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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
July 31, 2003 0-11088
For the fiscal year ended Commission file number
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2369085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Belleville Avenue, Bloomfield, New Jersey 07003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 748-8082
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
The aggregate market value of the common stock, par value $.001 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on September 3, 2003 was approximately $22,404,593. As of October 27, 2003
there were 28,183,658 shares of common stock, par value $.001 per share,
outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of the Stockholders scheduled to be held on January 14, 2004, to be
filed with the Commission not later than 120 days after the close of the
registrant's fiscal year, has been incorporated by reference, in whole or in
part, into Part III Items 10, 11, 12, 13 and 14 of this Annual Report on Form
10-K.
Table of Contents
PART I Page
----
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 15
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
Item 9A. Controls and Procedures 23
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management 23
Item 13. Certain Relationships and Related Transactions 23
Item 14. Principal Accounting Fees and Services 23
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 23
The following trademarks appear in this Annual Report: ONCONASE(R) is the
registered trademark of Alfacell Corporation, exclusively for the anti-cancer
indications; Alimta(R) and Gemzar(R) are registered trademarks of Eli Lilly;
Navelbine is a registered trademark of Glaxo Smith Kline.
All information on this Form 10-K is as of October 29, 2003 and we undertake no
obligation to update this information.
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We maintain a website at www.alfacell.com to provide information to the general
public and our stockholders on our products, resources and services along with
general information on Alfacell and its management, career opportunities,
financial results and press releases. Copies of our most recent Annual Report on
Form 10-K, our Quarterly Reports on Form 10-Q or our other reports filed with
the Securities and Exchange Commission, or SEC, can be obtained, free of charge
as soon as reasonably practicable after such material is electronically filed
with, or furnished to the SEC, from our [Investor Relations Department] by
calling 973-748-8082, through an e-mail request from our website at
www.alfacell.com/info.htm, or through the SEC's website by clicking the direct
link from our website at www.alfacell.com/investinfo.htm or directly from the
SEC's website at www.sec.gov. Our website and the information contained therein
or connected thereto are not intended to be incorporated into this Annual Report
on Form 10-K.
Information contained herein contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. All statements,
other than statements of historical fact, regarding our financial position,
potential, business strategy, plans and objectives for future operations are
"forward-looking statements." These statements are commonly identified by the
use of forward-looking terms and phrases such as "anticipates," "believes,"
"estimates," "expects," "intends," "may," "seeks," "should," or "will" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Actual future results may vary from expectations set
forth in these forward-looking statements. The matters set forth in Exhibit 99.1
hereto 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.
Part I
Item 1. BUSINESS.
Overview
Alfacell Corporation, a biopharmaceutical company, is a Delaware corporation
primarily engaged in the discovery and development of a new therapeutic class of
drugs for the treatment of cancer and other pathological conditions. Based on
our proprietary Ribonuclease, or RNase technology platform, our drug discovery
and development program consists of novel therapeutics developed from amphibian
ribonucleases. These primordial enzymes play important roles in nature. They
mediate several essential biological activities, namely, regulation of cell
proliferation, maturation, differentiation and cell death. Therefore, they are
ideal candidates for the development of therapeutics for cancer and other
life-threatening diseases, including HIV and autoimmune diseases, that require
anti-proliferative and apoptotic, or programmed cell death, properties. We are
recognized as a leader in the development of RNase based therapeutics and as
such, have both co-sponsored and been a key participant in the International
Ribonuclease Meetings held every three years.
ONCONASE(R), our trademark name for ranpirnase and our flagship product, is
undergoing the last stage of clinical testing, or Phase III. This international
randomized Phase III trial for patients with unresectable malignant
mesothelioma, an inoperable form of cancer found in the lining of the lung and
abdomen, is ongoing. We have also conducted other randomized and non-randomized
trials with patients with advanced stages of solid tumors in other types of
cancers.
ONCONASE(R) is a novel amphibian ribonuclease, unique among the superfamily of
pancreatic ribonuclease that has been isolated from the eggs of the leopard
frog. We have determined that, thus far, ranpirnase, the generic name of
ONCONASE(R) , is the smallest known protein belonging to the superfamily of
pancreatic ribonuclease and has been shown, on a molecular level, to re-regulate
the unregulated growth and proliferation of cancer cells. ONCONASE(R), unlike
most cancer drugs, that attack all cells regardless of their phenotype,
malignant vs. normal, and produce a variety of severe toxicities, is not an
indiscriminate cytotoxic agent, but rather, its activity is mediated through
elegant molecular mechanisms. ONCONASE(R) affects primarily exponentially
growing malignant cells.
In December 2002, we received Fast Track Designation from the Food and Drug
Administration, or the FDA for the treatment of malignant mesothelioma patients
with ONCONASE(R). In February 2001, we received an Orphan Medicinal Product
Designation for ONCONASE(R) from the European Agency for the Evaluation of
Medicinal
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Products, or the EMEA. These designations to ONCONASE(R) may serve to expedite
its regulatory review, assuming the clinical trials yield a positive result.
Our proprietary drug discovery program forms the basis for the development of
recombinant designer RNases for chemical conjugation, or chemical construct, and
gene fusion products with various targeting moieties such as monoclonal
antibodies, growth factors, cytokines, etc. This program provides for joint
design and generation of new products with outside partners. We may own these
new products along with a partner(s), or we may grant an exclusive license to
the collaborating partner(s).
We have established a number of scientific collaborations with the National
Cancer Institute, or NCI that are designed to develop new therapeutic
applications for ONCONASE(R). One collaboration has produced RN321, a conjugate
of ranpirnase, with a monoclonal antibody that demonstrated activity in treating
non-Hodgkin's lymphoma in preclinical studies. These results were presented by
the NCI investigators at the 2002 Ribonuclease Meeting in Bath, England. The NCI
has undertaken the manufacturing of RN321 (the conjugate) according to Good
Manufacturing Practices, or GMP regulations in preparation for commencing
clinical trials for the treatment of patients with non-Hodgkin's lymphoma with
RN321.
We have also discovered another series of proteins, collectively named
amphinases, that may have therapeutic uses. These proteins are bioactive and
have both anti-cancer and anti-viral activity. In addition to ranpirnase, we
have isolated several other proteins from eggs of the leopard frog, or Rana
pipiens. All of the proteins characterized to date are RNases. Information on
four of these proteins was presented at the 2002 Ribonuclease Meeting. These
products are currently undergoing preclinical testing. We are currently in
negotiations with potential pharmaceutical partners for the development of these
new compounds as conjugates and fusion proteins.
We have entered into a research and development collaboration with a major US
privately held stent and drug delivery company. ONCONASE(R) is being evaluated
in stents and other delivery platforms to treat cardiovascular disease and
cancer via direct site delivery. This collaboration may result in licensing
agreement between the companies, however; there is no assurance that such
agreement will be reached.
We have entered into a collaborative agreement (antiviral screening, non-SARS)
with the National Institute of Allergy and Infectious Diseases, or NIAID in
which five potential drug candidates (natural and genetically engineered) are
under evaluation against various viruses.
Our research and development collaboration with Wyeth Pharmaceuticals is ongoing
to develop a number of designer drugs such as conjugates and fusion proteins for
a variety of indications using our proprietary technology. This collaboration
may result in a licensing agreement between the companies, however; there is no
assurance that such an agreement will be reached.
We have signed confidentiality agreements and have entered into discussions and
due diligence with a number of companies for US or non-US marketing rights for
ONCONASE(R) and for out-licensing some of our early drug candidates.
We are engaged in the research, development and clinical trials of our products
both independently and through research collaborations. We have financed our
operations since inception through the sale of our equity securities, private
placements, convertible debentures and loans. These funds provide us with the
resources to acquire staff, facilities, capital equipment, finance our
technology, product development, manufacturing and clinical trials.
RESEARCH AND DEVELOPMENT PROGRAMS
Research and Development
Research and development expenses for the fiscal years ended July 31, 2003,
2002, and 2001 were $1,700,000, $2,033,000, and $1,901,000, respectively. Our
research and development programs focus primarily on the development of
therapeutics from amphibian ribonucleases. Because ribonucleases have been shown
to be involved in the regulation of cell proliferation, maturation,
differentiation and programmed cell death, known as apoptosis,
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ribonucleases may be ideal candidates for the development of therapeutics for
the treatment of cancer and other life-threatening diseases, including viral and
autoimmune diseases that require anti-proliferative and pro-apoptotic
properties.
Technology Platform and Pipeline
Using ribonucleases as therapeutics is a relatively new approach to drug
development. The use of these proteins to re-regulate the unregulated growth and
proliferation of cancer cells is unlike most cancer drugs that attack all cells
regardless of their phenotype, malignant versus normal. These anticancer drugs
are known to produce a variety of severe toxicities. ONCONASE(R) and related
drug candidates are not indiscriminate cytotoxic agents, but rather, their
activity is mediated through elegant molecular mechanisms. They affect primarily
exponentially growing malignant cells.
Cancer is associated with the over or under production of many types of proteins
in tumor cells. We believe that the ability to selectively halt the production
of certain proteins via ribonuclease activity in tumor cells without damaging
normal cells, may make treatment of cancer more effective. To make cancer
therapy more effective and less toxic, we are developing ONCONASE(R) and a
related family of regulatory proteins, collectively named amphinases. These
novel RNases are being developed as therapeutics as well as effector moieties
(payload), or killer molecules for targeted therapies. We believe that selective
degradation of intracellular proteins is central to the process of programmed
cell death.
We have devoted significant resources towards the development of recombinant
designer RNases for chemical conjugation and gene fusion products with various
targeting moieties such as monoclonal antibodies, growth factors, cytokines,
etc.
