UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/SB
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended September 30, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ________________
Commission File Number: 0-10379
INTERFERON SCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2313648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
(Address of principal executive offices) (Zip code)
(732) 249-3250
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of issuer's classes of common stock as of
October 31, 2003.
Common Stock 37,339,286 shares
INTERFERON SCIENCES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
Part I. Financial Information:
Consolidated Condensed Balance Sheets--
September 30, 2003 and December 31, 2002. . . . . . . . . . . . . . . . 1
Consolidated Condensed Statements of Operations--
Three Months and Nine Months Ended September 30, 2003 and 2002. . . .. .2-3
Consolidated Condensed Statement of Capital Deficiency---
Nine Months Ended September 30, 2003. . . . . . . . . . . . . . . . .. . .4
Consolidated Condensed Statements of Cash Flows--
Nine Months Ended September 30, 2003 and 2002. . . . . . . . . . . . . . 5
Notes to Consolidated Condensed Financial Statements. . . . . . . . . .. 6-17
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . ..18-22
Part II. Other Information . . . . . . . . . . . . . . . . . . . . . . . . .23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-26
INTERFERON SCIENCES, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
2003 2002
(Unaudited)
ASSETS ------------------------------
Current assets
Cash and cash equivalents $ 201,186 $ 378,663
Investment - available for sale 954,575
Accounts and other receivables 23,325 42,739
Notes receivable, net 371,625
Inventories, net of valuation allowances
of zero and $4,678,659, respectively 28,489
Prepaid expenses and other current assets 33,892 12,179
------------- -------------
Total current assets 1,584,603 462,070
------------- -------------
Assets under contract of sale
(subject to stockholder approval) 1,604,350
Property, plant and equipment, at cost 12,854,834
Less accumulated depreciation (11,173,264)
-------------
1,681,570
-------------
Patent costs, net of accumulated amortization 132,187
Other assets 6,850 100
------------- -------------
Total assets $ 3,195,803 $ 2,275,927
============= =============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities
Liabilities to be assumed by purchaser under
contract of sale for assets
(subject to stockholder approval) $ 2,501,993 $
Accounts payable and accrued expenses 1,023,581 3,204,594
ISI stock subject to resale agreement
and in-kind services due Metacine 1,700,000
Note payable and amount due GP Strategies 413,745
Convertible notes payable, net of debt discount 490,883 281,863
Loans and advances 250,000
------------- -------------
Total current liabilities 4,266,457 5,600,202
------------- -------------
Commitments and contingencies
Capital 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-37,339,286 and
21,030,405 shares, respectively 373,393 210,304
Capital in excess of par value 136,970,283 136,810,618
Accumulated deficit (138,605,905) (140,345,197)
Accumulated other comprehensive income 191,575
------------- ------------
Total capital deficiency (1,070,654) (3,324,275)
------------- ------------
Total liabilities and capital deficiency $ 3,195,803 $ 2,275,927
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS(1)
(Unaudited)
Three Months Ended
September 30,
-----------------------------
2003 2002
------------- -------------
Revenue
Alferon N Injection $ $ 687,197
Royalty income 14,000
------------- -------------
Total revenue 14,000 687,197
------------- -------------
Costs and expenses
Cost of goods sold and excess/idle
production costs 432,979
Research and development 308,912
General and administrative 369,114 441,054
------------- -------------
Total costs and expenses 369,114 1,182,945
------------- -------------
Loss before interest expense and other (355,114) (495,748)
Interest expense, net (69,986) (142,832)
Service fee income 156,724
Gain on Metacine settlement 1,550,000
------------- -------------
Net income (loss) $ 1,281,624 $ (638,580)
============= =============
Basic net income (loss) per share $ .03 $ (.03)
============= =============
Diluted net income (loss) per share $ .02 $ (.03)
============= =============
Weighted average number of shares
outstanding - basic 36,687,112 20,628,306
Effect of potential common shares 44,000,000 0
------------- -------------
Weighted average number of shares
outstanding - diluted 80,687,112 20,628,306
============= =============
(1)On March 11, 2003, the Company sold all its inventory related to its ALFERON
N Injection business. The Company also entered into an agreement, subject to
shareholder and regulatory approval, to sell all its other assets related to its
ALFERON N Injection business. See Note 10 of Notes to Consolidated Condensed
Financial Statements.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS(1)
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
2003 2002
------------- -------------
Revenue
Alferon N Injection $ 241,637 $ 1,647,279
Bulk sale of remaining Alferon inventory
and license fee 1,149,112
Royalty income 14,000
------------- -------------
Total revenue 1,404,749 1,647,279
------------- -------------
Costs and expenses
Cost of goods sold and excess/idle
production costs 267,054 1,173,166
Research and development 176,091 1,154,289
General and administrative 962,714 1,423,568
------------- -------------
Total costs and expenses 1,405,859 3,751,023
------------- -------------
Income loss before interest expense and other (1,110) (2,103,744)
Interest expense, net (260,449) (176,656)
Service fee income 450,851
Gain on Metacine settlement 1,550,000
------------- -------------
Net income (loss) $ 1,739,292 $(2,280,400)
============= =============
Basic net income (loss) per share $ .05 $ (.11)
============= =============
Diluted net income (loss) per share $ .02 $ (.11)
============= =============
Weighted average number of shares
outstanding - basic 32,523,394 20,475,507
Effect of potential common shares 49,900,000 0
------------- -------------
Weighted average number of shares
outstanding - diluted 82,423,394 20,475,507
============= =============
(1)On March 11, 2003, the Company sold all its inventory related to its ALFERON
N Injection business. The Company also entered into an agreement, subject to
shareholder and regulatory approval, to sell all its other assets related to its
ALFERON N Injection business. See Note 10 of Notes to Consolidated Condensed
Financial Statements.
