PROSPECTUS SUPPLEMENT NO. 1 Filed pursuant to Rule 424(b)(3)
(To Prospectus dated March 11, 2003) Registration No. 333-38136
ALFACELL CORPORATION
6,068,279 Shares
Common Stock
----------
This Prospectus Supplement No. 1 supplements and amends the Prospectus dated
March 11, 2003 relating to the offering of an aggregate 6,068,279 shares of our
common stock by our securityholders.
The Prospectus, together with this Prospectus Supplement No. 1, constitutes the
prospectus required to be delivered by Section 5(b) of the Securities Act of
1933, as amended, with respect to offers and sales of our common stock. All
reference in the prospectus to "this prospectus" are hereby amended to read
"this prospectus (as supplemented and amended)".
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this Prospectus Supplement is July 9, 2003.
The section entitled "Summary Financial Data" on page 3 of the prospectus is
hereby deleted in its entirety and substituted as follows:
"Summary Financial Data
You should read the following financial data in conjunction with the
sections entitled "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the
audited and unaudited financial statements and notes included in this
prospectus.
August 24,
1981
(Date of
Inception) Year Ended July 31,
to April 30, -------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
------------ ----------- ----------- ----------- ------------ ------------
(unaudited)
Statement of Operations
Data:
Total revenue, principally
investment income ............. $ 2,020,992 $ 4,838 $ 13,121 $ 51,144 $ 168,372 $ 311,822
Costs and Expenses:
Costs of sales .............. 336,495 0 0 0 0 0
Research and
development ............... 41,075,525 2,032,938 1,900,678 1,879,728 2,401,945 5,264,578
General and
administrative ............ 22,089,652 798,053 705,745 644,588 920,686 1,412,968
Interest .................... 3,507,514 118,741 153,029 4,980 2,377 21,782
------------ ----------- ----------- ----------- ------------ ------------
Total costs and expenses .... 67,009,186 2,949,732 2,759,452 2,529,296 3,325,008 6,699,328
State Tax Benefit ........... 1,790,440 353,732 451,395 755,854 -- --
Net loss ...................... $(63,197,754) $(2,591,162) $(2,294,936) $(1,722,298) $ (3,156,636) $ (6,387,506)
============ =========== =========== =========== ============ ============
Net loss per common
share:
Basic and diluted ........... $ (0.12) $ (0.12) $ (.10) $ (.18) $ (.40)
Weighted average number
of common shares:
Basic and diluted ........... 21,045,000 18,927,000 17,812,000 17,271,000 15,926,000
Dividends ..................... 0 0 0 0 0
Nine Months Ended
April 30,
----------------------------
2003 2002
------------ ------------
(unaudited)
Statement of Operations
Data:
Total revenue, principally
investment income ............. $ 30,277 $ 282
Costs and Expenses:
Costs of sales .............. 0 0
Research and
development ............... 1,173,552 1,539,885
General and
administrative ............ 426,206 576,605
Interest .................... 295,055 105,517
------------ ------------
Total costs and expenses .... 1,894,813 2,222,007
State Tax Benefit ........... 229,459 353,730
Net loss ...................... $ (1,635,077) $ (1,867,995)
============ ============
Net loss per common
share:
Basic and diluted ........... $ (0.07) $ (0.09)
Weighted average number
of common shares:
Basic and diluted ........... 22,911,335 20,553,185
Dividends ..................... 0 0
2
As of
-------------------------------
April 30, 2003 July 31, 2002
-------------- -------------
(unaudited)
Balance Sheet Data:
Total assets ................................. $ 139,406 $ 228,871
Cash and cash equivalents .................... 44,586 85,843
Working capital (deficit) .................... (2,360,494) (1,666,782)
Long-term liabilities ........................ 509,334 315,929
Total stockholders' equity (deficiency) ...... (2,781,992) (1,885,437)
The first paragraph on page 4 under the risk factor entitled "We have incurred
losses since inception and anticipate that we will incur continued losses for
the foreseeable future. We do not have a current source of product revenue and
may never be profitable." is deleted in its entirety and substituted with the
following:
"We are a development stage company and since our inception, our source of
working capital has been public and private sales of our stock. We
incurred a net loss of approximately $2,591,000 for the year ended July
31, 2002 and approximately $1,635,000 for the nine months ended April 30,
2003. We have continued to incur losses since April 2003. In addition, we
had a working capital deficit of approximately $2,360,000 as of April 30,
2003, and an accumulated deficit of approximately $63,198,000 as of April
30, 2003. We may never achieve revenue sufficient for us to attain
profitability."
The following sentence on page 8 under the risk factor entitled "Our stock is
thinly traded and you may not be able to sell our stock when you want to do so."
is deleted:
"From December 2000 through December 2002, the weekly trading volume was
as low at 4,160 shares per week and only as high as 309,100 shares for any
week in such period."
and substituted with the following:
"From May 2000 through May 2003, the weekly trading volume was as low at
4,160 shares per week and only as high as 309,100 shares for any week in
such period."
