<PAGE> 1
FORM 10-Q - QUARTERLY OR TRANSITIONAL REPORT UNDER
SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended - December 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.............. to................
Commission file number 0-10252
VIRAGEN, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-2101668
- --------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2343 West 76th Street - Hialeah, FL 33016
------------------------------------------
(Address of principal executive offices)
(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)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE
PRECEDING FIVE YEARS Check whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, par value $ .01 - 38,653,002 shares at February 12, 1997.
1
<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
The Consolidated Condensed Statements of Operations (Unaudited) for the three
months and six months ended December 31, 1996 and December 31, 1995 include the
accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
<TABLE>
<S> <C>
1) Consolidated Condensed Statements of Operations for the three months ended
and six months ended December 31, 1996 and December 31, 1995.
2) The Consolidated Condensed Balance Sheets as of December 31, 1996 and
June 30, 1996.
3) Consolidated Condensed Statements of Cash Flows for the six months ended
December 31, 1996 and December 31, 1995.
4) Notes to Consolidated Condensed Financial Statements as of December 31, 1996.
</TABLE>
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
Exhibit 27 - Financial Data Schedule (for SEC use only)
2
<PAGE> 3
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
INCOME
Revenues $ -- $ 98,092 $ -- $ 202,317
Interest and other income 269,941 15,874 497,899 42,065
------------ ----------- ---------- ------------
269,941 113,966 497,899 244,382
COSTS AND EXPENSES
Cost of goods sold -- 76,992 -- 160,800
Depreciation and amortization 68,618 49,329 122,419 97,538
Research and development costs 451,045 270,096 878,130 557,380
Selling, general and administrative
expenses 907,843 537,784 1,525,277 978,344
Directors & officers options granted 68,800 68,800 183,144
Interest expense 5,072 24,265 16,760 47,225
------------ ----------- ---------- ------------
1,501,378 958,466 2,611,386 2,024,431
------------ ----------- ---------- ------------
Loss before minority interest (1,231,437) (844,500) (2,113,487) (1,780,049)
Minority interest in loss of consolidated
subsidiaries 41,878 -- 69,687 --
------------ ----------- ---------- ------------
NET LOSS (1,189,559) (844,500) (2,043,800) (1,780,049)
Deduct required dividends on
convertible preferred stock, Series A 663 863 1,325 1,725
Deduct required dividends on
convertible preferred stock,
Series B (restated for 1996) 1,701,214 -- 4,043,073 --
Deduct required dividends on
convertible preferred stock, Series C 82,216 -- 82,216 --
------------ ----------- ---------- ------------
LOSS ATTRIBUTABLE TO COMMON
STOCK $ (2,973,652) $ (845,363) $(6,170,414) $ (1,781,774)
============ =========== ========== ============
LOSS PER COMMON SHARE,
after deduction for required dividends
on convertible preferred stocks $ (.08) $ (.02) $ (.16) $ (.05)
============ =========== ========== ============
Weighted average shares outstanding 38,412,896 35,555,096 38,215,967 35,482,257
============ =========== ========== ============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996 (A)
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 13,164,354 $ 19,449,059
Short-term investments 8,772,955 --
Accounts and notes receivable, less allowance of
$11,750 and $11,668 at December 31, 1996 and
June 30, 1996, respectively 15,196 26,086
Prepaid expenses 164,520 87,765
Due from employees 67,406 97,340
Other current assets 259,067 104,269
----------- ------------
TOTAL CURRENT ASSETS 22,443,498 19,764,519
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 1,127,096 1,195,209
Equipment and furniture 1,812,947 1,647,762
Construction in progress 1,234,135 21,811
----------- ------------
4,174,178 2,864,782
Less accumulated depreciation (2,149,359) (2,026,830)
----------- ------------
2,024,819 837,952
DEPOSITS AND OTHER ASSETS 51,503 14,955
------------ ------------
$24,519,820 $ 20,617,426
=========== ============
</TABLE>
4
<PAGE> 5
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996 (A)
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 874,800 $ 310,039
Accrued expenses and other liabilities 295,066 503,340
Current portion of long-term debt 37,716 685,211
------------ ------------
TOTAL CURRENT LIABILITIES 1,207,582 1,498,590
ROYALTIES PAYABLE 107,866 107,866
LONG TERM DEBT, less current portion 93,772 115,563
MINORITY INTEREST IN SUBSIDIARIES 2,031,601 1,620,222
STOCKHOLDERS' EQUITY
Convertible 10% Series A cumulative preferred
stock, $1.00 par value. Authorized 375,000
shares; issued and outstanding 2,650 shares
Liquidation preference value: $10 per share
aggregating $26,500 at December 31, 1996
and June 30, 1996 2,650 2,650
Convertible 5% Series B Cumulative preferred
stock, $1.00 par value. Authorized 15,000
shares; issued and outstanding 13,914 at
December 31, 1996 and 15,000 shares at
June 30, 1996 13,914 15,000
Convertible Series C Cumulative preferred
stock, $1.00 par value. Authorized 5,000
shares; issued and outstanding 5,000 shares 5,000 --
Common stock, $.01 par value Authorized
50,000,000 shares; issued and outstanding
38,629,091 at December 31, 1996 and
37,896,072 at June 30, 1996 386,289 378,959
Capital in excess of par value 44,709,318 38,618,391
Deficit (24,330,912) (21,782,872)
Foreign currency transaction adjustment 292,740 43,057
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 21,078,999 17,275,185
------------ ------------
$ 24,519,820 $ 20,617,426
============ ============
</TABLE>
(A) Reference is made to the Company's Annual Report on Form 10K, as amended,
for the year ended June 30, 1996 filed with the Securities and Exchange
Commission
See notes to consolidated condensed financial statements.
