<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 - March 31, 1999
( ) 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)
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 - 65,605,012 shares at May 12, 1999.
<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, 1999 and 1998 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, 1999 and 1998.
2) The Consolidated Condensed Balance Sheets as of March 31, 1999 and June
30, 1998.
3) Consolidated Condensed Statements of Cash Flows for the nine months
ended March 31, 1999 and 1998.
4) Notes to Consolidated Condensed Financial Statements as of March 31,
1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PART II - OTHER INFORMATION
Item 5. 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,
--------------------------------------- ----------------------------------
1999 1998 1999 1998
----------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
INCOME
Interest and other income $ 143,929 $ 216,886 $ 313,307 $ 988,652
----------------- ------------------ --------------- ---------------
143,929 216,886 313,307 988,652
COSTS AND EXPENSES
Research and development costs 1,745,589 917,815 4,289,624 2,845,495
Selling, general and administrative
expenses 1,287,258 1,461,747 4,190,700 4,001,805
Interest expense 74,532 122,269 95,980 576,664
----------------- ------------------ --------------- ---------------
3,107,379 2,501,831 8,576,304 7,423,964
----------------- ------------------ --------------- ---------------
Loss before minority interest (2,963,450) (2,284,945) (8,262,997) (6,435,312)
Minority interest in loss of consolidated
subsidiaries 288,547 199,956 772,355 1,077,777
----------------- ------------------ --------------- ---------------
NET LOSS (2,674,903) (2,084,989) (7,490,642) (5,357,535)
Deduct required dividends on convertible
preferred stock, Series A 663 663 1,988 1,988
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 -- 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 37,846 242,734 676,498 242,734
Deduct required dividends on redeemable
preferred stock, Series I 17,875 -- 320,581 --
----------------- ------------------ --------------- ---------------
LOSS ATTRIBUTABLE TO COMMON STOCK $(2,731,287) $(2,372,319) $(8,489,709) $(6,150,392)
================= ================== =============== ===============
BASIC AND DILUTED LOSS PER COMMON SHARE,
after deduction for required dividends on
convertible preferred stock $ (0.04) $ (0.05) $ (0.15) $ (0.12)
================= ================== =============== ===============
Weighted average shares outstanding 64,670,527 52,342,364 57,648,132 49,766,591
================= ================== =============== ===============
</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,
1999 1998
----------------------- ----------------------
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,969,200 $ 2,708,317
Marketable securities, available-for-sale -- 6,105,076
Prepaid expenses 342,301 206,995
Due from employees 58,514 60,597
Other current assets 530,210 470,353
----------------------- ----------------------
TOTAL CURRENT ASSETS 2,900,225 9,551,338
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 3,526,553 3,538,926
Equipment and furniture 5,571,901 5,311,327
Construction in progress 158,263 48,655
----------------------- ----------------------
9,256,717 8,898,908
Less accumulated depreciation (3,202,573) (2,744,827)
----------------------- ----------------------
6,054,144 6,154,081
Investment in Inflammatics, Inc. 815,122 --
DEPOSITS AND OTHER ASSETS 429,173 189,806
----------------------- ----------------------
$10,198,664 $15,895,225
======================= ======================
</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,
1999 1998
---------------------- ----------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,181,629 $ 829,661
Accrued expenses and other liabilities 488,405 708,005
8% Redeemable convertible notes 2,000,000 --
Current portion of long-term debt 159,612 171,277
---------------------- ----------------------
TOTAL CURRENT LIABILITIES 3,829,646 1,708,943
ROYALTIES PAYABLE 107,866 107,866
DEFERRED INCOME -- 200,000
LONG-TERM DEBT, less current portion 161,585 280,094
MINORITY INTEREST IN SUBSIDIARIES 544,019 525,936
SERIES H cumulative convertible preferred stock, $1.00
par value. Authorized 500 shares; issued and
outstanding 500 shares at June 30, 1998 -- 5,146,851
SERIES I cumulative convertible preferred stock, $1.00
par value. Authorized 500 shares; issued and
outstanding 11 and 200 shares at March 31, 1999
and June 30, 1998, respectively 118,727 2,039,014
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 75,000,000 shares;
issued 66,450,289 and 53,416,912 shares at March 31, 1999 and June 30,
1998, respectively, of which 845,277 and 606,277 shares are held as
treasury stock on March 31, 1999 and June 30, 1998, respectively 664,501 534,168
Capital in excess of par value 53,737,697 45,686,143
Treasury stock (1,277,523) (996,541)
Retained deficit (47,357,982) (39,624,889)
Accumulated other comprehensive income 137,929 284,990
