UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ________________
Commission File Number: 0-10379
INTERFERON SCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2313648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
(Address of principal executive offices) (Zip code)
(732) 249-3250
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of issuer's classes of common stock as of
July 25, 2002.
Common Stock 20,582,632 shares
INTERFERON SCIENCES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. Financial Information:
Consolidated Condensed Balance Sheets--
June 30, 2002 and December 31, 2001. . . . . . . . . . . . . . . . . . . .1
Consolidated Condensed Statements of Operations--
Three Months and Six Months Ended June 30, 2002 and 2001 . . . . . . . .2-3
Consolidated Condensed Statement of Changes in
Stockholders' Equity (Deficiency)--
Six Months Ended June 30, 2002 . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Condensed Statements of Cash Flows--
Six Months Ended June 30, 2002 and 2001. . . . . . . . . . . . . . . . . .5
Notes to Consolidated Condensed Financial Statements. . . . . . . . . . .6-12
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . 13-19
Part II. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
KPMG LLP, the Company's independent accountants, were not engaged to and did not
perform a review of this Quarterly Report on Form 10-Q in accordance with
Statement on Auditing Standards No. 71, "Interim Financial Information",
although such a review is required, as the Company lacks sufficient funds to pay
for this review.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2002 2001
(Unaudited)
ASSETS ------------------------------
Current assets
Cash and cash equivalents $ 251,451 $ 1,184,889
Accounts and other receivables 20,855 123,389
Inventories, net of reserves of
$5,108,793 and $5,286,011, respectively 252,402
Prepaid expenses and other current assets 35,258 17,608
------------- -------------
Total current assets 307,564 1,578,288
------------- -------------
Property, plant and equipment, at cost 12,854,834 12,854,834
Less accumulated depreciation (10,974,801) (10,776,342)
------------- -------------
1,880,033 2,078,492
------------- -------------
Patent costs, net of accumulated amortization 146,259 160,342
Other assets 100 10,100
------------- -------------
Total assets $ 2,333,956 $ 3,827,222
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued expenses $ 2,832,934 $ 2,653,209
Guaranteed value of ISI stock and
in-kind services due Metacine 1,700,000 1,700,000
Note payable and amount due GP Strategies 404,745 495,745
------------- -------------
Total current liabilities 4,937,679 4,848,954
------------- -------------
Convertible notes payable 225,000
------------- -------------
Equity in losses in excess of
investment in Metacine 527,172 290,994
------------- -------------
Commitments and contingencies
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-20,533,768 and
20,308,031 shares, respectively 205,338 203,080
Capital in excess of par value 138,452,701 138,407,621
Accumulated deficit (141,761,934) (139,043,427)
Consideration shares subject to guaranteed value (180,000) (520,000)
Settlement shares (72,000) (360,000)
------------- ------------
Total stockholders' equity (deficiency) (3,355,895) (1,312,726)
------------- ------------
Total liabilities and stockholders'
equity (deficiency) $ 2,333,956 $ 3,827,222
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
-----------------------------
2002 2001
------------- -------------
Revenues
Alferon N Injection $ 175,636 $ 343,817
------------- -------------
Total revenues 175,636 343,817
------------- -------------
Costs and expenses
Cost of goods sold and excess/idle
production costs 421,026 399,677
Research and development 377,269 590,296
General and administrative 402,951 728,181
Acquisition of in-process technology 2,341,418
Other expenses 260,000
------------- -------------
Total costs and expenses 1,461,246 4,059,572
------------- -------------
Loss from operations (1,285,610) (3,715,755)
Interest income (expense), net (19,210) 6,638
Equity in loss of Metacine (124,339) (27,445)
------------- -------------
Net loss $ (1,429,159) $(3,736,562)
============= =============
Basic and diluted net loss per share $ (.07) $ (.19)
============= =============
Weighted average number of shares outstanding 20,453,748 19,866,044
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
-----------------------------
2002 2001
------------- -------------
Revenues
Alferon N Injection $ 960,082 $ 714,462
------------- -------------
Total revenues 960,082 714,462
------------- -------------
Costs and expenses
Cost of goods sold and excess/idle
production costs 1,240,696 1,039,785
Research and development 845,377 1,177,529
General and administrative 982,514 1,401,288
Acquisition of in-process technology 2,341,418
Other expenses 340,000
------------- -------------
Total costs and expenses 3,408,587 5,960,020
------------- -------------
Loss from operations (2,448,505) (5,245,558)
Interest income (expense), net (33,824) 38,718
Equity in loss of Metacine (236,178) (27,445)
------------- -------------
Net loss $ (2,718,507) $(5,234,285)
============= =============
Basic and diluted net loss per share $ (.13) $ (.28)
============= =============
Weighted average number of shares outstanding 20,397,842 18,919,467
