UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended December 31, 2001
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition Period from ________to________
Commission File Number 0-10379
INTERFERON SCIENCES, INC. (Exact name of registrant as specified in its charter)
Delaware 22-2313648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 249-3250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter Period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No --
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of April 1, 2002, the aggregate market value of the outstanding shares
of the registrant's Common Stock, par value $.01 per share, held by
non-affiliates (assuming for this calculation only that all officers and
directors are affiliates) was approximately $3,464,231 based on the last
reported sale price of such stock on the OTC Bulletin Board on April 1, 2002.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 1, 2002
------------------------------------
Common Stock, par value $.01 per share 20,377,830 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2002 Annual Meeting
of Stockholders are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 38
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management 39
Item 13. Certain Relationships and Related Transactions 39
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 40
PART I
Item 1. Business
(a) General Development of Business
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical company
which studies, manufactures, and sells ALFERON N Injection(R), a pharmaceutical
product based on its highly purified, multi-species, natural-source alpha
interferon ("Natural Alpha Interferon"). ALFERON N Injection (Interferon
Alfa-n3) is approved by the United States Food and Drug Administration ("FDA")
for the treatment of certain types of genital warts and we have studied its
potential use in the treatment of human immunodeficiency virus ("HIV"),
hepatitis C virus ("HCV"), and other indications. ALFERON N Injection is
currently being studied in cancer and we are also evaluating its use in the
treatment of multiple sclerosis and certain other viral diseases.
In addition, we are seeking to enter into collaborations with companies in
the areas of cancer, infectious diseases, and immunology. Our strategy is to
utilize our expertise in regulatory affairs, clinical trials, manufacturing, and
research and development to acquire equity participations in early stage
companies. In April 2001, we acquired a significant equity interest in Metacine,
Inc., a company developing cancer vaccines based upon dendritic cell technology.
See "Business - Investments - Metacine."
(b) Financial Information about Business Segments
The Company operates as a single line of business. For the years ended
December 31, 2001, 2000 and 1999, domestic sales totaled $1,488,897, $1,046,470
and $2,204,437, respectively. All identifiable assets are located in the United
States.
(c) Narrative Description of Business
Scientific Background
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified four major classes of human
interferon: alpha, beta, gamma and omega. The Company's ALFERON N Injection
product contains a multi-species form of alpha interferon. The worldwide market
for injectable alpha interferon-based products has experienced rapid growth and
various alpha interferon injectable products are approved for many major medical
uses worldwide.
Alpha interferons are manufactured commercially in three ways: by genetic
engineering, by cell culture, and from human white blood cells. In the United
States, all three of these types of alpha interferon are approved for commercial
sale. The Company's Natural Alpha Interferon is produced from human white blood
cells.
The Company believes that the potential advantages of Natural Alpha
Interferon over recombinant interferons may be based upon their respective
molecular compositions. Natural Alpha Interferon is composed of a family of
proteins containing many different molecular species of interferon. In contrast,
recombinant alpha interferons each contain only a single species. Researchers
have reported that the various species of interferon may have differing
antiviral activity depending upon the type of virus. Natural Alpha Interferon
presents a broad complement of species which the Company believes may account
for its higher efficacy in laboratory studies with the HIV virus compared with
that of recombinant alpha interferon 2a and 2b (ROFERON(R) A and INTRON(R) A,
respectively). Natural Alpha Interferon is also glycosylated (partially covered
with sugar molecules). Such glycosylation is not present on the currently
marketed recombinant alpha interferons. The Company believes that the absence of
glycosylation may be, in part, responsible for the production of
interferon-neutralizing antibodies seen in patients treated with recombinant
alpha interferon. Although cell culture-derived interferon is also composed of
multiple glycosylated alpha interferon species, the types and relative quantity
of these species are different from the Company's Natural Alpha Interferon.
The production of Natural Alpha Interferon is dependent upon a supply of
human white blood cells and other essential materials. The Company obtains white
blood cells from FDA- licensed blood donor centers.
ALFERON N Injection
Approved Indication. On October 10, 1989, the FDA approved ALFERON N
Injection for the intralesional treatment of refractory (resistant to other
treatment) or recurring external genital warts in patients 18 years of age or
older. Substantially all of the Company's revenues, to date, have been generated
from the sale of ALFERON N Injection for such treatment. Certain types of human
papillomaviruses ("HPV") cause genital warts, a sexually transmitted disease. A
published report estimates that approximately eight million new and recurrent
cases of genital warts occur annually in the United States alone.
Genital warts are usually treated using caustic chemicals or through
physical removal methods. These procedures can be quite painful and effective
treatment outcomes are often difficult to achieve. The FDA approved a topical
formulation of an interferon-inducer in 1997 for the treatment of genital warts.
To date, the Company does not believe that such approval has had a material
adverse effect on the sales of ALFERON N Injection.
Clinical Trials for New Indications. In an effort to obtain approval to
market ALFERON N Injection for additional indications, the Company has
conducted, and is currently planning, various clinical trials for new
indications.
HIV-infected Patients. The Human Immunodeficiency Virus ("HIV") infection
is at epidemic levels in the world. It currently affects approximately 40
million people. HIV infection usually signals the start of a progressive disease
that compromises the immune system, ultimately resulting in Acquired Immune
Deficiency Syndrome ("AIDS").
An article published in AIDS Research and Human Retroviruses in 1993 by
investigators at Walter Reed Army Institute of Research ("Walter Reed") in
collaboration with the Company's scientists indicated that the various
interferon species display vast differences in their ability to affect virus
replication. Walter Reed researchers found that the Company's Natural Alpha
Interferon was approximately 10 to 100 times more effective than equal
concentrations of recombinant alpha interferon 2a or 2b, in blocking the
replication of HIV-1, the AIDS virus, in infected human cells (monocytes) in
vitro.
Moreover, the Company's scientists were able to separate members of the
interferon family in single protein fractions or clusters of proteins using
advanced fractionation techniques. The individual fractions were tested for
their ability to block HIV replication in the laboratory by researchers at
Walter Reed. They found that the unusual anti-HIV activity was attributable to
very specific fractions in the Company's product. The most active fractions are
not present in marketed recombinant interferon products.
This information provided additional support for a long-held belief of the
Company that its Natural Alpha Interferon has unique anti-viral properties
distinguishing it from recombinant interferon products. In addition, published
reports of trials using recombinant alpha interferon in asymptomatic
HIV-infected patients indicated that while high doses blocked virus production
in many cases, such doses resulted in high levels of adverse reactions, thereby
limiting the usefulness of the recombinant product. These facts led the Walter
Reed researchers to conduct a Phase 1 clinical trial with the Company's product
in asymptomatic HIV-infected patients.
In March 1992, Walter Reed launched a Phase 1 clinical trial in
asymptomatic HIV-infected patients with CD4 white blood cell counts of at least
400 cells per cubic millimeter, to investigate the safety and tolerance, at
several dose regimens, of ALFERON N Injection, self-injected subcutaneously for
periods of up to 24 weeks. The investigators concluded that the treatment was
"surprisingly" well tolerated by patients, at all dose regimens. Preliminary
findings were reported by Walter Reed at the IXth International Conference on
AIDS in Berlin in 1993. The investigators also reported that the expected
interferon side effects, such as flu-like symptoms, were rare or absent in the
majority of patients treated with the Company's product.
Although this Phase 1 clinical trial was designed primarily to provide
safety information on various doses of ALFERON N Injection used for extended
periods of time, there were encouraging indications that certain disease
parameters had stabilized or even improved in certain patients by the end of the
experimental treatment.
In a follow-up analysis of patients' blood testing data, it was found that
while on treatment, the amount of HIV detectable in the patients' blood, as
measured by polymerase chain reaction ("PCR") testing, declined in a dose
dependent manner (the greatest declines were observed in the highest dose
group). Also, none of the patients were found to have developed neutralizing
antibodies to Natural Alpha Interferon, even after being treated three times
weekly for many months. These results were reported at the Third International
Congress on Biological Response Modifiers held in Cancun, Mexico in January 1995
and were selected for a poster presentation at the 35th Interscience Conference
on Antimicrobial Agents and Chemotherapy held in San Francisco in September
1995. An extensive report was published in the May 1996 issue of the Journal of
Infectious Diseases.
It is important to note that, because of the small number of study
participants and the absence of a control group, no firm conclusions can be
drawn from these observations. However, based on the safety and preliminary
efficacy data obtained from this trial and after meeting with the FDA, the
Company conducted a multi-center Phase 3 clinical trial of ALFERON N Injection
in HIV-infected patients, which was completed in December 1997. This randomized,
double-blind, placebo-controlled trial was designed to evaluate the safety and
efficacy of ALFERON N Injection in the treatment of HIV-positive patients, some
of whom may have been taking other FDA-approved antiviral agents. Enrolled
patients were required to have CD4 white blood cell counts of at least 250 cells
per cubic millimeter and a viral burden (as determined by PCR testing) of at
least 2,000 RNA copies per milliliter. The Company completed the analysis of the
data collected from the 16 investigator sites and attended a pre-filing meeting
with the FDA in mid-March 1998. Shortly after that meeting, the FDA advised the
Company that, although ALFERON N Injection demonstrated biological activity in
this Phase 3 clinical trial, the results were insufficient for filing for
approval for this additional indication for ALFERON N Injection. While the
results over the course of treatment demonstrated benefits that were
statistically significant for the group of patients receiving ALFERON N
Injection and highly statistically significant for the subgroup of patients with
high CD4 white blood cell counts (CD4 counts of at least 400 cells per cubic
millimeter, as was studied in the Phase 1 study above), the study's primary
efficacy variable (reduction in viral load) was not met at the time point
specified in the protocol (end of treatment). Because the agreed upon primary
endpoint was not met and in light of the changes in HIV treatment regimen to
simultaneous multiple drug therapy since this trial was designed, the FDA
indicated that an additional trial, in which ALFERON N Injection was studied in
conjunction with multiple drug therapy would be necessary to evaluate further
the efficacy of ALFERON N Injection for this indication.
In February 2001, some of the researchers at the 8th Conference on
Retroviruses and Opportunistic Infections held in Chicago called for a delay in
starting patients on the powerful multiple drug therapies. Previously, the old
treatment guidelines started patients on therapy when their CD4 white blood cell
counts fell below 500 or the amount of HIV in the blood went above 20,000 copies
per milliliter as measured by PCR testing. The new guidelines call for
initiating treatment when CD4 white blood cell counts fall below 350, or when
the viral load rises above 55,000, which can take several years. In the HIV
trials with ALFERON N Injection, the subgroup of patients with CD4 white blood
counts above 400 and not on any other therapy seemed to show the most benefit.
Therefore, if these new guidelines are adopted, the type of additional trials
the FDA might require could be substantially different and the role that ALFERON
N Injection could play in the treatment of HIV infected patients could
potentially be important.
However, due to the cost and length of an additional HIV clinical trial,
the Company does not currently intend to pursue this program unless it obtains
substantial additional funding or enters into collaboration with another company
for such purpose.
There can be no assurance that ALFERON N Injection for the treatment of
patients with HIV will be cost-effective, safe, and effective or that the
Company will be able to obtain FDA approval for such use. Furthermore, even if
such approval is obtained, there can be no assurance that such product will be
commercially successful or will produce significant revenues or profits for the
Company.
Hepatitis C. Chronic viral hepatitis is a liver infection caused by various
hepatitis viruses. The United States Centers for Disease Control and Prevention
estimates that nearly four million people in the United States are presently
infected with the hepatitis C virus ("HCV"), a majority of who become chronic
carriers and will suffer gradual deterioration of their liver and possibly
cancer of the liver. Several brands of recombinant interferon and a
cell-cultured interferon have been approved for the treatment of hepatitis C
infection in the United States and by various regulatory agencies worldwide. See
"Business - ALFERON N Injection - Competition." However, reports have indicated
that many patients either do not respond to treatment with the recombinant
products or relapse after treatment. The Company has conducted three
multi-center, randomized, open-label, dose ranging Phase 2 clinical trials
utilizing ALFERON N Injection with patients chronically infected with HCV. The
objective of the Company's HCV clinical studies was to compare the safety and
efficacy of different doses of Natural Alpha Interferon injected subcutaneously
in naive (previously untreated), refractory (unsuccessfully treated with
recombinant interferon), and relapsing (initially responded to recombinant
interferon but later relapsed) patients.
The results in naive patients indicated a significant dose-dependent
response at the end of treatment favoring the highest dose group. In addition,
treatment of naive patients with ALFERON N Injection did not produce any
interferon-neutralizing antibodies. An oral presentation of the results in naive
patients was given at the American Association for the Study of Liver Diseases
("AASLD") meeting that took place in November 1995. The results of this study
were published in the February 1997 issue of Hepatology.
The results in refractory patients indicated a significant dose-dependent
response at the end of treatment favoring the highest dose group. A poster
presentation of the results in refractory patients was given at the AASLD
meeting that took place in November 1995. Based on the promising results
obtained in the study on naive patients, the study on relapsing patients, which
was accruing patients slowly, was terminated early so that the Company could
concentrate its limited resources on pursuing the Phase 3 trials in naive
patients, discussed below.
After meeting with the FDA, the Company commenced in 1996 a Phase 3
multi-center, open label, randomized, controlled clinical trial designed to
evaluate the safety and efficacy of ALFERON N Injection compared to INTRON A in
naive chronic hepatitis C patients. The trial was conducted at 26 sites located
in the United States and Canada and a total of 321 people were treated. The
trial consisted of a 24-week treatment phase and 24-week follow-up and also
included an interim analysis after approximately one-half of the enrolled
patients completed the treatment and follow-up phases.
On April 2, 1998, the Company announced it had completed the interim
analysis of the results for approximately half of the enrolled patients. If the
results of the interim analysis had demonstrated at a very high level of
statistical significance that ALFERON N Injection is effective, the Company
intended to seek FDA approval while continuing to follow the other enrolled
patients. However, while the efficacy analysis indicated that ALFERON N
Injection and the control treatment (an approved therapy) appeared to yield
similar results, the study protocol required a showing of superiority in order
to meet the criteria for statistical significance in the interim analysis.
Therefore, the Company did not seek FDA approval based on the interim analysis.