5
<PAGE> 6
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <S>
OPERATING ACTIVITIES
Net Loss $(2,043,800) $ (1,780,049)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 122,419 97,538
Compensation expense on stock options
granted to Directors and Officers 68,800 183,144
Compensation expense on stock options
granted to employees 162,750 --
Forgiveness of debt 12,500 --
Minority interest in loss of subsidiary (69,687) --
Increase (decrease) relating to operating
activities from:
Accounts and notes receivable 10,890 1,613
Inventory -- 193,632
Prepaid expenses (76,755) (9,183)
Due from employees 40,404 --
Other current assets (154,798) --
Deposits and other assets (36,548) 1,628
Accounts payable 564,761 (136,917)
Accrued expenses and other liabilities (208,274) (77,444)
------------ ------------
Net cash used in operating activities (1,607,338) (1,526,038)
------------ ------------
INVESTING ACTIVITIES
Purchase of short-term investments (8,772,955) --
Additions to property, plant and equipment,
net (1,309,286) (60,851)
------------ ------------
Net cash used in investing activities (10,082,241) (60,851)
------------ ------------
</TABLE>
6
<PAGE> 7
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------
1996 1995
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES
Payments on long-term debt $ (669,286) $ (19,005)
Proceeds from exercise of options and warrants 334,396 40,750
Cash acquired through reverse acquisition
of Sector Associates, Ltd. -- 800,000
Proceeds from exercise of subsidiaries'
options and warrants 1,131,577 --
Proceeds from sale of Series C preferred stock, net 4,750,000 --
Payments of dividends on preferred stock (391,496) --
------------ ------------
Net cash provided by financing
activities 5,155,191
821,745
Effect of exchange rate fluctuations on cash 249,683 --
------------ ------------
Decrease in cash (6,284,705) (765,144)
Cash and cash equivalents at beginning of
period 19,449,059 1,904,687
------------ ------------
Cash and cash equivalents at end of period $13,164,354 $ 1,139,543
============ ============
</TABLE>
7
<PAGE> 8
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE - A - ORGANIZATION AND CONSOLIDATION
Viragen, Inc. and subsidiaries have been engaged in the research, development
and manufacture of certain immunological products for commercial application.
The consolidated financial statements include the accounts of Viragen, Inc., and
its wholly-owned subsidiaries, Vira-Tech, Inc., and Viragen Technology, Inc.,
and its majority owned subsidiaries, Viragen USA, Inc. and Viragen (Europe)
Ltd., including its wholly-owned subsidiary, Viragen (Scotland) Ltd.,
collectively known as the Company. All material intercompany accounts and
transactions have been eliminated in consolidation.
Certain reclassifications have been made to the fiscal 1996 Financial Statements
to conform to the December 31, 1996 interim presentation.
NOTE - B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended and six months ended December
31, 1996 and December 31, 1995 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 six months ended December 31,
1996 are not necessarily indicative of the results that may be expected for the
entire year ending June 30, 1997.