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
SIX MONTHS ENDED JUNE 30, 2002
(Unaudited)
Consideration Total
Capital shares subject stockholders'
Common Stock in excess Accumulated to guaranteed Settlement equity
Shares Amount of par value deficit value shares (deficiency)
------------------ ------------ ------------- -------------- ---------- -------------
Balance at
Dec. 31, 2001 20,308,031 $203,080 $138,407,621 $(139,043,427) $ (520,000) $ (360,000) $(1,312,726)
Common stock
issued under
Company 401(k)
Plan 225,737 2,258 45,080 47,338
Market value
adjustment 340,000 288,000 628,000
Net loss (2,718,507) (2,718,507)
--------------------------------------------------------------------------------------------------------
Balance at
June 30, 2002 20,533,768 $205,338 $138,452,701 $(141,761,934) $ (180,000) $ (72,000) $(3,355,895)
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $(2,718,507) $(5,234,285)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 212,542 253,550
Acquisition of in-process research and development 2,341,418
Equity in loss of Metacine 236,178 27,445
Noncash compensation expense 47,338 59,277
Reduction of inventory reserve (177,218)
Provision for notes receivable 87,500
Market value adjustment 628,000 (9,713)
Change in operating assets and liabilities:
Inventories 429,620 275,984
Accounts and other receivables 102,534 1,522,927
Prepaid expenses and other current assets (17,650) (6,097)
Accounts payable and accrued expenses 179,725 (82,715)
Amount due to GP Strategies 9,000 15,936
------------ ------------
Net cash used for operating activities (1,068,438) (748,773)
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment (46,994)
Reduction of (investments in) other assets 10,000 (387,500)
------------ ------------
Net cash provided by (used for) investing activities 10,000 (434,494)
------------ ------------
Cash flows from financing activities:
Proceeds from convertible notes payable 225,000
Repayment of note payable to GP Strategies (100,000)
Proceeds from exercise of common stock options 561
------------ ------------
Net cash provided by financing activities 125,000 561
------------ ------------
Net decrease in cash and cash equivalents (933,438) (1,182,706)
Cash and cash equivalents at beginning of period 1,184,889 3,658,805
------------ ------------
Cash and cash equivalents at end of period $ 251,451 $ 2,476,099
============ ============
Noncash items:
Guaranteed value of common stock issued to
and in-kind services due Metacine $ $ 2,100,000
============ ============
Settlement shares sold $ $ 21,463
============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The financial information included herein is unaudited. Such information,
however, reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
periods. The operating results for interim periods are not necessarily
indicative of operating results to be expected for the year.
Note 2. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of June 30, 2002, the Company had an accumulated deficit
of approximately $141.8 million. For the six months ended June 30, 2002 and the
years ended December 31, 2001, 2000 and 1999, the Company had losses from
operations of approximately $2.4 million, $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 condensed 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, it 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.
At June 30, 2002, the Company had approximately $250,000 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 the end of August 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, topical or oral formulations of natural alpha interferon.
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.
In addition, the Company is continuing its efforts to sell the ALFERON N
Injection business or license the rights to sell ALFERON N Injection, and is in
preliminary discussions with several parties. Due to the Company's precarious
financial position, if such a transaction cannot be completed in a reasonably
short period of time, the Company would reevaluate its options which would
include a substantial curtailing or complete cessation of the ALFERON N
Injection business.
Note 3. Inventories
Inventories consist of the following:
June 30, December 31,
2002 2001
-------------- --------------
Finished goods $ 724,163 $ 1,153,783
Work in process 3,052,070 3,052,070
Raw materials 1,332,560 1,332,560
Less reserve for excess inventory (5,108,793) (5,286,011)
--------------- --------------
$ --- $ 252,402
================ ===============
Finished goods inventory consists of vials of ALFERON N Injection,
available for commercial and clinical use either immediately or upon final
release by quality assurance.
In light of the results to date of the Company's phase 3 studies of ALFERON
N Injection in HIV and HCV-infected patients, the Company has recorded a reserve
against its inventory of ALFERON N Injection to reflect its estimated net
realizable value. The reserve was a result of the Company's assessment of
anticipated near-term projections of product to be sold or utilized in clinical
trials, giving consideration to historical sales levels. As a result,
inventories at June 30, 2002 and December 31, 2001, reflect a reserve for excess
inventory of $5,108,793 and $5,286,011, respectively.
During the six months ended June 30, 2002, a portion of the reserve for
excess inventory was reduced in the amount of $177,218.
