<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
(MARK ONE)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended - March 31, 1998
( ) 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)
865 SW 78th Avenue, Suite 100, Plantation Floirda 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
------ ------
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 - 52,710,635 shares at May 12, 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 nine months ended March 31, 1998 and 1997 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 nine months ended March 31, 1998 and 1997.
2) The Consolidated Condensed Balance Sheets as of March 31, 1998 and June
30, 1997.
3) Consolidated Condensed Statements of Cash Flows for the nine months ended
March 31, 1998 and 1997.
4) Notes to Consolidated Condensed Financial Statements as of March 31, 1998.
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 Nine Months Ended
March 31, March 31,
------------------------------ ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME
Interest and other income $ 216,886 $ 361,271 $ 988,652 $ 859,170
----------- ----------- ----------- ------------
216,886 361,271 988,652 859,170
COSTS AND EXPENSES
Research and development costs 804,799 561,427 2,440,351 1,439,557
Selling, general and administrative expenses 1,368,405 840,434 3,814,932 2,365,711
Directors and officers options granted -- 218,750 -- 287,550
Depreciation and amortization 206,358 96,076 592,017 218,495
Interest expense 122,269 4,818 576,664 21,578
----------- ----------- ----------- ------------
2,501,831 1,721,505 7,423,964 4,332,891
----------- ----------- ----------- ------------
Loss before minority interest (2,284,945) (1,360,234) (6,435,312) (3,473,721)
Minority interest in loss of consolidated
subsidiaries 349,956 71,875 727,777 141,562
----------- ----------- ----------- ------------
NET LOSS (1,934,989) (1,288,359) (5,707,535) (3,332,159)
Deduct required dividends on convertible
preferred stock, Series A 663 663 1,988 1,988
Deduct required dividends on convertible
preferred stock, Series B -- 146,750 -- 4,121,898
Deduct required dividends on convertible
preferred stock, Series C -- 350,693 -- 432,523
Deduct required dividends on convertible
preferred stock, Series D -- 3,442,683 169,221 3,442,683
Deduct required dividends on convertible
preferred stock, Series E -- 478,309 65,418 478,309
Deduct required dividends on convertible
preferred stock, Series F 38,513 -- 230,416 --
Deduct required dividends on redeemable
preferred stock, Series G 5,420 -- 83,080 --
Deduct required dividends on redeemable
preferred stock, Series H 242,734 -- 242,734 --
----------- ----------- ----------- ------------
LOSS ATTRIBUTABLE TO COMMON STOCK $(2,222,319) $(5,707,457) $(6,500,392) $(11,809,560)
=========== =========== =========== ============
BASIC AND DILUTED LOSS PER COMMON SHARE, after
deduction for required dividends on
convertible preferred stock $ (0.04) $ (0.15) $ (0.13) $ (0.31)
=========== =========== =========== ============
Weighted average shares outstanding 52,342,364 38,867,643 49,766,591 38,430,023
=========== =========== =========== ============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,656,785 $12,873,301
Marketable securities, available-for-sale 7,700,441 18,541,616
Prepaid expenses 170,868 237,569
Due from employees 54,412 53,980
Other current assets 330,160 674,992
----------- -----------
TOTAL CURRENT ASSETS 12,912,666 32,381,458
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 3,492,932 3,011,044
Equipment and furniture 5,203,904 3,909,182
Construction in progress -- 370,364
----------- -----------
--
8,696,836 7,290,590
Less accumulated depreciation (2,849,529) (2,252,392)
----------- -----------
5,847,307 5,038,198
DEPOSITS AND OTHER ASSETS 138,921 41,887
----------- -----------
$18,898,894 $37,461,543
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS-(CONTINUED)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 437,925 $ 1,431,211
Note payable 3,240,080 --
Accrued expenses and other liabilities 337,932 1,573,464
Current portion of long-term debt 45,703 45,703
------------ ------------
TOTAL CURRENT LIABILITIES 4,061,640 3,050,378
ROYALTIES PAYABLE 107,866 107,866
DEFERRED INCOME 200,000 --
LONG-TERM DEBT, less current portion 211,019 238,895
MINORITY INTEREST IN SUBSIDIARIES 1,192,323 1,920,100
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 Series H Cumulative preferred stock,
$1.00 par value. Authorized 500 shares; issued and outstanding
500 shares at March 31, 1998 500 --
Common stock, $.01 par value. Authorized 75,000,000 shares;
issued 53,316,912 and 46,260,360 shares at March
31, 1998 and June 30, 1997, respectively, of which 606,277
and 386,777 shares are held as treasury stock at March 31, 1998
and June 30, 1997, respectively 533,168 462,601
Capital in excess of par value 50,738,803 59,995,768
Treasury stock (996,541) (699,150)
Retained deficit (37,336,712) (27,802,624)
Foreign currency translation adjustment 295,747 273,469
