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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 June 30, 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**(Exact name of registrant as specified in its charter)   **Delaware** **33-0255679**(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)   **5931 Darwin Court**  **Carlsbad, California** **92008**(Address of principal executive offices) (Zip Code)**Registrant’s telephone number, including area code: (760) 431-7080**Indicate by check mark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes þ No oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o       Accelerated filer o       Non-accelerated filer þIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No þAs of August 11, 2006, there were 845,750,722 shares of our common stock outstanding.  
 

 
**THE IMMUNE RESPONSE CORPORATION****INDEX**       **Page** **Part I FINANCIAL INFORMATION**         Item 1. Financial Statements (unaudited):         Condensed Balance Sheets — June 30, 2006 and December 31, 2005  3      Condensed Statements of Operations — Three and six months ended June 30, 2006 and 2005  4      Condensed Statements of Cash Flows — Six months ended June 30, 2006 and 2005  5      Notes to Condensed Financial Statements  6      Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  15      Item 3. Quantitative and Qualitative Disclosures About Market Risk  19      Item 4. Controls and Procedures  20      **Part II OTHER INFORMATION**         Item 1. Legal Proceedings  21      Item 1A. Risk Factors  21      Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  28      Item 3. Defaults Upon Senior Securities  28      Item 4. Submission of Matters to a Vote of Security Holders  28      Item 5. Other Information  29      Item 6. Exhibits  29      **SIGNATURES**  30  EXHIBIT 31.1 EXHIBIT 31.2 EXHIBIT 32.1 EXHIBIT 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)*           **June 30,**  **December 31,**   **2006**  **2005**   *(unaudited)*     **Assets**                 Current Assets:        Cash and cash equivalents $6,959  $146 Prepaid expenses and other current assets  318   291           7,277   437          Property and equipment, net  3,161   3,583 Licensed technology, net  353   706 Deposits and other assets ($600 restricted in escrow account as security forlong-term lease at June 30, 2006 and December 31, 2005)  690   690                   $11,481  $5,416                 **Liabilities and Stockholders’ (Deficit)**                 Current Liabilities:        Accounts payable $896  $1,039 Accrued expenses  2,164   1,753 Liability for warrants committed in excess of authorized stock  14,247   — Short-term convertible debenture, net of discount of $490 plus accrued interest of$15 at December 31, 2005  —   325 Current portion of deferred liabilities and revenue  327   306                    17,634   3,423                 Convertible promissory notes, related party, net of discount of $810 and $694 plus accruedinterest of $307 and $307 at June 30, 2006 and December 31, 2005, respectively  3,202   5,354 Secured convertible notes, net of discount of $5,222 plus accrued interest of $168 atJune 30, 2006  1,328   — Long-term deferred liabilities and revenue, net of current portion  2,125   2,289                 Total long-term liabilities  6,655   7,643                 Stockholders’ (Deficit) Equity :        Subscribed Stock  —   237 Common stock, $.0025 par value, 3,500,000,000 and 170,000,000 shares authorized; 624,696,840 and71,660,101 shares issued and outstanding at June 30, 2006 and December 31, 2005,respectively  1,562   179 Warrants  2,610   21,201 Additional paid-in capital  132,162   321,448 Accumulated (deficit)  (149,142)  (348,715)                Total stockholders’ (deficit)  (12,808)  (5,650)                  $11,481  $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 June 30,**  **Six months ended June 30,**   **2006**  **2005**  **2006**  **2005** Revenues:                Licensed research revenue $4  $4  $8  $8 Contract research revenue  7   7   14   14                                  11   11   22   22              Expenses:                Research and development  2,694   2,566   5,408   5,469 General and administrative  1,250   1,006   2,328   1,747                                  3,944   3,572   7,736   7,216                               Other income and (expense):                Interest expense — including non-cash accretionof $2,670 and $278 for three months and$3,488 and $868 for six months, respectively  (3,632)  (405)  (4,862)  (1,154)Investment income  44   21   64   71  Gain on warrant liability marked to fair value  111,521   —   226,180   —  Beneficial inducement cost  —   (1,201)  (14,095)  (1,201)                                 107,933   (1,585)  207,287   (2,284)                              Net income (loss)  104,000   (5,146)  199,573   (9,478) Less preferred stock dividends  —   (92)  —   (185)                              Net income (loss) attributable to common stockholders $104,000  $(5,238) $199,573  $(9,663)                              Basic income (loss) per share:                Net income (loss) $0.32  $(0.10) $0.88  $(0.19)                              Net income (loss) attributable to commonstockholders $0.32  $(0.11) $0.88  $(0.20)                              Diluted (loss) per share:                Net (loss) $0.00  $(0.10) $(0.01) $(0.19)                              Net (loss) attributable to common stockholders $0.00  $(0.11) $(0.01) $(0.20)             *See accompanying notes to condensed financial statements.