UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended December 31, 1999
/ / 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter Period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No --
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of April 1, 2000, the aggregate market value of the outstanding shares
of the registrant's Common Stock, par value $.01 per share, held by
non-affiliates (assuming for this calculation only that all officers and
directors are affiliates) was approximately $14,500,000 based on the last
reported sale price of such stock on the OTC Bulletin Board on March 31, 2000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 1, 2000
-----------------------------------
Common Stock, par value $.01 per share 5,387,473 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2000 Annual Meeting
of Stockholders are incorporated by reference into Part III hereof.
<PAGE>
TABLE OF CONTENTS
Page
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 36
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management 37
Item 13. Certain Relationships and Related Transactions 37
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 38
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical
company engaged in the study, manufacture, and sale of pharmaceutical products
based on its highly purified, multispecies, natural source alpha interferon
("Natural Alpha Interferon"). The Company's ALFERON N Injection(R) (Interferon
Alfa-n3) product has been approved by the United States Food and Drug
Administration ("FDA") for the treatment of certain types of genital warts and
the Company has been studying its potential use in the treatment of HIV,
hepatitis C, and other indications. The Company has also been studying ALFERON N
Gel(R) and ALFERON LDO(R), the Company's topical and oral formulations of
Natural Alpha Interferon, for the potential treatment of viral and immune system
diseases.
(b) Financial Information about Business Segments
The Company operates as a single line of business. For the years ended
December 31, 1999, 1998 and 1997, domestic sales totaled $2,204,437, $1,716,157
and $2,613,430, respectively, and foreign sales (primarily Germany) totaled
$124,508, $214,500 and $314,155, respectively. All identifiable assets are
located in the United States.
(c) Narrative Description of Business
Scientific Background
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified four major classes of human
interferon: alpha, beta, gamma, and omega. The Company's three ALFERON products
contain a form of alpha interferon. The worldwide market for injectable alpha
interferon-based products has experienced rapid growth and various alpha
interferon injectable products are approved for 17 major medical uses worldwide.
Alpha interferons are manufactured commercially in three ways: by
genetic engineering, by cell culture, and from human white blood cells. In the
United States, all three of these types of alpha interferon are approved for
commercial sale.
The Company believes that the potential advantages of Natural Alpha
Interferon over recombinant interferons may be based upon their respective
molecular compositions. Natural Alpha Interferon is composed of a family of
proteins containing many different molecular species of interferon. In contrast,
recombinant alpha interferons each contain only a single species. Researchers
have reported that the various species of interferon may have differing
antiviral activity depending upon the type of virus. Natural Alpha Interferon
presents a broad complement of species which the Company believes may account
for its higher efficacy in laboratory studies with the HIV virus compared with
that of recombinant alpha interferon 2a and 2b (ROFERON(R) A and INTRON(R) A,
respectively). Natural Alpha Interferon is also glycosylated (partially covered
with sugar molecules). Such glycosylation is not present on the currently
marketed recombinant alpha interferons. The Company believes that the absence of
glycosylation may be, in part, responsible for the production of
interferon-neutralizing antibodies seen in patients treated with recombinant
alpha interferon. Although cell cultured-derived interferon is also composed of
multiple glycosylated alpha interferon species, the types and relative quantity
of these species are different from the Company's Natural Alpha Interferon.
The production of Natural Alpha Interferon is dependent upon a supply
of human white blood cells and other essential materials. The Company obtains
white blood cells from FDA- licensed blood donor centers.
ALFERON N Injection
Approved Indication. On October 10, 1989, the FDA approved ALFERON N
Injection for the intralesional treatment of refractory (resistant to other
treatment) or recurring external genital warts in patients 18 years of age or
older. Substantially all of the Company's revenues, to date, have been generated
from the sale of ALFERON N Injection for such treatment. Genital warts, a
sexually transmitted disease, are caused by certain types of human papilloma
viruses. A published report estimates that approximately eight million new and
recurrent cases of genital warts occur annually in the United States alone.
Genital warts are usually treated using caustic chemicals or through
physical removal methods. These procedures can be quite painful and effective
treatment is often difficult to achieve. A topical formulation of an interferon
inducer was approved by the FDA in 1997 for the treatment of genital warts. To
date, the Company does not believe that such approval has had a material adverse
effect on the sales of Alferon N Injection.
Clinical Trials for New Indications. In an effort to obtain approval to
market ALFERON N Injection for additional indications in the United States and
around the world, the Company has conducted, and is currently planning, various
clinical trials for new indications.
HIV-infected patients. The Human Immunodeficiency Virus ("HIV")
infection is at epidemic levels in the world. The World Health Organization
projects that this virus will affect 30 to 40 million people by the year 2000.
HIV infection usually signals the start of a progressive disease that
compromises the immune systems, ultimately resulting in Acquired Immune
Deficiency Syndrome ("AIDS"). The United States Centers for Disease Control
estimates that as of the middle of 1999, there were approximately 285,000 people
living with AIDS in the United States.
An article published in AIDS Research and Human Retroviruses in 1993 by
investigators at Walter Reed Army Institute of Research ("Walter Reed") in
collaboration with the Company's scientists indicated that the various
interferon species display vast differences in their ability to affect virus
replication. Walter Reed researchers found that the Company's Natural Alpha
Interferon was 10 to 100 times more effective than equal concentrations of
recombinant alpha interferon 2a and 2b, respectively, in blocking the
replication of HIV-1, the AIDS virus, in infected human cells (monocytes) in
vitro.
Moreover, the Company's scientists were able to separate members of the
interferon family in single protein fractions or clusters of proteins using
advanced fractionation techniques. The individual fractions were tested for
their ability to block HIV replication in the laboratory by researchers at
Walter Reed. They found that the unusual anti-HIV activity was attributable to
very specific fractions in the Company's product. The most active fractions are
not present in marketed recombinant interferon products.
This information provided additional support for a long-held belief of
the Company that its Natural Alpha Interferon has unique anti-viral properties
distinguishing it from recombinant interferon products. In addition, published
reports of trials using recombinant alpha interferon in asymptomatic
HIV-infected patients indicated that while high doses blocked virus production
in many cases, such doses resulted in high levels of adverse reactions, thereby
limiting the usefulness of the recombinant product. These facts led the Walter
Reed researchers to conduct a Phase 1 clinical trial with the Company's product
in asymptomatic HIV-infected patients.
In March 1992, Walter Reed launched a Phase 1 clinical trial with
asymptomatic HIV-infected patients to investigate the safety and tolerance, at
several dose regimens, of ALFERON N Injection, self-injected subcutaneously for
periods of up to 24 weeks. The investigators concluded that the treatment was
"surprisingly" well tolerated by patients, at all dose regimens. Preliminary
findings were reported by Walter Reed at the IXth International Conference on
AIDS in Berlin in 1993. The investigators also reported that the expected
interferon side effects, such as flu-like symptoms, were rare or absent in the
majority of patients treated with the Company's product.
Although this Phase 1 clinical trial was designed primarily to provide
safety information on various doses of ALFERON N Injection used for extended
periods of time, there were encouraging indications that certain disease
parameters had stabilized or even improved in certain patients by the end of the
experimental treatment.
In a follow-up analysis of patients' blood testing data, it was found
after an average of 16 months after treatment, CD4 white blood cell counts
remained essentially unchanged or were higher than at the onset of the trial in
11 of 20 patients. In addition, while on treatment, the amount of HIV detectable
in the patients' blood, as measured by polymerize chain reaction ("PCR")
testing, declined in a dose dependent manner (the greatest declines were
observed in the highest dose group). Also, none of the patients were found to
have developed neutralizing antibodies to Natural Alpha Interferon, even after
being treated three times weekly for many months. These results were reported at
the Third International Congress on Biological Response Modifiers held in
Cancun, Mexico in January 1995 and were selected for a poster presentation at
the 35th Interscience Conference on Antimicrobial Agents and Chemotherapy held
in San Francisco in September 1995. An extensive report was published in the May
1996 Issue of the Journal of Infectious Diseases.
It is important to note that, because of the small number of study
participants and the absence of a control group, no firm conclusions can be
drawn from these observations. However, based on the safety and preliminary
efficacy data obtained from this trial and after meeting with the FDA, the
Company conducted a multi-center Phase 3 clinical trial of ALFERON N Injection
in HIV-infected patients, which was completed in December 1997. This randomized,
double-blind, placebo-controlled trial was designed to evaluate the safety and
efficacy of ALFERON N Injection in the treatment of HIV-positive patients, some
of whom may have been taking other FDA-approved antiviral agents. Enrolled
patients were required to have CD4 white blood cell counts of at least 250 cells
per micrometer and a viral burden (as determined by PCR testing) of at least
2,000 RNA copies per milliliter. The Company completed the analysis of the data
collected from the 16 investigator sites and attended a pre-filing meeting with
the FDA in mid-March 1998. Shortly after that meeting, the FDA advised the
Company that, although ALFERON N Injection demonstrated biological activity in
this Phase 3 clinical trial, the results were insufficient for filing for
approval for this additional indication for ALFERON N Injection. While the
results over the course of treatment demonstrated benefits that were
statistically significant for the group of patients receiving ALFERON N
Injection and highly statistically significant for the subgroup of such patients
with high CD4 counts, the study's primary efficacy variable (reduction in viral
load) was not met at the time point specified in the protocol (end of
treatment). The FDA therefore indicated that an additional trial would be
necessary to evaluate further the efficacy of ALFERON N Injection for this
indication. The Company does not currently intend to pursue this program until
it obtains substantial additional funding or enters into collaboration with
another company for such purpose.
There can be no assurance that ALFERON N Injection for the treatment of
patients with HIV will be cost-effective, safe, and effective or that the
Company will be able to obtain FDA approval for such use. Furthermore, even if
such approval is obtained, there can be no assurance that such product will be
commercially successful or will produce significant revenues or profits for the
Company.
Hepatitis C. Chronic viral hepatitis is a liver infection caused by
various hepatitis viruses. The United States Centers for Disease Control
estimates that nearly four million people in the United States are presently
infected with the hepatitis C virus ("HCV"), a majority of whom become chronic
carriers and will suffer gradual deterioration of their liver and possibly
cancer of the liver. Several brands of recombinant interferon and a
cell-cultured interferon have been approved for the treatment of hepatitis C in
the United States and by various regulatory agencies worldwide. See "Business -
ALFERON N Injection - Competition." However, reports have indicated that many
patients either do not respond to treatment with the recombinant products or
relapse after treatment. The Company has conducted three multi-center,
randomized, open-label, dose ranging Phase 2 clinical trials utilizing ALFERON N
Injection with patients chronically infected with HCV. The objective of the
Company's HCV clinical studies was to compare the safety and efficacy of
different doses of Natural Alpha Interferon injected subcutaneously in naive
(previously untreated), refractory (unsuccessfully treated with recombinant
interferon), and relapsing (initially responded to recombinant interferon but
later relapsed) patients.
The results in naive patients indicated a significant dose-dependent
response at the end of treatment favoring the highest dose group. In addition,
treatment of naive patients with ALFERON N Injection did not produce any
interferon-neutralizing antibodies. An oral presentation of the results in naive
patients was given at the American Association for the Study of Liver Diseases
("AASLD") meeting that took place in November 1995. The results of this study
were published in the February 1997 issue of Hepatology.
The results in refractory patients indicated a significant
dose-dependent response at the end of treatment favoring the highest dose group.
A poster presentation of the results in refractory patients was given at the
AASLD meeting that took place in November 1995.
As a result of the promising results obtained in the study on naive
patients, the study on relapsing patients, which was accruing patients slowly,
was terminated early so that the Company could concentrate its limited resources
on pursuing the Phase 3 trials in naive patients, discussed below.
After meeting with the FDA, the Company commenced in 1996 a Phase 3
multi-center, open label, randomized, controlled clinical trial designed to
evaluate the safety and efficacy of ALFERON N Injection in naive chronic
hepatitis C patients. The trial was conducted at 26 sites located in the United
States and Canada and a total of 321 people were treated. The trial consisted of
a 24-week treatment phase and 24-week follow-up and also included an interim
analysis after approximately one-half of the enrolled patients completed the
treatment and follow-up phases.
On April 2, 1998, the Company announced it had completed the interim
analysis of the results for approximately half of the enrolled patients. If the
results of the interim analysis had demonstrated at a very high level of
statistical significance that ALFERON N Injection is effective, the Company
intended to seek FDA approval while continuing to follow the other enrolled
patients. However, while the efficacy analysis indicated that ALFERON N
Injection and the control treatment (an approved therapy) appeared to yield
similar results, the study protocol required a showing of superiority in order
to meet the criteria for statistical significance in the interim analysis.
Therefore the Company did not seek FDA approval based on the interim analysis.
The Phase 3 study was completed in 1998. The Company completed the final
analysis of the data in March 1999, and met with the FDA to determine the
acceptability of the results for filing purposes. At that meeting, the FDA
advised the Company that the results of the 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. Therefore, the FDA informed the
Company that an additional trial would be required to further evaluate the
efficacy of Alferon N Injection for this indication. At the present time, the
Company does not have the resources necessary to conduct an additional study and
does not plan to initiate such a study unless it can find a sponsor to continue
this program.
