<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10252
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VIRAGEN, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-2101668
- - ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
2343 West 76th Street, Hialeah, Florida 33016
- - --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 557-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- - ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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
--- ---
Common Stock Outstanding:
Common Stock, $.01 par value - - 35,355,532 shares as of April 30, 1995.
<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION
The Consolidated Condensed Statements of Operations (Unaudited) for
the three months ended and nine months ended March 31, 1995 and March
31, 1994 include the accounts of the Registrants and its subsidiary.
Item 1. Financial Statements
1) Consolidated Condensed Statements of Operations for the three
months ended and nine months ended March 31, 1995 and March
31, 1994.
2) Consolidated Condensed Balance Sheets as of March 31, 1995 and
June 30, 1994.
3) Consolidated Condensed Statements of Cash Flows for the nine
months ended March 31, 1995 and March 31, 1994.
4) Notes to Consolidated Condensed Financial Statements as of
March 31, 1995.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<PAGE> 3
Item 1. Financial Statements
VIRAGEN, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INCOME
Revenues $ 121,550 $ 271,325 $ 454,902 $ 354,050
Interest and
other income 46,019 31,937 89,400 58,428
---------- ---------- ----------- ----------
167,569 303,262 544,302 412,478
COSTS AND EXPENSES
Cost of goods sold 69,493 101,398 268,566 144,178
Depreciation and
amortization 30,168 11,887 60,503 35,371
Research and
development cost 236,194 32,615 342,738 34,743
Selling, general
and administrative
expenses 416,500 295,870 1,132,859 854,396
Interest expense 22,490 19,799 70,884 60,968
---------- ---------- ----------- ----------
774,845 461,569 1,875,550 1,129,656
---------- ---------- ----------- ----------
NET LOSS (607,276) (158,307) (1,331,248) (717,178)
Deduct required
dividends on
convertible
preferred stock 863 933 2,588 2,799
---------- ---------- ----------- ----------
LOSS ATTRIBUTABLE TO
COMMON STOCK $ (608,139) $ (159,240) $(1,333,836) $ (719,977)
========== ========== =========== ==========
LOSS PER COMMON SHARE,
after deduction for
required dividends on
convertible preferred
stock $ (.02) $ (0.01) $ (.04) $ (0.04)
========== ========== =========== ==========
Weighted average
shares outstanding 35,355,532 19,411,576 30,637,957 18,559,724
========== ========== =========== ==========
</TABLE>
See Notes to consolidated condensed financial statements.
<PAGE> 4
VIRAGEN, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994 (A)
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,548,646 $ 879,926
Accounts receivable, less
allowance of $40,000 at
March 31, 1995 and $15,000
at June 30, 1994 68,515 22,785
Subscriptions receivable from
private placement 102,500
Inventory 579,328 766,471
Prepaid expenses 75,673 36,189
Other current assets 8,932 9,653
---------- ----------
TOTAL CURRENT ASSETS 3,281,094 1,817,524
INVENTORY 500,000
NOTES RECEIVABLE
less allowance of $15,600
at March 31, 1995 and
$5,600 at June 30, 1994 90,672 74,189
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 1,184,629 1,170,855
Equipment and furniture 1,269,285 1,049,072
---------- ----------
2,453,914 2,219,927
Less accumulated depreciation (1,475,671) (1,377,454)
---------- ----------
978,243 842,473
DEPOSITS AND OTHER ASSETS 9,021 10,308
---------- ----------
$4,859,030 $2,744,494
========== ==========
</TABLE>
<PAGE> 5
VIRAGEN, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994 (A)
-------- --------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 161,950 $ 420,049
Current portion of amounts
payable to Medicore, Inc. 31,592 52,153
Accrued expenses and other
liabilities 168,167 520,723
Current portion of notes payable 30,000 30,000
----------- -----------
TOTAL CURRENT LIABILITIES 391,709 1,022,925
CONVERTIBLE DEBENTURES PAYABLE 200,000
MORTGAGE NOTE PAYABLE
less current portion 460,939 483,439
AMOUNTS PAYABLE TO MEDICORE, INC.
less current portion 476,435 492,537
STOCKHOLDERS' EQUITY
Convertible 10% Series A cumulative
preferred stock, $1.00 par value.
