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, 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)
(Registrant's telephone number, including area code) (732) 249 - 3250
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 20, 1999:
Common Stock 4,767,116 shares
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information:
Consolidated Condensed Balance Sheets--September 30, 1999
and December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Condensed Statements of Operations--Three Months and Nine
Months Ended September 30, 1999 and 1998 . . . . . . . . . . . . . . . 2-3
Consolidated Condensed Statement of Changes in
Stockholders' Equity--Nine Months Ended
September 30, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows--Nine
Months Ended September 30, 1999 and 1998. . . . . . . . . . . . . . . . 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
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited) *
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 88,256 $ 1,170,861
Accounts and other receivables 335,020 689,511
Inventories, net of reserves
of $7,154,458 and $10,344,551 709,784
Prepaid expenses and other
current assets 180,062 36,511
------------- --------------
Total current assets 603,338 2,606,667
------------- --------------
Property, plant and equipment,
at cost 12,759,273 12,771,773
Less accumulated depreciation (9,655,361) (9,130,248)
------------- --------------
3,103,912 3,641,525
------------- --------------
Patent costs, net of accumulated
amortization 227,431 250,305
Other assets 10,100 100,150
------------- --------------
Total assets $ 3,944,781 $ 6,598,647
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and
accrued expenses $ 4,800,206 $ 4,386,307
Amount due GP Strategies 721,412 108,943
-------------- --------------
Total current liabilities 5,521,618 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-4,767,096 and
4,360,808 shares 47,671 43,608
Capital in excess of par value 128,547,625 127,933,885
Accumulated deficit (129,508,133) (125,210,096)
Settlement shares (664,000) (664,000)
-------------- ---------------
Total stockholders' equity (1,576,837) 2,103,397
-------------- ---------------
Total liabilities and stockholders'
equity $ 3,944,781 $ 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
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Alferon N Injection $ 998,275 $ 634,612
Research products and other revenues 4,022
------------- -------------
Total revenues 998,275 638,634
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 518,686 1,165,238
Research and development 513,776 1,943,198
General and administrative 414,770 1,065,389
------------- -------------
Total costs and expenses 1,447,232 4,173,825
------------- -------------
Loss from operations (448,957) (3,535,191)
Interest income 29,433
------------- -------------
Net loss $ (448,957) $ (3,505,758)
============= =============
Basic and diluted loss per share $ (.09) $ (1.12)
============= =============
Weighted average number of
shares outstanding 4,746,342 3,125,355
</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
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Alferon N Injection $ 1,984,185 $ 1,093,578
Research products and other revenues 277 93,148
------------- -------------
Total revenues 1,984,462 1,186,726
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 2,155,265 3,945,041
Provision for excess inventory 3,089,841
Research and development 2,456,765 6,161,208
General and administrative 1,675,846 3,615,977
------------- -------------
Total costs and expenses 6,287,876 16,812,067
------------- -------------
Loss from operations (4,303,414) (15,625,341)
Interest income 5,377 240,278
Loss on repurchase of
preferred stock (737,037)
------------- -------------
Net loss $(4,298,037) $(16,122,100)
============= =============
Basic and diluted loss per share $ (.92) $ (5.24)
============= =============
Weighted average number of
shares outstanding 4,671,691 3,077,943
</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
NINE MONTHS ENDED SEPTEMBER 30, 1999
<CAPTION>
(Unaudited)
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 121,288 1,213 82,215 83,428
Net loss (4,298,037) (4,298,037)
------------------------------------------------------------------------------------
Balance at
September 30,
1999 4,767,096 $ 47,671 $ 128,547,625 $(129,508,133) $ (664,000) $(1,576,837)
</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,
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Cash flows from operations:
Net loss $(4,298,037) $(16,122,100)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 560,487 670,141
Accounts payable, compensation and
benefits paid with common stock 617,803 254,795
Provision for excess inventory 3,089,841
Change in operating assets and liabilities:
Inventories 709,784 (979,273)
Payables to GP Strategies 612,469 78,931
Accounts and other receivables 354,491 687,636
Prepaid expenses and other current
assets (143,551) (14,278)
Accounts payable and accrued expenses 413,899 (211,227)
Loss on repurchase of preferred stock 737,037
------------ ------------
Net cash used for operations (1,172,655) (11,808,497)
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment (206,697)
Reductions to other assets 90,050 35,000
------------ ------------
Net cash provided by (used for)
