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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, 2005
 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 Court
Carlsbad, California
(Address of principal executive offices)
    
    92008
(Zip Code)
 Registrants telephone number, including area code: (760) 431-7080
 þ o
  o þ




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THE IMMUNE RESPONSE CORPORATION
 INDEX
 PagePart I FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Balance Sheets  June 30, 2005 and December 31, 2004
    
    
    3Condensed Statements of Operations  Three and six months ended June 30, 2005 and 2004
    
    
    4Condensed Statements of Cash Flows  Six months ended June 30, 2005 and 2004
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26Part II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    28EXHIBIT 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)
 June 30,
    
    December 31,2005
    
    2004(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    1,098
    
    
    $
    8,798Other current assets
    
    
    176
    
    
    
    3641,274
    
    
    
    9,162Property and equipment, net
    
    
    4,024
    
    
    
    4,431Licensed technology, net
    
    
    1,060
    
    
    
    1,413Deposits and other assets ($600 restricted as security for letter of credit)
    
    
    690
    
    
    
    690$
    7,048
    
    
    $
    15,696Liabilities and Stockholders Equity (Deficit)Current Liabilities:Accounts payable
    
    $
    606
    
    
    $
    494Accrued expenses
    
    
    959
    
    
    
    1,316Current portion of convertible promissory notes, related party, net of discount of $0
and $1,807 plus accrued interest of $0 and $1,151 at June 30, 2005 and
December 31, 2004, respectively
    
    
    
    
    
    
    6,552Current portion of deferred rent and accrued excess lease costs
    
    
    243
    
    
    
    212Current portion of deferred revenue
    
    
    44
    
    
    
    441,852
    
    
    
    8,618Convertible promissory note, related party, net of discount of $940 plus accrued
interest of
$78 at June 30, 2005
    
    
    4,879
    
    
    
    Long-term deferred rent and accrued excess lease costs, net of current portion
    
    
    2,306
    
    
    
    2,423Long-term deferred revenue, net of current portion
    
    
    139
    
    
    
    161Total long-term liabilities
    
    
    7,324
    
    
    
    2,584Stockholders Equity (Deficit):Preferred stock, $.001 par value, 10,000,000 shares authorized; 688,146 Series A
convertible shares issued and outstanding at June 30, 2005 and December 31, 2004
with a liquidation preference aggregating $4,669 and $4,484, respectively
    
    
    13,952
    
    
    
    13,952Common stock, $.0025 par value, 170,000,000 shares authorized; 49,846,544 and
48,627,099 shares issued and outstanding at June 30, 2005 and December 31, 2004,
respectively
    
    
    125
    
    
    
    122Warrants
    
    
    20,959
    
    
    
    20,827Additional paid-in capital
    
    
    302,129
    
    
    
    299,408Accumulated deficit
    
    
    (339,293
    )
    
    
    (329,815
    )Total stockholders equity (deficit)
    
    
    (2,128
    )
    
    
    4,494$
    $7,048
    
    
    $
    $15,696
 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 30,2005
    
    2004
    
    2005
    
    2004Revenues:Licensed research revenue
    
    $
    4
    
    
    $
    7
    
    
    $
    8
    
    
    $
    14Contract research revenue
    
    
    7
    
    
    
    7
    
    
    
    14
    
    
    
    1411
    
    
    
    14
    
    
    
    22
    
    
    
    28Expenses:Research and development
    
    
    2,566
    
    
    
    3,235
    
    
    
    5,469
    
    
    
    6,355General and administrative
    
    
    1,006
    
    
    
    885
    
    
    
    1,747
    
    
    
    1,7233,572
    
    
    
    4,120
    
    
    
    7,216
    
    
    
    8,078Other income and (expense):Interest expense  including non-cash
accretion
of $278 and $591 for three months and
$868 and $1,180 for six months, respectively
    
    
    (405
    )
    
    
    (737
    )
    
    
    (1,154
    )
    
    
    (1,490
    )Investment income
    
    
    21
    
    
    
    21
    
    
    
    71
    
    
    
    43Beneficial inducement cost
    
    
    (1,201
    )
    
    
    
    
    
    
    (1,201
    )
    
    
    (4,923
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,935
    )(1,585
    )
    
    
    (716
    )
    
    
    (2,284
    )
    
    
    (11,305
    )Net loss
    
    
    (5,146
    )
    
    
    (4,822
    )
    