Apoptosis
Apoptosis, or programmed cell death, is essential for the proper development of
embryos and of many body systems, including the central nervous system, immune
regulation and others. Apoptosis is required to accommodate the billions of new
cells produced daily by our bodies and to eliminate aged or damaged cells.
Abnormal regulation of the apoptosis process can result in disease. For example,
cancer, autoimmune disorders and many viral infections are associated with
inhibited apoptosis or programmed death of cells occuring too slowly.
Conversely, HIV is associated with increased apoptosis or programmed death of
cells occuring too rapidly. The process of programmed cell death is genetically
regulated. We have been recognized as the first company to discover and develop
a novel family of primordial "regulatory" proteins that have been shown to play
a fundamental role in this process.
ONCONASE(R) (ranpirnase) Pro-Apoptotic Mechanisms
The molecular mechanisms were identified which determine the apoptotic cell
death induced by ranpirnase. Ranpirnase preferentially degrades tRNA, leaving
rRNA and mRNA apparently undamaged. The RNA damage induced by ranpirnase appears
to represent a "death signal", or triggers a chain of molecular events
culminating in the activation of proteolytic enzyme cascades which, in turn,
induces disintegration of the cellular components and finally execute tumor cell
death. It has been shown that there is a protein synthesis
inhibition-independent component, which, together with the changes induced by
the protein synthesis inhibition, results in tumor cell death.
Many cancer cells become resistant to most types of cancer treatment, including
chemotherapy, radiation and monoclonal antibodies. Overcoming resistance to
chemotherapy remains a major challenge for cancer therapy. ONCONASE(R) has shown
to overcome multiple drug resistance or prevent resistance to cancer therapy,
thereby dramatically increasing the sensitivity of certain cancer cells to
chemotherapy and radiation therapy.
It remains unknown whether or not ONCONASE(R) targets and binds preferentially
to tumor cells, rather than normal cells of the respective tissues. It is
possible that there is no differential targeting and/or binding, but that tumor
cells are more susceptible to the cytostatic and cytotoxic effects of
ONCONASE(R). The cytostatic effects are manifested by the inhibition of
progression in the cell cycle (G1 phase block and by inhibition of expression of
cyclin D3). These effects have been associated with induction of parallel
differentiation and apoptosis. The cytostatic and
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differentiation-inducing effects are reflected in the stabilization of
previously progressive tumors observed in our clinical trials.
Preclinical Development and Clinical Studies of ONCONASE(R)
We have been very selective in our product development strategy, which is
focused on the use of ONCONASE(R) alone or in combination with drugs which have
shown evidence of preclinical and clinical efficacy on tumor types for which
median survivals are typically less than a year and for which there are few or
no approved treatments.
ONCONASE(R) has been tested in Phase I, Phase II and Phase III clinical trials
in more than 40 cancer centers across the United States since 1991 and in Europe
since 2000, including major centers such as Columbia-Presbyterian, University of
Chicago, M.D. Anderson and Cedars-Sinai Cancer Centers.
ONCONASE(R) has been tested as a single agent in patients with a variety of
solid tumors. It has also been tested in combination with tamoxifen in patients
with prostate cancer, advanced pancreatic cancer and renal cell carcinoma as
well as with doxorubicin in patients with malignant mesothelioma.
In order to affect RNA activity, ONCONASE(R) must enter the cell. After
intravenous injection, ONCONASE(R) distributes rapidly to organs, especially the
kidney. ONCONASE(R) is excreted predominately by the kidney. Biodistribution
studies of ONCONASE(R) in vivo, or studies done in laboratory animals, have
demonstrated high tumor tissue uptake rates relative to organ distribution.
We have been in collaboration with the National Institute of Health, or NIH
including NCI, as well as a number of well-renowned academic institutions, in
the United States, Europe, and Japan and have developed a considerable body of
knowledge in RNase technology and novel RNase-based therapeutics. We believe
that ONCONASE(R) is recognized as the "gold standard" in RNase research, as
reflected by the plethora of peer-reviewed publications. ONCONASE(R) has
demonstrated a broad spectrum of anti-tumor activity in vitro, or studies of
tumor cell lines in laboratory vessels, and was determined to kill cancer cells
and therefore was judged to be "active" in the NCI Cancer Screen.
In vitro and in vivo studies showed both cytostatic (stops cancer cells from
further dividing) and cytotoxic (induces cancer cells to disintegrate) antitumor
activity when used as a single agent and in combination with other agents.
In Vitro
ONCONASE(R), in combination with other drugs, has been shown to be synergistic
which means that the effect of ONCONASE(R) when given in combination with other
drugs is greater than if the drugs were given alone. The results of these
studies have been published. The combination of ONCONASE(R) and tamoxifen
resulted in a significant cell kill in pancreatic, prostate, and ovarian tumor
cell lines as compared to each drug alone. Similar results were found with
respect to the following:
o ONCONASE(R)+ phenothiazine for non-small cell lung cancer;
o ONCONASE(R)+ lovastatin in pancreatic, ovarian, and two types of
non-small cell lung cancer;
o ONCONASE(R)+ cisplatin in ovarian cancer;
o ONCONASE(R)+ all-trans-retinoic acid in glioma (brain) cancer;
o ONCONASE(R)+ vincristine in colorectal cancer and ;
o ONCONASE(R)+ doxorubicin in breast cancer including resistant
variants.
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In Vivo Anti-Cancer Activity
ONCONASE(R) as a Single Agent
ONCONASE(R) as a single agent has shown in vivo anti-tumor activity in several
mouse models of solid tumors:
o In the human squamous A-253 carcinoma and the NIH-OVCAR-3 ovarian
adenocarcinoma models, ONCONASE(R) has produced prolonged survival
and delayed time to development of ascites (fluid in the abdomen),
respectively.
o In mice bearing M109 Madison lung carcinoma cells, time to
appearance of ascites and survival were significantly prolonged in
ONCONASE(R) treated animals as compared to controls. Several
histologically confirmed cures were noted.
o In nude mice bearing human DU-145 prostate carcinoma and pancreatic
ASPC-1 carcinoma, ONCONASE(R) inhibited growth of the subcutaneously
transplanted tumor.
o In several mouse tumor models, ONCONASE(R) not only demonstrated
direct anti-tumor activity but also increased the potential for
other drugs to penetrate the tumor tissue as well as increased the
tumor sensitivity to radiation therapy.
ONCONASE(R) in Combination With Other Agents
Based on in vivo results, ONCONASE(R) in combination with the following
anti-cancer agents has been evaluated by us, in collaboration with the NCI, and
the results have been published:
o vincristine
o doxorubicin
o tamoxifen.
ONCONASE(R) prolonged the survival of nude mice bearing vincristine-resistant,
HT-29 human colorectal carcinomas transfected with mdr-1 gene, when used in
combination with vincristine. These NCI results demonstrated that ONCONASE(R)
can restore the sensitivity of resistant tumor cells to chemotherapy.
NCI experiments in nude mice transplanted intravenously with human breast
carcinoma cells treated with the combination of ONCONASE(R) and doxorubicin have
shown significantly prolonged survival. Tumor growth was significantly inhibited
as demonstrated by a decrease in the number pulmonary metastases present at the
time of sacrifice.
NCI reported the ability of ONCONASE(R) to overcome multiple drug resistance as
well as other forms of drug resistance (referring to a drug that no longer kills
cancer cells) both in vitro and in vivo. We believe that these in vivo results
demonstrate the therapeutic utility of ONCONASE(R) in chemotherapy-resistant
tumors, and the findings suggest that ONCONASE(R) in combination with other
agents has broad clinical application in cancer treatments.
Clinical Trials
Onconase(R) Phase III Randomized Clinical Trials
We are currently conducting a two-part Phase III clinical trial of ONCONASE(R)
as a treatment for malignant mesothelioma. The first part of the Phase III trial
compares ONCONASE(R) alone to doxorubicin. Doxorubicin has been considered by
opinion leaders to be the most effective drug for the treatment of malignant
mesothelioma. The second part of the trial compares the combination of
ONCONASE(R) and doxorubicin versus doxorubicin alone. The trial is a
nonrandomized, controlled study. The patient enrollment for the first part of
the clinical trial has been completed and the trial is on-going. The second part
is currently in the enrollment stage and is being conducted in the United
States, Germany and Italy.
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Since ONCONASE(R) has Fast Track Designation for the treatment of malignant
mesothelioma patients, we continue to have meetings and discussions with the FDA
to establish mutually agreed upon parameters for the New Drug Application, or
NDA to obtain marketing approval for ONCONASE(R), assuming the Phase III
clinical trial yields favorable results.
Phase III Single Agent Results
The single agent Phase III results of the Treatment Target Group, or TTG, which
included 104 patients, of which 47 were treated with ONCONASE(R) and 57 were
treated with doxorubicin who met the criteria for Cancer Adult Leukemia Group B,
or CALGB prognostic groups 1-4, showed a median survival benefit, or MST, of 2
months for ONCONASE(R) treated patients, 11.6 months vs. 9.6 months. This two
month median survival difference favoring ONCONASE(R) represents a 20% advantage
over the active agent, doxorubicin. Moreover, the clinical activity of
ONCONASE(R) is also evident from the overall 1-year and 2-year survival rates of
ONCONASE(R) vs. doxorubicin, 46.8% vs. 38.6% and 20.2% vs. 12.3%, respectively.