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, as amended, for the year ended June 30, 1996.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
8
<PAGE> 9
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE C - CAPITAL STOCK
Shares of the Company's common stock reserved at December 31, 1996 and June 30,
1996 for possible future issuance are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ ---------
<S> <C> <C>
Warrants - consultants 392,500 924,729
Convertible preferred stock, Series A 11,289 11,289
Convertible preferred stock, Series B 5,799,710 3,000,000
Convertible preferred stock, Series C 1,659,683 --
Employee option plans 184,500 500,000
Officers and directors 4,750,000 4,385,000
Warrants - private placement 631,821 633,821
------------ ---------
13,429,503 9,454,839
============ =========
</TABLE>
On May 15, 1995, as amended in September 1995, the Company adopted its 1995
Stock Option Plan under which 4,000,000 shares of Common Stock were reserved for
issuance to officers, directors, employees and consultants of the Company for
stock options designated as "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code.
During the six months ended December 31, 1996, 250,000 and 32,229 warrants
issued to a financial consultants having exercise prices of $1.00 and $.60 per
share, respectively and 2,000 warrants issued in connection with the Company's
August 1994 Private Placement offering with an exercise price of $.52 per share
were exercised into common stock of the Company. Also during six month period,
employees exercised 163,500 options at exercise prices ranging from $.30 to $.94
per share. The Company also issued 2,000 options to an employee with an exercise
price of $3.69 per share which vest over a two year period.
Through December 31, 1996, 3,746,500 options have been granted pursuant to the
1995 Stock Option Plan.
9
<PAGE> 10
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE D - LONG TERM DEBT
Long-term debt at December 31, 1996 and June 30, 1996 is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
--------- ---------
<S> <C> <C>
First mortgage note secured by land, building and
equipment with a net book value of and $837,952
at June 30, 1996. Monthly principal payments of
$2,500 plus interest at prime plus 2% with the
unpaid balance paid August 1, 1996 $ -- $453,439
Second mortgage secured by land building, equipment
and accounts receivable. Monthly principal
payments of $1,789 plus interest at prime plus 1%
with the unpaid balance paid August 1, 1996 -- 196,048
Capital lease obligations resulting from
acquisition of equipment, with a cost totaling
$213,130 at December 31, 1996 and June 30, 1996,
capitalized from three to five years 131,488 151,287
-------- --------
131,488 800,774
Less current portion 37,716 685,211
-------- --------
$ 93,772 $115,563
======== ========
</TABLE>
The prime rate was 8.25% at June 30, 1996.
Interest payment on debt totaled $5,162 and $21,441 for the three months
ended and six months periods December 31, 1996 and $22,450 and $44,217 for the
same periods of the preceding year.
During the fiscal 1997 the Company acquired no additional equipment under
capital lease agreements.
Future minimum lease payments under capital lease obligations at December 31,
1996 are: 1997 - $26,438; 1998 - $50,833; 1999 - $50,833; 2000 - $37,427 and
2001 - $3,543.
In August 1996, the Company paid-in-full its first and second mortgages on its
Florida research and manufacturing facility upon the maturity of these
obligations.
10
<PAGE> 11
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENT - CONTINUED
DECEMBER 31, 1996
NOTE E - FOREIGN CURRENCY TRANSACTION
The financial statements of the Company's foreign subsidiary Viragen (Scotland)
Ltd. have been translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52. All balance sheets accounts have been
translated using the current exchange rates at the balance sheet dates.
Statement of Operations accounts have been translated using the average exchange
rate for the periods. The translation adjustments resulting from the change in
exchange rates from period to period have been reported separately as a
component of stockholders' equity. Foreign currency transaction gains and
losses, which are not material, are included in results of operations. These
gains and losses result from exchange rate changes between the time transactions
are recorded and settled and, for unsettled transactions, exchange rate changes
between the time transactions are recorded and the balance sheet date.
NOTE F - STOCK BASED COMPENSATION
In fiscal 1997, the Company has adopted the provisions of FAS 123-Accounting for
Stock-Based Compensation. The Company will continue to account for stock-based
compensation plans under the provisions of ABP 25 - Accounting for Stock Issued
to Employees. The Company will disclose the pro forma information required for
stock-based compensation plans in its annual financial statements in accordance
with FAS 123.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include the Company's statements regarding liquidity, anticipated
cash needs and availability, and anticipated expense levels in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including expected product clinical trial introductions, expected research and
development expenditures, new facility completion data and related anticipated
costs. All forward looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward looking statement. It is important to
note that the Company's actual results could differ materially from those in
such forward looking statements. Among the factors that could cause actual
results to differ materially are the factors detailed below and the risks
discussed in the "Risk Factors" section included in the Company's Registration
Statement Form SB-2, as filed with the Securities and Exchange Commission
(effective on August 14, 1995 with related Post-Effective Amendment effective
May 30, 1996). You should also consult the risk factors listed from time to time
in the Company's Reports on Forms 10-Q, 8-K, 10-K, as amended if applicable, and
Annual Reports to the Stockholders.
