UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to ________________
Commission File Number: 0-10379
INTERFERON SCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2313648
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
Address of principal executive offices) (Zip code)
(732) 249 - 3250
(Registrant's telephone number, including area code)
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 [ ]
Number of shares outstanding of each of issuer's classes of common stock as of
October 16, 1998:
Common Stock 16,099,698 shares
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
----
Part I. Financial Information:
Consolidated Condensed Balance Sheets--September 30, 1998
and December 31, 1997 .............................................. 1
Consolidated Condensed Statements of Operations--Three
Months and Nine Months Ended September 30, 1998 and 1997 ........... 2-3
Consolidated Condensed Statement of Changes in
Stockholders' Equity--Nine Months Ended
September 30, 1998 ................................................. 4
Consolidated Condensed Statements of Cash Flows--Nine
Months Ended September 30, 1998 and 1997 ........................... 5
Notes to Consolidated Condensed Financial Statements ................. 6-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 9-15
Part II. Other Information ............................................. 16
Signatures .............................................................. 17
<PAGE>
<TABLE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
<CAPTION>
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1998 1997
(Unaudited) *
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,796,552 $ 14,059,283
Accounts and other receivables 301,822 989,458
Inventories, net of reserves
of $10,344,551 and $7,254,710 1,222,085 3,332,653
Receivables from GP Strategies
and affiliated companies 21,904
Prepaid expenses and other
current assets 79,631 65,353
------------ -------------
Total current assets 3,400,090 18,468,651
------------ -------------
Property, plant and equipment,
at cost 13,703,452 13,496,755
Less accumulated depreciation (8,914,038) (8,266,892)
------------ -------------
4,789,414 5,229,863
------------ -------------
Patent costs, net of accumulated
amortization 257,967 280,962
Other assets 138,900 173,900
------------ -------------
Total assets $ 8,586,371 $ 24,153,376
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and
accrued expenses $ 3,728,509 $ 3,939,736
Amount due GP Strategies and
affiliated companies 57,027
------------ -------------
Total current liabilities 3,785,536 3,939,736
------------ -------------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.01 per share;
authorized-5,000,000 shares; none issued
and outstanding
Common stock, par value $.01 per share;
authorized-55,000,000 shares; issued
and outstanding-16,099,598 and
15,210,405 shares 160,996 152,104
Capital in excess of par value 24,646,734 123,946,331
Accumulated deficit (120,006,895) (103,884,795)
------------- -------------
Total stockholders' equity 4,800,835 20,213,640
------------- -------------
Total liabilities and stockholders'
equity $ 8,586,371 $ 24,153,376
============= =============
</TABLE>
*The consolidated condensed balance sheet as of December 31, 1997 has been
summarized from the Company's audited balance sheet as of that date.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
<TABLE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenues
Alferon N Injection $ 634,612 $ 868,574
Research products and other revenues 4,022 1,097
------------- ------------
Total revenues 638,634 869,671
------------- ------------
Costs and expenses
Cost of goods sold and idle
production costs 1,165,238 469,055
Research and development
(net of zero and $58,749 of rental
income received from GP Strategies) 1,943,198 2,666,507
General and administrative
(includes $30,000 and $60,000
of payments to GP Strategies for
management fees and reimbursements of
certain salaries; net of $6,250 received
from GP Strategies for the three months
ended September 30, 1998 for reimbursements
of certain salaries) 1,065,389 1,059,358
------------- ------------
Total costs and expenses 4,173,825 4,194,920
------------- ------------
Loss from operations (3,535,191) (3,325,249)
Interest income 29,433 153,891
------------- ------------
Net loss $ (3,505,758) $(3,171,358)
============= ============
Basic and diluted loss per share $ (.22) $ (.23)
============= ============
Weighted average number of
shares outstanding 15,626,776 13,532,891
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
<TABLE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenues
Alferon N Injection $ 1,093,578 $ 2,256,694
Research products and other revenues 93,148 28,217
