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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 0-18006
 THE IMMUNE RESPONSE CORPORATION
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    33-0255679
(I.R.S. Employer
Identification No.)5931 Darwin CourtCarlsbad, California
(Address of principal executive offices)
    
    92008
(Zip Code)
 Registrants telephone number, including area code: (760) 431-7080
 þ o
  o o þ
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##### 



THE IMMUNE RESPONSE CORPORATION
 INDEX
 PagePart I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited):Condensed Balance
Sheets  March 31, 2006 and December 31, 2005
    
    
    3Condensed Statements of Operations  Three months ended March 31, 2006 and 2005
    
    
    4Condensed Statements of Cash Flows  Three months ended March 31, 2006 and 2005
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17Part II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    17Item 1A.
    
    Risk Factors
    
    
    17Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.
    
    Defaults Upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits
    
    
    25SIGNATURES
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 The Immune Response Corporation
 
 Condensed Balance Sheets
 (in thousands, except for share amounts)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    4,895
    
    
    $
    146Prepaid expenses
    
    
    193
    
    
    
    2915,088
    
    
    
    437Property and equipment, net
    
    
    3,383
    
    
    
    3,583Licensed technology, net
    
    
    530
    
    
    
    706Deposits and other assets ($569 and $600 restricted in escrow account as security for
long-term lease at March 31, 2006 and December 31, 2005, respectively)
    
    
    970
    
    
    
    690$
    9,971
    
    
    $
    5,416Liabilities and Stockholders (Deficit) EquityCurrent Liabilities:Accounts payable
    
    $
    808
    
    
    $
    1,039Accrued expenses
    
    
    1,920
    
    
    
    1,753Liability for warrants committed in excess of authorized stock
    
    
    134,487
    
    
    
    Short-term convertible debenture, net of discount of $321 and $490 plus accrued interest of $7
and $15 at March 31, 2006 and December 31, 2005, respectively
    
    
    54
    
    
    
    325Current portion of deferred liabilities and revenue
    
    
    314
    
    
    
    306137,583
    
    
    
    3,423Convertible promissory notes, related party, net of discount of $835 and $694 plus accrued
interest of $347 and $307 at March 31, 2006 and December 31, 2005, respectively
    
    
    4,498
    
    
    
    5,354Secured convertible notes, net of discount of $7,636 plus accrued interest of $51 at
March 31, 2006
    
    
    415
    
    
    
    Long-term deferred liabilities and revenue, net of current portion
    
    
    2,207
    
    
    
    2,289Total long-term liabilities
    
    
    7,120
    
    
    
    7,643Stockholders (Deficit) Equity :Subscribed Stock
    
    
    
    
    
    
    237Common stock, $.0025 par value, 170,000,000 shares authorized; 155,705,156 and
71,660,101 shares issued and outstanding at March 31, 2006 and December 31, 2005,
respectively
    
    
    389
    
    
    
    179Warrants
    
    
    2,610
    
    
    
    21,201Additional paid-in capital
    
    
    217,459
    
    
    
    321,448Accumulated (deficit)
    
    
    (355,190
    )
    
    
    (348,715
    )Total stockholders (deficit) equity
    
    
    (134,732
    )
    
    
    (5,650
    )$
    9,971
    
    
    $
    5,416
 See accompanying notes to condensed financial statements.
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The Immune Response Corporation
 
 Condensed Statements of Operations
 (in thousands, except for per share amounts)
 (unaudited)
 Three months ended March 31,2006
    
    
    2005Revenues:Licensed research revenue
    
    $
    4
    
    
    $
    4Contract research revenue
    
    
    7
    
    
    
    711
    
    
    
    11Expenses:Research and development
    
    
    2,714
    
    
    
    2,903General and administrative
    
    
    1,078
    
    
    
    7413,792
    
    
    
    3,644Other income and (expense):Interest expense  (including related party) including non-cash accretion
of $728 and $590 for 2006 and 2005, respectively
    
    
    (919
    )
    
    
    (749
    )Investment income
    
    
    20
    
    
    
    50Gain on warrant liability marked to fair value
    
    
    12,300
    
    
    
    Beneficial inducement cost
    
    
    (14,095
    )
    
    
    (2,694
    )
    
    
    (699
    )Net loss
    
    
    (6,475
    )
    
    
    (4,332
    )Less preferred stock dividends
    
    
    
    
    
    
    (93
    )Net loss attributable to common stockholders
    
    $
    (6,475
    )
    
    $
    (4,425
    )Basic and diluted loss per share:Net loss
    
    $
    (0.05
    )
    
    $
    (0.09
    )Net loss attributable to common stockholders
    
    $
    (0.05
    )
    
    $
    (0.09
    )Weighted average number of shares outstanding
    
    
    124,671
    
    
    