HIV and Hepatitis C Co-Infected Patients. In December 1997, patient
enrollment commenced in a Phase 2 multi-center, open label clinical trial
designed to evaluate the safety and efficacy of ALFERON N Injection in patients
co-infected with HIV and HCV. This study has been concluded and the data is
presently being analyzed.
Multiple Sclerosis. Multiple sclerosis ("MS") is a chronic, sometimes
progressive, immune-mediated disease of the central nervous system that is
believed to occur in genetically predisposed individuals following exposure to
an environmental factor, such as virus infection. The disease affects an
estimated 250,000 to 350,000 people in the United States, primarily young
adults. Symptoms of MS, including vision problems, muscle weakness, slurred
speech, and poor coordination, are believed to occur when the patient's own
cells attack and ultimately destroy the insulating myelin sheath surrounding the
brain and spinal cord nerve fibers, resulting in improper transmission of
signals throughout the nervous system.
In the United States, two recombinant forms of beta interferon have
been approved for the treatment of relapsing-remitting MS. However, reports in
the scientific literature and elsewhere have indicated that the significant
adverse reactions associated with the treatments may limit their usefulness for
a subset of patients. In addition, Copaxone(R), a non-interferon product was
approved by the FDA to treat relapsing-remitting multiple sclerosis. Based in
part on encouraging anecdotal reports on the use of ALFERON N Injection in MS
patients, as well as a recent poster presentation entitled "Management of
Interferon-(beta)1b (Betaseron) Failures in MS With Interferon-(alpha)n3
(Alferon N)", given at the Charcot Foundation Meeting in Switzerland in March
2000, the Company would like to conduct a clinical trial in order to investigate
the potential use of ALFERON N Injection for the treatment of MS. However, the
timing of this trial will be dependent upon the Company's ability to obtain
additional funding or a sponsor.
Other HPV Indications or Routes of Administration. The Company is also
evaluating whether to investigate the potential use of ALFERON N Injection by
subcutaneous systemic administration for the treatment of genital warts.
Currently, the approved route of administration is intralesional and requires up
to 16 office visits to the medical practitioner. If subcutaneous systemic
treatment were found to be efficacious, patients could potentially
self-administer the product as they have done in many of the clinical trials
conducted by the Company. This would make treatment considerably more convenient
for patients.
In addition, in the following two publications: "Adjuvant Interferon
for Anal Condyloma, A Prospective Randomized Trial", Dis Colon Rectum 1994, and
"Interferon as an Adjuvant Treatment for Genital Condyloma Acuminatum", Intl J
Gynecol Obstet 1995, in which ALFERON N Injection was studied in conjunction
with other treatments for genital warts, the authors reported that the addition
of ALFERON N Injection to the other ablative therapies significantly reduced the
recurrence rates. The Company is evaluating whether to conduct clinical trials
to further investigate the potential use of ALFERON N Injection as an adjuvant
to other genital wart treatments in the event it obtains additional funding.
Marketing and Distribution. The Company has focused its efforts in the
United States on making additional sales to existing customers. The Company does
not have its own sales force. In June 1998, the Company entered into an
agreement appointing Integrated Commercialization Solutions, Inc. ("ICS"), a
subsidiary of Bergen Brunswig Corporation, as the sole United States distributor
of ALFERON N Injection. ICS distributes ALFERON N Injection to wholesalers
throughout the United States. The Company does not believe that the loss of any
one wholesaler would have a material adverse effect on the Company's sales or
Financial position. Pursuant to such agreement, ICS also provides clinical and
product information, reimbursement information and services, and management of
patient assistance services. Most of the Company's sales have been in the United
States.
Manufacturing. The purified drug concentrate utilized in the
formulation of ALFERON N Injection is manufactured in the Company's facility
located in New Brunswick, New Jersey, and ALFERON N Injection is formulated and
packaged at a production facility located in McPherson, Kansas and operated by
Abbott Laboratories Inc. ("Abbott") pursuant to a processing and supply
agreement entered into in September 1994. Under the terms of the agreement with
Abbott, the Company pays Abbott an agreed price to formulate and package ALFERON
N Injection in accordance with specifications provided by the Company. At the
present time, the Company has discontinued production of crude interferon. The
Company intends to convert intermediates to finished product as needed. The
Company believes it has produced sufficient inventory of these intermediates to
satisfy its clinical and commercial needs for the foreseeable future. See
"Business - ALFERON N Injection - Clinical Trials for New Indications,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business - Governmental Regulation," and "Properties."
Competition. Presently, INTRON A, manufactured by Schering Plough Corp.
("Schering"), is the one other injectable interferon product approved by the FDA
for the treatment of genital warts. INTRON A is made from recombinant alpha
interferon. Since the production of INTRON A is not dependent on a source of
human blood cells, it may be able to be produced in greater volume and at a
lower cost than ALFERON N Injection. Currently, the Company's wholesale price on
a per unit basis of ALFERON N Injection is substantially higher than that of
INTRON A. In 1997, 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of external genital and perianal warts. ALFERON N Injection also
competes with surgical, chemical, and other methods of treating genital warts.
The Company cannot assess the impact from products developed by the Company's
competitors or advances in other methods of the treatment of genital warts on
the commercial viability of its product.
If and when the Company obtains approvals for additional indications of
ALFERON N Injection, it expects to compete primarily on the basis of product
performance and price with a number of pharmaceutical companies, both in the
United States and abroad.
A number of synthetic antiviral compounds have been approved in the
United States and certain foreign countries for the treatment, primarily in
combination therapy, of HIV infection and AIDS. Shown in Table 1 below are the
drugs, which are currently approved in the United States for the treatment of
patients infected with HIV.
<TABLE>
<CAPTION>
Table 1: HIV Antiretroviral Drugs Approved in the United States
<S> <C> <C> <C> <C>
Class of Drug Brand Name Generic Name Manufacturer
- ----------------------------------------------------------------------------------------------
Nucleoside Reverse Combivir(R) Zidovudine + Lamivudine Glaxo Wellcome
Transcriptase Inhibitors Epivir(R) Lamivudine Glaxo Wellcome
Hivid(R) Zalcitabine Hoffmann-La Roche
Retrovir(R) Zidovudine Glaxo Wellcome
Videx(R) Didanosine Bristol-Myers Squibb
Zerit(R) Stavudine Bristol-Myers Squibb
Ziagen(R) Abacavir Glaxo Wellcome
Non-Nucleoside Reverse Rescriptor(R) Delavirdine Pharmacia & Upjohn
Transcriptase Inhibitors Viramune(R) Nevirapine Boehringer Ingelheim
Sustiva(R) Efavirenz DuPont-Merck
Protease Inhibitors Crixivan(R) Indinavir Merck & Co.
Invirase(R) Saquinavir Hoffmann-La Roche
Fortovase(R) Saquinavir Hoffmann-La Roche
Norvir(R) Ritonavir Abbott Laboratories
Viracept(R) Nelfinavir Agouron Pharmaceuticals
Agenerase(R) Amprenavir Glaxo Wellcome
</TABLE>
Schering's recombinant interferon product is already approved for the
treatment of hepatitis C and hepatitis B in the United States and other markets,
as well as for many other medical uses. Roche Pharmaceuticals's recombinant
interferon product has been approved for the treatment of hepatitis C in the
United States and for other medical uses in the United States and in foreign
countries. In addition, Amgen Inc.'s recombinant interferon, Infergen(R), also
known as consensus interferon product, as well as Glaxo Wellcome's cell culture
derived interferon, Wellferon(R), are approved for the treatment of hepatitis C
in the United States.
In the United States, two recombinant forms of beta interferon, Biogen,
Inc.'s Avonex(R) and Berlex Laboratories' Betaseron(R) as well as Teva Marion
Partners' Copaxone(R), a non-interferon product, have been approved for the
treatment of relapsing-remitting MS.
Many of the Company's potential competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources and
product development, manufacturing, and marketing capabilities than the Company
or its marketing partners. Therefore, there can be no assurance that, if the
Company is able to obtain regulatory approval of ALFERON N Injection for the
treatment of any additional diseases, it will be able to achieve any significant
penetration into those markets.
ALFERON N Gel
ALFERON N Gel is a topical, Natural Alpha Interferon preparation which
the Company has developed and believes has potential in the treatment of
cervical dysplasia, intravaginal warts, and mucocutaneous and genital herpes.
Cervical Dysplasia. Affecting approximately 500,000 to one million
women each year in the United States alone, cervical dysplasia, or abnormal
cervical cells, has been identified as a potential precursor to cervical cancer.
Cervical cancer strikes approximately 13,000 women in the United States each
year, causing 5,000 deaths, and is responsible for more than half a million
deaths worldwide. Cervical dysplasia is caused by certain strains of the human
papillomavirus ("HPV"), the same family of viruses that causes genital warts.
The Company has completed a small Phase 2 dose-ranging study using ALFERON N Gel
at the Columbia-Presbyterian Medical Center in New York for the treatment of
mild cervical dysplasia. Pap smears, identification tests for the presence and
type of virus, and cervical biopsies indicated that ALFERON N Gel appears to
have the potential for improving the course of cervical dysplasia as indicated
in the majority of patients who completed the treatment course. The Company
presently does not plan to start additional clinical trials for this indication
unless it can find a sponsor.
Other Widespread Dermatological Lesions Potentially Treatable with
ALFERON N Gel Therapy. Nearly 30 million people in the U.S. are infected with
the herpes simplex type II virus, which is the infectious virus that causes
genital herpes. Up to 500,000 new cases are reported each year, according to the
Alan Guttmacher Institute. To date, there is no cure for genital herpes.
Preliminary findings with a previous formulation of recombinant interferon in
the Company's proprietary gel showed significant shortening of the contagious
period and relief of symptoms, but the Company will not start clinical trials
unless additional funding or a sponsor is secured.
ALFERON N Gel may also be beneficial to immunocompromised patients with
mucocutaneous herpes. Patients with this form of herpes suffer from persistent
skin lesions, which have become resistant to existing therapies. The Company
will not start clinical trials for this indication unless additional funding or
a sponsor is secured.
ALFERON N Gel may also be of benefit to patients who have intravaginal
warts. However, the Company will not start clinical trials for this indication
unless additional funding or a sponsor is secured.
Marketing and Distribution. The Company does not have any marketing
agreement with respect to ALFERON N Gel and, if FDA approval is obtained, no
assurance can be given that the Company will be able to enter into a marketing
agreement on terms satisfactory to the Company. The Company may also choose to
market ALFERON N Gel itself if FDA approval is obtained.
Competition. The Company believes that three antiviral products are
presently sold in the United States for the treatment of recurrent genital
herpes: Zovirax(R) (manufactured by Glaxo Wellcome, Inc.) which contains
acyclovir and is administered orally, topically, or intravenously, Famvir(R)
(manufactured by SmithKline Beecham Pharmaceuticals) which contains famcyclovir
and is administered orally, and Valtrex(R) (manufactured by Glaxo Wellcome,
Inc.) which contains valacyclovir and is also administered orally. The only
current treatment for cervical dysplasia in the United States is surgery, while
intravaginal warts are treated with ablative therapy.
ALFERON LDO
ALFERON LDO is a low dose oral liquid Natural Alpha Interferon
preparation which the Company has developed and believes has potential in the
treatment of several quality-of-life parameters of importance to patients
infected with HIV.
Clinical Trials for ALFERON LDO. As described below, the Company has
completed two Phase 2 clinical trials for its ALFERON LDO formulation for the
treatment of HIV-infected patients. In addition, a National Institute of Allergy
and Infectious Diseases ("NIAID") sponsored Phase 3 trial in HIV-infected
patients has been concluded in which ALFERON LDO was included as one of the
treatments.
HIV-infected patients. The Company has completed two double-blind
studies at Mount Sinai Medical Center in New York involving ALFERON LDO. One was
a placebo-controlled study in AIDS-related complex ("ARC") patients, and the
other was a dose ranging study in AIDS or ARC patients. The results from the
placebo-controlled study did not demonstrate a significant improvement or
alteration in the expected progression of the disease, although patients
receiving ALFERON LDO reported greater energy and appetite than those given the
placebo. The results from the dose ranging study indicate that one of the doses
may promote weight gain and an increase in energy and overall well-being. At the
insistence of AIDS groups and community-based physicians who had been using
low-dose oral formulations of interferon in their practice, the NIAID launched
in 1996 a Phase 3 trial of three preparations of low-dose oral interferon,
including ALFERON LDO and matching placebos. An advisory committee comprised of
representatives from the Company and other interferon manufacturers, AIDS
Support groups, the FDA, and the National Institutes of Health was organized to
design this multicenter study, which examined the effectiveness of low dose oral
alpha interferon therapy on several quality-of-life parameters of importance to
patients infected with HIV. Patients enrolled in the study were randomly
assigned to one of four treatment groups, with all participants receiving three
preparations. In three of the groups, patients received one active compound and
two placebos. Patients in the fourth group received only placebos. This was a
double-blind study and had a six-month treatment phase and six-month follow-up
period. While in the study, patients were permitted to take antiretroviral drugs
and therapies against opportunistic infections. The Company provided clinical
quantities of ALFERON LDO for use in the study.
