UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 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
October 31, 2000:
Common Stock 17,949,897 shares
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
Part I. Financial Information:
Consolidated Condensed Balance Sheets--September 30, 2000
and December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Consolidated Condensed Statements of Operations--Three Months
and Nine Months Ended September 30, 2000 and 1999. . . . . . . . . . .2-3
Consolidated Condensed Statement of Changes in
Stockholders' Equity--Nine Months Ended September 30, 2000. . . . . . . .4
Consolidated Condensed Statements of Cash Flows--Nine
Months Ended September 30, 2000 and 1999. . . . . . . .. . . . . . . . .5
Notes to Consolidated Condensed Financial Statements. . . . . . . . . . 6-11
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . .12-18
Part II. Other Information . . . . . . . . . . . . . . . . . . . . . . . . .19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
-------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 4,787,144 $ 2,273,242
Accounts and other receivables 217,505 35,561
Inventories, net of reserves
of $5,763,422 and $6,225,185,
respectively 585,389 766,000
Prepaid expenses and other
current assets 9,403 27,018
------------- -------------
Total current assets 5,599,441 3,101,821
------------- -------------
Property, plant and equipment,
at cost 12,759,273 12,759,273
Less accumulated depreciation (10,190,236) (9,834,558)
------------- -------------
2,569,037 2,924,715
------------- -------------
Patent costs, net of accumulated
amortization 197,270 219,822
Other assets 180,100 10,100
------------- -------------
Total assets $ 8,545,848 $ 6,256,458
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,905,238 $ 4,915,466
Note payable and amount due
GP Strategies 543,750 283,637
------------- -------------
Total current liabilities 3,448,988 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-17,045,171 and
5,327,473 shares, respectively 170,452 53,275
Capital in excess of par value 136,643,985 129,397,259
Accumulated deficit (131,717,577) (128,812,179)
Settlement shares (81,000)
------------- ------------
Total stockholders' equity 5,096,860 557,355
------------- ------------
Total liabilities and stockholders'
equity $ 8,545,848 $ 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)
Three Months Ended
September 30,
-----------------------------
2000 1999
(as restated)
------------- -------------
<S> <C> <C>
Revenues
Alferon N Injection $ 324,399 $ 998,275
------------- -------------
Total revenues 324,399 998,275
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 555,550 518,686
Reversal of reserve for
excess inventory (125,350)
Research and development 502,206 513,776
General and administrative 582,354 489,472
------------- -------------
Total costs and expenses 1,640,110 1,396,584
------------- -------------
Loss from operations (1,315,711) (398,309)
Interest income (expense), net 43,695 (250,000)
------------- -------------
Net loss $ (1,272,016) $ (648,309)
============= =============
Basic and diluted loss per share $ (.08) $ (.12)
============= =============
Weighted average number of
shares outstanding 15,735,454 5,246,342
============= =============
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)
Nine Months Ended
September 30,
-----------------------------
2000 1999
(as restated)
------------- -------------
<S> <C> <C>
Revenues
Alferon N Injection $ 645,471 $ 1,984,185
Research products 277
------------- -------------
Total revenues 645,471 1,984,462
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 1,210,880 2,742,526
Reversal of reserve for
excess inventory (135,271) (708,000)
Research and development (net of $456,998
for settlements of various liabilities
during the nine months ended
September 30, 2000) 960,025 2,456,765
General and administrative 1,548,531 1,774,495
------------- -------------
Total costs and expenses 3,584,165 6,265,786
------------- -------------
Loss from operations (2,938,694) (4,281,324)
Interest income (expense), net 33,296 (494,623)
------------- -------------
Net loss $ (2,905,398) $(4,775,947)
============= =============
Basic and diluted loss per share $ (.28) $ (.95)
============= =============
Weighted average number of
shares outstanding 10,342,756 5,021,691
============= =============
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
NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
Capital Total
Common Stock in excess Accummulated Settlement stockholders'
Shares Amount of par value deficit shares equity
------------------ ------------ -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
Dec. 31,
1999 5,327,473 $53,275 $129,397,259 $(128,812,179) $(81,000) $557,355
Net proceeds
from sale of
common stock 11,635,451 116,355 7,023,594 7,139,949
Common stock
issued as
compensation 20,000 200 23,550 23,750
Common stock
issued under
Company 401(k)
Plan 62,247 622 62,265 62,887
Employee stock
option compensation 7,431 7,431
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 (2,905,398) (2,905,398)
--------------------------------------------------------------------------------------
Balance at
September 30,
2000 17,045,171 $170,452 $136,643,985 $(131,717,577) $ --- $5,096,860
