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| ACEL.PK > SEC Filings for ACEL.PK > Form 10-Q on 9-Jun-2009 | All Recent SEC Filings |
9-Jun-2009
Quarterly Report
Information herein contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. All statements, other than statements of historical fact, regarding our financial position, potential, business strategy, plans and objectives for future operations are "forward-looking statements." These statements are commonly identified by the use of forward-looking terms and phrases as "anticipates," "believes," "estimates," "expects," "intends," "may," "seeks," "should," or "will" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. We cannot assure you that the future results covered by these forward-looking statements will be achieved. The matters set forth in Part I, Item 1A. "Risk Factors" in our most recent Annual Report on Form 10-K, filed on October 14, 2008, and as such risk factors have been revised in Part II, Item 1A "Risk Factors" in the quarterly report on Form 10-Q for the quarter ended January 31, 2009, constitute cautionary statements identifying important factors with respect to these forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary significantly from the future results indicated in these forward-looking statements. Other factors could also cause actual results to differ significantly from the future results indicated in these forward-looking statements.
Overview
We are a biopharmaceutical company engaged in the research, development, and commercialization of drugs for life threatening-diseases, such as malignant mesothelioma and other cancers. Our corporate strategy is to become a leader in the discovery, development, and commercialization of novel ribonuclease (RNase) therapeutics for cancer and other life-threatening diseases. As of April 30, 2009, we had four full time employees who conducted all administrative and research and development operations at our facility in Somerset, NJ.
We are a development stage company as defined in the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises" ("SFAS 7"). We are devoting substantially all of our present efforts to establishing a new business and developing new drug products. Our planned principal operations of marketing and/or licensing new drugs have not commenced and, accordingly, we have not derived any significant revenue from these operations.
Since our inception in 1981, we have devoted the vast majority of our resources to the research and development of ONCONASE®, our lead drug candidate, as well as other related drug candidates. In recent years we have focused our resources towards the completion of the clinical program for ONCONASE® in patients suffering from unresectable, or inoperable, malignant mesothelioma ("UMM"). We have incurred losses since inception and we have not received Food and Drug Administration ("FDA") approval of any of our drug candidates. We expect to continue to incur losses for the foreseeable future as we continue our research and development activities. Until we are able to consistently generate revenue through the sale of products, we anticipate that we will be required to fund the development of our pre-clinical compounds and drug product candidates primarily by other means, including, but not limited to, licensing the development or marketing rights to some of our drug candidates to third parties, collaborating with third parties to develop our drug candidates, or selling Company issued securities.
ONCONASE® has been granted orphan drug designation by the FDA. Orphan drug designation permits us to be awarded seven years of marketing exclusivity for ONCONASE® for the malignant mesothelioma indication upon FDA approval for this indication. Other benefits for which we are eligible with the orphan drug designation include protocol assistance by the FDA in the preparation of a dossier
that will meet regulatory requirements, tax credits, research and development grant funding, and reduced filing fees for the marketing application. Previously, our ONCONASE® development program received Fast Track Designation from the FDA for the treatment of malignant mesothelioma patients.
We also have received an Orphan Medicinal Product Designation for ONCONASE® from the European Agency for the Evaluation of Medicinal Products, or EMEA, as well as Orphan Drug Designation for ONCONASE® for malignant mesothelioma in Australia from the Therapeutics Goods Administration, or TGA. Orphan drug designation from these agencies provides benefits such as marketing exclusivity, reduced filing fees and regulatory guidance.
On May 28, 2008, we announced that the results of the preliminary statistical analysis of data from our ONCONASE® confirmatory Phase IIIb clinical trial did not meet statistical significance for the primary endpoint of survival in UMM. However, a statistically significant improvement in survival was seen in the treatment of UMM patients who failed one prior chemotherapy regimen, a currently unmet medical need and one of the predefined primary sub-group data sets for patients in the trial. In January 2009, we met with the FDA to discuss our proposed NDA submission of the final components of the ONCONASE® rolling NDA. At the pre-NDA meeting, the FDA recommended that an additional clinical trial be conducted in UMM patients that have failed one prior chemotherapy regimen, prior to filing an NDA.
