inc. (“Par”). Under the terms of the License
Agreement, Strativa Pharmaceuticals (“Strativa”), the proprietary products
division of Par, received exclusive marketing, sales and distribution rights to
ONCONASE® for the
treatment of cancer in the United States and its territories. The
Company retained all rights and obligations for product manufacturing, clinical
development and obtaining regulatory approvals, as well as all rights for those
non-U.S. jurisdictions in which the Company has not currently granted any such
rights or obligations to third parties. The Company received a cash
payment of $5 million upon the signing of the License Agreement.
On
September 8, 2009, the Company and Par entered into a Termination and Mutual
Release Agreement (the “Termination Agreement”) pursuant to which the Company’s
License Agreement and Supply Agreement with Par were terminated. The License
Agreement was terminated and all rights under the license granted to Par revert
back to the Company under the Termination Agreement. Under the Supply
Agreement, the Company had agreed to supply all of Par’s requirements for
ONCONASE®. Pursuant
to the Termination Agreement, Par will be entitled to a royalty of 2% of net
sales of ONCONASE® or any
other ranpirnase product developed by the Company for use in the treatment of
cancer in the United States and its territories commencing with the first sale
of such product and terminating upon the later to occur of the twelfth
anniversary of the first sale and the date of expiration of the last valid claim
of a pending application or issued patent owned or controlled by the Company
with respect to such product.
The
Company has evaluated both the License Agreement and the Termination Agreement
and has determined that the Company is obligated to provide royalty payments in
the event the Company has net sales. As such, as of October 31, 2009,
the Company has not recognized into income any of the $5 million upfront payment
received under the License Agreement.
8. COMMITMENTS
Employment
and Retirement Agreements
Except as
disclosed below, there have been no material changes with respect to the
Company’s employment and retirement agreements as disclosed in the “Notes to the
Financial Statements – Commitments” in the Company’s Annual Report on Form 10-K
for the fiscal year ended July 31, 2009.
On April
28, 2008, the Company entered into a retirement agreement (the “Retirement
Agreement”) with Ms. Shogen. Under the terms of the Retirement
Agreement, Ms. Shogen will be entitled to receive her current annual salary of
$300,000 and participate in all benefit plans available for the Company’s
executives through her retirement date, which will occur on or before March 31,
2009 (the “Termination Date”). Ms. Shogen will receive retirement
payments of $300,000 for each of the two years after the Termination
Date. During the fiscal year ended July 31, 2008, the Company accrued
these benefits in the amount of $612,000.
On
September 14, 2009, the Company entered into an amendment (the “Amendment”) to
the Retirement Agreement amending certain terms. Pursuant to the
Amendment, effective as of September 14, 2009, periodic payments owed to Ms.
Shogen under the Retirement Agreement during the two year period commencing
April 1, 2008 will be paid at the rate of $150,000 per year, rather than
$300,000 per year as originally provided in the Retirement
Agreement. Under the Retirement Agreement, Ms. Shogen was entitled to
receive continuing payments equal to 15% of any royalties received by Alfacell
pursuant to any and all license agreements entered into by Alfacell for the
marketing and distribution of Licensed Products. Under the Amendment, the amount
of such royalties related to net sales of Licensed Products to be received by
Ms. Shogen has been reduced to 5%. Under the Retirement Agreement,
Ms. Shogen was entitled to receive continuing payments equal to 5% of net sales
of Licensed Products booked by Alfacell on its financial
statements. Under the Amendment the amount of such net sales booked
by Alfacell has been reduced to 2%. Under the Amendment, in the event Alfacell
obtains marketing approval for ONCONASE® from the
Food and Drug Administration or the European Medicines Agency, Ms. Shogen will
be entitled to receive an additional payment equal to the difference between the
periodic payments actually paid to Ms. Shogen during the two year period
commencing April 1, 2008 and $600,000, the original amount of periodic payments
to which Ms. Shogen was entitled under the Retirement Agreement. Such
additional payment may be made by Alfacell, at its option, in cash, Alfacell
common stock or a combination of both. The Amendment is binding on
the parties as of September 14, 2009. Except as specifically amended
in the Amendment, all terms and conditions of the Retirement Agreement remain in
full force and effect.
