UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended March 31, 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
May 1, 2000:
Common Stock 5,387,473 shares
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INTERFERON SCIENCES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
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Page
Part I. Financial Information:
Consolidated Condensed Balance Sheets--March 31, 2000
and December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . .1
Consolidated Condensed Statements of Operations--Three
Months Ended March 31, 2000 and 1999 . . . . . . . . . . . . . . . . . .2
Consolidated Condensed Statement of Changes in
Stockholders' Equity--Three Months Ended
March 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Condensed Statements of Cash Flows--Three
Months Ended March 31, 2000 and 1999. . . . . . . . . . . . . . . . . . .4
Notes to Consolidated Condensed Financial Statements . . . . . . . . . .5-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . .10-14
Part II. Other Information . . . . . . . . . . . . . . . . . . . . . . . . .15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
CONSOLIDATED CONDENSED BALANCE SHEETS
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March 31, December 31,
2000 1999
(Unaudited) *
ASSETS -------------------------------
Current assets
Cash and cash equivalents $ 867,944 $ 2,273,242
Accounts and other receivables 52,139 35,561
Inventories, net of reserves
of $6,089,914 and $6,225,185 812,000 766,000
Prepaid expenses and other
current assets 31,962 27,018
------------- -------------
Total current assets 1,764,045 3,101,821
------------- -------------
Property, plant and equipment,
at cost 12,759,273 12,759,273
Less accumulated depreciation (9,960,346) (9,834,558)
------------- -------------
2,798,927 2,924,715
------------- -------------
Patent costs, net of accumulated
amortization 212,304 219,822
Other assets 10,100 10,100
------------- -------------
Total assets $ 4,785,376 $ 6,256,458
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 4,250,702 $ 4,915,466
Amount due GP Strategies 283,637
------------- -------------
Total current liabilities 4,250,702 5,199,103
------------- -------------
Note payable to GP Strategies 528,750 500,000
------------- -------------
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-5,387,473 and
5,327,473 shares 53,875 53,275
Capital in excess of par value 129,577,473 129,397,259
Accumulated deficit (129,625,424) (128,812,179)
Settlement shares (81,000)
------------- ------------
Total stockholders' equity 5,924 557,355
------------- ------------
Total liabilities and stockholders'
equity $ 4,785,376 $ 6,256,458
============= =============
*The consolidated condensed balance sheet as of December 31, 1999 has been
summarized from the Company's audited balance sheet as of that date.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
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2000 1999
(as restated)
------------- -------------
Revenues
Alferon N Injection $ 163,150 $ 459,521
Research products 277
------------- -------------
Total revenues 163,150 459,798
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 230,153 1,458,432
Reversal of reserve for
excess inventory (135,271) (308,861)
Research and development 423,819 1,246,492
General and administrative 448,074 780,231
------------- -------------
Total costs and expenses 966,775 3,176,294
------------- -------------
Loss from operations (803,625) (2,716,496)
Interest (expense) income (9,620) 4,737
------------- -------------
Net loss $ (813,245) $(2,711,759)
============= =============
Basic and diluted loss per share $ (.15) $ (.58)
============= =============
Weighted average number of
shares outstanding 5,360,979 4,709,265
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
(Unaudited)
Capital Total
Common Stock in excess Accummulated Settlement stockholders'
Shares Amount of par value deficit shares equity
------------------ ------------ -------------- ---------- -------------
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Balance at
Dec. 31,
1999 5,327,473 $ 53,275 $ 129,397,259 $(128,812,179) $ (81,000) $ 557,355
Common stock
issued as
compensation 20,000 200 23,550 23,750
Common stock
issued under
Company 401(k)
Plan 40,000 400 26,778 27,178
Forgiveness of
amount due GP
Strategies to
stockholders'
equity 129,886 129,886
Settlement shares
sold 368,341 368,341