Authorized 375,000 shares; issued
and outstanding 3,450 shares.
Liquidation preference value:
$10 per share, aggregating
$34,500 at March 31, 1995
and June 30, 1994 3,450 3,450
Common stock, $.01 par value.
Authorized 50,000,000 shares;
issued and outstanding 20,218,197
at June 30, 1994 and 35,355,532
shares at March 31, 1995. 353,555 202,182
Capital in excess of par value 17,989,202 12,698,723
Common Stock subscribed 1,126,250
Retained earnings (deficit) (14,490,010) (13,158,762)
Notes due from officers (326,250) (326,250)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,529,947 545,593
----------- -----------
$ 4,859,030 $ 2,744,494
=========== ===========
</TABLE>
(A) Reference is made to the Company's Annual Report on Form 10K for the year
ended June 30, 1994 filed with the Securities and Exchange Commission
See notes to consolidated condensed financial statements.
<PAGE> 6
VIRAGEN, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1995 1994
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $(1,331,248) $ (717,178)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 98,217 35,371
Stock Options granted to directors 27,500
Net gain in sale of fixed assets (11,392)
Bad debt expense 35,000
Increase (decrease) relating to
operating activities from:
Escrow Account 62,752
Accounts receivable (70,730) (79,923)
Note receivables (26,483)
Inventories (312,857) (585,231)
Prepaid expenses and other
current assets (38,763) (46,269)
Deferred expenses and other assets 1,287 (2,375)
Accounts payable (258,099) 56,520
Accounts payable to Medicore, Inc. (20,561) (27,926)
Accrued expenses and other liabilities (352,556) 175,390
----------- -----------
Net cash used in operating activities (2,276,793) (1,112,761)
INVESTING ACTIVITIES:
Proceeds from sale of equipment 45,992
Additions to property, plant and
equipment, net of minor disposals (233,987) (34,627)
----------- -----------
Net cash provided by (used in)
investing activities (233,987) 11,365
----------- -----------
FINANCING ACTIVITIES:
Proceeds from sale of common stock
net of related expenses 4,232,705 400,000
Proceeds from issuance of
convertable debentures 200,000
Advances from Medicore 74,034
Sale\repurchase of warrants (14,604) 20,000
Payments on long-term debt (38,602) (25,000)
Payments to Medicore (98,636)
----------- -----------
Net cash provided by in financing
activities 4,179,499 570,398
----------- -----------
Increase (decrease) in cash and
cash equivalents (530,998)
Cash and cash equivalents 1,688,720
at beginning of period 879,926 579,906
----------- -----------
Cash and cash equivalents
at end of period $ 2,548,646 $ 48,908
=========== ===========
</TABLE>
Supplemental Cash Flow Information: 1995
Issuance of Common Stock for Convertible Debentures $200,000
See notes to consolidated condensed financial statements.
<PAGE> 7
VIRAGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Consolidation: Viragen, Inc. and subsidiary have been engaged
in the research, development and manufacture of certain immunological products
for prospective commercial application. The consolidated financial statements
include the accounts of Viragen, Inc. and its wholly-owned subsidiary,
Vira-Tech, Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
Change in Fiscal Year-End: Effective January 1, 1993, the Company changed its
year-end from December 31st to June 30th.
Inventory: The Company has capitalized the human leukocyte interferon
manufactured in its laboratories at the lower of average cost or market.
The ultimate realization of the interferon inventory is dependent upon future
events, such as the success of the Company's intrastate marketing program. A
portion of the inventory has been classified as non-current at March 31, 1995
based on sales projections by the Company. Inventory is comprised of the
following:
<TABLE>
<CAPTION>
March 31, June 30,
1994 1994
------------ -----------
<S> <C> <C>
Supplies $ $ 5,000
Work in Process 252,604 99,864
Finished goods 826,724 661,607
----------- ---------
Less 1,079,328 766,471
Non - Current Portion 500,000
----------- ---------
$ 579,328 $ 766,471
=========== =========
</TABLE>
Less: Non - Current Portion
Property, Plant and Equipment: Property, plant and equipment is stated at the
lower of cost or net realizable value. Depreciation was computed using the
straight-line method over the estimated useful life for financial reporting
purposes and using accelerated methods for income tax purposes.