------------- -------------
Total revenues 1,186,726 2,284,911
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 3,945,041 1,573,697
Provision for excess inventory 3,089,841
Research and development
(net of $29,375 and $176,247
of rental income received from
GP Strategies) 6,161,208 8,394,042
General and administrative
(includes $90,000 and $176,250
of payments to GP Strategies for
management fees and reimbursements
of certain salaries; net of $18,750
received from GP Strategies for the
nine months ended September 30, 1998 for
reimbursements of certain salaries) 3,615,977 3,129,496
------------- -------------
Total costs and expenses 16,812,067 13,097,235
------------- -------------
Loss from operations (15,625,341) (10,812,324)
Interest income 240,278 461,425
Loss on repurchase of
preferred stock (737,037)
------------- -------------
Net loss $(16,122,100) $(10,350,899)
============= =============
Basic and diluted loss per share $ (1.05) $ (.81)
============= =============
Weighted average number of
shares outstanding 15,389,715 12,782,448
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
Capital Total
Common Stock in excess Accummulated Stockholders'
Shares Amount of par value Deficit Equity
------ ------ ------------ ----------- ------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance at
Dec. 31,
1997 15,210,405 $ 152,104 $ 123,946,331 $ (103,884,795) $ 20,213,640
Net proceeds
from sale of
common stock 800,000 8,000 446,500 454,500
Common stock
issued as
compensation 16,191 162 116,735 116,897
Common stock
issued under
Company 401(k)
Plan 73,002 730 137,168 137,898
Net loss (16,122,100) (16,122,100)
---------------------------------------------------------------------------------------------------
Balance at
Sept.30,
1998 16,099,598 $ 160,996 $ 124,646,734 $ (120,006,895) $ 4,800,835
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
<TABLE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Cash flows from operations:
Net loss $(16,122,100) $(10,350,899)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 670,141 568,173
Compensation and benefits paid
with common stock 254,795
Provision for excess inventory 3,089,841
Change in operating assets and liabilities:
Inventories (979,273) (3,572,395)
Receivables from GP Strategies and
affiliated companies 78,931 22,890
Accounts and other receivables 687,636 (943,919)
Prepaid expenses and other current assets (14,278) (4,570)
Accounts payable and accrued expenses (211,227) 232,637
Loss on repurchase of preferred stock 737,037
------------- -------------
Net cash used for operations (11,808,497) (14,048,083)
------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment (206,697) (604,485)
Reductions to other assets 35,000
------------- -------------
Net cash used for investing activities (171,697) (604,485)
------------- -------------
Cash flows from financing activities:
Net proceeds from sale of common stock 454,500 16,346,919
Net proceeds from preferred stock offering 7,179,000
Repurchase of preferred stock (7,916,037)
Proceeds from exercise of common stock
options 70,044
Purchase of fractional shares of common
stock (633)
------------- -------------
Net cash (used for) provided by financing
activities (282,537) 16,416,330
------------- -------------
Net (decrease) increase in cash and cash
equivalents (12,262,731) 1,763,762
Cash and cash equivalents at beginning
of period 14,059,283 17,491,955
------------- -------------
Cash and cash equivalents at end of period $ 1,796,552 $19,255,717
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The financial information included herein is unaudited. Such information,
however, reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods. The results for interim
periods are not necessarily indicative of results to be expected for the year.
Note 2. Earnings per Share
In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128), as required, and restated the previously reported earnings per share in
conformity with SFAS 128. The Company does have potential Common Stock, in the
form of options and warrants, that would be dilutive if the Company had
earnings.
Note 3. Inventories
Inventories, consisting of material, labor and overhead, are classified as
follows:
<TABLE>
September 30, December 31,
1998 1997
-------------- --------------
<CAPTION>
<S> <C> <C>
Finished goods $ 3,869,888 $ 3,720,000
Work in process 6,516,092 5,621,714
Raw materials 1,180,656 1,245,649
Less reserve for
excess inventory (10,344,551) (7,254,710)
-------------- --------------
$ 1,222,085 $ 3,332,653
============== ==============
Finished goods inventory consists of vials of ALFERON N Injection,
available for commercial and clinical use either immediately or upon final
release by Quality Assurance.
