UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ________________
Commission File Number: 0-10379
INTERFERON SCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2313648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
(Address of principal executive offices) (Zip code)
(732) 249 - 3250
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of issuer's classes of common stock as of
August 8, 2000:
Common Stock 17,036,349 shares
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
Part I. Financial Information:
Consolidated Condensed Balance Sheets--June 30, 2000
and December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . .1
Consolidated Condensed Statements of Operations--Three Months
and Six Months Ended June 30, 2000 and 1999 . . . . . . . . . . . . .2-3
Consolidated Condensed Statement of Changes in
Stockholders' Equity--Six Months Ended June 30, 2000. . . . . . . . . . .4
Consolidated Condensed Statements of Cash Flows--Six
Months Ended June 30, 2000 and 1999. . . . . . . . . . .. . . . . . . . .5
Notes to Consolidated Condensed Financial Statements. . . . . . . . . . 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . .11-16
Part II. Other Information . . . . . . . . . . . . . . . . . . . . . . . . .17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C>
June 30, December 31,
2000 1999
(Unaudited)
ASSETS -------------------------------
Current assets
Cash and cash equivalents $ 3,391,236 $ 2,273,242
Accounts and other receivables 128,097 35,561
Inventories, net of reserves
of $5,945,842 and $6,225,185,
respectively 735,203 766,000
Prepaid expenses and other
current assets 28,582 27,018
------------- -------------
Total current assets 4,283,118 3,101,821
------------- -------------
Property, plant and equipment,
at cost 12,759,273 12,759,273
Less accumulated depreciation (10,076,311) (9,834,558)
------------- -------------
2,682,962 2,924,715
------------- -------------
Patent costs, net of accumulated
amortization 204,788 219,822
Other assets 10,100 10,100
------------- -------------
Total assets $ 7,180,968 $ 6,256,458
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,867,722 $ 4,915,466
Note payable and amount due
GP Strategies 536,250 283,637
------------- -------------
Total current liabilities 3,403,972 5,199,103
------------- -------------
Note payable to GP Strategies 500,000
------------- -------------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.01 per share;
authorized-5,000,000 shares; none issued
and outstanding
Common stock, par value $.01 per share;
authorized-55,000,000 shares; issued
and outstanding-12,482,393 and
5,327,473 shares, respectively 124,824 53,275
Capital in excess of par value 134,097,733 129,397,259
Accumulated deficit (130,445,561) (128,812,179)
Settlement shares (81,000)
------------- ------------
Total stockholders' equity 3,776,996 557,355
------------- ------------
Total liabilities and stockholders'
equity $ 7,180,968 $ 6,256,458
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<S> <C> <C>
Three Months Ended
June 30,
-----------------------------
2000 1999
(as restated)
------------- -------------
Revenues
Alferon N Injection $ 157,922 $ 526,389
------------- -------------
Total revenues 157,922 526,389
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 425,177 765,408
Reversal of reserve for
excess inventory (273,789)
Research and development (net of $456,998
for settlements on various liabilities
during the three months ended June 30, 2000) 34,000 696,497
General and administrative 518,103 504,792
------------- -------------
Total costs and expenses 977,280 1,692,908
------------- -------------
Loss from operations (819,358) (1,166,519)
Interest expense and financing costs 779 249,360
------------- -------------
Net loss $ (820,137) $(1,415,879)
============= =============
Basic and diluted loss per share $ (.09) $ (.27)
============= =============
Weighted average number of
shares outstanding 9,227,925 5,179,034
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
-----------------------------
2000 1999
(as restated)
------------- -------------
<S> <C> <C>
Revenues
Alferon N Injection $ 321,072 $ 985,910
Research products 277
------------- -------------
Total revenues 321,072 986,187
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 655,330 2,223,840
Reversal of reserve for
excess inventory (135,271) (582,650)
Research and development (net of $456,998
for settlements on various liabilities
during the six months ended June 30, 2000) 457,819 1,942,989
General and administrative 966,177 1,285,023
------------- -------------
Total costs and expenses 1,944,055 4,869,202
------------- -------------
Loss from operations (1,622,983) (3,883,015)
Interest expense and financing costs 10,399 244,623
------------- -------------
Net loss $ (1,633,382) $(4,127,638)
============= =============
Basic and diluted loss per share $ (.22) $ (.84)