The following sentence on page 8 under the risk factor entitled. "The price of
our common stock has been, and may continue to be, volatile." is deleted:
"Over the past three fiscal years, the sale price of our common stock as
reported by Nasdaq and the OTC Bulletin Board has fluctuated from a low of
$0.33 to a high of $3.88."
and substituted with the following:
"Over the past three years, the sale price of our common stock as reported
by Nasdaq and the OTC Bulletin Board has fluctuated from a low of $0.18 to
a high of $3.88."
3
The section entitled "Selected Financial Data" on page 13 is deleted in its
entirety and substituted with the following:
"SELECTED FINANCIAL DATA
You should read the following selected financial data together with the
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this prospectus. The selected statement of operations data
shown below for the years ended July 31, 2002, 2001 and 2000 and the
balance sheet data as of July 31, 2002 and 2001 are derived from our
audited financial statements included elsewhere in this prospectus, and
have been audited by KPMG LLP, independent auditors, whose report contains
an explanatory paragraph that states that our recurring loss from
operations, net working capital deficiency and limited liquid resources
raise substantial doubt about our ability to continue as a growing
concern. The financial statements do not include any adjustment that might
result from the outcome of that uncertainty. The selected statement of
operations data shown below for the years ended July 31, 1999 and 1998 and
the balance sheet data as of July 31, 2000, 1999 and 1998 are derived from
our audited financial statements which were also audited by KPMG LLP, but
are not included in this prospectus or incorporated herein by reference.
The selected financial data as of and for the nine months ended April 30,
2003 and 2002 and for the period from August 29, 1981 (Date of Inception)
to April 30, 2003 are unaudited and, in our opinion, contain all
adjustments, consisting only of normal, recurring accruals, which are
necessary for a fair statement of the results of those periods. Results
for the nine months ended April 30, 2003 are not necessarily indicative of
results that may be expected for the entire year.
4
August 24,
1981
(Date of
Inception) Year Ended July 31,
to April 30, ----------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
Statement of Operations
Data:
Total revenue, principally
investment income .............. $ 2,020,992 $ 4,838 $ 13,121 $ 51,144 $ 168,372 $ 311,822
Costs and Expenses:
Costs of sales ............... 336,495 0 0 0 0 0
Research and
development ................ 41,075,525 2,032,938 1,900,678 1,879,728 2,401,945 5,264,578
General and
administrative ............. 22,089,652 798,053 705,745 644,588 920,686 1,412,968
Interest ..................... 3,507,514 118,741 153,029 4,980 2,377 21,782
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses ..... 67,009,186 2,949,732 2,759,452 2,529,296 3,325,008 6,699,328
State Tax Benefit ............ 1,790,440 353,732 451,395 755,854 -- --
Net loss ....................... $(63,197,754) $ (2,591,162) $ (2,294,936) $ (1,722,298) $ (3,156,636) $ (6,387,506)
============ ============ ============ ============ ============ ============
Net loss per common
share:
Basic and diluted ............ $ (0.12) $ (0.12) $ (.10) $ (.18) $ (.40)
Weighted average number
of common shares:
Basic and diluted ............ 21,045,000 18,927,000 17,812,000 17,271,000 15,926,000
Dividends ...................... 0 0 0 0 0
Nine Months Ended
April 30,
----------------------------
2003 2002
----------------------------
(unaudited)
Statement of Operations
Data:
Total revenue, principally
investment income .............. $ 30,277 $ 282
Costs and Expenses:
Costs of sales ............... 0 0
Research and
development ................ 1,173,552 1,539,885
General and
administrative ............. 426,206 576,605
Interest ..................... 295,055 105,517
------------ ------------
Total costs and expenses ..... 1,894,813 2,222,007
State Tax Benefit ............ 229,459 353,730
Net loss ....................... $ (1,635,077) $ (1,867,995)
============ ============
Net loss per common
share:
Basic and diluted ............ $ (0.07) $ (0.09)
Weighted average number
of common shares:
Basic and diluted ............ 22,911,335 20,553,185
Dividends ...................... 0 0
As of July 31, As of
April 30,
---------------------------------------------------------------- -----------
2002 2001 2000 1999 1998 2003
----------- --------- --------- ---------- ---------- -----------
Balance Sheet Data: (unaudited)
Total assets ................................ $ 228,871 $ 201,609 $ 488,099 $1,728,648 $5,516,678 $ 139,406
Cash and cash equivalents ................... 85,843 44,781 257,445 1,383,133 5,099,453 44,586
Working capital (deficit) ................... (1,666,782) (830,610) (303,646) 498,993 3,398,527 (2,360,494)
Long-term liabilities ....................... 315,929 23,663 30,251 0 6,727 509,334
Total stockholders' equity (deficiency) ..... (1,885,437) (740,378) (131,860) 757,200 3,691,838 (2,781,992)
The subsection entitled "Three Month Period ended October 31, 2002 and 2001"
under the section entitled "Management's Discussion and Analysis of Financial
Condition and results of Operations" on pages 14 and 15 is deleted in its
entirety and substituted with the following:
"Three and nine month periods ended April 30, 2003 and 2002
Revenues.