During the quarter, Charles Muniz, a long time supporter and significant
stockholder of Alfacell, was brought in at the direction of our board of
directors ("Board"), to conduct a thorough review of our operations. His
assignment included, but was not limited to a complete review of our management
as well as our clinical, scientific, regulatory, finance, and business
development operations. He was also asked to conduct a thorough review of our
Phase III clinical trial in malignant mesothelioma. After conducting his review,
Mr. Muniz was asked to implement a restructuring of our overall operations. Mr.
Muniz was later elected to our Board and as our President, Chief Operating
Officer and Chief Financial Officer ("CFO"). Also, during the quarter, Lawrence
A. Kenyon resigned as our acting President, CFO, Corporate Secretary and member
of the board of directors and Kuslima Shogen, our Chief Executive Officer,
acting CFO and scientific founder retired pursuant to a previously reported
retirement agreement. Dr. Shogen remains a member of our board of directors.
Almost all of the $72.5 million of research and development expenses we have incurred since our inception has gone toward the development of ONCONASE® and related drug candidates. For the three and nine months ended April 30, 2009 and for fiscal years ended July 31, 2008, 2007 and 2006, our research and development expenses were approximately $0.4 million, $3.2 million, $8.5 million, $5.5 million, and $5.2 million, respectively, almost all of which were used for the development of ONCONASE® and related drug candidates. We cannot predict with certainty what our total cost associated with obtaining marketing approvals will be, and we are unable to predict when and if such approvals will be granted, or if and when actual sales will occur.
We fund the research and development of our products primarily from cash receipts resulting from the sale of our equity securities and convertible debentures in registered offerings and private placements. Additionally, we have raised capital through other debt financings, the sale of our tax benefits and research products, interest income and financing received from our retired Chief Executive Officer. During the nine months ended April 30, 2009, we received gross proceeds of $13,220 from exercises of stock options and approximately $1.1 million from the sale of our total available tax benefits. Our current cash reserves will be used to continue our operations and to explore strategic alternatives. We have incurred losses since inception and in order to continue our operations we will need to obtain additional capital or conclude a strategic transaction, which could involve the possible sale of our Company or our assets.
Liquidity and Capital Resources
We have reported cumulative net losses of approximately $28.9 million for the three most recent fiscal years ended July 31, 2008. The net losses from date of inception, August 24, 1981, to April 30, 2009 amount to approximately $108.5 million. As of April 30, 2009, we have a working capital deficit of approximately $1.5 million.
We have financed our operations since inception primarily through the sale of our equity securities and convertible debentures in registered offerings and private placements. Additionally, we have raised capital through other debt financings, the sale of our state tax benefit and research products, and investment income and financing received from our retired Chief Executive Officer. As of April 30, 2009, we had approximately $0.6 million in cash and cash equivalents. We effected a reduction in force in January 2009 and have otherwise reduced our operations to the minimum sustainable level required to pursue strategic alternatives and additional capital. Based upon these actions, we currently believe that our cash reserves can support our activities through July 2009.
The primary use of cash will be to continue our operations while we seek additional capital or strategic alternatives. We will need to obtain additional financing or conclude a strategic transaction in order to continue our operations and continue to seek marketing approval for ONCONASE®. Given current market conditions, it may be extremely difficult, if not impossible, to obtain such financing. Strategic transactions may not be available when needed or on terms acceptable to us. We may also obtain additional capital through the sale of our tax benefit, if any, although there is no assurance that such sale will take place due to the current restructuring of our overall operations.
The audit report of our independent registered public accounting firm on our fiscal year ended July 31, 2008 financial statements expressed substantial doubt about our ability to continue as a going concern. Continued operations are dependent on our ability to raise additional capital from various sources such as those described above. Such capital raising opportunities may not be available or may not be available on reasonable terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty.