The accompanying notes are an integral part of these consolidated condensed
Financial statements
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT
OF CAPITAL DEFICIENCY
NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
Accumulated
Capital other Total
Common Stock in excess Accumulated comprehensive Comprehensive capital
Shares Amount of par value deficit income income deficiency
------------------ ------------ ------------ ------------- ------------- ----------
Balance at
Dec. 31, 2002 21,030,405 $210,304 $136,810,618 $(140,345,197) $ $ $(3,324,275)
Net proceeds
from sale of
common stock
and warrants 15,000,000 150,000 1,000 151,000
Common stock
issued under
Company 401(k)
Plan 308,881 3,089 18,665 21,754
Common stock
issued to
Metacine for
settlement of
obligation 1,000,000 10,000 140,000 150,000
Net income 1,739,292 1,739,292 1,739,292
Other
comprehensive
income - available
for sale securities 191,575 191,575 191,575
--------------
Comprehensive income $ 1,930,867
==============
---------------------------------------------------------------------------- ----------------
Balance at
Sept. 30, 2003 37,339,286 $373,393 $136,970,283 $(138,605,905) $ 191,575 $(1,070,654)
============================================================================ ================
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)
Nine Months Ended
September 30,
--------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,739,292 $(2,280,400)
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Receipt of shares of Hemispherx Biopharma,
Inc. for Alferon inventory and assumption
of certain liabilities (1,149,112)
Gain on Metacine settlement (1,550,000)
Depreciation and amortization 209,407 318,817
Noncash compensation expense 21,754 64,819
Debt discount 174,020 112,745
Amortization of interest income (3,375)
Change in operating assets and liabilities:
Accounts and other receivables 19,414 81,465
Inventories 6,564 68,963
Prepaid expenses and other current assets (21,713) (10,871)
Accounts payable and accrued expenses 301,772 379,967
Amount due to GP Strategies 13,500 13,500
------------ ------------
Net cash used for operating activities (238,477) (1,250,995)
------------ ------------
Cash flows from investing activities:
Additions to notes receivable (375,000)
Reduction of other assets 10,000
------------ ------------
Net cash (used for) provided by investing activities (375,000) 10,000
------------ ------------
Cash flows from financing activities:
Proceeds from convertible notes payable 100,000 500,000
Repayment of convertible notes payable (65,000)
Proceeds from loans and advances 250,000
Repayment of note payable to GP Strategies (100,000)
Net proceeds from sale of common stock and warrants 151,000
------------ ------------
Net cash provided by financing activities 436,000 400,000
------------ ------------
Net decrease in cash and cash equivalents (177,477) (840,995)
Cash and cash equivalents at beginning of period 378,663 1,184,889
------------ ------------
Cash and cash equivalents at end of period $ 201,186 $ 343,894
============ ============
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 and certain reclassifications which have been made to the financial
statements to conform with the current presentation) 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. Plan of Operations
On March 11, 2003, Interferon Sciences, Inc. (the "Company" or
"ISI") sold all its inventory related to its ALFERON N Injection product and
granted a license to sell the product to Hemispherx Biopharma, Inc. ("HEB"). In
exchange for the inventory and license, the Company received HEB common stock
with a guaranteed value of $675,000, an additional 62,500 shares of HEB common
stock without a guaranteed value, and a royalty equal to 6% of the net sales of
ALFERON N Injection. The HEB common stock is subject to selling restrictions. In
addition, HEB assumed approximately $408,000 of the Company's payables and
various other commitments. The Company and HEB also entered into another
agreement pursuant to which the Company will sell to HEB, subject to regulatory
approval, the Company's real estate property, plant, equipment, furniture and
fixtures, rights to ALFERON N Injection and all of its patents, trademarks and
other intellectual property related to its natural alpha interferon business. In
exchange, the Company will receive (if and when approved) $675,000 of HEB common
stock with a guaranteed value, an additional 62,500 shares of HEB common stock
without a guaranteed value and a royalty equal to 6% of the net sales of all
products sold containing natural alpha interferon. HEB will assume approximately
$2.5 million of the Company's indebtedness that currently encumbers its assets.
In addition, pending the completion of this transaction, HEB will fund the
operating costs of the Company's facility such as insurance, heat, light, air
conditioning and equipment maintenance. (See Note 10.)
Upon completion of the transaction with HEB, ISI will not be involved in
the natural alpha interferon business and will not have a manufacturing and
research facility. In addition, on August 29, 2003, ISI and Metacine, Inc.
agreed to terminate their agreements (See Note 8). On October 17, 2003, ISI and
Amphioxus Cell Technologies, Inc. ("ACT") entered into a non-binding letter of
intent pursuant to which ISI (or a wholly owned subsidiary of ISI) will acquire
ACT. ACT is a biotechnology company that applies liver biology solutions to
problems in drug discovery and human therapeutics. The shareholders of ACT will
receive preferred stock (the "ACT Preferred Stock") of ISI, convertible into a
number of common shares of ISI equal to 75% of the fully diluted capitalization
of ISI (see Note 16).
At September 30, 2003, the Company had approximately $201,000 of cash and
cash equivalents, with which to support future operating activities and to
satisfy its financial obligations as they become payable.
As of November 20, 2003, the Company has sold 388,000 of the shares of HEB
common stock and received net proceeds of $965,000.
The Company has experienced significant operating losses since its
inception in 1980. As of September 30, 2003, the Company had an accumulated
deficit of approximately $138.6 million. For the nine months ended September 30,
2003, the Company earned net income of $1,739,000 and for the years ended
December 31, 2002, 2001 and 2000, the Company incurred losses of approximately
$2.7 million, $6.4 million, and $2.7 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. Based on the Company's sale to HEB, estimates of
revenue, expenses, and the timing of repayment to creditors, management believes
that the Company has sufficient resources to enable the Company to continue
operations until March 31, 2004. However, actual results 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 from other sources, will be available when needed or
on terms acceptable to the Company. Insufficient funds will require the Company
to terminate operations.