Notes due from officers/directors (107,792) (101,417)
Unrealized gain (loss) on marketable securities,
available-for-sale (3,777) (10,612)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 13,126,046 32,144,304
------------ ------------
$ 18,898,894 $ 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>
Nine Months Ended
March 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (5,707,535) $ (3,332,159)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 592,017 218,495
Compensation expense on stock options granted to
Directors and Officers -- 287,550
Compensation expense on stock options granted to
employees -- 162,750
Forgiveness of debt -- 12,500
Minority interest in loss of subsidiaries (727,777) (141,562)
Increase (decrease) relating to operating activities from:
Accounts and notes receivable -- 19,291
Prepaid expenses 66,701 (62,449)
Due from employees and officers (6,807) 39,874
Other current assets 344,832 (385,962)
Deposit and other assets (97,034) (47,276)
Accounts payable (993,286) 265,077
Deferred income 200,000 --
Accrued expenses and other liabilities (282,141) 189,190
------------ ------------
Net cash used in operating activities (6,611,030) (2,774,681)
------------ ------------
INVESTING ACTIVITIES
Sale (purchase) of marketable securities,
available-for-sale 10,852,380 (11,494,180)
Additions to property, plant and equipment, net
(1,401,126) (2,556,608)
------------ ------------
Net cash provided by (used in) investing
activities 9,451,254 (14,050,788)
------------ ------------
</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>
Nine Months Ended
March 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES
Payments on long-term debt $ (27,876) $ (678,487)
Proceeds from borrowing -- 164,000
Payment of dividends on preferred stocks (1,260,561) (565,350)
Payments on note payable (6,480,161) --
Purchase of treasury stock (297,391) --
Proceeds from sale of Series C preferred stock, net -- 4,179,078
Proceeds from sale of Series D preferred stock, net -- 14,072,402
Proceeds from sale of Series E preferred stock, net -- 4,688,605
Proceeds from sale of Series H preferred stock, net 4,625,475 --
Refund of paid in capital (1,391,198) --
Exercise of cash-out option on conversion of Series F
preferred stock (2,773,200) --
Redemption of preferred stock, Series G (3,542,000) --
Proceeds from exercise of options and warrants 67,894 351,337
Proceeds from exercise of subsidiary options and
warrants -- 1,206,575
------------ -----------
Net cash (used in) provided by financing
activities (11,079,018) 23,418,160
------------ -----------
Effect of exchange rate fluctuations on cash 22,278 181,229
------------ -----------
(Decrease) increase in cash (8,216,516) 6,773,920
Cash and cash equivalents at beginning of period 12,873,301 19,449,059
------------ -----------
Cash and cash equivalents at end of period $ 4,656,785 $26,222,979
============ ===========
</TABLE>
See notes to consolidated condensed financial statements.
7
<PAGE> 8
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE A - ORGANIZATION AND CONSOLIDATION
Viragen, Inc. and its 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 March 31, 1998 interim presentation.
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended and nine months
ended March 31, 1998 and 1997 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, 1998 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 - CAPITAL STOCK
During the third and fourth fiscal quarters, the Company
closed $7 million of replacement financing replacing a portion of the funds used
to redeem previous preferred stock issuances. In February 1998 the Company
received net proceeds of
8
<PAGE> 9
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. In April 1998, the Company received net proceeds of approximately
$1,800,000 from the sale of 200 shares of its Series I Convertible Preferred
Stock (the "Series I Preferred Stock"). The Company incorporated certain
restrictions as part of the Series H and Series I 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 and Series I Preferred Stock
bear no dividends although, upon liquidation or conversion, an 8% accretion
factor will be included in the calculation for purposes of determining the
liquidation and conversion amount.
Both the Series H and Series I Preferred Stock issuances are not
convertible until six months following the final closing date for each
transaction. The conversion price is 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 ($2.15 per share) 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 retained the right to redeem both issuances of Preferred
Stock at various prices upon receipt of a notice of conversion.
In addition, the right of conversion is further limited to a maximum of
15% of the aggregate principal amount of the Series H and Series I 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.
NOTE D - 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 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.