The Phase 3 study was completed in 1998. The Company completed the final
analysis of the data in March 1999, and met with the FDA to determine the
acceptability of the results for filing purposes. At that meeting, the FDA
advised the Company that the results of the trial were insufficient to file for
approval because the designed endpoint of the trial (which required a showing of
superiority in sustained normalization of liver enzymes at the end of treatment
and after six months of follow up) was not met. Therefore, the FDA informed the
Company that an additional trial would be required to further evaluate the
efficacy of ALFERON N Injection for this indication. At the present time, the
Company does not have the resources necessary to conduct an additional study and
does not plan to initiate such a study unless it can find a sponsor to continue
this program.
HIV and Hepatitis C Co-Infected Patients. In December 1997, patient
enrollment commenced in a Phase 2 multi-center, open label clinical trial
designed to evaluate the safety and efficacy of ALFERON N Injection in patients
co-infected with HIV and HCV. In May 2000, an abstract entitled "Treatment of
HCV/HIV Coinfection with Leukocyte Derived Interferon Alfa-n3", was published in
Gastroenterology. At the present time, the Company does not plan to initiate
additional studies in this area unless it can find a sponsor.
Multiple Sclerosis. Multiple sclerosis ("MS") is a chronic, sometimes
progressive, immune-mediated disease of the central nervous system that is
believed to occur in genetically predisposed individuals following exposure to
an environmental factor, such as virus infection. The disease affects an
estimated 250,000 to 350,000 people in the United States, primarily young
adults. Symptoms of MS, including vision problems, muscle weakness, slurred
speech, and poor coordination, are believed to occur when the patient's own
cells attack and ultimately destroy the insulating myelin sheath surrounding the
brain and spinal cord nerve fibers, resulting in improper transmission of
signals throughout the nervous system.
In the United States, two recombinant forms of beta interferon have been
approved for the treatment of relapsing-remitting MS. However, reports in the
scientific literature and elsewhere have indicated that the significant adverse
reactions associated with the treatments may limit their usefulness for a subset
of patients. In addition, Teva Neuroscience, Inc.'s product, Copaxone(R), a
non-interferon product, was approved by the FDA to treat relapsing-remitting MS.
The Company has received anecdotal reports on the use of ALFERON N
Injection in MS patients. In addition, encouraging reports were presented at a
number of scientific conferences, namely:
"Management of Interferon-(beta)1b (Betaseron) Failures in MS with
Interferon-(alpha)n3 (Alferon N)", Charcot Foundation Meeting, Switzerland,
March 2000,
"Interferon-alfa-n3 (Alferon N) Reduces Gadolinium Enhancing Brain Lesions
in Multiple Sclerosis", XVII World Congress of Neurology, London, UK, June
2001,
"Alferon N (IFN-alfa-n3) and Betaseron (IFN-beta-1b) reduce T2 lesion load
in multiple sclerosis (MS)", 17th Congress of the European Committee for
Treatment & Research in Multiple Sclerosis (ECTRIMS), Dublin, Ireland,
September 2001, and
"Response of MR T2 Lesion Load in Patients with Multiple Sclerosis: A
Retrospective Blinded Study of Treatment with Interferon (beta)1b
(Betaseron) versus Interferon (alpha)-n3 (Alferon N) versus Untreated",
126th Annual Meeting of The American Neurological Association, in Chicago,
October 2001.
This last study was based on the retrospective review of multiple brain
magnetic resonance imaging (MRI) scans to assess MS brain lesion burden. The
study compared the scans of 40 MS patients treated with interferon alfa-n3
(ALFERON N Injection) as well as 40 MS patients treated with interferon beta-1b
(Betaseron(R)), both before therapy and at least six months after initiation of
therapy. A control group of 39 untreated MS patient scans were also evaluated
with an initial MRI scan at baseline and a second MRI obtained at least six
months after the baseline examination. On the 238 scans evaluated (119 patients)
only lesions of larger than 5 mm3 were measured to avoid inclusion of potential
non-MS lesions and assure accuracy of measurement. All scans were reviewed by
consensus of two experienced neuroradiologists who were blinded to all
identifiers, including name, date, order of scans, and clinical status of the
patient.
The study data showed a reduction in the volume of T2-weighted MS brain
lesions in both the interferon alfa-n3 treated group (-10%) and the interferon
beta-1b treated group (-7%), as compared to increased lesion volume in the
untreated control group (+12%).
Changes in disability scores amongst the groups were also retrospectively
reviewed, based on the extended disability status scale (EDSS). Only patients
with EDSS scores recorded both at baseline and after at least 12 months were
evaluated, which included 38 interferon alfa-n3 treated patients, 31 interferon
beta-1b treated patients, and 33 untreated patients. The results showed the mean
absolute change in EDSS scores from baseline to be -1.07 for interferon alfa-n3
treated patients and -0.16 for interferon beta-1b treated patients after 12
months, as compared to +0.80 for untreated patients (negative changes reflect
decreased disability scores, positive change reflects increased disability
scores). The scale of EDSS scores ranges from 0 for a normal neurological
examination to a score of 10 for death due to MS.
This retrospective evaluation does not constitute a prospective clinical
study of the type needed to obtain regulatory approval, and does not indicate
that interferon alfa-n3 will be shown to be effective if such clinical studies
are performed. However, based in part upon these encouraging findings and the
other reports mentioned above, the Company is presently in discussions with
potential corporate partners regarding the further investigation of its
interferon alfa-n3 product as a potential treatment in patients afflicted with
MS. The timing of any future clinical trials in MS will be dependent upon the
Company's ability to obtain additional funding or a sponsor.
Cancer. On April 30, 2001, the Company signed an exclusive technology
license agreement with Mayo Foundation for Medical Education and Research, of
Rochester, MN, for the rights to technology under investigation for preventing
the recurrence of cancer after surgical removal of tumors. As part of the
collaboration with Mayo, Interferon Sciences is funding a clinical trial
entitled "Identification of an Immunostimulatory Dose of Natural Interferon
(Phase A) and Its Impact on Clinical Outcome (Phase B) in Patients with
Melanoma", which commenced in December 2001.
The Company has committed to fund approximately $400,000 of costs related
to this clinical trial which is expected to be completed in early 2003. The
Company paid Mayo $100,000 related to this clinical trial in 2001 and will owe
other amounts upon the completion of certain parts of the trial, with the last
payment due upon receipt of the final written report on the trial. The Company
can terminate this agreement up to 60 days after receipt of this report. After
expiration of this ability to terminate, the Company must issue 25,000 shares of
the Company's common stock to Mayo and must pay milestone payments upon certain
regulatory or other events and royalties on future sales, if any. In addition,
the Company paid $60,000 to Mayo related to the agreement in 2001.
This new approach to cancer therapy being studied at Mayo is referred to as
neo-adjuvant immunotherapy with interferon. The goal of this approach, which
uses a short duration interferon pretreatment, is to stimulate the innate immune
system prior to surgical treatment. This is believed to be particularly
appropriate in light of literature reports of the possible existence of
postoperative anesthesia-induced immunosuppression.
This neo-adjuvant approach is based upon the research in mice with
implanted melanoma. In this study it was found that a short duration treatment
with natural mouse leukocyte interferon prior to surgery significantly increased
the survival rate compared to untreated controls (56% vs. 0%). In addition, at
the end of the study, no evidence of metastatic tumors was found in the
surviving mice. Animals treated with interferon for the same duration
immediately after surgery (adjuvant therapy) did no better than the untreated
controls. It is unknown whether comparable results can be achieved in humans.
Other Indications. The Company is also planning clinical trials to
investigate the potential use of ALFERON N Injection by subcutaneous systemic
administration for the treatment of genital and other types of warts. Currently,
the approved route of administration for the treatment of genital warts is
intralesional and requires up to 16 office visits to the medical practitioner.
If subcutaneous systemic treatment was found to be efficacious, patients could
potentially self-administer the product as they have done in many of the
clinical trials conducted by the Company. This would make treatment considerably
more convenient for patients. In addition, in the following two publications:
"Adjuvant Interferon for Anal Condyloma, A Prospective Randomized Trial",
Diseases of the Colon and Rectum 1994, and "Interferon as an Adjuvant Treatment
for Genital Condyloma Acuminatum", International Journal of Gynecology &
Obstetrics 1995, in which ALFERON N Injection was studied in conjunction with
other treatments for genital warts, the authors reported that the addition of
ALFERON N Injection to the other ablative therapies significantly reduced the
recurrence rates. The Company is planning a clinical trial to further
investigate the potential use of ALFERON N Injection as an adjuvant to other
treatments.
We are also planning a clinical trial in order to expand the potential uses
of ALFERON N Injection in the area of women's health.
Marketing and Distribution. The Company does not have a marketing and sales
force or an agreement with another company to carry out this function. In June
1998, the Company entered into an agreement with Integrated Commercialization
Solutions, Inc. ("ICS"), a subsidiary of AmerisourceBergen Corporation, pursuant
to which ICS became the sole United States distributor of ALFERON N Injection.
ICS distributes ALFERON N Injection to wholesalers throughout the United States.
The Company does not believe that the loss of any one wholesaler would have a
material adverse effect on the Company's sales or financial position. ICS also
provides clinical and product information, reimbursement information and
services, and management of patient assistant services. However they do not
market the product. At the present time the Company is dependent upon orders
being received from the marketplace and processed by ICS. Substantially all of
the revenues are derived from the sales of ALFERON N Injection in the United
States.
Manufacturing. The purified drug concentrate utilized in the formulation of
ALFERON N Injection is manufactured in the Company's facility located in New
Brunswick, New Jersey, and ALFERON N Injection is formulated and packaged at a
production facility located in McPherson, Kansas and operated by Abbott. In
April 1998 the Company discontinued the first stage of interferon production
because it had produced sufficient inventories of interferon intermediates to
satisfy its commercial needs. The Company has been converting and intends to
continue to convert intermediates to finished product as needed. The Company
believes it has produced sufficient inventory of these intermediates to satisfy
its clinical and commercial needs for the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business - ALFERON N Injection - Clinical Trials for New Indications,"
"Business - Governmental Regulation," and "Properties."
Competition. Presently, INTRON A, manufactured by Schering, is the one
other injectable interferon product approved by the FDA for the treatment of
genital warts. INTRON A is made from recombinant alpha interferon. Since the
production of INTRON A is not dependent on a source of human blood cells, it may
be able to be produced in greater volume and at a lower cost than ALFERON N
Injection. Currently, the Company's wholesale price on a per unit basis of
ALFERON N Injection is substantially higher than that of INTRON A. In 1997, 3M
Pharmaceuticals received FDA approval for its immune-response modifier,
Aldara(R), a self-administered topical cream, for the treatment of external
genital and perianal warts. ALFERON N Injection also competes with surgical,
chemical, and other methods of treating genital warts. The Company cannot assess
the impact from products developed by the Company's competitors or advances in
other methods of the treatment of genital warts on the commercial viability of
its product.
If and when the Company obtains approvals for additional indications of
ALFERON N Injection, it expects to compete primarily on the basis of product
performance and price with a number of pharmaceutical companies, both in the
United States and abroad.
In the United States, two recombinant forms of beta interferon, Biogen,
Inc.'s Avonex(R) and Berlex Laboratories' Betaseron(R) as well as Teva
Neuroscience, Inc.'s Copaxone(R), a non-interferon product, have been approved
for the treatment of relapsing-remitting MS. In addition, Immunex Corporation's
Novantrone(R) was approved by the FDA in 2000 for reducing neurological
disability and/or the frequency of clinical relapses in patients with secondary
(chronic) progressive, progressive relapsing or worsening relapsing-remitting
MS.
Many of the Company's potential competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources and
product development, manufacturing, and marketing capabilities than the Company
or its marketing partners. Therefore, there can be no assurance that, if the
Company is able to obtain regulatory approval of ALFERON N Injection for the
treatment of any additional diseases, it will be able to achieve any significant
penetration into those markets.
Licenses and Royalty Obligations
The Company agreed to pay GP Strategies Corporation ("GP Strategies") a
royalty of $1 million in connection with the acquisition of certain intellectual
property and technology rights from GP Strategies. Such amount is payable if and
when the Company generates income before taxes, limited to 25% of such income
before income taxes per year until the amount is paid in full. To date, the
Company has not generated income before taxes and therefore has not paid
royalties to GP Strategies.
Investments
Metacine, Inc.
On July 28, 2000, the Company acquired for $100,000 an option to purchase
certain securities of Metacine on the terms set forth below. The Company
exercised the option on April 9, 2001.
On exercise of the option, Metacine issued to the Company 700,000 shares of
Metacine common stock (the "Metacine Shares") and a five-year warrant (the
"Metacine Warrant") to purchase, at a price of $12.48 per share, 282,794 shares
of Metacine common stock in exchange for $300,000 in cash, $250,000 of services
to be rendered by the Company to Metacine, and 2,000,000 shares of the Company's
common stock (the "Company Shares").
The Agreement contains certain restrictions on the ability of Metacine to
sell the Company Shares and provides for cash payments ("Deficiency Payments")
by the Company to Metacine to the extent Metacine has not received $1,850,000 of
net cumulative proceeds ("Sales Proceeds") from the sale of Company Shares by
September 30, 2002 or $400,000 of net proceeds per quarter beginning with the
period ending September 30, 2001 and $250,000 for the quarter ending September
30, 2002. The Company made a Deficiency Payment in October 2001 in the amount of
$400,000 for the quarter ended September 30, 2001 but did not make the $ 400,000
Deficiency Payments which were due on December 31, 2001 and March 31, 2002. The
Company is currently discussing various options regarding the Deficiency
Payments with Metacine. If Metacine sells all of the Company Shares prior to
receiving Sales Proceeds and Deficiency Payments of $1,850,000, the Company may
issue to Metacine such number of additional shares of Company common stock as
the Company determines in its sole discretion, which additional shares shall
constitute Company Shares. If Metacine has received $1,850,000 in Sales Proceeds
and Deficiency Payments and has remaining Company Shares, then the Sales
Proceeds of any future sales by Metacine of Company Shares shall be paid by
Metacine to the Company until the aggregate amount paid to the Company equals
the aggregate amount of all Deficiency Payments. Any remaining Company Shares,
and the Sales Proceeds therefrom, shall be for the benefit of Metacine.
The Company was required to escrow 100,000 Metacine Shares to secure its
obligations to render $250,000 of services to Metacine and 462,500 Metacine
Shares to secure its potential obligations to make Deficiency Payments. Since
the Company has not made $800,000 in Deficiency Payments, Metacine could request
200,000 Metacine shares currently held in escrow to satisfy the Company's past
due obligation.