On
October 19, 2009, the Company entered into an Employment Agreement (the
“Employment Agreement”) with Mr. Muniz. Pursuant to the Employment
Agreement, Mr. Muniz shall serve as the Company’s President, Chief
Executive Officer and Chief Financial Officer. Mr. Muniz will receive an
annual base salary of $300,000 and is entitled to receive cash incentive
compensation or annual stock option awards as determined by the Board or the
Compensation Committee of the Board from time to time. In addition,
Mr. Muniz is entitled to participate in any and all employee benefit plans
established and maintained by the Company for executive officers of the Company.
Pursuant to the Employment Agreement, Mr. Muniz received an option (the
“Option”), granted under and in accordance with the Company’s 2004 Stock
Incentive Plan, to purchase an aggregate of 500,000 shares of Common Stock
exercisable for ten years from the date the Option is granted. The Option shall
vest in equal amounts on each of the first, second and third year anniversary of
the grant so long as Mr. Muniz remains employed by the Company. The exercise
price of the Option was equal to the fair market value of the Common Stock
on the date of grant. The Employment Agreement continues in effect
for two years following the date of the agreement and automatically renews for
successive one-year periods, unless Mr. Muniz’s employment is terminated by him
or by the Company. In the event that Mr. Muniz’s employment is terminated
by the Company for any reason, then Mr. Muniz is entitled to receive his
earned but unpaid base salary and incentive compensation, unpaid expense
reimbursements, accrued but unused vacation and any vested benefits under any
employee benefit plan of the Company. In the event that Mr. Muniz’s employment
is terminated by the Company without “cause” or by Mr. Muniz for “good
reason” (as such terms are defined in the Employment Agreement), then in
addition to the above mentioned payments and benefits, Mr. Muniz is entitled to
receive an amount equal to his then current annual base salary, payable in equal
installments over 12 months in accordance with the Company’s payroll practice
and all medical and health benefits for 18 months following the termination
date. Mr. Muniz’s Employment Agreement requires him to refrain from
competing with the Company and from hiring our employees and soliciting our
customers for a period of one year following the termination of his employment
with the Company for any reason.
Lease
Commitments
There have been no material changes
with respect to the Company’s operating leases as disclosed in the “Notes to the
Financial Statements – Commitments” in the Company’s Annual Report on Form 10-K
for the fiscal year ended July 31, 2009.
9. CONTINGENCIES
The Company has product liability
insurance coverage for clinical trials in the U.S. and in other countries where
it conducts its clinical trials. No product liability claims have been filed
against the Company. If a claim arises and the Company is found liable in an
amount that significantly exceeds the policy limits, it may have a material
adverse effect upon the financial condition and results of operations of the
Company.
Except as disclosed below, there have
been no material changes with respect to the Company’s contingencies as
disclosed in the “Notes to the Financial Statements – Contingencies” in the
Company’s Annual Report on Form 10-K for the fiscal year ended July 31,
2009.
On
October 9, 2009, Robert Love, a former Chief Financial Officer and alleged
shareholder of the Company, filed a complaint, Love v. Alfacell Corp. et
al., Case No. 3:09-cv-05199-MLC-LHG (the “Complaint”), against the
Company and certain of its current and former directors in the United States
District Court, District of New Jersey, asserting violations of federal and
state securities laws, direct and derivative common law claims for fraud and
breach of fiduciary duty, and a direct claim for negligent misrepresentation in
connection with the Company’s Phase IIIb clinical trial for ONCONASE®. The
Complaint alleges that the Company misled shareholders by issuing allegedly
false projections of when the required number of patient deaths would occur in
the Phase IIIb trial. The Complaint seeks compensatory damages of no
less than $350,000, punitive damages of no less than $20 million, and an
accounting and constructive trust. The Company believes that the
claims are meritless and intends to defend the case vigorously.
I & G
Garden State, LLC (“Landlord”) filed and served a complaint against the Company
in the Superior Court of New Jersey Law Division, Special Civil Part
Landlord-Tenant Section, Somerset County, on or about October 30, 2009, for
non-payment of rent and failure to maintain security deposit. The
complaint seeks to have the Company vacate the property. On November
13, 2009, the Company and Landlord mutually agreed that the Company will vacate
the property on or before December 31, 2009. The Landlord will
withdraw the remaining unpaid rental payments as of December 31, 2009 from the
Company’s secured irrevocable letter of credit which was placed in March
2007.
10. SALES
The Company was granted approval by the
Swiss government to sell its product ONCONASE® on a
named-patient basis. During the quarter ended October 31, 2009, the
Company received gross proceeds of $18,750 from such sale.