Note 4. Agreement with GP Strategies Corporation
Pursuant to an agreement dated March 25, 1999, GP Strategies Corporation
("GP Strategies") loaned the Company $500,000 (the "GP Strategies Debt"). In
return, the Company granted GP Strategies (i) a first mortgage on the Company's
real estate, (ii) a two-year option (which has expired) to purchase the
Company's real estate, provided that the Company has terminated its operations
and a certain liability to the American Red Cross (the "Red Cross") has been
repaid, and (iii) a two-year right of first refusal (which has expired) in the
event the Company desires to sell its real estate. In addition, the Company
issued GP Strategies 500,000 shares (the "GP Shares") of common stock and
five-year warrant (the "GP Warrant") to purchase 500,000 shares of common stock
at a price of $1 per share. The GP Shares and GP Warrant were valued at $500,000
and recorded as a financing cost and amortized over the original period of the
GP Strategies Debt in 1999. Pursuant to the agreement, the Company has issued a
note to GP Strategies representing the GP Strategies Debt, which note was
originally due on September 30, 1999 (but extended to June 30, 2001) and bears
interest, payable at maturity, at the rate of 6% per annum. 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, but has not commenced action to do
so.
In July 2002, the Company was sued in action seeking foreclosure of the
Company's property due to non-payment of approximately $ 450,000 in taxes. The
Company has until August 23, 2002 to answer the complaint. After such time, the
plaintiff has the right to seek an order giving the Company, GP Strategies or
the American Red Cross 30 days to pay the unpaid taxes. If the taxes remain
unpaid, the court may make the plaintiff the owner of the property and
extinguish the liens of GP Strategies and the American Red Cross. 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. GP Strategies or the American Red
Cross may also pay the unpaid taxes and have the amount of the payment added to
their liens, although there can be no assurance they will do so. The Company is
currently attempting to refinance the property to pay the taxes and repay the
current lienholders. There can be no assurance the Company will be successful in
refinancing the property.
Note 5. Agreement with the Red Cross
The Company obtained human white blood cells used in the manufacture of
ALFERON N Injection from several sources, including the Red Cross pursuant to a
supply agreement dated April 1, 1997 (the "Supply Agreement"). The Company will
not need to purchase more human white blood cells until such time as production
of crude alpha interferon is resumed. 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". 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 condensed balance
sheet at June 30, 2002 and December 31, 2001 was approximately $1,371,000 and
$1,339,000, 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 during the six months ended June
30, 2002, an adjustment for $288,000 was recorded with a corresponding charge to
cost of goods sold. Due to the increase in the Company's stock price during the
six months ended June 30, 2001, an adjustment for $9,713 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
$1,371,000 owed to the Red Cross. However, there can be no assurance that the
net proceeds from the sale of such shares will be sufficient to extinguish the
remaining liability owed the Red Cross.
Note 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 in 2000.
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, March 31, 2002, and June 30, 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
$1,200,000 in Deficiency Payments and has not rendered $250,000 of services to
Metacine, Metacine could request 400,000 Metacine shares currently held in
escrow to satisfy the Company's past due obligations.
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 2001, 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 June 30, 2002 and December 31, 2001. The $250,000 of services to be
provided has also been recorded as a current liability. Services rendered to
Metacine for the six months ended June 30, 2002 and during 2001 were immaterial
and as such, the liability remained unchanged at June 30, 2002 and December 31,
2001. The investment has been further reduced to $(527,172) and $(290,994) at
June 30, 2002 and December 31, 2001, respectively, by the Company's equity in
the loss of Metacine for the periods from April 9, 2001 through June 30, 2002
and from April 9, 2001 through December 31, 2001, respectively, 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. Due
to the decline in the Company's stock price during the six months ended June 30,
2002, an adjustment for $340,000 was recorded with a corresponding charge to
other expenses. 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. Convertible Notes Payable
In August 2002, the Company completed a private placement of $ 500,000 of
convertible notes to accredited investors. Each note is convertible into the
Company's common stock at a price of $.05 per share (subject to adjustment to
70% of the market price of the Company's common stock under certain
circumstances) and bears interest at the rate of 10% per annum. $ 250,000 of the
convertible notes are due January 31, 2003 and the other $ 250,000 of the
convertible notes are due December 31, 2003. For each $100,000 principal amount
of notes issued, the investors received warrants to purchase an additional 10.2
million shares of the Company's common stock exercisable at $.01 per share. The
transaction is subject to approval by the shareholders of the Company.
Note 8. 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 requires 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 as of January 1, 2002.
