<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 - September 30, 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, 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
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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 - 56,796,591 shares at November 12, 1998.
<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, 1998 and September 30, 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 September 30, 1998 and September 30, 1997.
2) The Consolidated Condensed Balance Sheets as of September 30, 1998 and
June 30, 1998.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended September 30, 1998 and September 30, 1997.
4) Notes to Consolidated Condensed Financial Statements as of September
30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II - OTHER INFORMATION
Item 4. Results of Votes of Security Holders
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
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
INCOME
Interest and other income $ 107,093 $ 433,851
----------- -----------
107,093 433,851
COSTS AND EXPENSES
Research and development costs 940,414 1,069,724
General and administrative expenses 1,602,980 1,067,567
Equity in losses of unconsolidated company 115,665 --
Interest expense 11,757 255,914
----------- -----------
2,670,816 2,393,205
----------- -----------
Loss before minority interest (2,563,723) (1,959,354)
Minority interest in loss of consolidated
subsidiaries 165,683 98,466
----------- -----------
NET LOSS (2,398,040) (1,860,888)
Deduct required dividends on convertible preferred stock,
Series A 663 663
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 -- 50,444
Deduct required dividends on redeemable preferred stock,
Series G -- 26,849
Deduct required dividends on redeemable preferred stock,
Series H 432,224 --
Deduct required dividends on redeemable preferred stock,
Series I 205,091 --
----------- -----------
LOSS ATTRIBUTABLE TO COMMON STOCK $(3,036,018) $(2,173,483)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE,
After deduction for required dividends on convertible
preferred stock $ (0.06) $ (0.05)
=========== ===========
Weighted average shares outstanding 53,299,268 47,357,382
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,087,258 $ 2,708,317
Marketable securities, available-for-sale 1,016,465 6,105,076
Prepaid expenses 212,031 206,995
Due from employees 63,600 60,597
Other current assets 272,111 470,353
------------ ------------
TOTAL CURRENT ASSETS 5,651,465 9,551,338
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 3,594,290 3,538,926
Equipment and furniture 5,501,548 5,311,327
Construction in progress 66,809 48,655
------------ ------------
9,162,647 8,898,908
Less accumulated depreciation (2,906,313) (2,744,827)
------------ ------------
6,256,334 6,154,081
Investment in unconsolidated company 1,254,335 --
DEPOSITS AND OTHER ASSETS 204,994 189,806
------------ ------------
$ 13,367,128 $ 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>
September 30, June 30,
1998 1998
------------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 684,687 $ 829,661
Accrued expenses and other liabilities 349,875 708,005
Current portion of long-term debt 171,277 171,277
------------ ------------
TOTAL CURRENT LIABILITIES 1,205,839 1,708,943
ROYALTIES PAYABLE 107,866 107,866
DEFERRED INCOME 200,000 200,000
LONG-TERM DEBT, less current portion 242,664 280,094
MINORITY INTEREST IN SUBSIDIARIES 360,253 525,936
SERIES H cumulative convertible preferred stock, $1.00 par
value. Authorized 500 shares; issued and outstanding 388
and 500 shares at September 30, 1998 and June 30, 1998,
respectively 4,073,487 5,146,851
SERIES I cumulative convertible preferred stock, $1.00 par
value. Authorized 500 shares; issued and outstanding
175 and 200 shares at September 30, 1998 and
June 30, 1998, respectively 1,820,530 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 55,388,250 and 53,416,912 shares at September 30, 1998
and June 30, 1998, respectively, of which 733,277 and
606,277 shares are held as treasury stock on September 30,
1998 and June 30, 1998, respectively 553,598 534,168
Capital in excess of par value 48,067,684 45,686,143
Treasury stock (1,171,447) (996,541)
Retained deficit (42,157,401) (39,624,889)
Accumulated other comprehensive income 362,773 284,990
Notes due from officers/directors (301,368) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,356,489 5,886,521
------------ ------------
$ 13,367,128 $ 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>
Three Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(2,398,040) $(1,860,888)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 154,967 270,815
Compensation expense on stock options 355,312 --
Minority interest in loss of subsidiary (165,683) (98,466)
Increase (decrease) relating to operating
activities from:
Prepaid expenses (5,036) 32,122
Due from employees and officers (4,371) (2,765)
Other current assets 198,242 (64,904)
Investment in unconsolidated company 115,665 --
Deposit and other assets (15,188) (294)
Accounts payable (144,974) (596,901)
Accrued expenses and other liabilities (362,537) 31,675
----------- -----------
Net cash used in operating activities (2,271,643) (2,289,606)
INVESTING ACTIVITIES
Sale (Purchase) of marketable securities,
available-for-sale, net 5,100,357 (4,640,299)
Purchase of equity in Inflammatics, Inc. (1,100,000) --
Purchase of property, plant and
equipment, net (257,220) (584,751)
----------- -----------