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)
Nine Months Ended
September 30,
--------------------------
2000 1999
(as restated)
------------ ------------
<S> <C> <C>
Cash flows from operations:
Net loss $(2,905,398) $(4,775,947)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 378,230 560,487
Amortization of deferred financing costs 500,000
Gain on settlements of research-related liabilities (456,998)
Compensation and
benefits paid with common stock 86,637 83,428
Employee stock option compensation 7,431
Reversal of reserve for
excess inventory (135,271) (708,000)
Market value adjustment (287,341) 587,261
Loss on sale of other assets 51,392
Change in operating assets and liabilities:
Inventories 315,882 709,784
Amount due to GP Strategies (110,001) 112,469
Accounts and other receivables (181,944) 354,491
Prepaid expenses and other current
assets 17,615 (143,551)
Accounts payable and accrued expenses (1,184,889) 1,046,923
------------ ------------
Net cash used for operations (4,456,047) (1,621,263)
------------ ------------
Cash flows from investing activities:
Increase in other assets (170,000)
Proceeds from sale of other assets 38,658
------------ ------------
Net cash (used for) provided by (170,000) 38,658
investing activities ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 7,139,949
Proceeds from note payable to
GP Strategies 500,000
------------ ------------
Net cash provided by financing activities 7,139,949 500,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,513,902 (1,082,605)
Cash and cash equivalents at beginning
of period 2,273,242 1,170,861
------------ ------------
Cash and cash equivalents at end of period $ 4,787,144 $ 88,256
============ ============
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) that 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:
September 30, December 31,
2000 1999
-------------- --------------
Finished goods $ 1,257,723 $ 361,809
Work in process 3,758,528 5,296,816
Raw materials 1,332,560 1,332,560
Less reserve for
excess inventory (5,763,422) (6,225,185)
--------------- --------------
$ 585,389 $ 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 nine months ended September 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 September 30, 2000 and December 31, 1999, reflect a reserve for
excess inventory of $5,763,422 and $6,225,185, respectively.
During the nine months ended September 30, 2000 and 1999, a portion of
the reserve for excess inventory was reversed in the amount of $135,271 and
$708,000, respectively, to reflect inventory at its estimated net realizable
value. In addition, during the nine months ended September 30, 2000, a portion
of the reserve for excess inventory was used in the amount of $326,492.
Note 3. Agreement with GP Strategies Corporation
Pursuant to an agreement dated March 25, 1999, GP Strategies Corporation
("GP Strategies") loaned the Company $500,000 (the "GP Strategies Debt"). In
return, the Company granted 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 issued 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.
Pursuant to the agreement, the Company has issued a note to GP Strategies
representing the GP Strategies Debt, which note was originally due on September
30, 1999 (but extended to June 30, 2001) and bears interest, payable at
maturity, at the rate of 6% per annum. Contemporaneous with the agreement with
GP Strategies, 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 September
30, 2000 and December 31, 1999, respectively), and (ii) 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
Pursuant to an agreement dated November 23, 1998, the Company granted the
Red Cross a security interest in certain assets to secure the Red Cross
Liability, issued to the Red Cross 300,000 shares of Common Stock and agreed to
issue 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 nine months ended
September 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 September 30, 2000 and December 31, 1999 was approximately
$1,260,000 and $1,579,000, respectively. On October 30, 2000, the Company issued
an additional 800,000 shares to the Red Cross. The net proceeds from the sale of
such shares by the Red Cross will be applied against the remaining liability of
$1,260,000 owed to the Red Cross. However, there can be no assurance that the
net proceeds from the sale of such shares will be sufficient to extinguish the
remaining liability owed the Red Cross.
Note 5. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of September 30, 2000, the Company had an accumulated
deficit of approximately $131.7 million. For the nine months ended September 30,
2000 and the years ended December 31, 1999, 1998 and 1997, the Company had
losses from operations of approximately $2.9 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 and third quarters of 2000, the Company received net
proceeds of $7,139,949 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. In addition, the Company issued to finders and placement agents in
connection with the private placement, warrants to purchase 1,467,059 units,
exercisable at a price of $.66 per unit. Each unit is comprised of a share of
common stock and a warrant to purchase an additional share of common stock,
exercisable until April 2005, 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.