Doxorubicin treatment was associated with a 60% higher risk of death compared to
ONCONASE(R) treatment. Tumor assessment by an independent radiologist for 53
patients revealed evidence of objective clinical activity in 17 patients in each
treatment arm. Four partial responses and 13 stabilization of previously
progressive disease in the ONCONASE(R) treated patients and 7 partial responses
and 10 stabilization of previously progressive disease in the doxorubicin
treated patients. Despite the small number of patients, the analysis revealed a
statistically significant difference, log rank test, p. = 0.037, in survival of
the responders favoring ONCONASE(R) treated patients with an MST 23.3 vs. 14.4
months for doxorubicin treated patients as well as the 2 year survival rates of
40% for ONCONASE(R) and 9% for doxorubicin. Preliminary results were presented
at the 2000 American Society of Clinical Oncologists, or ASCO, meeting.
These survival advantages were recognized as clinically important in this
patient population by opinion leaders and the FDA. Therefore, the FDA has
requested confirmation of the survival results in the TTG population in Part II
of the ongoing trial.
We have obtained Fast Track Designation from the FDA for the treatment of
malignant mesothelioma patients with ONCONASE(R) and doxorubicin. Fast Track is
a formal mechanism to interact with the FDA using approaches that are available
to all applicants for marketing claims for drugs that are being developed for a
serious or life-threatening disease for which there is an unmet medical need.
The benefits of Fast Track include scheduled meetings to seek FDA input into
development plans, the option of submitting an NDA in sections rather than all
components simultaneously, and the option of requesting evaluation of studies
using surrogate endpoints. We intend to use this designation to reduce the
marketing approval timeline for ONCONASE(R).
In February 2001, we received an Orphan Medicinal Product Designation for
ONCONASE(R) from the EMEA. We continue to fulfill the EMEA requirements
regarding the Marketing Authorization Application, or MAA registration
requirements for ONCONASE(R) for the treatment of malignant mesothelioma.
In part two of the ongoing Phase III trial, an interim analysis based on the
occurrence of 105 deaths is planned. Based upon the results of these analyses,
we may be able to file an NDA and an MAA within 6 months after the completion of
the analyses. However, we cannot assure you that marketing approval for
ONCONASE(R) as a treatment for malignant mesothelioma will be granted by the FDA
or EMEA.
We had initiated a Phase III trial in patients with advanced pancreatic cancer
in 1995 after meeting with the FDA, based on the Phase II trial results. The
median survival time of 5.5 months for 47 patients with stage 4 disease and
liver involvement treated with the combination of ONCONASE(R) weekly and
tamoxifen daily was more than double the median survival of such patients
reported in previously published trials treated with a variety of other systemic
therapies (published median survival times ranged from 2.0 to 2.5 months).
Multicenter randomized trials were designed to evaluate ONCONASE(R) and
tamoxifen regimen in untreated patients as well as patients who had failed
GEMZAR(R), an approved drug for pancreatic cancer. The primary endpoint of both
trials was survival. Early survival analyses of both trials did not reveal a
significant survival advantage over the controls. Therefore, we made a decision
that further evaluation of this end-stage patient population was not warranted
at that time and our resources were refocused on the ongoing malignant
mesothelioma program.
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ONCONASE(R) Phase II Clinical Trials
ONCONASE(R) as a single agent, demonstrated objective clinical activity in 105
patients with uresectable malignant mesothelioma that included many heavily
pretreated patients with refractory tumors. Analysis of the TTG population
confirmed the importance of the CALGB prognostic groups and their utility for
evaluating systemic therapies in this patient population.
41 patients, 39%, reported evidence of clinical activity of which there were
four partial responses, two minor responses and 35 stabilization of previously
progressive disease. The MST of these patients was 18.5 months and the overall
1-year and 2-year survival rates were 61% and 40.8%, respectively. Two patients,
1 PR and 1 SD had their residual tumors resected after termination from the
study and remain alive and tumor free for over 4 years after resection. The
results of this trial demonstrated a survival benefit for both newly diagnosed
patients and patients who failed prior therapies. The presentation of these data
to the FDA resulted in the design of our Phase III malignant mesothelioma trial.
A multicenter Phase II Broad Eligibility trial designed to evaluate ONCONASE(R)
as a single agent has been conducted and results of the findings for patients
with non-small cell lung cancer, or NSCLC, and advanced breast cancer have been
published.
ONCONASE(R) as a single agent, demonstrated objective clinical activity in
patients with advanced NSCLC and breast cancer. The median survival time of 30
patients with advanced NSCLC was greater than that in 19 of 20 regimens when
supportive care, a placebo or another single agent was given. Furthermore it was
greater than 75% of the reported MSTs in combination chemotherapy trials. The
MST and 1 year survival rates of 7.7 months and 27% for ONCONASE(R) treated
patients compared favorably to 7.2 months and 30% for patients treated with
Navelbine(R) (an approved drug for this indication) as a single agent.
Thirty percent of 17 patients with advanced breast cancer demonstrated objective
clinical activity, which included, one partial response, two minor responses and
significant reduction in bone pain and control of uncontrollable malignant fluid
in the lungs (one patient each).
A series of pilot Phase II studies to evaluate ONCONASE(R) as a single agent,
and ONCONASE(R) and tamoxifen in previously treated patients with unresectable
renal cell cancer were conducted. The results of both the Phase II single agent
and ONCONASE(R) and tamoxifen have been published. Although the single agent
study did not demonstrate evidence of clinical activity, the regimen of
ONCONASE(R) and tamoxifen did demonstrate evidence of clinical activity which
indicated further evaluation in untreated patients is warranted.
US Phase II telescopic studies to evaluate the regimen of ONCONASE(R) and
Gemzar(R), in patients with NSCLC as well as the regimen of ONCONASE(R) and an
approved taxane, in patients with advanced breast cancer are planned for 2004.
Research Collaborations
We are pursuing some of these programs independently, while others are being
undertaken in collaboration with the NIH and other United States, European and
Japanese institutions.
We have established a number of scientific collaborations with the NIH and NCI.
The objective of our collaborations with the NIH and NCI is to develop new
therapeutic applications for ONCONASE(R) as well as other drug candidates.
The pleiotropic pattern of biological activity of ONCONASE(R) led to research in
other areas of cancer biology. Two important areas associated with significant
market opportunities are radiation therapy and control of tumor angiogenesis, or
new tumor blood vessel formation. Many types of cancers undergo radiation
therapy at early stages of the disease; however, success of such treatment is
often limited. We believe any agent capable of enhancing tumor radiosensitivity
has great market potential. Moreover, since the growth of essentially all types
of cancer is dependent on new blood vessel formation, any agent that has
anti-angiogenic activity, we believe, is most desirable.
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Evaluation Of ONCONASE(R) As A Radiation Enhancer
Published studies have demonstrated that ONCONASE(R) causes an increase in both
tumor blood flow and in median tumor oxygen partial pressure causing tumor cells
to become less resistant to radiation therapy regardless of the presence or
absence of the functional p53 tumor-suppressor gene.
We believe these findings further expand the profile of ONCONASE(R) in vivo
activities and its potential clinical utility and market potential. These
findings have led to the collaboration with the Molecular Radiation Oncology
Sciences Program of the NCI. The Molecular Radiation Therapeutic Branch in
collaboration with the Radiation Biology Branch of the NCI is conducting this
research.
The University of Pennsylvania Medical Center, Metabolic Magnetic Resonance
Research and Computing Center will further evaluate ONCONASE(R) in combination
with radiation and cisplatin in human lung adenocarcinoma in a series of animal
models as well as look at the effects of ONCONASE(R) in the inhibition of
sub-lethal damage repair (SLDR) and potentially lethal damage repair (PLDR) in
human lung carcinoma cells.
ONCONASE(R) As a Resistance-Overcoming and Apoptosis-Enhancing Agent
The Fas (CD95) cell surface receptor (and its Fas ligand [FasL]) has been
recognized as an important "death" receptor involved in the induction of the
"extrinsic" pathway of apoptosis. The apoptotic pathways have been the preferred
target for new drug development in cancer, autoimmune, and other therapeutic
areas.
The Thoracic Surgery Branch of the NCI confirmed the synergy between ranpirnase
and soluble Fas ligand (sFasL) in inducing significant apoptosis in
sFasL-resistant Fas+tumor cells. These results provided rationale for using
ONCONASE(R) as a potential treatment of FasL-resistant tumors and possibly other
disorders such as the autoimmune lympho-proliferative syndrome (ALPS). Further
research in this area is ongoing.
Evaluation Of ONCONASE(R) As An Anti-Viral Agent
A collaborative agreement (antiviral screening, non-SARS) with the NIAID has
yielded positive results, which have been confirmed with one of our amphinases.
Further evaluation of this potential therapeutic is ongoing.
The ribonucleolytic activity was the basis for testing ONCONASE(R) as a
potential anti-viral agent against HIV. The NIH has performed an independent in
vitro screen of ONCONASE(R) against the HIV virus type 1. The results showed
ONCONASE(R) to inhibit replication of HIV by up to 99.9% after a four-day
incubation period at concentrations not toxic to uninfected cells. In vitro
findings by the NIH revealed that ONCONASE(R) significantly inhibited production
of HIV in several persistently infected human cell lines, preferentially
breaking down viral RNA and cellular transfer RNA while not affecting normal
cellular ribosomal RNA and messenger RNAs.