Market value
adjustment (287,341) (287,341)
Net loss (813,245) (813,245)
------------------------------------------------------------------------------------
Balance at
March 31,
2000 5,387,473 $ 53,875 $ 129,577,473 $(129,625,424) $ --- $ 5,924
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------
2000 1999
(as restated)
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Cash flows from operations:
Net loss $ (813,245) $(2,711,759)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 133,306 186,829
Compensation and
benefits paid with common stock 50,928 39,134
Reversal of reserve for
excess inventory (135,271) (308,861)
Market value adjustment (287,341) 425,213
Loss on sale of other assets 51,392
Change in operating assets and liabilities:
Inventories 89,271 270,645
Amount due to GP Strategies (125,001) 44,325
Accounts and other receivables (16,578) 303,095
Prepaid expenses and other current
assets (4,944) (101,275)
Accounts payable and accrued expenses (296,423) 552,393
------------ ------------
Net cash used for operations (1,405,298) (1,248,869)
------------ ------------
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:
Proceeds from note payable to
GP Strategies 125,000
------------ ------------
Net cash provided by financing activities 125,000
------------ ------------
Net decrease in cash and cash equivalents (1,405,298) (1,085,211)
Cash and cash equivalents at beginning
of period 2,273,242 1,170,861
------------ ------------
Cash and cash equivalents at end of period $ 867,944 85,650
============ ============
Noncash items:
Forgiveness of amount due GP Strategies $ 129,886 $
=========== ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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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
statement 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.
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Note 2. Inventories
Inventories are classified as follows:
March 31, December 31,
2000 1999
-------------- --------------
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Finished goods $ 272,538 $ 361,809
Work in process 5,296,816 5,296,816
Raw materials 1,332,560 1,332,560
Less reserve for
excess inventory (6,089,914) (6,225,185)
-------------- --------------
$ 812,000 $ 766,000
============== ==============
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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 March 31, 2000 and December 31, 1999, reflect a reserve for
excess inventory of $6,089,914 and $6,225,185, respectively.
During the three months ended March 31, 2000 and 1999, a portion of the
reserve for excess inventory was reversed in the amount of $135,271 and
$308,861, respectively.
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 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 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 classified as long-term on the accompanying consolidated
condensed balance sheets at March 31, 2000 and 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 (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 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 three months ended March 31, 1999, an
adjustment for $425,213 was recorded with a corresponding charge to operations.
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 operations. 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 March 31, 2000 and
December 31, 1999 was approximately $1,228,000 and $1,579,000, respectively.
Note 5. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of March 31, 2000, the Company had an accumulated deficit
of approximately $129.6 million. For the three months ended March 31, 2000 and
the years ended December 31, 1999, 1998 and 1997, the Company had losses from
operations of approximately $0.8 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, the Company raised gross proceeds of
$3,512,000 from the sale in a private placement of 5,321,212 shares of common
stock and warrants, exercisable until April 2005 to purchase 5,321,212 shares of
common stock at a price of $1.50 per share. At May 19, 2000, the Company has
$2,800,000 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.
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 through approximately December 31, 2000. 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 March 31, 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 and certain other expenses.