investing activities 90,050 (171,697)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 454,500
Net proceeds from preferred stock
offering 7,179,000
Repurchase of preferred stock (7,916,037)
------------ ------------
Net cash used for financing activities (282,537)
------------ ------------
Net decrease in cash and cash equivalents (1,082,605) (12,262,731)
Cash and cash equivalents at beginning
of period 1,170,861 14,059,283
------------ ------------
Cash and cash equivalents at end of period $ 88,256 $ 1,796,552
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Finished goods $ 574,875 $ 3,443,786
Work in process 5,435,948 6,466,914
Raw materials 1,143,635 1,143,635
Less reserve for
excess inventory (7,154,458) (10,344,551)
--------------- ---------------
$ -- $ 709,784
=============== ===============
</TABLE>
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 of the Company's phase 3 studies of ALFERON N
Injection in HIV and HCV-infected patients, the Company had 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, inventories at December 31,
1998, reflect a reserve for excess inventory of $10,344,551. As of December 31,
1998, the Company estimated that the remaining inventory value represented
product to be sold within a one-year period. As of September 30, 1999, the
remaining inventory value at December 31, 1998 had been fully utilized and
therefore all remaining inventory is fully reserved.
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 September 30, 1999 and
December 31, 1998, as well as the loss per share and average outstanding shares
for the three months and nine months ended September 30, 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.
To date, the Company has made no payments on the GP Strategies Debt. 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 September 30, 1999, the Company had an accumulated
deficit of approximately $129.5 million. For the nine months ended September 30,
1999 and the years ended December 31, 1998, 1997 and 1996, the Company had
losses from operations of approximately $4.3 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 September 30, 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 and expenses, management
believes that the cash presently available will be sufficient to enable the
Company to continue operations through approximately November 30, 1999. If the
Company is unable to obtain additional funding, it will be forced to cease
operations. 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.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
As of October 25, 1999, the Company had an aggregate of $100,000 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.
On May 25, 1999, the Company announced that based upon a meeting with the
Food and Drug Administration regarding its Phase 3 clinical trial comparing
ALFERON N Injection against Schering Plough's Intron(R) A for the treatment of
previously untreated patients infected with hepatitis C virus, it would be
required to conduct an additional clinical study prior to filing for approval
with the FDA. The FDA advised the Company that the results of this trial were
insufficient to file for approval because the designed endpoint of the trial
(which required a showing of superiority in sustained normalization of liver
enzymes at the end of treatment and after six months of follow up) was not met.
At the present time, the Company does not have the resources necessary to
conduct an additional study.
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 would 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 September 30, 1999. To date, the Company has made no
payments on the Red Cross Liability.
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. To date, the Company has made
no payments on the GP Strategies Debt. 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 and expenses, management believes that the cash presently
available will be sufficient to enable the Company to continue operations
through approximately November 30, 1999. If the Company is unable to obtain
additional funding, it will be forced to cease operations. 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, NASDAQ advised the Company 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
NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1998
For the nine months ended September 30, 1999, the Company's revenues of
$1,984,462 included $1,984,185 from the sale of ALFERON N Injection and the
balance from sales of research products. Revenues of $1,186,726 for the nine
months ended September 30, 1998 included $1,093,578 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 $2,155,265 and $3,945,041
for the nine months ended September 30, 1999 and 1998, respectively. Idle
production costs in the nine months ended September 30, 1999 and 1998,
represented fixed production costs, which were incurred after production of
ALFERON N Injection was discontinued in April 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,
the Company recognizes revenues. In the nine months ended September 30, 1999,
the Company sold to wholesalers and other customers in the United States 16,088
vials of ALFERON N Injection, compared to 7,489 vials sold by the Company during
the nine months ended September 30, 1998. In addition, foreign sales of ALFERON
N Injection were 1,374 vials and 2,000 vials for the nine months ended
September30, 1999 and 1998, respectively.