    
    (9,478
    )
    
    
    (19,355
    )Less preferred stock dividends
    
    
    (92
    )
    
    
    (92
    )
    
    
    (185
    )
    
    
    (181
    )Net loss attributable to common stockholders
    
    $
    (5,238
    )
    
    $
    (4,914
    )
    
    $
    (9,663
    )
    
    $
    (19,536
    )Basic and diluted loss per share:Net loss
    
    $
    (0.10
    )
    
    $
    (0.10
    )
    
    $
    (0.19
    )
    
    $
    (0.44
    )Net loss attributable to common stockholders
    
    $
    (0.11
    )
    
    $
    (0.11
    )
    
    $
    (0.20
    )
    
    $
    (0.45
    )Weighted average number of shares outstanding
    
    
    49,530
    
    
    
    46,071
    
    
    
    49,117
    
    
    
    43,655
 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 30,2005
    
    2004Cash Flows From Operating Activities:Net loss
    
    $
    (9,478
    )
    
    $
    (19,355
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    829
    
    
    
    819Operating expenses paid with common stock and warrants
    
    
    188
    
    
    
    137Stock option adjustments
    
    
    (18
    )
    
    
    (196
    )Deferred revenue
    
    
    (22
    )
    
    
    (28
    )Accrued excess lease costs and deferred rent
    
    
    (86
    )
    
    
    (210
    )Related party accrued interest
    
    
    266
    
    
    
    288Related party accrued interest paid upon convertible
notes exchanged and extended
    
    
    (1,340
    )
    
    
    Accretion of notes, related party
    
    
    868
    
    
    
    1,180Beneficial inducement cost
    
    
    1,201
    
    
    
    4,923Loss on extinguishment of debt
    
    
    
    
    
    
    4,935Interest expense converted into Series A preferred stock
    
    
    
    
    
    
    219Gain on sale of assets
    
    
    
    
    
    
    (4
    )Changes in operating assets and liabilities:Other current assets
    
    
    188
    
    
    
    167Accounts payable
    
    
    112
    
    
    
    (264
    )Accrued expenses
    
    
    (357
    )
    
    
    (390
    )Net cash used in operating activities
    
    
    (7,649
    )
    
    
    (7,779
    )Cash Flows From Investing Activities:Purchase of property and equipment
    
    
    (69
    )
    
    
    (287
    )Proceeds from sale of equipment
    
    
    
    
    
    
    4Net cash used in investing activities
    
    
    (69
    )
    
    
    (283
    )Cash Flows From Financing Activities:Net proceeds from private placement of common stock
    
    
    
    
    
    
    10,712Net proceeds from exercises of Unit Purchase Options
    
    
    18
    
    
    
    110Net offering costs for Series A preferred stock
    
    
    
    
    
    
    (23
    )Net proceeds from common stock purchases through employee plans
    
    
    
    
    
    
    145Net cash provided by financing activities
    
    
    18
    
    
    
    10,944Net (decrease) increase in cash and cash equivalents
    
    
    (7,700
    )
    
    
    2,882Cash and cash equivalents  beginning of year
    
    
    8,798
    
    
    
    12,838Cash and cash equivalents  end of period
    
    $
    1,098
    
    
    $
    15,720Supplemental Disclosure of Cash Flow Information:Interest paid
    
    $
    1,357
    
    
    $
    19Supplemental Disclosure of Noncash Information:Promissory note converted into common stock
    
    $
    1,467
    
    
    $
    Promissory notes and interest converted into Series A preferred stock
    
    $
    
    
    
    $
    4,118Common stock issued for consulting services and offering costs
    
    $
    42
    
    
    $
    873Common stock issued for 401(k) plan
    
    $
    146
    
    
    $
    69
 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:
   Stock-Based Compensation
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net loss attributable to common
stockholders:As reported
    
    $
    (5,238,000
    )
    
    $
    (4,914,000
    )
    
    $
    (9,663,000
    )
    
    $
    (19,536,000
    )Stock-based employee
compensation expense
(benefit) included in net loss
    
    
    4,000
    
    
    
    (93,000
    )
    
    
    (191,000
    )
    
    
    (148,000
    )Fair value of stock-based
employee compensation
    
    
    (287,000
    )
    
    
    (505,000
    )
    
    
    (859,000
    )
    
    
    (1,471,000
    )Pro forma
    
    $
    (5,521,000
    )
    
    $
    (5,512,000
    )
    