The biopharmaceutical industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the pharmaceutical and
biopharmaceutical markets include product efficacy, price and timing of new
product introductions. Increased competition from existing biopharmaceutical
companies as well as the entry into the market of new competitors could
adversely affect the Company's financial condition or results of operations.
The Company's future success depends in part upon its intellectual property,
including patents, trade secrets, know-how and continuing technology innovation.
There can be no assurance that the steps taken by the Company to protect its
intellectual property will be adequate to prevent misappropriation or that
others will not develop competitive technologies or products. There can be no
assurance that any patent owned by the Company will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to the Company or that any of the Company's future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology, duplicate
the Company's technology or design around the patents, if any, owned by the
Company.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred operational losses and operated with a negative cash
flow since its inception in December, 1980. Losses totaled $2,043,800 and
$1,189,559 for the six month periods ended December 31, 1996 and December 31,
1995, respectively.
Working capital totaled approximately $21,236,000 at December 31, 1996, an
increase of $2,970,000 from the year end balance. This increase was due to
the issuance of 5,000 shares of Cumulative Convertible Preferred Stock, Series
C, for $5,000,000 in December 1996, and the exercise of Common Stock Purchase
Warrants of the Company and its majority owned subsidiary, Viragen (Europe) Ltd.
with such increases being offset by operational losses of $2,043,800.
In June 1996, the Company entered into a Securities Purchase Agreement (the
"Series B Agreement") with GFL Performance Ltd., GFL Advantage Fund Ltd. and
Proton Global Asset Management, LDC (collectively the "Series B Purchaser")
pursuant to which the Series B Purchaser acquired 15,000 shares of the Company's
then newly established 5% Cumulative Convertible Preferred Stock, Series B (the
"Series B Preferred Stock") for $15,000,000.
Under the terms of the Series B Preferred Stock, the Series B Purchaser is
entitled to receive a cash dividend equal to 5% of the stated value of the
Series B Preferred Stock payable quarterly commencing September 7, 1996,
although the Company has the option to utilize shares of its Common Stock, under
certain conditions, to satisfy the dividend requirement. The Series B Purchaser
has the right to convert the Series B preferred Stock commencing August 21, 1996
into shares of Common Stock of the Company at a conversion price equal to the
lesser of 85% of the average market price (reduced by an additional 2% per month
commencing the 90th day following the close date, until the related Registration
Statement is declared effective by the SEC) for the Company's Common Stock, as
described in the Agreement, prior to the conversion date or $8.74. The final
conversion rate is 76.8% of the average market price. The Company also has a
right to require the Series B Purchaser, under certain terms and conditions, to
convert the Series B Preferred Stock commencing 180 days following the effective
date of a Registration Statement registering the resale of the shares of Common
Stock of the Company underlying the Series B Preferred Stock. The Series B
Preferred Stock does not carry any voting rights except as required under the
Delaware General Corporation Law. Loss attributable to common stock reflects
adjustments for cumulative preferred dividends, and in 1996, was restated to
reflect embedded dividends arising from discounted conversion terms on the
Convertible Preferred Stock, Series B.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
In December 1996, the Company issued 5,000 shares of its Series C Convertible
Preferred Stock (the "Series C Preferred Stock") in consideration for
$5,000,000. The purchases were made by Strome Hedgecap Limited, Strome Offshore
Limited, Strome Partners, L.P. and Strome Susskind Hedgecap, L.P. (collectively
the "Series C Purchasers"), pursuant to separate Securities Purchase Agreements.
In addition, warrants to purchase an aggregate of 214,593 shares of Common
Stock, exercisable at $2.00 per share on or prior to December 9, 1999, were
issued to the Series C Purchasers.
The Series C Purchases may convert up to 25% of the Series C Preferred Stock
into Common Stock of the Company on or after 10 days from the date the
registration statement registering the underlying shares is deemed effective by
the Securities and Exchange Commission thereafter 25% may be converted on or
after the 30th, 60th and 90th day on a cumulative basis. The Preferred Stock is
convertible into a number of Common Shares determined by dividing the stated
value of the Preferred Stock ($1,000 per share) by the closing price of the
Company's Common Stock over the five day period preceding notice of conversion
("conversion price"). The conversion price may not be less than $3.46 nor more
than $7.00. In the event the conversion price falls below $3.46, the difference
between $3.46 and the conversion price will be paid to the holder in cash. Any
shares of Series C Preferred Stock which are outstanding on December 5, 1997
will be automatically converted into shares of Common Stock based on the
conversion price at such time completed in accordance with the above procedures.