In light of the results of the Company's Phase 3 studies of ALFERON N
Injection in HIV- and HCV-infected patients, the Company had 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 estimated that the remaining
inventory value represented product to be sold within a one-year period. As of
September 30, 1999, the remaining inventory value at December 31, 1998 had been
fully utilized and therefore all remaining inventory is fully reserved.
Research and development expenses during the nine months ended
September 30, 1999 of $2,456,765 decreased by $3,704,443 from $6,161,208 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 nine months ended September
30, 1999 were $1,675,846 as compared to $3,615,977 for the same period in 1998.
The decrease of $1,940,131 was principally due to decreases 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, 1999 and 1998. 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.
Interest income for the nine months ended September 30, 1999 was $5,377
as compared to $240,278 for the same period in 1998. The decrease of $234,901
was due to less funds available for investment in the current period.
As a result of the foregoing, the Company incurred net losses of
$4,298,037 and $16,122,100 for the nine months ended September 30, 1999 and
1998, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1999
VERSUS
THREE MONTHS ENDED SEPTEMBER 30, 1998
For the three months ended September 30, 1999, the Company's revenues
of $998,275 were entirely from the sale of ALFERON N Injection. Revenues of
$638,634 for the three months ended September 30, 1998 included $634,612 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
$518,686 and $1,165,238 for the three months ended September 30, 1999 and 1998,
respectively. Idle production costs in the three months ended September 30, 1999
and 1998, represented fixed production costs, which were incurred after
production of ALFERON N Injection was discontinued in April 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,
the Company recognizes revenues. In the three months ended September 30, 1999,
the Company sold to wholesalers and other customers in the United States 8,191
vials of ALFERON N Injection, compared to 4,902 vials sold by the Company during
the three months ended September 30, 1998. In addition, foreign sales of ALFERON
N Injection were 1,020 vials and zero vials for the three months ended September
30, 1999 and 1998, respectively.
Research and development expenses during the three months ended
September 30, 1999 of $513,776 decreased by $1,429,422 from $1,943,198 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.
General and administrative expenses for the three months ended
September 30, 1999 were $414,770 as compared to $1,065,389 for the same period
in 1998. The decrease of $650,619 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 September 30, 1999 and 1998. For the three months
ended September 30, 1998, receipts from GP Strategies for services provided to
GP Strategies by Company personnel amounted to $6,250.
Interest income for the three months ended September 30, 1999 was zero
as compared to $29,433 for the same period in 1998.
As a result of the foregoing, the Company incurred net losses of
$448,957 and $3,505,758 for the three months ended September 30, 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 a 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 has completed, remediated or replaced critical IT and non-IT
systems that were non-compliant or not compatible and then tested 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 completed its assessment of the reasonably likely worst
case scenario of Non-IT Systems and/or IT Systems failures and related
consequences. 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 are based in part on the assessment of the
magnitude and probability of potential risks, 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.
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.
The Company has initiated communications with third party vendors 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 continues the
development of contingency plans to address potential business disruptions,
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
September 30, 1999.
<PAGE>
INTERFERON SCIENCES, INC.
September 30, 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: November 12, 1999 By: /s/ Lawrence M. Gordon
----------------------
Lawrence M. Gordon
Chief Executive Officer
DATE: November 12, 1999 By: /s/ Donald W. Anderson
----------------------
Donald W. Anderson
Controller
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