Net cash provided by (used in) investing
activities $ 3,743,137 $(5,225,050)
</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>
Three Months Ended
September 30,
1998 1997
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES
Payments on long-term debt $ (40,843) $ (10,158)
Purchase of treasury stock (174,906)
Payment on preferred dividends (835) (518,808)
Refund of paid in capital -- (838,157)
Redemption of preferred stock, series G -- (667,000)
Proceeds from exercise of warrants -- 67,894
Proceeds from exercise of options 50,000 --
------------ ------------
Net cash (used in) provided by financing
activities (166,584) (1,966,229)
Effect of exchange rate fluctuations on cash 74,031 (125,331)
------------ ------------
Increase (decrease) in cash 1,378,941 (9,606,216)
Cash and cash equivalents at beginning of period 2,708,317 12,873,301
------------ ------------
Cash and cash equivalents at end of period $ 4,087,258 $ 3,267,085
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
7
<PAGE> 8
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 subsidiaries Viragen (Scotland) Ltd. and Viragen (Germany) GmbH,
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 stages.
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 under the equity
method of accounting. The parties that own the remaining 90% equity in IFM are
not currently funding its research and development efforts. Accordingly, while
the Company only owns 10% of IFM, it is recognizing 100% of the losses incurred
by IFM. The Company is also expensing its excess investment costs ratably, as
research is performed by IFM.
Certain reclassifications have been made to the fiscal 1998 Financial
Statements to conform to the September 30, 1998 interim presentation.
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended September 30, 1998
and September 30, 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 condition and the results of operations for
these periods.
Operating results for the three months ended September 30, 1998 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
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.
NOTE C - CAPITAL STOCK CONTINGENCY
In October 1997, the Company, the Company's President and Cytoferon
Corp, a former affiliate of the President were named as defendants in a civil
action brought in the
8
<PAGE> 9
United States District Court for the southern District of Florida (Case No:
97-3187-CIV-MARCUS) by a shareholder of the Company and investor in Cytoferon
Corp. The suit alleges the defendants violated federal and state securities
laws, federal and state RICO statutes, fraud, conspiracy, breach of fiduciary
duties and breach of contract. The plaintiff was seeking an unspecified 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. 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 an
unspecified monetary judgement and specific performance delivery of 441,368
shares of common stock.
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.
NOTE D - COMPREHENSIVE LOSS
Three Months Ended
September 30,
------------------
1998 1997
---- ----
Net Loss (2,398,040) (1,860,888)
Other comprehensive income (expense)
Currency translation adjustment 70,618 (120,476)
Net unrealized gain on
marketable securities 7,165 --
---------- ----------
Total comprehensive loss (2,320,257) (1,981,364)
========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements contained in this report on Form 10-Q that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange
Act of 1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include the Company's statements regarding liquidity, anticipated
cash needs and availability, and anticipated expense levels in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including expected Product clinical trial 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 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
9
<PAGE> 10
Exchange Commission on November 3, 1998 (Registration No. 333-65199). You should
also consult the risk factors listed from time to time in the Company's Reports
on Forms 10-Q, 8-K, S-3, 10-K and Annual Reports to the Stockholders.
The biopharmaceutical industry is highly competitive and subject to
rapid technological change. Significant competitive factors in the
pharmaceutical and biopharmaceutical markets include product efficacy, price and
timing of new product introductions. Increased competition from existing
biopharmaceutical companies as well as the entry into the market of new
competitors could adversely affect the Company's financial condition or results
of operations.
The Company's future success depends in part upon its intellectual
property, including patents, trade secrets, know-how and continuing
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 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 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 a
negative cash flows since its inception in December 1980. Losses have totaled
$2,398,040, $7,856,136, and $4,775,245, for the three month period ended
September 30, 1998 and fiscal years ended June 30, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled approximately $4,446,000 on September 30, 1998,
a decrease of $3,397,000 from the previous year end balance. This decrease was
due in part to cash disbursement totalling $1,100,000 for the purchase of an
equity interest in Inflammatics, Inc., as well as additions to property, plant
and equipment of approximately $257,000, and operational losses of $1,927,000.