We are a development stage company as defined in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 7. We
are devoting substantially all of our present efforts to establishing a
new business and developing new drug products. Our planned principal
operations of marketing and/or licensing of new drugs have not commenced
and, accordingly, we have not derived any significant revenue from these
operations. We focus most of our
5
productive and financial resources on the development of ONCONASE(R) and
as such we have not had any sales in the three and nine month periods
ended April 30, 2003 and 2002. For the nine months ended April 30, 2003,
our other income was $30,000.
Research and Development.
Research and development expense for the three months ended April 30, 2003
was $374,000 compared to $532,000 for the same period last year, a
decrease of $158,000, or 30%. This decrease was primarily due to a
decrease in personnel costs, a decrease in regulatory consulting costs and
a reduction of a non-cash expense related to stock options issued for
consulting services. These decreases were partially offset by an increase
in costs related to our Phase III clinical trial for malignant
mesothelioma.
Research and development expense for the nine months ended April 30, 2003
was $1,174,000 compared to $1,540,000 for the same period last year, a
decrease of $366,000, or 24%. This decrease was primarily due to a
decrease in personnel costs, decrease in regulatory consulting costs and
reduction of a non-cash expense related to stock options issued for
consulting services partially offset by an increase in costs related to
our Phase III clinical trial for malignant mesothelioma.
General and Administrative.
General and administrative expense for the three months ended April 30,
2003 was $138,000 compared to $193,000 for the same period last year, a
decrease of $55,000, or 28%. This decrease was primarily due to decreases
in public relations and legal expenses and a reduction of a non-cash
expense related to stock options issued for consulting services.
General and administrative expense for the nine months ended April 30,
2003 was $426,000 compared to $577,000 for the same period last year, a
decrease of $151,000, or 26%. This decrease was primarily due to decreases
in public relations and legal expenses and a reduction of a non-cash
expense related to stock options issued for consulting services.
Interest.
Interest expense for the three months ended April 30, 2003 was $55,000
compared to $68,000 for the same period last year, a decrease of $13,000.
Interest expense for the nine months ended April 30, 2003 was $295,000
compared to $105,000 for the same period last year, an increase of
$190,000. The net increase was primarily due to the interest expense on
the beneficial conversion feature of the notes payable issued to unrelated
parties, the related warrants and the increase in total borrowing levels.
The interest expense was based on the fair value of the warrants using the
Black-Scholes method, amortized over the terms of the notes payable.
6
Income Taxes.
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carry forwards and state research and
development credits or tax benefits. For the state fiscal year 2003 (July
1, 2002 to June 30, 2003), we have approximately $1,372,000 total
available tax benefits of which approximately $273,000 was allocated to be
sold between July 1, 2002 and June 30, 2003. In December 2002, we received
approximately $229,000 from the sale of the allocated tax benefits which
was recognized as a tax benefit for the nine months ended April 30, 2003.
In December 2001, we received approximately $354,000 from the sale of the
allocated tax benefits which was recognized as a tax benefit for the
fiscal year ended July 31, 2002. We will attempt to sell the remaining
balance of our tax benefits in the amount of approximately $1,099,000
between July 1, 2003 and June 30, 2004, subject to all existing laws of
the State of New Jersey. However, we cannot assure you that we will be
able to find a buyer for our tax benefits or that such funds will be
available in a timely manner.
Net Loss.
We have incurred net losses during each year since our inception. The net
loss for the three months ended April 30, 2003 was $568,000 as compared to
$793,000 for the same period last year, a decrease of $225,000. The net
loss for the nine months ended April 30, 2003 was $1,635,000 as compared
to $1,868,000 for the same period last year, a decrease of $233,000. The
cumulative loss from the date of inception, August 24, 1981, to April 30,
2003, amounted to $63,198,000. Such losses are attributable to the fact
that we are still in the development stage and accordingly have not
derived sufficient revenues from operations to offset the development
stage expenses.
The subsection entitled "Liquidity and Capital Resources" under the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 17 and 18 is deleted in its entirety and
substituted with the following:
"Liquidity and Capital Resources
We have financed our operations since inception primarily through equity
and debt financing, research product sales and interest income. During the
nine months ended April 30, 2003, we had a net decrease in cash and cash
equivalents of $41,000, which resulted primarily from net cash used in
operating activities of $1,013,000, offset by net cash provided by
financing activities of $972,000, primarily from the proceeds from
long-term borrowings and from the issuance of common stock and warrants.
Total cash resources as of April 30, 2003 were $45,000 compared to $86,000
at July 31, 2002.
Our current liabilities as of April 30, 2003 were $2,412,000 compared to
$1,798,000 at July 31, 2002, an increase of $614,000. The increase was
primarily due to an increase in the current portion of long-term notes
payable and increased
7
accrued expenses partially offset by a decrease in accounts payable. As of
April 30, 2003 our current liabilities exceeded our current assets and we
had a working capital deficit of $2,360,000.