    48,699
 See accompanying notes to condensed financial statements.
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The Immune Response Corporation
 
 Condensed Statements of Cash Flows
 (in thousands)
 (unaudited)
 Three months ended March 31,2006
    
    
    2005Cash Flows From Operating Activities:Net loss
    
    $
    (6,475
    )
    
    $
    (4,332
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    402
    
    
    
    420Amortization of noncash loan fees
    
    
    15
    
    
    
    Operating expenses paid with common stock and warrants
    
    
    
    
    
    
    110Share-based compensation expense
    
    
    267
    
    
    
    (101
    )Deferred liabilities and revenue
    
    
    (74
    )
    
    
    (59
    )Accrued interest, related party
    
    
    103
    
    
    
    144Accrued interest, not related party
    
    
    51
    
    
    
    Accretion of notes, related party
    
    
    109
    
    
    
    590Accretion of short-term convertible debenture and secured convertible notes,
not related party
    
    
    619
    
    
    
    Gain on warrant liability marked to fair value
    
    
    (12,300
    )
    
    
    Beneficial inducement cost
    
    
    14,095
    
    
    
    Changes in operating assets and liabilities:Prepaid expenses
    
    
    98
    
    
    
    41Accounts payable
    
    
    (231
    )
    
    
    138Accrued expenses
    
    
    158
    
    
    
    (405
    )Net cash used in operating activities
    
    
    (3,163
    )
    
    
    (3,454
    )Cash Flows From Investing Activities:Long-term restricted escrow account utilized to pay rent expense
    
    
    31
    
    
    
    Purchase of property and equipment
    
    
    (26
    )
    
    
    (9
    )Net cash
provided by (used in) investing activities
    
    
    5
    
    
    
    (9
    )Cash Flows From Financing Activities:Net proceeds from common stock sold under the Standby Equity Distribution Agreement
    
    
    1,139
    
    
    
    Proceeds from secured convertible notes
    
    
    8,000
    
    
    
    Proceeds from secured convertible note, related party
    
    
    250
    
    
    
    Payments on short-term convertible debenture
    
    
    (400
    )
    
    
    Proceeds from warrant exercise
    
    
    10
    
    
    
    Net proceeds from exercises of Unit Purchase Options
    
    
    
    
    
    
    18Offering
costs for debt and equity transactions
    
    
    (1,092
    )
    
    
    Net cash provided by financing activities
    
    
    7,907
    
    
    
    18Net increase (decrease) in cash and cash equivalents
    
    
    4,749
    
    
    
    (3,445
    )Cash and cash equivalents  beginning of year
    
    
    146
    
    
    
    8,798Cash and cash equivalents  end of period
    
    $
    4,895
    
    
    $
    5,353Supplemental Disclosure of Cash Flow Information:Interest paid
    
    $
    22
    
    
    $
    15Supplemental Disclosure of Noncash Information:Reclassification
of equity to liability for warrants committed in excess of authorized stock
    
    $
    146,787
    
    
    $
    Warrants issued for offering costs
    
    $
    9,372
    
    
    $
    Debt discounts allocated to secured convertible notes for warrants and beneficial conversion
costs
    
    $
    8,250
    
    
    $
    Convertible promissory note, related party and interest converted into common stock
    
    $
    1,068
    
    
    $
    Warrants issued for loan fees
    
    $
    326
    
    
    $
    Additional debt discount allocated to short-term convertible debenture for antidilution
adjustment
    
    $
    85
    
    
    $
    Secured convertible debenture converted into common stock
    
    $
    32
    
    
    $
    Common stock issued for consulting services and offering costs
    
    $
    
    
    
    $
    42Common stock issued for 401(k) plan
    
    $
    
    
    
    $
    68
 See accompanying notes to condensed financial statements
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THE IMMUNE RESPONSE CORPORATION
 
 Notes to Condensed Financial Statements (unaudited)
 Note 1  Interim Financial Statements:
   Share-Based Compensation
    Stock-based
Compensation Information under FAS No. 123R
   Three MonthsEndedMarch 31, 2005Risk-free interest rate
    
    
    4.82
    %Volatility
    
    
    140
    %Forfeiture rate
    
    
    22.72
    %Expected life in years
    
    
    5Dividend yield
    
    
    0.0
    %
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THE IMMUNE RESPONSE CORPORATION  Notes to Condensed Financial Statements (unaudited)
    Pro
Forma Information under FAS No. 123 for Periods Prior to
2006
   Three MonthsEndedMarch 31, 2005Net loss attributable to common stockholders:As reported
    
    $
    (4,425,000
    )Stock-based employee compensation
expense (benefit) included in (and
reducing) net loss
    