Accounting Change: Effective in January 1, 1993, the Company changed its
method of accounting for income taxes and implemented Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". This change had
no effect on results of operations or financial position as presented in the
accompanying financial statements.
<PAGE> 8
VIRAGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Loss Per Share: Loss per share has been computed based on the weighted average
number of shares outstanding during each period. The effect of warrants and
stock options (common stock equivalents) are antidilutive. Fully diluted loss
per share data, which includes the assumed conversion of the convertible
preferred stock, has not been presented because it was not dilutive.
Cash Equivalents: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. The
carrying amounts, reported in the balance sheets for cash and cash equivalents
approximate their fair values.
NOTE B--INTERIM ADJUSTMENTS
The financial summaries for the three months ended and nine months ended March
31, 1995 and March 31, 1994 are unaudited and include, in the opinion of
management of the Company, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results
for the three months ended and nine months ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 1995.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these Consolidated
Condensed Financial Statements be read in conjunction with the financial
statements and notes included in the Company's latest annual report on Form
10-K for the year ended June 30, 1994.
NOTE C--CAPITAL STOCK
In August 1994, the Company concluded a Private Placement of its common stock
with the issuance of 8,919,000 shares at $.40 per share. At June 30, 1994,
2,534,375 shares had been recorded as subscribed. In connection with this
offering, the Company issued 765,650 common stock purchase warrants entitling
the holder to purchase one share of common stock at $.40 per share for a period
of five years from date of issuance. Subscriptions receivable of $102,500 at
June 30, 1994 related to this private placement and were received on July 16,
1994.
During fiscal 1994, Cytoferon Corporation purchased 1,333,333 shares of common
stock at $.30 per share under the terms of an Additional Stock Purchase
Agreement.
<PAGE> 9
VIRAGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
NOTE C--CAPITAL STOCK
Also during that period, the Company entered into stock purchase and option
agreements with officers and directors totaling 2,250,000 shares obtainable at
$.30 per share, of which 1,125,000 shares were immediately exercisable and
1,125,000 shares were subject to certain performance criteria. During the
second quarter of fiscal 1994 the option related performance criteria were met
and the remaining 1,125,000 options became exercisable. During the year ended
June 30, 1994, $117,000 was charged to operations upon the issuance of the
officer and director options.
In November, 1994, the Company commenced a second Private Placement solely to
accredited investors to raise, through the sale of Common Stock at $.60 per
share, a maximum of $3,000,000. This offering was completed on December 31,
1994 with the Company having realized gross proceeds of $2,056,000 upon the
issuance of 3,426,667. The net proceeds of this offering of approximately
$1,980,000 are intended to be utilized for the establishment of a research and
manufacturing facility in Europe during fiscal 1995 and for general working
capital purposes. Subject to receipt of additional funding to conduct
European-based clinical trials, it is the Company's intention to commence
European clinical trails and seek the necessary approvals for the sale of its
Alpha Leukoferon(TM)product in Europe.
In April 1994, an officer purchased 750,000 shares of common stock at $.30 per
share, in accordance with the provisions of his employment agreement. The
amount due from the officer of $225,000 was offset by certain compensation due
to the officer of $7,500. Consequently, a note receivable of $217,500 for the
net balance and compensation expense of $7,500 were recorded.
In June 1994, two directors and an affiliate each purchased 125,000 shares of
common stock at $.30 per share. The aggregate amounts due from the parties of
$37,500 each was offset by compensation due. Consequently, a note receivable of
$36,250 and compensation expense of $3,750 was recorded for each purchase.
These notes, relating to the purchase of common stock by officers and an
affiliate, total $326,250 and are classified as Notes due from officers in the
Stockholder's Equity section at March 31, 1995 and June 30, 1994.
The Company had outstanding 1,190,875 class A common stock purchase warrants
exercisable at $1.63 per share, 600,000 class B common stock purchase warrants
exercisable at $2.93 per share and 3,029,270 class C common stock purchase
warrants exercisable at $2.08 per share. These warrants expired on their terms
March 31, 1995 with no options being exercised.
<PAGE> 10
VIRAGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
NOTE C--CAPITAL STOCK
There are 3,450 shares of 10% Cumulative, Convertible Series A preferred stock
of the Company outstanding at March 31, 1995 and June 30, 1994. Each share of
preferred stock provides for a 10% cumulative dividend, payable at the option
of the Company, in either cash or common stock and is convertible into 4.26
shares of common stock.