Results of Operations
Three month periods ended April 30, 2009 and 2008
We focus most of our productive and financial resources on the development of ONCONASE® and as such we did not have any sales in the three month periods ended April 30, 2009 and 2008.
Research and development expense for the three month period ended April 30, 2009 was approximately $0.4 million compared to approximately $2.7 million for the same period in 2008, a decrease of approximately $2.3 million, or 86%. The decrease was primarily related to decreased expenses of approximately $1.7 million related to costs incurred for the ONCONASE® rolling NDA submission of our confirmatory Phase IIIb ONCONASE® clinical trial; and decreased compensation expense of approximately $0.6 million from decreased share-based compensation expense.
General and administrative expense for the three month period ended April 30, 2009 was approximately $0.3 million compared to approximately $2.4 million for the same period in 2008, a decrease of approximately $2.1 million, or 86%. This decrease was primarily due to decreased compensation expense of approximately $1.8 million, mostly related to the retirement agreement executed
by our chief executive officer in 2008 and share-based compensation; decreased legal and professional fees of approximately $0.2 million; and decreased general office expenses of approximately $0.1 million.
The net loss for the three month period ended April 30, 2009 was approximately $0.7 million as compared to $5.0 million for the same period last year, a decrease of approximately $4.3 million.
Nine month periods ended April 30, 2009 and 2008
We focus most of our productive and financial resources on the development of ONCONASE® and as such we did not have any sales in the nine month periods ended April 30, 2009 and 2008.
Research and development expense for the nine month period ended April 30, 2009 was approximately $3.2 million compared to approximately $6.4 million for the same period in 2008, a decrease of approximately $3.2 million, or 50%. The decrease was primarily due to decreased expenses of approximately $1.9 million related to costs incurred for the ONCONASE® rolling NDA submission of our confirmatory Phase IIIb ONCONASE® clinical trial; decreased compensation expense of approximately $1.0 million, mostly related to share-based compensation expense; and a decrease of approximately $0.3 million in expenses due to the completion of the Phase I component of our Phase I/II ONCONASE® clinical trials.
General and administrative expense for the nine month period ended April 30, 2009 was approximately $2.1 million compared to $5.0 million for the same period in 2008, a decrease of $2.9, or 58%. This decrease was primarily due to decreased compensation expense of approximately $2.3 million, mostly related to the retirement agreement executed by our chief executive officer in 2008 and share-based compensation; and decreased legal and professional fees of approximately $0.6 million primarily related to negotiations that resulted in commercial partnerships for ONCONASE® in 2008.
New Jersey permits certain corporations located in New Jersey to sell a portion of their state tax loss carryforwards and state research and development credits. For the state fiscal year 2009 (July 1, 2008 to June 30, 2009), we had approximately $1,274,000 of total available state tax benefit that was saleable. On December 1, 2008, we received approximately $1,140,000 from the sale of our total available state tax benefit, which was recognized as state tax benefit for the nine months ended April 30, 2009.
For the state fiscal year 2008 (July 1, 2007 to June 30, 2008), we had approximately $2,496,000 of total available state tax benefit that was saleable, of which New Jersey permitted us to sell approximately $1,969,000. In December 2007, we received approximately $1,755,000 from the sale of the $1,969,000 saleable state tax benefit, which was recognized as state tax benefit for the nine months ended April 30, 2008.
The net loss for the nine month period ended April 30, 2009 was approximately $4.2 million as compared to $9.4 million for the same period last year, a decrease of $5.2 million. The cumulative loss from the date of inception, August 24, 1981 to April 30, 2009, amounted to $108.5 million. We have incurred net losses during each year since our inception. 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 our development stage expenses.
Off-balance Sheet Arrangements
We have no debt, no exposure to off-balance sheet arrangements, no special purpose entities, nor activities that include non-exchange-traded contracts accounted for at fair value as of April 30, 2009.