Moreover, the NIH, Division of AIDS also screened ONCONASE(R) for anti-HIV
activity. ONCONASE(R) demonstrated highly significant anti-HIV activity in the
monocyte/macrophage system. Ranpirnase may inhibit viral replication at several
points during the life cycle of HIV, including its early phases. Ranpirnase is
likely to inhibit replication of all different HIV-1 subtypes. These properties
of ranpirnase are particularly relevant in view of the extremely high and
exponentially increasing rate of mutations of HIV that occur during infection,
and which are primarily responsible for the development of resistance to several
currently available antiviral drugs. At present, over 50% of clinical isolates
of HIV are resistant to both reverse transcriptase and protease inhibitors
drugs, and an additional 25%, while being sensitive to protease inhibitors, are
resistant to RT inhibitor(s) drugs. German collaborators continue to investigate
the anti-viral properties of ONCONASE(R). The ribonucleolytic activity of
ONCONASE(R) suggested that it might be active against a variety of RNA viruses,
including HIV and hepatitis C. We believe treatments for both viruses have huge
market potentials.
Research And Development Pipeline Of Targeted Therapies
10
Our proprietary drug discovery program forms the basis for the development of
recombinant designer RNases for chemical conjugation and gene fusion products
with various targeting moieties such as monoclonal antibodies, growth factors,
cytokines, etc. We believe these products can be produced in a cost effective
and controlled manufacturing environment.
This program also provides for joint design and generation of new products with
outside partners. We, along with any outside partners, may own these new
products jointly, or we may grant an exclusive license to the collaborating
partner(s).
Ranpirnase Conjugates and Fusion Proteins
The concept of targeting potent toxins as effector molecules to kill cancer or
other specifically targeted cells has been extensively evaluated over the last 2
decades. Several immunotoxins containing bacterial and plant toxins or other
biotoxins, have been evaluated in human clinical trials. Efficacy has always
been limited due to the high incidence of immunogenicity and other intolerable
toxicities, including death. Conjugation of ranpirnase to targeting ligands
appears to eliminate this safety problem.
We have established a number of scientific collaborations with the NCI. The
objective of our collaboration with the NCI is to develop new therapeutic
applications for ONCONASE(R). This collaboration has produced RN321, a conjugate
of ranpirnase, with a monoclonal antibody that demonstrated activity in treating
non-Hodgkin's lymphoma in preclinical studies. The relative benefit in killing
targeted tumor cells versus non-targeted healthy cells, or the therapeutic
index, is greater than 200,000-fold with this conjugate. These striking
"proof-of-concept" results were presented at the 2002 Ribonuclease Meeting in
Bath, England. The NCI has undertaken the manufacturing of RN321 (the conjugate)
according to GMP regulations in preparation for commencing clinical trials for
the treatment of patients with non-Hodgkin's lymphoma with RN321.
Although ranpirnase is active against a variety of human cancers, its activity
is not uniform across different tumor types. However, whether the tumor is more
or less sensitive to ranpirnase as a single agent, its anti-tumor activity can
be greatly augmented by conjugation to different targeting moieties. One of
these moieties is the epidermal growth factor, or EGF, which is a ligand for the
EGF receptor often hyperexpressed on malignant cells. The genetically engineered
ranpirnase conjugates with EGF (rRNP-EGF) exerted significant anti-tumor
activity in human squamous cell head and neck and pancreatic carcinomas, and
human D54MG glioblastoma. Other constructs target tumor blood vessel formation,
which could be potentially used in a broad spectrum of solid tumors. They are in
pre-clinical evaluation by our European collaborators.
Novel Amphibian Ribonucleases
In addition to ONCONASE(R), we have isolated several other novel proteins from
eggs of the leopard frog. All of the proteins characterized to date are RNases.
Information on four new proteins was presented at the 2002 Ribonuclease Meeting.
Preclinical testing of the new candidates collectively called amphinases showed
them to be similarly active to ranpirnase. Their chemical structure makes them
ideal candidates for genetic engineering of designer products.
Collaborations with Pharmaceutical/Drug Delivery Companies
A research and development collaboration with a major US privately held stent
and drug delivery company is ongoing. ONCONASE(R) is being evaluated in stents
and other delivery platforms to treat cardiovascular disease and cancer via
direct site delivery. This collaboration may result in licensing agreement
between the companies, however; there is no assurance that such agreement will
be reached.
Our research and development collaboration with Wyeth Pharmaceuticals is ongoing
to develop a number of designer drugs such as conjugates and fusion proteins for
a variety of indications using our proprietary technology. This collaboration
may result in a licensing agreement between the companies, however; there is no
assurance that such an agreement will be reached.
11
Raw Materials
The major active ingredient derived from leopard frog eggs is the protein
ranpirnase. We have sufficient egg inventory on hand to produce enough
ONCONASE(R) to complete the current Phase III clinical trial for malignant
mesothelioma and supply ONCONASE(R) for up to two years after commercialization.
In addition, we have successfully completed the cloning of the gene of the
natural protein ranpirnase; however, the use of this recombinant technology may
not be more cost effective than the natural source.
Manufacturing
We have signed an agreement with Scientific Protein Laboratories, a subsidiary
of a division of Wyeth Pharmaceuticals, which will perform the intermediary
manufacturing process of purifying ranpirnase. Scientific Protein Laboratories
sends the intermediate product to a contract filler for the final manufacturing
step and vial filling. Other than these arrangements, we do not have specific
arrangements for the manufacture of our product. Products manufactured for use
in Phase III clinical trials and for commercial sale must be manufactured in
compliance with Current Good Manufacturing Practices. Both Scientific Protein
Laboratories and the contract filler, to whom the intermediate product is sent,
manufacture in accordance with Current Good Manufacturing Practices. For the
foreseeable future, we intend to rely on these manufacturers, or substitute
manufacturers, if necessary, to manufacture our product. We might not be able to
find substitute manufacturers, if necessary. We are dependent upon our contract
manufacturers to comply with Current Good Manufacturing Practices and to meet
our production requirements. It is possible that our contract manufacturers may
not comply with Current Good Manufacturing Practices or deliver sufficient
quantities of our products on schedule.
Marketing
We do not plan to market our products at this time. We have entered into a
number of Confidential Disclosure Agreements and have been in discussions with
several United States and multinational biopharmaceutical companies for the
selection of suitable marketing partners for our lead product ONCONASE(R), our
proprietary ribonuclease technology pipeline, as well as several patented
product candidates.
We intend to enter into development and marketing agreements with third parties.
We expect that under such arrangements we would grant exclusive marketing rights
to our corporate partners in return for assuming further research and
development cost, up-front fees, milestone payments and royalties on sales.
Under these agreements, our marketing partner may have the responsibility for a
significant portion of product development and regulatory approval. In the event
that our marketing partner fails to develop a marketable product or fails to
market a product successfully, our business may be adversely affected.
Government Regulation
The manufacturing and marketing of pharmaceutical products in the United States
requires the approval of the FDA under the Federal Food, Drug and Cosmetic Act.
Similar approvals by comparable regulatory agencies are required in most foreign
countries. The FDA has established mandatory procedures and safety standards
that apply to the clinical testing, manufacturing and marketing of
pharmaceutical products in the United States. Obtaining FDA approval for a new
therapeutic may take many years and involve substantial expenditures. State,
local and other authorities also regulate pharmaceutical manufacturing
facilities.
As the initial step in the FDA regulatory approval process, preclinical studies
are conducted in laboratory dishes and animal models to assess the drug's
efficacy and to identify potential safety problems. Moreover manufacturing
processes and controls for the product are required. The manufacturing
information along with the results of these studies is submitted to the FDA as a
part of the IND, which is filed to obtain approval to begin human clinical
testing. The human clinical testing program typically involves up to three
phases. Data from human trials as well as other regulatory requirements such as
chemistry, manufacturing and controls, pharmacology and toxicology sections, are
submitted to the FDA in an NDA or Biologics License Application, or BLA.
Preparing an NDA or BLA involves considerable data collection, verification and
analysis. A similar process in accordance with EMEA regulations is
12
required to gain marketing approval in Europe. Moreover, a commercial entity
must be established and approved by the EMEA in a member state of the EU at
least three months prior to filing the MAA.
We have not received United States or other marketing approval for any of our
product candidates and may not receive any approvals. We may encounter
difficulties or unanticipated costs in our effort to secure necessary
governmental approvals, which could delay or preclude us from marketing our
products.
With respect to patented products, delays imposed by the governmental approval
process may materially reduce the period during which we may have the exclusive
right to exploit them.
Patents and Proprietary Technology
We have protected our business by applying for, and obtaining, patents and
trademark registrations.. We have also relied on trade secrets and know-how to
protect our proprietary technology. We continue to develop our portfolio of
patents, trade secrets, and know how. We have obtained, and continue to apply
for, patents concerning our RNase-based technology.
In addition, we have filed (and we intend to continue to file) foreign
counterparts of certain U.S. patent applications. Generally, we apply for patent
protection in the United States, selected European countries, and Japan.
We own the following patents in the United States:
o Patent No. US 6,423,515 B1 issued on July 23, 2002, which covers the
methodology for synthesizing gene sequences of ranpirnase and a
genetically engineered variant of ranpirnase.
o Patent No. US 6,290,951 B1 issued on September 18, 2001, which
covers alteration of the cell cycle in vivo, particularly for
inducing apoptosis of tumor cells.
o Patent No. US 6,239,257 B1, issued on May 29, 2001, which covers a
family of variants of ONCONASE(R).
o Patent No. US 6,175,003 B1, issued January 16, 2001, which covers
the genes of ONCONASE(R)and a variant of ONCONASE(R).
o U.S. Patent No. 5,728,805, issued in 1998, which covers a family of
variants of ONCONASE(R).
o U.S. Patents Nos. 5,529,775 and 5,540,925, issued in 1996, and U.S.
Patent No. 5,595,734, issued in 1997, which cover combinations of
ONCONASE(R) with certain other pharmaceuticals.
o U.S. Patent No. 5,559,212, issued in 1996, which covers the amino
acid sequence of ONCONASE(R).
o U.S. Patent No. 4,888,172, issued in 1989, which covers a
pharmaceutical produced from fertilized frog eggs (Rana pipiens) and
the methodology for producing it.