11. RELATED PARTY
TRANSACTIONS
On
October 19, 2009, Charles Muniz, the Company’s President, Chief Executive
Officer and Chief Financial Officer, was a party to the Securities Purchase
Agreement, the Investor Rights Agreement, the Security Agreement and the Escrow
Agreement. The Company’s entry into an employment agreement with Mr.
Muniz upon terms reasonably acceptable to the investors in the Offering was a
condition to the Closing. See Note 6 – Convertible Notes and
Warrants.
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 most recent annual
report on Form 10-K, filed on November 13, 2009, 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
We are a biopharmaceutical company
engaged in the research, development, and commercialization of drugs for life
threatening-diseases, such as malignant mesothelioma and other
cancers. Our corporate strategy is to become a leader in the
discovery, development, and commercialization of novel ribonuclease (RNase)
therapeutics for cancer and other life-threatening diseases. As of
October 31, 2009, we had 3 full time employees who conducted all administrative
and research and development operations at our facility in Somerset,
NJ.
We
are a development stage company as defined in the Accounting Standards
Codification (“ASC”) Topic 915, “Development Stage Entities”. 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.
Since
our inception in 1981, we have devoted the vast majority of our resources to the
research and development of ONCONASE®, our
lead drug candidate, as well as other related drug candidates. In
recent years we have focused our resources towards the completion of the
clinical program for ONCONASE® in
patients suffering from unresectable, or inoperable, malignant mesothelioma
(“UMM”). We have incurred losses since inception and we have not
received Food and Drug Administration (“FDA”) approval of any of our drug
candidates. We expect to continue to incur losses for the foreseeable
future as we continue our research and development activities, which may include
the sponsorship of human clinical trials for our drug
candidates. Until we are able to consistently generate revenue
through the sale of products, we anticipate that we will be required to fund the
development of our pre-clinical compounds and drug product candidates primarily
by other means, including, but not limited to, licensing the development or
marketing rights to some of our drug candidates to third parties, collaborating
with third parties to develop our drug candidates, or selling Company issued
securities.
During the quarter ended October 31,
2009, we completed a sale of 65 Units in a private financing to certain
investors pursuant to a securities purchase agreement (the “Securities Purchase
Agreement”) entered into on October 19, 2009. Each Unit consists of
(i) $50,000 principal amount of Senior Secured Notes convertible into
shares of the Company’s common stock at a price of $0.15 per share,
(ii) Series A Warrants to purchase in the aggregate that number of
shares of common stock initially issuable upon conversion of the aggregate
amount of the Senior Secured Notes issued as part of the Unit, at an exercise
price of $0.15 per share with a three year term and (iii) Series B Warrants
to purchase in the aggregate that number of shares of common stock initially
issuable upon conversion of the aggregate amount of the Senior Secured Notes
issued as part of the Unit, at an exercise price of $0.25 per share with a five
year term. The closing of the private financing occurred on October 19,
2009, and the Company received an aggregate of $3,250,000 in gross
proceeds.
Pursuant to the terms of the Securities
Purchase Agreement, certain investors party thereto are permitted to appoint a
designee to the Board of Directors (the “Board”) within a reasonable period of
time following the closing of the private financing. In addition, as a condition
to closing the private financing, each member of the Board other than David
Sidransky, Chairman of the Board, and Charles Muniz, agreed to resign from the
Board upon the request of Dr. Sidransky made at any time following the closing
of the private financing and prior to December 31, 2009.
In connection with the private
financing, the Company entered into the Investor Rights Agreement with each of
the investors. The Investor Rights Agreement provides that the Company will file
a “resale” registration statement covering all of the shares issuable upon
conversion of the Senior Secured Notes and the shares issuable upon exercise of
the Warrants, up to the maximum number of shares able to be registered pursuant
to applicable SEC regulations, by February 16, 2010. If any of the securities
issuable upon conversion or exercise, respectively, of the Senior Secured Notes
and Warrants are unable to be included on the initial “resale” registration
statement, the Company has agreed to file subsequent registration statements
until all the securities have been registered. Under the terms of the Investor
Rights Agreement, the Company is obligated to maintain the effectiveness of the
“resale” registration statement until all securities therein are sold or
otherwise can be sold pursuant to Rule 144 of the Securities Act, without any
restrictions. A cash penalty of 1% per month will be triggered in the event the
Company fails to file or obtain the effectiveness of a registration statement
prior to the deadlines set forth in the Investor Rights Agreement or if the
Company ceases to be current in filing its periodic reports with the SEC. The
aggregate penalty accrued with respect to each investor may not exceed 6% of the
original purchase price paid by that investor, or 12% if the only effectiveness
failure is the Company’s failure to be current in its periodic reports with the
SEC.