============= =============
Weighted average number of
shares outstanding 7,566,877 4,922,447
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
SIX MONTHS ENDED June 30, 2000
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Capital Total
Common Stock in excess Accummulated Settlement stockholders'
Shares Amount of par value deficit shares equity
------------------ ------------ -------------- ---------- -------------
Balance at
Dec. 31,
1999 5,327,473 $ 53,275 $129,397,259 $(128,812,179) $ (81,000) $ 557,355
Net proceeds
from sale of
common stock 7,088,648 70,886 4,507,614 4,578,500
Common stock
issued as
compensation 20,000 200 23,550 23,750
Common stock
issued under
Company 401(k)
Plan 46,272 463 39,424 39,887
Forgiveness of
amount due GP
Strategies 129,886 129,886
Settlement shares
sold 368,341 368,341
Market value
adjustment (287,341) (287,341)
Net loss (1,633,382) (1,633,382)
--------------------------------------------------------------------------------------
Balance at
June 30,
2000 12,482,393 $124,824 $134,097,733 $(130,445,561) $ --- $3,776,996
The accompanying notes are an integral part of these consolidated condensed
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------
2000 1999
(as restated)
------------ ------------
<S> <C> <C>
Cash flows from operations:
Net loss $(1,633,382) $(4,127,638)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 256,787 373,654
Amortization of deferred financing costs 250,000
Gain on settlements of research-related liabilities (456,998)
Compensation and
benefits paid with common stock 63,637 68,979
Reversal of reserve for
excess inventory (135,271) (582,650)
Market value adjustment (287,341) 587,261
Loss on sale of other assets 51,392
Change in operating assets and liabilities:
Inventories 166,068 520,434
Amount due to GP Strategies (117,501) 74,264
Accounts and other receivables (92,536) 480,810
Prepaid expenses and other current
assets (1,564) (78,319)
Accounts payable and accrued expenses (1,222,405) 878,161
------------ ------------
Net cash used for operations (3,460,506) (1,503,652)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of other assets 38,658
------------ ------------
Net cash provided by 38,658
investing activities ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 4,578,500
Proceeds from note payable to
GP Strategies 500,000
------------ ------------
Net cash provided by financing activities 4,578,500 500,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,117,994 (964,994)
Cash and cash equivalents at beginning
of period 2,273,242 1,170,861
------------ ------------
Cash and cash equivalents at end of period $ 3,391,236 $ 205,867
============ ============
Noncash items:
Forgiveness of amount due GP Strategies $ 129,886 $
=========== ============
The accompanying notes are an integral part of these consolidated condensed financial statements
</TABLE>
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The financial information included herein is unaudited. Such information,
however, reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
periods. The operating results for interim periods are not necessarily
indicative of operating results to be expected for the year.
Note 2. Inventories
Inventories are classified as follows:
June 30, December 31,
2000 1999
-------------- --------------
Finished goods $ 570,070 $ 361,809
Work in process 4,778,415 5,296,816
Raw materials 1,332,560 1,332,560
Less reserve for
excess inventory (5,945,842) (6,225,185)
--------------- --------------
$ 735,203 $ 766,000
=============== ==============
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.
During the three months ended June 30, 2000, the Company converted a
portion of its interferon intermediates (work in process inventory) into
finished goods inventory.
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 recorded a
reserve against its inventory of ALFERON N Injection to reflect its estimated
net realizable value. The reserve was 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 June 30, 2000 and December 31, 1999, reflect a reserve for excess
inventory of $5,945,842 and $6,225,185, respectively.
During the six months ended June 30, 2000 and 1999, a portion of the
reserve for excess inventory was reversed in the amount of $135,271 and
$582,650, respectively, to reflect inventory at its estimated net realizable
value. In addition, during the six months ended June 30, 2000, a portion of the
reserve for excess inventory was used in the amount of $144,072.
Note 3. Agreement with GP Strategies Corporation
In an agreement dated March 25, 1999, GP Strategies Corporation ("GP
Strategies") agreed to lend the Company $500,000 (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 a certain
liability to the American Red Cross (the "Red Cross") 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 and amortized over the original period of the GP Strategies Debt in 1999.