Our continued operations will depend on our ability to raise additional
funds through various potential sources such as equity and debt financing,
collaborative agreements, strategic alliances, sale of tax benefits,
revenues from the commercial sale of ONCONASE(R), licensing of our
proprietary RNase technology and our ability to realize the full potential
of our technology and our drug candidates via out-licensing agreements
with other companies. Such additional funds may not become available as we
need them or be available on acceptable terms. To date, a significant
portion of our financing has been through private placements of common
stock and warrants, the issuance of common stock for stock options and
warrants exercised and for services rendered, debt financing and financing
provided by our Chief Executive Officer. Additionally, we have raised
capital through the sale of our tax benefits. Until and unless our
operations generate significant revenues, we will attempt to continue to
fund operations from the sources of capital previously described. However,
there can be no assurance that we will be able to raise the capital
needed. After taking into account the net proceeds we received from the
sale of our tax benefits in December 2002, we believe that our cash and
cash equivalents as of April 30, 2003 will be sufficient to meet our
anticipated cash needs through April 30, 2004. We are continuing our fund
raising efforts and anticipate securing required financing by the end of
our fiscal year 2003. The report of our former independent auditors on our
July 31, 2002 financial statements included an explanatory paragraph which
states that our recurring losses, working capital deficit and limited
liquid resources raise substantial doubt about our ability to continue as
a going concern. As of April 30, 2003, we continued to incur losses, had a
working capital deficiency and limited liquid resources which raise
substantial doubt about the Company's ability to continue as a going
concern. Our financial statements at April 30, 2003 and July 31, 2002 do
not include any adjustments that might result from the outcome of this
uncertainty.
We will continue to incur costs in conjunction with our U.S. and foreign
registrations for marketing approval of ONCONASE(R). We are currently in
discussions with several potential strategic alliance partners, including
major international biopharmaceutical companies, to further the
development and marketing of ONCONASE(R) and other related products in our
pipeline. However, we cannot be sure that any such alliances will
materialize.
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits or tax benefits. For the state fiscal year 2003 (July
1, 2002 to June 30, 2003), we have approximately $1,372,000 total
available tax benefits of which approximately $273,000 was allocated to be
sold between July 1, 2002 and June 30, 2003. In December 2002, we received
approximately $229,000 from the sale of the allocated tax benefits which
was recognized as a tax benefit for the nine
8
months ended April 30, 2003. In December 2001, we received approximately
$354,000 from the sale of the allocated tax benefits which was recognized
as a tax benefit for the fiscal year ended July 31, 2002. We will attempt
to sell the remaining balance of our tax benefits in the amount of
approximately $1,099,000 between July 1, 2003 and June 30, 2004, subject
to all existing laws of the State of New Jersey. However, we cannot assure
you that we will be able to find a buyer for our tax benefits or that such
funds will be available in a timely manner.
Our common stock was delisted from The Nasdaq SmallCap Market effective at
the close of business April 27, 1999 for failing to meet the minimum bid
price requirements set forth in the NASD Marketplace Rules. As of April
28, 1999, our common stock trades on the OTC Bulletin Board under the
symbol "ACEL.OB". Delisting of our common stock from Nasdaq could have a
material adverse effect on our ability to raise additional capital, our
stockholders' liquidity and the price of our common stock.
The market price of our common stock is volatile, and the price of the
stock could be dramatically affected one way or another depending on
numerous factors. The market price of our common stock could also be
materially affected by the marketing approval or lack of approval of
ONCONASE(R).
The following subsection is added to the section entitled "Description of
Securities" on pages 45 through 47:
"Recent Transactions
The following transactions have occurred since January 2003:
o In February 2003, we completed a private placement resulting in the
issuance of an aggregate of 110,000 shares of restricted common
stock and five-year warrants to purchase 110,000 shares of common
stock at an exercise price of $1.25 per share. We received $55,000
from such private placement.
o In March 2003, we issued a $100,000 8% note payable to an unrelated
party, which will become due in September 2004. In consideration for
the loan, we issued warrants to purchase 100,000 shares of common
stock expiring five years from the date of issuance at an exercise
price of $0.60 per share. In addition, we will issue on the due date
of the note warrants to purchase 100,000 shares of common stock at
an exercise price of $1.00 per share, expiring five years from the
date of issuance. Additionally, the unrelated party can convert the
note into shares of our common stock at a conversion rate of $0.35
per share.
o In April 2003, we completed several private placements resulting in
the issuance of an aggregate of 440,000 shares of restricted common
stock and five-year warrants to purchase 440,000 shares of common
stock at an
9
exercise price of $1.25 per share. We received an aggregate of
$220,000 from such private placements.
o In May 2003, we issued a $100,000 8% note payable to an unrelated
party, which will become due in November 2004. The unrelated party
can convert the note into shares of our common stock at a conversion
rate of $0.50 per share. In addition, to the extent the unrelated
party converts the principal and interest, we will issue upon the
conversion date warrants to purchase an equivalent number of shares
of common stock at an exercise price of $1.00 per share, expiring
five years from the date of issuance.