In light of the results to date of the Company's phase 3 studies of ALFERON
N Injection in HIV and HCV-infected patients, the Company has written-down the
carrying value of its inventory of ALFERON N Injection to its estimated net
realizable value. The write-down was the result of the Company's reassessment of
anticipated near-term needs for product to be sold or utilized in clinical
trials (within approximately a two-year period based on historical sales
levels). As a result, inventories at December 31, 1997 reflect a reserve for
excess inventory of $7,254,710. Also, during the quarter ended March 31, 1998,
the Company recorded an additional write-off of $3,089,841 of inventories that
were produced during the three months ended March 31, 1998.
<PAGE>
Note 4. Preferred Stock
On February 5, 1998, the Company completed the sale of 7,500 shares of
Series A Convertible Preferred Stock to an institutional investor for an
aggregate amount of $7,500,000. The $7,179,000 of net proceeds were expected to
augment the Company's working capital while awaiting the results of the two
Phase 3 clinical trials of ALFERON N Injection for the treatment of HIV-infected
and hepatitis C patients. After considering the reaction of the Company's
stockholders to the issuance and the negative impact the issuance apparently had
on the Company's market capitalization, the Board of Directors determined on
February 13, 1998 to exercise an option to repurchase the shares of Convertible
Preferred Stock for $7,894,737 (plus accrued dividends). The net loss to the
Company on the repurchase of the Preferred Stock amounted to $737,037 and was
recorded on the income statement under the caption of loss on repurchase of
preferred stock for the quarter ended March 31, 1998.
Note 5. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of September 30, 1998, the Company had an accumulated
deficit of approximately $120.0 million. For the nine months ended September 30,
1998 and the years ended December 31, 1997, 1996 and 1995, the Company had
losses from operations of approximately $15.6 million, $22.4 million, $12.4
million and $7.4 million, respectively. Although the Company received FDA
approval in October 1989 to market ALFERON N Injection in the United States for
the treatment of certain genital warts and ALFERON N Injection currently is
marketed and sold in the United States by the Company, in Mexico by Industria
Farmaceutica Andromaco, S.A. De C.V. and in Germany by Cell Pharm GmbH ("Cell
Pharm"), the Company has had limited revenues from the sale of ALFERON N
Injection to date. For the Company to operate profitably, the Company must sell
significantly more ALFERON N Injection. Increased sales will depend primarily
upon the expansion of existing markets and/or successful attainment of FDA
approval to market ALFERON N Injection for additional indications, of which
there can be no assurance. There can be no assurance that sufficient quantities
of ALFERON N Injection will be sold to allow the Company to operate profitably.
The Company has limited financial resources as of September 30, 1998 with
which to support future operating activities and to satisfy its financial
obligations as they become payable. Consequently, management is continuing to
actively pursue raising additional capital by either (i) issuing securities in a
public or private equity offering, (ii) licensing the rights to its injectable,
topical or oral formulations of alpha interferon, or (iii) entering into
collaborative or other arrangements with corporate partners. Insufficient funds
will require the Company to further delay, scale back, or eliminate certain or
all of its activities or to license third parties to commercialize products or
technologies that the Company would otherwise seek to develop itself. In
addition, the Company hopes to renegotiate the minimum purchase commitment for
white blood cells discussed in Management's Discussion and Analysis of Financial
Condition and Liquidity, but if it is unable to do so such obligation may have a
material adverse effect on the financial condition of the Company.