Of the $2.5 million consideration paid for Metacine, $2,341,418 was
recorded as a charge for the acquisition of in-process research and development
("IPR&D"), in order to reduce the Company's investment in Metacine to the
Company's proportionate share of Metacine's net assets. The charge was recorded
as the acquisition of IPR&D as Metacine's primary asset is technology that has
not reached technological feasibility and has no alternative uses. The
$1,850,000 guaranteed value of the 2,000,000 shares of common stock issued to
Metacine, less the $400,000 Deficiency Payment made in October 2001, has been
recorded as a current liability at December 31, 2001. The $250,000 of services
to be provided has also been recorded as a current liability. Services rendered
to Metacine during 2001 were immaterial, and as such the liability remained
unchanged at December 31, 2001. The investment has been further reduced to
$(290,994) at December 31, 2001 by the Company's equity in the loss of Metacine
for the period from April 9, 2001 through December 31, 2001, and is recorded in
long-term liabilities. As the liability to Metacine remains unsettled until such
time as Metacine sells the shares, the Company has recorded the shares issued to
Metacine as a debit ("Consideration shares subject to guaranteed value") within
stockholders' equity. Any decreases, or increases up to the amount of any
previous decreases, in the market value at issuance of the Company's common
stock issued to Metacine, until such time as Metacine sells its shares, would
impact the value of the shares held by Metacine and accordingly require an
adjustment to Consideration shares subject to guaranteed value. No adjustment
was necessary through December 31, 2001.
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.
Metacine is a biopharmaceutical company engaged in the development of
biological therapy for the treatment of cancer, viral and autoimmune diseases,
and for the prevention of organ transplant rejection. Metacine uses dendritic
cells ("DC") to modulate the body's immune response to: (1) cancer and chronic
viral disease through immunostimulation and (2) autoimmune disease and organ
transplant rejection through downregulation of the immune system. Metacine's
technology was developed during a 10-year, research effort by a team of six
scientists at the University of Pittsburgh Medical Center (the "University") led
by Michael T. Lotze, MD, an internationally renowned scientist and a pioneer in
DC immunotherapy. Metacine's founding scientists have been awarded approximately
$39 million in Federal grants for DC research, approximately $25 million of
which has been spent to date developing the DC technology. Metacine has an
exclusive license from the University of Pittsburgh of the Commonwealth System
of Higher Education for a portfolio of six issued patents, eight pending
patents, and four invention disclosures resulting from this research.
The essential feature of Metacine's therapeutic strategy is the
modification and targeted activation of dendritic cells ("DC"), the body's
primary antigen presenting cell, for the treatment of first cancer, and then
viral disease, autoimmune disease and organ transplant rejection. The deployment
of DCs results in a cellular immune response culminating in the production of
two types of target-specific T cells (cytolytic and helper) that team together
to find and destroy tumors and virally infected cells. For effective treatment
of cancer (and chronic viral infections), a patient requires a large number of
cytolytic and helper T cells. In the case of transplant rejection (and
auto-immune disease), too many existing T cells attack donor (or normal) tissue,
ultimately killing the donated organ. Production of these T cells needs to be
curtailed to improve the chances of a successful outcome
Metacine is pursuing four different approaches to the therapeutic use of DC
for the treatment of cancer: (1) ex vivo (outside the body) cell processing
using patient's DC pulsed with antigens (substances capable of inducing an
immune response), (2) ex vivo cell processing using patient's DC cultured with
patient's tumor cells to create multi-antigenic, patient specific, autologous
vaccines, (3) in vivo activation of DC to stimulate the patient's immune system
to attack the primary tumor as well as metastatic sites, and (4) direct
intratumoral injection of patient's DC engineered to produce the desired
cytokine(s) (hormone-like proteins which can regulate the immune response) at
the tumor site in order to provoke an anti-tumor response in vivo. The use of DC
as the gene delivery vehicle has a further advantage in that following injection
the DC will migrate to the lymph nodes where they present the multiple antigens
they have absorbed at the tumor site. Animal experimentation has shown that this
technique has the potential to stimulate the patient's immune system to attack
the primary tumor as well as any metastatic sites.
Metacine's program for prevention of organ transplant rejection represents
another important area of application for DC. Ex vivo culturing and
re-introduction of tolerogenic DC down-regulates the patient's immune system by
flooding the system with DC that do not present the transplanted organ's
antigens. Pre-clinical animal (mouse) models in which tolerogenic DC are
introduced to prevent rejection of transplanted tissue have shown highly
positive results as evidenced by a reduction of detrimental host-versus-graft
immune responses resulting in a significant extension of life following organ
transplant.
Due to the breadth of the DC program at the University, Metacine is
investigating a number of different approaches to developing this therapy. A
Phase I clinical trial is currently underway at the University for treatment of
melanoma, the deadliest form of skin cancer. In this trial, DC derived from the
patient's blood are pulsed with multiple melanoma antigens to generate a "pulsed
antigen" vaccine. The pulsed DC are then re-injected into the patient to
stimulate the immune system to attack tumor cells that display these antigens.
This trial follows an already completed 28 patient Phase I trial in which safety
and immune response to the specific antigens used in the trial was demonstrated.
Several additional Phase I trials are currently being planned. These
include an autologous vaccine trial, in which the patient's DC and tumor cells
are removed, co-cultured, and re-injected to induce an immune reaction against
the specific antigens displayed by each patient's tumor(s), a trial evaluating
the intratumoral injection of DC engineered to express cytokines at the tumor
site, and a trial utilizing a novel method for stimulating DC directly in the
patient (in vivo).
To date, a general lack of significant side effects in human clinical
trials has been observed by Metacine, and by others investigating DC-based
therapy. In animal studies using multiple groups of four or five mice in each
experiment, Metacine's different DC immunization techniques exhibited results
that included tumor regression typically exceeding 50% of initial volume and in
numerous cases complete disappearance of tumor, regression of tumor volume at
metastatic sites, protection against challenge with tumor cells subsequent to DC
administration, and increased survival of treated animals to 60 - 90 days. In
contrast, all untreated control animals died within 20 - 30 days. There can be
no assurance that comparable results can be achieved with human beings.
Governmental Regulation
Regulations imposed by U.S. federal, state, and local authorities, as well
as their counterparts in other countries, are a significant factor in the
conduct of the research, development, manufacturing, and marketing activities
for present and proposed products developed by the Company.
The Company's or its licensees' potential products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human medical products are subject to rigorous pre-clinical and clinical testing
and other approval procedures by the FDA in the United States and similar health
authorities in foreign countries. Various federal and, in some cases, state
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping, and marketing of such products, including the
use, manufacture, storage, handling, and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with applicable federal and foreign statutes and
regulations involves a time-consuming process and requires the expenditure of
substantial resources.
The effect of government regulation may be to delay for a considerable
period of time or prevent the marketing of any product that the Company may
develop and/or impose costly procedures on the Company's activities, the result
of which may be to furnish an advantage to the Company's competitors. Any delay
in obtaining or failure to obtain such approvals would adversely affect the
marketing of the Company's products and the ability to earn product revenue.
Before testing of any agents with potential therapeutic value in healthy
human test subjects or patients may begin, stringent government requirements for
pre-clinical data must be satisfied. These data, obtained from studies in
several animal species, as well as from laboratory studies, are submitted in a
Notice of Claimed Investigational Exemption for a New Drug or its equivalent in
countries outside the U.S. where clinical studies are to be conducted. If the
necessary authorizations are received, the Company then conducts clinical tests
of its products on human beings at various unaffiliated medical centers and
institutions. Initial trials (Phase 1) are conducted on a small number of
volunteers to determine whether the drug is safe for human beings. If the
initial trials demonstrate the safety of the product, trials (Phase 2) are then
conducted on patients affected with the disease or condition under investigation
to establish the proper dose and dosing interval. The findings of these trials
are then used to design and implement large-scale controlled trials (Phase 3) to
provide statistical proof of effectiveness and adequate evidence of safety to
meet FDA and/or foreign approval requirements.
The FDA closely monitors the progress of each of the phases of clinical
testing and may, at its discretion, re-evaluate, alter, suspend, or terminate
the testing based on the data which have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient. Estimates of the total time
required for completing clinical testing vary between four and ten years. Upon
successful completion of clinical testing of a new drug, a company typically
submits a New Drug Application ("NDA"), or for biological products such as
Natural Alpha Interferon, a Biological License Application ("BLA"), to the FDA
summarizing the results and observations of the drug during the clinical trials.
Each facility, in which products are produced and packaged, whether
operated by the Company or a third party, must meet the FDA's standards for
current good manufacturing practices and must also be approved prior to
marketing any product produced or packaged in such facility. Any significant
change in the production process that may be commercially required, including
changes in sources of certain raw materials, or any change in the location of
the production facilities will also require FDA approval. To the extent a
portion of the manufacturing process for a product is handled by an entity other
than the Company, the Company must similarly receive FDA approval for the other
entity's participation in the manufacturing process. Abbott formulates and
packages ALFERON N Injection. The Company presently has a biologic establishment
license for the facilities in which it produces ALFERON N Injection, which
includes the facilities in which Abbott formulates and packages ALFERON N
Injection.
Once the manufacture and sale of a product is approved, various FDA
regulations govern the production processes and marketing activities of such
product. A post-marketing testing, surveillance, and reporting program may be
required to monitor the product's usage and effects. Product approvals may be
withdrawn, or other actions may be ordered, if compliance with regulatory
standards is not maintained.
Each individual lot of Natural Alpha Interferon produced must be tested for
compliance with specifications and released for sale by the FDA prior to
distribution in the marketplace. Even after initial FDA marketing approval for a
product has been granted, further studies may be required to provide additional
data on safety or efficacy; to obtain approval for marketing a product as a
treatment for specific diseases other than those for which the product was
originally approved; to change the dosage levels of a product; to support new
safety or efficacy claims for the product; or to support changes in
manufacturing methods, facilities, sources of raw materials, or packaging.
In many markets, effective commercialization also requires inclusion of the
product in national, state, provincial, or institutional formularies or cost
reimbursement systems. The impact of new or changed laws or regulations cannot
be predicted with any accuracy. The Company uses its own staff of regulatory
affairs professionals and outside consultants to enable it to monitor
compliance, not only with FDA laws and regulations, but also with state and
foreign government laws and regulations.
Promotional and educational communications by the Company and its
distributors also are regulated by the FDA and are governed by statutory and
regulatory restrictions and FDA policies regarding the type and extent of data
necessary to support claims that may be made. The Company currently does not
have data adequate to satisfy FDA requirements with respect to potential
comparative claims between Natural Alpha Interferon and competing recombinant
interferon products.
For marketing outside the United States, the Company will also be subject
to foreign regulatory requirements governing human clinical trials,
manufacturing, and marketing approval for drugs and other medical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country.
Under certain circumstances, the Company may be required to obtain FDA
authorization to export products for sale in foreign countries. For instance, in
most cases, the Company may not export products that have not been approved by
the FDA unless it first obtains an export permit from the FDA. However, these
FDA export restrictions generally do not apply if the Company's products are
exported in conformance with their United States approvals or are manufactured
outside the United States. At the present time, the Company does not have any
foreign manufacturing facilities.
Research Staff and Employees
As of April 1, 2002, the Company had 38 employees, 17 of whom work less
than full time. Of the 38 employees, 7 hold Ph.D. degrees, 1 holds an M.D.
degree and 15 hold other degrees in scientific or technical fields. Of such
employees, approximately 7 were engaged in research and product development, 11
were engaged in quality control, regulatory and quality assurance and product
and process improvement for manufacturing, 7 were engaged in engineering and
maintenance, 4 were engaged in medical affairs and 9 were general and
administrative personnel.
Research and Development
During the years ended December 31, 2001, 2000 and 1999, the Company
expended approximately $2.3 million, $1.5 million and $3.1 million,
respectively, for research and development. Substantially all of these
expenditures were for Company-sponsored research and development programs.
Executive Officers of the Registrant
The following table sets forth the names of the directors and principal
executive officers of the Company as of April 1, 2002, their positions with the
Company, and their principal business experience for the last five years.
Name Age Position
Samuel H. Ronel, Ph.D 65 Chairman of the Board
Lawrence M. Gordon 48 Chief Executive Officer and a
Director
Stanley G. Schutzbank, Ph.D., R.A.C. 56 President and a Director
Donald W. Anderson 52 Controller (Principal Accounting and
Financial Officer) and Secretary
Mei-June Liao, Ph.D. 51 Vice President, Research and
Development
James R. Knill, M.D. 68 Vice President, Medical Affairs
Robert P. Hansen 57 Vice President, Manufacturing
Sheldon L. Glashow 68 Director
Samuel H. Ronel, Ph.D. has been Chairman of the Board since February 1997
and was Vice Chairman of the Board from January 1996 to February 1997 and
President, Chief Executive Officer, and a director of the Company from 1981 to
January 1996. He was responsible for the interferon research and development
program since its inception in 1979. Dr. Ronel joined GP Strategies in 1970 and
served as the Vice President of Research and Development of GP Strategies and as
the President of Hydro Med Sciences, a division of GP Strategies, from 1976 to
September 1996. Dr. Ronel served as President of the Association of
Biotechnology Companies, an international organization representing United
States and foreign biotechnology firms, from 1986-88 and has served as a member
of its Board of Directors until 1993. Dr. Ronel was elected to the Board of
Directors of the Biotechnology Industry Organization from 1993 to 1995 and to
the Governing Body of the Emerging Companies Section from 1993 to 1997. Since
1999 he has been a member of the Technology Advisory Board of the New Jersey
Economic Development Authority. In 2001, Dr. Ronel was named member of the
Advisory Commission to the Biotechnology Research Institute, Montreal, a
National Research Council of Canada institution.
Lawrence M. Gordon has been Chief Executive Officer and a director of the
Company since January 1996, Vice President of the Company from June 1991 to
January 1996, General Counsel of the Company from 1984 to January 1996.
Stanley G. Schutzbank, Ph.D. has been President of the Company since
January 1996, Executive Vice President of the Company from 1981 to January 1996,
and a director of the Company since 1981 and has been associated with the
interferon research and development program since its inception in 1979. He is
involved with all facets of administration and planning of the Company and has
coordinated compliance with FDA regulations governing manufacturing and clinical
testing of interferon, leading to the approval of ALFERON N Injection in 1989.
