<PAGE> 1
UNITED STATES
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 - September
30, 1999
OR
[ ] 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, 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the 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 PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Sections 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:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $ .01 - 75,031,773 shares at November 15, 1999.
<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
The consolidated condensed statements of operations (unaudited) for the
three-month periods ended September 30, 1999 and 1998 include the accounts of
Viragen, Inc. and its subsidiaries.
Item 1. Financial Statements
1) Consolidated condensed statements of operations for the three months ended
September 30, 1999 and 1998
2) Consolidated condensed balance sheets as of September 30, 1999 and
June 30, 1999
3) Consolidated condensed statements of cash flows for the three months ended
September 30, 1999 and 1998
4) Notes to consolidated condensed financial statements as of September 30,
1999
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)
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------------
1999 1998
---------------------------------------
<S> <C> <C>
INCOME
Interest and other income $ 19,948 $ 107,093
------------ ------------
19,948 107,093
COSTS AND EXPENSES
Research and development costs 1,062,034 940,414
General and administrative expenses 1,012,734 1,602,980
Equity in losses of unconsolidated company 146,127 115,665
Interest expense 846,122 11,757
------------ ------------
3,067,017 2,670,816
------------ ------------
Loss before minority interest (3,047,069) (2,563,723)
Minority interest in loss of consolidated subsidiaries 184,540 165,683
------------ ------------
NET LOSS (2,862,529) (2,398,040)
Deduct required dividends on convertible preferred
stock, Series A 663 663
Deduct required dividends on redeemable preferred
stock, Series H -- 432,224
Deduct required dividends on redeemable preferred
stock, Series I 2,217 205,091
------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCK $ (2,865,409) $ (3,036,018)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE, after deduction for
required dividends on convertible preferred stock $ (0.04) $ (0.06)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES 72,875,763 53,299,268
============ ============
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 430,867 $ 1,055,587
Restricted cash 45,600 --
Prepaid expenses 254,405 254,057
Other current assets 203,443 306,433
----------- -----------
Total Current Assets 934,315 1,616,077
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 3,580,796 3,492,585
Equipment and furniture 6,023,464 5,556,106
Construction in progress -- 309,431
----------- -----------
9,604,260 9,358,122
Less accumulated depreciation (3,529,070) (3,337,807)
----------- -----------
6,075,190 6,020,315
INVESTMENT IN UNCONSOLIDATED
COMPANY 525,617 671,744
DEPOSITS AND OTHER ASSETS 185,475 221,218
----------- -----------
$ 7,720,597 $ 8,529,354
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
4
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,814,170 $ 1,132,323
Short-term promissory note 600,000 --
8% Convertible promissory notes -- 1,929,877
Accrued expenses and other liabilities 543,481 702,209
Current portion of long-term debt 132,755 142,109
------------ ------------
Total Current Liabilities 3,090,406 3,906,518
ROYALTIES PAYABLE 107,866 107,866
LONG-TERM DEBT, less current portion 213,018 231,107
MINORITY INTEREST IN SUBSIDIARIES 142,144 326,684
CONVERTIBLE SERIES I cumulative preferred stock,
$1.00 par value. Authorized 200 shares; issued and
outstanding 11 shares 123,137 120,920
COMMITMENTS AND CONTINGENCIES
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
Common stock, $.01 par value. Authorized 125,000,000 and
75,000,000 shares at September 30, 1999 and June 30, 1999, respectively;
issued 75,400,430 and 69,913,762 shares at September 30, 1999 and
June 30, 1999, respectively, of which 845,277 shares are held as
treasury stock 754,002 699,135
Capital in excess of par value 58,229,493 55,353,205
Treasury stock, at cost (1,277,613) (1,277,613)
Retained deficit (53,386,436) (50,521,028)
Accumulated other comprehensive income 192,381 46,752
Notes due from directors (470,451) (466,842)
------------ ------------
Total Stockholders' Equity 4,044,026 3,836,259
------------ ------------
$ 7,720,597 $ 8,529,354
============ ============
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
5
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(2,862,529) $(2,398,040)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 164,008 154,967
Compensation expense on stock options 34,144 355,312
Interest expense on reset shares 697,246 --
Minority interest in loss of subsidiary (184,540) (165,683)
Increase (decrease) relating to operating activities from:
Prepaid expenses 20,238 (5,036)
Other current assets 102,990 198,242
Investment in unconsolidated company 146,127 115,665
Deposit and other assets 55,792 (15,188)
Accounts payable 681,847 (144,974)
8% Convertible promissory notes 70,123 --
Accrued expenses and other liabilities (103,279) (362,537)
Due from employees and officers (3,609) (4,371)
----------- -----------
Net cash used in operating activities (1,181,442) (2,271,643)
INVESTING ACTIVITIES
Sale of marketable securities, available-for-sale, net -- 5,100,357
Investment in unconsolidated company -- (1,100,000)
Additions to property, plant and equipment, net (218,883) (257,220)
----------- -----------
Net cash (used in) provided by investing
activities (218,883) 3,743,137