Upon adoption of SFAS No. 142, the Company was 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 was identified as having an indefinite
useful life, the Company would 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
would 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 is subject to the transition provisions of SFAS No. 142.
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
adopted SFAS No. 144 on January 1, 2002.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
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. 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. Management also is 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. 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.
In addition, the Company is continuing its efforts to sell the ALFERON N
Injection business or license the rights to sell ALFERON N Injection, and is in
preliminary discussions with several parties. Due to the Company's precarious
financial position, if such a transaction cannot be completed in a reasonably
short period of time, the Company would reevaluate its options which would
include a substantial curtailing or complete cessation of the ALFERON N
Injection business.
Liquidity and Capital Resources
In August 2002, the Company completed a private placement of $ 500,000 of
convertible notes to accredited investors. Each note is convertible into the
Company's common stock at a price of $.05 per share (subject to adjustment to
70% of the market price of the Company's common stock under certain
circumstances) and bears interest at the rate of 10% per annum. $ 250,000 of the
convertible notes are due January 31, 2003 and the other $ 250,000 of the
convertible notes are due December 31, 2003. For each $100,000 principal amount
of notes issued, the investors received warrants to purchase an additional 10.2
million shares of the Company's common stock exercisable at $.01 per share. The
transaction is subject to approval by the shareholders of the Company. As of
August 15, 2002, the Company had approximately $85,000 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 the end of August 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, March 31, 2002 and June 30, 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 submitted 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, 2000 of approximately $29 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.
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". 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 condensed balance
sheet at June 30, 2002 and December 31, 2001 was approximately $1,371,000 and
$1,339,000, 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 during the six months ended June
30, 2002, an adjustment for $288,000 was recorded with a corresponding charge to
cost of goods sold. Due to the increase in the Company's stock price during the
six months ended June 30, 2001, an adjustment for $9,713 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
$1,371,000 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 (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 (which have not yet been paid) were not paid within 30 days,
that a complaint may be filed to foreclose on the property. In July 2002, the
Company was sued in action seeking foreclosure of the Company's property due to
non-payment of approximately $ 450,000 in taxes. The Company has until August
23, 2002 to answer the complaint. After such time, the plaintiff has the right
to seek an order giving the Company, GP Strategies or the American Red Cross 30
days to pay the unpaid taxes. If the taxes remain unpaid, the court may make the
plaintiff the owner of the property and extinguish the liens of GP Strategies
and the American Red Cross. 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. GP Strategies or the American Red Cross may also pay the unpaid taxes and
have the amount of the payment added to their liens, although there can be no
assurance they will do so. The Company is currently attempting to refinance the
property to pay the taxes and repay the current lienholders. There can be no
assurance the Company will be successful in refinancing the property.
The Company's Common Stock now trades on the OTC Bulletin Board, which may
have a material adverse effect on the ability of the Company to finance its
operations and on the liquidity of the Common Stock.
Results of Operations
Six Months Ended June 30, 2002 Versus Six Months Ended June 30, 2001
For the six months ended June 30, 2002 and 2001, the Company had revenues
from the sale of ALFERON N Injection of $960,082 and $714,462, respectively.
During the first quarter of 2002, the Company notified its customers of a price
increase for ALFERON N Injection. As a result, several wholesalers purchased
above normal quantities of ALFERON N Injection ahead of the price increase which
resulted in greater than normal sales in the six months ended June 30, 2002.
In the six months ended June 30, 2002, the Company sold, through its
distributor, to wholesalers and other customers in the United States 7,271 vials
of ALFERON N Injection, compared to 5,425 vials sold by the Company during the
six months ended June 30, 2001. In addition, foreign sales of ALFERON N
Injection were zero and 25 vials for the six months ended June 30, 2002 and
2001, respectively.
Cost of goods sold and excess/idle production costs totaled $1,240,696 and
$1,039,785 for the six months ended June 30, 2002 and 2001, respectively.
Excess/idle production costs in the six months ended June 30, 2002 and 2001
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 six months ended June 30, 2002 as compared to the
six months ended June 30, 2001. Cost of goods sold in the six months ended June
30, 2002 was lower then the six months ended June 30, 2001 since $177,218 of
inventory sold was applied against the reserve for excess inventory. However,
based on changes in the value of the Settlement Shares, for the six months ended
June 30, 2002, cost of goods sold was charged for $288,000 as compared to a
credit of $9,713 for the six months ended June 30, 2001.
Research and development expenses during the six months ended June 30, 2002
of $845,377 decreased by $332,152 from $1,177,529 for the same period in 2001,
due to decreases in both external research payments and internal research costs.