Dr. Schutzbank joined GP Strategies (previously National Patent Development
Corporation) in 1972 and served as the Corporate Director of Regulatory and
Clinical Affairs from 1976 to September 1996 and as Executive Vice President of
Hydro Med Sciences from 1982 to September 1996. Dr. Schutzbank is a member of
the Regulatory Affairs Professionals Society ("RAPS") and has served as Chairman
of the Regulatory Affairs Certification Board from its inception until 1994. Dr.
Schutzbank received the 1991 Richard E. Greco Regulatory Affairs Professional of
the Year Award for his leadership in developing the United States Regulatory
Affairs Certification Program. In September 1995, Dr. Schutzbank was elected to
serve as President-elect in 1996, President in 1997, and Chairman of the Board
in 1998 of RAPS. In October 2000, Dr. Schutzbank received the Leonard J.
Stauffer Award from RAPS. RAPS gives this award once each year to a Regulatory
Affairs Certified ("RAC") individual who exemplifies outstanding service to the
RAC Program and/or mentoring in the regulatory affairs profession.
Donald W. Anderson has been the Controller of the Company since 1981 and
Corporate Secretary of the Company since 1988. He was an officer of various
subsidiaries of GP Strategies from 1976 to September 1996.
Mei-June Liao, Ph.D. has been Vice President, Research and Development of
the Company since March 1995. Dr. Liao served as Director of Research &
Development from 1987 to 1995, and held senior positions in the Company's
Research & Development Department since 1983. Dr. Liao received her Ph.D. from
Yale University and completed a three-year postdoctoral appointment at the
Massachusetts Institute of Technology under the direction of Nobel Laureate in
Medicine, Professor H. Gobind Khorana. Dr. Liao has authored many scientific
publications and invention disclosures.
James R. Knill, M.D. has been Vice President, Medical Affairs of the
Company since September 1996 and a consultant to the Company from November 1995
to September 1996. Dr. Knill was employed as Vice President of Medical Affairs
for Cytogen Corporation from 1994 to 1995 and as consultant for Cytogen
Corporation from 1995 to July 1996. He was previously employed for more than 20
years as Vice President of Medical Affairs for Bristol-Myers Squibb Company.
Robert P. Hansen has been Vice President, Manufacturing of the Company
since February 1997. He served as a Director of Manufacturing since 1995, and
held senior positions in the Company's Manufacturing Department since 1987.
Sheldon L. Glashow, Ph.D. has been a director of the Company since 1991. He
has been a director of GP Strategies since 1987, a director of GSE Systems, Inc.
since 1995, and a director of CalCol, Inc. since 1994. Dr. Glashow is the
Higgins Professor of Physics and the Mellon Professor of the Sciences at Harvard
University. He was a Distinguished Professor and visiting Professor of Physics
at Boston University. In 1971, he received the Nobel Prize in Physics.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
All of the Company's material operations and sales are conducted in the
United States.
Item 2. Properties
The Company's executive offices and its research and production facilities
are located at 783 Jersey Avenue, New Brunswick, New Jersey 08901, and its
telephone number is (732) 249-3250.
The Company owns two freestanding buildings comprising approximately 44,000
square feet that are located in New Brunswick, New Jersey. The Company uses the
facilities for staff offices, manufacturing, quality control and research
activities, and storage.
The Company believes that its current facilities and equipment are suitable
and adequate for its current intended purposes. At the present time the Company
believes that the reinitiation of full-scale manufacturing would require the
expenditure of approximately $250,000 to upgrade certain equipment.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Common Stock is traded on the OTC Bulletin Board and is quoted under
the symbol IFSC. The following table sets forth for each period indicated, the
high and low sales prices for the Common Stock as reported on the OTC Bulletin
Board.
2 0 0 1 2 0 0 0
------------ -----------
Quarter High Low High Low
- ------- ---- --- ---- ---
First $0.97 $0.22 $5.63 $0.31
Second 0.53 0.24 3.00 1.13
Third 0.44 0.11 2.56 1.03
Fourth 0.52 0.14 1.28 0.38
As of February 1, 2002, the Company had 692 stockholders of record.
The Company has not paid any dividends on the Common Stock since its
inception and does not contemplate paying dividends on the Common Stock in the
foreseeable future.
Item 6. Selected Financial Data
- --------------------------------
(Thousands of dollars except per share data)
Year Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues $ 1,499 $ 1,069 $ 2,329 $ 2,007 $ 2,956
Cost of goods sold and excess/
idle production costs 2,010 2,332 3,552 6,533 1,858
Increase/(Reduction) of inventory reserve (563) (1,178) 3,090 7,255
Research and development costs, net 2,286 1,533 3,060 8,655 11,864
General and administrative expense 2,647 2,306 2,315 4,570 4,389
Loss from operations* (7,785) (4,539) (5,420) (20,841) (22,410)
Interest income (expense and
Financing costs), net 17 74 (530) 253 670
Gain on sale of state net
operating loss carryovers 969 1,484 2,349
Net loss* (7,250) (2,982) (3,602) (21,325) (21,740)
Basic and diluted loss per share (.37) (.25) (.71) (6.67) (8.15)
Dividends NONE NONE NONE NONE NONE
- ----------------------------------
*The Company has suffered recurring losses from operations, has an accumulated
deficit, a working capital deficiency and has limited liquid resources that
raise substantial doubt about its ability to continue as a going concern (see
Note 3 to the Consolidated Financial Statements).
December 31,
2001 2000 1999 1998 1997
------------------------------------------------
Total assets $3,827 $8,998 $6,256 $6,599 $24,153
Working capital (deficiency) (3,271) 3,043 (2,097) (1,889) 14,529
Long-term debt 500
Stockholders' equity (deficiency) (1,313) 5,852 557 2,103 20,214
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Since 1981, the Company has been primarily engaged in the research and
development of pharmaceutical products containing Natural Alpha Interferon. The
Company has experienced significant operating losses since its inception. The
Company received FDA approval in 1989 to market ALFERON N Injection in the
United States for the treatment of certain types of genital warts. ALFERON N
Injection is currently marketed and sold in the United States by the Company.
However, the Company has had limited revenues from the sale of ALFERON N
Injection to date. For the Company to operate profitably, the Company must sell
significantly more ALFERON N Injection. Increased sales will depend primarily
upon the expansion of existing markets and/or successful attainment of FDA
approval to market ALFERON N Injection for additional indications. The future
revenues and profitability of, and availability of capital for, biotechnology
companies may be affected by the continuing efforts of governmental and
third-party payors to contain or reduce the costs of health care through various
means. The Company has primarily financed its operations to date through private
placements, public offerings of the Company's securities and the sale of the
Company's New Jersey tax loss carryovers.
Management is continuing to pursue raising additional capital by either (i)
issuing securities in a private or public equity offering or (ii) licensing the
rights to its injectable Natural Alpha Interferon for one or more indications.
This may be more difficult in the future in light of the FDA's requirement for
the Company to conduct additional Phase 3 studies of ALFERON N Injection in the
treatment of patients infected with the human immunodeficiency virus and
hepatitis C virus. See "Business - ALFERON N Injection - Clinical Trials for New
Indications." Management is also seeking to enter into mergers, joint ventures
or other collaborations in the areas of cancer, infectious diseases, and
immunology that could provide the additional resources necessary to advance the
Company's most valuable programs. The Company's strategy is to utilize its
expertise in regulatory affairs, clinical trials, manufacturing, and research
and development to acquire equity participations in early stage companies. For a
description of the Company's first investment, see "Business - Investments -
Metacine." There can be no assurance, however, that the Company will be
successful in obtaining an adequate level of financing, on terms that are
acceptable to the Company, needed to continue operations.
Liquidity and Capital Resources
During the year ended December 31, 2001, the Company generated $1,498,603
in revenues from the sale of ALFERON N Injection and received $968,553 from the
sale of the Company's New Jersey net operating loss carryovers, which accounted
for substantially all of the Company's funding. As of April 1, 2002, the Company
had an aggregate of approximately $560,000 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 until May 2002. 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 February 20, 2002 on the
Company's consolidated financial statements as of and for the year ended
December 31, 2001 includes an explanatory paragraph that states that the Company
has suffered recurring losses from operations, has an accumulated deficit, a
working capital deficiency, and has limited liquid resources that raise
substantial doubt about its ability to continue as a going concern.
On April 9, 2001, the Company exercised its option to acquire a substantial
equity interest in Metacine, Inc. Pursuant to the agreement, as amended, the
Company received 700,000 shares of Metacine common stock and a five-year warrant
to purchase, at a price of $12.48 per share, 282,794 shares of Metacine common
stock in exchange for $300,000 in cash, $250,000 of services to be rendered by
the Company by June 30, 2002 and 2,000,000 shares of the Company's common stock.
The agreement contains certain restrictions on the ability of Metacine to sell
the Company's shares and provides for cash payments ("Deficiency Payments") by
the Company to Metacine to the extent Metacine has not received, from the sale
of the Company's common stock, cumulative net proceeds of $1,850,000 by
September 30, 2002 or $400,000 of net proceeds per quarter beginning with the
period ending September 30, 2001 and $250,000 for the quarter ending September
30, 2002. In October 2001, the Company made a Deficiency Payment to Metacine in
the amount of $400,000 for the quarter ending September 30, 2001. The Company
has not, as yet, made Deficiency Payments in the amount of $400,000 for each of
the quarters ended December 31, 2001 and March 31, 2002. The Company is
currently discussing various options regarding the Deficiency Payments with
Metacine. In the event that and to the extent that cumulative net proceeds to
Metacine from the sale of the Company's common stock exceed $1,850,000, any
Deficiency Payments previously made by the Company would be repaid to the
Company.
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 2001, 2000 and 1999, the Company completed the sale of
approximately $12 million, $19 million and $32 million of its New Jersey tax
loss carryovers and received $0.97 million, $1.48 million and $2.35 million,
which was recorded as a gain on sale of state net operating loss carryovers on
the Company's Consolidated Statement of Operations in 2001, 2000 and 1999,
respectively. In June 2002, the Company will submit an application to sell an
additional approximately $2.6 million of tax benefits (calculated by multiplying
the Company's unused New Jersey net operating loss carryovers through December
31, 2001 of approximately $32 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 fiscal year 2002 and future years is $40 million per year.
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. 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% per
annum accruing from April 1, 1998 (the "Red Cross Liability") for white blood
cells purchased pursuant to the Supply Agreement.
In an agreement dated November 23, 1998, the Company agreed to grant the
Red Cross a security interest in certain assets to secure the Red Cross
Liability and to issue to the Red Cross 300,000 shares of common stock (with a
market value of $1,171,875 at December 4, 1998) and additional shares at some
future date as requested by the Red Cross to satisfy any remaining amount of the
Red Cross Liability. 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 into an agreement pursuant to which the Red
Cross agreed that until September 30, 2000 it would forbear from exercising its
rights under (i) the Supply Agreement, including with respect to collecting the
Red Cross Liability, and (ii) the Security Interest. 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 Red
Cross has the right 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 that this would occur.
As the liability to the Red Cross remains unsettled until such time as the
Red Cross sells the shares it has 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, or increases up to the amount
of any previous decreases, in the market value at issuance of the Company's
common stock issued to the Red Cross, until such time as the Red Cross sells its
shares, would impact the value of the shares held by the Red Cross and
accordingly require an adjustment to Settlement Shares. Due to the decline in
the Company's stock price during 1999, an adjustment for $550,000 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 $287,000 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 December 31, 2001 and 2000 was
approximately $1,339,000 and $1,276,000, respectively. On October 30, 2000, the
Company issued an additional 800,000 shares to the Red Cross (with a market
value of $824,000 on such date). Due to the decline in the Company's stock price
from October 30, 2000 to December 31, 2000, an adjustment for $524,000 has been
recorded with a corresponding charge to cost of goods sold in 2000. Due to the
increase in the Company's stock price during 2001, an adjustment for $65,713 was
recorded with a corresponding credit to cost of goods sold. The net proceeds
from the sale of such shares by the Red Cross will be applied against the
remaining liability of $1,339,000 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 to the Red Cross.
Pursuant to an agreement dated March 25, 1999, GP Strategies loaned the
Company $500,000 (the "GP Strategies Debt"). In return, the Company agreed to
grant GP Strategies (i) a first mortgage on the Company's real estate, (ii) a
two-year option (which has expired) 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 (which
has expired) in the event the Company desires to sell its real estate. In
addition, the Company agreed to issue GP Strategies 500,000 shares of common
stock (the "GP Shares") and a five-year warrant (the "GP Warrant") to purchase
500,000 shares of common stock at a price of $1 per share. The common stock and
warrants issued to GP Strategies 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 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 (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 which
was recorded as a credit to capital in excess of par value. On August 23, 2001,
the Company and GP Strategies entered into an agreement pursuant to which the GP
Strategies Debt was extended to March 15, 2002. During 2001, the Company paid GP
Strategies $100,000 to reduce the GP Strategies Debt. In addition, in January
2002, the Company paid GP Strategies $100,000 to further reduce the GP
Strategies Debt. The Company and GP Strategies are currently discussing
restructuring the balance of the GP Strategies Debt. As of the date hereof, GP
Strategies has not given the Company notice of its intent to exercise its rights
to collect the GP Strategies Debt. Under the terms of such agreement, GP
Strategies has the right to sell the Company's real estate. In the event GP
Strategies 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 that this would occur.
In January 2002, the Company was notified that if past due property taxes
on its facility of approximately $200,000 (which have not yet been paid) were
not paid within 30 days, that a complaint may be filed to foreclose on the
property. As of the date hereof, the tax lien holder has not exercised its
rights to foreclose on the Company's real estate. In the event the tax lien
holder foreclosed on the Company's real estate, and the real estate was sold,
the Company would hope to be able to enter into a lease with the new owner,
although there can be no assurance that this would occur.
The Company's common stock now trades on the OTC Bulletin Board, which may
have a material adverse effect on the ability of the Company to finance its
operations and on the liquidity of the common stock.
Critical Accounting Policies
Inventory reserves - The Company provides inventory reserves based on the
anticipated near-term projections of product to be sold or utilized in clinical
trials, giving consideration to historical sales levels. These estimates could
be materially different from actual usage.
