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 March 31, 1999
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
May 6, 1999:
Common Stock 4,677,767 shares
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
----
Part I. Financial Information:
Consolidated Condensed Balance Sheets--March 31, 1999
and December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Condensed Statements of Operations--Three
Months Ended March 31, 1999 and 1998 . . . . . . . . . . . . . . . . . 2
Consolidated Condensed Statement of Changes in
Stockholders' Equity--Three Months Ended
March 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Cash Flows--Three
Months Ended March 31, 1999 and 1998 . . . . . .. . . . . . . . . . . . 4
Notes to Consolidated Condensed Financial Statements . . . . . . . . . 5-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 8-13
Part II. Other Information . . . . . . . . . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
<TABLE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited) *
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 85,650 $ 1,170,861
Accounts and other receivables 386,416 689,511
Inventories, net of reserves
of $10,344,551 439,139 709,784
Prepaid expenses and other
current assets 137,786 36,511
------------- --------------
Total current assets 1,048,991 2,606,667
------------- --------------
Property, plant and equipment,
at cost 12,771,773 12,771,773
Less accumulated depreciation (9,309,451) (9,130,248)
------------- --------------
3,462,322 3,641,525
------------- --------------
Patent costs, net of accumulated
amortization 242,679 250,305
Other assets 10,100 100,150
------------- --------------
Total assets $ 4,764,092 $ 6,598,647
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and
accrued expenses $ 4,426,789 $ 4,386,307
Amount due GP Strategies 278,268 108,943
------------- --------------
Total current liabilities 4,705,057 4,495,250
------------- --------------
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-4,668,064 and
4,360,808 shares 46,681 43,608
Capital in excess of par value 128,504,321 127,933,885
Accumulated deficit (127,827,967) (125,210,096)
Settlement shares (664,000) (664,000)
------------- --------------
Total stockholders' equity 59,035 2,103,397
------------- --------------
Total liabilities and stockholders'
equity $ 4,764,092 $ 6,598,647
============== ==============
</TABLE>
*The consolidated condensed balance sheet as of December 31, 1998 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
March 31,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Revenues
Alferon N Injection $ 459,521 $ 252,523
Research products and other revenues 277 77,025
------------ ------------
Total revenues 459,798 329,548
------------ ------------
Costs and expenses
Cost of goods sold and idle
production costs 1,033,219 203,386
Provision for excess inventory 3,089,841
Research and development 1,246,492 2,055,139
General and administrative 802,695 1,472,399
----------- ------------
Total costs and expenses 3,082,406 6,820,765
------------ ------------
Loss from operations (2,622,608) (6,491,217)
Interest income 4,737 144,720
Loss on repurchase of
preferred stock (737,037)
------------ ------------
Net loss $(2,617,871) $(7,083,534)
============ ============
Basic and diluted loss per share $ (.57) $ (2.33)
============ ============
Weighted average number of
shares outstanding 4,584,265 3,045,263
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
<TABLE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<CAPTION>
Capital Total
Common Stock in excess Accummulated Settlement Stockholders'
Shares Amount of par value Deficit Shares Equity
------------------ ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
Dec. 31,
1998 4,360,808 $ 43,608 $ 127,933,885 $(125,210,096) $ (664,000) $ 2,103,397
Common stock
issued as
payment against
accounts payable 285,000 2,850 531,525 534,375
Common stock
issued under
Company 401(k)
Plan 22,256 223 38,911 39,134
Net loss (2,617,871) (2,617,871)
-------------------------------------------------------------------------------------
Balance at
March 31,
1999 4,668,064 $ 46,681 $ 128,504,321 $(127,827,967) $ (664,000) $ 59,035
</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>
Three Months Ended
March 31,
----------------------
1999 1998
----------------------
<S> <C> <C>
Cash flows from operations:
Net loss $ (2,617,871) $(7,083,534)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 186,829 222,879
Accounts payable, compensation and
benefits paid with common stock 573,509 176,115
Provision for excess inventory 3,089,841
Change in operating assets and liabilities:
Inventories 270,645 (2,738,949)
Payables to GP Strategies 169,325 (13,419)
Accounts and other receivables 303,095 691,333
Prepaid expenses and other current
assets (101,275) (2,713)
Accounts payable and accrued expenses 40,482 (427,768)
Loss on repurchase of preferred stock 737,037
-------------- ------------
Net cash used for operations (1,175,261) (5,349,178)
-------------- ------------
Cash flows from investing activities:
Additions to property, plant and equipment (89,921)
Reductions to other assets 90,050 12,500
-------------- ------------