Notes due from officers/directors (470,451) --
---------------------- ----------------------
TOTAL STOCKHOLDERS' EQUITY 5,436,821 5,886,521
---------------------- ----------------------
$ 10,198,664 $15,895,225
====================== ======================
</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,
------------------------------------------------
1999 1998
----------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (7,490,642) $ (5,357,535)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 472,484 592,017
Compensation expense on stock options 513,214 --
Minority interest in loss of subsidiary (772,355) (1,077,777)
Increase (decrease) relating to operating activities from:
Prepaid expenses (135,306) 66,701
Due from employees and officers (8,868) (6,807)
Other current assets 440,143 344,832
Investment in Inflammatics, Inc. 613,878 --
Deposit and other assets 211,823 (97,034)
Accounts payable 351,968 (993,286)
Accrued expenses and other liabilities (222,925) (282,141)
Deferred Income (200,000) 200,000
----------------------- --------------------
Net cash used in operating activities (6,226,586) (6,611,030)
INVESTING ACTIVITIES
Sale of marketable securities,
available-for-sale 6,108,504 10,852,380
Purchase of equity in Inflammatics, Inc. (1,100,000) --
Addition to property, plant and equipment, net (372,547) (1,401,126)
----------------------- --------------------
Net cash provided by investing activities 4,635,957 9,451,254
</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,
------------------------------------------------------
1999 1998
---------------------- ----------------------
<S> <C> <C>
FINANCING ACTIVITIES
Payments on long-term debt $ (130,174) $ (27,876)
Proceeds from issuance of 8% Redeemable convertible
notes, net 1,361,820
Payment of dividends on preferred stocks -- (1,260,561)
Payments on note payable -- (6,480,161)
Purchase of treasury stock (280,982) (297,391)
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 50,000 67,894
---------------------- ----------------------
Net cash provided by (used in) financing activities 1,000,664 (11,079,018)
Effect of exchange rate fluctuations on cash (149,152) 22,278
---------------------- ----------------------
Decrease in cash (739,117) (8,216,516)
Cash and cash equivalents at beginning of period 2,708,317 12,873,301
---------------------- ----------------------
Cash and cash equivalents at end of period $ 1,969,200 $ 4,656,785
====================== ======================
</TABLE>
See notes to consolidated condensed financial statements.
7
<PAGE> 8
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE A - ORGANIZATION AND CONSOLIDATION
Viragen, Inc. and its subsidiaries are engaged in the research,
development and manufacture of immunological products for commercial
application. The consolidated financial statements include the accounts of
Viragen, Inc., its wholly-owned subsidiaries, Vira-Tech, Inc., Viragen Reagents,
Inc., Viragen Technology, Inc., and Florida Capital Enterprise Corp., and its
majority-owned subsidiaries Viragen U.S.A., Inc., and Viragen (Europe) Ltd.,
including its wholly-owned subsidiaries Viragen (Scotland) Ltd. and Viragen
(Germany) GmbH. Viragen and its subsidiaries are collectively known as the
Company. All material intercompany accounts and transactions have been
eliminated in consolidation.
The Company owns a 10% equity interest in Inflammatics, Inc. ("IFM"), a
biopharmaceutical company currently in the research and development stage. While
the Company has the option to increase its ownership up to 80%, the financial
accounts of IFM are not consolidated with those of the Company. Accordingly, the
Company accounts for its investment in IFM in accordance with EITF 85-12.
Certain reclassifications have been made to the fiscal 1998 Financial
Statements to conform to the March 31, 1999 interim presentation.
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended and nine months
ended March 31, 1999 and 1998 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 condition and the results of
operations for these periods.
Operating results for the three months ended and nine months ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending June 30, 1999.
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/A for the year ended June 30, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
8
<PAGE> 9
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 United States District Court for the southern District of
Florida (Case No: 97-3187-CIV-MARCUS) by a shareholder of Viragen 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 monetary 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.
In December 1998, the U.S. District Court awarded the Company
attorneys' fees and expenses under Rule 11 of the Federal Rules of Civil
Procedure and the Private Securities Litigation Reform Act. While there can be
no assurance as to the amount, if any, to be ultimately recovered by the
Company, the Company has submitted to the Court a request for reimbursement of
litigation related costs of approximately $75,000.