We own four European patents, which have been validated in certain European
countries. These patents cover ONCONASE(R), a variant of ONCONASE(R), process
technology for making ONCONASE(R), and combinations of ONCONASE(R) with certain
other chemotherapeutics. We also have patent applications pending in the United
States, Europe, and Japan. Additionally, we own one Japanese patent and have an
undivided interest in two US patent applications, each relating to a Subject
Invention (as that term is defined in Cooperative Research and Development
Agreements, or CRADAs, to which we and the NIH are parties.)
The scope of protection afforded by patents for biotechnological inventions can
be uncertain, and such uncertainty may apply to our patents as well. The patent
applications we have filed, or that we may file in the future, may not result in
patents. Our patents may not give us competitive advantages, may be wholly or
partially invalidated or held unenforceable, or may be held uninfringed by
products that compete with our products. Patents owned by others may adversely
affect our ability to do business. Furthermore, others may independently develop
products that are similar to our products or that duplicate our products, and
may design around the claims of our patents. Although we believe that our
patents and patent applications are of substantial value to us, we cannot assure
you that such patents and patent applications will be of commercial benefit to
us, will adequately protect us from competing products or will not be
challenged, declared invalid, or uninfringed upon. We also rely on proprietary
know-how and on trade secrets to develop and maintain our competitive position.
Others may independently develop or obtain access to such know-how or trade
secrets. Although our employees and consultants having access to proprietary
information
13
are required to sign agreements that require them to keep such information
confidential, our employees or consultants may breach these agreements or these
agreements may be held to be unenforceable.
Competition
Currently, there are no approved systemic treatments for malignant mesothelioma.
To our knowledge, no other company is developing a product with the same
mechanism of action as ONCONASE(R). There are several companies, universities
and research teams which are engaged in research similar, or potentially similar
to those performed by us. Eli Lilly is developing a multi-targeted antifolate
ALIMTA(R) (pemetrexed) for patients with malignant mesothelioma. Final results
have been published in the Journal of Clinical Oncology, July 2003. Some of our
competitors have far greater financial resources, larger research staffs and
more extensive physical facilities. These competitors may develop products that
are more effective than ours and may be more successful than us at producing and
marketing their products. We are not aware, however, of any product currently
being marketed that has the same mechanism of action as our proposed anti-tumor
agent, ONCONASE(R). Search of scientific literature reveals no published
information that would indicate that others are currently employing this method
or producing such an anti-tumor agent. Others may develop new treatments that
are more effective than ONCONASE(R).
Employees
As of October 24, 2003, we have 13 employees, of whom 10 were engaged in
research and development activities and three were engaged in administration and
management. We have six employees who hold Ph.D. degrees. All of our employees
are covered by confidentiality agreements. We consider relations with our
employees to be excellent. None of our employees are covered by a collective
bargaining agreement.
Environmental Matters
Our operations are subject to comprehensive regulation with respect to
environmental, safety and similar matters by the United States Environmental
Protection Agency and similar state and local agencies. Failure to comply with
applicable laws, regulations and permits can result in injunctive actions,
damages and civil and criminal penalties. If we expand or change our existing
operations or propose any new operations, we may need to obtain additional or
amend existing permits or authorizations. We spend time, effort and funds in
operating our facilities to ensure compliance with environmental and other
regulatory requirements.
Such efforts and expenditures are common throughout the biotechnology industry
and generally should have no material adverse effect on our financial condition.
The principal environmental regulatory requirements and matters known to us
requiring or potentially requiring capital expenditures by us do not appear
likely, individually or in the aggregate, to have a material adverse effect on
our financial condition. We believe that we are in compliance with all current
laws and regulations.
Item 2. PROPERTIES
We lease a total of approximately 17,000 square feet in an industrial office
building located in Bloomfield, New Jersey. Our lease expired on December 31,
2001 and we have been leasing the property on a month-to-month basis. The
monthly rental obligation is $11,333. We believe that the facility is sufficient
for our needs in the foreseeable future.
Item 3. LEGAL PROCEEDINGS.
We are presently not involved in any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the OTC Bulletin Board, or OTCBB, under the symbol
"ACEL". At the close of business April 27, 1999, we were delisted from The
Nasdaq SmallCap Market, or Nasdaq, for failing to meet the minimum bid price
requirements set forth in the NASD Marketplace Rules. As of October 23, 2003,
there were approximately 1,195 stockholders of record of our common stock.
The following table sets forth the range of high and low sale prices of our
common stock for the two fiscal years ended July 31, 2003 and 2002. The prices
were obtained from OTCBB and are believed to be representative of inter-dealer
quotations, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
High Low
---- ---
Year Ended July 31, 2003:
First Quarter $ 0.36 $ 0.18
Second Quarter 1.01 0.19
Third Quarter 0.85 0.39
Fourth Quarter 1.45 0.64
Year Ended July 31, 2002:
First Quarter 0.96 0.33
Second Quarter 1.01 0.35
Third Quarter 0.77 0.42
Fourth Quarter 0.47 0.27
We have not paid dividends on our common stock since inception and we do not
plan to pay dividends in the foreseeable future. Any earnings we may realize
will be retained to finance our growth.
The following table provides additional information on the Company's equity
based compensation plans as of July 31, 2003:
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of outstanding exercise price of equity compensation plans
options, warrants and outstanding options, (excluding securities
Plan Category rights warrants and rights reflected in column a)
----------------------- ------------------- -------------------------
(a) (b) (c)
Equity compensation plans approved
by security holders 2,393,666 $ 1.26 2,181,779
Equity compensation plans not
approved by security holders 779,556(1) $ 1.02 -0-
(1) The following 779,556 securities to be issued upon the exercise of
outstanding options and warrants that were not approved by the
shareholders, relate to options and warrants we issued to third parties in
connection with services rendered.
On October 1, 1998, we issued options to purchase 200,000 shares of common
stock at an exercise price of $1.00 per share to Sage Partners as payment
for services to be rendered. 150,000 of such options were cancelled in
November 1999 upon the cancellation of the contract with Sage Partners.
The remaining options vested as to 2,500 shares per month from October 31,
1998 through September 30, 1999 and as to 20,000 shares
15
on October 1, 1999. The options expire five years from the respective
vesting date. As of July 31, 2003, options to purchase 50,000 shares
remained outstanding. On September 10, 2003, the option to purchase these
remaining 50,000 shares was exercised.
In August 2001, we converted $50,000 of our accounts payable owed to DZS
Computer Solutions, Inc., into 55,556 shares of common stock. In addition,
we issued to DZS Computer Solutions, Inc. 55,556 five-year warrants to
purchase 55,556 shares of common stock at an exercise price of $1.50 per
share.
In February 2002, we issued 1,500,000 five-year warrants to purchase an
aggregate of 1,500,000 shares of common stock in connection with the
engagement of a consultant. We received $1,500 for the issuance of the
warrants. Of such warrants 500,000 are exercisable immediately, 250,000 at
an exercise price of $0.50 and 250,000 at an exercise price of $1.00. The
remaining 1,000,000 warrants will become exercisable if the consultant is
successful in helping us raise capital. For each $1 million in capital
financing raised with the assistance of the consultant, 200,000 warrants
will become exercisable up to 1,000,000 warrants in the aggregate. Of
these 1,000,000 warrants, 400,000 are exercisable at $1.00 per share and
600,000 are exercisable at $1.50 per share. During the fiscal year 2003,
the vesting of the 600,000 warrants was amended to vest immediately and
the exercise price was amended from $1.50 to $.50 per share. As of July
31, 2003, warrants to purchase 826,000 shares of common stock had been
exercised and warrants to purchase 674,000 shares of common stock remained
outstanding.
Recent Sales of Unregistered Securities
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,
upon conversion of the note, we will issue warrants to purchase an equal number
of shares of common stock at an exercise price of $1.00 per share, expiring five
years from the date of issuance. This transaction was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended.
From May 2003 to July 2003, we settled $84,223 of our accounts payable by
issuing 149,171 shares of restricted common stock. These transactions were
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended.
From May 2003 to July 2003, we issued to private investors an aggregate 730,000
shares of restricted common stock and five-year warrants to purchase an
aggregate 730,000 shares of common stock at exercise prices ranging from $1.25
to $1.50 per share. We received an aggregate of $411,000 from such private
placements. These transactions were exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended.
From May 2003 to July 2003, we issued an aggregate of 724,000 shares of common
stock upon the exercise of warrants and options by unrelated parties, which
resulted in aggregate gross proceeds of $358,000 to us. These transactions were
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended.
The net proceeds from the above mentioned transactions will be used for general
corporate purposes.
16
Item 6. SELECTED FINANCIAL DATA.
Set forth below is the selected financial data for our company for the five
fiscal years ended July 31, 2003.
Year Ended July 31,
-------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Interest Income $ 9,877 $ 4,838 $ 13,121 $ 51,144 $ 168,372
Other Income 30,000 -- -- -- --
Net Loss (1) (2,411,532) (2,591,162) (2,294,936) (1,722,298) (3,156,636)
Net Loss Per Basic
and Diluted Share (.10) (.12) (.12) (.10) (.18)
Dividends None None None None None
Total Assets 495,322 228,871 201,609 488,099 1,728,648
Long-term Debt 242,516 315,929 23,663 30,251 None
Total Equity
(Deficiency) (2,491,681) $(1,885,437) (740,378) (131,860) 757,200
(1) Included in the net loss of $2,411,532, $2,591,162 and $2,294,936 for
fiscal years ended July 31, 2003, 2002 and 2001, respectively, are tax
benefits of $231,357, $353,732 and $451,395, respectively, related to the
sale of certain state tax operating loss carryforwards.