Note 3. Earnings (Loss) Per Share
Basic earnings (loss) per share have been computed using the weighted
average number of shares of common stock of the Company outstanding for each
period presented. For the three months and nine months ended September 30, 2003,
the dilutive effect of stock options and other common stock equivalents is
included in the calculation of diluted earnings per share using the treasury
stock method. For the three months and nine months ended September 30, 2002,
common stock equivalents are not included in the calculation of loss per share
as the effect would be anti-dilutive.
The following table provides the net income (loss) and the weighted average
number of shares outstanding - basic and diluted, used in computing the earnings
(loss) per share:
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
Net income (loss) $ 1,281,624 $ (638,580) $ 1,739,292 $ (2,280,400)
Weighted average number
of shares outstanding -
basic 36,687,112 20,628,306 32,523,394 20,475,507
Weighted average number
of shares outstanding -
diluted 80,687,112 20,628,306 82,423,394 20,475,507
Note 4. Investments
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), securities are classified either as trading, held to
maturity or available for sale. The Company intends to dispose of its
investments within one year and accordingly has classified its investments in
marketable securities as available for sale. Such investments are carried at
market value with unrealized gains and losses included as a separate component
in capital deficiency. At September 30, 2003, such investments consisted of
487,028 shares of common stock of Hemispherx Biopharma, Inc., a publicly traded
company (see Note 10).
The values of marketable securities owned by the Company can change
substantially because of volatility in the price of each security, changes in
the business prospects of the issuer of the securities, specific events
influencing the operations of the issuer of the securities, and various other
circumstances outside the security issuer's control. Accordingly, the value of
the securities could decline so that a loss would be required to be recognized
for the total carrying amount of such securities.
Note 5. Inventories
Inventories consist of the following:
September 30, December 31,
2003 2002
-------------- -------------
Finished goods $ 0 $ 322,518
Work in process 0 3,052,070
Raw materials 0 1,332,560
Less reserve for excess inventory 0 (4,678,659)
--------------- -------------
$ 0 $ 28,489
=============== =============
As discussed in Note 2, on March 11, 2003, the Company sold all its
inventory related to its ALFERON N Injection product to HEB.
Finished goods inventory consisted 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 of the Company's phase 3 studies of ALFERON N
Injection in HIV and HCV-infected patients, the Company 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, 2002, reflect a reserve for excess inventory of
$4,678,659.
Note 6. 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. In
connection with the Asset Sale Transactions, the Company, HEB and GP Strategies
entered into an agreement pursuant to which GP Strategies agreed to forbear from
exercising its rights until May 31, 2003 and GP Strategies agreed to accept HEB
common stock with a guaranteed value of $425,000 in full settlement of all the
Company's obligations to GP Strategies. On June 2, 2003, HEB delivered the HEB
common stock to GP Strategies in accordance with HEB's obligation under the
terms of the forbearance agreement. However the forbearance agreement provided
that in addition to the issuance by HEB of the HEB common stock to GP
Strategies, HEB was obligated to register the HEB common stock for resale and
any shares of HEB shares received by GP Strategies which remain unsold after
November 30, 2004 may be put to HEB at a price of $ 1.59 per share.
The forbearance agreement makes no reference to GP Strategies obligation if HEB
fails to perform its obligations under the forbearance agreement or what happens
in the event HEB satisfies the GP Strategies obligation and the asset purchase
agreement between ISI and HEB, which is subject to stockholder approval, does
not close.
Because stockholder approval has not yet been obtained and consequently the
asset purchase agreement has not closed, the condition for the ultimate
settlement of the GP Strategies obligation has not occurred. Accordingly, no
recognition of any settlement of the GP Strategies obligation paid by HEB has
been recorded as of September 30, 2003 and will not be recognized until the
closing of the asset purchase agreement takes place.
Note 7. 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. In connection with the Asset Sale Transactions, the Company,
HEB and the Red Cross entered into a similar agreement pursuant to which the Red
Cross agreed to forbear from exercising its rights until May 31, 2003 and the
Red Cross agreed to accept HEB common stock with a guaranteed value of $500,000
in full settlement of all of the Company's obligations to the Red Cross. On June
2, 2003, HEB delivered the HEB common stock to the Red Cross in accordance with
HEB's obligation under the terms of the forbearance agreement. However the
forbearance agreement provided that in addition to the issuance by HEB of the
HEB common stock to the Red Cross, HEB was obligated to register the HEB common
stock for resale and any shares of HEB shares received by the Red Cross which
remain unsold after May 31, 2004 may be put to HEB at a price of $ 1.59 per
share.
The forbearance agreement makes no reference to the Red Cross obligation if HEB
fails to perform its obligations under the forbearance agreement or what happens
in the event HEB satisfies the Red Cross obligation and the asset purchase
agreement between ISI and HEB, which is subject to stockholder approval, does
not close.
Because stockholder approval has not yet been obtained and consequently the
asset purchase agreement has not closed, the condition for the ultimate
settlement of the Red Cross obligation has not occurred. Accordingly, no
recognition of any settlement of the Red Cross obligations paid by HEB has been
recorded as of September 30, 2003 and will not be recognized until the closing
of the asset purchase agreement takes place.
Note 8. 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.
On April 9, 2001, the Company exercised its option to acquire an 82% 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, an obligation to pay Metacine $
1,850,000 and $250,000 of services to be rendered by the Company by June 30,
2002. In addition, the Company issued Metacine 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 the Company to make cash
payments ("Deficiency Payments") 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 ended 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 made the remainder of the Deficiency Payments in
the aggregate amount of $1,450,000. 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 ($400,000 through December 31, 2002) 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 $1,450,000 in Deficiency Payments and
has not rendered $250,000 of services to Metacine, Metacine could request
462,500 Metacine shares currently held in escrow to satisfy the Company's past
due obligations.
