<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, DC 20549
FORM 10-Q/A
(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, 1997
( ) 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
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)
865 SW 78TH AVENUE, SUITE 100, PLANTATION, FLORIDA 33324
--------------------------------------------------------
(Address of principal executive offices)
(954) 233-8746
--------------
(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
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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 - 52,760,635 shares at February 10, 1998.
<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
The Consolidated Condensed Statements of Operations (Unaudited) for the three
months ended and six months ended December 31, 1997 and 1996 include the
accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
1) Consolidated Condensed Statements of Operations for the three months ended
and six months ended December 31, 1997 and 1996.
2) The Consolidated Condensed Balance Sheets as of December 31, 1997 and
June 30, 1997.
3) Consolidated Condensed Statements of Cash Flows for the six months ended
December 31, 1997 and 1996.
4) Notes to Consolidated Condensed Financial Statements as of December 31,
1997.
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 11 - Computation of Per Share Earnings
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,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME
Interest and other income $ 337,915 $ 269,941 $ 771,766 $ 497,899
----------- ----------- ----------- -----------
337,915 269,941 771,766 497,899
COSTS AND EXPENSES
Research and development costs 736,441 451,045 1,635,552 878,130
Selling, general and administrative expenses 1,479,162 907,843 2,446,527 1,525,277
Directors and officers options granted - 68,800 - 68,800
Depreciation and amortization 114,844 68,618 385,659 122,419
Interest expense 198,481 5,072 454,395 16,760
----------- ----------- ----------- ----------
2,528,928 1,501,378 4,922,133 2,611,386
--------- ----------- ----------- -----------
Loss before minority interest (2,191,013) (1,231,437) (4,150,367) (2,113,487)
Minority interest in loss of consolidated
subsidiaries 779,355 41,878 877,821 69,687
----------- ----------- ----------- -----------
NET LOSS (1,411,658) (1,189,559) (3,272,546) (2,043,800)
Deduct required dividends on convertible
preferred stock, Series A 663 663 1,325 1,325
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
Deduct required dividends on convertible
preferred stock, Series D - - 169,221 -
Deduct required dividends on convertible
preferred stock, Series E - - 65,418 -
Deduct required dividends on convertible
preferred stock, Series F 141,459 - 191,903 -
Deduct required dividends on redeemable
preferred stock, Series G 50,811 - 77,660 -
----------- ----------- ----------- -----------
LOSS ATTRIBUTABLE TO COMMON STOCK $(1,604,591) $(2,973,652) $(3,778,073) $(6,170,414)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON
SHARE, after deduction for required
dividends on convertible preferred stock
$ (0.03) $ (0.08) $ (0.08) $ (0.16)
=========== =========== =========== ===========
Weighted average shares outstanding 49,678,398 38,412,896 48,532,715 38,215,967
=========== =========== =========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
3
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ --------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 884,899 $12,873,301
Marketable securities, available-for-sale 16,637,078 18,541,616
Prepaid expenses 224,674 237,569
Due from employees 54,102 53,980
Other current assets 437,474 674,992
----------- -----------
TOTAL CURRENT ASSETS 18,238,227 32,381,458
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 3,455,196 3,011,044
Equipment and furniture 4,898,408 3,909,182
Construction in progress - 370,364
----------- -----------
8,353,604 7,290,590
Less accumulated depreciation (2,638,714) (2,252,392)
----------- -----------
5,714,890 5,038,198
DEPOSITS AND OTHER ASSETS 53,078 41,887
----------- -----------
$24,006,195 $37,461,543
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
4
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\
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS-(CONTINUED)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 256,072 $ 1,431,211
Note payable 6,480,160 -