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
6
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from short-term borrowings, net $ 534,351 $ --
Payments on long-term debt (48,997) (40,843)
Purchase of treasury stock -- (174,906)
Payment on preferred dividends -- (835)
Proceeds from exercise of options and warrants 143,654 50,000
----------- -----------
Net cash provided by (used in) financing
activities 629,008 (166,584)
Effect of exchange rate fluctuations on cash 146,597 74,031
----------- -----------
Increase (decrease) in cash (624,720) 1,378,941
Cash and cash equivalents at beginning of period 1,055,587 2,708,317
----------- -----------
Cash and cash equivalents at end of period $ 430,867 $ 4,087,258
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
7
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VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE A - CONSOLIDATION AND BASIS OF PRESENTATION
Viragen, Inc. and its subsidiaries are engaged in the research,
development and manufacture of certain immunological products for commercial
application. The consolidated condensed financial statements include the parent
company and all subsidiaries, including those operating outside the U.S. All
significant transactions among our businesses have been eliminated. We made
certain reclassifications to the fiscal 1999 financial statements to conform to
the September 30, 1999 interim presentation.
Viragen owns a 10% equity interest in Inflammatics, Inc., a
biopharmaceutical company currently in the research and development stage. While
we have the option to increase our ownership interest up to 80%, the financial
accounts of Inflammatics are not consolidated with those of Viragen. We account
for our investment under the equity method of accounting. The parties that own
the remaining 90% equity in Inflammatics are not currently funding its research
and development efforts. Accordingly, while Viragen only owns 10% of
Inflammatics, it is recognizing 100% of the losses incurred by the
unconsolidated company. Viragen is also expensing its excess investment costs
ratably, as research is performed by Inflammatics.
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended September 30, 1999
and 1998 include, in the opinion of our management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation of
the financial condition and the results of operations for these periods.
Operating results for the three months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending June 30, 2000.
While our management believes that the disclosures presented are
adequate to make the information not misleading, we suggest that these
consolidated condensed financial statements be read together with the financial
statements and notes included in our annual report on Form 10-K for the year
ended June 30, 1999.
In preparing the financial statements, we must use some estimates and
assumptions that may affect reported amounts and disclosures. Estimates are used
when accounting for depreciation, amortization, and asset valuation allowances.
We are also subject to risks and uncertainties that may cause actual results to
differ from estimated results such as changes in the health care environment,
competition, foreign exchange and changes in legislation.
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NOTE C - SHORT-TERM PROMISSORY NOTE
On August 10, 1999, Viragen mortgaged its Florida-based research
facility for $600,000. Interest on the promissory note is payable in eleven
monthly installments, commencing on September 10, 1999. Interest is calculated
at the rate of 1% over the prime rate per annum, as quoted by the Wall Street
Journal and the rate is adjusted on a daily basis. The principal balance of
$600,000 plus any unpaid interest is due on July 10, 2000.
On November 3, 1999, Viragen secured a $400,000 short-term loan by
pledging its domestic scientific equipment and a second mortgage on our Florida
based research facility as collateral. Interest on the promissory note is
payable in 6 monthly installments, commencing on December 3, 1999. Interest is
calculated at the rate of 12% per annum. The principal balance of $400,000 plus
any unpaid interest is due on May 3, 2000.
NOTE D - COMPREHENSIVE LOSS
Three Months Ended
September 30,
-----------------------------------------
1999 1998
------------------- ------------------
Net loss $(2,862,529) $(2,398,040)
Other comprehensive income:
Currency translation adjustment 145,629 70,618
Net unrealized gain on marketable
securities -- 7,165
----------- -----------
Total comprehensive loss $(2,716,900) $(2,320,257)
=========== ===========
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 Viragen's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward-looking
statements include our statements regarding liquidity, anticipated cash needs
and availability, and anticipated expense levels discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including expected product clinical trial commencement dates, product
introductions, expected research and development expenditures and related
anticipated costs. All forward-looking statements included in this document are
based on information available on this date, and we assume no obligation to
update any forward-looking statements. It is important to note that actual
results could differ materially from those contained in the forward-looking
statements. Among
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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
our amendment no. 3 on Form S-1 to registration statement on Form S-3, as filed
with the Securities and Exchange Commission on October 21, 1999 (File No.