In connection with the private
placement, the Company also entered into an escrow agreement whereby certain
investors placed $1,600,000 of the proceeds paid for their Units in an escrow
account pursuant to the terms of the Securities Purchase Agreement. Such amounts
can be disbursed from the escrow account only to satisfy obligations of the
Company owed to clinical research organizations, hospitals, doctors and other
vendors and service providers associated with the clinical trials which the
Company intends to conduct for its ONCONASEâ
product. The escrow agreement shall terminate on the earlier of the date that
all funds have been disbursed from the escrow account and April 19, 2011, at
which time any remaining funds will be disbursed to the Company.
In
connection with our private financing completed in October 2009, we issued $3.25
million of Senior Secured Notes convertible into shares of the Company’s common
stock at a price of $0.15 per share. The Senior Secured Notes mature
on the earlier of (i) October 19, 2012; (ii) the closing of a public or private
offering of the Company’s debt or equity securities subsequent to the date of
issuance resulting in gross proceeds of at least $8,125,000 other than a
transaction involving a stockholder who holds 5% or more of the Company’s
outstanding capital stock as of the date of issuance; or (iii) on the demand of
the holder of the Senior Secured Note upon the Company’s consummation of a
merger, sale of substantially all of its assets, or the acquisition by any
entity, person or group of 50% or more of the voting power of the Company.
Interest accrues on the principal amount outstanding under the Senior Secured
Notes at 5% per annum, and is due upon maturity. Upon an event of default under
the Notes, the interest rate shall increase to 7%, provided that if the Company
is unable to obtain stockholder approval by April 1, 2010 to amend its
certificate of incorporation to increase its authorized capital stock, the
interest rate shall increase to 15% and such failure will be an event of default
under the Senior Secured Notes. The Senior Secured Notes are not
prepayable for a period of one year following the issuance thereof. The Senior
Secured Notes are secured by a senior security interest and lien on all of the
Company’s right, title and interest to all of the assets owned by the Company as
of the closing of the private financing or thereafter acquired pursuant to the
terms of a security agreement entered into by the Company with each of the
investors.
For so
long as the Senior Secured Notes are outstanding, the Company is not permitted,
among other restrictions, to liquidate or dissolve, consolidate with or merge
into or with any other corporation, to sell its assets, other than in the
ordinary course of business, redeem or repurchase any outstanding equity or debt
securities, create or incur any indebtedness which is not subordinate to the
Senior Secured Notes or create liens on its assets with certain
exceptions.
Almost
all of the $73 million of research and development expenses we have incurred
since our inception has gone toward the development of ONCONASE® and
related drug candidates. For the three months ended October 31, 2009
and for fiscal years ended July 31, 2009, 2008 and 2007, our research and
development expenses were approximately $0.2 million, $3.3 million, $8.5
million, and $5.5 million, respectively, almost all of which were used for the
development of ONCONASE® and
related drug candidates.
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 Kuslima Shogen,
our former Chief Executive Officer. During the three months ended
October 31, 2009, we received gross proceeds of $3,250,000 from private
financing described above of which $1.6 million was placed in
escrow. Our current cash reserves will be used primarily to fund our
clinical and pre-clinical research and development efforts for ONCONASEâ. The
most significant expenses will be incurred for the currently planned Phase II
clinical study for non-small cell lung cancer. Additional expenses
are also expected to be incurred as we continue to move our drug product
candidates towards the next phase of clinical and pre-clinical
development.
We have
incurred losses since inception and, to date, we have generated only small
amounts of capital from marketing and distribution agreements for ONCONASE®. Our
audited financial statements for the fiscal year ended July 31, 2009, were
prepared under the assumption that we will continue our operations as a going
concern. We were incorporated in 1981 and have a history of losses
and negative cash flows from operating activities. As a result, our
independent registered public accounting firm in their audit report has
expressed that there was substantial doubt about our ability to continue as a
going concern. Continued operations are dependent on our ability to raise
additional capital from various sources such as those described
above. Such capital raising opportunities may not be available or may
not be available on reasonable terms. Our financial statements do not
include any adjustments that may result from the outcome of this
uncertainty.