    
    (195,000
    )Fair value of stock-based employee
compensation
    
    
    (572,000
    )Pro forma
    
    $
    (5,192,000
    )Net loss per share (basic and diluted):As reported
    
    $
    (0.09
    )Pro forma
    
    $
    (0.11
    )
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THE IMMUNE RESPONSE CORPORATION  Notes to Condensed Financial Statements (unaudited)
 Three MonthsEndedMarch 31, 2005Risk-free interest rate
    
    
    4.18
    %Volatility
    
    
    128
    %Expected life in years
    
    
    5Dividend yield
    
    
    0.0
    %
  Note 2  The Company:
 TM
 TM Remune®
  Note 3  Going Concern:
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THE IMMUNE RESPONSE CORPORATION  Notes to Condensed Financial Statements (unaudited)
 Note 4  Net Loss per Share:
  Note 5  Short-Term Convertible Debenture:
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THE IMMUNE RESPONSE CORPORATION  Notes to Condensed Financial Statements (unaudited)
 Note 6  Convertible Promissory Notes, Related Party:
         Note 7  Standby Equity Distribution Agreement:
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THE IMMUNE RESPONSE CORPORATION  Notes to Condensed Financial Statements (unaudited)
  Note 8  2006 Private Placement:
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THE IMMUNE RESPONSE CORPORATION  Notes to Condensed Financial Statements (unaudited)
 Note 9  Liability for Warrants Committed in Excess of Authorized Stock:
   Note 10  Subsequent Events:
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  Liquidity and Capital Resources
       -13-




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TM  Remune®
 TM Remune® TM Remune® TM Remune®
 -14-




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Remune® TM Remune®
  Results of Operations
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005.
    Remune®
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Critical Accounting Policies and Estimates
  Insufficient Number of Underlying Common Shares
  Share-Based Compensation
   Intangibles and Other Long-Lived Assets
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  We need more cash immediately, and also on an ongoing basis.
   TM
 
    
    the timing of approval to begin new clinical trials;
    
    our ability to raise additional funding and the amounts raised, if any;
    
    the time and cost involved in obtaining regulatory approvals;
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
    
    continued scientific progress in our research and development programs;
    
    the scope and results of preclinical studies and clinical trials;
    
    the cost of manufacturing scale-up;
    
    the costs involved in filing, prosecuting and enforcing patent claims;
    
    competing technological and market developments;
    
    effective commercialization activities and arrangements;
    
    the costs of defending against and settling lawsuits; and/or
    
    other factors not within our control or known to us.
  
    
    obtaining regulatory approvals;
    
    our research and development programs;
    
    our preclinical and clinical trials; and/or
    
    scaling up manufacturing.
  
    
    overall financial market conditions;
    
    the security interest in substantially all of our assets in respect of an aggregate principal amount of $11,358,000;
    
    Potential dilution which would occur upon the exercise or conversion of outstanding derivative securities which
overlie 2,269,172,000 shares of our common stock.
 Our independent registered public accountants have expressed substantial doubt as to our ability to
continue as a going concern.
  Our existing stockholders could be diluted by well over 90% as a result of our 2006 Private
Placement and may suffer additional dilution in connection with future financings.
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Our stock has been delisted from Nasdaq and is subject to penny stock rules, which may make it more
difficult for us to raise capital and for you to sell your securities.
  Our failure to successfully develop our product candidates may cause us to cease operations.
  ® TM
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The lengthy product approval process and uncertainty of government regulatory requirements may
delay or prevent us from commercializing products. We must work to re-establish our credibility
with the FDA.
       
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Our patents and proprietary technology may not be enforceable and the patents and proprietary
technology of others may prevent us from commercializing products. Some of our patents expire
fairly soon.
     Technological change and competition may render our potential products obsolete.
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Our lack of commercial manufacturing and marketing experience and our dependence on third parties
for manufacturing may prevent us from successfully commercializing products.
     We may be unable to enter into additional collaborations.
  Adverse determinations and pressures concerning product pricing, reimbursement and related matters
could prevent us from successfully commercializing any of our product candidates.
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Our success in the HIV field may depend upon the acceptance of IR103 by the medical and
HIV-activist communities.
  Kevin Kimberlin, a member of our Board of Directors, beneficially owns approximately 60.2% of our
outstanding common stock and has the rights to acquire approximately 324,374,000 additional shares
of our common stock, which could theoretically result in ownership of up to approximately 82.5% of
our outstanding shares and could allow him to control or influence stockholder votes.
   Mr. Kimberlin is also a secured creditor.
  We have significant indebtedness that will mature before our operations can repay it.
  Legal proceedings could require us to pay substantial amounts of money and impair our operations.
 In
re Immune Response Securities Litigation ®
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We have hired a new CEO.
  Hazardous materials and environmental matters could expose us to significant costs.
  Product liability exposure may expose us to significant liability.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
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Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description of Document10.188 (1)
    