In 1994 and 1992, 250 shares and 10,000 shares of the convertible 10% series A
cumulative preferred stock were converted into 1,065 and 42,600 shares
respectively, of the Company's common stock.
Shares of the Company's common stock reserved at March 31, 1995 for possible
future issuance are as follows:
<TABLE>
<S> <C>
Warrants - former consultants 480,340
Convertible preferred stock 14,697
Employee option plans 1,485,000
Directors options 650,000
Warrants - private placement 765,650
----------
3,395,687
==========
</TABLE>
In October 1994, the $200,000 of Convertible Debentures outstanding at December
31 and June 30, 1994 were converted into 666,668 shares of common stock.
NOTE D--INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes and implemented Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Statement 109 changes the method of
accounting for income taxes from the deferred to the liability method.
Under the liability method, deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between financial
accounting and tax bases of assets. Under the deferred method, deferred income
taxes are recognized using the tax rates in effect when the tax is first
recorded and are not adjusted for subsequent changes in tax rates until paid or
recovered.
NOTE E--TRANSACTIONS WITH OTHER RELATED PARTIES
In November, 1993, the Company issued $200,000 in 8 1/2%, three year
convertible debentures. The debentures, at the holders option were immediately
convertible into common stock of the Company at $.30 per share. These
debentures were held by a fund managed by a director of the Company. In
October, 1994, these debentures were converted into 666,668 shares of common
stock. These shares are held by Fundamental Growth Partners, Ltd., Fundamental
Associates, Ltd., Hedge Fund Partners, Ltd. and Fundamental Resources, Ltd.,
which are investment funds managed by William B. Saeger, a director of the
Company.
<PAGE> 11
VIRAGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
NOTE E--TRANSACTIONS WITH OTHER RELATED PARTIES
In December 1993, the Company issued 260,130 shares of common stock to a
stockholder and former director in payment of a 10% convertible promissory note
in the amount of $66,600 and related accrued interest of $11,439. At June 30,
1994, the Company had outstanding a note payable in the amount of $25,000 to
this stockholder. The note with related interest was repaid in July 1994.
During the fourth quarter of fiscal 1994, the Company made a series of
short-term borrowings from Cytoferon represented by notes payable bearing
interest at 10%. At June 30, 1994 such notes totaled $60,000 and were repaid
in July 1994.
NOTE F--AGREEMENT FOR SALE OF STOCK
On February 5, 1993, the Company entered into a Stock Agreement with Cytoferon
to purchase up to 11,640,000 shares of the Company's common stock for
consideration of $1,500,000 ("Maximum Investment"). By May 31, 1993, the
expiration of the investment period, the Company had received the Minimum
Purchase under the terms of the stock agreement, $1,000,000, in exchange for
6,000,000 shares of common stock at $.167 per share. This price reflects the
receipt, by Cytoferon, of a 20% bonus of common stock due upon having reached
the Minimum Purchase.
On November 19, 1993, the Company entered into an Additional Stock Purchase
Agreement under which terms Cytoferon purchased an additional 1,333,333 common
shares at $.30 per share.
The funds invested enabled the Company to reinitiate production of its
interferon product, Alpha Leukoferon(TM), and to reinitiate the distribution of
the product through physicians specializing in the treatment of multiple
sclerosis and HIV/AIDS patients residing in the state of Florida.
Under the terms of the Stock Agreement, the Company had approved the Management
and Marketing Services Agreement ("MMS Agreement") subject to certain
modifications, which appointed Cytoferon as consultant to the Company relating
to production, administration, marketing and regulatory affairs for which
Cytoferon was to receive a consulting fee of $204,000 the first year and
$240,000 the next two years provided certain minimum sales requirements were
met. To the extent Cytoferon's investment in the Company was less than the
Maximum Investment, the consulting fee was reduced pro-rata. The MMS Agreement
also provided a 4% gross sales commission for exclusive distributorship for
non-FDA approved products and non-exclusive marketing of FDA approved products,
none of which the Company presently has. The MMS Agreement further provided
for the Company to pay Cytoferon 50% of any fees for foreign licensing,
franchising and transfer of technology plus a 20% royalty on any revenues the
Company may receive from foreign agreements resulting from Cytoferon's efforts.