    $
    (10,713,000
    )
    
    $
    (21,155,000
    )Net loss per share (basic and diluted):As reported
    
    $
    (0.11
    )
    
    $
    (0.11
    )
    
    $
    (0.20
    )
    
    $
    (0.45
    )Pro forma
    
    $
    (0.11
    )
    
    $
    (0.12
    )
    
    $
    (0.22
    )
    
    $
    (0.48
    )
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THE IMMUNE RESPONSE CORPORATION
 Notes to Condensed Financial Statements (unaudited)
 Note 2  The Company:
 Remune â TM Remune â
 TM
 Note 3  Going Concern:
    Remune â
 Note 4  Net Loss per Share:
  Note 5  Convertible Promissory Note, Related Party:
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THE IMMUNE RESPONSE CORPORATION
 Notes to Condensed Financial Statements (unaudited)
    Note 6  Subsequent Events:
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THE IMMUNE RESPONSE CORPORATION
 Notes to Condensed Financial Statements (unaudited)
    -9-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  Liquidity and Capital Resources
 Remune â
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Remune â
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Remune â TM
 Remune â TM Remune â TM Remune â TM Remune â Remune â TM
  -12-




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Results of Operations
 Three and Six Months Ended June 30, 2005 Compared to Three and Six Months Ended June 30, 2004.
  Remune â TM
 Remune â
     Critical Accounting Policies and Estimates
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Pro Forma Stock-Based Compensation
      Intangibles and Other Long-Lived Assets
   Certain Risk Factors
  We need more cash immediately, and also on an ongoing basis.
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Remune â
      Remune â 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;
    
    continued scientific progress in our research and development programs;
    
    the scope and results of preclinical studies and clinical trials;
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
    
    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; or
    
    scaling up manufacturing.
  
    
    our covenant in the SEDA not to, during its term, engage in any other equity financing
without the consent of Cornell Capital Partners, which is not to be unreasonably withheld,
and a similar covenant made by us in connection with the Cornell Capital Partners bridge
loan;
    
    the timing of stockholder approval to allow the sale of the bulk of the shares of common stock under the SEDA;
    
    overall financial market conditions;
    
    applicable Nasdaq rules and federal and state securities laws;
    
    the security interest in our intellectual property in respect of the $5,741,000 principal
amount of the 2007 Mortgage Note issued to Cheshire Associates LLC (Cheshire), an affiliate
of Kevin Kimberlin (who is one of our directors and our principal stockholder);
    
    the security interest in substantially all of our assets in respect of Cornell Capital Partners bridge loan to us;
    
    the effect of the potential for conversion of the 2007 Mortgage Note into approximately 8,201,000 shares of common stock;
    
    the effect of the potential for conversion of the Cornell Capital Partners bridge loan
into approximately 1,584,000 shares of common stock and the potential for exercise of
warrants exercisable into 500,000 shares of common stock issued in connection with the
bridge loan;
    
    the effect of the potential for exercise of outstanding options and warrants exercisable
into approximately 33,719,000 shares of common stock not including the warrants issued in
connection with the bridge loan;
    
    the effect of the potential for conversion of 688,000 shares of Series A Convertible
Preferred Stock issued in January 2004 to Cheshire, an affiliate of Kevin Kimberlin. The
Series A Convertible Preferred Stock is currently convertible into 6,193,000 shares of
common stock and with the passage of time will become convertible into up to a maximum of
8,258,000 shares of common stock; and
    