*
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**The Immune Response Corporation****Condensed Statements of Cash Flows***(in thousands)**(unaudited)*           **Six months ended June 30,**   **2006**  **2005** Cash Flows From Operating Activities:        Net income (loss) $199,573  $(9,478)Adjustments to reconcile net loss to net cash used in operating activities:        Depreciation and amortization  804   829 Noncash loan fees  966   — Operating expenses paid with common stock and warrants  —   188 Share-based compensation expense  547   (18)Deferred liabilities and revenue  (143)  (108)Accrued interest, related party  174   (1,074)Accrued interest, not related party  204   — Accretion of notes, related party  380   868 Accretion of short-term convertible debenture and secured convertible notes,not related party  3,108   — Gain on warrant liability marked to fair value  (226,180)  — Beneficial inducement cost  14,095   1,201 Changes in operating assets and liabilities:        Prepaid expenses  (27)  188 Accounts payable  (143)  112 Accrued expenses  396   (357)       Net cash used in operating activities  (6,246)  (7,649)                Cash Flows From Investing Activities:        Purchase of property and equipment  (29)  (69)       Net cash (used in) investing activities  (29)  (69)                Cash Flows From Financing Activities:        Net proceeds from common stock sold under the Standby Equity Distribution Agreement  1,139   — Proceeds from secured convertible notes  7,700   — Proceeds from secured convertible note, related party  550   — Payments on short-term convertible debenture  (548)  — Proceeds from warrant exercise  6,123   — Net proceeds from exercises of Unit Purchase Options  —   18 Offering costs for debt and equity transactions  (1,876)  —        Net cash provided by financing activities  13,088   18                 Net increase (decrease) in cash and cash equivalents  6,813   (7,700)Cash and cash equivalents — beginning of year  146   8,798        Cash and cash equivalents — end of period $6,959  $1,098                 Supplemental Disclosure of Cash Flow Information:        Interest paid $35  $1,357                 Supplemental Disclosure of Noncash Information:        Net reclassification of equity to liability for warrants committed in excess of authorized stock $240,428  $—        Warrants issued for offering costs $13,454  $—        Debt discounts allocated to secured convertible notes for warrants and beneficial conversionCosts $8,250  $         Convertible promissory note and interest converted into common stock $1,347  $—        Convertible promissory note, related party and interest converted into common stock $2,768  $1,467        Warrants issued for loan fees $966  $—        Additional debt discount allocated to short-term convertible debenture for antidilution adjustment $85  $—        Secured convertible debenture converted into common stock $252  $—        Common stock issued for consulting services and offering costs $—  $42        Common stock issued for 401(k) plan $—  $146        *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:**The accompanying condensed balance sheet as of June 30, 2006 and the condensed statements ofoperations for the three and six months ended June 30, 2006 and 2005 and of cash flows for the sixmonths ended June 30, 2006 and 2005 have been prepared by The Immune Response Corporation (the“Company”) and have not been audited. These financial statements, in the opinion of management,include all adjustments (consisting only of normal recurring accruals) necessary for a fairpresentation of the financial position, results of operations and cash flows for all periodspresented. The financial statements should be read in conjunction with the financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K filed for the year endedDecember 31, 2005. Interim operating results are not necessarily indicative of operating resultsfor the full year.The preparation of financial statements in conformity with generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.