The Plaintiff did file 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 an
unspecified monetary judgement and specific performance delivery of 441,368
shares of common stock. The plaintiff is claiming that he is entitled to these
additional shares of common stock under a consulting agreement, that the
Company's president breached his fiduciary duty to Cytoferon Corp. by not
achieving sufficient financing for the Company which would have entitled
Cytoferon Corp. to additional shares and for misrepresentations in connection
with the previous Cytoferon financings.
In March 1998, the Circuit Court granted the Company's Motion to
Dismiss in this matter. Subsequently, the plaintiff filed an Amended Complaint
alleging breach of contract, fraud, violation of Florida's RICO Act and breach
of fiduciary duties and seeking an unspecified monetary judgement and specific
performance delivery of 441,368 shares of common stock. In April 1998, the
Company filed a Motion to Dismiss the Plaintiff's 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. The ultimate
liability, if any, cannot be determined at this time and no accrual for loss has
been recorded.
9
<PAGE> 10
NOTE D - COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Net loss $(2,674,903) $(2,084,989) $(7,490,642) $(5,357,535)
Other comprehensive income (expense):
Currency translation adjustment (108,829) 56,328 (149,152) 22,278
Net unrealized gain on
Marketable securities (762) (16,471) 2,091 6,835
------------------ ------------------- ------------------- ------------------
Total comprehensive loss $(2,784,494) $(2,045,132) $(7,637,703) $(5,328,422)
================== =================== =================== ==================
</TABLE>
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 the Company's statements regarding liquidity, anticipated
cash needs and availability, and anticipated expense levels in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including expected Product clinical trial commencement dates, the costs of
planned clinical trials, expected research and development expenditures 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 the Company's actual results could differ
materially from those in such forward-looking statements. Among the factors that
could cause actual results to differ materially are the factors detailed below
and the risks discussed in the "Risk Factors" section included in the Company's
Registration Statement Form S-3, as filed with the Securities and Exchange
Commission on April 6, 1999 (File No. 333-75749). You should also consult the
risk factors listed from time to time in the Company's Reports on Forms 10-Q,
10-Q/A, 8-K, S-3, 10-K, 10-K/A 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 competition of investment
capital in a sector which has shown a broad decline in stock prices in the last
12 month period, product efficacy, price and timing of new product
introductions. Increased competition from existing biopharmaceutical companies
as well as the entry into the market of new competitors could adversely affect
the Company's financial condition or results of operations.
10
<PAGE> 11
The Company's future success depends to a large extent on its
intellectual property, including patents, trade secrets, know-how and continuing
technological 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 or medically
superior technologies or products. There can be no assurance that any current or
future patent, if any, 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 current or
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.
The Company has incurred operational losses and operated with negative
cash flows since its inception in December 1980. Losses have totaled $7,490,642
and $5,357,535, for the nine month periods ended March 31, 1999 and 1998,
respectively, and $7,856,136 and $4,775,245, for fiscal years ended June 30,
1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of approximately $930,000 on
March 31, 1999, a decrease in working capital of $8,772,000 from the previous
year end balance. This decrease was due in part to cash disbursements totaling
$1,100,000 for the purchase of an equity interest in Inflammatics, Inc., as well
as additions to property, plant and equipment of approximately $373,000, and
operational losses of $7,490,642.
On March 17, 1999, the Company entered into a purchase agreement with
The Isosceles Fund ("Isosceles") for funding up to $9 million through the
issuance of a series of 8% Redeemable Convertible Notes. This Agreement provides
for up to three tranches with the initial tranch of $2 million funded on March
17, 1999. The Company received $1.4 million, net of related fees, on March 17,
1999, with $500,000 held in escrow, pending the filing of a registration
statement with the SEC. The Company filed a Registration Statement on Form S-3
(File No. 333-75749) on April 6, 1999 registering the shares underlying the
initial $2 million in Notes and related investor warrants and finders warrants.