<PAGE> 12
VIRAGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
NOTE F--AGREEMENT FOR SALE OF STOCK
All such fees and commissions were subject to the Company generating certain
minimum sales under the MMS Agreement. For the nine month periods ended March
31, 1995 and 1994, the Company incurred management fees and sales commission
expenses of $140,000, and $120,133, and $12,067 for 1995 and $13,272 for 1994,
respectively.
In August 1994, the Board of Directors of the Company voted to terminate the
MMS Agreement with Cytoferon, subject to receipt of a fairness opinion, and
issue the 1,750,000 shares contingently issuable under the Additional Stock
Purchase Agreement. The Company's management believed it was in the long-term
best interest of the Company to unify and consolidate management functions and
efforts and eliminate conflicts that could arise by virtue of minimum sales
requirements that could be inconsistent with the Company's plans to introduce
new production technologies and refinement of related protocols. Accordingly,
the Company executed a Subsequent Agreement which, subject to receipt of a
fairness opinion received in December 1994, terminated the MMS Agreement and
accelerated the issuance of the 1,750,000 shares contingently issuable under
the November 1993 Additional Stock Agreement concurrent with the cancellation
of the MMS Agreement and related contractual obligations.
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company has incurred operational losses and operated with a negative
cash flow since its inception in December, 1980. Losses have totaled
approximately $607,000 and $1,334,000 for the three months ended and nine
months ended March 31, 1995 and $1,083,000, $313,000 and $271,000 (unaudited)
for the year ended June 30, 1994, and the six month periods ended June 30, 1993
and 1992, respectively. See "Results of Operations" below.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled approximately $2,889,000 at March 31, 1995, an
increase of $2,094,000 over the year end balance. This increase was
attributable to the receipt during the first quarter of approximately
$2,275,000, representing the proceeds, net of expenses, of the Company's $3.5
million Private Placement Offering completed in August 1994 and net proceeds of
approximately 1,980,000 from the Company's second Private Placement completed
as of December 31, 1994 such financings being offset to a large extent by the
classification of $500,000 of inventory to non-current based on revised sales
projections and operational losses. See Results of Operations, below.
Approximately $911,000 in proceeds of the offering completed in August, 1994,
were received prior to June 30, 1994.
Certain components of working capital changed significantly between the
June 30, 1994 and March 31, 1995 periods, reflecting the recommencement and
scale-up of manufacturing operations in 1993. total inventory balances
increased from approximately $766,000 at June 30, 1994 to approximately
$1,079,000 at March 31, 1995 inclusive of $500,000 classified as noncurrent
based on revised sales projections.
On February 5, 1993 the Company entered into the Stock Agreement with
Cytoferon, pursuant to which Cytoferon had the right to purchase up to
11,640,000 shares of the Company's common stock, $.01 par value, which would
have constituted approximately 49.5% of the then to-be-outstanding common stock
of the Company. Within the terms of the contract period, which ended May 31,
1993, Cytoferon invested $1,000,000 in the Company in exchange for 6,000,000
shares of common stock. In November 1993, the Company negotiated and executed
and Additional Stock Agreement for 1,667,000 shares of the Company's common
stock. The investment threshold was subsequently met in part through the
purchase of $200,000 in convertible subordinated debentures with Cytoferon
being issued 1,333,333 shares.
Using the capital invested by Cytoferon, the Company recommenced the
production of its Alpha Leukoferon(TM) product ("product") in May, 1993 and
began limited distribution of the product in September 1993, for the treatment
of multiple sclerosis and HIV/AIDS patients residing in Florida through
physicians specializing in the treatment of those diseases. The Company hopes
that its product will be embraced as a standard treatment for both intermittent
and progressive multiple sclerosis and further believes its Alpha
Leukoferon(TM) product may be of benefit for those suffering from HIV/AIDS and
related illnesses.
Currently, the company has 29 patients using its interferon product.
Completion of their course of treatment, already commenced, will require
product with a cost basis of approximately $329,000. In addition, the Company
has an
<PAGE> 14
additional 20 patients enrolled by the State of Florida for treatment under the
State's 499 Program. These patients are in various stages of making the
necessary financial and residency arrangements prior to the commencement of
treatment and were enrolled prior to the State's moratorium on new enrollments.