Accrued expenses and other liabilities 548,820 1,573,464
Current portion of long-term debt 45,703 45,703
----------- -----------
TOTAL CURRENT LIABILITIES 7,330,755 3,050,378
ROYALTIES PAYABLE 107,866 107,866
LONG-TERM DEBT, less current portion 216,076 238,895
MINORITY INTEREST IN SUBSIDIARIES 1,042,279 1,920,100
REDEEMABLE 10% CUMULATIVE PREFERRED
STOCK-SERIES G, $1.00 par value. Authorized
4,000 shares; issued and outstanding 1,332 shares at
December 31, 1997. 1,332,000 -
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 2,650 2,650
Convertible 5% Series B Cumulative preferred stock,
$1.00 par value. Authorized 15,000 shares; issued
and outstanding 7,445 shares at June 30, 1997 - 7,445
Convertible Series C Cumulative preferred stock, $1.00
par value. Authorized 5,000 shares; issued and
outstanding 974 shares at June 30, 1997 - 974
Convertible 6% Series D Cumulative preferred stock,
$1.00 par value. Authorized 15,000 shares; issued
and outstanding 10,200 shares at June 30, 1997 - 10,200
Convertible 5% Series E Cumulative preferred stock,
$1.00 par value. Authorized issued and outstanding
5,000 shares at June 30, 1997 - 5,000
Convertible 10% Series F Cumulative preferred stock,
$1.00 par value. Authorized 15,000 shares; issued
and outstanding 4,200 shares at December 31, 1997 4,200 -
Common stock, $.01 par value. Authorized 75,000,000
shares; issued 51,208,711 and 46,260,360 shares at
December 31, 1997 and June 30, 1997, respectively,
of which 548,777 and 386,777 shares are held as
treasury stock at December 31, 1997 and June 30,
1997, respectively. 512,086 462,601
Capital in excess of par value 48,378,315 59,995,768
Treasury stock (890,746) (699,150)
Retained deficit (34,175,732) (27,802,624)
Foreign currency translation adjustment 239,419 273,469
Notes due from officers/directors (105,667) (101,417)
Unrealized gain (loss) on marketable securities,
available-for-sale 12,694 (10,612)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 13,977,219 32,144,304
------------ ------------
$ 24,006,195 $ 37,461,543
============ ============
</TABLE>
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,
1997 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(3,272,546) $ (2,043,800)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 385,659 122,419
Compensation expense on stock options
granted to Directors and Officers - 68,800
Compensation expense on stock options
granted to employees - 162,750
Forgiveness of debt - 12,500
Minority interest in loss of subsidiary (877,821) (69,687)
Increase (decrease) relating to operating activities from:
Prepaid expenses 12,895 (76,755)
Due from employees (4,372) 40,404
Other current assets 237,518 (143,908)
Deposit and other assets (11,191) (36,548)
Accounts payable (1,175,139) 564,761
Accrued expenses and other liabilities (173,287) (208,274)
----------- ------------
Net cash used in operating activities (4,878,284) (1,607,338)
----------- ------------
INVESTING ACTIVITIES
Sale (purchase) of marketable securities,
available-for-sale 1,927,844 (8,772,955)
Additions to property, plant and
equipment, net (1,062,351) (1,309,286)
----------- ------------
Net cash provided by (used in)
investing activities 865,493 (10,082,241)
----------- ------------
</TABLE>
See notes to consolidated condensed financial statements.
6
<PAGE> 7
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1997 1996
------------ -----------
<S> <C> <C>
FINANCING ACTIVITIES
Payments on long-term debt $ (22,819) $ (669,286)
Payment of dividends on preferred stocks (928,473) (391,496)
Payments on note payable (3,240,081) -
Purchase of treasury stock (21,884) -
Proceeds from sale of Series C preferred
stock, net - 4,750,000
Refund of paid in capital (1,391,198) -
Redemption of preferred stock, series G (2,405,000) -
Proceeds from exercise of options and warrants 67,894 334,396
Proceeds from exercise of subsidiary options and
warrants - 1,131,577
------------ -----------
Net cash (used in) provided by financing
activities (7,941,561) 5,155,191
------------ -----------
Effect of exchange rate fluctuations on cash (34,050) 249,683
------------ -----------
Decrease in cash (11,988,402) (6,284,705)
Cash and cash equivalents at beginning of period 12,873,301 19,449,059
------------ -----------
Cash and cash equivalents at end of period $ 884,899 $13,164,354
============ ===========
</TABLE>
See notes to consolidated condensed financial statements.