The impact of the restatement on the Company's Consolidated Condensed
Statements of Operations and Cash Flows for the three months ended March 31,
1999 is summarized as follows:
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Operations: As Reported Restated
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Revenues
Alferon N Injection $ 459,521 $ 459,521
Research products 277 277
------------- -------------
Total revenues 459,798 459,798
------------- -------------
Costs and expenses
Cost of goods sold and idle production costs 1,033,219 1,458,432
Reversal of reserve for excess inventory (308,861)
Research and development 1,246,492 1,246,492
General and administrative 802,695 780,231
------------- -------------
Total costs and expenses 3,082,406 3,176,294
------------- -------------
Loss from operations (2,622,608) (2,716,496)
Interest income 4,737 4,737
------------- -------------
Net loss $ (2,617,871) $ (2,711,759)
============= =============
Basic and diluted loss per share $ (.57) $ (.58)
============= =============
Weighted average number of
shares outstanding 4,584,265 4,709,265
Cash flows: As Reported Restated
Cash flows from operations:
Net loss $ (2,617,871) $ (2,711,759)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 186,829 186,829
Accounts payable and benefits paid with
common stock 573,509 39,134
Reversal of reserve for excess inventory (308,861)
Market value adjustment 425,213
Loss on sale of other assets 51,392
Change in operating assets and liabilities:
Inventories 270,645 270,645
Amount due to GP Strategies 169,325 44,325
Accounts and other receivables 303,095 303,095
Prepaid expenses and other current assets (101,275) (101,275)
Accounts payable and accrued expenses 40,482 552,393
------------ ------------
Net cash used for operations (1,175,261) (1,248,869)
------------ ------------
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 125,000
------------ ------------
Net cash provided by financing activities 125,000
------------ ------------
Net decrease in cash and cash equivalents (1,085,211) (1,085,211)
Cash and cash equivalents at beginning of
period 1,170,861 1,170,861
------------ ------------
Cash and cash equivalents at end of period $ 85,650 $ 85,650
============ ============
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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, the Company raised gross proceeds of
$3,512,000 from the sale, in a private placement, of 5,321,212 shares of common
stock and warrants, exercisable until April 2005 to purchase 5,321,212 shares of
common stock at a price of $1.50 per share. As of May 19, 2000, the Company had
an aggregate of $2,800,000 in cash and cash equivalents. Until utilized, such
cash and cash equivalents are being invested principally in short-term
interest-bearing investments.
The Company'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 through approximately December 31, 2000. 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 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 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 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 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 three months ended March 31, 1999, an
adjustment for $425,213 was recorded with a corresponding charge to operations.
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 operations. 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 March 31, 2000 and
December 31, 1999 was approximately $1,228,000 and $1,579,000, 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. 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 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
Three Months Ended March 31, 2000 Versus Three Months Ended March 31,
1999(as restated)
For the three months ended March 31, 2000 and 1999, the Company had
revenues from the sale of ALFERON N Injection of $163,150 and $459,521,
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 March 31, 2000 due to the fact that such customers were selling out
their inventory of Alferon N Injection (rather than purchasing Alferon N
Injection directly from the Company).
In the three months ended March 31, 2000, the Company sold, through its
distributor, to wholesalers and other customers in the United States 1,417 vials
of ALFERON N Injection, compared to 3,708 vials sold by the Company during the
three months ended March 31, 1999. In addition, foreign sales of ALFERON N
Injection were 162 vials for the three months ended March 31, 1999. There were
no foreign sales in the three months ended March 31, 2000.
Cost of goods sold and idle production costs totaled $230,153 and
$1,458,432 for the three months ended March 31, 2000 and 1999, respectively.
Idle production costs in the three months ended March 31, 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, based on
changes in the value of the Settlement Shares, for the three months ended March
31, 2000, cost of goods sold was credited for $287,341 as compared to a charge
of $425,213 to cost of goods sold for the three months ended March 31, 1999.
During the three months ended March 31, 2000 and 1999, a portion of the
reserve for excess inventory was reversed in the amount of $135,271 and
$308,861, respectively, in order to reflect the inventory at its estimated net
realizable value.
Research and development expenses during the three months ended March 31,
2000 of $423,819 decreased by $822,673 from $1,246,492 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.
General and administrative expenses for the three months ended March 31,
2000 were $448,074 as compared to $780,231 for the same period in 1999. The
decrease of $332,157 was principally due to decreases in payroll and other
operating expenses.
Interest expense, net, for the three months ended March 31, 2000 was $9,620
of expense and primarily represented interest accrued on the Red Cross Liability
partially offset by interest income compared to interest income for the three
months ended March 31, 1999 of $4,737.
As a result of the foregoing, the Company incurred net losses of $813,245
and $2,711,759 for the three months ended March 31, 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 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" ("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 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 financial impact of FIN 44 and has not yet determined whether
applying the accounting guidance of FIN 44 will have a material effect on its
financial position and results of operations.
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.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
None
INTERFERON SCIENCES, INC.
MARCH 31, 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: May 22, 2000 By: /s/ Lawrence M. Gordon
Lawrence M. Gordon
Chief Executive Officer
DATE: May 22, 2000 By: /s/ Donald W. Anderson
Donald W. Anderson
Controller
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