In June 1997, NIAID terminated enrollment in this study with 247 out of
the required 560 patients enrolled. Even though the trial did not enroll the
number of patients the advisory committee had deemed necessary to determine if
the drugs were effective, the results were recently published in the Journal of
Acquired Immune Deficiency Syndromes in December of 1999. In that article the
authors concluded: "Although the trial was designed to enroll 560 study subjects
and was prematurely terminated because of slow accrual and discontinuation of
participants, the small differences among the arms in the primary and secondary
endpoints do not support claims of efficacy for the measures studied." The
Company does not presently anticipate the further development of ALFERON LDO for
this use or any other use unless a sponsor is secured.
Marketing and Distribution. The Company does not have a marketing
agreement with respect to ALFERON LDO and, if FDA approval of ALFERON LDO is
obtained, no assurance can be given that the Company will be able to enter into
a marketing agreement for such products on terms satisfactory to the Company.
The Company may also choose to market ALFERON LDO itself if FDA approval is
obtained.
Competition. Under the terms of a licensing agreement (as amended, the
"Amarillo Agreement") with Amarillo Bioscience, Inc. (formerly Amarillo Cell
Culture Company, Incorporated) ("Amarillo") (i) the Company has the exclusive
right to sell ALFERON LDO, containing Natural Alpha Interferon, in the United
States and all foreign countries other than Japan, (ii) Amarillo and Pharma
Pacific Management Pty. Ltd. ("PPM"), a company which has also obtained a
license from Amarillo, each has the right to sell any interferon other than
Natural Alpha Interferon in the United States and all foreign countries other
than Japan, and (iii) Hayashibara Biochemical Laboratory has the right to sell
its low dose alpha interferon in Japan. See "Business -- Licenses and Royalty
Obligations." Therefore, with respect to low dose oral interferon products, the
Company will potentially compete with Amarillo and PPM in the United States and
in the rest of the world except Japan and with Hayashibara Biochemical
Laboratory in Japan. In addition, the Company will potentially compete with the
manufacturers of the synthetic antiviral compounds that have been approved in
the United States and certain foreign countries for the treatment of HIV and
AIDS. (See "Business -- ALFERON N Injection -- Competition").
Patents
In 1996, the Company was issued a United States patent, comprised of 15
claims, for Natural Alpha Interferon. The two major claims are for (i) a highly
purified Natural Alpha Interferon composition produced from human peripheral
blood leukocytes and (ii) an improved method to produce this composition. The
issuance of this patent gives the Company protection for the manufacture, use,
and sale of its Natural Alpha Interferon product in the United States and
prevents a competitor from producing or using equivalent products derived from
human peripheral blood leukocytes. Patents have also been issued in selected
foreign countries. In 1997, the Company was issued a second United States patent
which broadens the scope of the first one to cover certain individual, or
mixtures of, alpha interferon species present in Natural Alpha Interferon.
Also in 1996, the Company was issued a United States patent, comprised
of four claims that will expand the Company's portfolio on overall technologies
in the interferon field. The biological activities of interferon take place when
the interferon binds to Type 1-interferon receptor proteins, which are present
in various human cells. The major claim is the composition claim for an
interferon receptor protein specifically binding alpha and beta, but not gamma,
interferons. The receptor, which is isolated from a cancerous cell line, binds
both natural and recombinant alpha interferons and is a variant form of the
human interferon receptor (Type 1) which has been found in some cases of acute
leukemia. The claimed receptor protein could be used to produce anti-receptor
antibodies that may have potential use in diagnostic testing for tumors or
cancers which have an abnormal number of receptors. The claimed receptor protein
may also have potential use as a therapeutic agent for those diseases, which
have aberrant production of interferon, by binding to and neutralizing the
excess interferon.
The United States Patent and Trademark Office has also issued two
patents to the Company, which disclose and claim topical interferon
preparations. The patents encompass interferon preparations for the topical
delivery of one or more interferons to the site of a disease which responds
therapeutically to interferon, and a system for delivering interferon topically
which prevents oxidation of the protein. The inventions specifically encompass
the topical treatment for treating viral diseases, such as herpes genitalis,
with alpha interferon.
In 1999, the Company was issued a United States patent, comprised of 16
claims, that describes an innovative method for recovery of white blood cells
from recycled filters. Major blood centers in the United States and foreign
countries have been adopting a process to use filters to deplete white blood
cells (leukoreduction) from plasma, red blood cells, platelets, and other blood
preparations. Typically, these filters which contain a large amount of white
blood cells are discarded. The new invention provides an efficient back-flushing
method to recover functional white blood cells from these filters. The white
blood cells recovered can be used for production of interferons and other
cytokines for use as therapeutic products. They can also be used for further
isolation of subsets of white blood cells for development of new immunological
products. This invention protects the Company's ability to utilize white blood
cells collected in the filters for interferon production when the leukoreduction
process is uniformly implemented in blood centers. An international patent
application was filed in December 1998.
Licenses and Royalty Obligations
F. Hoffmann-LaRoche Ltd. and Hoffmann-La Roche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. In 1995, the Company obtained a non-exclusive
perpetual license from Hoffmann (the "Hoffmann Agreement") which grants the
Company the worldwide rights to make, use, and sell, without a potential patent
infringement claim from Hoffmann, any formulation of Natural Alpha Interferon.
The Hoffmann Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann has patent rights covered by the Hoffmann Agreement
(the "Hoffmann Territory") to any third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann,
which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to
pay Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha
Interferon products by the Company in an amount equal to (i) 8% of net sales in
the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of
products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales
in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. The Hoffmann Agreement can be terminated by the Company on 30 days'
notice with respect to the United States patent, any individual foreign patent,
or all patents owned by Hoffmann. If the Hoffmann Agreement is terminated with
respect to the patents owned by Hoffmann in a specified country, such country is
no longer included in the Hoffmann Territory. Accordingly, the Company would not
be permitted to market any formulation of alpha interferon in such country.
In 1989, the Company entered into the Amarillo Agreement. Amarillo,
which is located in Amarillo, Texas, is in the business of the research and
development of animal health products and became a public company in 1996. Under
the terms of the Amarillo Agreement, the Company has a non-exclusive license
under all of Amarillo's issued patents, patent applications, and "know-how"
relating to the treatment of humans by the oral administration of Natural Alpha
Interferon in low doses. In addition, Amarillo has the right to purchase the
Company's Natural Alpha Interferon for use in the animal health market and is
obligated to pay royalties to the Company based upon sales using the Company's
Natural Alpha Interferon.
The Company will be obligated to pay Amarillo royalties of 10% on the
sales of Natural Alpha Interferon products using Amarillo's patented technology
as determined under the Amarillo Agreement. In addition, the Company is a party
to certain license agreements, including the Hoffmann Agreement, pursuant to
which it is obligated to pay royalties based upon commercial exploitation of
ALFERON N Gel and ALFERON LDO. Under the terms of such license agreements, the
Company would pay royalties of up to 13.5% and 19.5% of net sales of ALFERON N
Gel and ALFERON LDO, respectively.
In addition, the Company agreed to pay GP Strategies Corporation ("GP
Strategies"), formerly named National Patent Development Corporation, a royalty
of $1 million in connection with the acquisition of certain intellectual
property and technology rights from GP Strategies. Such amount is payable if and
when the Company generates income before taxes, limited to 25% of such income
before income taxes per year until the amount is paid in full. To date, the
Company has not generated income before taxes and therefore has not paid
royalties to GP Strategies.
Governmental Regulation
Regulations imposed by U.S. federal, state, and local authorities, as
well as their counterparts in other countries, are a significant factor in the
conduct of the research, development, manufacturing, and marketing activities
for present and proposed products developed by the Company.
The Company's or its licensees' potential products will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human medical products are subject to rigorous pre-clinical and
clinical testing and other approval procedures by the FDA in the United States
and similar health authorities in foreign countries. Various federal and, in
some cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping, and marketing of such
products, including the use, manufacture, storage, handling, and disposal of
hazardous materials and certain waste products. The process of obtaining these
approvals and the subsequent compliance with applicable federal and foreign
statutes and regulations involves a time-consuming process and requires the
expenditure of substantial resources.
The effect of government regulation may be to delay for a considerable
period of time or prevent the marketing of any product that the Company may
develop and/or impose costly procedures on the Company's activities, the result
of which may be to furnish an advantage to the Company's competitors. Any delay
in obtaining or failure to obtain such approvals would adversely affect the
marketing of the Company's products and the ability to earn product revenue.
Before testing of any agents with potential therapeutic value in
healthy human test subjects or patients may begin, stringent government
requirements for pre-clinical data must be satisfied. These data, obtained from
studies in several animal species, as well as from laboratory studies, are
submitted in a Notice of Claimed Investigational Exemption for a New Drug or its
equivalent in countries outside the U.S. where clinical studies are to be
conducted. If the necessary authorizations are received, the Company then
conducts clinical tests of its products on human beings at various unaffiliated
medical centers and institutions. Initial trials (Phase 1) are conducted on a
small number of volunteers to determine whether the drug is safe for human
beings. If the initial trials demonstrate the safety of the product, trials
(Phase 2) are then conducted on patients affected with the disease or condition
under investigation to establish the proper dose and dosing interval. The
findings of these trials are then used to design and implement large-scale
controlled trials (Phase 3) to provide statistical proof of effectiveness and
adequate evidence of safety to meet FDA and/or foreign approval requirements.
The FDA closely monitors the progress of each of the phases of clinical
testing and may, at its discretion, re-evaluate, alter, suspend, or terminate
the testing based on the data which have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient. Estimates of the total time
required for completing clinical testing vary between four and ten years. Upon
successful completion of clinical testing of a new drug, a company typically
submits a New Drug Application ("NDA"), or for biological products such as
Natural Alpha Interferon, a Product and Establishment License Applications
("PLA/ELA") to the FDA summarizing the results and observations of the drugs
during the clinical trials.
Each facility, in which products are produced and packaged, whether
operated by the Company or a third party, must meet the FDA's standards for
current good manufacturing practices and must also be approved prior to
marketing any product produced or packaged in such facility. Any significant
change in the production process which may be commercially required, including
changes in sources of certain raw materials, or any change in the location of
the production facilities will also require FDA approval. To the extent a
portion of the manufacturing process for a product is handled by an entity other
than the Company, the Company must similarly receive FDA approval for the other
entity's participation in the manufacturing process. The Company has entered
into an agreement with Abbott, pursuant to which Abbott formulates and packages
ALFERON N Injection. The Company presently has a biologic establishment license
for the facilities in which it produces ALFERON N Injection, which includes the
facilities in which Abbott formulates and packages ALFERON N Injection. In
addition, FDA approval would have to be obtained if the Company should choose to
use an outside formulator and/or packager for ALFERON N Gel or ALFERON LDO.
Once the manufacture and sale of a product is approved, various FDA
regulations govern the production processes and marketing activities of such
product. A post-marketing testing, surveillance, and reporting program may be
required to monitor the product's usage and effects. Product approvals may be
withdrawn, or other actions may be ordered, if compliance with regulatory
standards is not maintained.
Each individual lot of Natural Alpha Interferon produced must be tested
for compliance with specifications and released for sale by the FDA prior to
distribution in the marketplace. Even after initial FDA marketing approval for a
product has been granted, further studies may be required to provide additional
data on safety or efficacy; to obtain approval for marketing a product as a
treatment for specific diseases other than those for which the product was
originally approved; to change the dosage levels of a product; to support new
safety or efficacy claims for the product; or to support changes in
manufacturing methods, facilities, sources of raw materials, or packaging.
In many markets, effective commercialization also requires inclusion of
the product in national, state, provincial, or institutional formularies or cost
reimbursement systems. The impact of new or changed laws or regulations cannot
be predicted with any accuracy. The Company uses its own staff of regulatory
affairs professionals and outside consultants to enable it to monitor
compliance, not only with FDA laws and regulations, but also with state and
foreign government laws and regulations.
Promotional and educational communications by the Company and its
distributors also are regulated by the FDA and are governed by statutory and
regulatory restrictions and FDA policies regarding the type and extent of data
necessary to support claims that may be made. The Company currently does not
have data adequate to satisfy FDA requirements with respect to potential
comparative claims between Natural Alpha Interferon and competing recombinant
interferon products.
For marketing outside the United States, the Company will also be
subject to foreign regulatory requirements governing human clinical trials,
manufacturing, and marketing approval for drugs and other medical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country. In addition to
its United States approval, ALFERON N Injection has received regulatory approval
in Mexico, Germany, Hong Kong, and Singapore, and registration filings have been
submitted in certain other countries.