7
<PAGE> 8
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A - ORGANIZATION AND CONSOLIDATION
Viragen, Inc. and subsidiaries are 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., Viragen
Reagents, Inc., and Viragen Technology, Inc., and its majority owned
subsidiaries Viragen U.S.A., 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 1997 Financial
Statements to conform to the December 31, 1997 interim presentation.
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended and six months ended
December 31, 1997 and 1996 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, 1997 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending June 30, 1998.
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, 1997.
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.
NOTE C - CONTINGENCY
In October 1997, the Company, the Company's President and Cytoferon
Corp., a former affiliate of the President, were named as defendants in a civil
action brought in the
8
<PAGE> 9
United States District Court for the Southern District of Florida (Case No:
97-3187-CIV-MARCUS) by a shareholder of the Company and investor in Cytoferon
Corp. The suit alleges the defendants violated federal and state securities
laws, federal and state RICO statutes, fraud, conspiracy, breach of fiduciary
duties and breach of contract. The plaintiff was seeking an unspecified monitory
judgement and the specific performance delivery of 441,368 shares of common
stock. The Company filed a Motion to Dismiss denying the allegations and
requesting reimbursement of its costs.
In November 1997, the plaintiff in this litigation filed a Notice of
Voluntary Dismissal with the Federal Court concurrently notifying the Company of
their intent to refile a complaint in Circuit Court in the State of Florida. The
plaintiff subsequently filed a complaint in the Circuit Court of the 11th
Judicial Circuit in and for Miami-Dade County, Florida (Case No. 97-25587 CA30)
naming the same defendants. The suit alleges breach of contract, fraud,
violation of Florida's RICO statute and breach of fiduciary duties and seeks a
judgement similar to that of the dismissed Federal suit.
The Company denies the allegations of the complaint and intends to
vigorously defend the claims with regard to this matter.
NOTE D - RECENT PRONOUNCEMENTS
Effective during the quarter ended December 31, 1997, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Common Share. All periods presented reflect the implementation of SFAS No. 128.
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, estimated time frames or strategies regarding the future.
Forward-looking statements include the Company's statements regarding liquidity,
anticipated cash needs and future cash availability, and anticipated expense
levels in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" including expected product clinical trial introductions,
the estimated timing of the commencement of clinical trials, 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 Statements on Form S-3,as filed with the Securities and Exchange
Commission on March 10, 1997, and the Registration Statement on Form SB-2, as
filed with the Securities and Exchange Commission (effective on August 14, 1995
with related
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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, S-3, 10-K 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 of new competitors into the
market could adversely affect the Company's financial condition or results of
operations.
The Company's future success is significantly dependent 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.
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
$3,272,546 and $2,043,800 for the six month periods ended December 31, 1997 and
1996, respectively and $4,775,245, $4,672,271 and $3,951,839 for the years ended
June 30, 1997, 1996 and 1995, respectively.
Working capital totaled approximately $10,907,000 at December 31, 1997,
a decrease of $18,424,000 from the year end balance. This decrease was due to an
exchange and reclassification of a convertible preferred stock series for a note
payable totaling $9,720,240 classified as a current liability, cash redemptions
in certain convertible preferred stock series totaling $2,405,000 and
operational losses of $3,773,000.
Commencing in June 1996 through February 1997, the Company completed
four Convertible Preferred stock issuances with gross proceeds of $40,000,000:
Series B-$15,000,000; Series C-$5,000,000; Series D-$15,000,000 and Series
E-$5,000,000.
During July and August of 1997, the terms of the four series of
preferred stock were modified in order to limit or otherwise restrict the timing
or number of conversions of the preferred stock into common stock over a given
period. This restructuring was
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<PAGE> 11
initiated in order to mitigate concerns of the Company and the investment
community concerning the "overhang" on the Company's common stock represented by
the potential conversion of these outstanding series of preferred stock under
their original terms.