    Note Exchange Agreement dated February 8, 2006 between us and Cheshire Associates, LLC.10.189 (1)
    
    Note Revision Agreement dated February 8, 2006 between us and Cheshire Associates, LLC.10.190 (1)
    
    Security Purchase Agreement dated February 9, 2006 between us and Qubit Holdings, LLC.10.191 (1)
    
    8% Senior Secured Convertible Promissory Note dated February 9, 2006 issued to Qubit
Holdings, LLC.10.192 (1)
    
    Warrant Agreement dated February 9, 2006 by and between us and Qubit Holdings, LLC.10.193 (1)
    
    Security Agreement dated February 9, 2006 by and between us and Qubit Holdings, LLC.10.193.1 (1)
    
    Amendment No. 1 to Security Agreement dated as of March 7, 2006 by and between us and Qubit
Holdings, LLC.10.194 (1)
    
    Intercreditor Agreement dated February 9, 2006 by and among us, Cheshire Associates, LLC,
Cornell Capital Partners, L.P., and Hudson Asset Partners, LLC.10.194.1 (1)
    
    Amendment No. 1 to Intercreditor Agreement dated as of March 7, 2006 by and among us,
Cheshire Associates, LLC, Cornell Capital Partners, L.P., and Hudson Asset Partners, LLC.10.195 (1)
    
    Placement Agency Agreement dated February 9, 2006 between us and Spencer Trask Ventures,
Inc.10.196 (1)
    
    Warrant Agreement dated February 9, 2006 by and between us and Spencer Trask Intellectual
Capital Company, LLC.10.196.1 (1)
    
    Amendment No. 1 to Warrant Agreement dated February 28, 2006 by and between us and Spencer
Trask Intellectual Capital Company, LLC.10.197 (1)
    
    Registration Rights Agreement dated February 22, 2006 by and among us, Spencer Trask
Ventures, Inc. and certain accredited investors purchasing 8% senior secured convertible
promissory notes and warrants to purchase shares of common stock.10.197.1 (1)
    
    Amendment No. 1 to Registration Rights Agreement dated as of March 7, 2006 by and among us,
Spencer Trask Ventures, Inc. and certain accredited investors purchasing 8% senior secured
convertible promissory notes and warrants to purchase shares of common stock.10.198 (1)
    
    Limited Recourse Interest Inducement Agreement dated February 9, 2006 by and between us and
Spencer Trask Intellectual Capital Company, LLC.
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ExhibitNumber
    
    Description of Document10.198.1 (1)
    
    Amendment No. 1 to Limited Recourse Interest Inducement Agreement dated as of March 7, 2006
by and between us and Spencer Trask Intellectual Capital Company, LLC.10.199 (1)
    
    Note Conversion Commitment Agreement dated February 15, 2006 between us and Cheshire
Associates, LLC.10.200 (1)
    
    Warrant Agreement dated February 22, 2006 by and between us and Spencer Trask Ventures, Inc.10.200.1 (1)
    
    Amendment No. 1 to Warrant Agreement dated as of March 7, 2006 by and between us and
Spencer Trask Ventures, Inc.10.201 (1)
    
    Additional Warrant Agreement dated February 22, 2006 by and between us and Spencer Trask
Ventures, Inc.10.201.1 (1)
    
    Amendment No. 1 to Additional Warrant Agreement dated February 27, 2006 by and between us
and Spencer Trask Ventures, Inc.10.202 (1)
    
    Right of First Refusal Agreement dated February 22, 2006 by and between Spencer Trask
Ventures, Inc.10.203 (1)
    
    Form of 8% Senior Secured Convertible Promissory Note limited in aggregate principal amount
to Five Million ($5,000,000) Dollars.10.204 (1)
    
    Form of 8% Senior Secured Convertible Promissory Note limited in aggregate principal amount
to Eight Million ($8,000,000) Dollars.10.205 (1)
    
    Form of Stock Purchase Warrant.31.1
    
    Certification of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).31.2
    
    Certification of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).32.1
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).32.2
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).
 
 (1)
    
    Incorporated by reference to the Exhibits of the same numbers filed with our
Registration Statement on Form S-1, No. 333-133210. -26-




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SIGNATURES
  THE IMMUNE RESPONSE CORPORATIONDate: May 15, 2006
    
    By:
    
    /s/ Michael K. GreenMichael K. Green,Chief Operating Officer & Chief Financial Officer
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Exhibit Index
 ExhibitNumber
    
    Description of Document31.1
    
    Certification of the Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).31.2
    
    Certification of the Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).32.1
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).32.2
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).