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 provided Southern the right to
acquire, through September 30, 1998, subsequently extended to December 31, 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, $100,000
of which is non refundable and intended to defer the costs of related due
diligence with the remaining $100,000 refundable if the Company elects not to
proceed with this transaction. There can be no assurance that this
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<PAGE> 11
transaction will ultimately be successfully concluded. Also, the Company
believes that this transaction may be negatively affected by instability in
Asian financial markets.
While subject to significant limitation, the Company at September 30,
1998 has available approximately $28 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.
On September 22, 1998 the Company entered into an Equity Line Financing
Agreement ("Equity Line Agreement") for a maximum offering amount of $20
million, subsequently reduced to $15 million, over three years. Provisions of
the Equity Line Agreement provide that the Company, at its option, may ("Put")
shares of Common Stock to the investor, following an effective Registration
Statement, at a "Put Share Price" equal to the lesser of (a) 87.5% of the Market
Price for such Put or (b) the difference of (i) the Market Price of such Put
minus (ii) $0.225 where the Market Price is defined as the lowest Closing Bid
Price during the 10 to 20 trading days (depending upon the size of the Put)
following each Put.
The amount of Common Stock that may be Put in any 30 day period, is
limited to one half (1/2) of the aggregate daily reported trading volume in the
outstanding Common Stock reported during the 10 trading days preceding the Put
date. In addition, on each six month anniversary of the Subscription Agreement
date, the Company shall issue to the Subscriber a Purchase Warrant to purchase a
number of shares of Common Stock equal to 10% of the number of Put Shares issued
to the Subscriber during the preceding 6 calendar months. Each Purchase Warrant
shall be exercisable at 108% of the lowest closing bid price for the 10 trading
days immediately preceding each six month anniversary.
In connection with the Equity Line Agreement, the Company also entered
into a Placement Agent Agreement which provides for a Cash Placement Fee on the
gross proceeds from the sale of the securities in any Put of: 7% on the first $5
million; 6% from $5 million to $10 million; and 3.5% for amounts in excess of
$10 million. If the Company were to Put securities for the entire $15 million
available under the Equity Line Agreement, the Cash Placement Fee would total
5.5% of the total gross proceeds derived. In addition, the Placement Agent
Agreement provides for the issuance of Placement Agent Warrants to the Placement
Agent equal to: (i) 7%, 6% and 3.5%, respectively, on all shares issued in
connection with Put Shares at the same thresholds as the Cash Placement Fee,
exercisable at 125% of the average Put Share Price of all Put Shares issued
during the preceding six calendar months; and (ii) a warrant to purchase a
number of Common Shares in the same percentages as above for which the
subscriber
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has been issued a Purchase Warrant, exercisable at 108% of the lowest closing
bid price for the 10 trading days immediately, preceding the applicable six
month anniversary.
As of the closing of the Equity Line Agreement, the Company had
approximately 1,900,000 shares of Common Stock available from total authorized
shares. Accordingly, to utilize the total funding available under the Equity
Line Agreement, the Company must obtain Stockholder approval to increase the
number of authorized shares in the Company. In addition, to comply with NASDAQ
National Market regulations regarding potential dilution limitations, the
Company intends to seek Shareholder's approval of the Equity Line Financing
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 Equity Line Agreement
will provide the Company with the funds necessary for at least 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 EU preclinical
trials currently being conducted and the commencement of clinical trials.
Clinical trials in the EU are scheduled to commence in the first quarter of
calendar 1999.
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 in
the EU include: preclinical, 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, general working capital purposes including administrative support
functions and the possible equity investments in businesses complementary to the
Company's operations.
In August 1998, the Company 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 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 150,000 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
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<PAGE> 13
made at the sole option of the Company. The Company also paid $100,000 and
issued warrants to purchase 50,000 shares of the Company's Common Stock at
$1.00 per share, as a finders fee.
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 the Company to issue up to 3
million shares of its Common Stock and warrants to acquire 300,000 shares, at
the then current market price, of the Company's Common Stock, in exchange for
additional Series A Convertible shares of Inflammatics, if all funding phases
are completed.
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 commenced pre-clinical trials with OMNIFERON in the EU in
March 1998 and intends to commence clinical trials in the EU during the first
calendar quarter of 1999 and eventually submit an Investigational New Drug
Application to the U.S. 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.
RESULTS OF OPERATIONS
No sales revenue or related costs of sales were recognized during the
quarter ended September 30, 1998 or the fiscal years ended June 30, 1998 or
1997, respectively. The termination of sales revenue 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 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 commenced pre-clinical trials in the EU in March 1998 and
intends to commence clinical trials in the EU during the first 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.