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. At November 8, 2000, the Company has approximately $4.3
million of cash and cash equivalents, with which to support future operating
activities and to satisfy its financial obligations as they become payable.
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 approximately the next 12 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 activities or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself.
Note 6. Restatement of the September 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 nine months ended September
30, 1999 and cash flows for the nine months ended September 30, 1999 is
summarized as follows:
<TABLE>
Three Months Ended
September 30, 1999
<S> <C> <C>
Operations: As Reported Restated
---------- ----------- --------
Revenues
Alferon N Injection $ 998,275 $ 998,275
------------- -------------
Total revenues 998,275 998,275
------------- -------------
Costs and expenses
Cost of goods sold and idle production costs 518,686 518,686
Reversal of reserve for excess inventory (125,350)
Research and development 513,776 513,776
General and administrative 414,770 489,472
------------- -------------
Total costs and expenses 1,447,232 1,396,584
------------- -------------
Loss from operations (448,957) (398,309)
Interest expense and
financing costs 250,000
------------- -------------
Net loss $ (448,957) $ (648,309)
============= =============
Basic and diluted loss per share $ (.09) $ (.12)
============= =============
Weighted average number of
shares outstanding 4,746,342 5,246,342
============= =============
Nine Months Ended
September 30, 1999
Operations: As Reported Restated
---------- ----------- --------
Revenues
Alferon N Injection $ 1,984,185 $ 1,984,185
Research products 277 277
------------- -------------
Total revenues 1,984,462 1,984,462
------------- -------------
Costs and expenses
Cost of goods sold and idle production costs 2,155,265 2,742,526
Reversal of reserve for excess inventory (708,000)
Research and development 2,456,765 2,456,765
General and administrative 1,675,846 1,774,495
------------- -------------
Total costs and expenses 6,287,876 6,265,786
------------- -------------
Loss from operations (4,303,414) (4,281,324)
Interest income (expense and
financing costs) 5,377 (494,623)
------------- -------------
Net loss $ (4,298,037) $ (4,775,947)
============= =============
Basic and diluted loss per share $ (.92) $ (.95)
============= =============
Weighted average number of
shares outstanding 4,671,691 5,021,691
============= =============
Nine Months Ended
September 30, 1999
Cash flows: As Reported Restated
---------- ----------- --------
Cash flows from operations:
Net loss $ (4,298,037) $ (4,775,947)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 560,487 560,487
Amortization of deferred financing costs 500,000
Accounts payable and benefits paid with
common stock 617,803 83,428
Reversal of reserve for excess inventory (708,000)
Market value adjustment 587,261
Loss on sale of other assets 51,392
Change in operating assets and liabilities:
Inventories 709,784 709,784
Amount due to GP Strategies 612,469 112,469
Accounts and other receivables 354,491 354,491
Prepaid expenses and other current assets (143,551) (143,551)
Accounts payable and accrued expenses 413,899 1,046,923
------------ ------------
Net cash used for operations (1,172,655) (1,621,263)
------------ ------------
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 (1,082,605) (1,082,605)
Cash and cash equivalents at beginning of
period 1,170,861 1,170,861
------------ ------------
Cash and cash equivalents at end of period $ 88,256 $ 88,256
============ ============
</TABLE>
Note 7. Agreement with Metacine, Inc.
On July 28, 2000, the Company acquired for $100,000 an option to purchase
certain securities of Metacine, Inc. ("Metacine"), a company engaged in research
using dendritic cell technology, on the terms set forth below. Metacine will use
such funds to retain a third party to conduct a review and analysis of
Metacine's intellectual property. The option may be exercised by the Company
during the 60-day period following the Company's receipt of such review and
analysis, which is required to be delivered to the Company by December 15, 2000.
If the option is exercised, Metacine is required to issue to the Company
700,000 shares of Metacine common stock and a warrant to purchase, at a price of
$12.48 per share, 178,056 shares of Metacine common stock in exchange for
$150,000 in cash, $250,000 of services to be rendered by the Company to
Metacine, and shares of the Company's common stock having a market value of
$2,000,000. The Company is also required to pay Metacine the amount, if any, by
which the net proceeds from the sale by Metacine of the shares of the Company's
common stock is less than $2,000,000.
Metacine presently has outstanding 150,000 shares of common stock and has
issued warrants to purchase, at a price of $.01 per share, 752,500 shares of
Metacine common stock.