Based on the Company's estimates of revenues, expenses and levels of
production, management believes that the cash available will be sufficient to
enable the Company to continue operations through approximately December 31,
1998. However, actual results, especially with respect to revenues, may differ
materially from such estimates, and no assurance can be given that additional
funding will not be required sooner than anticipated or that such additional
funding, whether from financial markets or collaborative or other arrangements
with corporate partners or from other sources, will be available when needed or
on terms acceptable to the Company.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
During the three months ended September 30, 1998, the Company received net
proceeds of $454,500 from the sale of 800,000 shares of common stock. As of
November 13, 1998, the Company had an aggregate of $800,000 in cash and cash
equivalents. Until utilized, such cash and cash equivalents are being invested
principally in short-term interest-bearing investments.
The Company intends to participate in the State of New Jersey's
coroporation business tax benefit certificate transfer program (the "Program"),
which when effective will allow certain high technology and biotechnology
companies to transfer unused New Jersey net operating loss carryovers to other
New Jersey corporation business taxpayers. The Company will submit an
application to the New Jersey Economic Development Authority (the "EDA") to
participate in the Program. The EDA will then issue a certificate certifying the
Company's eligibility to participate in the Program and the amount of New Jersey
net operating loss carryovers the Company has available to transfer. Since New
Jersey law provides that net operating losses can be carried over for up to
seven years, the Company will be able to transfer its New Jersey net operating
losses from the last seven years. The Company estimates that, as of January 1,
1999, it will have approximately $66 million of unused New Jersey net operating
loss carryovers available for transfer under the Program. The Program requires
that a purchaser pay at least 75% of the amount of the surrendered tax benefit.
Applying the maximum New Jersey corporate income tax rate of 9% and the minimum
statutory transfer price of 75%, such unused New Jersey net operating loss
carryovers would have a value of at least $4.45 million. This assumes that (i)
the EDA certifies the Company's eligibility to participate in the Program and
that the Company has at least $66 million of available unused New Jersey net
operating loss carryovers and (ii) the Company is able to find a purchaser for
all of its available unused New Jersey net operating loss carryovers, as to all
of which there can be no assurance. In addition, the administrative procedures
for participation in the Program have not yet been finalized by the EDA, and the
Company is unable to predict how such procedures may affect the amount or timing
of any benefit the Company may receive from participating in the Program. While
the Program is effective for tax years beginning on or after January 1, 1999,
the Company anticipates that it will attempt to monetize the value of its rights
under the Program, at least in part, prior to such date, although there can be
no assurance that the Company will be able to do so.
The Company requires substantial funds to conduct research and development
and pre-clinical and clinical testing and to market its products. For the nine
months ended September 30, 1998, the cash utilized by the Company's operations
was approximately $11.8 million of which increases in inventories accounted for
approximately $1.0 million. The Company had continued to increase its investment
in inventories of ALFERON N Injection to meet anticipated increases in market
demand, for use in the Company-sponsored Phase 3 and Phase 2 clinical trials,
and so that inventory would be available in the event ALFERON N Injection was
subsequently approved for the treatment of HIV or hepatitis C or both by the
U.S. Food and Drug Administration. In light of the results to date of the
Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected
patients, the Company has determined that it has enough inventory on hand to
satisfy its clinical and commercial needs for the foreseeable future and
therefore discontinued production of ALFERON N Injection in April 1998. The
Company currently obtains human white blood cells used in the manufacture of
ALFERON N Injection from several sources, including the American Red Cross (the
"Red Cross") pursuant to a supply agreement dated April 1, 1997. The Company
will not need a substantial amount of human white blood cells until such time as
production of ALFERON N Injection is resumed. Under the terms of the agreement
with the Red Cross, the Company is obligated to purchase a minimum number of
human white blood cells each month through March 1999. The aggregate commitment
is approximately $260,000 per month. The Company has not purchased any
buffycoats from the Red Cross since April 1, 1998, representing unfilled minimum
purchase commitments of $1,560,000 as of September 30, 1998. Although it has not
done so as of the date of this report, the Red Cross may assert that the Company
has breached the minimum purchase commitment and is liable to the Red Cross for
damages. The Company is negotiating with the Red Cross to amend the agreement
with the Red Cross to, among other things, eliminate this potential liability,
but there can be no assurance that such negotiations will be successful. The
Company believes the amount of its potential liability, if any, for such damages
is not presently determinable, but would in any event be less than the amount of
the aggregate unfilled minimum purchase commitment. Any such potential liability
nevertheless may have a material adverse effect on the financial condition of
the Company. No provision has been made for the unfilled minimum purchase
commitment or any other related potential liability on the Company's financial
statements. The Company's future capital requirements will depend on many
factors, including: continued scientific progress in its drug development
programs; the magnitude of these programs; progress with pre-clinical testing
and clinical trials; the time and costs involved in obtaining regulatory
approvals; the costs involved in filing, prosecuting, and enforcing patent
claims; competing technologies and market developments; changes in its existing
research relationships; and the ability of the Company to establish
collaborative arrangements and effective commercialization activities and
arrangements.