General and administrative expenses for the six months ended June 30, 2002
were $982,514 as compared to $1,401,288 for the same period in 2001. The
decrease of $418,774 was principally due to decreases in payroll, consulting and
public relations expenses.
The Company recorded $2,341,418 as acquisition of in-process research and
development expense related to its investment in Metacine for the six months
ended June 30, 2001 as Metacine's primary asset is technology which has not
reached technological feasibility and has no alternative uses.
Based on changes in the value of the Consideration Shares subject to
guaranteed value, for the six months ended June 30, 2002, other expenses were
charged for $340,000.
Interest expense, net, for the six months ended June 30, 2002 was $33,824
and primarily represented interest accrued on the Red Cross Liability and GP
Strategies Debt partially offset by interest income. Interest income, net, for
the six months ended June 30, 2001 was $38,718 and primarily represented
interest income on cash and cash equivalents partially offset by interest
expense accrued on the Red Cross Liability and GP Strategies Debt.
Equity in loss of Metacine for the six months ended June 30, 2002 was
$236,178 and represents the Company's equity in loss of Metacine for such
period. Equity in loss of Metacine for the six months ended June 30, 2001 was
$27,445 and represents the Company's equity in loss of Metacine for the period
from April 9, 2001 to June 30, 2001.
As a result of the foregoing, the Company incurred net losses of $2,718,507
and $5,234,285 for the six months ended June 30, 2002 and 2001, respectively.
Three Months Ended June 30, 2002 Versus Three Months Ended June 30, 2001
For the three months ended June 30, 2002 and 2001, the Company had revenues
from the sale of ALFERON N Injection of $175,636 and $343,817, respectively.
During the first quarter of 2002, the Company notified its customers of a price
increase for ALFERON N Injection. As a result, several wholesalers purchased
above normal quantities of ALFERON N Injection ahead of the price increase which
resulted in greater than normal sales in the three months ended March 31, 2002
and lower than normal sales in the three months ended June 30, 2002.
In the three months ended June 30, 2002, the Company sold, through its
distributor, to wholesalers and other customers in the United States 1,400 vials
of ALFERON N Injection, compared to 2,598 vials sold by the Company during the
three months ended June 30, 2001.
Cost of goods sold and excess/idle production costs totaled $421,026 and
$399,677 for the three months ended June 30, 2002 and 2001, respectively.
Excess/idle production costs in the three months ended June 30, 2002 and 2001
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 three months ended June 30, 2002 as compared to
the three months ended June 30, 2001. Cost of goods sold in the three months
ended June 30, 2002 was lower then the three months ended June 30, 2001 since
$82,880 of inventory sold was applied against the reserve for excess inventory.
However, based on changes in the value of the Settlement Shares, for the three
months ended June 30, 2002, cost of goods sold was charged for $104,000 as
compared to a credit of $91,520 for the three months ended June 30, 2001.
Research and development expenses during the three months ended June 30,
2002 of $377,269 decreased by $213,027 from $590,296 for the same period in
2001, due to decreases in both external research payments and internal research
costs.
General and administrative expenses for the three months ended June 30,
2002 were $402,951 as compared to $728,181 for the same period in 2001. The
decrease of $325,230 was principally due to decreases in payroll, public
relations 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 three months
ended June 30, 2001 as Metacine's primary asset is technology which has not
reached technological feasibility and has no alternative uses.
Based on changes in the value of the Consideration Shares subject to
guaranteed value, for the three months ended June 30, 2002, other expenses were
charged for $260,000.
Interest expense, net, for the three months ended June 30, 2002 was $19,210
and primarily represented interest accrued on the Red Cross Liability and GP
Strategies Debt partially offset by interest income. Interest income, net, for
the three months ended June 30, 2001 was $6,638 and primarily represented
interest income on cash and cash equivalents partially offset by interest
expense accrued on the Red Cross Liability and GP Strategies Debt.
Equity in loss of Metacine for the three months ended June 30, 2002 was
$124,339 and represents the Company's equity in loss of Metacine for such
period. Equity in loss of Metacine for the three months ended June 30, 2001 was
$27,445 and represents the Company's equity in loss of Metacine for the period
from April 9, 2001 to June 30, 2001.
As a result of the foregoing, the Company incurred net losses of $1,429,159
and $3,736,562 for the three months ended June 30, 2002 and 2001, respectively.
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.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended June 30, 2002.
INTERFERON SCIENCES, INC.
June 30, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
INTERFERON SCIENCES, INC.
DATE: August 19, 2002 By: /s/ Lawrence M. Gordon
Lawrence M. Gordon
Chief Executive Officer
DATE: August 19, 2002 By: /s/ Donald W. Anderson
Donald W. Anderson
Controller