Although the Company is the majority owner of Metacine, the Company must,
on many matters, vote its shares of Metacine common stock in the same proportion
as votes cast by the minority 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 which include controlling the selection,
termination and setting of compensation for Metacine management who are
responsible for implementing policies and procedures, making operating and
capital decisions (including establishing budgets) for Metacine and most other
ordinary operating matters, and therefore, the Company does not control
Metacine. In addition, the Company only has one representative on a board of
directors consisting of three directors. 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. 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 a patent portfolio consisting of six issued patents, eight
pending patents and four invention disclosures related to the use of dendritic
cells for the treatment of various diseases. While the patent portfolio, when
viewed as a whole, represented a new approach to the treatment of various
diseases utilizing cell therapy, the six issued patents had no independent
commercial value. While the Company did not engage the services of an
independent appraiser to assess the fair value of the purchased in process
research and development, it considered the following factors: (i) any product
or process utilizing dendritic cells as a treatment for any disease would
regulated by the FDA and therefore would require extensive clinical testing
prior to the time any revenue would be generate from the sale of a product or
process, (ii) the cost of such clinical trials would be in excess of
$50,000,000, (iii) it would take between seven to ten years to complete such
clinical trials, (iv) there could be no assurance that even if Metacine could
obtain the funding required to complete the clinical trials (which was well
beyond Metacine's capability at the time Metacine acquired rights to the patent
portfolio), that the clinical trials would have shown the product or process
tested to be safe and effective. The Company's $1,850,000 obligation to
Metacine, less the $400,000 Deficiency Payment made in October 2001, has been
recorded as a current liability at December 31, 2002 and 2001. The $250,000 of
services to be provided has also been recorded as a current liability. Services
rendered to Metacine to date were immaterial and as such, the liability remained
unchanged at December 31, 2002 and 2001. The investment has been further reduced
to zero at December 31, 2001, by the Company's equity in the loss of Metacine of
$158,582 for the period from April 9, 2001 through December 31, 2001.
On April 1, 2003, the license granted by the University of Pittsburgh to
Metacine covering Metacine's technology was terminated due to non-payment by
Metacine.
Accordingly, the Company's has not reflected its share of its equity in the
losses in Metacine for the years ended December 31, 2002 and 2001 in the amounts
of $274,846 and $290,994, respectively.
On August 29, 2003, the Company and Metacine entered into an agreement
pursuant to which the Company relinquished all rights to the shares and warrants
of Metacine held by the Company and issued Metacine 1,000,000 shares of the
Company's common stock and Metacine relieved the Company of its $1,700,000
obligation to Metacine. In addition, Metacine retains the 2,000,000 shares of
the Company's common stock issued on April 9, 2001. The issuance of the
1,000,000 shares (valued at $.05 per share which was the closing price of the
Company's common stock on the settlement date) and the Company's agreement to
allow Metacine to retain the 2,000,000 shares previously issued (valued at $.05
per share which was the closing price of the Company's common stock on the
settlement date) was recorded as a credit to the Company's equity of $150,000
which resulted in a gain of $1,550,000 and is shown on the consolidated
condensed statements of operations for the three months and nine months ended
September 30, 2003 as a gain on Metacine settlement.
Note 9. Recently Issued Accounting Standards
In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Statements
4, 44 and 64, Amendment of FAS Statement 13 and Technical Corrections." SFAS No.
145 eliminates Statement 4 (and Statement 64, as it amends Statement 4), which
required gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, and thus, also the exception to
applying Opinion 30 is eliminated as well. This statement is effective for
fiscal years beginning after May 2002 for the provisions related to the
rescission of Statements 4 and 64 and for all transactions entered into
beginning May 2002 for the provision related to the amendment of Statement 13.
The Company does not expect that the adoption of SFAS No. 145 will have a
material impact on its results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
associated with Exit or Disposal Activities." SFAS No. 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan. The Company is required to
adopt SFAS No. 146 on January 1, 2003. The Company does not expect the adoption
of SFAS No. 146 will have a material impact on its results of operations or
financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment to SFAS No. 123,
"Accounting for Stock-Based Compensation." Provisions of this statement provide
two additional alternative transition methods: modified prospective method and
retroactive restatement method, for an entity that voluntary changes to the fair
value based method of accounting for stock-based employee compensation. The
statement eliminates the use of the original SFAS No. 123 prospective method of
transition alternative for those entities that change to the fair value based
method in fiscal years beginning after December 15, 2003. It also amends the
disclosure provisions of SFAS No. 123 to require prominent annual disclosure
about the effects on reported net income in the Summary of Significant
Accounting Policies and also requires disclosure about these effects in interim
financial statements. These provisions are effective for financial statements
for fiscal years ending after December 15, 2002. Accordingly, the Company
adopted the applicable disclosure requirements of this statement for year-end
reporting. The transition provisions of this statement apply upon the adoption
of the SFAS No. 123 fair value based method. The Company did not change its
method of accounting for employee stock-based compensation from the intrinsic
method to the fair value based alternative.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." Among other things, this
Statement requires that contracts with comparable characteristics be accounted
for similarly and clarifies under what circumstances a contract with an initial
net investment meets the characteristics of a derivative. SFAS No. 149 is
effective July 1, 2003. The Company does not expect this pronouncement to have a
material impact on its results of operations or financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003.
The Company does not expect this pronouncement to have a material impact on its
results of operations or financial condition.
Note 10. Agreement with Hemispherx Biopharma, Inc. ("HEB")
On March 11, 2003, the Company executed two agreements with HEB to sell
certain assets of ISI (the two asset sale transactions are hereinafter jointly
referred to as the "Asset Sale Transactions" and individually referred to as the
"First Asset Sale" and the "Second Asset Sale") and consummated the First Asset
Sale.
In the first agreement with HEB (the "First Asset Sale Agreement"), ISI
sold all of its inventory related to ALFERON N Injection(R), ISI's natural alpha
interferon product approved for the treatment of certain types of genital warts
(the "Product"), and granted a three-year license for the production,
manufacture, use, marketing and sale of the Product in the United States.