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 (and accordingly is classified as a current liability and a long-term
liability on the accompanying consolidated condensed balance sheets at June 30,
2000 and December 31, 1999, respectively), (ii) the Company agreed to file a
registration statement prior to July 31, 2000 (which the Company is currently in
the process of filing) 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 (whereby certain legal, financial and administrative services
were provided by GP Strategies to the Company) was terminated and all
intercompany accounts between the Company and GP Strategies (other than the GP
Strategies Debt) were discharged. The amount of intercompany accounts that were
discharged was approximately $130,000, which was recorded in the quarter ended
March 31, 2000 as a contribution to capital. 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.
Note 4. Agreement with the Red Cross
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.
As the liability to the Red Cross remained unsettled until such time as
the Red Cross sells the shares they have already received and could receive in
the future, the Company 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 the six months ended June 30,
1999, an adjustment for $587,261 was recorded with a corresponding charge to
cost of goods sold. Due to the increase in the Company's stock price during the
three months ended March 31, 2000 up to the date of sale by the Red Cross of all
remaining Settlement Shares, an adjustment for $287,341 was recorded with a
corresponding credit to cost of goods sold. During 1999, the Red Cross sold
27,000 of the Settlement Shares and sold the balance of such shares (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 in 2000, were
applied against the liability to the Red Cross. The remaining liability to the
Red Cross at June 30, 2000 and December 31, 1999 was approximately $1,244,000
and $1,579,000, respectively.
Note 5. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of June 30, 2000, the Company had an accumulated deficit
of approximately $130.4 million. For the six months ended June 30, 2000 and the
years ended December 31, 1999, 1998 and 1997, the Company had losses from
operations of approximately $1.6 million, $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.
During the second quarter of 2000 and through August 3, 2000, the Company
raised gross proceeds of $7,679,380 from the sale in a private placement of
11,635,451 shares of common stock at a price of $0.66 per share and warrants,
exercisable until April 2005 to purchase 11,635,451 shares of common stock at a
price of $1.50 per share. The proceeds from this private placement will be used
to fund new initiatives, in addition to funding certain projects within the
Company's existing interferon-related operations. At August 10, 2000, the
Company has $5,700,000 of cash and cash equivalents, with which to support
future operating activities and to satisfy its financial obligations as they
become payable. 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.
During the second quarter of 2000, the Company was able to settle certain
amounts owed on various research-related liabilities at a savings to the Company
of approximately $457,000. Such amount was credited against research and
development expenses.
Based on the Company's estimates of revenues, expenses, the timing of
repayment of creditors, and levels of production, management believes that the
cash presently available will be sufficient to enable the Company to continue
operations for at least the next twelve months. However, actual results,
especially with respect to revenues, may differ materially from such estimate,
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 6. Restatement of the June 30, 1999 Financial Statements (unaudited)
The Company has restated its consolidated condensed financial statements
for the three months ended March 31, 1999, June 30, 1999 and September 30, 1999
because of errors discovered subsequent to the issuance of such consolidated
condensed financial statements. The consolidated condensed financial statements
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 condensed
statements of operations for the three months and six months ended June 30, 1999
and cash flows for the six months ended June 30, 1999 is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999
Operations: As Reported Restated
---------- ----------- --------
<S> <C> <C>
Revenues
Alferon N Injection $ 526,389 $ 526,389
------------- -------------
Total revenues 526,389 526,389
------------- -------------
Costs and expenses
Cost of goods sold and idle production costs 603,360 765,408
Reversal of reserve for excess inventory (273,789)
Research and development 696,497 696,497
General and administrative 458,381 504,792
------------- -------------
Total costs and expenses 1,758,238 1,692,908
------------- -------------
Loss from operations (1,231,849) (1,166,519)
Interest income (expense and
financing costs) 640 (249,360)
------------- -------------
Net loss $ (1,231,209) $ (1,415,879)
============= =============
Basic and diluted loss per share $ (.26) $ (.27)
============= =============
Weighted average number of
shares outstanding 4,697,034 5,179,034
============= =============
Six Months Ended
June 30, 1999
Operations: As Reported Restated
---------- ----------- --------
Revenues
Alferon N Injection $ 985,910 $ 985,910
Research products 277 277
------------- -------------
Total revenues 986,187 986,187
------------- -------------
Costs and expenses