The Agreement further provides that following the initial $2 million
tranch, the Notes are convertible into common stock of the Company, one-half, on
the later of the day following the effective date of the related Registration
Statement or 120 days following the initial funding ("Conversion Date"), and the
remaining one-half thirty days later. The Notes are convertible at a conversion
price which is the lesser of the average of the closing bid prices of the
Company's common stock during the five (5) trading days prior to the funding
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<PAGE> 12
date or the lowest closing bid price of the Company's common stock for the ten
(10) trading days immediately preceding each Conversion Date. The investor is
also entitled to receive additional Re-Set shares on the 30th and 60th day
following the Conversion Date. On each of the two Re-Set dates, the investor is
entitled to receive shares representing an additional 20% and 22%, respectively
on the shares being converted. In the event the market price of the common stock
were to increase beyond these thresholds, no additional shares would be
issuable.
Notes issued by the Company may be prepaid prior to conversion at 120%
of the Note balance being prepaid, plus related 8% accrued interest, prior to
the effectiveness of the Registration Period, as defined by the Agreement.
On the closing date of the initial $2 million tranch, the Company
issued 699,029 five (5) year common stock purchase warrants to the investors
exercisable at 120% of the market price on the closing date representing 30% of
the total common shares issuable by dividing the Note principal by the market
price ($0.64) at the time of closing. In addition, the Company paid a 6% cash
placement fee for amounts funded upon the issuance of the Notes. The placement
agent also received 155,339 warrants exercisable for 5 years at 120% of the
market price at the time of closing. If the Company does not elect to prepay the
Notes prior to conversion, one-half of these warrants will be cancelled and
returned to the Company. Both the investor warrant and placement agent warrant
exercise prices are subject to exercise price Re-Sets similar to the provisions
of the shares issuable upon conversion of the Notes.
On September 22, 1998 the Company entered into an Equity Line Financing
Agreement for a maximum offering amount of $20 million, subsequently reduced to
$15 million, over three years. Provisions of the Equity Line Agreement provided
that the Company, at its option, could "Put" shares of Common Stock to the
investor, following an effective Registration Statement, at a "Put Share Price",
which was discounted from the Market Price.
In October 1998, the Company filed a Registration Statement on Form S-3
(File No. 333-65119) with the Securities and Exchange Commission ("SEC"),
subsequently amended in November 1998, to register shares underlying the Equity
Line Agreement. The SEC raised certain issues regarding the structure of the
transaction making it unlikely that the transaction, as initially structured,
would be approved. As a result of the SEC's concerns and pursuant to the
Agreement with Isosceles and Cefeo, in March 1999 the Company withdrew the
registration statement related to the Equity Line and terminated the Equity Line
Agreement.
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 and available under its Redeemable Convertible
Note financing will provide the Company with the funds necessary for at least
12
<PAGE> 13
the next fiscal year to continue its current level of operations, focused on
current development and production scale-up projects relating to OMNIFERON in
the Company's laboratory and manufacturing facility in Scotland, including the
commencement of clinical trials in the EU, which are scheduled to commence in
the third quarter of calendar 1999. Eventually, the Company intends to submit an
Investigational New Drug Application to the U.S. FDA. Regulatory 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.
Additional funding will be required to complete the clinical trial
process relating to OMNIFERON both in the EU and domestically prior to receiving
regulatory approval to market the Product. Anticipated funding requirements
related to approval of the Company's OMNIFERON product for hepatitis C, the
first approval being sought by the Company, 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; and joint research and development
projects -- $4 million. Additional funding will be required to complete Phase
III studies, such 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 the
Company's operations.
To fully utilize the funding available under financing agreements
dependent upon the issuance of common stock, the Company must obtain stockholder
approval to increase the number of authorized shares in the Company or to
reverse split its common stock. In addition, to comply with NASDAQ National
Market regulations regarding potential dilution limitations, the Company will
require stockholder approval of further financing agreements or similar
transactions.
In August 1998, the Company entered into a strategic alliance
concurrent with the purchase of a 10% equity interest in Inflammatics, Inc.
("IFM"), a private drug development company headquartered in Philadelphia, PA.
Inflammatics is focused 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 the Inflammatics Agreement, the Company made an
initial investment in the form of Series A Convertible Preferred Stock of
Inflammatics for $1 million and warrants to purchase 200,000 shares of the
Company's Common Stock at $1.00 dollar per share. The Company further obtained
two options to acquire an additional 70% equity position in Inflammatics through
two additional fundings to be made at the sole option of the Company. The first
additional funding, subject to the Company's evaluation of the Phase I/II
clinical trial results, provides for the issuance of 1,000,000 shares of Common
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<PAGE> 14
Stock, the issuance of 300,000 Common Stock purchase warrants exercisable at
$1.00 through August 14, 2003, and the underwriting of Phase III clinical
trials, in exchange for an additional 36.3% equity interest. Preliminary
estimates for the funding of Phase III clinical trials of LEUKOVAX range between
$6.0 million and $10.0 million. The second additional funding, subject to the
Company's further evaluation of clinical trial results, provides for the
issuance of an additional 2,000,000 shares of Common Stock in exchange for an
additional 33.3% equity interest.