o In May 2003, we issued 200,000 shares of common stock upon the
exercise of warrants by an unrelated party, which resulted in gross
proceeds of $100,000.
o In May 2003, we completed several private placements resulting in
the issuance of an aggregate of 70,000 shares of restricted common
stock and five-year warrants to purchase 70,000 shares of common
stock at an exercise price of $1.25 per share. We received $35,000
from such private placement.
o In June 2003, we completed several private placements resulting in
the issuance of an aggregate of 140,000 shares of restricted common
stock and five-year warrants to purchase 140,000 shares of common
stock at an exercise price of $1.25 per share. We received $70,000
from such private placement.
o In June 2003, we issued 100,000 shares of common stock upon the
exercise of warrants by an unrelated party, which resulted in gross
proceeds of $50,000.
o In June 2003 we issued an aggregate of 75,000 shares of common stock
upon the exercise of stock options held by a former officer and
director, at exercise prices ranging from $0.26 to $0.49 per share,
which resulted in gross proceeds of $31,750.
o In July 2003 we issued an aggregate of 25,000 shares of common stock
upon the exercise of stock options held by a former officer and
director, at exercise prices ranging from $0.43 to $0.54 per share,
which resulted in gross proceeds of $12,950.
The Unaudited Financial Statement on pages F-44 through F-51 is deleted in its
entirety and substituted with the following:
10
ALFACELL CORPORATION
(A Development Stage Company)
BALANCE SHEETS
April 30, 2003 and July 31, 2002
April 30, 2003 July 31, 2002
-------------- -------------
(Unaudited)
-----------
ASSETS
Current assets:
Cash and cash equivalents $ 44,586 $ 85,843
Other assets 6,984 45,754
------------ ------------
Total current assets 51,570 131,597
Property and equipment, net of accumulated depreciation and amortization
of $1,133,985 at April 30, 2003 and $1,120,371 at July 31, 2002 14,993 28,607
Loan receivable, related party 72,843 68,667
------------ ------------
Loan receivable, related party 72,843 68,667
------------ ------------
Total assets $ 139,406 $ 228,871
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
Current liabilities:
Current portion of long-term debt $ 8,680 $ 8,179
Notes payable, net of debt discount of $4,067 at April 30, 2003 345,933 --
Loan payable, related party 106,114 139,794
Accounts payable 659,926 796,128
Accrued expenses 1,291,411 854,278
------------ ------------
Total current liabilities 2,412,064 1,798,379
Long-term debt, less current portion, net of debt discount of $200,053 at April 30, 2003 509,334 315,929
------------ ------------
Total liabilities 2,921,398 2,114,308
------------ ------------
Stockholders' (deficiency):
Preferred stock, $.001 par value
Authorized and unissued, 1,000,000 shares at April 30, 2003 and July 31, 2002 -- --
Common stock $.001 par value
Authorized 40,000,000 shares at April 30, 2003 and July 31, 2002;
Issued and outstanding, 23,422,958 shares at April 30, 2003 and 22,760,921
shares at July 31, 2002 23,423 22,761
Capital in excess of par value 60,392,339 59,654,479
Deficit accumulated during the development stage (63,197,754) (61,562,677)
------------ ------------
Total stockholders' (deficiency) (2,781,992) (1,885,437)
------------ ------------
Total liabilities and stockholders' (deficiency) $ 139,406 $ 228,871
============ ============
See accompanying notes to financial statements.
11
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Three months and nine months ended April 30, 2003 and 2002,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2003
(Unaudited)
Three Months Ended Nine Months Ended August 24, 1981
April 30, April 30, (Date of
---------- --------- Inception) to
2003 2002 2003 2002 April 30, 2003
---- ---- ---- ---- --------------
Revenue:
Sales $ -- $ -- $ -- $ -- $ 553,489
Investment income 43 125 277 282 1,377,400
Other income -- -- 30,000 -- 90,103
------------ ------------ ------------ ------------ ------------
Total revenue 43 125 30,277 282 2,020,992
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales -- -- -- -- 336,495
Research and development 374,183 531,904 1,173,552 1,539,885 41,075,525
General and administrative 138,131 192,991 426,206 576,605 22,089,652
Interest:
Related parties, net 653 -- 1,939 -- 1,149,486
Others 54,831 67,999 293,116 105,517 2,358,028
------------ ------------ ------------ ------------ ------------
Total costs and expenses 567,798 792,894 1,894,813 2,222,007 67,009,186
------------ ------------ ------------ ------------ ------------
Loss before state tax benefit (567,755) (792,769) (1,864,536) (2,221,725) (64,988,194)
State tax benefit -- -- 229,459 353,730 1,790,440
------------ ------------ ------------ ------------ ------------
Net loss $ (567,755) $ (792,769) $ (1,635,077) (1,867,995) $(63,197,754)
============ ============ ============ ============ ============
Loss per basic common share $ (.02) $ (.04) $ (.07) $ (.09)
============ ============ ============ ============
Weighted average number of shares
outstanding 23,079,250 21,020,967 22,911,335 20,553,185
============ ============ ============ ============
See accompanying notes to financial statements.