Net cash provided by (used for) 90,050 (77,421)
investing activities -------------- ------------
Cash flows from financing activities:
Net proceeds from preferred stock
offering 7,179,000
Repurchase of preferred stock (7,916,037)
-------------- ------------
Net cash used for financing activities (737,037)
-------------- ------------
Net decrease in cash and cash equivalents (1,085,211) (6,163,636)
Cash and cash equivalents at beginning
of period 1,170,861 14,059,283
-------------- ------------
Cash and cash equivalents at end of period $ 85,650 $ 7,895,647
============== ============
</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. Inventories
Inventories, consisting of material, labor and overhead, are classified as
follows:
March 31, December 31,
1999 1998
-------------- --------------
Finished goods $ 3,173,141 $ 3,443,786
Work in process 6,466,914 6,466,914
Raw materials 1,143,635 1,143,635
Less reserve for
excess inventory (10,344,551) (10,344,551)
-------------- --------------
$ 439,139 $ 709,784
============== ==============
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 Injectin 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 is a 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, beginning January 1, 1998 and
based on historical sales levels). As a result, inventories at March 31, 1999
and December 31, 1998, reflect a reserve for excess inventory of $10,344,551. As
of December 31, 1998, the Company estimates that the remaining inventory value
represents product to be sold within a one-year period.
Note 3. Reverse Stock Split
On January 6, 1999, the Company's stockholders approved a proposal to amend
the Company's Restated Certificate of Incorporation to effect a one-for-five
reverse stock split of the Company's Common Stock.
The balance sheets, statements of changes in stockholders equity, earnings
per share and all footnote disclosures at March 31, 1999 and December 31, 1998,
as well as the loss per share and average outstanding shares for the three
months ended March 31, 1999 and 1998, have been restated to reflect the reverse
split as if it had occurred on January 1, 1998.
Note 4. Agreement with GP Strategies Corporation
In an agreement dated March 25, 1999, GP Strategies Corporation ("GP
Strategies") agreed to lend the Company $500,000 at the rate of $250,000 a month
(the "GP Strategies Debt"). In return, the Company agreed to grant GP Strategies
(i) a first mortgage on the Company's real estate, (ii) a two-year option to
purchase the Company's real estate, provided that the Company has terminated its
operations and the Red Cross Debt has been repaid, and (iii) a two-year right of
first refusal in the event the Company desires to sell its real estate. In
addition, the Company agreed to allow a designee of GP Strategies to attend any
meeting with the FDA with respect to approval of ALFERON N Injection for the
treatment of hepatitis C and to issue GP Strategies 500,000 shares of Common
Stock and five-year options to purchase 500,000 shares of Common Stock at a
price of $1 per share. The Company also agreed not to increase its payroll
during the term of the GP Strategies Debt without the prior consent of GP
Strategies. Pursuant to the agreement, the Company has issued a note to GP
Strategies representing the GP Strategies Debt, which note matures on September
30, 1999 and bears interest, payable at maturity, at the rate of 6% per annum.
In addition, the Company has negotiated a subordination agreement with the Red
Cross pursuant to which the Red Cross has agreed that its lien on the Company's
real estate is subordinate to GP Strategies' lien.
Note 5. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of March 31, 1999, the Company had an accumulated deficit
of approximately $127.8 million. For the three months ended March 31, 1999 and
the years ended December 31, 1998, 1997 and 1996, the Company had losses from
operations of approximately $2.6 million, $20.8 million, $22.4 million and $12.4
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 March 31, 1999 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 private
equity offering, (ii) licensing the rights to its injectable, topical or oral
formulations of alpha interferon, or (iii) selling the Company. 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.
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
June 15, 1999. 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
As of May 12, 1999, the Company had an aggregate of 350,000 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 corporation
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 has submitted an application to the
New Jersey Economic Development Authority (the "EDA") to participate in the
Program. If the Company's application is approved, 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 had approximately $85 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 $5.73
million. This assumes that (i) the EDA certifies the Company's eligibility to
participate in the Program and that the Company has at least $5.73 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 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.