We may
seek to satisfy future funding requirements through public or private offerings
of securities or with collaborative or other arrangements with corporate
partners. Additional financing or strategic transactions may not be
available when needed or on terms acceptable to us, if at all. If
adequate financing is not available, we may be required to delay, scale back, or
eliminate certain of our research and development programs, relinquish rights to
certain of our technologies, drugs or products, or license third parties to
commercialize products or technologies that we would otherwise seek to develop
ourselves.
Results
of Operations
Three month periods ended
October 31, 2009 and 2008
We focus most of our productive and
financial resources on the development of ONCONASE® and as
such, except for the sales for the three month period ended October 31, 2009 in
the amount of $18,750 which resulted from the sale on a named-patient basis of
our product ONCONASE® as
approved by the Swiss government, we did not have any material sales in the
three month periods ended October 31, 2009 and 2008.
Research
and development expense for the three month period ended October 31, 2009 was
approximately $0.2 million compared to approximately $1.7 million for the same
period in 2008, a decrease of approximately $1.5 million, or
90.7%. The decrease was primarily related to decreased expenses of
approximately $1.1 million related to costs incurred for the ONCONASE® rolling
NDA submission for our Phase IIIb clinical trial for malignant mesothelioma and
decreased compensation expense of approximately $0.4 million from decreased
stock-based compensation expense and reduction in force.
General
and administrative expense for the three month period ended October 31, 2009 was
approximately $0.4 million compared to approximately $1.1 million for the same
period in 2008, a decrease of approximately $0.7 million, or
62.5%. This decrease was primarily due to decreased compensation
expense of approximately $0.5 million from decreased stock-based compensation
expense, retirement of Kuslima Shogen, our former chief executive officer and
resignation of Lawrence Kenyon, our former chief financial
officer. Public relations related costs and other general
administrative expenses also decreased by approximately $0.2 million due to our
reduced operations in fiscal year 2010.
Interest
expense for the three month period ended October 31, 2009 increased by
approximately $9.4 million compared to the same period last
year. This increase was directly due to the beneficial conversion
feature of the convertible debenture and warrants we issued in October 2009 and
the original recognition of and the change in valuation of the derivative
liability.
The net
loss for the three month period ended October 31, 2009 was approximately $10
million as compared to $2.8 million for the same period last year, an increase
of approximately $7.2 million.
Liquidity
and Capital Resources
We have
reported cumulative net losses of approximately $25.6 million for the three most
recent fiscal years ended July 31, 2009. The net losses from date of
inception, August 24, 1981, to October 31, 2009 amount to approximately $118.9
million. As of October 31, 2009, we have a working capital deficit of
approximately $13.5 million.
We have
financed our operations since inception primarily through 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 state tax benefit and research products, and
investment income and financing received from Kuslima Shogen, our former Chief
Executive Officer. As of October 31, 2009, we had approximately
$1.6 million in cash and cash equivalents. We currently believe
that our cash reserves and the $1.6 million restricted cash intended for future
clinical trials can support our activities into the fourth quarter of our fiscal
year 2010, based upon our reduced operations.
The
primary use of cash over the next nine months will be to fund our clinical and
pre-clinical research and development efforts for ONCONASEâ. The
most significant expenses will be incurred for the currently planned Phase II
clinical study for non-small cell lung cancer. Additional expenses
are also expected to be incurred as we continue to move our drug product
candidates towards the next phase of clinical and pre-clinical
development. We will need to obtain additional financing in order to
continue our operations. Given current market conditions, it may be
very difficult, if not impossible, to obtain such financing. In order
to continue our operations we will need to pursue strategic alternatives for the
further development of ONCONASE®.
The audit report of our independent
registered public accounting firm on our fiscal year ended July 31, 2009
financial statements expressed that there was substantial doubt about our
ability to continue as a going concern. Continued operations are
dependent on our ability to raise additional capital from various sources such
as those described above. Such capital raising opportunities may not
be available or may not be available on reasonable terms. Our
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
Off-balance
Sheet Arrangements
We have
no off-balance sheet debt, no exposure to off-balance sheet arrangements, no
special purpose entities, nor activities that include non-exchange-traded
contracts accounted for at fair value as of October 31, 2009.