Settlement Shares/Consideration Shares subject to guaranteed value - The
Company initially records the Settlement Shares issued to the Red Cross at the
fair value on date of issuance within stockholders' equity (deficiency) as a
credit to common stock/capital in excess of par value and a debit to settlement
shares. Any decrease, or increases up to the amount of any previous decreases,
in market value at issuance of the Company's common stock issued to the Red
Cross, until such time as the Red Cross sells its shares, would impact the value
of the shares held by the Red Cross and accordingly require an adjustment to
Settlement Shares. Any such adjustment is recorded with an offsetting adjustment
to cost of goods sold. The Consideration Shares subject to guaranteed value have
similar accounting treatment except that the initial debit entry was recorded to
the Consideration Shares subject to guaranteed value account within
Stockholders' equity (deficiency) and any adjustment to the value would be
recorded with an adjustment to other income (expense) of the Company.
Commitments
As discussed above, the Company is obligated to make Deficiency Payments to
Metacine for which the Company has not made the required payments of $400,000
each related to the quarters ended December 31, 2001 and March 31, 2002. The
Company may also be required to pay an additional $650,000 during 2002 if
Metacine does not receive any proceeds from the sale of the Company's common
stock which it holds. Also as discussed above, the Company's note payable to GP
Strategies of approximately $400,000 (after the $100,000 principal payment made
in January 2002) was due March 15, 2002 and has not yet been paid. The Company
and GP Strategies are currently discussing restructuring the balance of the GP
Strategies Debt.
Results of Operations
Year Ended December 31, 2001 versus Year Ended December 31, 2000
For the year ended December 31, 2001 (the "2001 Period") and 2000 (the
"2000 Period"), the Company had revenues from the sale of ALFERON N Injection of
$1,498,603 and $1,067,471, respectively. In 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 lower than normal sales in the 2000
Period. 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 2001 Period, the Company sold, through its distributor, to
wholesalers and other customers in the United States 11,296 vials of ALFERON N
Injection, compared to 7,946 vials sold by the Company during the 2000 Period.
In addition, foreign sales of ALFERON N Injection were 61 vials and 132 vials
for the 2001 and 2000 Periods, respectively.
Cost of goods sold and excess/idle production costs totaled $2,009,586 and
$2,332,153 for the 2001 Period and 2000 Period, respectively. Excess/idle
production costs in the 2001 and 2000 Periods represented fixed production
costs, which were incurred after production of ALFERON N Injection was
discontinued in April 1998. Excess/idle production costs were slightly lower
during the 2001 Period as compared to the 2000 Period. In addition, based on
changes in the value of the Settlement Shares, for the 2001 Period, cost of
goods sold was credited for $65,713 as compared to a charge of $278,835 to cost
of goods sold for the 2000 Period. However, higher unit sales in the 2001 Period
as compared to the 2000 Period contributed to higher cost of goods sold.
During the 2000 Period, the inventory reserve was reduced by $563,215.
Research and development expenses during the 2001 Period of $2,286,300
increased by $752,976 from $1,533,324 for the 2000 Period, principally because
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.
The Company also incurred increases in payroll and research costs during the
2001 Period, as compared to the 2000 Period.
General and administrative expenses for the 2001 Period were $2,646,734 as
compared to $2,306,146 for the 2000 Period. The increase of $340,588 was
principally due to increases in payroll and other operating expenses.
The Company recorded $2,341,418 as acquisition of in-process research and
development expense related to its investment in Metacine for the 2001 Period as
Metacine's primary asset is technology which has not reached technological
feasibility and has no alternative uses. The in-process research and development
expenses relate to research utilizing dendritic cells for the treatment of
various diseases.
Interest income for the 2001 Period and 2000 Period was $108,351 and
$161,835, respectively. The decrease of $53,484 was due to less funds available
for investment in the 2001 Period.
Interest expense for the 2001 Period and 2000 Period was $91,469 and
$87,873, respectively, and represents interest expense accrued on the Red Cross
Liability and GP Strategies Debt.
Equity in loss of Metacine for the 2001 Period was $449,576 and represents
the Company's equity in loss of Metacine for the period from April 9, 2001 to
December 31, 2001.
During 2001 and 2000, the Company completed the sale of a portion of its
New Jersey tax net operating loss carryforwards and recorded a gain on such sale
amounting to $968,553 and $1,483,861, which is recorded as an income tax benefit
in the 2001 and 2000 Periods, respectively.
As a result of the foregoing, the Company incurred net losses of $7,249,576
and $2,981,672 for the 2001 Period and 2000 Period, respectively.
Year Ended December 31, 2000 Versus Year Ended December 31, 1999
For the year ended December 31, 2000 (the "2000 Period") and 1999 (the
"1999 Period"), the Company had revenues from the sale of ALFERON N Injection of
$1,067,471 and $2,328,945, 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 1999 Period and in lower than
normal sales in the 2000 Period. 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 2000 Period, the Company sold, through its distributor, to
wholesalers and other customers in the United States 7,946 vials of ALFERON N
Injection, compared to 19,463 vials sold by the Company during the 1999 Period.
In addition, foreign sales of ALFERON N Injection were 132 vials and 1,374 vials
for the 2000 and 1999 Periods, respectively.
Cost of goods sold and excess/idle production costs totaled $2,332,153 and
$3,552,026 for the 2000 and 1999 Periods, respectively. Excess/idle production
costs in the 2000 and 1999 Periods 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
2000 Period as compared to the 1999 Period contributed to lower cost of goods
sold. In addition, based on changes in the value of the Settlement Shares for
the 2000 Period, cost of goods sold was charged for $278,835 in 2000 as compared
to a charge of $550,000 to cost of goods sold for the 1999 Period.
During the 2000 and 1999 Periods, a portion of the reserve for excess
inventory was reduced in the amount of $563,215 and $1,177,531 respectively.
Research and development expenses during the 2000 Period of $1,533,324
decreased by $1,526,695 from $3,060,019 for the 1999 Period, principally because
the Company had a reduction in research personnel which reduced its payroll and
research costs. In addition, during 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 2000 Period were $2,306,146 as
compared to $2,315,010 for the 1999 Period. The decrease of $8,864 was
principally due to decreases in administrative fees and other operating expenses
partially offset by increases in payroll and certain other operating costs.
Interest income for the 2000 Period was $161,835 as compared to $6,104 for
the 1999 Period. The increase of $155,731 was due to more funds available for
investment in the 2000 Period.
Interest expense and financing costs for the 2000 Period was $87,873 as
compared to $536,394 for the 1999 Period. The decrease of $448,521 was primarily
due to financing costs related to the GP Strategies Debt in the 1999 Period.
During 2000 and 1999, the Company completed the sale of a portion of its
New Jersey tax net operating loss carryforwards and recorded a gain on such sale
amounting to $1,483,861 and $2,348,509, which is recorded as an income tax
benefit in the 2000 and 1999 Periods, respectively.
As a result of the foregoing, the Company incurred net losses of $2,981,672
and $3,602,083 for the 2000 and 1999 Periods, respectively.
Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 141, Business Combinations, ("SFAS
No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 is effective January 1, 2002.
Upon adoption of SFAS No. 142, the Company is required to reassess the
useful lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. If an intangible asset is identified as having an indefinite
useful life, the Company will be required to test the intangible asset for
impairment in accordance with the provisions of SFAS No. 142 within the first
interim period. Impairment is measured as the excess of carrying value over the
fair value of an intangible asset with an indefinite life. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
As of the date of adoption of SFAS No. 142, the Company does not have any
goodwill and has unamortized identifiable intangible assets of approximately
$160,000, all of which will be subject to the transition provisions of SFAS No.
142. Amortization expense related to other intangible assets, was approximately
$30,000 and $29,000, for the years ended December 31, 2001, and 2000,
respectively. In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. SFAS No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company is required to adopt SFAS No. 144 on January 1, 2002.
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
additional uses under development for the Company's FDA-approved product and
foreign regulatory approvals if sought and if such approvals are obtained,
uncertainty of the successful commercial development of such product;
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 product; dependence on certain
contractors to manufacture or distribute the Company's product; potential
adverse side effects from the use of the Company's product; potential patent
infringement claims against the Company; possible inability of the Company to
protect its technology; limited production experience of the Company, risk of
product liability; and risk of loss of key management personnel, all of which
are difficult to predict and many of which are beyond the control of the
Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 21
Financial Statements:
Consolidated Balance Sheets - December 31, 2001 and 2000 22
Consolidated Statements of Operations - Years ended
December 31, 2001, 2000 and 1999 23
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency)- Years ended December 31, 2001, 2000 and 1999 24
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999 25
Notes to Consolidated Financial Statements 26
Schedule II - Valuation and Qualifying Accounts 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Interferon Sciences, Inc.:
We have audited the consolidated financial statements of Interferon
Sciences, Inc. and subsidiary as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Interferon
Sciences, Inc. and subsidiary as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 3 to the consolidated financial statements, the
Company has suffered recurring losses from operations, has an accumulated
deficit, a working capital deficiency, and has limited liquid resources that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Princeton, New Jersey
February 20, 2002
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2001 2000
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 1,184,889 $ 3,658,805
Receivable from sale of state
net operating loss carryovers 1,483,861
Accounts and other receivables 123,389 190,937
Inventories, net of reserves of $5,286,011 252,402 837,300
Prepaid expenses and other current assets 17,608 17,488
------------ ------------
Total current assets 1,578,288 6,188,391
------------- ------------
Property, plant and equipment, at cost
Land 140,650 140,650
Buildings and improvements 7,793,242 7,750,672
Equipment 4,920,942 4,916,518
-------------- ------------
12,854,834 12,807,840
Less accumulated depreciation (10,776,342) (10,298,260)
------------ ------------
2,078,492 2,509,580
------------ ------------
Patent costs, net of accumulated amortization
of $360,819 and $331,394 160,342 189,767
Other assets 10,100 110,100
------------ ------------
$ 3,827,222 $ 8,997,838
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities
Accounts payable $ 2,302,661 $ 2,300,719
Accrued expenses 350,548 278,108
Guaranteed value of ISI stock and
in-kind services due Metacine 1,700,000
Note payable and amount due GP Strategies 495,745 566,639
------------- -------------
Total current liabilities 4,848,954 3,145,466
------------- -------------
Equity in losses in excess of investment in Metacine 290,994
-------------
Commitments
Stockholders' equity (deficiency)
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- 20,308,031 and 17,931,838
shares, respectively 203,080 179,318
Capital in excess of par value 138,407,621 137,782,655
Accumulated deficit (139,043,427) (131,793,851)
Consideration shares subject to
guaranteed value (520,000)
Settlement shares (360,000) (315,750)
-------------- -------------
Total stockholders' equity (deficiency) (1,312,726) 5,852,372
-------------- -------------
$ 3,827,222 $ 8,997,838
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
-------- -------- -------
Revenues
ALFERON N Injection $ 1,498,603 $ 1,067,471 $ 2,328,945
Research products and other revenues 1,442 277
------------ ------------ -----------
Total revenues 1,498,603 1,068,913 2,329,222
------------ ------------ -----------
Costs and expenses
Cost of goods sold and excess/idle
production costs 2,009,586 2,332,153 3,552,026
Reduction of inventory reserve (563,215) (1,177,531)
Research and development 2,286,300 1,533,324 3,060,019
General and administrative 2,646,734 2,306,146 2,315,010
Acquisition of in-process technology 2,341,418
------------ ------------ -----------
Total costs and expenses 9,284,038 5,608,408 7,749,524
------------ ------------ -----------
Loss from operations (7,785,435) (4,539,495) (5,420,302)
Interest income 108,351 161,835 6,104
Interest expense and financing costs (91,469) (87,873) (536,394)
Equity in loss of Metacine (449,576)
----------- ------------ -----------
Loss before income tax benefit (8,218,129) (4,465,533) (5,950,592)
Income tax benefit:
Gain on sale of state net operating loss
carryovers 968,553 1,483,861 2,348,509
------------- ------------ -----------
Net loss $ (7,249,576) $ (2,981,672) $ (3,602,083)
============= ============ ===========
Basic and diluted net loss per share $ (.37) $ (.25) $ (.71)
============= ============ ===========
Weighted average number of
shares outstanding 19,576,312 12,097,252 5,088,620
============= ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Consideration
Capital shares subject Total
Common Stock in excess Accumulated to guaranteed Settlement stockholders'
Shares Amount of par value deficit value shares equity (deficiency)
------------------ ------------ -------------- ------------- ---------- -------------
Balance at
Dec. 31, 1998 4,360,808 $43,608 $127,933,885 $(125,210,096) $(664,000) $2,103,397
Common stock
issued as
financing cost 500,000 5,000 495,000 500,000
Common stock
issued as
payment against
accounts payable 285,000 2,850 531,525 534,375
Common stock
issued under
Company
401(k)plan 181,665 1,817 98,159 99,976
Compensation paid
in cash in settlement
of obligation to
issue common stock 338,690 338,690
Settlement shares sold 33,000 33,000
Market value adjustment 550,000 550,000
Net loss (3,602,083) (3,602,083)
- ------------------------------------------------------------------------------------------------------------------------
Balance at
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 11,635,451 116,354 6,980,595 7,096,949
Common stock
issued as
compensation 20,000 200 23,550 23,750
Common stock
issued under
Company
401(k) plan 78,914 789 79,409 80,198
Common stock
issued as
payment against
accounts payable 870,000 8,700 887,400 (896,100)
Employee stock
option compensation 2,050 2,050
Compensation paid
in cash in settlement
of obligation
to issue common stock 282,506 282,506
Forgiveness of amount
due GP Strategies 129,886 129,886
Settlement shares sold 382,515 382,515
Market value adjustment 278,835 278,835
Net loss (2,981,672) (2,981,672)
- ------------------------------------------------------------------------------------------------------------------------
Balance at
Dec. 31, 2000 17,931,838 179,318 137,782,655 (131,793,851) (315,750) 5,852,372
Common stock
issued to
Metacine 2,000,000 20,000 500,000 (520,000)
Common stock
issued as
compensation 50,000 500 12,780 13,280
Common stock
issued under
Company
401(k) plan 323,949 3,239 106,095 109,334
Proceeds from
exercise of common
stock options 2,244 23 538 561
Employee stock
option compensation 5,553 5,553
Settlement shares sold 21,463 21,463
Market value adjustment (65,713) (65,713)
Net loss (7,249,576) (7,249,576)
- ------------------------------------------------------------------------------------------------------------------------
Balance at
Dec. 31, 2001 20,308,031 $203,080 $138,407,621 $(139,043,427) $(520,000) $(360,000) $(1,312,726)
The accompanying notes are an integral part of these consolidated financial statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net loss $ (7,249,576) $ (2,981,672) $ (3,602,083)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 507,507 502,157 747,293
Acquisition of in-process research and development 2,341,418
Equity in loss of Metacine 449,576
Amortization of deferred financing costs 500,000
Gain on settlements of research-related
liabilities (456,998)
Reduction of inventory reserve (563,215) (1,177,531)
Provision for notes receivable 87,500 70,000
Non-cash compensation expense 128,167 388,504 438,666
Market value adjustment (65,713) 278,835 550,000
Loss on sale of other assets 51,392
Change in operating assets
and liabilities:
Accounts and other receivables 1,551,409 (1,639,237) 653,950
Inventories 584,898 491,915 1,121,315
Prepaid expenses and other current assets (120) 9,530 9,493
Accounts payable and accrued expenses 95,845 (1,497,126) 1,096,534
Amount due to GP Strategies 29,106 (87,112) 174,694
--------------- ------------ -------------
Net cash (used for) provided by operating
activities (1,539,983) (5,484,419) 563,723
--------------- ------------ -------------
Cash flows from investing activities:
Additions to property, plant and equipment (46,994) (56,967)
Investments in Metacine and other assets (787,500) (170,000)
Proceeds from sale of other assets 38,658
--------------- ------------ ------------
Net cash (used for) provided by
investing activities (834,494) (226,967) 38,658
--------------- ------------ -------------
Cash flows from financing activities:
Net proceeds from sale of common stock 7,096,949
(Repayment of) proceeds from note payable
to GP Strategies (100,000) 500,000
Proceeds from exercise of common stock options 561
--------------- ------------ -------------
Net cash (used for) provided by financing
activities (99,439) 7,096,949 500,000
--------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents (2,473,916) 1,385,563 1,102,381
Cash and cash equivalents at beginning of year 3,658,805 2,273,242 1,170,861
-------------- ------------ -------------
Cash and cash equivalents at end of year $ 1,184,889 $ 3,658,805 $ 2,273,242
============== ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Business
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical company
that operates in a single segment and is engaged in the study, manufacture, and
sale of pharmaceutical products based on its highly purified, multispecies,
natural source alpha interferon ("Natural Alpha Interferon"). The Company's
ALFERON(R) N Injection (Interferon Alfa-n3) product has been approved by the
United States Food and Drug Administration ("FDA") for the treatment of certain
types of genital warts and the Company has studied its potential use in the
treatment of HIV, hepatitis C, and other indications. Alferon N Injection is
sold principally in the United States, however, a portion is sold in foreign
countries. For the years ended December 31, 2001, 2000 and 1999, domestic sales
totaled $1,488,897, $1,046,470, and $2,204,437, respectively, and foreign sales
totaled $9,706, $21,001, and $124,508, respectively. All identifiable assets are
located in the United States.