The investment in IFM was initially capitalized at $1,370,000, which
consisted of the $1,000,000 paid to IFM, the $100,000 cash finders fee, and
$270,000 in costs associated with the warrants issued, pursuant to FAS 123. The
Company capitalized an additional $59,000 in costs associated with warrants
issued in the IFM transaction.
While subject to significant limitation, the Company at March 31, 1999
has available approximately $38 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. The Company's ability to generate revenues during
future periods is dependent upon obtaining regulatory approvals of its
OMNIFERON(TM) and/oR LEUKOVAX products. 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.
In April 1998, the Company entered into an option agreement with
Southern Health SDN.DHD ("Southern") a private Malaysian/Australian-based
healthcare investment group. The option agreement initially provided Southern
the right to acquire, through September 30, 1998, subsequently extended to
December 31, 1998 and then to March 31, 1999, an exclusive private-label
Manufacturing and Distribution License, covering Malaysia, Indonesia, the
Philippines, Thailand, Taiwan, Korea, Singapore, Australia and New Zealand, 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 paid the Company a $200,000 option fee.
On March 31, 1999, the option agreement expired, without being
exercised. The Company recognized one-half of the fee, or $100,000, as revenue,
and the balance was refunded to Southern during April 1999.
In November 1998, Viragen established Florida Capital Enterprise Corp.
("FCEC"), a wholly owned subsidiary, to participate in a $150 million insurance
company premium tax credit investment program in the State of Florida. FCEC was
certified as a Certified Capital Company ("CAPCO") under Florida Statutes,
Section 288.99. The allocations of funds to the CAPCOs occurred in April 1999.
FCEC did not ultimately qualify as one of the three companies selected for
funding.
In November 1998, the Company signed an exclusive supply and
distribution agreement with AGC, a Pakistan-based, multinational conglomerate,
for the purchase and distribution of OMNIFERON. AGC's designated territories
include Saudi Arabia, Kuwait, Yemen, Oman, UAE, Brunei and other Middle Eastern
countries, as well as India and Pakistan. The AGC Agreement calls for AGC to
purchase a minimum of $20 million of OMNIFERON over five years commencing with,
14
<PAGE> 15
and subject to, AGC's receipt of the required regulatory approvals for product
commercialization in the designated territories, and the Company's receipt of
the requisite regulatory approval, following the filing of its Clinical Trial
Exemption application and the successful completion of Phase I Clinical Studies,
to export OMNIFERON from its commercial manufacturing facility in Edinburgh,
Scotland. The purchase minimums will be secured by a $1 million irrevocable
revolving letter of credit. These minimums increase significantly upon the
Company obtaining regulatory approval for commercialization of OMNIFERON in the
United States and/or Europe. The AGC Agreement has been approved by the Boards
of Directors of AGC and the Company.
Under the terms of the AGC Agreement, AGC is responsible for clinical
and regulatory costs to obtain approvals for commercialization of OMNIFERON in
its designated territories and all subsequent sales, marketing and distribution
activities. The AGC Agreement also calls for AGC to build, own and operate, at
its own expense, a GMP pharmaceutical distribution facility in a mutually
agreeable location within the territory. It is expected that AGC will initially
focus on the Company's natural alpha interferon for hepatitis B and C, diseases
which are at epidemic proportions in the designated territories.
Currently, the Company believes that its foreign currency risk is not
material. At the present time, the Company does not have sales revenue or
related receivables. Also, the Company does not purchase foreign currencies on a
regular basis. Transfers of funds to its foreign subsidiaries are performed
infrequently, in large sums, at the then-current exchange rates.
The Company was not impacted by the EU's adoption of the "Euro"
currency. The Company's foreign operations are located in Edinburgh, Scotland,
and the United Kingdom did not participate in the adoption of the Euro. The
United Kingdom does not have a scheduled date for the eventual adoption of the
Euro.