9
<PAGE> 10
In March 1998 the Circuit Court granted the Company's Motion to Dismiss
in this matter. Subsequently, the plaintiff filed an Amended Complaint alleging
similar claims and seeking and judgement similar to that of the dismissal
Federal and initial State of Florida suits. In April 1998, the Company filed a
Motion to Dismiss plaintiffs amended complaint which was denied by the Court.
The Company denies the allegations of the complaint and intends to
vigorously defend the claims with regard to this matter.
NOTE E - 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, 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 statements. 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, including the Registration Statement filed with the
Securities and Exchange Commission on April 14, 1998, and the Registration
Statement on 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 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
10
<PAGE> 11
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
$5,707,535 and $3,332,159 for the nine month periods ended March 31, 1998 and
1997, 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 $8,851,000 at March 31, 1998, a
decrease of $20,480,000 from the year end balance. This decrease was due in part
to an exchange and reclassification of a convertible preferred stock series for
a note payable totaling $9,720,240 of which $3,240,080 remained outstanding at
March 31, 1998, and classified as a current liability, as well as cash
redemptions, refunds and dividends in certain convertible preferred stock series
totaling $8,967,000 and operational losses of $5,707,535 during the nine month
period.
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 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 10% Promissory Note in the amount of $9,720,240. The Note
provided for principal and interest payments over nine monthly installments
commencing in
11
<PAGE> 12
October 1997. The Note could be prepayment without penalty and was not
convertible into common stock of the Company. Principal outstanding under the
Note totaled $3,240,080 at March 31, 1998 and the remaining balance was prepaid
in full in April 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 provided for a limitation on the holder
limiting conversion during any two-week period to $800,000 including accrued and
unpaid dividends. The terms also provided 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. During the quarter ended March 31, 1998, the
remaining Series F Preferred Stock outstanding totally 4,200 shares
($4,200,000), was converted (1,750 shares) or redeemed through cash payments
(2,450 shares).
Terms of the Series G Preferred Stock provided that commencing in
September 1997, the holder was limited to converting 667 shares ($667,000) per
month over a 6-month period. The provisions further provided that the Company
would 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 was restricted from converting into common stock if the
market price of the Company's common stock was 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 were made in the substantive terms from the
previously issued Series E Preferred Stock. The final redemption of the Series G
Preferred Stock occurred in February 1998.
During the third and fourth fiscal quarters, the Company closed $7
million of replacement financing replacing a portion of the funds used to redeem
previous preferred stock issuances. In February 1998 the Company received net
proceeds of approximately $4,625,000 from the sale of 500 shares of its Series H
Convertible Preferred Stock (the
12
<PAGE> 13
"Series H Preferred Stock") with an aggregate stated value of $5 million. In
April 1998, the Company received net proceeds of approximately $1,800,000 from
the sale of 200 shares of its Series I Convertible Preferred Stock (the "Series
I Preferred Stock"). The Company incorporated certain restrictions as part of
the Series H and Series I 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 and Series I Preferred Stock bear no dividends
although, upon liquidation or conversion, an 8% accretion factor will be
included in the calculation for purposes of determining the liquidation and
conversion amount.
Both the Series H and Series I Preferred Stock issuances are not
convertible until six months following the final closing date for each
transaction. The conversion price is 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 ($2.15 per share) 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 retained the right to redeem both issuances of Preferred
Stock at various prices upon receipt of a notice of conversion.
In addition, the right of conversion is further limited to a maximum of
15% of the aggregate principal amount of the Series H and Series I 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.
In April 1998, the Company entered into an option agreement with
Southern Health SDN.BHD ("Southern"), a private Malaysian/Australian-based
healthcare investment group. The option agreement provides Southern the right to
acquire, through September 30, 1998, an exclusive private-label Manufacturing
and Distribution License for the Company's proprietary production process in
exchange for an initial cash licensing fee of $20 million and a continuing
royalty of 12% of Southern's related revenues. Southern has paid the Company a
$200,000 option fee. The Company has begun its related due diligence in this
transaction however, there can be no assurance that this transaction will
ultimately be successfully concluded.
While subject to significant limitation, the Company at March 31, 1998
has available approximately $33 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.
13
<PAGE> 14
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 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
including EU pre-clinical trials currently being conducted and the commencement
of clinical trials. Clinical trials in the EU are scheduled to commence 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., ("Inflammatics") a domestic company which produces a human
white blood cell derived drug for the treatment of rheumatoid arthritis.