Contractual Obligations and Commercial Commitments
Since July 31, 2008, there has been no material change with respect to our commitments and contingencies as disclosed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations and Commercial Commitments" in our Annual Report on Form 10-K for the fiscal year ended July 31, 2008.
Critical Accounting Policies and Estimates
Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: research and development expenses, accounting for share-based compensation, accounting for warrants issued with convertible debt and deferred income taxes. Estimates in each of these areas are based on historical experience and various assumptions that we believe are appropriate. Actual results may differ from these estimates. Our accounting practices are discussed in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 of "Notes to Financial Statements" in our Annual Report on Form 10-K for the year ended July 31, 2008.
Recently Issued Accounting Standards
In June 2008, the FASB issued EITF No. 07-05 "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock", ("EITF 07-05"). EITF 07-05 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock, which would qualify as a scope exception under SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities." EITF 07-05 is effective for fiscal years beginning after December 15, 2008 and early adoption for an existing instrument is not permitted. We are currently evaluating the impact that the adoption of EITF 07-05 will have, if any, on our reported financial results.
In May 2008, the FASB issued SFAS No. 162 "Hierarchy of GAAP", ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with GAAP". We adopted SFAS 162 in November 2008 and determined that it did not have a material impact on our reported financial results.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not require new fair value measurements. We adopted SFAS 157 as of August 1, 2008, and determined that it did not have a material impact on our reported financial results.
In February 2008, the FASB issued FASB Staff Position ("FSP") SFAS No. 157-1, "Application of FASB Statement No. 157 to SFAS Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement
13", ("FSP 157-1"). FSP 157-1 amends SFAS 157 to exclude SFAS 13 and other accounting pronouncements that address fair value measurements for purposes of lease classifications under SFAS 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, "Business Combinations", or SFAS 141(R), regardless of whether those assets and liabilities are related to leases. FSP 157-1 is effective upon initial adoption of SFAS 157. We adopted SFAS 157 as of August 1, 2008, and determined that it did not have a material impact on our reported financial results.
In February 2008, the FASB issued FSP SFAS No. 157-2, "Effective Date of FASB SFAS No. 157", ("FSP 157-2"). FSP 157-2 delays the effective date of SFAS 157 for non financial assets and non financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis at least annually. This delay is intended to allow the FASB and constituents additional time to consider the effect of various implementation issues that have arisen from the application of SFAS 157. We have reviewed FSP 157-2 and will wait to hear for additional positions taken by the FASB before proceeding further.
In October 2008 the FASB issued FSP SFAS No. 157-3, "Determining the Fair Value of a Financial Asset when the Market for that Asset is not Active" ("FSP 157-3"). FSP 157-3 clarifies the application of FASB No. 157 in a market that is not active and provides key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall become effective upon issuance. We believe that this new pronouncement will not have a material impact on our financial statements in future periods.
In December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" ("SFAS
141(R)"). SFAS 141(R) establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The guidance will
become effective as of the beginning of a company's fiscal year beginning after
December 15, 2008. We believe that this new pronouncement will not have a
material impact on our financial statements in future periods.
In June 2007, the FASB issued EITF Issue No. 07-03, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities," ("EITF 07-03"). EITF 07-03 addresses the diversity that exists with respect to the accounting for the nonrefundable portion of a payment made by a research and development entity for future research and development activities. The EITF concluded that an entity must defer and capitalize nonrefundable advance payments made for research and development activities and expense these amounts as the related goods are delivered or the related services are performed. EITF 07-03 will be effective for interim or annual reporting periods in fiscal years beginning after December 15, 2007. We adopted EITF 07-03 as of August 1, 2008, and determined that it did not have a material impact on our reported financial results.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. We adopted SFAS 159 as of August 1, 2008, and determined that it did not have a material impact on our reported financial results.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a company's tax return. We adopted FIN 48 and determined that it did not have a material impact on our reported financial results.
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