Integrated Commercialization Solutions, Inc. ("ICS"), a subsidiary of
AmerisourceBergen Corporation, is the sole United States distributor of ALFERON
N Injection. ICS distributes ALFERON N Injection to a limited number of
wholesalers throughout the United States.
Note 2. Summary of Significant Accounting Policies
Principles of consolidation -- The consolidated financial statements
include the operations of the Company and Interferon Sciences Development
Corporation ("ISD"), its wholly owned subsidiary. All significant intercompany
transactions and balances have been eliminated. The transactions and balances of
Metacine, Inc. are being accounted for under the equity method (see Note 6). As
substantially all of Metacine's funding is being provided by the Company, 100%
of the losses of Metacine since April 9, 2001, the date of the Company's
acquisition of an 86% equity interest in Metacine, are reflected in the
accompanying statement of operations as equity in loss of Metacine.
Cash and cash equivalents -- The Company considers all highly liquid
instruments with maturities of three months or less from purchase date to be
cash equivalents.
Property, plant and equipment -- Property, plant and equipment are carried
at cost. Major additions and betterments are capitalized while maintenance and
repairs, which do not extend the lives of the assets, are expensed.
Depreciation -- The Company provides for depreciation and amortization of
plant and equipment following the straight-line method over the estimated useful
lives of such assets as follows:
Class of Assets Estimated Useful Lives
Buildings and Improvements 15 to 30 years
Equipment 5 to 10 years
Patent costs -- The Company capitalizes costs to obtain patents and
licenses. Patent costs are amortized over 17 years on a straight-line basis. To
the extent a patent is determined to be worthless, the related net capitalized
cost is immediately expensed.
Revenue recognition -- Title passes to the customer at the shipping point
and revenue is therefore recognized when the product is shipped. The Company's
product is also tested by its quality control department prior to shipment. The
Company has no other obligation associated with its products once shipment has
occurred.
Research and Development Costs - Research and development are expensed when
incurred. The types of costs included in research and development are: salaries,
supplies, clinical costs, facility costs and depreciation. All of these
expenditures were for Company sponsored research and development programs.
During 2000, the Company settled amounts owed by the Company on various research
related liabilities at a savings to the Company of approximately $457,000. The
amount was credited against research and development expenses in 2000.
Inventories -- Inventories, consisting of raw materials, work in process
and finished goods, are stated at the lower of cost or market on a FIFO basis.
Inventory in excess of the Company's estimated usage requirements is written
down to its estimated net realizable value. Inherent in the estimates of net
realizable value is management estimates related to the Company's future
manufacturing schedules, customer demand, possible alternative uses and ultimate
realization of potentially excess inventory.
Long-Lived Assets -- The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or estimated
fair value less costs to sell.
Stock option plan - The Company accounts for its stock-based compensation
to employees and members of the Board of Directors in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation is recorded on the date of issuance or grant as the excess of the
current market value of the underlying stock over the purchase or exercise
price. Any deferred compensation is amortized over the respective vesting
periods of the equity instruments, if any. The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," which permits
entities to provide pro forma net loss and net loss per share disclosures for
stock-based compensation as if the fair value method defined in SFAS No. 123 had
been applied. As required by SFAS No. 123, transactions with non-employees, in
which goods or services are the consideration received for the issuance of
equity instruments, are accounted for under the fair value basis in accordance
with SFAS 123.
Reverse stock split -- As a result of a one-for-five reverse stock split
effective as of January 6, 1999, all shares and per share information have been
restated retroactively.
Loss per share -- Basic earnings (loss) per share (EPS) are based upon the
weighted average number of common shares outstanding during the period. Diluted
EPS are based upon the weighted average number of common shares outstanding
during the period assuming the issuance of common shares for all dilutive
potential common shares outstanding. At December 31, 2001, 2000 and 1999, the
Company's options and warrants outstanding are anti-dilutive and therefore basic
and diluted EPS are the same.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period
that includes the enactment date.
Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 141, Business Combinations, ("SFAS
No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 is effective January 1, 2002.
Upon adoption of SFAS No. 142, the Company is required to reassess the
useful lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. If an intangible asset is identified as having an indefinite
useful life, the Company will be required to test the intangible asset for
impairment in accordance with the provisions of SFAS No. 142 within the first
interim period. Impairment is measured as the excess of carrying value over the
fair value of an intangible asset with an indefinite life. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
As of the date of adoption of SFAS No. 142, the Company does not have any
goodwill and has unamortized identifiable intangible assets of approximately
$160,000, all of which will be subject to the transition provisions of SFAS No.
142. Amortization expense related to other intangible assets, was approximately
$30,000 and $29,000, for the years ended December 31, 2001, and 2000,
respectively. In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. SFAS No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company is required to adopt SFAS No. 144 on January 1, 2002.
Note 3. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 2001, the Company had an accumulated
deficit of approximately $139 million. For the years ended December 31, 2001,
2000 and 1999, the Company had losses from operations of approximately $7.8
million, $4.5 million and $5.4 million, respectively. Also, the Company has
limited liquid resources. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Although the Company received FDA approval in 1989 to market
ALFERON N Injection in the United States for the treatment of certain genital
warts, 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 year ended December 31, 2001, the Company generated $1,498,603
in revenues from the sale of ALFERON N Injection and received $968,553 from the
sale of the Company's New Jersey net operating loss carryovers. At December 31,
2001, the Company had approximately $1.2 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
Company has sufficient resources to enable the Company to continue operations
until May 2002. 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.
Management plans to pursue raising additional capital by either (i) issuing
securities in a private or public equity offering or (ii) licensing the rights
to its injectable Natural Alpha Interferon for one or more indications.
Management is seeking to enter into mergers, joint ventures or other
collaborations that could provide the additional resources necessary to advance
the Company's most valuable programs. There can be no assurances, however, that
the Company will be successful in obtaining an adequate level of financing, on
terms that are acceptable to the Company, needed to continue operations.
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 4. Agreements with Hoffmann-LaRoche
F. Hoffmann-La Roche Ltd. and Hoffmann-LaRoche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. In 1995, the Company obtained a non-exclusive
perpetual license from Hoffmann (the "Hoffmann Agreement") that grants the
Company the worldwide rights to make, use, and sell, without a potential patent
infringement claim from Hoffmann, any formulation of Natural Alpha Interferon.
The Hoffmann Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann has patent rights covered by the Hoffmann Agreement
(the "Hoffmann Territory") to any third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann,
which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to pay
Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha
Interferon products by the Company in an amount equal to (i) 8% of net sales in
the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of
products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales
in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. For the years ended December 31, 2001, 2000 and 1999, the Company
recorded approximately $60,000, $42,000, and $94,000 in royalty expenses to
Hoffmann, respectively. The Hoffmann Agreement can be terminated by the Company
on 30 days notice with respect to the United States patent, any individual
foreign patent, or all patents owned by Hoffmann. If the Hoffmann Agreement is
terminated with respect to the patents owned by Hoffmann in a specified country,
such country is no longer included in the Hoffmann Territory. Accordingly, the
Company would not be permitted to market any formulation of alpha interferon in
such country.
Note 5. Research and Development Agreement with Interferon Sciences Research
Partners, Ltd.
In 1984, the Company organized ISD to act as the sole general partner of
Interferon Sciences Research Partners, Ltd., a New Jersey limited partnership
(the "Partnership"). The Company and the Partnership entered into a development
contract whereby the Company received substantially all of the net proceeds
($4,414,475) of the Partnership's public offering of limited partnership
interests. The Company used the proceeds to perform research, development and
clinical testing on behalf of the Partnership for the development of ALFERON Gel
containing recombinant interferon.
In connection with the formation of the Partnership, ISD agreed to make
additional cash contributions for purposes of continuing development of ALFERON
Gel if the Partnership exhausted its funds prior to development of such product.
ISD is wholly dependent upon the Company for capital to fund such commitment.
The Partnership exhausted its funds during 1986, and the Company contributed a
total of $1,997,000 during the period from 1986 to 1990, for the continued
development of ALFERON Gel. In 1987, the Company filed a Product License
Application with the FDA for approval to market ALFERON Gel. In February 1990,
the FDA indicated that additional process development and clinical trials would
be necessary prior to approval of ALFERON Gel. The Company believed, at that
time, that the costs to complete the required process development and clinical
trials would be substantial, and there could be no assurance that the clinical
trials would be successful.
As a result of the above events, in 1992, the Company withdrew its FDA
Product License Application for ALFERON Gel containing recombinant interferon.
In place of single species recombinant interferon, previously ALFERON Gel's
active ingredient, the Company commenced, in 1992, further development of
ALFERON Gel using the Company's natural source multi-species alpha interferon
("ALFERON N Gel"). However, at the present time, the Company is not actively
pursuing development of ALFERON N Gel and the Company does not have an
obligation to provide additional funding to the Partnership. Assuming successful
development and commercial exploitation of ALFERON N Gel, which to date has not
occurred, the Company may be obligated to pay the Partnership royalties equal to
4% of the Company's net sales of ALFERON N Gel and 15% of revenues received from
sublicensing ALFERON N Gel.
Note 6. Agreement with 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. The $100,000 paid
for the option was recorded as investment in Metacine and other assets on the
December 31, 2000 consolidated balance sheet.
On April 9, 2001, the Company exercised its option to acquire an 86% equity
interest in Metacine. Pursuant to the agreement, as amended, the Company
received 700,000 shares of Metacine common stock and a five-year warrant to
purchase, at a price of $12.48 per share, 282,794 shares of Metacine common
stock in exchange for $300,000 in cash, $250,000 of services to be rendered by
the Company by June 30, 2002 and 2,000,000 shares of the Company's common stock.
The agreement contains certain restrictions on the ability of Metacine to sell
the Company's shares and provides for cash payments ("Deficiency Payments") by
the Company to Metacine to the extent Metacine has not received from the sale of
the Company's common stock, cumulative net proceeds of $1,850,000 by September
30, 2002 or $400,000 of net proceeds per quarter beginning with the period
ending September 30, 2001 and $250,000 for the quarter ending September 30,
2002. On October 4, 2001, the Company made a Deficiency Payment to Metacine in
the amount of $400,000 for the quarter ending September 30, 2001. The Company
has not, as yet, made Deficiency Payments in the amount of $400,000 for each of
the quarters ended December 31, 2001 and March 31, 2002. The Company is
currently discussing various options regarding the Deficiency Payments with
Metacine. If Metacine sells all of the 2,000,000 shares received and the
cumulative proceeds from the sales and any Deficiency Payments are less than
$1,850,000, the Company may issue to Metacine additional shares of common stock
at the Company's full discretion. These additional shares would be treated in
the same manner as the original 2,000,000 shares. In the event that cumulative
net proceeds to Metacine from the sale of the Company's common stock exceed
$1,850,000, any Deficiency Payments previously made by the Company would be
repaid to the Company to the extent these proceeds exceed $1,850,000. All
additional proceeds beyond the $1,850,000 and repayment of Deficiency Payments,
if any, would be for the benefit of Metacine. The Company was required to put in
escrow 100,000 Metacine shares to secure its obligations to render $250,000 of
services to Metacine and 462,500 Metacine shares to secure its potential
obligations to make Deficiency Payments. Since the Company has not made $800,000
in Deficiency Payments, Metacine could request 200,000 Metacine shares currently
held in escrow to satisfy the Company's past due obligation.