The Company has obtained 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 "Supply
Agreement"). In addition, the Company will not need more human white blood cells
until such time as production of ALFERON N Injection is resumed, and has not
purchased any since April 1, 1998. Under the terms of the Supply Agreement, the
Company was obligated to purchase a minimum amount of human white blood cells
each month through March 1999 (the "Minimum Purchase Commitment"), with an
aggregate Minimum Purchase Commitment during the period from April 1998 through
March 1999 of in excess of $3,000,000. As of November 23, 1998, the Company owed
the Red Cross approximately $1.46 million plus interest at the rate of 6% annum
accruing from April 1, 1998 (the "Red Cross Liability") for white blood cells
purchased pursuant to the Supply Agreement.
In an agreement dated November 23, 1998, the Company agreed to grant the
Red Cross a security interest in certain assets to secure the Red Cross
Liability and to issue to the Red Cross 300,000 shares of Common Stock (with a
market value of $1,171,875 at December 4, 1998) and additional shares at some
future date as requested by the Red Cross. The Red Cross agreed that any net
proceeds received by it upon sale of such shares would be applied against the
Red Cross Liability and that at such time as the Red Cross Liability was paid in
full, the Minimum Purchase Commitment would be deleted effective April 1,1998
and any then existing breaches of the Minimum Purchase Commitment wold be
waived. In January 1999 the Company granted the Red Cross a security interest
in, among other things, the Company's real estate, equipment inventory,
receivables, and New Jersey net operating loss carryovers to secure repayment of
the Red Cross Liability, and the Red Cross agreed to forbear from exercising its
rights under the Supply Agreement, including with respect to collecting the Red
Cross Liability, until June 30, 1999.
As the liability to the Red Cross remains unsettled until such time as the
Red Cross sells the shares they have already received and could receive in the
future, the Company has recorded any shares issued to the Red Cross as
"Settlement Shares" within stockholders equity. Any decreases in the market
value of the Company's common stock below $1.2 million, until such time as the
Red Cross were to sell its shares, would impact the value of the shares held by
the Red Cross and accordingly require an adjustment to "Settlement Shares". Due
to the decline in the Company's stock price from November 23, 1998 to December
31, 1998, an adjustment for $525,000 has been recorded with a corresponding
charge to operations.
In an agreement dated March 25, 1999, GP Strategies agreed to lend the
Company $500,000 at the rate of $250,000 a month (the "GP Strategies Debt"). In
return, the Company agreed to grant GP Strategies (i) a first mortgage on the
Company's real estate, (ii) a two-year option to purchase the Company's real
estate, provided that the Company has terminated its operations and the Red
Cross Debt has been repaid, and (iii)a two-year right of first refusal in the
event the Company desires to sell its real estate. In addition, the Company
agreed to allow a designee of GP Strategies to attend any meeting with the FDA
with respect to approval of ALFERON N Injection for the treatment of hepatitis C
and to issue GP Strategies 500,000 shares of Common Stock and five-year options
to purchase 500,000 shares of Common Stock at a price of $1 per share. The
Company also agreed not to increase its payroll during the term of the GP
Strategies debt without the prior consent of GP Strategies. Pursuant to the
agreement, the Company has issued a note to GP Strategies representing the GP
Strategies Debt, which note matures on September 30, 1999 and bears interest,
payable at maturity, at the rate of 6% per annum. In addition, the Company has
negotiated a subordination agreement with the Red Cross pursuant to which the
Red Cross has agreed that its lien on the Company's real estate is subordinate
to GP Strategies' lien.
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.
The Company anticipates that the cash that will be utilized by the
Company's operations in 1999 will be significantly less than in 1998 as a result
of the discontinuance in 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 (including the layoff of 30 people)
instituted in 1998 and early 1999 by the Company. 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 June 15, 1999. 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 15, 1999 on the Company's consolidated financial statements ended December
31, 1998 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.
On April 13, 1999, the Company was advised by NASDAQ that the Company's
Common Stock was being delisted for failure to maintain certain listing
requirements. As a result of being delisted from NASDAQ, the Common Stock now
trades 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
Three Months Ended March 31, 1999 Versus Three Months Ended March 31, 1998
For the three months ended March 31, 1999, the Company's revenues of
$459,798 included $459,521 from the sale of ALFERON N Injection and the balance
from sales of research products. Revenues of $329,548 for the three months ended
March 31, 1998 included $252,523 from the sale of ALFERON N Injection and the
balance from sales of research products and other revenues. Cost of goods sold
and idle production costs totaled $1,033,219 and $203,386 for the three months
ended March 31, 1999 and 1998, respectively. Idle production costs in the three
months ended March 31, 1999 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 March 31, 1998.