Inflammatics, Inc.'s product, LeukoVAXTM, 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. Through
March 31, 1998, the Company had advanced $85,000 to Inflammatics to be applied
against the initial $1 million payment.
RESULTS OF OPERATIONS
No sales revenue or related costs of sales were recognized for the
three month periods and nine month periods ended March 31, 1998 or 1997,
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 unless or 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 OmniferonTM, the Company's
multi-
14
<PAGE> 15
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 commenced pre-clinical trials in the EU in February 1998
and 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.
Research and development costs totaled $2,440,351 for the first nine
months of fiscal 1998 compared to $1,439,557 for the same period of the previous
year. Similar costs for the quarter ended March 31, 1998 totaled $804,799, an
increase of $243,372 (43%) over the same period of the prior year. These
increases reflect the overall increase in research activities between the
periods both in the U.S. and Scotland 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 nine and three month periods
included increases in laboratory supplies expense of $385,000 and $88,000,
respectively, increases in research related salaries and support fees of
$342,000 and $63,000 for the nine 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 $3,814,932 and
$1,368,405 for the nine month and three month periods ended March 31, 1998,
respectively, reflecting increases of approximately $1,449,221 (61%) and
$527,971 (63%), respectively from the same periods of the preceding year. These
increases included increases in administrative salaries and related taxes of
$452,000 and $125,000 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 commencing in
August 1997 related to its new administrative facility in Plantation, Florida.
Rent expense for Viragen's facilities has increased by $383,000 and $155,000
during the nine month and three month periods ended March 31, 1998,
respectively. Legal fees between the periods have increased by $252,000 and
$116,000, respectively, primarily due to litigation previously reported,
increases in fees related to patents and expanded efforts in collaborative
agreements both domestically and in Europe. 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 $592,017 and $206,358 for the nine
month period and three month period ended March 31, 1998 compared with $218,495
and $96,076 for the same periods of the preceding year. These increases are
attributable primarily to the acquisition and commencement of utilization of
laboratory equipment in the Company's Scottish laboratory and manufacturing
facility during fiscal 1997 and fiscal 1998. The balance of the increases
between the periods was primarily due to the utilization of additional
laboratory and research equipment in the Company's Florida laboratory facility
acquired during the same period. Depreciation expense will continue
15
<PAGE> 16
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 $576,664 and $122,269 for the nine months and
three months ended March 31, 1998, 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. This Note was
paid-in-full in April 1998. See Liquidity and Capital Resources, above.
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.
16
<PAGE> 17
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: May 13, 1998
17
<PAGE> 1
EXHIBIT - 11
VIRAGEN, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC AND DILUTED
Weighted average shares outstanding 52,342,364 38,867,643 49,766,591 38,430,023
============ ============ ============ ============
Net Loss $ (1,934,989) $ (1,288,359) $ (5,707,535) $ (3,332,159)
Deduct required dividends on convertible
preferred stock, Series A 663 663 1,988 1,988
Deduct required dividends on convertible
preferred stock, Series B -- 146,750 -- 4,121,898
Deduct required dividends on convertible
preferred stock, Series C -- 350,693 -- 432,523
Deduct required dividends on convertible
preferred stock, Series D -- 3,442,683 169,221 3,442,683
Deduct required dividends on convertible
preferred stock, Series E -- 478,309 65,418 478,309
Deduct required dividends on convertible
preferred stock, Series F 38,513 -- 230,416 --
Deduct required dividends on redeemable
preferred stock, Series G 5,420 -- 83,080 --
Deduct required dividends on redeemable
preferred stock, Series H 242,734 -- 242,734 --
------------ ------------ ------------ ------------
Loss attributable to common stock $ (2,222,319) $ (5,707,457) $ (6,500,392) $(11,809,560)
============ ============ ============ ============
Basic and diluted loss per common share, after
deduction for required dividends on convertible
preferred stock $ (0.04) $ (0.15) $ (0.13) $ (0.31)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 4,656,785
<SECURITIES> 7,700,441
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,912,666
<PP&E> 8,696,836
<DEPRECIATION> 2,849,529
<TOTAL-ASSETS> 18,898,894
<CURRENT-LIABILITIES> 4,061,640
<BONDS> 0
0
3,150
<COMMON> 533,168
<OTHER-SE> 12,589,728
<TOTAL-LIABILITY-AND-EQUITY> 18,898,894
<SALES> 0
<TOTAL-REVENUES> 988,652
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,847,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 576,664
<INCOME-PRETAX> (5,707,535)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,707,535)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,707,535)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
</TABLE>