While the Company is the majority owner of Metacine, the Company must cast
its votes on many matters in the same proportion as votes cast by other
stockholders of Metacine, except for certain matters with respect for which the
Company has protective rights. In accordance with EITF Issue No. 96-16,
Investor's Accounting for an Investee When the Investor has a Majority of the
Voting Interest but the Minority Shareholder or Shareholders have Certain
Approval or Veto Rights, the minority holders have substantive participating
rights including controlling the selection, termination and setting of
compensation for Metacine management, making operating and capital decisions for
Metacine and most other ordinary operating matters, and therefore, the Company
does not control Metacine. Accordingly, the acquisition is being accounted for
under the equity method.
Of the $2.5 million consideration paid for Metacine, $2,341,418 was
recorded as a charge for the acquisition of in-process research and development
("IPR&D"), in order to reduce the Company's investment in Metacine to the
Company's proportionate share of Metacine's net assets. The charge was recorded
as the acquisition of IPR&D as Metacine's primary asset is technology that has
not reached technological feasibility and has no alternative uses. The
in-process research and development expenses relate to research utilizing
dendritic cells for the treatment of various diseases. The $1,850,000 guaranteed
value of the 2,000,000 shares of common stock issued to Metacine, less the
$400,000 Deficiency Payment made in October 2001, has been recorded as a current
liability at December 31, 2001. The $250,000 of services to be provided has also
been recorded as a current liability. Services rendered to Metacine during 2001
were immaterial and as such, the liability remained unchanged at December 31,
2001. The investment has been further reduced to $(290,994) at December 31, 2001
by the Company's equity in the loss of Metacine for the period from April 9,
2001 through December 31, 2001, and is recorded in long-term liabilities. As the
liability to Metacine remains unsettled until such time as Metacine sells the
shares, the Company has recorded the shares issued to Metacine as a debit
("Consideration shares subject to guaranteed value") within stockholders'
equity. Any decreases, or increases up to the amount of any previous decreases,
in the market value at issuance of the Company's common stock issued to
Metacine, until such time as Metacine sells its shares, would impact the value
of the shares held by Metacine and accordingly require an adjustment to
Consideration shares subject to guaranteed value. No adjustment was necessary
through December 31, 2001. Pro forma information as if the investment in
Metacine had occurred as of January 1, 2000 has not been presented as the
inclusion of such amounts would be immaterial to the results of operations of
the Company for the years ended December 31, 2001 and 2000. As substantially all
of Metacine's funding is being provided by the Company, 100% of the losses of
Metacine are reflected in the accompanying statement of operations as equity in
loss of Metacine.
Note 7. Inventories
Inventories, consisting of material, labor and overhead, are classified as
follows:
December 31,
2001 2000
-------------------------
Finished goods $ 1,153,783 $ 1,073,195
Work in process 3,052,070 3,717,556
Raw materials 1,332,560 1,332,560
Less reserve for excess inventory (5,286,011) (5,286,011)
----------- ------------
$ 252,402 $ 837,300
=========== ============
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 2001, 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 December 31, 2001 and 2000, reflect a reserve for excess
inventory of $5,286,011.
During 2000 and 1999, a portion of the reserve for excess inventory was
reduced in the amount of $563,215 and $1,177,531, respectively.
In addition, during 2000, approximately $375,959 of inventory was written
off against the reserve for excess inventory due to losses in the conversion of
work in process inventory into finished goods. Also, during 1999, approximately
$2,900,000 of inventory was written off against the reserve for excess inventory
since the inventory had expired and could no longer be sold or used for clinical
trials.
Note 8. Income Taxes
As a result of the loss allocation rules contained in the Federal income
tax consolidated return regulations, approximately $5,900,000 of net federal
operating loss carryforwards, which expire from 2003 to 2006, are available to
the Company upon ceasing to be a member of GP Strategies's consolidated return
group in 1991. In addition, the Company has net federal operating loss
carryforwards for periods subsequent to May 31, 1991, and through December 31,
2001 of approximately $95,700,000 that expire from 2006 to 2021. In addition,
the Company had state net operating loss carryforwards of approximately
$32,000,000 which expire from 2004 to 2008.
The Company believes that the events culminating with the closing of its
Common Stock Private Offering on November 6, 2000 may result in an "ownership
change" under Internal Revenue Code, Section 382, with respect to its stock. The
Company believes that as a result of the ownership change, the future utility of
its pre-change net operating losses may be significantly limited. In addition,
the Company has approximately $150,000 of research and development credit
carryforwards, which expire in 2002 that are, in accordance with Internal
Revenue Code, Section 383, subject to the annual limitation under Internal
Revenue Code Section 382.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities consist of the following as of December 31, 2001 and
2000:
Deferred tax assets 2001 2000
- ------------------- ---- -----
Net operating loss carryforwards $34,551,000 $33,096,000
Tax credit carry-forwards 150,000 209,000
Inventory reserve 2,114,000 2,114,000
Property and equipment,
principally due to differences
in basis and depreciation 588,000 510,000
In-process technology costs 937,000
---------- -----------
Gross deferred tax asset 38,340,000 35,929,000
Valuation allowance (38,340,000) (35,929,000)
----------- -----------
Net deferred taxes $ --- $ ---
=========== ===========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's history of annual net losses, that a full
valuation allowance is appropriate. The change in the valuation allowance for
2001 and 2000 was $2,411,000 and $1,303,000, respectively.
Based on the Company's net loss before income taxes in 2001, 2000 and 1999,
the Company would have recorded a tax benefit. During each of these years, the
Company recorded increases in the valuation allowance due to uncertainty
regarding the realization of deferred taxes which reduced the Company's expected
income tax benefit to zero in these years.
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 Program requires that a purchaser pay at
least 75% of the amount of the surrendered tax benefit.
During 2001, 2000 and 1999, the Company completed the sale of approximately
$12 million, $19 million and $32 million of its New Jersey tax loss carryovers
and received $0.97 million, $1.48 million and $2.35 million, which were recorded
as a tax benefit from gains on sale of state net operating loss carryovers on
its Consolidated Statement of Operations in 2001, 2000 and 1999, respectively.
Note 9. Common Stock, Stock Options, Warrants and Other Shares Reserved
The Company has a stock option plan (the "Plan"), which authorizes a
committee of the Board of Directors to grant options, to purchase shares of
Common Stock, to officers, directors, employees and consultants of the Company.
Pursuant to the terms of the Plan, no option may be exercised after 10 years
from the date of grant. The Plan permits options to be granted at a price not
less than 85% of the fair market value, however, the options granted to date
have been at fair market value of the common stock at the date of the grant.
During 2001, the Company did not grant any stock options. The per share
weighted-average fair value of stock options granted during 2000 and 1999 was
$.88 and $.21 on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions: 2000 - expected dividend yield
of 0.0%, risk-free interest rate of 6.1%, expected volatility of 142.4% and an
expected life of 3.0 years; 1999 - expected dividend yield of 0.0%, risk-free
interest rate of 6.1%, expected volatility of 116.4% and an expected life of 4.0
years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and as
options granted had exercise prices equal to the fair value on the date of
grant, no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below:
2001 2000 1999
---- ---- ----
Net loss as reported $(7,249,576) $(2,981,672) $(3,602,083)
pro forma (7,979,860) (3,643,671) (4,411,970)
Basic and diluted
net loss per
share as reported $ (.37) $ (.25) $ (.71)
pro forma (.41) (.30) (.87)
Employee stock option activity for options under the Plan during the periods
indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
---------- ----------------
Balance at December 31, 1998 538,089 $1.40
Granted 1,487,792 .25
Forfeited (138,621) 1.40
----------
Balance at December 31, 1999 1,887,260 .25
Granted 61,710 1.10
Forfeited (2,580) .25
----------
Balance at December 31, 2000 1,946,390 .28
Exercised (2,244) .25
Forfeited (13,525) .35
----------
Balance at December 31, 2001 1,930,621 .28
On October 27, 1999, the Company repriced all existing employee stock
options to have an exercise price of $.25 (the closing market price on that
date), which vest over a three-year period, and have an expiration date of
December 31, 2003. Accordingly, the weighted average price of options
outstanding at December 31, 1999 has been restated to $.25. All other terms and
conditions of the repriced options remain the same with the exception of
repricing the exercise price and the new expiration date.
At December 31, 2001, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.25-$1.25, and 2 years,
respectively.
At December 31, 2001, the number of options exercisable was 1,547,360, and
the weighted-average exercise price of those options was $.27.
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 that 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) were fully vested on
January 1, 2001. On December 31, 2001, the closing price of the Company's common
stock was $.45 per share and accordingly, under FIN 44, no compensation expense
was recorded on the repriced fully vested stock options of July 1, 2000.
However, under FIN 44, for the repriced unvested stock options of July 1, 2000,
the Company calculated and recorded compensation expense of $5,553, subject to
adjustment for changes in the stock price.
Information regarding all Options and Warrants
Changes in options and warrants outstanding during the years ended December
31, 2001, 2000 and 1999, and options and warrants exercisable and shares
reserved for issuance at December 31, 2001 are as follows:
The following table includes all options and warrants including employee
options (which are discussed above).
Price Range Number of
Per Share Shares
----------- ---------
Outstanding at December 31, 1998 $ 1.40 - $ 77.90 720,911
Granted .25 - 1.00 1,987,792
Terminated 1.40 - 54.00 (141,671)
--------------------- -----------
Outstanding at December 31, 1999 .25 - 77.90 2,567,032
Granted .56 - 1.50 14,631,279
Terminated .25 - 77.90 (90,975)
--------------------- -----------
Outstanding at December 31, 2000 .25 - 48.00 17,107,336
Exercised .25 (2,244)
Terminated .25 - 48.00 (77,938)
--------------------- -----------
Outstanding at December 31, 2001 .25 - 36.00 17,027,154
===========
Exercisable:
December 31, 2001 .25 - 36.00 16,643,893
==========
Shares reserved for issuance:
December 31, 2001 17,027,154
==========
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2001, include 26,964 shares under warrant agreements
with the underwriters of a 1997 Stock Offering. The warrants are priced at
$36.00 per share and expire on August 18, 2002.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2001, include 500,000 shares under a warrant agreement
with GP Strategies. The warrants are priced at $1.00 per share and expire on
March 25, 2004.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2001, include 11,635,451 shares under warrant
agreements with the purchasers of a 2000 private offering. The warrants are
priced at $1.50 per share and expire on April 17, 2005.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2001, include 2,934,118 shares under a warrant
agreement to purchase 1,467,059 units. Each unit consists of a share of common
stock and a warrant to purchase an additional share of common stock at a price
of $1.50 per share, exercisable at a price of $.66 per unit. The units were
issued as compensation for services rendered to the Company in the 2000 private
offering and expire on April 17, 2005.
Note 10. Savings Plan
The ISI Savings Plan (the "Savings Plan") permits pre-tax contributions to
the Savings Plan by participants pursuant to Section 401(k) of the Internal
Revenue Code of up to 15% of base compensation. The Company will match up to the
6% level of the participants' eligible contributions. The Savings Plan matches
40% in cash and 60% in the Company's common stock up to the 6% level. For 2001,
the Company's contribution to the Savings Plan was $176,000, consisting of
$66,666 in cash and $109,334 in stock. For 2000, the Company's contribution to
the Savings Plan was $124,000, consisting of $43,802 in cash and $80,198 in
stock. For 1999, the Company's contribution to the Savings Plan was $137,000,
consisting of $37,024 in cash and $99,976 in stock.
Note 11. Common Stock Compensation and Profit Sharing Plan
Common Stock Compensation Plan
Effective October 1, 1997, the Company adopted the Common Stock
Compensation Plan (the "Stock Compensation Plan"), providing key employees with
the opportunity of receiving the Company's common stock as additional
compensation.
Pursuant to the terms of the Stock Compensation Plan, key employees were to
receive, as additional compensation, a pre-determined amount of the Company's
common stock in three equal installments on October 1, 1998, 1999 and 2000,
provided that the key employees remain in the employ of the Company at each such
installment date. As of October 1, 2000, 1999 and 1998, a deferred compensation
liability of $289,920, $340,821 and $412,344, respectively, was accrued for
these employees based on the common stock market price of October 1, 1997. On
October 1, 2000, 1999 and 1998, the Company paid the compensation in cash in
settlement of the Company's obligation to issue shares of common stock.
Accordingly, cash of $7,414, $2,131, and $25,947, respectively, was paid in
satisfaction of the accrued liability of $289,920, $340,821 and $412,344,
respectively. The difference of $282,506, $338,690, and $386,397 was credited to
additional paid in capital in 2000, 1999 and 1998, respectively.
Profit Sharing Plan
The Company has a Profit Sharing Plan (the "Profit Sharing Plan") providing
key employees and consultants with an opportunity to share in the profits of the
Company. The Profit Sharing Plan is administered by the Company's Compensation
Committee.
Pursuant to the terms of the Profit Sharing Plan, the Compensation
Committee, in its sole discretion, based upon the significance of the employee's
contributions to the operations of the Company, selects certain key employees
and consultants of the Company who are entitled to participate in the Profit
Sharing Plan and determines the extent of their participation. The amount of the
Company's profits available for distribution to the participants (the
"Distribution Pool") is the lesser of (a) 10% of the Company's income before
taxes and profit sharing expense and (b) an amount equal to 100% of the base
salary for such year of all the participants in the Profit Sharing Plan.
The Compensation Committee may require as a condition to participation that
a participant remain in the employ of the Company until the end of the fiscal
year for which payment is to be made. Payments required to be made under the
Profit Sharing Plan must be made within 10 days of the filing of the Company's
tax return. To date, there have been no contributions by the Company under the
Profit Sharing Plan.
Note 12. Related Party Transactions
GP Strategies owns less than 5% of the Company's common stock as of
December 31, 2001. The Company was a party to a management agreement with GP
Strategies, pursuant to which certain legal, financial and administrative
services had been provided by employees of GP Strategies. The fee for such
services in 1999 was $120,000. Such costs were included in general and
administrative expenses. The management agreement was terminated on March 27,
2000 (See Note 14).
See Note 14 for information with respect to royalty obligations to GP
Strategies.
Note 13. Supplemental Statement of Cash Flow Information
The Company paid no income taxes or interest during the three-year period
ended December 31, 2001.
During the years ended December 31, 2001, 2000 and 1999 the following
non-cash financing and investing activities occurred:
2001:
The Company issued 2,000,000 shares, with a guaranteed value of $1,850,000,
of common stock and committed to provide $250,000 of services to be rendered by
the Company to Metacine (see Note 6).