Under certain circumstances, the Company may be required to obtain FDA
authorization to export products for sale in foreign countries. For instance, in
most cases, the Company may not export products that have not been approved by
the FDA unless it first obtains an export permit from the FDA. However, these
FDA export restrictions generally do not apply if the Company's products are
exported in conformance with their United States approvals or are manufactured
outside the United States. At the present time, the Company does not have any
foreign manufacturing facilities.
Research Staff and Employees
As of March 15, 2000, the Company had 35 employees, 15 of whom work
less than full time. Of the 35 employees, 6 hold Ph.D. degrees, 1 holds an M.D.
degree and 13 hold other degrees in scientific or technical fields. Of such
employees, approximately 6 were engaged in research and product development, 9
were engaged in quality control, regulatory and quality assurance and product
and process improvement for manufacturing, 8 were engaged in engineering and
maintenance, 3 were engaged in medical affairs and 9 were general and
administrative personnel.
Research and Development
During the years ended December 31, 1999, 1998, and 1997, the Company
expended approximately $3.1 million, $8.7 million, and $11.9 million,
respectively for research and development. Substantially all of these
expenditures were for Company-sponsored research and development programs.
Executive Officers of the Registrant
The following table sets forth the names of the principal executive
officers of the Company as of March 15, 2000 and their positions with the
Company. The principal business experience of the executive officers for the
last five years is also described below.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
Samuel H. Ronel, Ph.D 63 Chairman of the Board
Lawrence M. Gordon 46 Chief Executive Officer and a
Director
Stanley G. Schutzbank, Ph.D., R.A.C. 54 President and a Director
Donald W. Anderson 50 Controller (Principal
Accounting and Financial
Officer) and Secretary
Mei-June Liao, Ph.D. 48 Vice President, Research and
Development
James R. Knill, M.D. 67 Vice President, Medical Affairs
Robert P. Hansen 56 Vice President, Manufacturing
</TABLE>
Samuel H. Ronel, Ph.D. has been Chairman of the Board since February
1997 and was Vice Chairman of the Board from January 1996 to February 1997 and
President, Chief Executive Officer, and a director of the Company from 1981 to
January 1996. He was responsible for the interferon research and development
program since its inception in 1979. Dr. Ronel joined GP Strategies in 1970 and
served as the Vice President of Research and Development of GP Strategies and as
the President of Hydro Med Sciences, a division of GP Strategies, from 1976 to
September 1996. Dr. Ronel served as President of the Association of
Biotechnology Companies, an international organization representing United
States and foreign biotechnology firms, from 1986-88 and has served as a member
of its Board of Directors until 1993. Dr. Ronel was elected to the Board of
Directors of the Biotechnology Industry Organization from 1993 to 1995 and to
the Governing Body of the Emerging Companies Section from 1993 to 1997. Since
1999 he has been a member of the Technology Advisory Board of the New Jersey
Economic Development Authority.
Lawrence M. Gordon has been Chief Executive Officer and a director of
the Company since January 1996, Vice President of the Company from June 1991 to
January 1996, General Counsel of the Company from 1984 to January 1996.
Stanley G. Schutzbank, Ph.D. has been President of the Company since
January 1996, Executive Vice President of the Company from 1981 to January 1996,
and a director of the Company since 1981 and has been associated with the
interferon research and development program since its inception in 1979. He is
involved with all facets of administration and planning of the Company and has
coordinated compliance with FDA regulations governing manufacturing and clinical
testing of interferon, leading to the approval of ALFERON N Injection in 1989.
Dr. Schutzbank joined GP Strategies in 1972 and served as the Corporate Director
of Regulatory and Clinical Affairs of GP Strategies from 1976 to September 1996
and as Executive Vice President of Hydro Med Sciences from 1982 to September
1996. Dr. Schutzbank is a member of the Regulatory Affairs Professionals Society
and has served as Chairman of the Regulatory Affairs Certification Board from
its inception until 1994. Dr. Schutzbank received the 1991 Richard E. Greco
Regulatory Affairs Professional of the Year Award for his leadership in
developing the United States Regulatory Affairs Certification Program. In
September 1995, Dr. Schutzbank was elected to serve as President-elect in 1996,
President in 1997, and Chairman of the Board in 1998 of the Regulatory Affairs
Professionals Society.
Donald W. Anderson has been the Controller of the Company since 1981
and Corporate Secretary of the Company since 1988. He was an officer of various
subsidiaries of GP Strategies from 1976 to September 1996.
Mei-June Liao, Ph.D. has been Vice President, Research and Development
of the Company since March 1995. She has served as a Director, Research & Deve-
lopment since 1987, and held senior positions in the Company's Research &
Development Department since 1983. Dr. Liao received her Ph.D. from Yale Univ-
ersity and completed a three-year postdoctoral appointment at the Massachusetts
Institute of Technology under the direction of Nobel Laureate in Medicine,
Professor H. Gobind Khorana. Dr. Liao has authored many scientific publications
and invention disclosures.
James R. Knill, M.D. has been Vice President, Medical Affairs of the
Company since September 1996 and a consultant to the Company from November 1995
to September 1996. Dr. Knill was employed as Vice President of Medical Affairs
for Cytogen Corporation from 1994 to 1995 and as consultant for Cytogen
Corporation from 1995 to July 1996. He was previously employed for more than 20
years as Vice President of Medical Affairs for Bristol-Myers Squibb Company.
Robert P. Hansen has been Vice President, Manufacturing of the Company
since February 1997. He served as a Director of Manufacturing since 1995, and
held senior positions in the Company's Manufacturing Department since 1987.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
All of the Company's material operations and sales are conducted in the
United States.
Item 2. Properties
The Company's executive offices and its research and production
facilities are located at 783 Jersey Avenue, New Brunswick, New Jersey 08901,
and its telephone number is (732) 249-3250.
The Company owns two freestanding buildings comprising approximately
44,000 square feet which are located in New Brunswick, New Jersey. The Company
uses the facilities for staff offices, for the conversion of interferon
intermediates to finished product, for quality control and research activities,
and for the storage of raw, in process and finished materials.
The Company believes that its current facilities and equipment are
suitable and adequate for research and development and the conversion of
interferon intermediates to finished product, and in good condition.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Common Stock is traded on the OTC Bulletin Board and is quoted
under the symbol IFSC. On April 13, 1999, the Common Stock was delisted from the
NASDAQ National Market System for failure to maintain certain listing
requirements. The following table sets forth for each period indicated, the high
and low sales prices for the Common Stock as reported on the NASDAQ National
Market System through April 13, 1999 and on the OTC Bulletin Board commencing
April 14, 1999.
All prices have been adjusted for a one-for-five reverse stock split
effective as of January 6, 1999.
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8
------------ -----------
<S> <C> <C> <C> <C>
Quarter High Low High Low
- ------- ---- --- ---- ---
First....... $ 2 1/2 $ 3/4 $ 46 7/8 $ 18 29/32
Second.... 1 3/16 35 15/16 4 17/32
Third...... 1/2 7/32 6 1/4 2 1/2
Fourth..... 15/32 1/8 8 3/4 1 13/32
</TABLE>
As of April 1, 2000, the Company had 720 stockholders of record.
The Company has not paid any dividends on the Common Stock since its
inception and does not contemplate paying dividends on the Common Stock in the
foreseeable future.
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
- --------------------------------
(Thousands of dollars except per share data)
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $2,329 $ 2,007 $ 2,956 $ 2,092 $ 1,296
Cost of goods sold and excess/
idle production costs 3,552 6,533 1,858 1,400 3,076
Research and development
costs, net 3,060 8,655 11,864 6,400 3,726
General and administrative
expense 2,315 4,570 4,389 3,405 1,940
Loss from operations* (5,420) (20,841) (22,410) (12,426) (7,447)
Interest (expense and financing
costs) income, net (530) 253 670 441 75
Gain on sale of state net
operating loss carryovers 2,349
Net loss* (3,602) (21,325) (21,740) (11,986) (7,372)
Basic and diluted loss per
share of common stock** (.71) (6.67) (8.15) (5.98) (5.55)
Dividends NONE NONE NONE NONE NONE
- ----------------------------------
</TABLE>
*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 (see Note 3 to the Consolidated Financial Statements).
**All periods have been restated to reflect the effect of the one-for-four
reverse stock split effective as of March 21, 1997 and for the one-for-five
reverse stock split effective as of January 6, 1999 (see Note 10 to the
Consolidated Financial Statements).
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $6,256 $6,599 $24,153 $27,743 $13,953
Working capital (deficiency) (2,097) (1,889) 14,529 19,929 7,062
Stockholders' equity 557 2,103 20,214 25,374 12,827
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Since 1981, the Company has been primarily engaged in the research and
development of pharmaceutical products containing Natural Alpha Interferon. The
Company has experienced significant operating losses since its inception. The
Company received FDA approval in 1989 to market ALFERON N Injection in the
United States for the treatment of certain genital warts. ALFERON N Injection is
currently marketed and sold in the United States by the Company and in Mexico
and Germany by licensees. However, 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. The future revenues and profitability of, and availability of
capital for, biotechnology companies may be affected by the continuing efforts
of governmental and third-party payors to contain or reduce the costs of health
care through various means. The Company has limited financial resources 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. The Company
has primarily financed its operations to date through private placements and
public offerings of the Company's securities. This may be more difficult in the
future in light of the results to date of the Company's Phase 3 studies of
ALFERON N Injection in HIV- and HCV-infected patients. See "Business - ALFERON N
Injection - Clinical Trials for New Indications."
Liquidity and Capital Resources
As of April 10, 2000, the Company had an aggregate of $650,000 in cash
and cash equivalents. Until utilized, such cash and cash equivalents are being
invested principally in short-term interest-bearing investments.
The Company'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.
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 30, 2000. 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 10, 2000 on the
Company's consolidated financial statements as of and for the year ended
December 31, 1999 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 participates in the State of New Jersey's corporation
business tax benefit certificate transfer program (the "Program"), which allows
certain high technology and biotechnology companies to transfer unused New
Jersey net operating loss carryovers to other New Jersey corporation business
taxpayers. During 1999, the Company submitted an application to the New Jersey
Economic Development Authority (the "EDA") to participate in the Program and the
application was approved. The EDA then issued 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 may be able to transfer its New Jersey net operating
losses from the last seven years. The Company estimated 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.
During December 1999, the Company completed the sale of approximately
$32 million of its New Jersey tax loss carryforwards and received $2.35 million.
In June 2000, the Company will submit an application to sell an additional $4.8
million of tax benefits (calculated by multiplying the Company's unused New
Jersey net operating loss carryovers of approximately $53 million by 9%). The
actual amount of tax benefits the Company may sell will depend upon the
allocation among qualifying companies of an annual pool established by the State
of New Jersey. The allocated pool for future years is $40 million per year.
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 and does not plan to initiate such a study unless it
can find a sponsor to continue this 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"). 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 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
(the "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 (which was
subsequently extended until December 31, 1999). On December 29, 1999, the
Company, the Red Cross and GP Strategies entered in an agreement pursuant to
which the Red Cross agreed that until September 30, 2000 it would forbear from
exercising its rights under (i) the Supply Agreement, including with respect to
collecting the Red Cross Liability, and (ii) the Security Interest. Under the
terms of such agreement, the Company is allowing the Red Cross to sell the
Company's real estate. In the event the Red Cross is successful in selling the
Company's real estate, the Company would hope to be able to enter into a lease
with the new owner, although there can be no assurance.
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 during 1999 and from November 23,
1998 to December 31, 1998, an adjustment for $550,000 and $525,000 has been
recorded with a corresponding charge to operations during 1999 and 1998,
respectively. During 1999, the Red Cross sold 27,000 of the Settlement Shares
and sold the balance of such shares (273,000) during the first quarter of 2000.
As a result, the net proceeds from the sales of the Settlement Shares, $33,000
in 1999 and $368,000 in 2000, were applied against the liability to the Red
Cross. The remaining liability to the Red Cross at December 31, 1999 and at
April 1, 2000 was approximately $1,579,000 and $1,228,000, respectively.
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 Liability 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 issue GP Strategies 500,000 shares of Common
Stock (the "GP Stock") and a five-year warrant (the "GP Warrant") 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 was due on September 30, 1999 and bears interest, payable at
maturity, at the rate of 6% per annum. In addition, at that time the Company
negotiated a subordination agreement with the Red Cross pursuant to which the
Red Cross agreed that its lien on the Company's real estate is subordinate to GP
Strategies' lien. On March 27, 2000, the Company and GP Strategies entered into
an agreement pursuant to which (i) the GP Strategies Debt was extended until
June 30, 2001, (ii) the Company agreed to file a registration statement prior to
July 31, 2000 covering the shares issuable upon exercise of the GP Warrant and
any of the GP Shares for which Rule 144 under the Securities Act of 1933 was not
available, and (iii) the Management Agreement between the Company and GP
Strategies was terminated (see Note 13 to the Consolidated Financial Statements)
and all intercompany accounts between the Company and GP Strategies (other than
the GP Strategies Debt) in the amount of $130,000 were discharged and
eliminated. The agreement also provides that (i) commencing on May 1, 2001 and
ending on June 30, 2001, on any day ISI may require GP Strategies to exercise
the GP Warrant and sell the underlying shares, if the market price of ISI Common
Stock exceeds $1.00 per share on each of the 10 trading days prior to any such
day, and (ii) any proceeds from the sale of the shares issuable upon exercise of
the GP Warrant in excess of the aggregate amount paid by GP Strategies to
purchase such shares, would be deemed to reduce the then outstanding amount of
principal and interest of the GP Strategies Debt until such amount is reduced to
zero.