If, conservatively; one-half of these patients are ultimately treated with the
product, this would represent an additional $130,000 in product costs. These
facts, coupled with a projected number of patients who will request/require an
ongoing maintenance program, indicate that the portion of the inventory
carried as current is reasonable in light of information currently available,
and is based upon projected product requirements of patients approved for
treatment prior to the State of Florida's moratorium on new enrollment.
With regards to the non-current portion of the inventory, the Company we have
requested an informal hearing with Florida HRS authorities to address the issue
of the immediate lifting of the moratorium on new enrollments. Based on the
best information currently available, we expect this hearing to take place
prior to June 30, 1995. All preliminary information has been provided to HRS
and, while there can be no absolute assurance, we reasonably expect to prevail
on the issue.
Once the manufactured product is bottled, i.e., final container, it carries a
two year expiration. Currently, the Company is shipping product with an
expiration date of June, 1996. Accordingly, an inventory valuation adjustment
stemming from product expiration is currently considered unlikely.
Additionally, given the Company's industry knowledge related to human leukocyte
interferon, particularly in the areas efficacy and minimal side effects, much
of which information was received from the company sponsored, state sanctioned
clinical trial with the University of Miami and our proprietary technology, we
believe technological obsolesces for the foreseeable future, will not impact
marketability of our product.
In August 1994, the Company completed a 3.5 million Private Placement
Offering ("Offering") of its common stock at $.40 per share, issuing 8,919,000
shares. In connection with this Private Placement, an Agreement was executed
with Laidlaw Equities, Inc. ("Laidlaw") utilizing that firm as placement
agent. The Agreement further provided for the issuance of five year common
stock purchase warrants with an exercise price of $.40 per share equal to ten
(10%) of the number of shares issued during the Offering. The Company agreed
to file a Registration Statement within six (6) months from the closing date
registering the common shares sold pursuant to the Offering. This Registration
was filed on a timely basis and is currently in the review and amendment
process. The Company also agreed to use its best efforts to file a
Registration Statement for the related warrants within one year of the issuance
of such warrants.
The net proceeds of the August Private Placement, approximately
$3,185,000, are being utilized for the acquisition of laboratory production
equipment, purchase of a company-wide computer system, development of FDA study
protocols, employment of additional operating and administrative personnel and
working capital.
In December, 1994, the Company completed a second Private Placement
solely to accredited investors to raise, through the sale of Common Stock at
$.60 per share, a maximum of $3,000,000. This offering was completed at
December 31, 1994 with the Company having realized gross proceeds of $2,056,000
upon the issuance of 3,426,667 shares. The net proceeds of this offering of
approximately 1,980,000 are intended to be utilized for
<PAGE> 15
implementation of the initial phase of the Company's European market
strategy, which includes the establishment of a research and manufacturing
facility in Europe during fiscal 1995 and for general working capital purposes.
Subject to receipt of additional funding to conduct European-based clinical
trials, it is the Company's intention to commence European clinical trials and
seek the necessary approvals for the sale of its Alpha-Leukoferon(TM) product in
Europe. During April 1995, the Company established a 100% owned subsidiary,
Viragen (Scotland) Limited, a Scottish corporation. Viragen (Scotland) Limited
had no operations during the quarter ended March 31, 1995.
Previously, the Company was being funded by Medicore, Inc. ("Medicore"),
its former parent, and during 1992 received advances in the amount of $300,946
to finance its minimal operations during this period. Aggregate indebtedness
due Medicore was $508,026 and $544,690 at March 31, 1995 and June 30, 1994,
respectively. This indebtedness is secured by a $429,400 note and mortgage on
the realty and personal property of the Company.
While subject to significant limitations, the Company has available net
tax operating loss carry forwards of approximately $10,800,000, expiring
between 1995 and 2009, which may be used to offset taxable income during those
periods.
Management believes that given the continued distribution of its Product
to enrolled physicians and working capital currently, on-hand, the Company will
have the funds necessary to continue its current level of operations and fund
current research projects at least through March 31, 1996.