<PAGE>
The Company anticipates that the cash that will be utilized by the
Company's operations in 1998 will be significantly less than in 1997 as a result
of the discontinuance in April 1998 of manufacturing, the conclusion in 1998 of
the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected
patients, and certain other cost reductions instituted in 1998 by the Company,
offset in part by the expenses associated with the HIV and hepatitis C
co-infection study that commenced in December 1997. Based on the Company's
estimates of revenues, expenses, and levels of production, management believes
that the cash presently available will be sufficient to enable the Company to
continue operations through approximately December 31, 1998. However, actual
results, especially with respect to revenues, may differ materially from such
estimates, and no assurance can be given that additional funding will not be
required sooner than anticipated or that such additional funding, whether from
financial markets or collaborative or other arrangements with corporate partners
or from other sources, will be available when needed or on terms acceptable to
the Company. Insufficient funds will require the Company to further delay, scale
back, or eliminate certain or all of its research and development programs or to
license third parties to commercialize products or technologies that the Company
would otherwise seek to develop itself. The Independent Auditors' Report dated
April 2, 1998 on the Company's consolidated financial statements ended December
31, 1997 notes that the Company has suffered recurring losses from operations
and has an accumulated deficit that raise substantial doubt about its ability to
continue as a going concern.
The Company has received a letter from the Nasdaq Stock Market, Inc.
notifying the Company that its Common Stock had failed to maintain a closing bid
price of at least $1 per share (one of the requirements for continued listing on
Nasdaq) for 30 consecutive trading days. The letter stated that if the closing
bid price of the Common Stock is not at least $1 per share for a minimum of ten
consecutive trading days (the "Minimum Price Condition") by November 29, 1998,
the Common Stock would be delisted from Nasdaq at the opening of business on
December 1, 1998. The letter went on to say that the delisting would be stayed
if Nasdaq receives a request for a hearing and the applicable fees prior to
November 29, 1998. The closing bid price of the Common Stock has been at least
$1 per share since November 6, 1998, and the Minimum Price Condition will be
satisfied if the closing bid price remains at least $1 per share through
November 19, 1998, of which there can be no assurance. If the closing bid price
falls below $1 per share on or before November 19, 1998, the Company intends to
request a hearing from Nasdaq and to submit to its stockholders for approval a
proposal to reverse split the Common Stock. There can be no assurance that the
reverse stock would be approved by stockholders or, if it is approved, that it
would result in the satisfaction of the Minimum Price Condition. Based on
informal advice received from Nasdaq, the Company believes that the Common Stock
would not be delisted if the Minimum Price Condition were satisfied before the
scheduled hearing date. If the Company fails to satisfy the Minimum Price
Condition by the scheduled hearing date, the Company believes that, if the
Company proposes to the hearing panel a plan (such as a reverse stock split)
that is reasonably likely to result in the satisfaction of the Minimum Price
Condition in the following 30 to 45 days, the panel would be likely to extend
the stay for that period. However, there can be no assurance that the Common
Stock would not be delisted after the hearing for failure to meet the Minimum
Price Condition or another of the Nasdaq maintenance standards, such as having
tangible net assets of at least $4 million. If it were delisted from Nasdaq, the
Common Stock would trade on the OTC Bulletin Board, which may have a material
adverse effect on the ability of the company to finance its operations and on
the liquidity of the Common Stock.
