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Auditors Raise Concerns About Two Firms

Two Carlsbad public companies were notified by their external auditors about the ability of the companies to continue as a “going concern,” raising doubts of the firms’ continued viability.

But at least for one firm, it’s old news.

“For the past five years our auditors have issued going concern opinions about us,” said Lisa Hart, the executive vice president of nStor Technologies Inc., a maker of data storage systems.

Immune Response Corp., a biopharmaceutical firm engaged in research and developing drugs to treat HIV and multiple sclerosis, also filed a going concern opinion from its auditors in its latest year-end financial report to the Securities and Exchange Commission.

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A going concern opinion, while viewed by some to be the kiss of death, is actually a warning by the firm’s outside accountants that unless things change, there are doubts a company will survive beyond a year, said Mike Stewart, partner in charge of the San Diego office of J.H. Cohn LLP, a national accountancy based in New Jersey.

Asked to translate the boilerplate legal language that makes up a going concern opinion into plain English, Stewart said, “For now, there’s substantial doubt whether we (a company) will continue to exist What they’re saying is that if we don’t get some more dough in here, we may not survive.”

In nStor’s case, the company is exploring strategies such as raising new debt or equity capital, but Hart declined to provide any details, including the name of the hired investment consultant.

“A new management team came in last year to put together a plan to take nStor to the next level,” Hart said. “Our revenues grew by 32 percent last year, and our margins are up, and the company is certainly on the road, both financially and from a management standpoint, to executing the plan.”

For the year ended Dec. 31, nStor reported a net loss of $9.8 million on revenues of $10.3 million, compared with a net loss of $5.9 million on revenues of $7.8 million for the prior year.

The firm’s shareholders’ equity as of Dec. 31 was a deficit of $6.5 million. However, a conversion of $9.1 million of outstanding debt into preferred stock that occurred in January would have boosted the firm’s equity to $2.6 million, according to its 10K filing.

Nstor’s stock, traded on the American Stock Exchange, dropped a penny to 17 cents April 6, near its 52-week low of 14 cents. Its high during the period was 45 cents.

Immune Response’s going concern opinion, rendered by Levitz, Zacks & Ciceric, followed a similar statement by Immune Response’s former auditors, BDO Siedman, last year. Levitz was hired in September.

Founded in 1986 by the late Dr. Jonas Salk, Immune Response has never generated any substantial sales and has piled up hefty losses in recent years. For the five prior years starting in 2004, it listed net losses of $29.9 million; $28.8 million; $30.8 million; $15.9 million; and $24.5 million. As of Dec. 31, its accumulated deficit was $329.8 million.

Further, the company said it didn’t anticipate generating any revenues until at least the fourth quarter of 2008.

“These factors, among others, raise substantial doubt about the company’s ability to continue as a going concern,” the company said in its 10K report.

John Bonfiglio, Immune Response’s chief executive officer, did not return a call for comment. Spokeswoman Laura Liotta called the going concern opinion “a routine disclosure required by Nasdaq.”

The company is attempting to raise additional capital to fund operations beyond the second quarter of 2005, and “remains very confident of its future based on the potential of its innovative, immune-based therapies in development for the treatment of HIV and MS,” Liotta wrote in an e-mail.

Traded under IMNR, Immune Response closed at 53 cents on April 6.

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