333-75749). You should also consult the risk factors listed from time to time in
Viragen's reports and amendments, if applicable, on Forms 10-Q, 8-K, S-3, 10-K
and annual reports to our 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 and availability of investment capital.
Increased competition from existing biopharmaceutical companies, as well as the
entry into the market of new competitors, could adversely affect our financial
condition or results of operations.
Our future success depends in part upon intellectual property,
including patents, trade secrets, know-how and continuing technological
innovation. We cannot provide assurances that any steps we take to protect our
intellectual property will be adequate to prevent misappropriation or that
others will not develop competitive technologies or products. We cannot offer
any assurances that any current or future patent, if any, owned by us will not
be invalidated, circumvented or challenged, that the rights granted to us will
provide competitive advantages or that any future patent applications will be
issued with the scope of the claims sought by us, if at all. Furthermore, we
cannot assure you that others will not develop technologies that are similar or
superior to ours, duplicate our technology or design around any patents held by
us.
Viragen has incurred operational losses and operated with negative cash
flows since its inception in December 1980. Losses have totaled $2,862,529,
$10,650,832, and $7,856,136, for the three month period ended September 30, 1999
and fiscal years ended June 30, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of November 15, 1999, Viragen has limited capital to sustain its
operations. The fiscal 1999 report of independent certified public accountants,
included in our annual report on Form 10-K, noted our financial condition raises
substantial doubt as to our ability to continue as a going concern. Our
financial condition has not improved since this report was issued. We are
actively seeking new investment capital; however; we cannot assure you as to the
timing of any new investment, if at all. If we are unable to attract new
investment capital in the near-term, it would be necessary for us to
significantly reduce or completely suspend all operations.
Our working capital deficit totaled approximately $2,156,000 on
September 30, 1999, an increase in working capital of $134,000 from the previous
year end balance. This increase was attributed to the conversion of $2,000,000
in convertible notes plus related interest into 5,210,412 shares of common
stock. This increase was reduced by operational losses of approximately
$2,863,000 and additions to property, plant and equipment of $219,000.
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While subject to significant limitation, Viragen at September 30, 1999,
has available approximately $33 million in net tax operating loss carryforwards
expiring between 1999 and 2013, which may be used to offset taxable income, if
any, during those periods. Our ability to generate revenues during future
periods is dependent upon obtaining regulatory approvals of our OMNIFERON(TM)
and/or LEUKOVAX products. As we cannot be assured as to our ultimate success in
obtaining the necessary regulatory approvals, we are unable to conclude that
realization of benefits from our deferred tax assets is more likely than not, as
prescribed by SFAS 109. Accordingly, we have recognized a valuation allowance to
offset 100% of the deferred tax assets related to these carryforwards.
We believe that our 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. We intend to commence clinical trials in the European
Union during the fourth calendar quarter of 1999 and eventually submit an
Investigational New Drug Application to the U.S. Food and Drug Administration.
Approvals of these projects cannot be assured and are subject to the successful
completion of lengthy and costly clinical trials and our ability to raise
significant additional investment capital to fund the completion of these
trials.
Additional funding will be required to conduct the clinical trial
process relating to OMNIFERON both in the European Union and domestically prior
to receiving regulatory approval to market OMNIFERON. Anticipated funding
requirements related to approval of OMNIFERON for hepatitis C, the first
approval we are seeking in the European Union, include: Phase I and Phase II
trials -- $3.2 million and Phase III studies -- $9.1 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, general working capital purposes including
administrative support functions and the possible equity investments in
businesses complementary to our operations.
In August 1998, Viragen entered into a strategic alliance concurrent
with the purchase of a 10% equity interest in Inflammatics, Inc., a private drug
development company, headquartered in Philadelphia, PA. Inflammatics has
focussed on the development of therapeutic drugs for autoimmune disorders. Its
lead product is LEUKOVAX, an immunomodulating white blood cell (leukocyte)
preparation currently in FDA Phase I/II clinical trials for rheumatoid
arthritis. Under the terms of this agreement, we have options to acquire an
additional 70% equity position in Inflammatics through two additional fundings
to be made at our sole option.
Additional funding, if any, will be made based upon the evaluation of
LEUKOVAX clinical trial data and will be utilized to underwrite a Phase III
clinical trial. The agreement also provides for us to issue up to 3 million
shares of its common stock and warrants to acquire 300,000 shares of common
stock, in exchange for additional series A convertible shares of Inflammatics,
if all funding phases are completed. Preliminary estimates for the funding of
Phase III clinical trials of LEUKOVAX range between $6.0 million and $10.0
million.