Results of Operations
Nine Months Ended September 30, 1998 Versus Nine Months Ended September 30,1997
For the nine months ended September 30, 1998, the Company's revenues of
$1,186,726 included $1,093,578 from the sale of ALFERON N Injection and the
balance from sales of research products and other revenues. Revenues of
$2,284,911 for the nine months ended September 30, 1997 included $2,256,694 from
the sale of ALFERON N Injection and the balance from sales of research products.
Cost of goods sold and idle production costs totaled $3,945,041 and $1,573,697
for the nine months ended September 30, 1998 and 1997, respectively. Idle
production costs in the nine months ended September 30, 1998 primarily
represented fixed production costs, which were incurred after production of
ALFERON N Injection was discontinued in April 1998. There were no idle
production costs in the nine months ended September 30, 1997.
In May 1997, the Company appointed Alternate Site Distributors, Inc.
("ASD"), a wholly owned subsidiary of Bergen Brunswig Corporation, the sole
United States distributor of ALFERON N Injection. Under the agreement with ASD,
the Company sold vials to ASD, which then resold them to the marketplace. As a
result, the Company recognized revenues when it sold vials to ASD, rather than
when ASD resold them to the marketplace. In June 1998, the Company replaced ASD
with Integrated Commercialization Solutions ("ICS"), another subsidiary of
Bergen Brunswig Corporation better able to handle the Company's specialty
distribution requirements. Under the new agreement, vials are not sold to ICS,
but are instead sold by the Company directly to the marketplace, at which time
revenues are recognized by the Company. In the nine months ended September 30,
1998, ASD and the Company sold to wholesalers and other customers in the United
States 11,839 vials of ALFERON N Injection, compared to 12,002 vials sold by ASD
and the Company during the nine months ended September 30, 1997. Notwithstanding
the only slight decrease in vials sold, the Company's revenues from the sale of
ALFERON N Injection decreased by $1,163,116, a 51.5% decline, in the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997.
This decrease was due primarily to (i) ASD's sales in the 1998 period were
primarily from ASD's inventory (and therefore had been accounted for as revenues
by the Company in 1997), (ii) the Company's revenues in the 1997 period included
sales to ASD for its inventory, and (iii) a decrease in foreign sales in the
1998 period.
<PAGE>
In light of the results to date of the Company's Phase 3 studies of ALFERON
N Injection in HIV- and HCV-infected patients, the Company has written-down the
carrying value of its inventory of ALFERON N Injection to its estimated net
realizable value. The write-down was the result of the Company's reassessment of
anticipated near-term needs for product to be sold or utilized in clinical
trials (within approximately a two-year period based on historical sales
levels). As a result, during the three months ended March 31, 1998, the Company
recorded an inventory write-off of $3,089,841 in addition to the $7,254,710
inventory write-down which was recorded at December 31, 1997.
Research and development expenses during the nine months ended September
30, 1998 of $6,161,208 decreased by $2,232,834 from $8,394,042 for the same
period in 1997, principally because the Company has nearly concluded its Phase 3
clinical studies of ALFERON N Injection in HIV- and HCV-infected patients. The
Company received $29,375 and $176,247, respectively, as rental income from GP
Strategies Corporation ("GP Strategies") for the use of a portion of the
Company's facilities, which offset research and development expenses.
General and administrative expenses for the nine months ended September 30,
1998 were $3,615,977 as compared to $3,129,496 for the same period in 1997. The
increase of $486,481 was principally due to increases in payroll and other
operating expenses. GP Strategies provides certain administrative services for
which the Company paid GP Strategies $90,000 for each of the nine-month periods
ended September 30, 1998 and 1997. In addition, for the nine months ended
September 30, 1997, payments to GP Strategies for services provided to the
Company by GP Strategies personnel amounted to $86,250. For the nine months
ended September 30, 1998, receipts from GP Strategies for services provided to
GP Strategies by Company personnel amounted to $18,750.