The Company's 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
Year Ended December 31, 1999 versus Year Ended December 31, 1998
For the year ended December 31, 1999 (the "1999 Period"), the Company's
revenues of $2,329,222 included $2,328,945 from the sale of ALFERON N Injection
and the balance from sales of research products. Revenues of $2,007,007 for the
year ended December 31, 1998 (the "1998 Period") included $1,930,657 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 totalled $3,552,026
and $6,533,462 for the 1999 Period and 1998 Period, respectively. Idle
production costs in the 1999 and 1998 Periods, 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 1999 Period, the Company sold to
wholesalers and other customers in the United States 19,463 vials of ALFERON N
Injection, compared to 13,284 vials sold by the Company during the 1998 Period.
In addition, foreign sales of ALFERON N Injection were 1,374 vials and 3,300
vials for the 1999 and 1998 periods, respectively.
During 1999, a portion of the reserve for excess inventory was reversed
in the amount of $1,177,531 as compared to a provision for excess inventory of
$3,089,841 during 1998 in order to reflect the inventory at its estimated net
realizable value.
Research and development expenses during the 1999 Period of $3,060,019
decreased by $5,594,869 from $8,654,888 for the 1998 Period, 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 1999 Period were $2,315,010
as compared to $4,569,608 for the 1998 Period. The decrease in the 1999 Period
was principally due to decreases in payroll and other operating expenses.
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 1999 Period was $6,104 as compared to $252,528
for the 1998 Period. The decrease of $246,424 was due to less funds available
for investment in the 1999 Period.
Interest expense and financing costs for the 1999 Period was $536,394,
primarily due to interest and other costs related to the GP Strategies Debt in
1999, as compared to zero for the 1998 Period.
During December 1999, the Company completed the sale of a portion of
its New Jersey tax loss carryforwards and recorded a gain on such sale amounting
to $2,348,509, which is recorded as an income tax benefit.
As a result of the foregoing, the Company incurred net losses of
$3,602,083 and $21,325,301 for the 1999 Period and 1998 Period, respectively.
Year Ended December 31, 1998 Versus Year Ended December 31, 1997
For the year ended December 31, 1998, the Company's revenues of
$2,007,007 included $1,930,657 from the sale of ALFERON N Injection and the
balance from sales of research products and other revenues. Revenues of
$2,955,802 for the year ended December 31, 1997 (the "1997 Period") included
$2,927,585 from the sale of ALFERON N Injection and the balance from sales of
research products. Cost of goods sold and idle production costs totaled
$6,533,462 and $1,857,959 for the 1998 Period and 1997 Period, respectively.
Idle production costs in the 1998 Period 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 1997
Period.
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, under the
administration of ICS, at which time revenues are recognized by the Company. In
the 1998 Period, the Company sold to wholesalers and other customers in the
United States 13,284 vials of ALFERON N Injection, compared to 21,584 vials sold
by the Company during the 1997 Period. In addition, foreign sales of ALFERON N
Injection were 3,300 vials and 4,587 vials for the 1998 and 1997 Periods,
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-downs were 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.
Research and development expenses during the 1998 Period of $8,654,888
decreased by $3,209,099 from $11,863,987 for the 1997 Period, 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
$234,996, respectively, 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 1998 Period were $4,569,608
as compared to $4,389,025 for the 1997 Period. The increase of $180,583 was
principally due to increases in payroll and other operating expenses. GP
Strategies provides certain administrative services for which the Company paid
GP Strategies $120,000 for both the 1998 and 1997 Period. In addition, for the
1997 Period, payments to GP Strategies for services provided to the Company by
GP Strategies personnel amounted to $135,000. For the 1998 Period, receipts from
GP Strategies for services provided to GP Strategies by Company personnel
amounted to $25,000.
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 1998 Period was $252,528 as compared to
$670,199 for the 1997 Period. The decrease of $417,671 was due to less funds
available for investment in the current period.
As a result of the foregoing, the Company incurred net losses of
$21,325,301 and $21,739,680 for the 1998 Period and 1997 Period, respectively.
Recent Accounting Developments
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 as amended by SFAS 137 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is still evaluating its
position with respect to the use of derivative instruments.
On December 3, 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 - "Revenue Recognition in Financial
Statements" ("SAB No. 101"). SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaborations with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB No. 101, amended
by SAB 101A, issued on March 24, 2000, requires registrants to adopt the
accounting guidance contained therein by no later than the second fiscal quarter
of the fiscal year beginning after December 15, 1999. The Company is currently
assessing the financial impact of complying with SAB No. 101 and has not yet
determined whether applying the accounting guidance of SAB No. 101 will have a
material effect on its financial position or results of operations.
FASB Interpretation No. 44 provides guidance for applying APB Opinion
No. 25, "Accounting for Stock Issued to Employees". It applies prospectively to
new awards, exchanges of awards in a business combination, modifications to
outstanding awards, and changes in grantee status on or after July 1, 2000,
except for provisions related to repricings and the definition of an employee
which apply to awards issued after December 15, 1998. The provisions related to
modifications to fixed stock option awards to add a reload feature are effective
for awards modified after January 12, 2000. The Company is evaluating the impact
on its financial position and results of operations.
Year 2000
The Company did not experience any business or operational disruptions,
resulting from the Company's or its suppliers, as a result of the arrival of the
year 2000.
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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 20
Financial Statements:
Consolidated Balance Sheets - December 31, 1999 and 1998 21
Consolidated Statements of Operations - Years ended
December 31, 1999, 1998 and 1997 22
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 1999, 1998 and 1997 23
Consolidated Statements of Cash Flows - Years ended
December 31, 1999, 1998 and 1997 24
Notes to Consolidated Financial Statements 25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Interferon Sciences, Inc.:
We have audited the consolidated financial statements of Interferon
Sciences, Inc. and subsidiary as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Interferon
Sciences, Inc. and subsidiary at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, 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. Management's plans in
regard to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
New York, New York
April 10, 2000
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,273,242 $ 1,170,861
Accounts and other receivables 35,561 689,511
Inventories, net of reserves of
$6,225,185 and $10,344,551 766,000 709,784
Prepaid expenses and other current assets 27,018 36,511
------------- ------------
Total current assets 3,101,821 2,606,667
------------- ------------
Property, plant and equipment, at cost
Land 140,650 140,650
Buildings and improvements 7,702,825 7,702,825
Equipment 4,915,798 4,928,298
-------------- ------------
12,759,273 12,771,773
Less accumulated depreciation (9,834,558) (9,130,248)
------------ ------------
2,924,715 3,641,525
------------ ------------
Patent costs, net of accumulated amortization
of $301,339 and $270,856 219,822 250,305
Other assets 10,100 100,150
------------ ------------
$ 6,256,458 $ 6,598,647
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,396,181 $ 4,149,666
Accrued expenses 519,285 236,641
Amount due GP Strategies 283,637 108,943
------------- -------------
Total current liabilities 5,199,103 4,495,250
------------- -------------
Note payable to GP Strategies 500,000
------------- -------------
Commitments
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
- 5,327,473 and 4,360,808 shares 53,275 43,608
Capital in excess of par value 129,397,259 127,933,885
Accumulated deficit (128,812,179) (125,210,096)
Settlement shares (81,000) (664,000)
-------------- -------------
Total stockholders' equity 557,355 2,103,397
-------------- -------------
$ 6,256,458 $ 6,598,647
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenues
ALFERON N Injection $ 2,328,945 $ 1,930,657 $ 2,927,585
Research products and other
revenues 277 76,350 28,217
------------ ------------ ------------
Total revenues 2,329,222 2,007,007 2,955,802
------------ ------------ ------------
Costs and expenses
Cost of goods sold and excess/idle
production costs 3,552,026 6,533,462 1,857,959
(Reversal) Provision for excess inventory (1,177,531) 3,089,841 7,254,710
Research and development 3,060,019 8,654,888 11,863,987
General and administrative 2,315,010 4,569,608 4,389,025
------------ ------------- ------------
Total costs and expenses 7,749,524 22,847,799 25,365,681
------------ ------------- ------------
Loss from operations (5,420,302) (20,840,792) (22,409,879)
Interest income 6,104 252,528 670,199
Interest expense and financing costs (536,394)
Loss on repurchase of preferred stock (737,037)
----------- ------------- ------------
Loss before income tax benefit (5,950,592) (21,325,301) (21,739,680)
----------- ------------- ------------
Income tax benefit:
Gain on sale of state net operating loss
carryovers 2,348,509
------------- ------------- ------------
Net loss $ (3,602,083) $(21,325,301) $(21,739,680)
============= ============= ============
Basic and diluted
loss per share $ (.71) $ (6.67) $ (8.15)
============= ============= ============
Weighted average number of
shares outstanding 5,088,620 3,199,396 2,668,352
============= ============= ============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Capital in Total
Preferred stock Common stock excess of Accumulated Settlement stockholders'
Shares Amount Shares Amount par value deficit shares equity
--------------- ------------------ ------------ -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 2,455,239 $24,552 $107,494,394 $(82,145,115) $ $25,373,831
Net proceeds from sale of
common stock 582,418 5,824 16,429,896 16,435,720
Purchase of fractional shares of
common stock resulting from
reverse stock split (21) - (633) (633)
Common stock issued
under Company 401(k) plan 483 5 22,962 22,967
Proceeds from exercise
of common stock options 3,962 40 121,395 121,435
Net loss (21,739,680) (21,739,680)
----------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,042,081 30,421 124,068,014 (103,884,795) 20,213,640
Net proceeds from the sale of
common and preferred stock 7,500 75 960,000 9,600 9,123,762 9,133,437
Repurchase of preferred Stock (7,500) (75) (7,178,925) (7,179,000)
Common stock issued as payment
against negotiated settlement
and accounts payable 330,000 3,300 1,246,794 (1,189,000) 61,094
Common stock issued
as compensation 3,238 32 116,865 116,897
Common stock issued
under Company 401(k) plan 25,489 255 170,978 171,233
Compensation paid in cash in
exchange of obligation to issue
common stock 386,397 386,397
Market value adjustment 525,000 525,000
Net loss (21,325,301) (21,325,301)
----------------------------------------------------------------------------------------------
Balance at December 31, 1998 4,360,808 43,608 127,933,885 (125,210,096) (664,000) 2,103,397
Common stock issued as financing cost 500,000 5,000 495,000 500,000
Common stock issued as payment against
accounts payable 285,000 2,850 531,525 534,375
Common stock issued
under Company 401(k) plan 181,665 1,817 98,159 99,976
Compensation paid in cash in exchange
of obligation to issue
common stock 338,690 338,690
Settlement shares sold 33,000 33,000
Market value adjustment 550,000 550,000
Net loss (3,602,083) (3,602,083)
----------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 5,327,473 $53,275 $129,397,259 $(128,812,179) $(81,000) $557,355
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operations:
Net loss $ (3,602,083) $(21,325,301) $(21,739,680)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 747,293 894,013 782,802
Amortization of deferred financing costs 500,000
Compensation and benefits
paid with common stock 99,976 288,130 22,967
(Reversal) provision for excess inventory (1,177,531) 3,089,841 7,254,710
Non-cash deferred compensation 338,690 386,397
Loss on repurchase of preferred stock 737,037
Market value adjustment 550,000 515,625
Provision for impairment of equipment 803,217
Loss on sale of other assets 51,392
Change in operating assets
and liabilities:
Inventories 1,121,315 (466,972) (6,258,765)
Accounts and other receivables 653,950 299,947 (756,421)
Prepaid expenses and other current assets 9,493 28,842 96,666
Amount due to GP Strategies 174,694 130,847 60,998
Accounts payable and accrued expenses 1,096,534 517,040 1,570,704
--------------- ------------ -------------
Net cash provided by (used for) operations 563,723 (14,101,337) (18,966,019)
--------------- ------------ -------------
Cash flows from investing activities:
Additions to property, plant and equipment (78,235) (1,023,175)
Proceeds from sale of other assets 38,658 73,750
--------------- ------------ ------------
Net cash provided by (used for)
investing activities 38,658 (4,485) (1,023,175)
--------------- ------------ -------------
Cash flows from financing activities:
Proceeds from GP Strategies 500,000
Net proceeds from sale of common stock 1,954,437 16,435,720
Net proceeds from preferred stock offering 7,179,000
Repurchase of preferred stock (7,916,037)
Proceeds from exercise of common stock options 121,435
Purchase of fractional shares of common stock (633)
--------------- ------------ -------------
Net cash provided by financing activities 500,000 1,217,400 16,556,522
--------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents 1,102,381 (12,888,422) (3,432,672)
Cash and cash equivalents at beginning of year 1,170,861 14,059,283 17,491,955
-------------- ------------ -------------
Cash and cash equivalents at end of year $ 2,273,242 $ 1,170,861 $14,059,283
============== ============ =============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Business
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical
company that operates in a single segment and is engaged in the study,
manufacture, and sale of pharmaceutical products based on its highly purified,
multispecies, natural source alpha interferon ("Natural Alpha Interferon"). The
Company's ALFERON(R) N Injection (Interferon Alfa-n3) product has been approved
by the United States Food and Drug Administration ("FDA") for the treatment of
certain types of genital warts and is being studied for potential use in the
treatment of HIV, hepatitis C, and other indications. Alferon N Injection is
sold principally in the United States, however, a portion is sold in foreign
countries. For the years ended December 31, 1999, 1998 and 1997, domestic sales
totaled $2,204,437, $1,716,157 and $2,613,430, respectively, and foreign sales
(primarily Germany) totaled $124,508, $214,500 and $314,155, respectively. All
identifiable assets are located in the United States. The Company also is
studying ALFERON N Gel and ALFERON LDO(R), the Company's topical and oral
formulations of Natural Alpha Interferon, for the potential treatment of viral
and immune system diseases. (See Note 5).