Cost of goods sold and idle production costs 1,636,579 2,223,840
Reversal of reserve for excess inventory (582,650)
Research and development 1,942,989 1,942,989
General and administrative 1,261,076 1,285,023
------------- -------------
Total costs and expenses 4,840,644 4,869,202
------------- -------------
Loss from operations (3,854,457) (3,883,015)
Interest income (expense and
financing costs) 5,377 (244,623)
------------- -------------
Net loss $ (3,849,080) $ (4,127,638)
============= =============
Basic and diluted loss per share $ (.83) $ (.84)
============= =============
Weighted average number of
shares outstanding 4,636,733 4,922,447
============= =============
Six Months Ended
June 30, 1999
Cash flows: As Reported Restated
---------- ----------- --------
Cash flows from operations:
Net loss $ (3,849,080) $ (4,127,638)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 373,654 373,654
Amortization of deferred financing costs 250,000
Accounts payable and benefits paid with
common stock 603,354 68,979
Reversal of reserve for excess inventory (582,650)
Market value adjustment 587,261
Loss on sale of other assets 51,392
Change in operating assets and liabilities:
Inventories 520,434 520,434
Amount due to GP Strategies 574,264 74,264
Accounts and other receivables 480,810 480,810
Prepaid expenses and other current assets (78,319) (78,319)
Accounts payable and accrued expenses 319,839 878,161
------------ ------------
Net cash used for operations (1,055,044) (1,503,652)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of other assets 90,050 38,658
------------ ------------
Net cash provided by investing activities 90,050 38,658
------------ ------------
Cash flows from financing activities:
Proceeds from note payable to GP Strategies 500,000
------------ ------------
Net cash provided by financing activities 500,000
------------ ------------
Net decrease in cash and cash equivalents (964,994) (964,994)
Cash and cash equivalents at beginning of
period 1,170,861 1,170,861
------------ ------------
Cash and cash equivalents at end of period $ 205,867 $ 205,867
============ ============
</TABLE>
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
During the second quarter of 2000 and through August 3, 2000, the Company
raised gross proceeds of $7,679,380 from the sale, in a private placement, of
11,635,451 shares of common stock at a price of $0.66 per share and warrants,
exercisable until April 2005 to purchase 11,635,451 shares of common stock at a
price of $1.50 per share. The proceeds from this private placement will be used
to fund new initiatives, in addition to funding certain projects within the
Company's existing interferon-related operations. The Company is seeking to
enter into collaborations with companies in the areas of cancer, infectious
diseases, and immunology. Their strategy is to utilize their expertise in
regulatory affairs, clinical trials, manufacturing, and research and development
to acquire equity participations in early stage companies. As of August 10,
2000, the Company had an aggregate of $5,700,000 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, the timing of
repayment of creditors, and levels of production, management believes that the
cash presently available will be sufficient to enable the Company to continue
operations for at least the next twelve months. However, actual results,
especially with respect to revenues, may differ materially from such estimate,
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 included an explanatory paragraph that states
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 carryovers and received $2.35 million. In
June 2000, the Company submitted 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 such 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.
The Company has obtained human white blood cells used in the manufacture
of ALFERON N Injection from several sources, including the Red Cross pursuant to
a supply agreement dated April 1, 1997 (the "Supply Agreement"). The Company
will not need to purchase more human white blood cells until such time as
production of crude alpha interferon 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 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 the six months ended June 30,
1999, an adjustment for $587,261 was recorded with a corresponding charge to
cost of goods sold. Due to the increase in the Company's stock price during the
three months ended March 31, 2000 up to the date of sale by the Red Cross of all
remaining Settlement Shares, an adjustment for $287,341 was recorded with a
corresponding credit to cost of goods sold. During 1999, the Red Cross sold
27,000 of the Settlement Shares and sold the balance of such shares (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 in 2000, were
applied against the liability to the Red Cross. The remaining liability to the
Red Cross at June 30, 2000 and December 31, 1999 was approximately $1,244,000
and $1,579,000, respectively. The Company is currently discussing with the Red
Cross the repayment of the remaining liability.
In an agreement dated March 25, 1999, GP Strategies agreed to lend the
Company $500,000. 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 and a five-year 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 (which the Company is
currently in the process of filing) 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 and all intercompany
accounts between the Company and GP Strategies (other than the GP Strategies
Debt) in the amount of approximately $130,000 were discharged. 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.