<PAGE> 16
RESULTS OF OPERATIONS
For the past several years the vast majority of the Company's limited
revenues have been derived from sales of the Company's interferon product,
Alpha Leukoferon(TM), through Florida physicians (primarily neurologists) for
the treatment of Multiple Sclerosis. Distribution of the Company's interferon
product is limited to the State of Florida and is sanctioned by, and subject
to, the provisions of Florida Statute 400.018. This statute permits controlled
distribution of the product in a clinical trial environment only within the
State. Commercialization of products under this statute is not permitted. An
increase in revenues under this program is dependent upon expanded clinical
studies which can not be assured.
The Company terminated production of its Alpha-Leukoferon(TM) product
using existing technology on December 31, 1994 and expects to recommence
production of its improved product during fiscal 1995. The Company is in the
process of implementing its new proprietary production technology including the
acquisition, installation and validation of new equipment. In addition, during
December 1994, the Company received notification from the Florida Health and
Rehabilitative Services ("HRS") to postpone enrollment of new patients under
its Florida Statute 499 Investigational Study Program until such time as the
Company has provided certain administrative reports to the HRS and corrected to
their satisfaction certain FDA inspection related comments resulting from an
FDA inspection of the Company's facility and manufacturing processes. All
requested state administrative reports have been provided and the Company
believes it has substantially complied with the inspection related comments.
While there can be no assurance, based upon corrective actions taken by the
Company, management believes that the restriction imposed on the enrollment of
new patients may be lifted in whole or in part during the 1995 Calendar year.
The Company continues to distribute its Alpha-Leukoferon(TM) product to
Florida physicians enrolled in the Florida Statute 499 Investigational Study
Program prior to the December 1994 notification.
The Company will postpone enrollment of new patients under its Florida
Statute 499 Investigational Study Program until such time as the Company has
achieved full scale production capability and the restrictions on the
enrollment of new patients by the Florida HRS is removed. Viragen believes
that its new proprietary manufacturing technology will result in the production
of a more highly purified, Alpha-Leukoferon(TM) product produced at a
significantly lower cost. The implementation of this technology is also
expected to enable the Company to substantially reduce the cost and selling
price of its improved product. There can be no assurance, however, that such
new manufacturing technology will enable the Company to achieve the level of
manufacturing proficiency and product improvement anticipated by management or
that product will ultimately obtain FDA approval.
Losses from operations have been incurred since inception and totaled
approximately $607,276 and $1,333,836 for the three months ended and nine
months ended March 31, 1995 and $1,038,000 for the year ended June 30, 1994,
and $313,000 and $271,000 (unaudited for the six month periods ended June 30,
1993, and 1992, respectively.
<PAGE> 17
Sales for the quarter ended March 31, 1995 totaled $121,550 and were
derived almost entirely from distribution of the Company's Alpha Leukoferon(TM)
product for the clinical study treatment of multiple sclerosis. As the Company
was essentially dormant prior to the receipt of investment capital (see
Liquidity and Capital Resources, above) due to the then lack of working capital
and depletion of its inventories in the prior year, sales of the Company's
Alpha Leukoferon(TM) product essentially commenced during the second quarter of
fiscal 1994. Sales for the third quarter of the prior year totaled $271,325
compared with the $121,550 during the third quarter of the current year.
This decrease was due to the moratorium on the enrollment of new patients
placed on the Company by the Florida HRS.
In December 1994, the Company received notification from the Florida
Health and Rehabilitative Services to postpone enrollment of new patients under
its 499 Program until such time as the Company has provided certain
administrative reports to the HRS and satisfied certain FDA inspection-related
comments concerning the Company's manufacturing processes and facility. On
March 17, 1995, the Company received further notice from HRS requesting that
Viragen demonstrate that its production technology complies with FDA
promulgated cGMP and for the Company to continue the postponement of the
enrollment of new patients under the 400 Program until the Company has
demonstrated such compliance. The Company is continuing to provide its Products
to patients currently receiving treatment or enrolled in the Company's 499
Program consistent with existing treatment protocols and reporting procedures
established for the 499 Program. The company believes it has since obtained
substantial compliance with cGMP requirements and have requested a hearing from
the HRS for purposes of substantiating its compliance, which hearing is
expected to be held prior to June 30, 1995. Management believes that the
postponement of enrollment of new patients will limit the revenues that it
would currently be eligible to receive under the 499 Program and concomitantly
will also limit nominal marketing efforts previously undertaken by Viragen
within the medical community. However, such postponement will not affect the
undertaking of clinical trials and the approval process fro the Company's
Product following submission to the FDA and EU, which submission will represent
the focus of the Company's effort at he present time.