Contractual
Obligations and Commercial Commitments
Since
July 31, 2009, there has been no material change with respect to our commitments
and contingencies as disclosed in the “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, 2009.
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, 2009.
Recently
Issued Accounting Standards
In June
2009, the Financial Accounting Standards Board (“FASB”) issued the FASB
Accounting Standards Codification (the “Codification”). Effective July 1,
2009, the Codification became the single source of authoritative nongovernmental
U.S. generally accepted accounting principles (GAAP), superseding existing
rules and related literature issued by the FASB, American Institute of Certified
Public Accountants (“AICPA”) and Emerging Issues Task Force (“EITF”). The
Codification also eliminates the previous U.S. GAAP hierarchy and establishes
one level of authoritative GAAP. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. All other literature is considered
non-authoritative. The Codification, which has not changed GAAP, was
effective for interim and annual periods ended after September 15,
2009. The Company adopted the Codification for the quarter ended
October 31, 2009. Other than the manner in which accounting guidance
is referenced, the adoption of the Codification had no impact on the Company’s
financial statements.
In
December 2007, the FASB issued new accounting guidance related to the accounting
for business combinations and related disclosures. This guidance
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree, and any
goodwill acquired in a business combination. It also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of a business combination. The guidance is to be applied
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company adopted this guidance, effective August 1,
2009, and it did not have any effect on the Company’s financial
statements.
In
February 2008, the FASB issued amended guidance to delay the fair value
measurement and expanded disclosures about fair value measurements for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until fiscal years beginning after November 15,
2008. Effective August 1, 2009, the Company adopted the guidance
related to fair value measurements for nonfinancial assets and nonfinancial
liabilities and the adoption of such guidance did not have any effect on the
Company’s financial statements.
In June
2008, the FASB issued guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity’s own stock,
which would qualify as a scope exception to derivative classification under ASC
Topic 815, “Derivatives and Hedging”. The guidance is effective for
fiscal years beginning after December 15, 2008 and early adoption for an
existing instrument is not permitted. The Company adopted this
guidance, effective August 1, 2009. The adoption had no impact on the
Company’s previously accounted for equity-linked financial instruments that were
considered to be indexed to its own equity. Refer to Note 6 for the
result of the adoption on the equity-linked instruments included within the
Securities Purchase Agreement entered into on October 19, 2009.
In May
2009, the FASB issued guidelines on subsequent event accounting which sets
forth: (1) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; (2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; (3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date and (4) requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date. The Company adopted these amendments for the fiscal year ended
July 31, 2009 and determined that it did not have a material impact on the
Company’s financial statements. The Company evaluated all events or
transactions that occurred after October 31, 2009 through the date the financial
statements were issued on December 21, 2009.
In August
2009, the FASB issued amended guidance on the measurement of liabilities at fair
value. The guidance provides clarification that in circumstances in
which a quoted market price in an active market for an identical liability is
not available, the fair value of a liability be measured using one or more of
the valuation techniques that uses the quoted price of an identical liability
when traded as an asset or, if unavailable, quoted prices for similar
liabilities or similar assets when traded as assets. If none of this
information is available, an entity should use a valuation technique in
accordance with existing fair valuation principles. This guidance is
effective for the first reporting period (including interim periods) after
issuance. The Company adopted this guidance in the quarter ended
October 31, 2009. The adoption had no impact on the Company’s
financial statements.
In
October 2009, the FASB issued amended guidance for separating consideration in
multiple-deliverable arrangements. It eliminates the requirement
under previous guidance that all undelivered elements have vendor-specific
objective evidence (VSOE) or third-party evidence (TPE) of fair value before
recognizing a portion of revenue related to the delivered items, and establishes
that revenue be allocated to each element based on its relative selling price,
as determined by VSOE, TPE, or the entity’s estimated selling price if neither
of the aforementioned is available. Additionally, the amended
guidance eliminates the residual method of allocation and expands required
disclosures about multiple-element revenue arrangements. It will be
effective prospectively for revenue arrangements entered into beginning
January 1, 2011, with early adoption permitted.
Item
3. Quantitative and Qualitative
Disclosures About Market Risk
As of October 31, 2009, we were exposed
to market risks, primarily changes in U.S. interest rates. As of October 31,
2009, we held total cash and cash equivalents of approximately $1.6 million. All
cash equivalents have a maturity less than 90 days. Declines in interest
rates over time would reduce our interest income from our
investments.