Integrated Commercialization Solutions, Inc. (ICS), a subsidiary of Bergen
Brunswig Corporation, is the sole United States distributer of ALFERON N
Injection to wholesalers throughout the United States. The Company does not
believe that the loss of any one wholesaler would have material adverse effect
on the Company's sales or financial position.
Note 2. Summary of Significant Accounting Policies
Principles of consolidation -- The consolidated financial statements
include the operations of the Company and Interferon Sciences Development
Corporation ("ISD"), its wholly owned subsidiary. All significant intercompany
transactions and balances have been eliminated.
Cash and cash equivalents -- The Company considers all highly liquid
instruments with maturities of three months or less from purchase date to be
cash equivalents.
Property, plant and equipment -- Property, plant and equipment are
carried at cost. Major additions and betterments are capitalized while
maintenance and repairs, which do not extend the lives of the assets, are
expensed.
Depreciation -- The Company provides for depreciation and amortization
of plant and equipment following the straight-line method over the estimated
useful lives of such assets as follows:
Class of Assets Estimated Useful Lives
Buildings and Improvements 15 to 30 years
Equipment 5 to 10 years
Patent costs -- The Company capitalizes costs to obtain and maintain
patents and licenses. Patent costs are amortized over 17 years on a
straight-line basis. To the extent a patent is determined to be worthless, the
related net capitalized cost is immediately expensed.
Revenue recognition -- Sales are recorded upon shipment of product.
Collaborative agreement research and development revenues and costs -
The costs of performing research and development are expensed when incurred.
Generally, the Company matches its collaborative research and development
revenues in the same accounting periods in which the related research costs are
incurred. However, when the revenues are exhausted, the Company has the option
to continue the research activities at its own expense.
Inventories -- Inventories, consisting of raw materials, work in
process and finished goods, are stated at the lower of cost or market on a FIFO
basis. Inventory in excess of the Company's estimated usage requirements is
written down to its estimated net realizable value. Inherent in the estimates of
net realizable value are management estimates related to the Company's future
manufacturing schedules, customer demand, possible alternative uses and ultimate
realization of potentially excess inventory.
Long-Lived Assets -- The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or estimated
fair value less costs to sell. Due to the circumstances described in Note 7,
during 1998, the Company ceased production of finished goods inventory and
continues to hold its long-lived assets for use. In addition, as the Company's
financial and operating situation had continued to worsen (as further described
in Note 3), and after consideration of projected revenues for 1999, the Company
determined that the carrying value of their equipment was impaired. Accordingly,
the Company recorded a charge for impairment of its equipment of $803,217 in
December 1998 to write down this equipment to its estimated fair value.
Management has determined, based on their best estimates and available
information, the estimated fair value of this equipment to be that amount which
could be recovered through the sale of the equipment. No further impairment was
deemed to exist at December 31, 1999. Quoted market prices are not available.
Stock option plan - The Company applies the provision of SFAS No. 123,
Accounting for Stock-Based Compensation, which requires entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. As permitted under SFAS No. 123, the Company elects to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
(loss) and pro forma earnings (loss) per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied and, accordingly, no compensation cost
has been recognized for its stock options in the consolidated financial
statements.
Reverse stock split -- As a result of a one-for-four reverse stock
split effective as of March 21, 1997, and a one-for-five reverse stock split
effective as of January 6, 1999, all shares and per share information have been
restated.
Loss per share -- Basic earnings (loss) per share (EPS) are based upon
the weighted average number of common shares outstanding during the period.
Diluted EPS are based upon the weighted average number of common shares
outstanding during the period assuming the issuance of common shares for all
dilutive potential common shares outstanding. At December 31, 1999, 1998 and
1997, the Company's options and warrants are anti-dilutive and therefore basic
and diluted EPS are the same.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income taxes - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Reclassifications - Certain balances in prior years have been
reclassified to conform to the presentation adopted in the current year.
Note 3. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 1999, the Company had an accumulated
deficit of approximately $128.8 million. For the years ended December 31, 1999,
1998 and 1997, the Company had losses from operations of approximately $5.4
million, $20.8 million and $22.4 million, respectively. Although the Company
received FDA approval in 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 December 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 30, 2000. 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.
Note 4. Agreements with Hoffmann-LaRoche
F. Hoffmann-La Roche Ltd. and Hoffmann-LaRoche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. In 1995, the Company obtained a non-exclusive
perpetual license from Hoffmann (the "Hoffmann Agreement") which grants the
Company the worldwide rights to make, use, and sell, without a potential patent
infringement claim from Hoffmann, any formulation of Natural Alpha Interferon.
The Hoffmann Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann has patent rights covered by the Hoffmann Agreement
(the "Hoffmann Territory") to any third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann,
which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to
pay Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha
Interferon products by the Company in an amount equal to (i) 8% of net sales in
the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of
products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales
in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. For the years ended December 31, 1999, 1998 and 1997, the Company
recorded approximately $94,000, $77,000 and $117,000 in royalty expenses to
Hoffmann, respectively. The Hoffmann Agreement can be terminated by the Company
on 30 days notice with respect to the United States patent, any individual
foreign patent, or all patents owned by Hoffmann. If the Hoffmann Agreement is
terminated with respect to the patents owned by Hoffmann in a specified country,
such country is no longer included in the Hoffmann Territory. Accordingly, the
Company would not be permitted to market any formulation of alpha interferon in
such country.
Note 5. Research and Development Agreement with Interferon Sciences Research
Partners, Ltd.
In 1984, the Company organized ISD to act as the sole general partner
of Interferon Sciences Research Partners, Ltd., a New Jersey limited partnership
(the "Partnership"). The Company and the Partnership entered into a development
contract whereby the Company received substantially all of the net proceeds
($4,414,475) of the Partnership's public offering of limited partnership
interests. The Company used the proceeds to perform research, development and
clinical testing on behalf of the Partnership for the development of ALFERON Gel
containing recombinant interferon.
In connection with the formation of the Partnership, ISD agreed to make
additional cash contributions for purposes of continuing development of ALFERON
Gel if the Partnership exhausted its funds prior to development of such product.
ISD is wholly dependent upon the Company for capital to fund such commitment.
The Partnership exhausted its funds during 1986, and the Company contributed a
total of $1,997,000 during the period from 1986 to 1990, for the continued
development of ALFERON Gel. In 1987, the Company filed a Product License
Application with the FDA for approval to market ALFERON Gel. In February 1990,
the FDA indicated that additional process development and clinical trials would
be necessary prior to approval of ALFERON Gel. The Company believed, at that
time, that the costs to complete the required process development and clinical
trials would be substantial, and there could be no assurance that the clinical
trials would be successful.
As a result of the above events, in 1992, the Company withdrew its FDA
Product License Application for ALFERON Gel containing recombinant interferon.
In place of single species recombinant interferon, previously ALFERON Gel's
active ingredient, the Company commenced, in 1992, further development of
ALFERON Gel using the Company's natural source multi-species alpha interferon
("ALFERON N Gel"). Assuming successful development and commercial exploitation
of ALFERON N Gel, which to date has not occurred, the Company may be obligated
to pay the Partnership royalties equal to 4% of the Company's net sales of
ALFERON N Gel and 15% of revenues received from sublicensing ALFERON N Gel.
Note 6. Agreement with Cell Pharm GmbH
In 1996, the Company entered into a supply and distribution agreement
(the "Cell Pharm Agreement") with Cell Pharm. Cell Pharm, headquartered in
Hanover, Germany, is a privately owned pharmaceutical company primarily involved
in the distribution and manufacture of products for cancer treatment and other
uses. The Cell Pharm Agreement, which terminates on June 30, 2001, unless
renewed, grants Cell Pharm rights to distribute, promote, and sell ALFERON N
Injection in Germany. The Cell Pharm Agreement provides that the Company will
supply Cell Pharm with ALFERON N Injection at specified prices, and obligates
Cell Pharm to purchase specified minimum amounts in each annual period. In
addition, Cell Pharm is required to pay the Company 50% of the incremental
revenue Cell Pharm receives as a result of selling ALFERON N Injection at a
price higher than a specified price. To date, no incremental revenue has been
generated. Cell Pharm has informed the Company that it is marketing ALFERON N
Injection under the trade name Cytoferon(R), pursuant to Cell Pharm's existing
regulatory approval to market Cellferon in Germany for the treatment of hairy
cell leukemia and for the treatment of patients who develop antibodies against
recombinant alpha interferons.
Note 7. Inventories
<TABLE>
<CAPTION>
Inventories, consisting of material, labor and overhead, are classified
as follows:
December 31,
1999 1998
-------------------------
<S> <C> <C> <C>
Finished goods ................ $ 361,809 $ 3,443,786
Work in process............... 5,296,816 6,466,914
Raw materials.................. 1,332,560 1,143,635
Less reserve for excess inventory (6,225,185) (10,344,551)
------------ ------------
$ 766,000 $ 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 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 is a result of the Company's
assessment of anticipated near-term projections of product to be sold or
utilized in clinical trials, giving consideration to historical sales levels. As
a result, inventories at December 31, 1999 and 1998, reflect a reserve for
excess inventory of $6,225,185 and $10,344,551, respectively.
During 1999, the reserve for excess inventory was reversed in the
amount of $1,177,531.
In addition, during 1999, approximately $2,900,000 of inventory was
written off against the reserve for excess inventory since the inventory had
expired and could no longer be sold or used for clinical trials.
Note 8. 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.
Note 9. Income Taxes
As a result of the loss allocation rules contained in the Federal
income tax consolidated return regulations, approximately $6,009,000 of net
federal operating loss carry-forwards, which expire from 2001 to 2006, are
available to the Company upon ceasing to be a member of GP Strategies's
consolidated return group in 1991. In addition, the Company has net federal
operating loss carry-forwards for periods subsequent to May 31, 1991, and
through December 31, 1999 of approximately $93,565,000 which expire from 2006 to
2014. For the year ended December 31, 1999, the Company had a tax net operating
loss of $9,318,000, which expires in 2014.
The Company believes that the events culminating with the closing of
its Common Stock Offering on August 22, 1995 resulted in an "ownership change"
under Internal Revenue Code, Section 382, with respect to its stock. The Company
believes that as a result of the ownership change, the future utility of its
pre-change net operating losses are limited to an annual amount of approximately
$3,230,000. In addition, the Company has approximately $33,000 of investment tax
credit carry-forwards, which expire in 2000 and $488,000 of research and
development credit carry-forwards, which expire from 2000 to 2002 that are, in
accordance with Internal Revenue Code, Section 383, subject to the annual
limitation under Internal Revenue Code Section 382.
The tax effects that give rise to deferred tax assets and liabilities consist of
the following as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Deferred tax assets 1999 1998
- ------------------- ---------------------
<S> <C> <C>
Net operating loss carry-forwards $31,601,000 $ 28,644,000
Tax credit carry-forwards 521,000 676,000
Inventory 2,117,000 3,517,000
Property and equipment,
principally due to differences
in basis and depreciation 387,000 246,000
------------ -----------
Net deferred tax asset 34,626,000 33,083,000
Valuation allowance (34,626,000) (33,083,000)
------------ ------------
Net deferred tax asset after
valuation allowance $ --- $ ---
============ ============
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will be realized. The Company has
determined, based on the Company's history of annual net losses, that a full
valuation allowance is appropriate.
The Company participates in the State of New Jersey's corporation
business tax benefit certificate transfer program (the "Program"), which allows
certain high technology and biotechnology companies to transfer unused New
Jersey net operating loss carryovers to other New Jersey corporation business
taxpayers. During 1999, the Company submitted an application to the New Jersey
Economic Development Authority (the "EDA") to participate in the Program and the
application was approved. The EDA then issued 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 may be able to transfer its New Jersey net operating
losses from the last seven years. The Company estimated 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.