Research and development costs totaled approximately $940,000 for the
first quarter of fiscal 1999 compared to $1,070,000 for the same period of the
previous year. The decrease of $130,000 included a decrease in laboratory
supplies expense of $194,100, and an increase in research related salaries and
support fees of $25,700.
The decrease in lab supplies expense is representative of the
decreased development activity, related to Omniferon, being performed
domestically, as the technology transfer 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.
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General and administrative expenses totaled approximately
$1,603,000 for the quarter ended September 30, 1998, an increase of
approximately $535,000 from the same period of the preceding year. This increase
reflects an increase in administrative salaries and support fees of $132,500
due to the addition of administrative staff in the Company's Scottish laboratory
and manufacturing facility, increased administrative staff in the Company's
Florida facility and domestic salary increases. Also, 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 Company also incurred an increase in accounting and legal fees
associated with increased operations totalling $180,500 over the same period in
the prior year. The increased activities include strategic contract
negotiations, patent investigations, and defense of pending litigation. The
increased expenses are offset by a decrease in insurance costs of $30,000 from
the prior year due to favorable rates obtained on policy renewals.
The Company recognized approximately $116,000 in losses related to its
investment in Inflammatics, Inc. This loss reflects 100% of the losses incurred
by Inflammatics associated with the clinical testing of LeukoVAX.
Management anticipates operational losses will continue increasing, as
the Company commences clinical trials of Omniferon and continues investigating
business opportunities.
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 whom 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 Products 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, it is expected that most of
this work will be performed by outside contractors retained specifically for
this project. The Company expects to complete its internal Year 2000 project by
March 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.
14
<PAGE> 15
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 or 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.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 4. Results of Votes of Security Holders
On July 31, 1998, the Company held a shareholders meeting in Davie,
Florida to vote on: (i) the election of directors (ii) to ratify an Amendment to
the 1997 Stock Option Plan and (iii) ratification of the appointment of
independent auditors. With 79.6% of the outstanding shares voting either by
proxy or in person, the proposals passed with the following votes:
<TABLE>
<CAPTION>
NAMES OF DIRECTORS FOR AGAINST ABSTAIN NO VOTES
------------------ --- ------- ------- --------
CLASS A
- -------
<S> <C> <C> <C>
Sidney Dworkin 41,458,396 18,598 10,785,056
Charles J. Simons 41,304,154 172,840 10,785,056
CLASS B
- -------
Robert H. Zeiger 41,465,665 11,325 10,785,056
Peter D. Fischbein 41,383,743 93,251 10,785,056
Dennis W. Healey 41,470,212 6,782 10,785,056
CLASS C
- -------
Gerald Smith 40,984,126 492,868 10,785,056
Carl N. Singer 40,957,800 519,194 10,785,056
Proposal to ratify an amendment
to the 1997 Stock Option
Plan, increasing the number
of shares included in the Plan
from 3,000,000 shares to
4,000,000 shares. 39,111,072 2,526,799 267,534 10,805,230
Proposal to ratify the appointment of
independent auditors 41,614,366 241,272 69,941 10,785,056
</TABLE>
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.
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: July 22, 1999
17
<PAGE> 1
EXHIBIT 11
VIRAGEN, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
BASIC AND DILUTED
Weighted average shares outstanding 53,299,268 47,357,382
============ ============
Net Loss (2,398,040) (1,860,888)
Deduct required dividends on convertible preferred stock, Series A 663 663
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 -- 50,444
Deduct required dividends on redeemable preferred stock, Series G -- 26,849
Deduct required dividends on redeemable preferred stock, Series H 432,224 --
Deduct required dividends on redeemable preferred stock, Series I 205,091 --
------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCK $ (3,036,018) $ (2,173,483)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE
After deduction for required dividends on convertible preferred stock $ (0.06) $ (0.05)
============ ============
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,087,258
<SECURITIES> 1,016,465
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,651,465
<PP&E> 9,162,647
<DEPRECIATION> 2,906,313
<TOTAL-ASSETS> 13,367,128
<CURRENT-LIABILITIES> 1,205,839
<BONDS> 242,664
5,894,017
2,650
<COMMON> 553,598
<OTHER-SE> 4,800,241
<TOTAL-LIABILITY-AND-EQUITY> 13,367,128
<SALES> 0
<TOTAL-REVENUES> 107,093
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,659,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,757
<INCOME-PRETAX> (2,398,040)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,398,040)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,398,040)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