In July 1997, the then remaining unconverted Series B Preferred Stock
was exchanged for a Promissory Note in the amount of $9,720,240. The Note bears
interest at 10% per annum with principal and interest payable over nine monthly
installments commencing in October 1997. The Note may be prepaid without penalty
and is not convertible into common stock of the Company. Principal outstanding
under this Note totaled $6,480,160 at December 31, 1997 and $4,320,107 at
February 5, 1998. Also in July 1997, the holders of the Series C Preferred Stock
agreed to modify their conversion price and limit conversions of their then
remaining 974 shares ($1,000 face value per share) over a minimum two month
period. The modified conversion price was the lower of (i) $2.20 per share or
(ii) the average closing price of the Company's Common Stock over the five day
period ending the day prior to the notice of conversion. The remaining shares of
Series C Preferred Stock were completely converted into common stock in December
1997.
In September 1997, the Company concluded two Exchange Agreements
whereby the terms of the Series D Preferred Stock and Series E Preferred Stock
were modified. The then remaining unconverted preferred shares ($1,000 face
value per share) of Series D (7,950 Preferred Shares) were exchanged for a like
number of Series F Preferred Shares and Series E (4,000 Preferred Shares) was
exchanged for a like number of Series G Preferred Shares.
The Series F Preferred Stock provides for a limitation on the holder
limiting conversion during any two-week period to $800,000 including accrued and
unpaid dividends. The terms also provide the Company with a cash-out option at
the face amount being converted plus 12% if the Conversion Price is below $2.00
per share. In consideration for the holder of the Series D Preferred Stock
agreeing to a limitation on the speed of future conversions, the Company agreed
to increase the dividend rate from 6% for the Series D Preferred Stock to 10%
for the Series F Preferred Stock. Series F Preferred Stock outstanding totaled
4,200 shares ($4,200,000) at December 31, 1997 and 1,650 shares ($1,650,000) at
February 10, 1998, respectively.
Terms of the Series G Preferred Stock provide that commencing in
September 1997, the holder is limited to converting 667 shares ($667,000) per
month over a 6-month period. The provisions further prove that the Company will
be required to redeem 667 shares ($667,000) per month less the number of Series
G Preferred Stock converted during the proceeding calendar month. In addition,
the holder is restricted from converting into common stock if the market price
of the Company's common stock is less on $2.50, subject to adjustment, at the
date of the conversion notice. In consideration for the restrictions on
conversion, the Company agreed to increase the dividend rate from 5% for the
Series E Preferred Stock to 10% for the Series G Preferred Stock. No other
material changes have been made in the substantive terms from the previously
issued Series E Preferred Stock. Series G Preferred Stock outstanding totaled
1,332 shares
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<PAGE> 12
($1,332,000) at December 31, 1997. The final redemption of this series occurred
in February 1998. As of February 10, 1998, there were no Series G shares
outstanding.
The Company has reached agreement on the terms of replacement financing
for its previously redeemed preferred stock. The Company will receive net
proceeds of approximately $4,650,000 from the sale of 500 shares of its Series H
Convertible Preferred Stock (the "Series H Preferred Stock") with an aggregate
stated value of $5 million. The Company has incorporated certain restrictions as
part of the Series H Preferred Stock designations which the Company believes
will facilitate a more orderly market relative to the underlying shares of its
Common Stock. The Series H Preferred Stock will bear no dividends although, upon
liquidation or conversion, an 8% accretion factor has been included in the
calculation for purposes of determining the liquidation and conversion amount.
The Series H Preferred Stock will not be convertible until six months
following the final closing date for the transaction. The conversion price will
be the lower of (i) the fixed conversion price, which will be equal to the lower
of the average closing price per share for the 5 days prior to closing or the
market price of the Common Stock six months following the final closing date,
and (ii) the variable conversion price which will be equal to 82% of the market
price at the date of conversion. The Company will also retain the right to
redeem the Preferred Stock at various prices upon receipt of any notice of
conversion.
In addition, the right of conversion will be further limited to a
maximum of 15% of the aggregate principal amount of the Series H Preferred Stock
issued to each holder for each one month period cumulatively to a maximum of not
in excess of 25% for such month in the event the holder has converted less than
15% in any of the preceding months.