12
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Nine months ended April 30, 2003 and 2002,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2003
(Unaudited)
August 24, 1981
Nine Months Ended (Date of Inception) to
April 30, 2003 April 30, 2002 April 30, 2003
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $(1,635,077) $(1,867,995) $(63,197,754)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities -- -- (25,963)
Depreciation and amortization 13,615 31,564 1,545,021
Loss on disposal of property and equipment -- -- 18,926
Noncash operating expenses 20,161 190,783 6,052,214
Charge for beneficial conversion rights 204,603 -- 204,603
Amortization of debt discount 37,849 -- 37,849
Amortization of deferred compensation -- -- 11,442,000
Amortization of organization costs -- -- 4,590
Changes in assets and liabilities:
Decrease (increase) other current assets 38,770 4,812 (66,851)
(Increase) decrease in other assets (4,176) (17,927) 23,208
Increase in interest payable-related party -- -- 744,539
(Decrease) increase in accounts payable (126,202) 423,164 1,030,162
Increase in accrued payroll and expenses,
related parties -- -- 2,348,145
Increase in accrued expenses 437,133 179,871 1,832,924
----------- ----------- ------------
Net cash used in operating activities (1,013,324) (1,055,728) (38,006,387)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of marketable equity securities -- -- (290,420)
Proceeds from sale of marketable equity
securities -- -- 316,383
Purchase of property and equipment -- -- (1,406,836)
Patent costs -- -- (97,841)
----------- ----------- ------------
Net cash used in investing activities -- -- (1,478,714)
----------- ----------- ------------
(continued)
See accompanying notes to financial statements.
13
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Continued
Nine months ended April 30, 2003 and 2002,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2003
(Unaudited)
August 24, 1981
(Date of Inception)
Nine Months Ended to
April 30, 2003 April 30, 2002 April 30, 2003
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from short-term borrowings $ 25,000 $ -- $ 874,500
Payment of short-term borrowings (25,000) (5,000) (653,500)
(Decrease) increase in loans payable - related party, net (33,680) 126,553 2,734,982
Proceeds from bank debt and other borrowings, net of
deferred issuance costs 750,000 100,000 3,502,460
Reduction of long-term debt (6,041) (4,719) (2,948,501)
Proceeds from issuance of common stock, net 241,788 789,629 29,602,499
Proceeds from exercise of stock options and warrants, net 20,000 50,000 5,703,254
Proceeds from issuance of convertible debentures, related party -- -- 297,000
Proceeds from issuance of convertible debentures, unrelated party -- -- 416,993
------------ ------------ ------------
Net cash provided by financing activities 972,067 1,056,463 39,529,687
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (41,257) 735 44,586
Cash and cash equivalents at beginning of period 85,843 44,781 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 44,586 $ 45,516 $ 44,586
============ ============ ============
Supplemental disclosure of cash flow information - interest paid $ 4,416 $ 6,971 $ 1,687,057
============ ============ ============
Noncash financing activities:
Issuance of convertible subordinated debenture for loan payable
to officer $ -- $ -- $ 2,725,000
============ ============ ============
Issuance of common stock upon the conversion of convertible
subordinated debentures, related party $ -- $ -- $ 3,242,000
============ ============ ============
Conversion of short-term borrowings to common stock $ -- $ -- $ 226,000
============ ============ ============
Conversion of accrued interest, payroll and expenses by related
parties to stock options $ -- $ -- $ 3,194,969
============ ============ ============
Repurchase of stock options from related party $ -- $ -- $ (198,417)
============ ============ ============
Conversion of accrued interest to stock options $ -- -- $ 142,441
============ ============ ============
Conversion of accounts payable to common stock 10,000 $ 50,000 $ 370,326
============ ============ ============
Conversion of notes payable, bank and accrued interest
to long-term debt $ -- $ -- $ 1,699,072
============ ============ ============
Conversion of loans and interest payable, related party and
accrued payroll and expenses, related parties to long-term
accrued payroll and other, related party $ -- $ -- $ 1,863,514
============ ============ ============
Issuance of common stock upon the conversion of convertible
subordinated debentures, other $ -- $ 64,993 $ 191,993
============ ============ ============
Issuance of common stock for services rendered $ -- $ -- $ 2,460
============ ============ ============
Issuance of warrants with notes payable $ 196,686 $ -- $ 196,686
============ ============ ============
See accompanying notes to financial statements.
14
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial position as of April 30,
2003 and its results of operations and cash flows for the three and/or nine
month periods ended April 30, 2003 and 2002 and the period from August 24, 1981
(date of inception) to April 30, 2003. The results of operations for the nine
months ended April 30, 2003 are not necessarily indicative of the results to be
expected for the full year.
The Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 7.
The Company is devoting substantially all of its present efforts to establishing
a new business. Its planned principal operations have not commenced and,
accordingly, no significant revenue has been derived therefrom.