During December 1999, the Company completed the sale of approximately
$32 million of its New Jersey tax loss carryforwards and received $2.35 million,
which was recorded as a gain on sale of state net operating loss carryovers on
its Consolidated Statement of Operations. In June 2000, the Company will submit
an application to sell an additional $4.8 million of tax benefits (calculated by
multiplying the Company's unused New Jersey net operating loss carryovers of
approximately $53 million by 9%). The actual amount of tax benefits the Company
may sell will depend upon the allocation among qualifying companies of an annual
pool established by the State of New Jersey. The allocated pool for future years
is $40 million per year.
Note 10. Common Stock, Stock Options, Warrants and Other Shares Reserved
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 reverse
stock split was effective as of January 6, 1999. As of January 6, 1999, there
were 21,804,138 shares of Common Stock outstanding and after the stock split
there were 4,360,808 shares of Common Stock outstanding.
The par value of the Common Stock did not change as a result of the
reverse stock split. Cash was paid in lieu of fractional shares based on the
last reported sale price of the Common Stock on the first trading date after the
stock split.
The Company has a stock option plan (the "Plan"), which authorizes a
committee of the Board of Directors to grant options, to purchase shares of
Common Stock, to officers, directors, employees and consultants of the Company.
Pursuant to the terms of the Plan, no option may be exercised after 10 years
from the date of grant. The Plan permits options to be granted at a price not
less than 85% of the fair market value, however, the options granted to date
have been at fair market value of the common stock at the date of the grant.
At December 31, 1999, the per share weighted-average fair value of
stock options granted during 1999, 1998 and 1997 was $.21, $2.20 and $22.05 on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1999 - expected dividend yield of 0.0%,
risk-free interest rate of 6.1%, expected volatility of 116.4% and an expected
life of 4.0 years; 1998 - expected dividend yield of 0.0%, risk-free interest
rate of 4.3%, expected volatility of 113.9% and an expected life of 5.0 years;
1997 - expected dividend yield of 0.0%, risk-free interest rate of 6.3%,
expected volatility of 85.5% and an expected life of 4.4 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net loss as reported $(3,602,083) $(21,325,301) $(21,739,680)
pro forma (4,231,122) (21,868,534) (24,255,223)
Basic and diluted
loss per share as reported $ (.71) $ (6.67) $ (8.15)
pro forma (.83) (6.84) (9.10)
</TABLE>
Pro forma net loss reflects options granted between 1995 and 1999. In
addition, compensation cost is reflected over the options' vesting period.
Employee stock option activity for options under the Plan during the
periods indicated is as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
<S> <C> <C> <C>
--------- -----------
Balance at December 31, 1996 160,013 $35.95
Granted 117,733 33.25
Exercised (2,909) 29.40
Forfeited (4,942) 30.60
Expired (57,528) 41.35
----------
Balance at December 31, 1997 212,367 33.20
Granted 336,234 2.65
Forfeited 9,787) 32.25
Expired (725) 46.05
----------
Balance at December 31, 1998 538,089 1.40
Granted 1,487,792 .25
Forfeited (138,621) 1.40
----------
Balance at December 31, 1999 1,887,260 .25
</TABLE>
On October 27, 1999, the Company repriced all existing employee stock
options to have an exercise price of $.25 (the closing market price on that
date) and an expiration date of December 31, 2003. Accordingly, the weighted
average price of options outstanding at December 31, 1999 has been re-stated to
$.25. All other terms and conditions remain the same with the exception of
repricing the exercise price and the new expiration date.
On October 15, 1998, the Company repriced all existing employee stock
options to have an exercise price of $1.40 (the closing market price on that
date).
At December 31, 1999, the exercise price and weighted-average remaining
contractual life of outstanding options was $.25 and 4 years, respectively.
At December 31, 1999, 1998 and 1997, the number of options exercisable
was 641,755, 249,434 and 153,758, respectively, and the weighted-average
exercise price of those options was $.25, $1.40 and $35.20, respectively.
Information regarding all Options and Warrants
Changes in options and warrants outstanding during the years ended
December 31, 1999, 1998 and 1997, and options and warrants exercisable and
shares reserved for issuance at December 31, 1999, 1998 and 1997 are as follows:
The following table includes all options and warrants including
employee options (which are discussed above).
<TABLE>
<CAPTION>
Price Range Number of
Per Share Shares
<S> <C> <C> <C> <C> <C>
----------- ---------
Outstanding at December 31, 1996 $21.80 - $84.00 295,252
Granted 25.00 - 77.90 172,619
Exercised 21.80 - 40.00 ( 3,962)
Terminated 25.00 - 84.00 (68,720)
--------------------- -----------
Outstanding at December 31, 1997 21.80 - 77.90 395,189
Granted 2.65 - 41.90 336,234
Terminated 25.00 - 55.00 (10,512)
--------------------- -----------
Outstanding at December 31, 1998 1.40 - 77.90 720,911
Granted .25 - 1.00 1,987,792
Terminated 1.40 - 54.00 (141,671)
-------------------- ----------
Outstanding at December 31, 1999 .25 - 77.90 2,567,032
==========
Exercisable:
December 31, 1997 21.80 - 77.90 309,616
==========
December 31, 1998 1.40 - 77.90 432,256
==========
December 31, 1999 .25 - 77.90 1,321,527
==========
Shares reserved for issuance:
December 31, 1997 425,879
==========
December 31, 1998 739,364
==========
December 31, 1999 2,573,479
==========
</TABLE>
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1999, 1998 and 1997, include 33,282 shares under a
warrant agreement with a certain individual. The warrants are priced at $51.35
and $77.90 per share and expire on August 31, 2000.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1999, 1998 and 1997, include 55,113 shares under
warrant agreements with the underwriter of a 1995 Stock Offering. The warrants
are priced at $37.20 per share and expire on August 14, 2000.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1999, 1998 and 1997, include 64,413 shares under
warrant agreements with the underwriter of a 1996 Stock Offering. The warrants
are priced at $48.00 per share and expire on April 23, 2001.
Options and warrants outstanding and shares reserved for issuance at
December 31, 1999 1998 and 1997, and exercisable at December 31, 1999 and 1998,
include 26,964 shares under warrant agreements with the underwriters of a 1997
Stock Offering. The warrants are priced at $36.00 per share and expire on August
18, 2002.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1999, include 500,000 shares under a warrant
agreement with GP Strategies. The warrants are priced at $1.00 per share and
expire on March 25, 2004.
Shares reserved for issuance at December 31, 1999, 1998 and 1997
include 6,447, 18,451 and 30,690 shares under the common stock compensation
plan. (See Note 12).
Note 11. Savings Plan
The ISI Savings Plan (the "Savings Plan") permits pre-tax contributions
to the Savings Plan by participants pursuant to Section 401(k) of the Internal
Revenue Code of up to 15% of base compensation. The Company will match up to the
6% level of the participants eligible contributions. The Savings Plan matches
40% in cash and 60% in the Company's common stock up to the 6% level. For 1999,
the Company's contribution to the Savings Plan was $137,000, consisting of
$37,024 in cash and $99,976 in stock. For 1998, the Company's contribution to
the Savings Plan was $288,000, consisting of $116,767 in cash and $171,233 in
stock. For 1997, the Company's contribution to the Savings Plan was $126,000,
consisting of $103,033 in cash and $22,967 in stock.
Note 12. Common Stock Compensation and Profit Sharing Plan
Common Stock Compensation Plan
Effective October 1, 1997, the Company adopted the Common Stock
Compensation Plan (the "Stock Compensation Plan"), providing key employees with
the opportunity of receiving the Company's common stock as additional
compensation.
Pursuant to the terms of the Stock Compensation Plan, key employees
will receive, as additional compensation, a pre-determined amount of the
Company's common stock in three equal installments on October 1, 1998, 1999, and
2000, provided that the key employees remain in the employ of the Company at
each such installment date. As of October 1, 1999 and 1998, a deferred
compensation liability of $340,821 and $412,344, respectively, was accrued for
these employees based on the common stock market price of October 1, 1997. On
October 1, 1999 and 1998, the Company agreed to pay the additional compensation
in cash in place of the issuance of the Company's common stock. Accordingly,
cash of $2,131 and $25,947, respectively, was paid in satisfaction of the
accrued liability of $340,821 and $412,344, respectively. The difference of
$338,690 and $386,397 was credited to additional paid in capital in 1999 and
1998, respectively. At December 31, 1999, the total number of shares reserved
for issuance under the Stock Compensation Plan for the remaining installment is
6,447 and the amount of $72,480 is recorded in accrued expenses.
Profit Sharing Plan
The Company has a Profit Sharing Plan (the "Profit Sharing Plan")
providing key employees and consultants with an opportunity to share in the
profits of the Company. The Profit Sharing Plan is administered by the Company's
Compensation Committee.
Pursuant to the terms of the Profit Sharing Plan, the Compensation
Committee, in its sole discretion, based upon the significance of the employee's
contributions to the operations of the Company, selects certain key employees
and consultants of the Company who are entitled to participate in the Profit
Sharing Plan and determines the extent of their participation. The amount of the
Company's profits available for distribution to the participants (the
"Distribution Pool") is the lesser of (a) 10% of the Company's income before
taxes and profit sharing expense and (b) an amount equal to 100% of the base
salary for such year of all the participants in the Profit Sharing Plan.
The Compensation Committee may require as a condition to participation
that a participant remain in the employ of the Company until the end of the
fiscal year for which payment is to be made. Payments required to be made under
the Profit Sharing Plan must be made within 10 days of the filing of the
Company's tax return. To date, there have been no contributions by the Company
under the Profit Sharing Plan.
Note 13. Related Party Transactions
GP Strategies owns approximately 6% of the Company's common stock as of
December 31, 1999. The Company was a party to a management agreement with GP
Strategies, pursuant to which certain legal, financial and administrative
services had been provided by employees of GP Strategies. The fee for such
services in 1999, 1998 and 1997 was $120,000 annually. The management agreement
was terminated on March 27, 2000 (See Note 15). In addition, during 1997 GP
Strategies provided to the Company, at its estimated cost, certain personnel and
services which the Company used in its operations. For the year ended December
31, 1997, such charges amounted to $135,000. During the year ended December 31,
1998, the Company provided certain services to GP Strategies at the Company's
estimated cost of $25,000. Such costs were included in general and
administrative expense.
The Company owns the buildings which contain its offices and
laboratories and until March 1998 leased a portion of the buildings to GP
Strategies. Total occupancy costs for the years ended December 31, 1998 and 1997
were approximately $1,084,000 and $1,039,000, respectively. GP Strategies paid
to the Company as rent GP Strategies's proportionate share of such occupancy
costs (based on both square feet occupied and number of personnel), which
amounted to $29,375 and $234,996, respectively. Such income was included as a
reduction to research and development expense.
See Note 15 for information with respect to royalty obligations to GP
Strategies.
Note 14. Supplemental Statement of Cash Flow Information
The Company paid no income taxes or interest during the three-year
period ended December 31, 1999.
During the years ended December 31, 1999, 1998 and 1997 the following
non-cash financing and investing activities occurred:
1999:
The Company issued 285,000 shares, valued at $534,375, of Common Stock
as payment against accounts payable and the purchase of inventory.
As consideration for a loan from GP Strategies, the Company issued
500,000 shares and warrants to purchase an additional 500,000 shares, valued at
$500,000.
1998:
The Company issued 330,000 shares valued at $1,250,094 of common stock
as payment against a negotiated settlement (see Note 15) and accounts payable.
The Company issued 3,238 shares valued at $116,897 of common stock as
compensation.
1997:
None
Note 15. Commitments
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"). 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% per
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 June 30, 1999 (which was subsequently extended until
December 31, 1999). On December 29, 1999, the Company, the Red Cross and GP
Strategies entered into an agreement pursuant to which the Red Cross agreed that
until September 30, 2000 it would forbear from exercising its rights under (i)
the Supply Agreement, including with respect to collecting the Red Cross
Liability, and (ii) the Security Interest. Under the terms of such agreement,
the Company is allowing the Red Cross to sell the Company's real estate. In the
event the Red Cross is successful in selling the Company's real estate, the
Company would hope to be able to enter into a lease with the new owner, although
there can be no assurance.
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 during 1999 and from November 23,
1998 to December 31, 1998, an adjustment for $550,000 and $525,000 has been
recorded with a corresponding charge to operations during 1999 and 1998,
respectively. During 1999, the Red Cross sold 27,000 of the Settlement Shares
and sold the balance of 273,000 shares during the first quarter of 2000. As a
result, the net proceeds from the sales of the Settlement Shares, $33,000 in
1999 and $368,000, were applied against the liability to Red Cross. The
remaining liability to the Red Cross at December 31, 1999 and at April 1, 2000
was approximately $1,579,000 and $1,228,000, respectively.