Item
4T. 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, as amended (“the Exchange Act”)), as of October
31, 2009, the end of the period covered by this report. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission including without limitation, controls and procedures that are
designed to ensure that the information required to be disclosed in reports by
us that we file or submit under the Exchange Act is accumulated and communicated
to our management, including our principal executive and principal financial
officers, as appropriate to allow timely discussion regarding required
disclosures.
(b) Changes in internal
controls.
There
have been no changes in our internal control over financial reporting during the
quarter ended October 31, 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting subsequent to the date of the evaluation referred to
above.
|
PART
II.
|
OTHER
INFORMATION
|
Item
1. Legal
Proceedings
Except as
disclosed below, there have been no material changes with respect to the
Company’s Legal Proceedings as disclosed in “Item 3. Legal
Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year
ended July 31, 2009.
On October 9, 2009, Robert Love, a
former Chief Financial Officer and alleged shareholder of the Company, filed a
complaint, Love v. Alfacell
Corp. et al., Case No. 3:09-cv-05199-MLC-LHG (the “Complaint”), against
the Company and certain of its current and former directors in the United States
District Court, District of New Jersey, asserting violations of federal and
state securities laws, direct and derivative common law claims for fraud and
breach of fiduciary duty, and a direct claim for negligent misrepresentation in
connection with the Company’s Phase IIIb clinical trial for ONCONASE®. The
Complaint alleges that the Company misled shareholders by issuing allegedly
false projections of when the required number of patient deaths would occur in
the Phase IIIb trial. The Complaint seeks compensatory damages of no
less than $350,000, punitive damages of no less than $20 million, and an
accounting and constructive trust. The Company believes that the
claims are meritless and intends to defend the case vigorously.
I & G
Garden State, LLC (“Landlord”) filed and served a complaint against the Company
in the Superior Court of New Jersey Law Division, Special Civil Part
Landlord-Tenant Section, Somerset County, on or about October 30, 2009, for
non-payment of rent and failure to maintain security deposit. The
complaint seeks to have the Company vacate the property. On November
13, 2009, the Company and Landlord mutually agreed that the Company will vacate
the property on or before December 31, 2009. The Landlord will
withdraw the remaining unpaid rental payments as of December 31, 2009 from the
Company’s secured irrevocable letter of credit which was placed in March
2007.
Item
1A. Risk
Factors
There have been no material changes to
the discussion of risk factors included in our most recent Annual Report on Form
10-K.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
|
|
(a)
|
Recent
Sales of Unregistered Securities
|
On October 19, 2009, we
completed a sale of 65 units (the “Units”) in a private financing to certain
investors pursuant to a securities purchase agreement (the “Securities Purchase
Agreement”) entered into on October 19, 2009. Each Unit consists of
(i) $50,000 principal amount of Senior Secured Notes convertible into
shares of the Company’s common stock at a price of $0.15 per share,
(ii) Series A Warrants to purchase in the aggregate that number of
shares of common stock initially issuable upon conversion of the aggregate
amount of the Senior Secured Notes issued as part of the Unit, at an exercise
price of $0.15 per share with a three year term and (iii) Series B Warrants
to purchase in the aggregate that number of shares of common stock initially
issuable upon conversion of the aggregate amount of the Senior Secured Notes
issued as part of the Unit, at an exercise price of $0.25 per share with a five
year term. The Company received an aggregate of $3,250,000 in gross proceeds
from the private financing. The securities were offered pursuant to
the exemptions from registration set forth in section 4(2) of the
Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.
|
|
(b)
|
Purchases
of Equity Securities by Issuer and Affiliated
Purchasers
|
None.
Item
3. Defaults Upon Senior
Securities
None.
Item
4. Submission of Matters to a
Vote of Security Holders
None.
Item 5. Other
Information
None.
Item
6. Exhibits
Exhibits (numbered in accordance with Item 601 of Regulation S-K).
|
Exhibit
No.
|
Item Title
|
| |
|
|
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
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURE
PAGE
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
21, 2009
|
By:
|
/s/ Charles
Muniz |
|
| |
|
Chief Executive Officer,
President and
Chief Financial
Officer
|
|
| |
|
(Principal
Executive Officer, Principal
Accounting
Officer and Principal
Financial
Officer)
|
|
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