For these assets, ISI:
(i) received 424,528 shares of HEB common stock (the "Common Stock") (these
shares, along with other shares described below as having a guaranteed value,
are sometimes referred to as the "Guaranteed Shares") which had a Market Value
(as defined in the First Asset Sale Agreement) of $675,000 and a guaranteed
value of $675,000;
(ii) received an additional 62,500 shares of Common Stock without a
guaranteed value; and
(iii) will receive a royalty equal to 6% of the net sales of the Product.
ISI received a service fee until October 31, 2003 for providing certain
transitional services. Such service fee is shown on the consolidated condensed
statements of operations for the three months and nine months ended September
30, 2003 as service fee income in the amount of $156,724 and $450,851,
respectively. In addition, HEB assumed ISI payables aggregating approximately
$408,000 and certain other obligations related to the Product. This Agreement
obligates HEB to register the Common Stock issued to ISI, sets periodic limits
on the number of shares ISI may sell and requires HEB to pay ISI an amount equal
to the product received by multiplying (i) the number of Guaranteed Shares
remaining unsold on March 11, 2005 and (ii) $1.59. The remaining Guaranteed
Shares will then be returned to HEB.
In the second agreement with ISI (the "Second Asset Sale Agreement"), ISI
has agreed to sell, subject to certain approvals, to HEB all of its rights to
the Product and other assets related to the Product including, but not limited
to, real estate and machinery.
At September 30, 2003, such assets have been classified as "assets under
contract of sale (subject to stockholder approval)" in the accompanying balance
sheet. At September 30, 2003, the carrying value of these assets were:
Property, Plant and Equipment $1,485,234
Patent Costs 119,116
-------
$1,604,350
For these assets, ISI will:
(i) receive 424,528 shares of HEB Common Stock which has a Market Value (as
defined in the Second Asset Sale Agreement) of $675,000 and a guaranteed value
of $675,000;
(ii) receive an additional 62,500 shares of HEB Common Stock without a
guaranteed value; and
(iii) receive a royalty equal to 6% of the net sales of any products
containing natural alpha interferon sold by HEB (or a Marketing Partner, as
defined in the Second Asset Sale Agreement).
In addition, in connection with the second agreement, HEB was
required to satisfy ISI's obligations to (i) the American Red Cross, (ii) GP
Strategies Corp., and (iii) MD Sass (for unpaid local property taxes and water
and sewer charges) which aggregate approximately $2,500,000. HEB is also
obligated to pay certain ongoing expenses, on a current basis, related to ISI's
facility, such as insurance, heat, light, air conditioning and equipment
maintenance, prior to the closing of the Second Asset Sale Agreement.
The Second Asset Sale Agreement obligates HEB to register the Common Stock
to be issued, sets periodic limits on the number of these shares that may be
sold and requires HEB to pay ISI an amount equal to the product received by
multiplying (i) the number of Guaranteed Shares remaining unsold on the date
which is two years after the closing date of the Second Asset Sale Agreement and
(ii) $ 1.59. The remaining Guaranteed Shares will then be returned to HEB.
The purchase price for the assets was determined by negotiation between HEB
and ISI.
The foregoing descriptions of the Asset Sale Transactions, the First Asset
Sale Agreement and the Second Asset Sale Agreement are qualified in their
entirety by reference to the full text of the First Asset Sale Agreement, the
Second Asset Sale Agreement, which are filed as Exhibits 2.1 and 2.2 to the
Current Report on Form 8-K, dated March 18, 2003, and incorporated herein by
reference.
Note 11. Note Receivable - Agreement with Amphioxus Cell Technologies, Inc.
("Amphioxus" or "ACT")
On March 20, 2003, the Company entered into a collaterialized note
agreement, as amended (the "Note") with Amphioxus to advance up to $500,000.
Amphioxus is a biotechnology company that applies liver biology solutions to
problems in drug discovery and human therapeutics. Pursuant to the Note, the
Company advanced $375,000 as of September 30, 2003. The Note is due on March 19,
2004, bears interest at the rate of 10% per annum and is collaterialized by all
of the assets of Amphioxus. In addition, the Company received a warrant,
exercisable until March 2008, to purchase for $100,000, an aggregate of 20% of
the common stock of Amphioxus on a fully diluted basis. The warrant is valued at
$15,000, is prorated based on the amount of monies advanced and is amortized as
interest income over the term of the Note. On October 17, 2003, the Company
entered into a non-binding letter of intent to acquire Amphioxus. See Note 16.
Note 12. Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for all the plans. Accordingly, no compensation cost has been
recognized under these plans. The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
which was released in December 2002 as an amendment to SFAS No. 123. The
following table illustrates the effect on net income (loss) and earnings (loss)
per share if the fair value based method had been applied to all awards:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ------------------
2003 2002 2003 2002
----------------------------------------
Reported net income (loss) $1,281,624 $(638,580) $1,739,292 $(2,280,400)
Stock-based employee
compensation expense
in reported net income
(loss), net of
related tax effects
Stock-based employee
compensation expense
determined under the fair
value based method, net of
related tax effects -- (23,541) -- (70,624)
----------------------------------------------
Pro forma net income (loss) $1,281,624 $(662,121) $1,739,292 $(2,351,024)
==============================================
Income (loss) per share basic
As reported $ .03 $ (.03) $ .05 $ (.11)
Pro forma $ .03 $ (.03) $ .05 $ (.11)
Income (loss) per share diluted
As reported $ .02 $ (.03) $ .02 $ (.11)
Pro forma $ .02 $ (.03) $ .02 $ (.11)
Note 13. Stockholders Equity
In March 2003, the Company sold 15,000,000 shares of its common stock in a
private placement transaction to an investor for $150,000. In connection with
this private placement, the Company also sold, for $1,000, 15,000,000 warrants
exercisable at $0.01 per share and expiring in March 2008.