The Company has reported net losses since its inception. Also, the Company
has limited liquid resources. The report of the Company's former independent
accountants on the Company's July 31, 2002 financial statements included an
explanatory paragraph which states that the Company's recurring losses, working
capital deficit and limited liquid resources raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements at
July 31, 2002 and April 30, 2003 do not include any adjustments that might
result from the outcome of this uncertainty.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of tax benefits,
revenues from the commercial sale of ONCONASE(R), licensing of its proprietary
RNase technology and its ability to realize the full potential of its technology
and its drug candidates via out-licensing agreements with other companies. Such
additional funds may not become available as needed or be available on
acceptable terms. To date, a significant portion of the Company's financing has
been through private placements of common stock and warrants, the issuance of
common stock for stock options and warrants exercised and for services rendered,
debt financing and financing provided by the Company's Chief Executive Officer.
Additionally, the Company has raised capital through the sale of its tax
benefits. Until and unless the Company's operations generate significant
revenues, the Company will attempt to continue to fund its operations from cash
on hand and through the sources of capital previously described. From August 1,
2002 through May 31, 2003, the Company received gross proceeds of approximately
$1,561,000 from long-term and short-term borrowings from unrelated parties, the
private placement of common stock and warrants,
15
sale of tax benefits and other income. No assurances can be provided that the
additional capital will be sufficient to meet the Company's needs.
2. LOSS PER COMMON SHARE
"Basic" loss per common share equals net loss divided by weighted average
common shares outstanding during the period. "Diluted" loss per common share
equals net income divided by the sum of weighted average common shares
outstanding during the period plus the effect of potentially dilutive
securities. The Company's Basic and Diluted per share amounts are the same since
the assumed exercise of stock options and warrants are all anti-dilutive. The
amount of options and warrants excluded from the calculation was 10,070,773 and
8,458,511 at April 30, 2003 and 2002, respectively.
3. STOCK-BASED COMPENSATION
During the third fiscal quarter of 2003, Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB Statement No. 123" became
effective for the Company.
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method. As the exercise price of
all options granted under these plans was equal to the fair market price of the
underlying common stock on the grant date, no stock-based employee compensation
cost is recognized in the condensed statements of operations.
In accordance with SFAS 148 and Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company's pro forma option expense is computed using the Black-Scholes option
pricing model. This model was developed for use in estimating the value of
traded options that have no vesting restrictions and are fully transferable. The
Company's employee stock options have characteristics significantly different
from those of traded options; therefore, in the opinion of management, the
Black-Scholes option pricing model required by SFAS 148 and SFAS 123, does not
necessarily provide a reliable measure of the fair value of the Company's
options.
To comply with SFAS 148, the Company is presenting the following table to
illustrate the effect on the net loss and loss per share if it had applied the
fair value recognition provisions of SFAS 123, as amended, to options granted
under the stock-based employee compensation plans. For purposes of this pro
forma disclosure, the estimated value of the options is amortized ratably to
expense over the options' vesting periods.
16
Three Months Ended Nine Months Ended
April 30, April 30,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net loss applicable to common shares
As reported $ 567,755 $ 792,769 $ 1,635,077 $ 1,867,995
Pro forma 606,153 838,318 1,779,837 2,037,703
Net loss per common share
As reported $ 0.02 $ 0.04 $ 0.07 $ 0.09
Pro forma 0.03 0.04 0.08 0.10
4. RELATED PARTY INSTRUMENTS
The Company's CEO, Kuslima Shogen, has made loans to the Company repayable
upon demand bearing interest at 8% per annum. As of April 30, 2003, the Company
owes Ms. Shogen $106,114 classified as a current liability included in Loan
payable, related party. Amounts due from Ms. Shogen totaling $72,843 are
classified as a long term asset in Loan receivable, related party as the Company
does not expect repayment of these amounts within one year. The Company earns
interest at a rate of 8% per annum.
5. ACCOUNTING FOR WARRANTS ISSUED WITH CONVERTIBLE DEBT
The Company accounts for the intrinsic value of beneficial conversion
rights arising from the issuance of convertible debt instruments with
nondetachable conversion rights that are in-the money at the commitment date
pursuant to the consensuses for EITF Issue No. 98-5 and EITF Issue No. 00-27.
Such value is allocated to additional paid-in capital and the resulting debt
discount is charged to interest expense using the effective yield method over
the period to the debt instrument's earliest conversion date. Such value is
determined after first allocating an appropriate portion of the proceeds
received to warrants or any other detachable instruments included in the
exchange. The Company is amortizing the interest expense over the terms of the
notes payable.