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On August 10, 1999, Viragen mortgaged its Florida-based research
facility for $600,000. Interest on the promissory note is payable in eleven
monthly installments, commencing on September 10, 1999. Interest is calculated
at the rate of 1% over the prime rate per annum, as quoted by the Wall Street
Journal and the rate is adjusted on a daily basis. The principal balance of
$600,000 plus any unpaid interest is due on July 10, 2000.
On November 3, 1999, Viragen secured a $400,000 short-term loan by
pledging its domestic scientific equipment and a second mortgage on our Florida
based research facility as collateral. Interest on the promissory note is
payable in 6 monthly installments, commencing on December 3, 1999. Interest is
calculated at the rate of 12% per annum. The principal balance of $400,000 plus
any unpaid interest is due on May 3, 2000.
In November 1999, Viragen entered into negotiations for a financing
agreement for the sale of 4,767,000 shares of common stock and 375,000 common
stock purchase warrants exercisable at $1.15 for $2.55 million. Under the terms
of the agreement, the offering proceeds would be invested: $775,000 within 10
days after the preparation and delivery of the related registration statement;
$775,000 upon filing of the registration statement; and $1,000,000 upon the
effectiveness of the registration statement. We anticipate delivering the
related registration statement on Form S-1 to the investors by November 17,
1999. Management is currently also in negotiations with additional funding
sources.
RESULTS OF OPERATIONS
As the discussion of Liquidity and Capital Resources noted, our fiscal
1999 report of independent certified public accountants noted our financial
condition raises substantial doubt as to our ability to continue as a going
concern.
Viragen has recognized no sales revenue or related costs for the three
months ended September 30, 1999 or the fiscal years ended June 30, 1999, 1998 or
1997, respectively. We have limited potential for sales prior to receiving the
necessary regulatory approvals from the U.S. Food and Drug Administration and/or
comparable European authorities. We could commence generating sales revenue
through export sales of OMNIFERON prior to the end of fiscal 2000 under an
agreement with the AGC group of companies. These sales however, are contingent
upon AGC's receipt of the required regulatory approvals for product
commercialization in the designated territories, and our receipt of the
requisite regulatory approvals.
While we did receive approval of our Clinical Trial Exemption
Application from the European Union regulatory authorities to begin clinical
trials of OMNIFERON, our multi-species natural human leukocyte-derived alpha
interferon, we have not yet begun these trials. We intend to commence clinical
trials in the European Union during the fourth calendar quarter of 1999 and
eventually submit an Investigational New Drug Application to the Food and Drug
Administration. We cannot assure you we will receive these approvals. These
approvals are subject to the successful completion of clinical trials and our
ability to raise significant additional investment capital to fund the
completion of these trials.
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Research and development costs totaled approximately $1,062,000 for the
first quarter of fiscal 2000 compared to $940,000 for the same period of the
previous year. The increase of $122,000 included an increase in laboratory
supplies expense of $26,200, and an increase in research related salaries and
support fees of $130,100.
The increase in research and development costs is net of the decreased
development activity, related to OMNIFERON, being performed domestically, as the
technology transfer to our Scottish facility was deemed completed. During the
quarter, domestic lab supplies and research related support fees decreased by
$77,100 and $84,900 respectively, when compared to the same period of the
previous year. In November 1999, we ceased all research projects being conducted
in our Florida laboratory facility. All research related projects, including
research related to production scale-up, are now being conducted in our
Edinburgh, Scotland facility. We believe that this consolidation step will
improve and streamline our scientific development efforts as well as reduce
operating costs by consolidating operations in one facility. Research and
development costs, however, will continue to increase in the following periods
as we commence our clinical trials of OMNIFERON.
General and administrative expenses totaled approximately $1,013,000
for the quarter ended September 30, 1999, a decrease of approximately $590,000
from the same period of the preceding year. This decrease reflects a decrease in
domestic administrative salaries and support fees of $182,200 due to the
implementation of our cost reduction program. Also, Viragen waived a 90-day
expiration provision on stock options held by three directors who were not
re-elected to the Board of Directors during the first quarter of the previous
year. Accordingly, last year we recognized $324,500 in compensation expense, in
accordance with the provisions of FAS 123, during the first quarter of fiscal
1999. This expense was not incurred during the current fiscal year.
We recognized approximately $146,000 in losses related to our
investment in Inflammatics, Inc. up from $116,000 in the prior year. This loss
reflects 100% of the losses incurred by Inflammatics associated with the
clinical testing of LEUKOVAX and the expensing of our excess investment costs.