Note 14. Notes Payable
In June and July 2003, the Company received an aggregate of $100,000 and
issued convertible notes payable to private investors. The notes are due June
30, 2004 and bear interest at the rate of 6% per annum. Each note is convertible
into the Company's common stock at a price of $.06 per share (which exceeded the
closing price of the Company's common stock on the date of issuance). During
August and September 2003, the Company repaid an aggregate of $65,000 of such
notes.
In September 2003, the Company received $250,000 and issued a note to a
private investor. The note was due on September 30, 2004 and was subject to
earlier repayment based upon sales by the Company of its HEB common stock. The
note was repaid in its entirety in November 2003.
Note 15. Litigation
Tax Litigation
In September 2003, the Company was sued in action seeking foreclosure of
the Company's property due to non-payment of approximately $225,000 in taxes.
The Company had until October 17, 2003 to answer the complaint. After such time,
the plaintiff has the right to seek an order giving the Company 30 days to pay
the unpaid taxes. As of the date hereof, no such order has been received by the
Company. If the taxes remain unpaid, the court may make the plaintiff the owner
of the property. The property is subject to the sale of the Company's assets to
HEB. See Note 10.
HEB Litigation
On September 16, 2003, HEB filed and subsequently served and moved for
expedited proceedings on, a complaint filed in the Court Of Chancery of the
State of Delaware, New Castle County, against ISI. The Complaint seeks specific
performance, and declaratory and injunctive relief related to the Inventory and
Asset Purchase Agreements with ISI. Specifically, HEB alleges that ISI has
delayed its performance pursuant to the Inventory and Asset Purchase Agreement
and, as a result, the Asset Purchase Agreement did not close within 180 days of
the date of the execution of the agreements. Paragraph 7.7 of the Asset Purchase
Agreement states that either party to the agreement may terminate the agreement
if there is no closing within 180 days of the date of the agreement. HEB
requested that the Court require ISI to specifically perform its obligations
under the agreement or, in the alternative, that paragraph 7.7 of the agreement
be eliminated or reformed to eliminate ISI's ability to terminate pursuant to
that paragraph. HEB also requested that ISI, as a result of its conduct, not be
permitted to terminate the Asset Purchase Agreement pursuant to paragraph 7.7 or
due to the passage of time. At a hearing held on September 29, 2003, the Court
set a trial of the case for January 6-7, 2004 and the parties have agreed that
neither party shall have the right to terminate the Asset Purchase Agreement
pursuant to paragraph 7.7 until the date which is at least two weeks following
trial, and only then, unless the Court has ruled, upon five days written notice
to the other party. In response to HEB's complaint, ISI has filed a motion to
dismiss.
Note 16. Subsequent Event
On October 17, 2003, ISI and Amphioxus Cell Technologies, Inc. ("ACT")
entered into a letter of intent pursuant to which ISI (or a wholly owned
subsidiary of ISI) will acquire ACT. The shareholders of ACT will receive
preferred stock (the "ACT Preferred Stock") of ISI, convertible into a number of
common shares of ISI equal to 75% of the fully diluted capitalization of ISI.
The ACT Preferred Stock will be convertible at the option of the holder at any
time, and subject to mandatory conversion if, prior to the date which is two
years after the merger, the sum of the proceeds received from (i) the sale of
the assets of ISI at the date of merger, and (ii) common equity capital raised
at a pre-money valuation in excess of $10 million, exceed $2.5 million.
Certain debt (the "ACT Debt") aggregating approximately $2.9 million that
is currently owed to shareholders of ACT will continue as secured non-interest
bearing debt of ISI. The ACT Debt will be non-interest bearing and repayable by
ISI on the fourth anniversary of the date of the merger, subject to accelerated
payment of 25% of the net after tax profits of ACT over $1 million on a
cumulative basis. The ACT Debt shall be fully payable upon a change of control
of ISI (excluding the transactions whereby the ACT stockholders convert the ACT
Preferred Stock). In addition, the ACT Debt shall also be repaid to the extent
of the net proceeds from the sale of any equity securities of ISI exceeding $8
million. In addition, certain additional debt aggregating approximately $200,000
owed to a shareholder of ACT will be repayable on the fifth anniversary of the
date of the merger.
In addition, preferred stock (the "Junior Preferred Stock") held by a
shareholder of ACT will continue as non-accruing preferred stock in the face
amount of $2 million, senior in right of preference as to dividends and
distributions in liquidation to the ACT Preferred Stock and common stock of ISI.
The Junior Preferred Stock will be repayable by ISI on the fourth anniversary of
the date of the merger, subject to accelerated payment from 25% of the net after
tax profits of ISI available after payment of the ACT Debt. The Junior Preferred
Stock will also be subject to reset upon the following conditions: the
redemption value and liquidation preference of Junior Preferred Stock shall be
increased if either the market capitalization of ISI or the amount to be paid by
any third party for ISI values the common stock and any other equity securities
or debt convertible into equity securities at (i) greater than $25 million, in
which case the Junior Preferred Stock shall be increased to $2.75 million, or
(ii) greater than $35 million, in which case the Junior Preferred Stock shall be
increased to $3.5 million (each a "Reset Event"). If not sooner redeemed and
paid, the Junior Preferred Stock shall be fully redeemed and retired (subject
only to the prior payment of the ACT Debt) at any time upon a change of control
of the surviving company (excluding the transaction whereby the ACT stockholders
convert their ACT Preferred Stock), or to the extent of the net proceeds from
the sale of any equity securities of ISI exceeds $10.9 million.
In addition, on the merger date, three officers of ISI have agreed to grant
ISI the option to terminate their employment agreements in exchange for (i) a
one-year consulting agreement at the rate of $4,000 per month, (ii) common stock
or options exercisable into approximately 1.25% of ISI and (iii) an amount by
which 10% of the proceeds from the sale of certain assets of ISI exceed
$200,000.