17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Since our inception, we have devoted the majority of our resources to the
research and development of ONCONASE(R) and related drug candidates. We have
focused our resources towards the completion of the clinical program for
unresectable malignant mesothelioma.
Since ONCONASE(R) has Fast Track Designation for the treatment of malignant
mesothelioma patients, we continue to have meetings and discussions with the FDA
to establish mutually agreed upon parameters for the New Drug Application, or
NDA to obtain marketing approval for ONCONASE(R), assuming the Phase III
clinical trial yields favorable results.
We received an Orphan Medicinal Product Designation for ONCONASE(R) from the
European Agency for the Evaluation of Medicinal Products, or the EMEA. We
continue to fulfill the EMEA requirements regarding the Marketing Authorization
Application, or MAA registration requirements for ONCONASE(R) for the treatment
of malignant mesothelioma.
In the ongoing Phase III trial, an interim analysis based on the occurrence of
105 deaths is planned. Based upon the results of these analyses, we may be able
to file an NDA and an MAA within six months after the completion of the
analyses. Marketing approval for ONCONASE(R) as a treatment for malignant
mesothelioma may not be granted by the FDA or EMEA.
We fund the research and development of our products from cash receipts
resulting from the private sales of our securities, sale of our tax benefits and
from certain debt financings. Presently, our cash balance is sufficient to fund
our operations in the near term, however, we intend to raise additional capital
through the sale of our securities and strategic alliance(s). However, there are
no assurances that such funds will be obtained.
Results of Operations
Fiscal Years Ended July 31, 2003, 2002 and 2001
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 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
productive and financial resources on the development of ONCONASE(R). We did not
have any sales in fiscal 2003, 2002 and 2001. Investment income for fiscal 2003
was $10,000 compared to $5,000 for fiscal 2002, an increase of $5,000. The
increase was due to higher balances of cash and cash equivalents. Investment
income for fiscal 2002 was $5,000 compared to $13,000 for fiscal 2001, a
decrease of $8,000. This decrease was due to lower balances of cash and cash
equivalents.
Research and Development
Research and development expense for fiscal 2003 was $1,700,000 compared to
$2,033,000 for fiscal 2002, a decrease of $333,000, or 16.4%. This decrease was
primarily due to decreases in personnel costs, regulatory consulting costs and a
reduction of non-cash expenses relating to stock options issued for consulting
services. These decreases were partially offset by an increase in costs relating
to patent and trademark applications for ONCONASE(R).
Research and development expense for fiscal 2002 was $2,033,000 compared to
$1,901,000 for fiscal 2001, an increase of $132,000, or 7%. This increase was
primarily due to an increase in costs in support of ongoing clinical
18
trial for ONCONASE(R) resulting from the expansion of our Phase III clinical
trial for malignant mesothelioma in Europe. This increase was partially offset
by a decrease in expenses related to outside consultants, reduction of non-cash
expenses relating to stock options issued for consulting services and a decrease
in costs relating to patent and trademark applications for ONCONASE(R).
General and Administrative
General and administrative expense for fiscal 2003 was $624,000 compared to
$798,000 for fiscal 2002, a decrease of $174,000, or 21.8%. This decrease was
primarily due to decreases in costs related to public relations activities,
insurance expenses, personnel costs and reduction in non-cash expense relating
to stock options issued for consulting services.
General and administrative expense for fiscal 2002 was $798,000 compared to
$706,000 for fiscal 2001, an increase of $92,000, or 13%. This increase was
primarily due to an increase in costs related to public relations activities, an
increase in legal costs associated with business development activities and an
increase in insurance expenses offset by a decrease in non-cash expense relating
to stock options issued for consulting services.
Interest
Interest expense for fiscal 2003 was $358,000 compared to $119,000 in fiscal
2002, an increase of $239,000. The 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 value of the warrants using the
Black-Scholes options-pricing model, amortized on a straight-line basis over the
term of the notes.
Interest expense for fiscal 2002 was $119,000 compared to $153,000 in fiscal
2001, a decrease of $34,000. The decrease was primarily due to the interest
expense on convertible notes and related warrants issued during the fiscal year
ended 2001. The interest expense was based on the value of the warrants using
the Black-Scholes options-pricing model, amortized on a straight-line basis over
the term of the notes.
Income Taxes
New Jersey has enacted legislation permitting certain corporations located in
New Jersey to sell state tax loss carryforwards and state research and
development credits, or tax benefits. For the state fiscal year 2003 (July 1,
2002 to June 30, 2003), we have $1,373,000 total available tax benefits of which
$273,000 was allocated to be sold between July 1, 2002 and June 30, 2003. In
December 2002, we received $231,000 from the sale of an aggregate of $273,000
tax benefits which was recognized as a tax benefit for fiscal 2003. In December
2001, we received $354,000 from the sale of an aggregate of $426,000 tax
benefits which was recognized as a tax benefit for our fiscal 2002. We will
attempt to sell the remaining balance of our tax benefits in the amount of
approximately $1,100,000 between July 1, 2003 and June 30, 2004, subject to all
existing laws of the State of New Jersey. However, we may not be able to find a
buyer for our tax benefits or that such funds may not be available in a timely
manner.
Net Loss
We have incurred net losses during each year since our inception. The net loss
for fiscal 2003 was $2,411,000 as compared to $2,591,000 in fiscal 2002 and
2,295,000 in fiscal 2001. The cumulative loss from the date of inception, August
24, 1981, to July 31, 2003 amounted to $63,974,000. 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.
19
Liquidity and Capital Resources
We have reported net losses of approximately $2,411,000, $2,591,000, and
$2,295,000 for the fiscal years ended July 31, 2003, 2002 and 2001,
respectively. The loss from date of inception, August 24, 1981, to July 31, 2003
amounts to $63,974,000. Also, we have a working capital deficit and limited
liquid resources.
We have financed our operations since inception primarily through equity and
debt financing, research product sales and interest income. During the fiscal
year 2003, we had a net increase in cash and cash equivalents of $244,000. This
increase primarily resulted from net cash provided by financing activities in
the amount of $1,798,000, primarily due to proceeds from short and long-term
borrowings, from the private placement of common stock and warrants and proceeds
from the exercise of warrants, offset by net cash used in operating activities
of $1,554,000. Total cash resources as of July 31, 2003 were $330,000 compared
to $86,000 at July 31, 2002.
Our current liabilities as of July 31, 2003 were $2,744,000 compared to
$1,798,000 at July 31, 2002, an increase of $946,000. The increase was primarily
due to the short-term maturity of notes payable, accrued payroll and payroll
taxes offset by the reduction of a loan payable to a related party. As of July
31, 2003, we had a total of $644,023 in unpaid payroll and $240,784 in unpaid
payroll taxes. As of September 2003, all unpaid payroll taxes have been fully
satisfied. In addition, $115,000 in unpaid payroll was paid and since July 31,
2003, we have been current in our payroll and payroll taxes. As of July 31, 2003
our current liabilities exceeded our current assets and we had a working capital
deficit of $2,404,000.
The following transactions occurred after July 31, 2003:
In August 2003, the Company issued an aggregate of 120,000 shares of common
stock to private investors resulting in aggregate gross 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 of price of $1.25 per
share.
In September 2003, the Company issued 1,704,546 shares of common stock to an
institutional investor resulting in gross proceeds of $1,500,000 to the Company.
In addition, the private investors were granted five-year warrants to purchase
852,273 shares of common stock at an exercise of price of $1.50 per share.
From August 2003 through October 14, 2003, the Company issued to unrelated
parties, an aggregate of 1,165,773 shares of common stock upon the exercise of
warrants and stock options at per share exercise prices ranging from $0.43 to
$1.00. The Company realized aggregate gross proceeds of approximately $861,225.
In September 2003, the terms of our notes payable were amended such that (i)
they are convertible into shares of Series A Preferred Stock rather than common
stock, and (ii) the warrants to be issued upon the due date of the notes are
warrants to purchase shares of Series A Preferred Stock rather than common
stock. In the event the stockholders approve an increase in the number of shares
of common stock authorized, the terms of the notes will revert to the original
terms to the extent the notes have not been converted.
In September 2003, our Board of Directors designated 200,000 of the 1,000,000
shares of preferred stock as Series A Preferred Stock. 105,666 shares of our
Series A Preferred Stock has been reserved for issuance upon the conversion of
certain of our outstanding notes.
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 $1,373,000 total available tax benefits of which
$273,000 was allocated to be sold between July 1, 2002 and June 30, 2003. In
December 2002, we received $231,000 from the sale of an aggregate of $273,000
tax benefits which was recognized as a tax benefit for our fiscal 2003. In
December 2001 and 2000, we received $354,000 and $451,000 from the sale of an
aggregate of $426,000 and $602,000 tax benefits which was recognized as tax
benefits for our fiscal years 2002 and 2001, respectively. We will attempt to
sell the remaining
20
balance of our tax benefits in the amount of approximately $1,100,000 between
July 1, 2003 and June 30, 2004, subject to all existing laws of the State of New
Jersey. However, we may not be able to find a buyer for our tax benefits or that
such funds may not be available in a timely manner.