On February 5, 1998, the Company completed the sale of 7,500 shares of
Series A Convertible Preferred Stock to an institutional investor for an
aggregate amount of $7,500,000. The $7,179,000 of net proceeds were expected to
augment the Company's working capital while awaiting the results of the two
Phase 3 clinical trials of ALFERON N Injection for the treatment of HIV-infected
and hepatitis C patients. After considering the reaction of the Company's
stockholders to the issuance and the negative impact the issuance apparently had
on the Company's market capitalization, the Board of Directors determined on
February 13, 1998 to exercise an option to repurchase the shares of Convertible
Preferred Stock for $7,894,737 (plus accrued dividends). The net loss to the
Company on the repurchase of the Preferred Stock amounted to $737,037 and was
recorded on the income statement under the caption of loss on repurchase of
preferred stock for the quarter ended March 31, 1998.
<PAGE>
Interest income for the nine months ended September 30, 1998 was $240,278
as compared to $461,425 for the same period in 1997. The decrease of $221,147
was due to less funds available for investment in the current period. As a
result of the foregoing, the Company incurred net losses of $16,122,100 and
$10,350,899 for the nine months ended September 30, 1998 and 1997, respectively.
Three Months Ended September 30, 1998 Versus Three Months Ended September 30,
1997
For the three months ended September 30, 1998, the Company's revenues of
$638,634 included $634,612 from the sale of ALFERON N Injection and the balance
from sales of research products and other revenues. Revenues of $869,671 for the
three months ended September 30, 1997 included $868,574 from the sale of ALFERON
N Injection and the balance from sales of research products. Cost of goods sold
and idle production costs totaled $1,165,238 and $469,059 for the three months
ended September 30, 1998 and 1997, respectively. Idle production costs in the
three months ended September 30, 1998 primarily represented fixed production
costs, which were incurred after production of ALFERON N Injection was
discontinued in April 1998. There were no idle production costs in the three
months ended September 30, 1997.
In the three months ended September 30, 1998, the Company sold to
wholesalers and other customers in the United States 4,902 vials of ALFERON N
Injection, compared to 4,928 vials sold by ASD during the three months ended
September 30, 1997, a 0.5% decline. The Company's revenues from the sale of
ALFERON N Injection decreased by $233,962, a 26.9% decline, in the three months
ended September 30, 1998 compared to the three months ended September 30, 1997.
This percentage decline was greater than the percentage decline in vials sold
primarily due to the fact that the Company's sales in the 1997 period included
sales to ASD for its inventory.
Research and development expenses during the three months ended September
30, 1998 of $1,943,198 decreased by $723,309 from $2,666,507 for the same period
in 1997, principally because the Company has nearly concluded its Phase 3
clinical studies of ALFERON N Injection in HIV- and HCV-infected patients. The
Company received $58,749, as rental income from GP Strategies for the use of a
portion of the Company's facilities in 1997, which offset research and
development expenses.
General and administrative expenses for the three months ended September
30, 1998 were $1,065,389 as compared to $1,059,358 for the same period in 1997.
The increase of $6,031 was principally due to increases in payroll, partially
offset by decreases in marketing expenses. GP Strategies provides certain
administrative services for which the Company paid GP Strategies $30,000 for
each of the three-month periods ended September 30, 1998 and 1997. For the three
months ended September 30, 1997, payments to GP Strategies for the services
provided to the Company by GP Strategies personnel amounted to $30,000. For the
three months ended September 30, 1998, receipts from GP Strategies for the
services provided to GP Strategies by Company personnel amounted to $6,250.
<PAGE>
Interest income for the three months ended September 30, 1998 was $29,433
as compared to $153,891 for the same period in 1997. The decrease of $124,458
was due to less funds available for investment in the current period.
As a result of the foregoing, the Company incurred net losses of $3,505,758
and $3,171,358 for the three months ended September 30, 1998 and 1997,
respectively.