In connection with the execution of the Letter of Intent, ISI borrowed
$250,000 from Prism Ventures LLP, $150,000 of which was advanced to ACT.
The Letter of Intent is non-binding and subject to the execution of
definitive documents and final due diligence. However, the parties have agreed
to use good faith efforts to negotiate such agreements, and consummate the
transaction as soon as reasonably practicable.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Since 1981, the Company was 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. Upon
completion of the transactions described below with HEB, ISI will not be
involved in the natural alpha interferon business and will not have a
manufacturing and research facility. In addition, on August 29, 2003, ISI and
Metacine, Inc. agreed to terminate their agreements (See Note 8). On October 17,
2003, ISI and Amphioxus Cell Technologies, Inc. ("ACT") entered into a letter of
intent pursuant to which ISI (or a wholly owned subsidiary of ISI) will acquire
ACT. ACT is a biotechnology company that applies liver biology solutions to
problems in drug discovery and human therapeutics. The shareholders of ACT will
receive preferred stock (the "ACT Preferred Stock") of ISI, convertible into a
number of common shares of ISI equal to 75% of the fully diluted capitalization
of ISI (see Note 16).
Liquidity and Capital Resources
Agreement with Hemispherx Biopharma, Inc. ("HEB")
On March 11, 2003, Interferon Sciences, Inc. ("ISI" or the "Company")
executed two agreements with HEB to sell certain assets of ISI (the two asset
sale transactions are hereinafter jointly referred to as the "Asset Sale
Transactions" and individually referred to as the "First Asset Sale" and the
"Second Asset Sale") and consummated the First Asset Sale.
In the first agreement with HEB (the "First Asset Sale Agreement"), ISI
sold all of its inventory related to ALFERON N Injection(R), ISI's natural alpha
interferon product approved for the treatment of certain types of genital warts
(the "Product"), and granted a three-year license for the production,
manufacture, use, marketing and sale of the Product in the United States.
For these assets, ISI:
(i) received 424,528 shares of HEB common stock (the "Common Stock") (these
shares, along with other shares described below as having a guaranteed value,
are sometimes referred to as the "Guaranteed Shares") which had a Market Value
(as defined in the First Asset Sale Agreement) of $675,000 and a guaranteed
value of $675,000;
(ii) received an additional 62,500 shares of Common Stock without a
guaranteed value; and
(iii) will receive a royalty equal to 6% of the net sales of the Product.
ISI received a service fee until October 31, 2003 for providing certain
transitional services. In addition, HEB will assume ISI payables and certain
other obligations related to the Product. This Agreement obligates HEB to
register the Common Stock issued to ISI, sets periodic limits on the number of
shares ISI may sell and requires HEB to pay ISI an amount equal to the product
received by multiplying (i) the number of Guaranteed Shares remaining unsold on
March 11, 2005 and (ii) $1.59. The remaining Guaranteed Shares will then be
returned to HEB.
In the second agreement with ISI (the "Second Asset Sale Agreement"), ISI
has agreed to sell, subject to certain approvals, to HEB all of its rights to
the Product and other assets related to the Product including, but not limited
to, real estate and machinery. For these assets, ISI will:
(i) receive 424,528 shares of HEB Common Stock which has a Market Value (as
defined in the Second Asset Sale Agreement) of $675,000 and a guaranteed value
of $675,000;
(ii) receive an additional 62,500 shares of HEB Common Stock without a
guaranteed value; and
(iii) receive a royalty equal to 6% of the net sales of any products
containing natural alpha interferon sold by HEB (or a Marketing Partner, as
defined in the Second Asset Sale Agreement).
In addition, HEB will be required to satisfy three obligations of
ISI which aggregate approximately $2,500,000. HEB will be obligated to pay
certain ongoing expenses, on a current basis, related to ISI's facility such as
insurance, heat, light, air conditioning and equipment maintenance prior to the
closing of the Second Asset Sale Agreement.
The Second Asset Sale Agreement obligates HEB to register the Common Stock
to be issued, sets periodic limits on the number of these shares that may be
sold and requires HEB to pay ISI an amount equal to the product received by
multiplying (i) the number of Guaranteed Shares remaining unsold on the date
which is two years after the closing date of the Second Asset Sale Agreement and
(ii) $ 1.59. The remaining Guaranteed Shares will then be returned to HEB.
The purchase price for the assets was determined by negotiation between HEB
and ISI.
The foregoing descriptions of the Asset Sale Transactions, the First Asset
Sale Agreement and the Second Asset Sale Agreement are qualified in their
entirety by reference to the full text of the First Asset Sale Agreement, the
Second Asset Sale Agreement, which are filed as Exhibits 2.1 and 2.2 to the
Current Report on Form 8-K, dated March 18, 2003, and incorporated herein by
reference.
In March 2003, the Company sold 15,000,000 shares of its common stock in a
private placement transaction to an investor for $150,000. In connection with
this private placement, the Company also issued 15,000,000 warrants exercisable
at $.01 per share and expiring in March 2008.
In June and July 2003, the Company received $100,000 and issued convertible
notes payable to private investors. The notes are due June 30, 2004 and bear
interest at the rate of 6% per annum. Each note is convertible into the
Company's common stock at a price of $.06 per share. During August and September
2003, the Company repaid $65,000 of such notes.
As of September 30, 2003, the Company had approximately $201,000 in cash
and cash equivalents. Until utilized, such cash and cash equivalents are being
invested principally in short-term interest-bearing investments.
As of November 20, 2003, the Company has sold 388,000 of the shares of HEB
common stock and received net proceeds of $965,000.
Based on the Company's sale to HEB, estimates of revenue, expenses, and the
timing of repayment of creditors, management believes that the cash presently
available will be sufficient to enable the Company to continue operations until
March 31, 2004. However, actual results 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 will be
available when needed or on terms acceptable to the Company. Insufficient funds
will require the Company to terminate operations.