The significant increase in interest expense is related to debt
instruments which were outstanding during the first quarter of fiscal 2000, but
not outstanding during the same period of fiscal 1999. Specifically, Viragen had
outstanding 8% convertible promissory notes with a principal balance of
$2,000,000 and a short-term promissory note totaling $600,000. Also, Viragen
incurred approximately $700,000 of interest expense on reset shares issued to
investors upon the conversion of the promissory notes.
Our management anticipates operational losses will continue increasing
as we begin planned clinical trials of OMNIFERON. In January 1999, we began
implementing a cost-reduction plan. Planned cost reductions implemented in
calendar 1999 are expected to save approximately $2.4 million annually in
operating expenses. The reductions include the elimination of administrative and
research positions in the U. S.
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saving approximately $1.6 million. We also closed our Florida-based research
facility, consolidating these operations in our Scottish facility and saving
approximately an additional $800,000 annually. We intend to sell our Florida
facility during the second fiscal quarter. These changes in operations reflect
the shift from developing OMNIFERON in our domestic laboratories to scale-up
development and conducting clinical research in the European Union. As a result,
while significant savings will be realized in the U.S., particularly in general
and administrative expenses, these savings will be more than offset by
increasing expenses in our Scottish facilities related to scale-up process and
the start of clinical trials scheduled to commence in the fourth calendar
quarter of 1999.
YEAR 2000
Viragen recognizes the potential problem posed to its operations by its
dependence upon date sensitive computer systems and applications throughout its
business and the operations of third parties upon whom we are dependent. We rely
heavily on computerized laboratory equipment both for its ongoing research and
production scale-up projects as well as computer controlled commercial scale
manufacturing equipment. In addition, through strategic alliance and supply
agreements currently in place, we are also dependent upon Year 2000 compliance
by third parties for the supply of critical raw materials as well as certain
manufacturing steps and storage of products produced for planned clinical trials
and eventually for commercial scale production.
We have been utilizing both internal and external resources to isolate
and as necessary, reprogram, update or replace hardware or software found to be
non-Year 2000 compliant. Due to the limited size of our administrative staff,
most of this work has been performed by outside contractors retained
specifically for this project. We believe that all of our significant computer
dependent systems, both administrative and scientific, are now Year 2000
compliant. The total estimated cost to us to complete our internal Year 2000
project was approximately $50,000, including hardware replacements where
indicated. Funding for the evaluation and corrective phases was provided from
general working capital.
We have contacted certain external third parties, including raw
material vendors and scientific equipment manufacturers considered critical to
our current and planned future operations to discuss and evaluate their own
compliance programs. We are still evaluating the third party responses, and will
prepare a contingency plan to mitigate third party Year 2000 issues, if
necessary.
The ultimate success of our Year 2000 compliance program is dependent
in large part upon compliance programs of external third parties or scientific
equipment and software vendors over whom we have no direct control. Accordingly,
the inability of critical vendors to meet Year 2000 compliance deadlines could
have a material adverse impact on our operations from a product development,
clinical trial or commercial manufacturing standpoint, negatively affecting its
financial condition, results of operations and cash flows.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Per Share Earnings
(27) Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None.
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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: November 15, 1999
16
<PAGE> 1
EXHIBIT 11
VIRAGEN, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES 72,875,763 53,299,268
============ ===========
NET LOSS $ (2,862,529) $(2,398,040)
Deduct required dividends on convertible preferred stock, Series A 663 663
Deduct required dividends on redeemable preferred stock, Series H -- 432,224
Deduct required dividends on redeemable preferred stock, Series I 2,217 205,091
------------ -----------
LOSS ATTRIBUTABLE TO COMMON STOCK $(2,865,409) $(3,036,018)
============ ===========
BASIC AND DILUTED LOSS PER COMMON SHARE
after deduction for required dividends on convertible preferred stock $ (0.04) $ (0.06)
============ ===========
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 430,867
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 934,315
<PP&E> 9,604,260
<DEPRECIATION> 3,529,070
<TOTAL-ASSETS> 7,720,597
<CURRENT-LIABILITIES> 3,090,406
<BONDS> 213,018
123,137
2,650
<COMMON> 754,002
<OTHER-SE> 3,287,374
<TOTAL-LIABILITY-AND-EQUITY> 7,720,597
<SALES> 0
<TOTAL-REVENUES> 19,948
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,220,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 846,122
<INCOME-PRETAX> (2,862,529)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,862,529)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,862,529)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