Cost of sales as a percentage of sales revenues totaled 57% and 59%,
respectively, for the three months ended and nine months ended March 31, 1995,
a significant increase from the 37% and 41% from the comparable periods of the
proceeding year. This increase may be expected to continue through the balance
of calendar 1995 due to a significant (44%) drop in the selling price of the
Company's product. This sharp price reduction reflects the Company's efforts
to make the product more price competitive with the synthetic interferons, and
accordingly, a more viable alternative patient treatment. However, the Company
anticipates implementation during fiscal 1995 of improved manufacturing
techniques which are expected to significantly reduce its costs of production.
While the actual production cost savings can not yet be accurately quantified,
it is believed, but not assured, that such savings will at least yield savings
sufficient to recoup the gross profit margins lost through the price reduction.
Research and development costs increased significantly over the prior
year reflecting the lack of research capital during the preceding year. The
Company's research efforts are focused primarily on improved production
techniques for the Company's Alpha Leukoferon(TM) product. These
<PAGE> 18
costs are expected to continue to increase over future periods as the Company
continues to seek improved methods of manufacturing aimed at maintaining or
improving product quality and manufacturing efficiencies.
The sharp increase in selling general and administrative expenses for the
comparative three month periods and nine month periods reflect the overall
increase in the level of production activities prior to the suspension of
production activities December 31, 1994 and research activities including the
addition of administrative personnel with related benefit costs. During the
bulk of the comparable periods of the proceeding year, the Company was
essentially dormant with limited distribution of the Company's product not
commencing until September, 1993. Included in those components, which
increased as a direct result of the recommencement of sales, were fees relating
to product liabilities insurance coverage, sales commissions and royalty fees.
The increase in interest expense resulted from the increase in the bank
prime rate between the periods. The Company has two mortgages on its
production facility, both of which are tied to the prime rate.
The Company's bank prime rate was 9% and 8.5% at March 31, 1995 and
December 31, 1994, respectively.
<PAGE> 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re: computation of per
share earnings
(27) Financial Data Schedule (for SEC use
only)
(b) Reports on Form 8-k
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIRAGEN, INC.
By: /s/ Dennis W. Healey
---------------------------
Dennis W. Healey, Executive
Vice President, Chief
Financial Officer
Dated: May 15, 1995
<PAGE> 1
EXHIBIT 11
VIRAGEN, INC. AND SUBSIDIARY
COMPUTATION OF LOSS PER COMMON SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Weighted average shares
outstanding 35,355,532 19,411,576 30,637,957 18,559,724
========== ========== =========== ==========
Net Loss $ (607,276) $ (158,307) $(1,331,248) $ (717,178)
Deduct required dividends
on convertible preferred
stock 863 933 2,588 2,799
---------- ---------- ----------- ----------
Loss attributable to
common stock $ (608,139) $ (159,240) $(1,333,836) $ (719,977)
========== ========== =========== ==========
Net loss per common
share after deduction
for required dividends
on convertible preferred
stock $ (0.02) $ (0.01) $ (0.04) $ (0.04)
========== ========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 2,548,646
<SECURITIES> 0
<RECEIVABLES> 68,515<F1>
<ALLOWANCES> 0
<INVENTORY> 579,328
<CURRENT-ASSETS> 3,281,094
<PP&E> 2,453,914
<DEPRECIATION> 1,475,671
<TOTAL-ASSETS> 4,859,030
<CURRENT-LIABILITIES> 391,709
<BONDS> 0
<COMMON> 353,555
0
3,450
<OTHER-SE> 3,172,942
<TOTAL-LIABILITY-AND-EQUITY> 4,859,030
<SALES> 121,550
<TOTAL-REVENUES> 167,569
<CGS> 69,493
<TOTAL-COSTS> 69,493
<OTHER-EXPENSES> 682,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,490
<INCOME-PRETAX> (607,276)
<INCOME-TAX> 0
<INCOME-CONTINUING> (607,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (607,276)
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
<FN>
<F1>Accounts receivable are not of allowances of $40,000 at March 31, 1995.
</FN>
</TABLE>