The Company reduced the settlement share contra-equity account and the
corresponding liability by $21,463 for settlement shares sold.
2000:
The Company issued 870,000 shares, valued at $896,100, of common stock as
settlement shares related to accounts payable (see Note 14).
The Company credited capital in excess of par value for forgiveness of
$129,886 of debt due GP Strategies.
The Company reduced the settlement share contra-equity account and the
corresponding liability by $382,515 for settlement shares sold.
1999:
The Company issued 285,000 shares, valued at $534,375, of common stock as
payment against accounts payable and the purchase of inventory.
As consideration for a loan from GP Strategies, the Company issued 500,000
shares and warrants to purchase an additional 500,000 shares, valued at
$500,000.
The Company reduced the settlement share contra-equity account and the
corresponding liability by $33,000 for settlement shares sold.
Note 14. Commitments
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. 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% per
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 to
satisfy any remaining amount of the Red Cross Liability. 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 Red Cross has the right 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 that this would occur.
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 (deficiency). Any decreases, or increases up
to the amount of any previous decreases, in the market value at issuance of the
Company's common stock issued to the Red Cross, until such time as the Red Cross
sells its shares, would impact the value of the shares held by the Red Cross and
accordingly require an adjustment to "Settlement Shares". Due to the decline in
the Company's stock price during 1999, an adjustment for $550,000 has been
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 included in accounts payable
on the consolidated balance sheet at December 31, 2001 and 2000 was
approximately $1,339,000 and $1,276,000, respectively. On October 30, 2000, the
Company issued an additional 800,000 shares to the Red Cross (with a market
value of $824,000 on such date). Due to the decline in the Company's stock price
from October 30, 2000 to December 31, 2000, an adjustment for $524,000 has been
recorded with a corresponding charge to cost of goods sold in 2000. Due to the
increase in the Company's stock price during 2001 an adjustment for $65,713 was
recorded with a corresponding credit to cost of goods sold. The net proceeds
from the sale of such shares by the Red Cross will be applied against the
remaining liability of $1,339,000 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.
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 (which has
expired) 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 (which has expired) 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. The common stock and warrants
issued to GP Strategies 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. 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 which was recorded as a credit to capital in excess of
par value. On August 23, 2001, the Company and GP Strategies entered into an
agreement pursuant to which the GP Strategies Debt was extended to March 15,
2002. During 2001, the Company paid GP Strategies $100,000 to reduce the GP
Strategies Debt. In addition, in January 2002, the Company paid GP Strategies
$100,000 to further reduce the GP Strategies Debt. The Company and GP Strategies
are currently discussing restructuring the balance of the GP Strategies Debt.
Under the terms of such agreement, GP Strategies has the right to sell the
Company's real estate.
As consideration for the transfer to the Company of certain licenses,
rights and assets upon the formation of the Company by GP Strategies, the
Company agreed to pay GP Strategies royalties of $1,000,000, but such payments
will be made only with respect to those years in which the Company has income
before income taxes, and will be limited to 25% of such income. To date, the
Company has not generated income before taxes and therefore has not accrued or
paid royalties to GP Strategies.
See Notes 4 and 5 for information relating to royalties payable to Hoffmann
and the Partnership, respectively.
Note 15. Quarterly Financial Data (unaudited)
The following summarizes the Company's unaudited quarterly results for 2001 and
2000.
2001 Quarters First Second Third Fourth
------ ------ ----- ------
Thousands of dollars except per share data
Revenues $ 371 $ 344 $ 459 $ 325
Gross profit (loss)(1) (269) (56) (267) 81
Net loss (1,498) (3,737) (1,665) (350)
Basic and diluted net loss per share (.08) (.19) (.08) (.02)
2000 Quarters First Second Third Fourth
------ ------ ----- ------
Thousands of dollars except per share data
Revenues $ 163 $ 158 $ 324 $ 424
Gross profit (loss)(1) 68 (267) (231) (270)
Net loss (813) (820) (1,272) (77)
Basic and diluted net loss per share (.15) (.09) (.08) --
(1) Gross profit (loss) is calculated as revenue less cost of goods sold and
excess/idle production costs and reduction of inventory reserve.
Note 16. Fair Value of Financial Instruments
The carrying values of financial instruments, assuming the Company
continues as a going concern, including cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and note payable approximate fair
values, because of the short term nature or interest rates that approximate
current rates.
Note 17. Agreement with Mayo
In April 2001, the Company entered into a technology license agreement with
Mayo Foundation for Medical Education and Research ("Mayo") under which the
Company obtained certain technology rights. The Company has committed to fund
approximately $400,000 of costs related to a clinical trial beginning in
December 2001 and expected to be completed in early 2003. The Company paid Mayo
$100,000 related to this clinical trial in 2001 and will owe other amounts upon
the completion of certain parts of the trial, with the last payment due upon
receipt of the final written report on the trial. The Company can terminate this
agreement up to 60 days after receipt of this report. After expiration of this
ability to terminate, the Company must issue 25,000 shares of the Company's
common stock to Mayo and must pay milestone payments upon certain regulatory or
other events and royalties on future sales, if any. In addition, the Company
paid $60,000 to Mayo related to the agreement in 2001.
Note 18. Subsequent Event
In January 2002, the Company was notified that if past due property taxes
on its facility of approximately $200,000 (which have not yet been paid) were
not paid within 30 days, that a complaint may be filed to foreclose on the
property.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Company is incorporated
herein by reference to the Company's definitive proxy statement pursuant to
Regulation 14A, which proxy statement will be filed not later than 120 days
after the end of the fiscal year covered by this report.
Item 11. Executive Compensation
Information with respect to compensation of executives of the Company is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed not later than
120 days after the end of the fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to the Company's definitive
proxy statement pursuant to Regulation 14A, which statement will be filed not
later than 120 days after the end of the fiscal year covered by this Report.
Item 13. Certain Relationships and Related Transactions
Information with respect to Certain Relationships and Related Transactions
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which statement will be filed not later than 120
days after the end of the fiscal year covered by this Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements are included in Part II, Item
8:
Page
Independent Auditors' Report 21
Financial Statements:
Consolidated Balance Sheets - December 31, 2001 and 2000 22
Consolidated Statements of Operations - Years ended
December 31, 2001, 2000 and 1999 23
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) - Years ended December 31, 2001, 2000 and 1999 24
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999 25
Notes to Consolidated Financial Statements 26
(a)(2) The following is a list of all financial schedules for 2001,
filed as part of this report:
Schedule II - Valuation and Qualifying Accounts 42
Schedules other than that listed above have been omitted because
they are not required or are not applicable or the required
information has been included in the financial statements or the
notes thereto.
(a)(3) See accompanying Index to Exhibits
(b) There were no reports on Form 8-K filed by the Registrant during
the last quarter of the Period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERFERON SCIENCES, INC.
By: /s/ Lawrence M. Gordon
-----------------------
Lawrence M. Gordon
Chief Executive Officer
Dated: April 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Samuel H. Ronel Chairman of the Board April 15, 2002
- -------------------
Samuel H. Ronel, Ph.D.
/s/ Lawrence M. Gordon Chief Executive Officer and Director
- ---------------------- (Principal Executive Officer) April 15, 2002
Lawrence M. Gordon
/s/ Stanley G. Schutzbank President and Director April 15, 2002
- -------------------------
Stanley G Schutzbank, Ph.D.
___________________ Director April 15, 2002
Sheldon L. Glashow
/s/ Donald W. Anderson Controller (Principal April 15, 2002
- ---------------------- Accounting and Financial
Donald W. Anderson Officer)
The foregoing constitutes a majority of the members of the Board of
Directors.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning Costs, Provisions End of
Description Of Period and Expenses Deductions Period
Year ended December 31, 2001
Valuation and qualifying accounts
deducted from assets to which they
apply:
Reserve for excess inventory $5,286,011 $ $ $5,286,011
Year ended December 31, 2000
Valuation and qualifying accounts
deducted from assets to which they
apply:
Reserve for excess inventory $6,225,185 $ (a)$ 939,174 $5,286,011
Year ended December 31, 1999
Valuation and qualifying accounts
deducted from assets to which they
apply:
Reserve for excess inventory $10,344,551 $ (b)$4,119,366 $6,225,185
Notes:
(a) Deductions include $563,215 for the reduction of a portion of the reserve
for excess inventory and $375,959 for the usage of the reserve to write-off
inventory.
(b) Deductions include $1,177,531 for the reduction of a portion of the reserve
for excess inventory, $139,132 for the usage of a portion of the reserve to
write-off excess inventory and $2,802,703 to write-off expired inventory.
INDEX TO EXHIBITS
Exhibit Number
3.1 - Restated Certificate of Incorporation of the Registrant. Incorporated
herein by reference to Exhibit 3B of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1988.
3.2 - Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.4 of Registration
Statement No. 33-40902.
3.3 - Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.2 of Registration
Statement No. 33-40902.
3.4 - Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant. Incorporated herein by reference to Exhibit 3.4 of Registration
Statement No. 33-00845.
3.5 - Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant. Incorporated by reference to Exhibit 3.5 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
3.6 - By-Laws of the Registrant, as amended. Incorporated herein by reference to
Exhibit 3.2 of Registration Statement No. 2-7117.
4.1 - Form of Underwriter's Purchase Option issued in connection with the
August/September 1995 Offering. Incorporated herein by reference to Exhibit 4.1
of Registration Statement No. 33-59479.
4.2 - Form of Underwriter's Purchase Option issued in connection with the May
1996 Offering. Incorporated herein by reference to Exhibit 4.4 of Registration
Statement No. 333-00845.
4.3 - Form of Purchase Option issued in connection with the December 1996
Private Placement. Incorporated by reference to Exhibit 4.3 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
10.1 - Transfer and License Agreement among National Patent, Hydron
Laboratories, Inc. and the Registrant dated as of January 1, 1981. Incorporated
herein by reference to Exhibit 10.8 of the Registrant's Registration Statement
No. 2-71117.
10.2 - Registrant's 1981 Stock Option Plan, as amended. Incorporated herein by
reference to Exhibit 10.3 to Registration Statement No. 33-59479.
10.3 - Profit Sharing Plan of the Registrant. Incorporated herein by reference
to Exhibit 10X of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.
10.4 - License Agreement dated October 20, 1989 between the Registrant and
Amarillo Cell Culture Company, Incorporated. Incorporated herein by reference to
Exhibit 10Y of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989.
10.5 - GP Strategies 401(k) Savings Plan dated January 9, 1992, effective March
1, 1992. Incorporated herein by reference to Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the Year ended December 31, 1992.
10.6 - Distribution Agreement dated as of February 3, 1994 between Registrant
and Industria Farmaceutica Andromaco, S.A. Incorporated herein by reference to
Exhibit 6(a) to the Registrant's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994.
10.7 - Processing and Supply Agreement dated as of September 1, 1994 between
Registrant and Sanofi Winthrop L.P. Incorporated herein by reference to Exhibit
6(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
10.8 - Amendment dated March 24, 1995 to Distribution Agreement dated as of
February 3, 1994 between Registrant and Industria Farmaceutica Andromaco S.A.
Incorporated herein by reference to Exhibit 10.30 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.9 - License Agreement, dated as of March 29, 1995, among the Registrant,
Hoffmann-La Roche, Inc. and F. Hoffmann La-Roche, Ltd. Incorporated herein by
reference to Exhibit 10.42 to Registration Statement No. 33-59479.
10.10 - Amendment of ACC/ISI License Agreement, dated 27, 1995, between
Registrant and Amarillo Cell Culture Company, Incorporated. Incorporated herein
by reference to Exhibit 10.43 to Registration Statement No. 33-59479.
10.11 - PPM/ACC Sub License Agreement, dated April 27, 1995, between Pharma
Pacific Management Pty. Ltd., and Amarillo Cell Culture Company, Incorporated.
Incorporated herein by reference to Exhibit 10.52 to Registration Statement No.
33-59479.
10.12 - Supply and Distribution Agreement, dated as of April 3, 1996, between
the Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.56 to Registration Statement No. 333-00845.
10.13 - Quality Assurance Agreement, dated as of April 3, 1996, between the
Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.57 to Registration Statement No. 333-00845.
10.14 - Agreement, dated as of April 1, 1997, between the Registrant and the
American National Red Cross. Incorporated by reference to Exhibit 10.54 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.15 - Agreement dated May 27, 1997, between the Registrant and Alternate Site
Distributors, Inc. Incorporated by reference to Exhibit 10.55 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.16 - Stock Bonus Plan. Incorporated by reference to Exhibit 10.57 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
10.17 - Form of employment agreement for participants in Stock Bonus Plan.
Incorporated by reference to Exhibit 10.58 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
10.18 - Employment Agreement, dated as of October 1, 1997, between the
Registrant and Lawrence M. Gordon. Incorporated by reference to Exhibit 10.59 of
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
21.0 - Subsidiaries of the Registrant. *
23.1 - Consent of KPMG LLP. *
- -----------------
*Filed herewith
Exhibit 21
Subsidiaries of the Registrant
Name Jurisdiction
Interferon Sciences Development Corporation Delaware
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
THE BOARD OF DIRECTORS
INTERFERON SCIENCES, INC.
We consent to the incorporation by reference in (i) the Registration
Statement (No. 33-64921) on Form S-3, (ii) the Registration Statement (No.
333-04381) on Form S-3, (iii) the Registration Statement (No. 333-19451) on Form
S-3, (iv) the Registration Statement (No. 33-30209) on Form S-8, (v) the
Registration Statement (No. 333-34203) on Form S-3, and (vi) the Registration
Statement (No. 333-43078) on Form S-1 filed on November 6, 2000 of Interferon
Sciences, Inc. of our report dated February 20, 2002 with respect to the
consolidated balance sheets of Interferon Sciences, Inc. and subsidiary as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for each
of the years in the three-year period ended December 31, 2001, and the related
financial statement schedule, which report appears in the December 31, 2001
Annual Report on Form 10-K of Interferon Sciences, Inc. Our report dated
February 20, 2002, contains an explanatory paragraph that states the Company has
suffered recurring losses from operations, has an accumulated deficit, a working
capital deficiency, and has limited liquid resources that raise substantial
doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
/s/ KPMG LLP
Princeton, New Jersey
April 15, 2002