Results of Operations
Six Months Ended June 30, 2000 Versus Six Months Ended June 30,1999(as restated)
For the six months ended June 30, 2000 and 1999, the Company had revenues
from the sale of ALFERON N Injection of $321,072 and $985,910, respectively. In
the third and fourth quarters of 1999, the Company offered price concessions to
its largest customers in an attempt to raise cash from the sale of ALFERON N
Injection, which resulted in substantially higher than normal sales in the
second half of 1999 and in lower than normal sales in the six months ended June
30, 2000. This was due to the fact that such customers were selling out of their
inventory of Alferon N Injection (rather than purchasing Alferon N Injection
from the Company).
In the six months ended June 30, 2000, the Company sold, through its
distributor, to wholesalers and other customers in the United States 2,636 vials
of ALFERON N Injection, compared to 7,897 vials sold by the Company during the
six months ended June 30, 1999. In addition, foreign sales of ALFERON N
Injection were 354 vials for the six months ended June 30, 1999. There were no
foreign sales in the six months ended June 30, 2000.
Cost of goods sold and idle production costs totaled $655,330 and
$2,223,840 for six months ended June 30, 2000 and 1999, respectively. Idle
production costs in the six months ended June 30, 2000 and 1999 represented
fixed production costs, which were incurred after production of ALFERON N
Injection was discontinued in April 1998. Such costs were greater in the 1999
period due to higher levels of payroll costs. In addition, lower unit sales in
the six months ended June 30, 2000 as compared to the six months ended June 30,
1999 contributed to lower cost of goods sold. In addition, based on changes in
the value of the Settlement Shares, for the six months ended June 30, 2000, cost
of goods sold was credited for $287,341 as compared to a charge of $587,261 to
cost of goods sold for the six months ended June 30, 1999.
During the six months ended June 30, 2000 and 1999, a portion of the
reserve for excess inventory was reversed in the amount of $135,271 and
$582,650, respectively, in order to reflect the inventory at its estimated net
realizable value.
Research and development expenses during the six months ended June 30,
2000 of $457,819 decreased by $1,485,170 from $1,942,989 for the same period in
1999, principally because the Company has had a reduction in research personnel
which has reduced its payroll and research costs. In addition, during the second
quarter of 2000, the Company settled amounts owed on various research related
liabilities at a savings to the Company of approximately $457,000. Such amount
was credited against research and development expenses.
General and administrative expenses for the six months ended June 30,
2000 were $966,177 as compared to $1,285,023 for the same period in 1999. The
decrease of $318,846 was principally due to decreases in payroll and other
operating expenses.
Interest expense, net, for the six months ended June 30, 2000 was $10,399
of expense and primarily represented interest accrued on the Red Cross Liability
and GP Strategies Debt partially offset by interest income. Interest expense,
net, for the six months ended June 30, 1999 was $244,623 of expense and
primarily represented financing costs partially offset by interest income.
As a result of the foregoing, the Company incurred net losses of
$1,633,382 and $4,127,638 for the six months ended June 30, 2000 and 1999,
respectively.
Three Months Ended June 30, 2000 Versus Three Months Ended June 30, 1999
(as restated)
For the three months ended June 30, 2000 and 1999, the Company had
revenues from the sale of ALFERON N Injection of $157,922 and $526,389,
respectively. In the third and fourth quarters of 1999, the Company offered
price concessions to its largest customers in an attempt to raise cash from the
sale of ALFERON N Injection, which resulted in substantially higher than normal
sales in the second half of 1999 and in lower than normal sales in the three
months ended June 30, 2000. This was due to the fact that such customers were
selling out of their inventory of Alferon N Injection (rather than purchasing
Alferon N Injection from the Company).
In the three months ended June 30, 2000, the Company sold, through its
distributor, to wholesalers and other customers in the United States 1,219 vials
of ALFERON N Injection, compared to 4,189 vials sold by the Company during the
three months ended June 30, 1999. In addition, foreign sales of ALFERON N
Injection were 192 vials for the three months ended June 30, 1999. There were no
foreign sales in the three months ended June 30, 2000.