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 Liability 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 (the "GP Shares") of Common Stock and
five-year warrant (the "GP Warrant") to purchase 500,000 shares of Common Stock
at a price of $1 per share. The GP Shares and GP Warrant were valued at $500,000
and recorded as a financing cost on the Consolidated Statement of Operations and
amortized over the original period of the GP Strategies Debt. 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 matured on September 30, 1999 and bears interest, payable at
maturity, at the rate of 6% per annum. In addition, at that time, the Company
negotiated a subordination agreement with the Red Cross pursuant to which the
Red Cross agreed that its lien on the Company's real estate is subordinate to GP
Strategies' lien. On March 27, 2000, the Company and GP Strategies entered into
an agreement pursuant to which (i) the GP Strategies Debt was extended until
June 30, 2001 (and reclassified as long-term on the accompanying Consolidated
Balance Sheet at December 31, 1999), (ii) the Company agreed to file a
registration statement prior to July 31, 2000 covering the shares issuable upon
exercise of the GP Warrant and any of the GP Shares for which Rule 144 under the
Securities Act of 1933 was not available, and (iii) the Management Agreement
between the Company and GP Strategies was terminated (see Note 13 to the
Consolidated Financial Statements) and all intercompany accounts between the
Company and GP Strategies (other than the GP Strategies Debt) were discharged
and eliminated. The amount of intercompany accounts that were discharged and
eliminated was approximately $130,000, which were recorded in the first quarter
of 2000. The agreement also provides that (i) commencing on May 1, 2001 and
ending on June 30, 2001, on any day ISI may require GP Strategies to exercise
the GP Warrant and sell the underlying shares, if the market price of ISI Common
Stock exceeds $1.00 per share on each of the 10 trading days prior to any such
day, and (ii) any proceeds from the sale of the shares issuable upon exercise of
the GP Warrant in excess of the aggregate amount paid by GP Strategies to
purchase such shares, would be deemed to reduce the then outstanding amount of
principal and interest of the GP Strategies Debt until such amount is reduced to
zero.
As consideration for the transfer to the Company of certain licenses,
rights and assets upon the formation of the Company by GP Strategies, the
Company agreed to pay GP Strategies royalties of $1,000,000, but such payments
will be made only with respect to those years in which the Company has income
before income taxes, and will be limited to 25% of such income. To date, the
Company has not generated income before taxes and therefore has not paid
royalties to GP Strategies.
See Notes 4 and 5 for information relating to royalties payable to
Hoffmann and the Partnership, respectively.
In 1989, the Company entered into a license agreement with Amarillo for
co-exclusive rights to certain low dose oral formulations of interferon. The
Company will be required to pay a royalty of 10% of net sales, as defined, of
products produced and marketed by the Company that may be developed under the
license agreement. To date, no sales of these products have occurred, therefore,
no royalty payments have been made.
Note 16. Fair Value of Financial Instruments
The carrying values of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable, approximate fair market
values, because of short maturities or interest rates that approximate current
rates.
Note 17. Restatement of 1999 Quarterly Financial Statements (unaudited)
The Company has restated its consolidated financial statements as of
and for the three months ended March 31, June 30, and September 30, 1999 because
of errors discovered for those periods subsequent to the issuance of such
consolidated financial statements. The consolidated financial statements for
each three-month and year to date periods ended in 1999 required restatement to
correct the reporting for inventories, Settlement Shares, deferred compensation,
cost of sales, financing costs and certain other expenses.
The impact of the restatement on the Company's consolidated balance
sheets and statements of operations is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
March 31, 1999 June 30, 1999 September 30, 1999
As Reported Restated As Reported Restated As Reported Restated
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Operations:
- ----------
Total costs
and expenses $3,082,406 $3,176,294 $1,758,238 $1,692,908 $1,447,232 $1,396,584
Loss from operations (2,622,608) (2,716,496) (1,231,849) (1,166,519) (448,957) (398,309)
Net loss (2,617,871) (2,711,759) (1,231,209) (1,415,879) (448,957) (648,309)
Basic and diluted loss
per share (.57) (.58) (.26) (.27) (.09) (.12)
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Nine Months Ended
June 30, 1999 September 30, 1999
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Total costs
and expenses $4,840,644 $4,869,202 $6,287,876 $6,265,786
Loss from operations (3,854,457) (3,883,015) (4,303,414) (4,281,324)
Net loss (3,849,080) (4,127,638) (4,298,037) (4,775,947)
Basic and diluted loss
per share (.83) (.84) (.92) (.95)
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1999 September 30, 1999
As Reported Restated As Reported Restated As Reported Restated
----------- -------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet:
- -------------
Total current assets $1,048,991 $1,857,852 $ 718,748 $1,551,398 $ 603,338 $1,311,338
Total assets 4,764,092 5,572,953 4,247,024 5,079,674 3,944,781 4,652,781
Total current
liabilities 4,705,057 4,682,593 5,389,353 5,413,300 5,521,618 5,620,267
Total stockholders'
equity (deficit) 59,035 890,360 (1,142,329) (333,626) (1,576,837) (967,486)
Total liabilities and
stockholders' equity 4,764,092 5,572,953 4,247,024 5,079,674 3,944,781 4,652,781
</TABLE>
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Company is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed not later than
120 days after the end of the fiscal year covered by this report.
Item 11. Executive Compensation
Information with respect to compensation of executives of the Company
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed not later than
120 days after the end of the fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the Company's
definitive proxy statement pursuant to Regulation 14A, which statement will be
filed not later than 120 days after the end of the fiscal year covered by this
Report.
Item 13. Certain Relationships and Related Transactions
Information with respect to Certain Relationships and Related
Transactions is incorporated herein by reference to the Company's definitive
proxy statement pursuant to Regulation 14A, which statement will be filed not
later than 120 days after the end of the fiscal year covered by this Report.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
<TABLE>
<CAPTION>
<S> <C> <C>
Page
Independent Auditors' Report 20
Financial Statements:
Consolidated Balance Sheets - December 31, 1999 and 1998 21
Consolidated Statements of Operations - Years ended
December 31, 1999, 1998, and 1997 22
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 1999, 1998 and 1997 23
Consolidated Statements of Cash Flows - Years ended
December 31, 1999, 1998, and 1997 24
Notes to Consolidated Financial Statements 25
</TABLE>
(a)(2) Schedules have been omitted because they are not required or are
not applicable, or the required information has been included in the financial
statements or the notes thereto.
(a)(3) See accompanying Index to Exhibits
(b) There were no reports on Form 8-K filed by the Registrant during
the last quarter of the Period covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERFERON SCIENCES, INC.
By: /s/ Lawrence M. Gordon
----------------------
Lawrence M. Gordon
Chief Executive Officer
Dated: April 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Samuel H. Ronel Chairman of the Board April 13, 2000
- -------------------
Samuel H. Ronel, Ph.D.
/s/ Lawrence M. Gordon Chief Executive Officer and Director
- ---------------------- (Principal Executive Officer) April 13, 2000
Lawrence M. Gordon
/s/ Stanley G. Schutzbank President and Director April 13, 2000
- -------------------------
Stanley G Schutzbank, Ph.D.
___________________ Director April __, 2000
Sheldon L. Glashow
/s/ Donald W. Anderson Controller (Principal April 13, 2000
- ---------------------- Accounting and Financial
Donald W. Anderson Officer)
The foregoing constitute a majority of the members of the Board of
Directors.
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
3.1 - Restated Certificate of Incorporation of the Registrant. Incorporated
herein by reference to Exhibit 3B of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1988.
3.2 - Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant. Incorporated herein by reference to Exhibit 3.4 of
Registration Statement No. 33-40902.
3.3 - Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant. Incorporated herein by reference to Exhibit 3.2 of
Registration Statement No. 33-40902.
3.4 - Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant. Incorporated herein by reference to Exhibit 3.4 of
Registration Statement No. 33-00845.
3.5 - Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant.
3.6 - By-Laws of the Registrant, as amended. Incorporated herein by reference to
Exhibit 3.2 of Registration Statement No. 2-7117.
4.1 - Form of Underwriter's Purchase Option issued in connection with the
August/September 1995 Offering. Incorporated herein by reference to
Exhibit 4.1 of Registration Statement No. 33-59479.
4.2 - Form of Underwriter's Purchase Option issued in connection with the
May 1996 Offering. Incorporated herein by reference to Exhibit 4.4 of
Registration Statement No. 333-00845.
4.3 - Form of Purchase Option issued in connection with the December 1996
Private Placement.
10.1 - Transfer and License Agreement among National Patent,Hydron Laboratories,
Inc. and the Registrant dated as of January 1, 1981. Incorporated herein by
reference to Exhibit 10.8 of the Registrant's Registration Statement
No. 2-71117.
10.2 - Registrant's 1981 Stock Option Plan, as amended. Incorporated herein
by reference to Exhibit 10.3 to Registration Statement No. 33-59479.
10.3 - Profit Sharing Plan of the Registrant. Incorporated herein by reference
to Exhibit 10X of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.
10.4 - License Agreement dated October 20, 1989 between the Registrant and
Amarillo Cell Culture Company, Incorporated. Incorporated herein by reference to
Exhibit 10Y of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989.
10.5 - GP Strategies 401(k) Savings Plan dated January 9, 1992, effective March
1, 1992. Incorporated herein by reference to Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the Year ended December 31, 1992.
10.6 - Distribution Agreement dated as of February 3, 1994 between Registrant
and Industria Farmaceutica Andromaco, S.A. Incorporated herein by reference to
Exhibit 6(a) to the Registrant's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994.
10.7 - Processing and Supply Agreement dated as of September 1, 1994 between
Registrant and Sanofi Winthrop L.P. Incorporated herein by reference to Exhibit
6(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
10.8 - Amendment dated March 24, 1995 to Distribution Agreement dated as of
February 3, 1994 between Registrant and Industria Farmaceutica Andromaco S.A.
Incorporated herein by reference to Exhibit 10.30 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.9 - License Agreement, dated as of March 29, 1995, among the Registrant,
Hoffmann-La Roche, Inc. and F. Hoffmann La-Roche, Ltd. Incorporated herein by
reference to Exhibit 10.42 to Registration Statement No. 33-59479.
10.10 - Amendment of ACC/ISI License Agreement, dated 27, 1995, between
Registrant and Amarillo Cell Culture Company, Incorporated. Incorporated herein
by reference to Exhibit 10.43 to Registration Statement No. 33-59479.
10.11 - PPM/ACC Sub License Agreement, dated April 27, 1995, between Pharma
Pacific Management Pty. Ltd., and Amarillo Cell Culture Company, Incorporated.
Incorporated herein by reference to Exhibit 10.52 to Registration Statement No.
33-59479.
10.12 - Supply and Distribution Agreement, dated as of April 3, 1996, between
the Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.56 to Registration Statement No. 333-00845.
10.13 - Quality Assurance Agreement, dated as of April 3, 1996, between the
Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.57 to Registration Statement No. 333-00845.
10.14 - Agreement, dated as of April 1, 1997, between the Registrant and the
American National Red Cross. Incorporated by reference to Exhibit 10.54 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.15 - Agreement dated May 27, 1997, between the Registrant and Alternate Site
Distributors, Inc. Incorporated by reference to Exhibit 10.55 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.16 - Stock Bonus Plan.
10.17 - Form of employment agreement for participants in Stock Bonus Plan.
10.18 - Employment Agreement, dated as of October 1, 1997, between the
Registrant and Lawrence M. Gordon.
21.0 - Subsidiaries of the Registrant. *
23.1 - Consent of Independent Auditors. *
- -----------------
*Filed herewith
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Name Jurisdiction
Interferon Sciences Development Corporation Delaware
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
INTERFERON SCIENCES, INC.
We consent to incorporation by reference in (i) the Registration
Statement (No. 33-64921) on Form S-3, ii) the Registration Statement (No.
333-04381) on Form S-3, (iii) the Registration Statement (No. 333-19451) on Form
S-3, (iv) the Registration Statement (No. 33-30209) on Form S-8, and (v) the
Registration Statement (No. 333-34203) on Form S-3 of Interferon Sciences, Inc.
of our report dated April 10, 2000 relating to the consolidated balance sheets
of Interferon Sciences, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999,
which report appears in the December 31, 1999 annual report on Form 10-K of
Interferon Sciences, Inc.
Our report on Interferon Sciences, Inc. and subsidiary dated April 10,
2000, contains an explanatory paragraph that states 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
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG LLP
New York, New York
April 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000351532
<NAME> INTERFERON SCIENCES, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,273,242
<SECURITIES> 0
<RECEIVABLES> 35,561
<ALLOWANCES> 0
<INVENTORY> 766,000
<CURRENT-ASSETS> 3,101,821
<PP&E> 12,759,273
<DEPRECIATION> 9,834,558
<TOTAL-ASSETS> 6,256,458
<CURRENT-LIABILITIES> 5,199,103
<BONDS> 0
0
0
<COMMON> 53,275
<OTHER-SE> 504,080
<TOTAL-LIABILITY-AND-EQUITY> 6,256,458
<SALES> 2,329,222
<TOTAL-REVENUES> 2,329,222
<CGS> 3,552,026
<TOTAL-COSTS> 3,552,026
<OTHER-EXPENSES> 4,197,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,950,592)
<INCOME-TAX> (3,602,083)
<INCOME-CONTINUING> (3,602,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,602,083)
<EPS-BASIC> (.71)
<EPS-DILUTED> (.71)
</TABLE>