The Company and the other stockholders of Metacine have entered into a
stockholders' agreement providing for rights of first refusal, tag-along rights,
and preemptive rights. The agreement also provides that the Company will have
one representative on Metacine's board and will vote its shares in the same
proportion as Metacine's other stockholders, and that certain corporate actions
will not be taken without the Company's consent.
<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 and third quarters of 2000, the Company received net
proceeds of $7,139,949 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. In addition, the Company issued to finders and placement agents
in connection with the private placement, warrants to purchase 1,467,059 units,
exercisable at a price of $.66 per unit. Each unit is comprised of a share of
common stock and a warrant to purchase an additional share of common stock,
exercisable until April 2005, 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. Our strategy is to
utilize their expertise in regulatory affairs, clinical trials, manufacturing,
and research and development to acquire equity participations in early stage
companies.
On July 28, 2000, the Company acquired for $100,000 an option to purchase
certain securities of Metacine, Inc. ("Metacine"), a company engaged in research
using dendritic cell technology, on the terms set forth below. Metacine will use
such funds to retain a third party to conduct a review and analysis of
Metacine's intellectual property. The option may be exercised by the Company
during the 60-day period following the Company's receipt of such review and
analysis, which is required to be delivered to the Company by December 15, 2000.
If the option is exercised, Metacine is required to issue to the Company
700,000 shares of Metacine common stock and a warrant to purchase, at a price of
$12.48 per share, 178,056 shares of Metacine common stock in exchange for
$150,000 in cash, $250,000 of services to be rendered by the Company to
Metacine, and shares of the Company's common stock having a market value of
$2,000,000. The Company is also required to pay Metacine the amount, if any, by
which the net proceeds from the sale by Metacine of the shares of the Company's
common stock is less than $2,000,000.
Metacine presently has outstanding 150,000 shares of common stock and has
issued warrants to purchase, at a price of $.01 per share, 752,500 shares of
Metacine common stock.
The Company and the other stockholders of Metacine have entered into a
stockholders' agreement providing for rights of first refusal, tag-along rights,
and preemptive rights. The agreement also provides that the Company will have
one representative on Metacine's board and will vote its shares in the same
proportion as Metacine's other stockholders, and that certain corporate actions
will not be taken without the Company's consent.
As of November 8, 2000, the Company had an aggregate of approximately
$4.3 million 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 approximately the next 12 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.
Certificate Transfer Program
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.
As of January 1, 1999, the Company had approximately $85 million of
unused New Jersey net operating loss carryovers (which have a value of
approximately $7.65 million) 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 $53
million of tax benefits (with a value of approximately $4.8 million) and the
application was approved. However, 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
2000 is $40 million.
Agreements with the Red Cross
The Company 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.
Pursuant to an agreement dated November 23, 1998, the Company granted the
Red Cross a security interest in certain assets to secure the Red Cross
Liability, issued to the Red Cross 300,000 shares of Common Stock and agreed to
issue 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. As of the date hereof, the Red Cross has not given the
Company notice of its intent to exercise its rights to collect the Red Cross
Liability. 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 nine months ended
September 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 September 30, 2000 and December 31, 1999 was approximately
$1,260,000 and $1,579,000, respectively. On October 30, 2000, the Company issued
an additional 800,000 shares to the Red Cross. The net proceeds from the sale of
such shares by the Red Cross will be applied against the remaining liability of
$1,260,000 owed to the Red Cross. However, there can be no assurance that the
net proceeds from the sale of such shares will be sufficient to extinguish the
remaining liability owed the Red Cross.
Agreement with GP Strategies
Pursuant to an agreement dated March 25, 1999, GP Strategies loaned the
Company $500,000. In return, the Company granted 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 issued 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.
Pursuant to the agreement, the Company has issued a note to GP Strategies
representing the GP Strategies Debt, which note was originally due on September
30, 1999 (but extended to June 30, 2001) 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 (ii) 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
Nine Months Ended September 30, 2000 Versus Nine Months Ended September 30, 1999
(as restated)
For the nine months ended September 30, 2000 and 1999, the Company had
revenues from the sale of ALFERON N Injection of $645,471 and $1,984,185,
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 nine
months ended September 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 nine months ended September 30, 2000, the Company sold, through
its distributor, to wholesalers and other customers in the United States 4,882
vials of ALFERON N Injection, compared to 16,088 vials sold by the Company
during the nine months ended September 30, 1999. In addition, foreign sales of
ALFERON N Injection were 132 vials and 1,374 vials for the nine months ended
September 30, 2000 and 1999, respectively.