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 2002, 2001 and 2000, the Company completed the sale of
approximately $6.5 million, $12 million and $19 million of its New Jersey tax
loss carryovers and received $0.53 million, $0.97 million and $1.48 million,
which was recorded as a gain on sale of state net operating loss carryovers on
the Company's Consolidated Statements of Operations in 2002, 2001 and 2000,
respectively. In June 2003, the Company submitted an application to sell an
additional approximately $2 million of tax benefits (calculated by multiplying
the Company's unused New Jersey net operating loss carryovers through December
31, 2000 of approximately $22.6 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 2003 and future years is $40 million per year.
The Company's Common Stock now trades on the OTC Pink Sheets, 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
Nine Months Ended September 30, 2003 Versus Nine Months Ended September 30, 2002
For the nine months ended September 30, 2003 and 2002, the Company had
revenues from the sale of ALFERON N Injection of $241,637 and $1,647,279,
respectively. In addition, the Company recorded revenues of $1,149,112 from the
bulk sale of the remaining Alferon inventory and $14,000 in royalty income.
Through March 10, 2003, the Company sold, through its distributor, to
wholesalers and other customers in the United States 1,980 vials of ALFERON N
Injection, compared to 12,679 vials sold by the Company during the nine months
ended September 30, 2002.
Cost of goods sold and excess/idle production costs totaled $267,054 and
$1,173,166 for the nine months ended September 30, 2003 and 2002, respectively.
Excess/idle production costs in the nine months ended September 30, 2003 and
2002 represented fixed production costs, which were incurred after production of
ALFERON N Injection was discontinued in April 1998. Excess/idle production costs
were lower during the nine months ended September 30, 2003 as compared to the
nine months ended September 30, 2002, due principally to Hemispherx taking over
certain operating costs beginning March 11, 2003.
Research and development expenses during the nine months ended September
30, 2003 of $176,091 decreased by $978,198 from $1,154,289 for the same period
in 2002, due principally to Hemispherx taking over certain operating costs
beginning March 11, 2003.
General and administrative expenses for the nine months ended September 30,
2003 were $962,714 as compared to $1,423,568 for the same period in 2002. The
decrease of $460,854 was due principally to Hemispherx taking over certain
operating costs beginning March 11, 2003.
Interest expense, net, for the nine months ended September 2003 was
$260,449 as compared to $176,656 for the nine months ended September 30, 2002.
The increase of $83,793 was primarily due to the interest, including
amortization of debt discount, on the convertible notes payable.
For the nine months ended September 30, 2003, the Company recorded service
fee income of $450,851 from Hemispherx as a result of providing certain
transitional services.
The Company recorded a gain on the Metacine settlement of $1,550,000 for
the nine months ended September 30, 2003.
As a result of the foregoing, the Company incurred net income of $1,739,292
and net loss of $2,280,400 for the nine months ended September 30, 2003 and
2002, respectively.
Three Months Ended September 30, 2003 Versus Three Months Ended September 30,
2002
For the three months ended September 30, 2003 and 2002, the Company had
revenues from the sale of ALFERON N Injection of zero and $687,197,
respectively. On March 11, 2003, the Company sold all its inventory related to
its ALFERON N Injection product and granted a license to sell the product to
Hemispherx. In addition, the Company recorded revenues of $14,000 from royalty
income in the three months ended September 30, 2003.
The Company sold, through its distributor, to wholesalers and other
customers in the United States 5,408 vials of ALFERON N Injection during the
three months ended September 30, 2002.
Cost of goods sold and excess/idle production costs totaled zero and
$432,979 for the three months ended September 30, 2003 and 2002, respectively.
Excess/idle production costs in the three months ended September 30, 2002
represented fixed production costs, which were incurred after production of
ALFERON N Injection was discontinued in April 1998. Excess/idle production costs
were zero during the three months ended September 30, 2003 due to Hemispherx
taking over certain operating costs beginning March 11, 2003.
Research and development expenses during the three months ended September
30, 2003 were zero as compared to $308,912 for the same period in 2002, due to
Hemispherx taking over certain operating costs beginning March 11, 2003.
General and administrative expenses for the three months ended September
30, 2003 were $369,114 as compared to $441,054 for the same period in 2002. The
decrease of $71,940 was due principally to Hemispherx taking over certain
operating costs beginning March 11, 2003.
Interest expense, net, for the three months ended September 30, 2003 was
$69,986 as compared to $142,832 for the three months ended September 30, 2002.
The decrease of $72,846 was primarily due to the decrease in the amortization of
debt discount on the convertible notes payable.
For the three months ended September 30, 2003, the Company recorded service
fee income of $156,724 from Hemispherx as a result of providing certain
transitional services.
The Company recorded a gain on the Metacine settlement of $1,550,000 for
the three months ended September 30, 2003.
As a result of the foregoing, the Company incurred net income of $1,281,624
and net loss of $638,580 for the three months ended September 30, 2003 and 2002,
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 and the uncertainty of obtaining additional funding
for the Company, 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 September 30, 2003.
INTERFERON SCIENCES, INC.
September 30, 2003
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: December 4, 2003 By: /s/ Lawrence M. Gordon
Lawrence M. Gordon
Chief Executive Officer
DATE: December 4, 2003 By: /s/ Donald W. Anderson
Donald W. Anderson
Controller
CERTIFICATIONS
I, Lawrence M. Gordon, certify that:
1. I have reviewed this quarterly report on Form 10-Q/SB of Interferon
Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 4, 2003
/s/ Lawrence M. Gordon
- ----------------------
Lawrence M. Gordon
Chief Executive Officer
CERTIFICATIONS
I, Donald W. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q/SB of Interferon
Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 4, 2003
/s/ Donald W. Anderson
- ----------------------
Donald W. Anderson
Controller