Recent Tax and Accounting Developments
The Financial Accounting Standards Board issued Accounting Standards (SFAS
130), "Reporting Comprehensive Income", in June 1997 which requires a statement
of comprehensive income to be included in the financial statements for fiscal
years beginning after December 15, 1997. The Company has adopted this Statement
and has no other comprehensive income, other than net income, therefore
comprehensive income is the same as net income (loss).
In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 requires disclosure
of certain information about operating segments and about products and services,
geographic areas in which a company operates, and their major customers. The
Company does not expect this statement to have a material impact on the
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company will adopt SFAS No. 133 by
January 1, 2000. The Company does not expect this statement to have a material
impact on the consolidated financial statements.
<PAGE>
Year 2000
Many computer systems ("IT systems") and equipment and instruments with
embedded microprocessors ("non-IT systems") were designed to only recognize the
last two digits of a calendar year. With the arrival of the Year 2000, these
systems and microprocessors may encounter operating problems due to their
inability to distinguish years after 1999 from years preceding 1999. Failure to
properly recognize such information could generate inaccurate data or cause a
system to fail, resulting in business interruption.
The Company is currently developing a plan to address Year 2000 concerns.
The first phase, which the Company expects to complete by the end of the first
quarter of 1999, is to inventory the IT systems and non-IT systems of the
Company, determine which systems are not Year 2000 compliant, and, among any
systems that are not Year 2000 compliant, distinguish "critical" systems from
"non-critical" systems. The second phase, which the Company expects to complete
by the end of 1999, is to remediate or replace critical IT and non-IT systems
that are non- compliant and then test such remediated or replaced systems. The
Company believes, based on preliminary information, that the costs to address
the Company's Year 2000 issues will not be material, although there can be no
assurance that this will be the case.
The Company's operations may also be impacted in the event third parties
with whom the Company conducts significant business experience disruptions due
to Year 2000 problems. These third parties include vendors, suppliers,
distributors, clinical researchers, contract manufacturers, research partners,
utility companies, financial institutions, and government agencies. Prior to the
end of 1998, the Company intends to initiate communications with these third
parties to assess their state of readiness. The Company currently believes that
the most reasonably likely worst case scenario concerning the Year 2000 involves
potential business disruption among these third parties. The Company could be
materially adversely affected if any of these third parties experience business
disruption due to a Year 2000 problem. While the Company intends to develop
contingency plans to address potential business disruptions at these third
parties, there can be no assurance that it will be able to do so and it is
unlikely that any contingency plan will be able to fully mitigate the impact of
significant business disruptions among these third parties.
Forward-Looking Statements
This report contains certain forward-looking statements reflecting
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements, including, but not limited to, the risk that the
Company will run out of cash; uncertainty of obtaining additional funding for
the Company; uncertainty of obtaining United States regulatory approvals for the
Company's products under development and foreign regulatory approvals for the
Company's FDA-approved product and products under development and, if such
approvals are obtained, uncertainty of the successful commercial development of
such products; substantial competition from companies with substantially greater
resources than the Company in the Company's present and potential businesses; no
guaranteed source of required materials for the Company's products; dependence
on certain distributors to market the Company's products; potential adverse side
effects from the use of the Company's products; potential patent infringement
claims against the Company; possible inability of the Company to protect its
technology; uncertainty of pharmaceutical pricing; substantial royalty
obligations payable by the Company; limited production experience of the
Company; risk of product liability; and risk of loss of key management
personnel, all of which are difficult to predict and many of which are beyond
control of the Company.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed for the period ended
September 30, 1998.
<PAGE>
INTERFERON SCIENCES, INC.
SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
INTERFERON SCIENCES, INC.
DATE: November 16, 1998 By: /s/ Lawrence M. Gordon
-----------------------
Lawrence M. Gordon
Chief Executive Officer
DATE: November 16, 1998 By: /s/ Donald W. Anderson
------------------------
Donald W. Anderson
Controller
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