In February 1997, the Company issued 15,000 shares of its 6% Series D
Convertible Preferred Stock (the "Series D Preferred Stock") to P.R.I.F., L.P.
in consideration for $15,000,000. The funds and the certificates representing
the Series D Preferred Stock have been placed in escrow pending approval by the
stockholders of the Company at the Annual Meeting of Stockholders scheduled for
February 28, 1997, of the proposed Amendment to the Company's Certificate of
Incorporation to increase the authorized number of Common Stock shares from
fifty million to seventy five million shares. The Company has also placed in
escrow a commitment fee of $300,000 which would be paid to P.R.I.F., L.P. in the
event authorization is not obtained by the specified date.
The Series D Preferred Stock is convertible into a number of shares of Common
Stock of the Company determined by dividing the five day trading average price
of the Company's Common Stock prior to conversion, discounted by 18%, into the
stated value of the Preferred Shares being converted.
In connection with the issuance of the Series D Preferred Stock, the Company
also issued 375,000 Common Stock Purchase warrants, exercisable at $6.00 per
share, such exercise price being adjustable downward if the Company raises
additional capital through the issuance of equity securities within 180 days of
the closing of the of the Series D financing.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
In September 1995, the Company entered into an Agreement and Plan Reorganization
("Agreement") with Sector Associated, Ltd. ("Sector"). Under the terms of the
Agreement, the Company acquired a 94% interest in Sector in a reverse
acquisition transaction. Sector was a publicly traded corporation which
contained net cash assets of $800,000 at the transaction closing date.
This transaction closed on December 8, 1995.
In March 1996, Sector completed two Private Placement Offerings, issuing 768,000
shares of its Common Stock and 216,500 Common Stock purchase Warrants having an
exercise price of $12.00 per share. These two Offerings yielded net proceeds of
approximately $5,102,000 after related expenses of $317,500. The company is
using these proceeds to undertake European research clinical trial activities
including the related establishment of a laboratory and manufacturing facility
in Edinburgh Scotland, currently under construction, the purchase of laboratory
equipment and related working capital. On May 2, 1996, Sector changed its name
to Viragen (Europe) Ltd.
The construction and equipping of the Company's Scottish laboratory and
production facility is expected to be completed during the first half of
calendar 1997. Estimated costs to complete the facilities, including equipment,
total approximately $3,400,000.
While subject to significant limitations, the Company at December 31, 1996 has
available net tax operating loss carryforwards of approximately $19,000,000
expiring between 1996 and 2010, which may be used to offset taxable income, if
any, during those periods.
It is the Company's policy to invest its temporarily idle cash exclusively in
U.S. Treasury and Agency Securities which are relatively liquid, providing
market rates of return that are not intended to speculate in interest rate
movements. Depending upon short-term capital requirements, a portion of the
portfolio is held in a Money-Market Fund which invests exclusively in U.S.
Government obligations.
Management believes that the Company's Omniferon product currently under
development can be manufactured in significant quantity and will be priced at a
level to offer patients an attractive alternative treatment to the Synthetic
Interferons currently being marketed. Management further believes that working
capital currently on hand will provide the Company with the funds necessary for
the foreseeable future to continue its current level of operations, focused on
current research projects, the establishment of a research and manufacturing
facility in Scotland and the commencement of EU clinical trials. In addition,
the Company expects to be able to draw upon its remaining $15 million in
financing available through the issuance of additional Convertible Preferred
Stock by April 1997 under its June financing agreement or similar amounts from
other investor groups during the same period. The additional funding raised will
be used to supplement funding of EU clinical trials as needed, commence clinical
trial studies in the U.S. of its Omniferon product, the establishment of one or
more domestic production facilities, the possible
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
acquisition of one or more business complimentary to the Company's operations
and for general working capital.