***Fair Value of Financial Instruments***Financial instruments consist of cash and cash equivalents, accounts payable, accrued expenses andshort-term and long-term convertible debt obligations. With the exception of our convertiblepromissory notes (see Notes 5,6, and 8), the fair value of these financial instruments approximatestheir carrying amount as of June 30, 2006 and December 31, 2005 due to the nature of, or shortmaturity of these instruments.***Share-Based Compensation***In December 2004, the Financial Accounting Standards Board (“FASB”) issued Financial AccountingStandard (“FAS”) No. 123R, “Share-Based Payment.” This statement is a revision to FAS No. 123,“Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees.” FAS No. 123R establishes accountingfor share-based compensation awards exchanged for employee services and requires companies toexpense the estimated fair value of these awards over the requisite employee service period.The Company adopted FAS No. 123R on January 1, 2006, using the modified prospective application,which provides for certain changes to the method for valuing share-based compensation. Under themodified prospective application, prior periods are not revised for comparative purposes. Thevaluation provisions of FAS No. 123R apply to new awards and to awards that are outstanding on theeffective date and subsequently are modified or cancelled. Estimated compensation expense forawards outstanding at the effective date will be recognized over the remaining service period usingthe compensation cost calculated for pro forma disclosure purposes under FAS No. 123 withmodification for estimated forfeitures.The Company has elected to adopt the alternative transition method provided in FASB Staff PositionNo. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effect of Share-Based PaymentAwards,” for calculating the tax effects of share-based compensation pursuant to FAS No. 123R. Thealternative transition method includes a simplified method to establish the beginning balance ofthe additional paid-in capital pool (“APIC pool”) related to the tax effects of employeeshare-based compensation, which is available to absorb tax deficiencies recognized subsequent tothe adoption of FAS No. 123R.*Stock-based Compensation Information under FAS No. 123R*Upon adoption of FAS No. 123R, the Company is continuing to use the Black-Scholes option-pricingmodel for valuation of share-based awards granted following January 1, 2006, but with futuremodifications for estimated vesting forfeiture rates applied. The Company decided that theBlack-Scholes option-pricing model is an appropriate method for valuing employee grants due to thehistorical volatility of our stock price combined with daily vesting provisions for a majority ofthe stock option grants.The weighted-average estimated fair value of employee stock options granted during the three andsix months ended June 30, 2006 was $0.0840 and $0.0881 per share, respectively, using theBlack-Scholes model with the following weighted average assumptions (annualized percentages):
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**THE IMMUNE RESPONSE CORPORATION****Notes to Condensed Financial Statements (unaudited)**           **Three Months** **Three Months**  **Ended** **Ended**  **June 30, 2006** **March 31, 2006**Risk-free interest rate  5.10%  4.82%Volatility  159.65%  140.00%Forfeiture rate  22.07%  22.72%Expected life in years  5   5 Dividend yield  0.0%  0.0%The Company used the historical volatility rate of the Company’s stock price for the five yearspreceding the second quarter of 2006 as the basis for forecasting an expected volatility rate. Therisk-free interest rate assumption is based upon observed interest rates that coincide with theexpected life for options assumed at five years, typically half of the life of the option grant.The Company uses half of the option term due to the extreme volatility of the Company’s stockprice. The vesting forfeiture rate is based on the Company’s historical option forfeitureinformation for the five years preceding the second quarter of 2006. The Company uses gradedvesting to recognize employee option expense.As share-based compensation expense recognized in the Condensed Statement of Operations for thethree and six months ended June 30, 2006 is based on awards ultimately expected to vest, it isreduced for estimated forfeitures. FAS No. 123R requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeitures differ from thoseestimates. In the Company’s pro forma information required under FAS No. 123 for the periods priorto 2006, the Company also accounted for forfeitures, but as they occurred.The Company recorded $279,000 and $547,000 in share-based compensation expense during the three andsix months ended June 30, 2006, respectively, of which $279,000 and $541,000, respectively,represents the effect of the adoption of FAS No. 123R.*Pro Forma Information under FAS No. 123 for Periods Prior to 2006*