Cost of goods sold and idle production costs totaled $425,177 and
$765,408 for the three months ended June 30, 2000 and 1999, respectively. Idle
production costs in the three months ended June 30, 2000 and 1999 represented
fixed production costs, which were incurred after production of ALFERON N
Injection was discontinued in April 1998. In addition, lower unit sales in the
three months ended June 30, 2000 as compared to the three months ended June 30,
1999 contributed to lower cost of goods sold. During the three months ended June
30, 2000, the Company incurred expenses to convert, formulate and package
interferon intermediates (work in process inventory) into finished goods
inventory. In addition, based on changes in the value of the Settlement Shares,
for the three months ended June 30, 1999, cost of goods sold was charged for
$162,048.
During the three months ended June 30, 1999, a portion of the reserve for
excess inventory was reversed in the amount of $273,789 in order to reflect the
inventory at its estimated net realizable value.
Research and development expenses during the three months ended June 30,
2000 of $34,000 decreased by $662,497 from $696,497 for the same period in 1999,
principally because the Company settled amounts owed on various research related
liabilities at a savings to the Company of approximately $457,000. Such amount
was credited against research and development expenses. In addition, the Company
has had a reduction in research personnel which has reduced its payroll and
research costs.
General and administrative expenses for the three months ended June 30,
2000 were $518,103 as compared to $504,792 for the same period in 1999, which
reflects only a minor change in administrative costs during the 2000 period.
Interest expense, net, for the three months ended June 30, 2000 was $779
of expense and primarily represented interest accrued on the Red Cross Liability
and GP Strategies Debt partially offset by interest income. Interest expense,
net, for the three months ended June 30, 1999 was $249,360 of expense and
primarily represented financing costs partially offset by interest income.
As a result of the foregoing, the Company incurred net losses of $820,137
and $1,415,879 for the three months ended June 30, 2000 and 1999, 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 and 138, 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. On June 26, 2000, the
SEC issued SAB No. 101B which postponed the implementation of SAB No. 101 until
the quarter beginning October 1, 2000. 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" ("FIN 44"). 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 Company is
evaluating the financial impact of FIN 44 and has determined that the repricing
of employee stock options on October 27, 1999 falls within the guidance of FIN
44. On October 27, 1999, the Company repriced 429,475 stock options to $.25 per
share. On July 1, 2000, the implementation date of FIN 44, 352,823 shares of the
429,475 shares were fully vested (exercisable) and the closing price of the
Company's common stock on such date was $1.63 per share. Beginning on and after
July 1, 2000, the Company is required to record compensation expense on the
repriced vested or exercised stock options only when the market price exceeds
$1.63 per share and only on the amount in excess of $1.63 per share. For the
repriced unvested stock options, the intrinsic value measured at the July 1,
2000 effective date that is attributable to the remaining vesting period will be
recognized over that future period. The unvested stock options at July 1, 2000
(76,652) will fully vest on January 1, 2001. On August 10, 2000, the closing
price of the Company's common stock was $1.50 per share. The Company believes
that this will be the only impact for FIN 44.
Forward-Looking Statements
This report contains certain forward-looking statements reflecting
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements, including, but not limited to, the risk that the
Company will run out of cash; uncertainty of obtaining additional funding for
the Company; uncertainty of obtaining United States regulatory approvals for the
Company's products under development and foreign regulatory approvals for the
Company's FDA-approved product and products under development and, if such
approvals are obtained, uncertainty of the successful commercial development of
such products; substantial competition from companies with substantially greater
resources than the Company in the Company's present and potential businesses; no
guaranteed source of required materials for the Company's products; dependence
on certain distributors to market the Company's products; potential adverse side
effects from the use of the Company's products; potential patent infringement
claims against the Company; possible inability of the Company to protect its
technology; uncertainty of pharmaceutical pricing; substantial royalty
obligations payable by the Company; limited production experience of the
Company; risk of product liability; and risk of loss of key management
personnel, all of which are difficult to predict and many of which are beyond
the control of the Company.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 Financial Data Schedule - June 30, 2000.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three
months ended June 30, 2000.
<PAGE>
INTERFERON SCIENCES, INC.
June 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed in its behalf by
the undersigned thereunto duly authorized.
INTERFERON SCIENCES, INC.
DATE: August 11, 2000 By: /s/ Lawrence M. Gordon
Lawrence M. Gordon
Chief Executive Officer
DATE: August 11, 2000 By: /s/ Donald W. Anderson
Donald W. Anderson
Controller