RESULTS OF OPERATIONS
No sales revenue or related costs of sales were recognized during the
three month periods or nine month periods ended March 31, 1999 or 1998, or the
fiscal years ended June 30, 1998 or 1997, respectively. The Company has limited
potential for sales prior to receiving the necessary regulatory approvals from
the U.S. Food and Drug Administration ("FDA") and/or comparable European
authorities. The Company could commence generating sales revenue through export
sales of OMNIFERON, under the AGC Agreement. Such sales, however, are contingent
upon AGC's receipt of the required regulatory approvals for product
commercialization in the designated territories, and the Company's receipt of
the requisite regulatory approval, following the filing of its Clinical Trial
Exemption application and the successful completion of Phase I Clinical Studies
in the EU. At the present time, the Company has no pending application relative
to OMNIFERON, 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 concluded its preclinical trials
of OMNIFERON in the EU and intends to commence clinical trials in the EU during
the third calendar quarter of 1999 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.
15
<PAGE> 16
Research and development costs totaled approximately $4,290,000 for the
first nine months of fiscal 1999 compared to $2,845,000 for the same period of
the previous year. The increase of $1,445,000 (51%) included an increase in
research related salaries and support fees of $169,600, an increase in foreign
lab supplies expense of $292,800, and an increase in equipment maintenance costs
of $106,800. The Company also recognized an additional $472,500 in research and
development expenses incurred by IFM associated with the clinical testing of
LEUKOVAX. The Company has also recognized $319,000 in compensation expense on
warrants issued to scientific consultants, pursuant to FAS 123. These expenses
were not incurred in the prior year. These increases were offset by a decrease
in domestic lab supplies expense of $232,900. The decrease in domestic lab
supplies expense is representative of the decreased development activity,
related to OMNIFERON, being performed domestically, as the technology transfer
to the Companies Scottish facility was deemed completed in November 1997.
Research and development costs, however, will continue to increase in the
following periods as the Company commences clinical trials of OMNIFERON (See
Liquidity and Capital Resources above).
Research and development costs increased by $828,000 during the third
fiscal quarter, an increase of 90% over the third quarter of the prior year.
This increase included an increase in research related salaries and support fees
of $203,153, an increase in equipment maintenance costs of $54,000, and an
increase in lab supplies expense of $194,100. These increases were attributed
primarily to expanded process scale-up projects in the Company's Scotland
facility. The increase between the periods also included $76,300 attributable to
expenses incurred related to clinical testing of LEUKOVAX. The Company incurred
$110,700 in expenses related to compensation expense on warrants issued to
scientific consultants.
General and administrative expenses totaled approximately $4,191,000
for the nine months ended March 31, 1999, an increase of approximately $189,000
from the same period of the preceding year. The Company waived a 90-day
expiration provision on stock options held by three directors who were not
re-elected to the Board of Directors. Accordingly, the Company recognized
$324,500 in compensation expense, pursuant to the provisions of FAS 123. The
increased expenses are offset by a decrease in insurance costs of $79,500 from
the prior year due to favorable rates obtained on policy renewals. The Company
also experienced a decrease of $73,000 in legal fees between periods due to the
settlement of litigation during the prior year, as well as the completion of
contract negotiations.
General and administrative expenses decreased $174,000 during the third
fiscal quarter when compared to the previous year. This decrease reflected a
decrease in legal fees, primarily due to fees incurred in the prior year related
to negotiations not incurred during the current year and reduction in legal fees
associated with a law suit filed against the Company and other defendants in
November 1997. See Note C to Notes to Consolidated Condensed Financial
Statements.
16
<PAGE> 17
The significant decrease in interest expense, which was realized during
the current fiscal period, is attributable to the payment-in-full of a
$9,720,241 Promissory Note during the prior year.
Management anticipates operational losses will continue increasing, as
the Company commences clinical trials of OMNIFERON and continues investigating
business opportunities. During January 1999, the Company began implementing a
cost-reduction plan, whereby the Company estimates saving approximately $2.4
million annually in current operating expenses. The reductions include the
elimination of administrative and research positions in the U.S. costing
approximately $1.6 million, as well as the closing of its Florida-based research
facility saving an additional $800,000 annually. The changes in operations
reflect the Company's shift from developing Omniferon(TM) in its laboratories to
scale-up development and conducting clinical research in the EU. As a result,
while significant savings will be realized in the US, these savings will be more
than offset by increasing expenses incurred in Company's Scottish facilities
related to scale-up process and clinical trials.