While subject to significant limitation, the Company at December 31,
1997 has available approximately $31 million in net tax operating loss
carryforwards expiring between 1999 and 2012, which may be used to offset
taxable income, if any, during those periods. The Company's ability to generate
revenues during future periods is dependent upon obtaining regulatory approvals
of the Product. As the Company cannot be assured as to its ultimate success in
obtaining the necessary regulatory approvals, the Company is unable to conclude
that realization of benefits from its deferred tax assets is more likely than
not, as prescribed by SFAS 109. Accordingly, the Company has recognized a
valuation allowance to offset 100% of the deferred tax assets related to these
carryforwards.
Management believes that the Company's Omniferon product currently
under development can be manufactured in sufficient 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
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current level of operations, focused on current research and development and
production scale-up projects in the Company's laboratory and manufacturing
facility in Scotland and the commencement of EU pre-clinical and clinical
trials. Preclinical trials in the EU are scheduled to commence in the first
calendar quarter of 1998 with clinical trials scheduled for commencement in the
second half of calendar 1998.
Additional funding will be required to complete the clinical trial
process both in the EU and domestically prior to receiving regulatory approval
to market the Product. Anticipated funding requirements in the EU include:
pre-clinical Phase I and Phase II trials -- $1.5-$2.0 million and Phase III
studies -- $12-$14 million. In addition, anticipated funding requirements for
U.S. operations include: the establishment of domestic manufacturing capacity --
$6 million; joint research and development projects -- $4 million and
commencement of domestic preclinical Phase I and Phase II studies -- $1.5-$2.0
million. Funding will also be utilized for continued product development
research, general working capital purposes including administrative support
functions and the possible equity investments in businesses complementary to the
Company's operations.
In January 1998, the Company entered into a Letter of Intent with
Inflammatics, Inc., a domestic company which produces a human white blood cell
derived drug for the treatment of rheumatoid arthritis. Inflammatics, Inc.'s
product, LeukoVAX(TM), is in FDA Phase I/II clinical trials. The agreement
provides for an initial payment of $1 million by the Company in exchange for a
10% equity interest in Inflammatics and options to acquire up to an additional
70% for additional capital infusion to be agreed upon.
RESULTS OF OPERATIONS
No sales revenue or related costs of sales were recognized for the
three month periods and six month periods ended December 31, 1997 or 1996,
respectively. The termination of sales revenues was due to patients previously
enrolled under the Company's State of Florida HRS 499 Program, the Company's
only sources of sales revenue, completing their course of treatments in fiscal
1996. The Company discontinued enrollment of new patients in its 499 Program
(with the exception of certain limited enrollments approved by HRS for
humanitarian purposes including an HIV/AIDS study conducted at no charge to
patients) and all revenues under this program ceased in March 1996. The Company
has no other source of revenues from the sale of its products until it receives
the necessary regulatory approvals from the U.S. Food and Drug Administration
and/or comparable European authorities. At the present time, the Company has no
pending application relative to Omniferon(TM), the Company's multi-species,
natural human leukocyte-derived alpha interferon, before the EU regulatory
authorities or the FDA for the treatment of any disease indications, although
the Company intends to commence clinical trials in the EU during the third
calendar quarter of 1998 and eventually submit an Investigational New Drug
Application to the FDA. Such approvals cannot be assured and are subject to the
successful completion of clinical trials and the Company's ability to raise
significant additional investment capital to fund the completion of such trials.
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Research and development costs totaled $1,635,552 for the first six
months of fiscal 1998 compared to $878,130 for the same period of the previous
year. Similar costs for the quarter ended December 31, 1997 totaled $736,441, an
increase of $285,396 over the same period of the prior year. These increases
reflect the overall increase in research activities between the periods related
primarily to the scale-up of the Company's manufacturing technology in the
Company's Scottish manufacturing facility. Components of these increases for the
six month period included increased laboratory supplies expense of $301,000,
increases in research related salaries and support fees of $256,000 and $190,000
for the six month and three month periods, respectively, and increased travel
related expenses associated with the transfer of technology and process
development between the Company's Florida and Scottish facilities.