Cost of goods sold and idle production costs totaled $1,210,880 and
$2,742,526 for nine months ended September 30, 2000 and 1999, respectively. Idle
production costs in the nine months ended September 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, supplies and depreciation
expense. In addition, lower unit sales in the nine months ended September 30,
2000 as compared to the nine months ended September 30, 1999 contributed to
lower cost of goods sold. In addition, based on changes in the value of the
Settlement Shares, for the nine months ended September 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 nine months ended September 30, 1999.
During the nine months ended September 30, 2000 and 1999, a portion of
the reserve for excess inventory was reversed in the amount of $135,271 and
$708,000, respectively, in order to reflect the inventory at its estimated net
realizable value.
Research and development expenses during the nine months ended September
30, 2000 of $960,025 decreased by $1,496,740 from $2,456,765 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 nine months ended September
30, 2000 were $1,548,531 as compared to $1,774,495 for the same period in 1999.
The decrease of $225,964 was principally due to decreases in administrative
fees, distribution costs and other operating expenses partially offset by
increases in payroll and certain other operating costs.
Interest income, net, for the nine months ended September 30, 2000 was
$33,296 and primarily represented interest income on cash and cash equivalents
partially offset by interest expense accrued on the Red Cross Liability and GP
Strategies Debt. Interest expense, net, for the nine months ended September 30,
1999 was $494,623 and primarily represented financing costs partially offset by
interest income.
As a result of the foregoing, the Company incurred net losses of
$2,905,398 and $4,775,947 for the nine months ended September 30, 2000 and 1999,
respectively.
Three Months Ended September 30, 2000 Versus Three Months Ended
September 30, 1999 (as restated)
For the three months ended September 30, 2000 and 1999, the Company had
revenues from the sale of ALFERON N Injection of $324,399 and $998,275,
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 September 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 September 30, 2000, the Company sold, through
its distributor, to wholesalers and other customers in the United States 2,246
vials of ALFERON N Injection, compared to 8,191 vials sold by the Company during
the three months ended September 30, 1999. In addition, foreign sales of ALFERON
N Injection were 132 vials and 1,020 vials for the three months ended September
30, 2000 and 1999, respectively.
Cost of goods sold and idle production costs totaled $555,550 and
$518,686 for the three months ended September 30, 2000 and 1999, respectively.
Idle production costs in the three months ended September 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 higher
during the three months ended September 30, 2000, due to the Company incurring
expenses to convert, formulate and package interferon intermediates (work in
process inventory) into finished goods inventory. In addition, during the three
months ended September 30, 1999, a portion of the reserve for excess inventory
was used in the amount of $387,390 representing a portion of the cost of vials
sold during such period.
During the three months ended September 30, 1999, a portion of the
reserve for excess inventory was reversed in the amount of $125,350 in order to
reflect the inventory at its estimated net realizable value.
Research and development expenses during the three months ended September
30, 2000 of $502,206 decreased by $11,570 from $513,776 for the same period in
1999, which reflects the net effect of minor changes within the various
components making up research and development costs.
General and administrative expenses for the three months ended September
30, 2000 were $582,354 as compared to $489,472 for the same period in 1999. The
increase of $92,882 was principally due to increases in payroll and other
operating expenses.
Interest income, net, for the three months ended September 30, 2000 was
$43,695 and primarily represented interest income on cash and cash equivalents
partially offset by interest expense accrued on the Red Cross Liability and GP
Strategies Debt. Interest expense for the three months ended September 30, 1999
was $250,000 and represented financing costs.
As a result of the foregoing, the Company incurred net losses of
$1,272,016 and $648,309 for the three months ended September 30, 2000 and 1999,
respectively.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("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 derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging 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
does not believe that implementation of SFAS 133, as amended, will have a
material effect on its results of operations or financial position.
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 does not believe that
implementation 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
has evaluated 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 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 September 30, 2000, the closing
price of the Company's common stock was $1.16 per share and accordingly, under
FIN 44, no compensation expense was recorded on the repriced fully vested stock
options. However, under FIN 44, for the repriced unvested stock options, the
Company calculated and recorded compensation expense of $7,431.
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 - September 30, 2000.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three
months ended September 30, 2000.
<PAGE>
INTERFERON SCIENCES, INC.
September 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: November 14, 2000 By: /s/ Lawrence M. Gordon
Lawrence M. Gordon
Chief Executive Officer
DATE: November 14, 2000 By: /s/ Donald W. Anderson
Donald W. Anderson
Controller