    the issuance of a placement agent option to Spencer Trask Ventures, Inc., (an affiliate
of Kevin Kimberlin) and its transferees that is exercisable for 1,672,000 shares of common
stock, 1,438,000 Class A warrants and 1,452,000 Class B warrants, all of which are not
redeemable by us.
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Our independent registered public accountants have expressed substantial doubt as to our ability to
continue as a going concern.
  Our failure to successfully develop our product candidates, Remune ® ,
IR103 and NeuroVax TM , may cause us to cease operations.
 Remune â TM. Remune â TM
 Remune â Remune â Remune â
  Remune â TM
 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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Remune â
 Remune â Remune â
   Remune â Remune â Remune â Remune â Remune â
 Remune â
  Remune â Remune â Remune â Remune â Remune â Remune â
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Technological change and competition may render our potential products obsolete.
  Our lack of commercial manufacturing and marketing experience and our dependence on third parties
for manufacturing may prevent us from successfully commercializing products.
 Remune â Remune â Remune â Remune â
    Adverse determinations concerning product pricing, reimbursement and related matters could prevent
us from successfully commercializing any of our other products.
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Our
success may depend upon the acceptance of Remune ® and IR103 by
the medical and HIV-activist communities.
 Remune â Remune â Remune â
 Hazardous materials and environmental matters could expose us to significant costs.
  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.
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We are responsible to repay a stringent bridge loan from Cornell Capital Partners.
      Kevin Kimberlin, a member of our Board of Directors, beneficially owns approximately 16.9% of our
outstanding common stock and 100% of our outstanding Series A Convertible Preferred Stock and has
the rights to acquire an additional 29,456,514 shares of our common stock, which could result in
ownership of up to approximately 47.8% of our outstanding shares and could allow him to control or
influence stockholder votes.
    Mr. Kimberlin is also a secured creditor.
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We may be unable to enter into additional collaborations.
  You could suffer substantial dilution of your investment as a result of past and future financings.
     You could suffer substantial dilution of your investment if compensatory warrants and options to
purchase common stock are exercised for common stock.
  Future sales by our stockholders may adversely affect our stock price and our ability to raise
funds in new stock offerings.
  Existing stockholders will experience significant dilution from our sale of shares under the SEDA.
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Under the SEDA, Cornell Capital Partners will pay less than the then-prevailing market price of our
common stock.
  The sale of our stock under the SEDA could encourage short sales by third parties, which could
contribute to the future decline of our stock price.
   We may not be able to access sufficient funds under the SEDA when needed.
  We may not be able to obtain a cash advance under the SEDA if Cornell Capital Partners holds more
than 9.9% of our common stock.
  Cornell Capital Partners may sell shares of our common stock after we deliver an advance notice
during the pricing period, which could cause our stock price to decline.
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Our stock may become delisted and subject to penny stock rules, which may make it more difficult
for you to sell your securities.
   Legal proceedings could require us to pay substantial amounts of money and impair our operations.
 In re
Immune Response Securities Litigation Remune â
   Our certificate of incorporation and bylaws include provisions that could make attempts by
stockholders to change management more difficult.
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We have a new management team. If we lose our key personnel or are unable to attract and retain
additional personnel, we may be unable to successfully develop our technology.
  Remune â
  Product liability exposure may expose us to significant liability.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
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Item 4. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 In
re Immune Response Securities Litigation Remune â
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
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1.
    
    The following Class I directors were elected:John N. Bonfiglio, Ph.D., 34,285,271 common shares were voted in favor of the nominee, 677,563
common shares withheld their vote; and 688,146 Series A Convertible Preferred shares were
voted in favor.
David P. Hochman, 34,278,829 common shares were voted in favor of the nominee, 684,005 common shares
withheld their vote; and 688,146 Series A Convertible Preferred shares were voted in
favor.2.
    
    An amendment to the Companys 2003 Stock Plan to increase the authorized number of shares
issuable under the plan by 2,000,000 was approved. Common shares voted for the proposal were
14,211,807, with 1,862,773 common shares voted against, 74,465 common shares abstained and
18,813,789 common shares were broker non-votes; and 688,146 Series A Convertible Preferred shares were voted in favor.
 
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description of Document10.150.1(3)**
    
    
    2003 Stock Plan, as amended through June 14, 2005.10.162.1(4)**
    
    
    401(k) Stock Match Plan, as amended June 14, 2005.10.168.1(2)**
    
    
    Termination of Inducement Stock Option.10.169(1)
    
    
    Note Exchange Agreement dated as of April 29, 2005, between us and Cheshire Associates LLC.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 Exhibit of the same number filed with the
Companys Form 8-K dated April 29, 2005.(2)
    
    Incorporated by reference to the Exhibit of the same number filed with the Companys
Form 8-K dated June 17,2005.(3)
    
    Incorporated by reference to Exhibit 99.1 filed with the Companys Registration
Statement on Form S-8, No. 333-126829.(4)
    
    Incorporated by reference to Exhibit 99.1 filed with the Companys Registration
Statement on Form S-8, No. 333-126828. **
    
    Indicates management contract or compensatory plan or arrangement. -27-




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SIGNATURES
  THE IMMUNE RESPONSE CORPORATIONDate: August 15, 2005
    By:
    /s/ Michael K. GreenMichael K. Green,Chief Financial Officer -28-




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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).