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 three months ended March 31,
1999, the Company sold to wholesalers and other customers in the United States
3,708 vials of ALFERON N Injection, compared to 994 vials sold by the Company
during the three months ended March 31, 1998. In addition, foreign sales of
ALFERON N Injection were 162 vials and 2,000 vials for the three months ended
March 31, 1999 and 1998, respectively.
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 beginning January 1, 1998 and
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. As of December 31, 1998, the Company estimates that the remaining
inventory value represents product to be sold within a one-year period.
Research and development expenses during the three months ended March 31,
1999 of $1,246,492 decreased by $808,647 from $2,055,139 for the same period in
1998, principally because the Company has concluded its Phase 3 clinical studies
of ALFERON N Injection in HIV- and HCV-infected patients. The Company received
$29,375 in 1998, as rental income from 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 three months ended March 31,
1999 were $802,695 as compared to $1,472,399 for the same period in 1998. The
decrease of $669,704 was principally due to decreases in payroll and other
operating expenses. GP Strategies provides certain administrative services for
which the Company paid GP Strategies $30,000 for each of the three-month periods
ended March 31, 1999 and 1998. For the three months ended March 31, 1998,
receipts from GP Strategies for services provided to GP Strategies by Company
personnel amounted to $6,250.
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.
Interest income for the three months ended March 31, 1999 was $4,737 as
compared to $144,720 for the same period in 1998. The decrease of $139,983 was
due to less funds available for investment in the current period.
As a result of the foregoing, the Company incurred net losses of $2,617,871
and $7,083,534 for the three months ended March 31, 1999 and 1998, respectively.
Recent Accounting Developments
The Financial Accounting Standards Board ("FASB") 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, therefore
comprehensive income is the same as net income (loss).
In addition, in June 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. As of
January 1, 1998, the Company adopted SFAS 131, however, as the Company operates
as one business segment the adoption of this Statement has minimal impact on
disclosure and has no effect on the Company's financial position or results of
operations.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities". This Statement establishes accounting and reporting standards for
derivatives as either assets or liabilities in the 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 133 by January 1, 2000. Going
forward, the Company is still evaluating its position with respect to the use of
derivative instruments.
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 has developed an informal plan to address Year 2000 concerns.
The first phase, which the Company has completed was to inventory the IT systems
and non-IT systems of the Company, determine which systems were not Year 2000
compliant or Year 2000 compatible, and, among any systems that were not Year
2000 compliant or Year 2000 compatible, distinguish "critical" systems from
"non-critical" systems. Based upon the results of the tests which the Company
has conducted, the Company believes that the IT systems utilized by its
accounting department and the IT systems and non-IT systems utilized in the
production of Alferon N Injection are Year 2000 compliant. The second phase,
which the Company expects to complete by July 1999, is to remediate or replace
critical IT and non-IT systems that are non-compliant or not compatible and then
test such remediated or replaced systems.
Based on current information, the Company believes the Year 2000 issue will
not have a material adverse effect on the Company, its consolidated financial
position, results of operations or cash flows. 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, or that the Company will have sufficient financial resources to
remediate. There can be no assurance that the Year 2000 remediation by the
Company or third parties will be properly and timely completed, and the failure
to do so could have a material adverse effect on the Company, its business,
results of operations, and its financial condition.
The Company has not completed its assessment of the reasonably likely worst
case scenario of Non-IT Systems and/or IT Systems failures and related
consequences. However, the Company is in the process of preparing specific Year
2000 contingency plans to mitigate the potential impact of such failures. The
Company's contingency plans, which will be based in part on the assessment of
the magnitude and probability of potential risks, will primarily focus on steps
to prevent Year 2000 failures from occurring, or if they should occur, to detect
them quickly, minimize their impact and expedite their repair. Development of
the Year 2000 contingency plans is expected to be substantially complete by the
end of September 1999.
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 the second quarter of 1999, 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
the 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 March 31,
1999.
<PAGE>
INTERFERON SCIENCES, INC.
MARCH 31, 1999
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: May 17, 1999 By: /s/ Lawrence M. Gordon
-----------------------
Lawrence M. Gordon
Chief Executive Officer
DATE: May 17, 1999 By: /s/ Donald W. Anderson
-----------------------
Donald W. Anderson
Controller
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