6. LONG TERM DEBT, NOTES PAYABLE
From August 2002 through April 30, 2003, the Company issued 8% convertible
notes payable to unrelated parties with principal balances totaling an aggregate
of $750,000. These notes payable are scheduled to mature on various dates from
April 2004 through May 2005. Additionally, with the issuance of the notes
payable, the Company issued to the unrelated parties warrants to purchase an
aggregate of 615,000 shares of the Company's common stock, expiring five years
from the date of issuance at an exercise price of $0.60 per share. In addition,
the Company will issue on the due date of the notes payable warrants to purchase
an aggregate of 815,000 shares of the Company's common
17
6. LONG TERM DEBT, NOTES PAYABLE (Continued)
stock expiring five years from the date of issuance at per share exercise prices
of $1.00 and $1.10. The Company valued these warrants in an aggregate of
$196,686 based on the fair value determined by using the Black-Scholes method.
At the issuance dates of the notes payable, the fair market values of the
Company's shares exceeded the effective conversion prices. Accordingly, the
Company initially increased additional paid-in capital by $196,686 for the fair
value of the warrants and reduced the carrying value of the notes payable for
the same amount for the debt discount attributable to the fair value of the
warrants. The Company is amortizing the debt discount over the terms of the
notes payable.
Pursuant to the applicable guidance in the consensus for EITF Issue No.
00-27, the Company valued the beneficial conversion feature using the effective
conversion price. Accordingly, the Company first allocated $196,686 to the
detachable warrants and decreased the carrying value of the notes payable. Based
on the effective conversion prices, the Company recorded a beneficial conversion
charge of $249,897 which was allocated to additional paid-in capital and the
resulting debt discount is charged to interest expense amortized over the terms
of the notes payable.
7. CAPITAL STOCK
In September 2002, the Company issued 40,000 shares of common stock upon
the exercise of warrants by an unrelated party, which resulted in gross proceeds
of $20,000 to the Company.
In October 2002, the Company issued 37,037 shares of common stock in
settlement of accounts payable in the amount of $10,000. The settled accounts
payable amount was credited to equity as the value of the common stock.
In October 2002, the Company sold 35,000 shares of common stock to a
private investor resulting in proceeds of $7,000 to the Company. In addition,
the private investor was granted five-year warrants to purchase 35,000 shares of
common stock at an exercise price of $1.00 per share.
In October 2002, the Company issued five-year stock options to purchase
25,000 shares of common stock to an unrelated party as an incentive for lending
the Company an aggregate of $25,000, which was fully paid as of April 30, 2003.
The stock options vested immediately and have an exercise price of $0.23 per
share. The total non-cash interest expense recorded for these stock options was
$2,503, based upon the fair value of such options on the date of issuance, as
estimated by the Black-Scholes options-pricing model.
18
7. CAPITAL STOCK (Continued)
During the quarter ended April 30, 2003, the Company sold 550,000 shares
of common stock to various private investors resulting in proceeds of $275,000
to the Company. In addition, the various private investors were granted
five-year warrants to purchase 550,000 shares of common stock at an exercise
price of $1.25 per share.
During the nine months ended April 30, 2003, the Company incurred an
aggregate $40,212 of expenses relating to the registration of shares issued in
various private placements.
8. SALE OF NET OPERATING LOSSES
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits, or tax benefits. For the state fiscal year 2003 (July 1,
2002 to June 30, 2003), the Company has approximately $1,372,000 total available
tax benefits of which approximately $273,000 was allocated to be sold between
July 1, 2002 and June 30, 2003. In December 2002, the Company received
approximately $229,000 from the sale of its allocated tax benefits which was
recognized as a tax benefit for the nine months ended April 30, 2003. In
December 2001, the Company received approximately $354,000 from the sale of its
allocated tax benefits which was recognized as a tax benefit for the fiscal year
ended July 31, 2002. The Company will attempt to sell the remaining balance of
its tax benefits in the amount of approximately $1,099,000 between July 1, 2003
and June 30, 2004, subject to all existing laws of the State of New Jersey.
However, there is no assurance that the Company will be able to find a buyer for
its tax benefits or that such funds will be available in a timely manner.
9. ACCRUED EXPENSES
Included in accrued expenses as of April 30, 2003 is $789,200 of unpaid
payroll and payroll taxes. The Company is currently negotiating a payment plan
with the taxing authorities for the payment of payroll taxes with interest and
penalties, to be determined. The Company believes that any interest and
penalties assessed will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
10. SUBSEQUENT EVENTS
In May 2003, the Company issued an 8% convertible note payable to an
unrelated party with a principal balance of $100,000. This note payable is
scheduled to mature in November 2004. In addition, the Company will issue on the
due date of the note payable warrants to purchase of 200,000 shares of the
Company's common stock expiring five years from the date of issuance at a per
share exercise price of $1.10. The Company will value these warrants based on
the fair value determined by using the Black-Scholes method.
19
10. SUBSEQUENT EVENTS (Continued)
In May 2003, the Company issued 200,000 shares of common stock upon the
exercise of warrants by an unrelated party, which resulted in gross proceeds of
$100,000 to the Company.
In May and June 2003, the Company issued an aggregate of 120,000 shares of
common stock to private investors resulting in proceeds of $60,000 to the
Company. In addition, the private investors were granted five-year warrants to
purchase 120,000 shares of common stock at an exercise price of $1.25 per share.
20