Selling, general and administrative expenses totaled $2,446,527 and
$1,479,162 for the six month and three month periods ended December 31, 1997,
respectively, reflecting increases of approximately $921,250 and $571,319,
respectively from the same periods of the preceding year. These increases
included increases in administrative salaries and related taxes of $361,000 and
$177,000 for the periods, due primarily to the addition of administrative staff
in the Company's Florida facility and domestic salary increases. The Company
also recognized increases in rent expense in 1997 related to its new
administrative facility in Plantation, Florida. Rent expense for Viragen's
facilities has increased by $234,000 and $132,000 during the six month and three
month periods ended December 31, 1997, respectively. Legal fees between the
periods have increased by $157,000 and $125,000, respectively, primarily due to
litigation previously reported, increases in fees related to patents and
expanded efforts in collaborative agreements. The Company has also experienced
increased travel related costs attributable to administrative support related to
the establishment of the Company's Scottish facility.
Depreciation expense increased to $385,659 and $114,844 for the six
month period and three month period ended December 31, 1997 compared with
$122,419 and $68,618 for the same periods of the preceding year. These
increases reflect the acquisition and commencement of utilization of laboratory
equipment in the Company's Scottish laboratory and manufacturing facility during
fiscal 1997 and the first half of fiscal 1998. The balance of the increases
between the periods was attributable primarily to utilization of additional
laboratory and research equipment in the Company's Florida laboratory facility
acquired during the same period. Depreciation expense will continue to increase
over comparable periods of the preceding year as the Company continues its
technology transfer and process development projects related to its Omniferon
product and enters its clinical trial phases scheduled to commence in the second
half of calendar 1998.
Interest expense totaled $454,395 and $198,481 for the six months and
three months ended December 31, 1997, reflecting sharp increases over the same
periods of the preceding year. These increases were due primarily to interest
expense attributable to the 10%, $9,720,240 Note Payable issued in July 1997 in
exchange for the Company's Series B Convertible Stock outstanding. See Liquidity
and Capital Resources, above.
14
<PAGE> 15
The Securities and Exchange Commission has issued Staff Legal Bulletin
No. 5 stating that public companies should consider whether there will be any
anticipated costs, problems and uncertainties associated with the Year 2000
issue, which affects many existing computer programs that use only two digits to
identify a year in the date field. To the best of the Company's knowledge, all
software critical to the Company's operations is Year 2000 compliant and the
Company will continue to address this issue with all software systems used or
intended for use by the Company.
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.
15
<PAGE> 16
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 and
Principal Financial Officer
By: /s/ JOSE I. ORTEGA
-----------------------------
Jose I. Ortega
Controller and
Principal Accounting Officer
Dated: October 9, 1998
16
<PAGE> 1
EXHIBIT - 11
COMPUTATION OF PER SHARE EARNINGS
<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC AND DILUTED
Weighted average shares outstanding 49,678,398 38,412,896 48,532,715 38,215,967
=========== =========== =========== ===========
Net Loss $(1,411,658) $(1,189,559) $(3,272,546) $(2,043,800)
Deduct required dividends on convertible
preferred stock, Series A 663 663 1,325 1,325
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
Deduct required dividends on convertible
preferred stock, Series D - - 169,221 -
Deduct required dividends on convertible
preferred stock, Series E - - 65,418 -
Deduct required dividends on convertible
preferred stock, Series F 141,459 - 191,903 -
Deduct required dividends on redeemable
preferred stock, Series G 50,811 77,660 -
----------- ----------- ----------- -----------
Loss attributable to common stock $(1,604,591) $(2,973,652) $(3,778,073) $(6,170,414)
=========== =========== =========== ===========
Basic and diluted loss per common share, after
deduction for required dividends on
convertible preferred stock $ (0.03) $ (0.08) $ (0.08) $ (0.16)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 884,899
<SECURITIES> 16,637,078
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,238,227
<PP&E> 8,353,604
<DEPRECIATION> 2,638,714
<TOTAL-ASSETS> 24,006,195
<CURRENT-LIABILITIES> 7,330,755
<BONDS> 216,076
1,332,000
6,850
<COMMON> 512,086
<OTHER-SE> 13,458,283
<TOTAL-LIABILITY-AND-EQUITY> 24,006,195
<SALES> 0
<TOTAL-REVENUES> 771,766
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,467,738
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454,395
<INCOME-PRETAX> (3,272,546)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,272,546)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,272,546)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