RESULTS OF OPERATIONS
For the past several years, the Company's limited revenues have been derived
from the sales of the Company's Alpha Leukoferon(TM) product ("Product") through
Florida physicians (primarily Neurologists) for the treatment of Multiple
Sclerosis. Distribution of the Company's Product was limited to the State of
Florida and was sanctioned by, and subject to, the provisions of Florida Statute
499.018. This statute permitted controlled distribution of the Product in a
clinical trial environment only within the State. Commercialization of products
under this statute is not permitted. In an Agreement reached with the State of
Florida, the Company in March 1996, discontinued enrollment of new patients in
its 499 program, and all revenues under this program ceased in March 1996.
Following the final shipments of Product under 499 Program in March 1996, the
Company has no approved source of sales revenue until it receives the necessary
regulatory approvals from the U.S. Food and Drug Administration and/or
comparable European Union authorities. Such approvals cannot be assured and are
subject to successful completion of lengthy clinical trials and the Company's
ability to raise significant additional capital to fund such trials.
Losses from operations have been incurred since inception and totaled
$1,189,559 and $2,043,800, for the three month period and six month period
ended December 31, 1996, and $844,500 and $1,780,049 for the corresponding
periods of the preceding year.
No sales revenues or cost of sales were recorded during the three months ended
or six months ended December 31, 1996 with sales revenues of $98,092 and
$202,317 being recorded during the same periods of the previous year. The
termination of the revenues was due to patients previously enrolled under the
499 Program completing their course of treatment coupled with the discontinuance
of new enrollments as discussed above.
Research and development costs totaled $878,130 and $557,380 for the six
month periods ended December 31, 1996 and 1995, respectively. This sharp
increase was attributed to expanded research efforts associated with the
Company's newly developed Natural Interferon (alpha) product Omniferon(TM).
These costs are expected to continue to significantly increase at least through
the balance of fiscal 1997. The Company intends to continue its process
development refinement efforts and work towards regulatory submissions,
initially in the EU, to conduct clinical trials on the Company's Omniferon(TM)
product. The expanded research efforts are focused on improved methods of
manufacturing aimed at maintaining or improving product quality, production
yields and
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
manufacturing efficiencies. Components of the overall increase between the
periods of $320,750 include increase of laboratory supplies expense of
approximately $210,300 and the hiring of additional research personnel with
salaries and related taxes and benefits. The increases also reflect an increase
in consulting fees, travel and equipment rentals associated with the overall
increases in the level of research activities.
Selling and general administration expenses totaled $1,525,277 for the first
half of fiscal 1997 compared to $978,344 for the same period of the preceding
year. Components of this increase included an increase in administrative
salaries with related taxes and benefits of approximately $239,400. Also,
the fiscal 1997 figures reflect increased travel associated with the planning
and establishment of the European production facility with related corporate
development efforts in Europe.
17
<PAGE> 18
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
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and 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
Principal Financial Officer
By: /s/ Jose Ortega
------------------------------
Jose Ortega
Chief Accounting Officer
Dated: February 12, 1997
19
<PAGE> 1
EXHIBIT - 11
COMPUTATION OF PER SHARE EARNINGS
20
<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF LOSS PER COMMON SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------- ------------
1996 1995 1996 1995
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Weighted average shares outstanding 38,412,896 35,555,096 38,215,967 35,482,257
=========== =========== =========== =============
Net Loss $(1,189,559) $ (844,500) $(2,043,800) $ (1,780,049)
Deduct required dividends on
convertible preferred stock, Series A 663 863 1,325 1,725
Deduct required dividends on
convertible preferred stock, Series B
(restated for 1996) 1,701,214 -- 4,043,073 --
Deduct required dividends on
convertible preferred stock, Series C 82,216 -- 82,216 --
----------- ----------- ----------- -------------
Loss attributed to common stock $(2,973,652) $ (845,363) $(6,170,414) $ (1,781,774)
=========== =========== =========== =============
Net loss per common share after
deduction for required dividends on
convertible preferred stock $ (.08) $ (.02) $ (.16) $ (.05)
=========== =========== =========== =============
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,164,354
<SECURITIES> 8,772,955
<RECEIVABLES> 26,946
<ALLOWANCES> 11,750
<INVENTORY> 0
<CURRENT-ASSETS> 22,443
<PP&E> 4,174,178
<DEPRECIATION> 2,149,359
<TOTAL-ASSETS> 24,519,820
<CURRENT-LIABILITIES> 1,207,582
<BONDS> 0
21,564
0
<COMMON> 386,289
<OTHER-SE> 20,671,146
<TOTAL-LIABILITY-AND-EQUITY> 24,514,820
<SALES> 0
<TOTAL-REVENUES> 497,899
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,611,386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,043,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,043,800)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> 0
</TABLE>