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), our primary anti-cancer product being
developed, 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. Through
July 31, 2003, 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 our operations generate
significant revenues, we will continue to fund operations from cash on hand and
through the sources of capital previously described. During the fiscal year
ended July 31, 2003, the Company received gross proceeds of approximately
$2,241,000 from long-term and short-term borrowings from unrelated parties, from
the private placement of common stock and warrants, proceeds from the exercise
of warrants and options and from the sale of our tax benefits. After taking into
account these net proceeds and the anticipated proceeds from the sale of the
balance of our tax benefits, we believe that our cash and cash equivalents will
be sufficient to meet our anticipated cash needs through October 2004. We
continue our fund raising efforts and anticipates securing additional financing
in the first calendar quarter of 2004. The reports of our independent auditors
on our financial statements includes 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. Our
financial statements 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, as well as
our proprietary technology. However, we cannot be certain that any such
alliances will materialize.
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. Since April 28, 1999, our
common stock has traded on the OTC Bulletin Board under the symbol "ACEL".
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).
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their most
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe based on our current business that there are no critical accounting
policies. Our accounting policies are described in Note 1 to the financial
statements.
Contractual Obligations
Our major outstanding contractual obligations relate to our equipment operating
lease and convertible notes.
21
Below is a table that presents our contractual obligations and commercial
commitments as of July 31, 2003:
Payments Due by Fiscal Year
------------------------------------
2006 and
Total 2004 2005 Thereafter
----- ---- ---- ----------
Research and development
commitments $ -0- $ -0- $ -0- $ -0-
Operating lease 30,600 17,500 13,100 -0-
-------- -------- -------- ------
Total contractual cash obligations $ 30,600 $ 17,500 $ 13,100 $ -0-
======== ======== ======== ======
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted as a separate section of this report
commencing on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As described in the current report on Form 8-K filed by the Company on December
12, 2002 which is incorporated by reference into this Item 9, on December 6,
2002 KPMG LLP resigned as our independent accountants and was replaced by J.H.
Cohn LLP as our independent accountants for fiscal 2003. The engagement of J.H.
Cohn was approved by our Audit Committee. The reports of KPMG on the financial
statements for the past two fiscal years contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle except that the report on our financial
statements for the fiscal years ended July 31, 2002 and 2001 contained a
separate paragraph stating that "the Company has suffered recurring losses from
operations, has a working capital deficit and has limited liquid resources which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty." During our two most recent fiscal years through
December 6, 2002, there were no disagreements between us and KPMG on any matter
of accounting principles or practices, financial statement disclosures or
auditing scope or procedures, which disagreements if not resolved to the
satisfaction of KPMG would have caused them to make reference thereto in their
report on the financial statements for such years.
On December 1, 1993, certain shareholders of Armus Harrison & Co., or AHC,
terminated their association with AHC, or the AHC termination, and AHC ceased
performing accounting and auditing services, except for limited accounting
services to be performed on our behalf. In June 1996, AHC dissolved and ceased
all operations. The report of J.H. Cohn LLP with respect to our financial
statements from inception to July 31, 2003 is based on the report of KPMG LLP
from August 1, 1992 to July 31, 2002 and of AHC for the period from inception to
July 31, 1992, although AHC has not consented to the use of such report herein
and will not be available to perform any subsequent review procedures with
respect to such report. Accordingly, investors will be barred from asserting
claims against AHC under Section 11 of the Securities Act on the basis of the
use of such report in any registration statement into which such report is
incorporated by reference. In addition, in the event any persons seek to assert
a claim against AHC for false or misleading financial statements and disclosures
in documents previously filed by us, such claim will be adversely affected and
possibly barred. Furthermore, as a result of the lack of a consent from AHC to
the use of its audit report herein, or to its incorporation by reference into a
registration statement, our officers and directors will be unable to rely on the
authority of AHC as experts in auditing and accounting in the event any claim is
brought against such persons under Section 11 of the Securities Act based on
alleged false and misleading Financial Statements and disclosures attributable
to AHC. The discussion regarding certain effects of the AHC termination is not
meant and should not be construed in any way as legal advice to any party and
any potential purchaser should consult with his, her or its own counsel with
respect to the effect of the AHC termination on a potential investment in our
common stock or otherwise.
Item 9A. CONTROLS AND PROCEDURES.
22
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and acting Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of July 31, 2003, the evaluation date. Based upon the evaluation,
the Chief Executive Officer and acting Chief Financial Officer concluded that,
as of the evaluation date, our disclosure controls and procedures are effective
in timely alerting them to the material information relating to us required to
be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
Part III
The information required by Item 10 - Directors and Executive Officers of the
Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership of
Certain Beneficial Owners and Management; Item 13 - Certain Relationships and
Related Transactions and Item 14 - Principal Accounting Fees and Services is
incorporated into Part III of this Annual Report on Form 10-K by reference to
the Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
on January 14, 2004.
Part IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to these portions of Item 15 is submitted as a
separate section of this report commencing on page F-1.
(a)(3) Exhibits (numbered in accordance with Item 601 of Regulation
S-K).
Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
------- ---------- ---------
3.1 Certificate of Incorporation *
3.2 By-Laws *
3.3 Amendment to Certificate of Incorporation #
3.4 Amendment to Certificate of Incorporation +
3.5 Certificate of Designation for Series A Preferred Stock ###
4.1 Form of Convertible Debenture **
10.1 1993 Stock Option Plan and Form of Option Agreement ****
10.2 Debt Conversion Agreement dated March 30, 1994 with Kuslima Shogen ***
10.3 Accrued Salary Conversion Agreement dated March 30, 1994 with Kuslima
Shogen ***
10.4 Accrued Salary Conversion Agreement dated March 30, 1994 with
Stanislaw Mikulski ***
10.5 Option Agreement dated March 30, 1994 with Kuslima Shogen ***
10.6 Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Kuslima Shogen ***
10.7 Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Kuslima Shogen ****
10.8 Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Stanislaw Mikulski ****
23
Exhibit No. or
Exhibit Incorporation by
No. Item Title Reference
------- ---------- ---------
10.9 1997 Stock Option Plan ##
10.10 Form of Subscription Agreement and Warrant Agreement used in Private
Placement completed on February 20, 1998 +
10.11 Form of Warrant Agreement issued to the Placement Agent in connection
with the Private Placement completed on February 20, 1998 +
10.12 Form of Subscription Agreement and Warrant Agreement used in Private
Placements completed in February 2000 ++
10.13 Form of Subscription Agreement and Warrant Agreement used in the
August and September 2000 Private Placements +++
10.14 Form of Subscription Agreement and Warrant Agreement used in the April
2001 Private Placements ^
10.15 Form of Convertible Note entered into in April 2001 ^
10.16 Form of Subscription Agreement and Warrant Agreement used in the July
2001 Private Placements ^
10.17 Form of Subscription Agreement and Warrant Agreement used in the
August and October 2001 private placement ^
10.18 Form of Subscription Agreement and Warrant Agreement used in the
September 2001, November 2001 and January 2002 private placements ^
10.19 Warrant issued in the February 2002 private placement ^
10.20 Form of Subscription Agreement and Warrant Agreement used in the March
2002, April 2002 and May 2002 private placements ^^
10.21 Form of Subscription Agreement and Warrant Agreement used in the June
2002 and October 2002 private placements ^
10.22 Form of Note Payable and Warrant Certificate entered into April, June,
July, September, November and December 2002 ^
10.23 Form of Note Payable and Warrant Certificate entered into November
2001, January, March and May 2003 ###
10.24 Form of Subscription Agreement and Warrant Agreement used in the
February 2003 and April through August 2003 private placements ###
10.25 Securities Purchase Agreement and Warrant Agreement used in September
2003 private placement ###
10.26 Registration Rights Agreement used in September 2003 private placement ###
10.27 Form of Amended Notes Payable which amends the November 2001, April
2002, June 2002, July 2002, September 2002, November 2002 December
2002, January 2003, March 2003 and May 2003 notes payable ###
21.1 Subsidiaries of Registrant **
23.1 Consent of J.H. Cohn LLP ###
23.2 Consent of KPMG LLP ###
31.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Rule 13a-14(a) (Section 302 Certification), as adapted
pursuant to Section 302 of Sarbanes-Oxley Act of 2002 ###
32.1 Certification Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 ###
99.1 Factors to Consider in Connection with Forward-Looking Statements ###
24
* Previously filed as exhibit to the Company's Registration Statement
on Form S-18 (File No. 2-79975-NY) and incorporated herein by
reference thereto.
** Previously filed as exhibits to the Company's Annual Report on Form
10-K for the year ended July 31, 1993 and incorporated herein by
reference thereto.
*** Previously filed as exhibits to the Company's Quarterly Report on
Form 10-QSB for the quarter ended April 30, 1994 and incorporated
herein by reference thereto.
**** Previously filed as exhibits to the Company's Registration Statement
Form SB-2 (File No. 33-76950) and incorporated herein by reference
thereto.
+ Previously filed as exhibits to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1998 and incorporated
herein by reference thereto.
++ Previously filed as exhibits to the Company's Annual Report on Form
10-K for the year ended July 31, 2000 and incorporated herein by
reference thereto.
+++ Previously filed as exhibits to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 2000 and incorporated
herein by reference thereto.
^ Previously filed as exhibits to the Company's Registration Statement
on Form S-1 (File No. 333-38136) and incorporated herein by
reference thereto.
^^ Previously filed as exhibits to the Company's Registration Statement
on Form S-1 (File No. 333-89166) and incorporated herein by
reference thereto.
# Previously filed as exhibits to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1995 and incorporated herein by
reference thereto.
## Previously filed as exhibits to the Company's Quarterly Report on
Form 10-QSB for the quarter ended April 30, 1997 and incorporated
herein by reference thereto.
### Filed herewith.
(b) Reports on Form 8-K.
None.