YEAR 2000
The Company 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 which the Company is
dependent. The Company relies 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 place in the Company's
Scottish facility. In addition, the Company, through strategic alliance and
supply agreements currently in place, is 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 Product produced for planned clinical
trials and eventually for commercial scale production.
The Company will utilize both internal and external resources to
isolate and as necessary, reprogram, update or replace hardware or software
found to be non-Year 2000 compliant. The evaluation phase of the Company's Year
2000 compliance program began in the fourth fiscal quarter of 1998. Due to the
limited size of the Company's administrative staff, to-date most of this work is
being performed by outside contractors retained specifically for this project.
The Company expects to complete its internal Year 2000 project by July 1999. The
total estimated cost to the Company to complete its internal Year 2000 project
is $50,000 to $70,000, including projected hardware replacements indicated.
Funding for the evaluation and corrective phases will be provided from general
working capital.
17
<PAGE> 18
The Company has contacted certain external third parties, including raw
material vendors and scientific equipment manufacturers considered critical to
its current and planned future operations to discuss and evaluate their own
compliance programs. After evaluation of the third party responses, the Company
will prepare a contingency plan to mitigate third party Year 2000 issues, if
necessary.
The costs and projected completion dates of the Company's Year 2000
compliance program is based on management's best estimates and is dependent in
large part upon compliance programs of external third parties including
scientific equipment and software vendors over whom the Company has no direct
control. Accordingly, the inability of the Company or critical vendors to meet
Year 2000 compliance deadlines could have a material adverse impact on the
Company's operations from a product development, clinical trial or commercial
manufacturing standpoint, negatively affecting its financial condition, results
of operations and cash flows.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 5. Other Information
The Company had received correspondence from the NASDAQ Stock Market
expressing concern that the Company's Common Stock has failed to maintain a
closing bid price of greater than $1.00 for a specified period of time in
accordance with NASDAQ Marketplace Rule 4450 (a) (5). NASDAQ indicated that the
Company had been provided with a 90-day period, ending March 16, 1999, to regain
compliance with Marketplace Rule 4450 (a) (5) by demonstrating compliance for a
minimum of ten consecutive days of the minimum closing bid price requirement. In
the event of non-compliance, the Company was afforded with the right to request
a hearing to present its basis for compliance or plan to regain compliance, with
applicable maintenance listing requirements. The Company requested an oral
hearing before the NASDAQ Qualifications Panel. Failure to demonstrate long term
compliance may result in the delisting of the Company's Common Stock from
NASDAQ.
On May 6, 1999, representatives of the Company presented a compliance
plan before the Panel which included a request for additional time to meet the
minimum listing requirements and provided for a reverse-split of the Company's
common stock, if necessary, to achieve the $1.00 minimum bid requirement. The
Company is currently awaiting the decision of NASDAQ.
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.
19
<PAGE> 20
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: June 18, 1999
20
<PAGE> 1
EXHIBIT 11
VIRAGEN, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
BASIC AND DILUTED
Weighted average shares outstanding 64,670,527 52,342,364 57,648,132 49,766,591
================ =============== ================ =================
Net Loss $(2,674,903) $(2,084,989) $(7,490,642) $(5,357,535)
Deduct required dividends on convertible
preferred stock, Series A 663 663 1,988 1,988
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 -- 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 37,846 242,734 676,498 242,734
Deduct required dividends on redeemable
preferred stock, Series I 17,875 -- 320,581 --
---------------- --------------- ---------------- -----------------
LOSS ATTRIBUTABLE TO COMMON STOCK $(2,731,287) $(2,372,319) $(8,489,709) $(6,150,392)
================ =============== ================ =================
BASICAND DILUTED LOSS PER
COMMON SHARE after deduction for
required dividends on convertible
preferred stock $ (0.04) $ (0.05) $ (0.15) $ (0.12)
================ =============== ================ =================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,969,200
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,900,225
<PP&E> 9,256,717
<DEPRECIATION> 3,202,573
<TOTAL-ASSETS> 10,198,664
<CURRENT-LIABILITIES> 3,829,646
<BONDS> 161,585
118,727
2,650
<COMMON> 664,501
<OTHER-SE> 4,769,670
<TOTAL-LIABILITY-AND-EQUITY> 10,198,664
<SALES> 0
<TOTAL-REVENUES> 313,307
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,480,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,980
<INCOME-PRETAX> (7,490,642)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,490,642)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,490,642)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