25
Signature
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: October 29, 2003 By: /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief Executive Officer,
Acting Chief Financial Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: October 29, 2003 /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief Executive
Officer, Acting Chief Financial
Officer (Principal Executive
Officer, Principal Accounting
Officer) and Chairman of the Board
Dated: October 29, 2003 /s/ STEPHEN K. CARTER
Stephen K. Carter, M.D., Director
Dated: October 29, 2003 /s/ DONALD R. CONKLIN
Donald R. Conklin, Director
Dated: October 29, 2003 /s/ MARTIN F. STADLER
Martin F. Stadler, Director
Dated: October 29, 2003 /s/ PAUL M. WEISS
Paul M. Weiss, Ph.D., MBA, Director
26
Index
Page
Audited Financial Statements:
Independent Auditors' Report of J.H. Cohn LLP................................F-2
Independent Auditors' Report of KPMG LLP.....................................F-3
Independent Auditors' Report of Armus, Harrison & Co.........................F-4
Balance Sheets - July 31, 2003 and 2002......................................F-6
Statements of Operations - Years ended July 31, 2003, 2002,
and 2001 and the Period from August 24, 1981
(Date of Inception) to July 31, 2003....................................F-7
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2003....................................F-8
Statements of Cash Flows - Years ended July 31, 2003, 2002,
and 2001 and Period from August 24, 1981
(Date of Inception) to July 31, 2003...................................F-14
Notes to Financial Statements - Years ended July 31, 2003,
2002 and 2001 and the Period from August 24, 1981
(Date of Inception) to July 31, 2003...................................F-17
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Alfacell Corporation
We have audited the accompanying balance sheet of ALFACELL CORPORATION (A
Development Stage Company) as of July 31, 2003, and the related statements of
operations, stockholders' deficiency and cash flows for the year then ended and
for the period from August 24, 1981 (date of inception) to July 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Alfacell Corporation for the period from
August 24, 1981 to July 31, 2002 were audited by other auditors whose reports
dated November 4, 2002 and December 9, 1992, except for Note 18 which is as of
July 19, 2003 and Note 3 which is as of October 28, 1993, expressed unqualified
opinions on those statements with explanatory paragraphs relating to the
Company's ability to continue as a going concern.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for the effect on the period from
August 24, 1981 to July 31, 2003 of the amounts for the period from August 24,
1981 to July 31, 2002, on the reports of other auditors, the financial
statements referred to above present fairly, in all material respects, the
financial position of Alfacell Corporation as of July 31, 2003, and its results
of operations and cash flows for the year then ended and for the period from
August 24, 1981 to July 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
The financial statements referred to above have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered substantial losses from inception
and is a development stage company. Such matters raise substantial doubt about
the ability of the Company to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
referred to above do not include any adjustments that might result from the
outcome of this uncertainty.
J.H. Cohn LLP
Roseland, New Jersey
September 26, 2003, except for Note 18,
which is as of October 14, 2003
F-2
Independent Auditors' Report
The Stockholders and Board of Directors
Alfacell Corporation:
We have audited the accompanying balance sheet of Alfacell Corporation (a
development stage company) as of July 31, 2002, and the related statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
years in the two-year period ended July 31, 2002 and the period from August 24,
1981 (date of inception) to July 31, 2002 (not presented herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Alfacell Corporation for the period from
August 24, 1981 to July 31, 1992 were audited by other auditors whose report
dated December 9, 1992, except as to note 18 which is July 19, 1993 and note 3
which is October 28, 1993, expressed an unqualified opinion on those statements
with an explanatory paragraph regarding the Company's ability to continue as a
going concern.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for the effect on the period from
August 24, 1981 to July 31, 2002 of the amounts for the period from August 24,
1981 to July 31, 1992, on the report of other auditors, the financial statements
referred to above present fairly, in all material respects, the financial
position of Alfacell Corporation as of July 31, 2002, and the results of its
operations and its cash flows for each of the years in the two-year period ended
July 31, 2002 and the period from August 24, 1981 to July 31, 2002 (not
presented herein) in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficit and has limited liquid resources which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
Short Hills, New Jersey
November 4, 2002
F-3
On December 1, 1993, certain shareholders of Armus Harrison & Co. ("AHC")
terminated their association with AHC (the "AHC termination"), and AHC ceased
performing accounting and auditing services, except for limited accounting
services to be performed on behalf of the Company. In June 1996, AHC dissolved
and ceased all operations. The report of AHC with respect to the financial
statements of the Company from inception to July 31, 1992 is included herein,
although AHC has not consented to the use of such report herein and will not be
available to perform any subsequent review procedures with respect to such
report. Accordingly, investors will be barred from asserting claims against AHC
under Section 11 of the Securities Act of 1933, as amended (the "Securities
Act") on the basis of the use of such report in any registration statement of
the Company into which such report is incorporated by reference. In addition, in
the event any persons seek to assert a claim against AHC for false or misleading
financial statements and disclosures in documents previously filed by the
Company, such claim will be adversely affected and possibly barred. Furthermore,
as a result of the lack of a consent from AHC to the use of its audit report
herein, or, to its incorporation by reference into a registration statement, the
officers and directors of the Company will be unable to rely on the authority of
AHC as experts in auditing and accounting in the event any claim is brought
against such persons under Section 11 of the Securities Act based on alleged
false and misleading financial statements and disclosures attributable to AHC.
The discussion regarding certain effects of the AHC termination is not meant and
should not be construed in any way as legal advice to any party and any
potential purchaser should consult with his, her or its own counsel with respect
to the effect of the AHC termination on a potential investment in the Common
Stock of the Company or otherwise.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Alfacell Corporation
Bloomfield, New Jersey
We have audited the balance sheets of Alfacell Corporation (a Development Stage
Company) as of July 31, 1992 and 1991, as restated, and the related statements
of operations, stockholders' deficiency, and cash flows for the three years
ended July 31, 1992, as restated, and for the period from inception August 24,
1981 to July 31, 1992, as restated. In connection with our audit of the 1992 and
1991 financial statements, we have also audited the 1992, 1991 and 1990
financial statement schedules as listed in the accompanying index. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in all
material respects, the financial position of Alfacell Corporation as of July 31,
1992 and 1991, as restated, and for the three years ended July 31, 1992, as
restated, and for the period from inception August 24, 1981 to July 31, 1992, as
restated, and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
F-4
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liability in the normal course of business. As shown in the statement of
operations, the Company has incurred substantial losses in each year since its
inception. In addition, the Company is a development stage company and its
principal operation for production of income has not commenced. The Company's
working capital has been reduced considerably by operating losses, and has a
deficit net worth. These factors, among others, as discussed in Note 2 to the
Notes of Financial Statements, indicates the uncertainties about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts and the amount of classification of liabilities that might be
necessary should the Company be unable to continue its existence.
/s/ Armus, Harrison & Co.
-------------------------
Armus, Harrison & Co.
Mountainside, New Jersey
December 9, 1992
Except as to Note 18 which
is July 19, 1993 and Note 3
which is October 28, 1993
F-5
ALFACELL CORPORATION
(A Development Stage Company)
Balance Sheets
July 31, 2003 and 2002
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 330,137 $ 85,843
Other assets ................................................ 10,103 45,754
------------ ------------
Total current assets .................................... 340,240 131,597
Property and equipment, net of accumulated depreciation and
amortization of $1,136,183 in 2003 and $1,120,371 in 2002 ... 12,795 28,607
Loan receivable, related party ................................... 142,287 68,667
------------ ------------
Total assets ............................................ $ 495,322 $ 228,871
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt, net of debt discount of
$187,121 at July 31, 2003 ................................ $ 637,080 $ 8,179
Loan payable, related party ................................. -- 139,794
Accounts payable ............................................ 699,429 796,128
Accrued expenses ............................................ 1,407,978 854,278
------------ ------------
Total current liabilities ............................... 2,744,487 1,798,379
Long-term debt, less current portion, net of debt discount of
$163,687 at July 31, 2003 .................................... 242,516 315,929
------------ ------------
Total liabilities ....................................... 2,987,003 2,114,308
------------ ------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 2003 and 2002 .............. -- --
Common stock $.001 par value. Authorized 40,000,000
shares; issued and outstanding 25,026,129 shares and
22,760,921 shares at July 31, 2003 and 2002, respectively 25,026 22,761
Capital in excess of par value .............................. 61,457,502 59,654,479
Deficit accumulated during development stage ................ (63,974,209) (61,562,677)
------------ ------------
Total stockholders' deficiency .......................... (2,491,681) (1,885,437)
------------ ------------
Total liabilities and stockholders' deficiency .......... $ 495,322 $ 228,871
============ ============
See accompanying notes to financial statements.
F-6
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 2003, 2002
and 2001, and the Period from August 24, 1981
(Date of Inception) to July 31, 2003
August 24, 1981
(date of
inception)
to July 31, 2003 2003 2002 2001
---------------- ------------ ------------ ------------
Revenues:
Sales ............................ $ 553,489 $ -- $ -- $ --
Investment income ................ 1,387,000 9,877 4,838 13,121
Other income ..................... 90,103 30,000 -- --
------------ ------------ ------------ ------------
2,030,592 39,877 4,838 13,121
------------ ------------ ------------ ------------
Cost and expenses:
Cost of sales .................... 336,495 -- -- --
Research and development ......... 41,601,935 1,699,962 2,032,938 1,900,678
General and administrative ....... 22,287,852 624,406 798,053 705,745
Interest:
Related parties ............... 1,147,547 -- 4,687 108,900
Others ........................ 2,423,310 358,398 114,054 44,129
------------ ------------ ------------ ------------
67,797,139 2,682,766 2,949,732 2,759,452
------------ ------------ ------------ ------------
Loss before state tax benefit ......... (65,766,547) (2,642,889) (2,944,894) (2,746,331)
State tax benefit ..................... 1,792,338 231,357