<PAGE> 1
FORM 10-Q - QUARTERLY OR TRANSITIONAL REPORT UNDER
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended - December 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-10252
VIRAGEN, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-2101668
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
865 SW 78th Avenue, Suite 100, Plantation, 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 - 61,686,393 shares at February 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 six months ended December 31, 1998 and 1997 include the
accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
(1) Consolidated Condensed Statements of Operations for the three months
ended and six months ended December 31, 1998 and 1997.
(2) The Consolidated Condensed Balance Sheets as of December 31, 1998 and
June 30, 1998.
(3) Consolidated Condensed Statements of Cash Flows for the six months
ended December 31, 1998 and 1997.
(4) Notes to Consolidated Condensed Financial Statements as of December 31,
1998.
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 Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME
Interest and other income $ 62,285 $ 337,915 $ 169,378 $ 771,766
------------ ------------ ------------ ------------
62,285 337,915 169,378 771,766
COSTS AND EXPENSES
Research and development costs 1,487,956 857,956 2,544,035 1,927,680
General and administrative expenses 1,300,462 1,472,491 2,903,442 2,540,058
Interest expense 9,691 198,481 21,448 454,395
------------ ------------ ------------ ------------
2,798,109 2,528,928 5,468,925 4,922,133
------------ ------------ ------------ ------------
Loss before minority interest (2,735,824) (2,191,013) (5,299,547) (4,150,367)
Minority interest in loss of consolidated
subsidiaries 318,125 779,355 483,808 877,821
------------ ------------ ------------ ------------
NET LOSS (2,417,699) (1,411,658) (4,815,739) (3,272,546)
Deduct required dividends on convertible
preferred stock, Series A 663 663 1,325 1,325
Deduct required dividends on cvertible
preferred stock, Series D -- -- -- 169,221
Deduct required dividends on convertible
preferred stock, Series E -- -- -- 65,418
Deduct required dividends on convertible
preferred stock, Series F -- 141,459 -- 191,903
Deduct required dividends on redeemable
preferred stock, Series G -- 50,811 -- 77,660
Deduct required dividends on redeemable
preferred stock, Series H 206,428 -- 638,652 --
Deduct required dividends on redeemable
preferred stock, Series I 97,615 -- 302,706 --
============ ============ ============ ============
LOSS ATTRIBUTABLE TO COMMON STOCK $ (2,722,405) $ (1,604,591) $ (5,758,422) $ (3,778,073)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE,
after deduction for required dividends on
convertible preferred stock $ (0.05) $ (0.03) $ (0.10) $ (0.08)
============ ============ ============ ============
Weighted average shares outstanding 57,147,051 49,678,398 55,223,160 48,532,715
============ ============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,387,952 $ 2,708,317
Marketable securities, available-for-sale 303,187 6,105,076
Prepaid expenses 400,260 206,995
Due from employees 63,321 60,597
Other current assets 149,973 470,353
------------ ------------
TOTAL CURRENT ASSETS 3,304,693 9,551,338
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 3,574,867 3,538,926
Equipment and furniture 5,488,830 5,311,327
Construction in progress 162,328 48,655
------------ ------------
9,226,025 8,898,908
Less accumulated depreciation (3,055,852) (2,744,827)
------------ ------------
6,170,173 6,154,081
Investment in Inflammatics, Inc. 914,294 --
DEPOSITS AND OTHER ASSETS 66,830 189,806
============ ============
$ 10,455,990 $ 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>
December 31, June 30,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 689,536 $ 829,661
Accrued expenses and other liabilities 324,938 708,005
Current portion of long-term debt 171,277 171,277
------------ ------------
TOTAL CURRENT LIABILITIES 1,185,751 1,708,943
ROYALTIES PAYABLE 107,866 107,866
DEFERRED INCOME 200,000 200,000
LONG-TERM DEBT, less current portion 194,925 280,094
MINORITY INTEREST IN SUBSIDIARIES 703,709 525,936
SERIES H cumulative convertible preferred stock, $1.00 par
Value. Authorized 500 shares; issued and outstanding 156
and 500 shares at December 31, 1998 and June 30, 1998,
respectively 1,682,389 5,146,851
SERIES I cumulative convertible preferred stock, $1.00
par Value. Authorized 500 shares; issued and
outstanding 86 and 200 shares at December 31, 1998
and June 30, 1998, respectively 912,462 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 60,720,815 and 53,416,912 shares at December 31,
1998 and June 30, 1998, respectively, of which 845,277
and 606,277 shares are held as treasury stock on
December 31, 1998 and June 30, 1998, respectively 607,206 534,168
Capital in excess of par value 51,011,034 45,686,143
Treasury stock (1,277,523) (996,541)
Retained deficit (44,657,636) (39,624,889)
Accumulated other comprehensive income 247,520 284,990
Notes due from officers/directors (464,363) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,468,888 5,886,521
------------ ------------
$ 10,455,990 $ 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>
Six Months Ended
December 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(4,815,739) $(3,272,546)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 313,215 385,659
Compensation expense on stock options 414,313 --
Bonus to directors 2,500 --
Minority interest in loss of subsidiary (483,808) (877,821)
Increase (decrease) relating to operating activities from:
Prepaid expenses (193,265) 12,895
Due from employees and officers (10,087) (4,372)
Other current assets 320,380 237,518
Investment in Inflammatics, Inc. 514,706 --
Deposit and other assets 122,976 (11,191)
Accounts payable (140,125) (1,175,139)
Accrued expenses and other liabilities (386,216) (173,287)
----------- -----------
Net cash used in operating activities (4,341,150) (4,878,284)
INVESTING ACTIVITIES
Sale of marketable securities,
available-for-sale, net 5,806,566 1,927,844
Purchase of equity in Inflammatics, Inc. (1,100,000) --
Purchase of property, plant and equipment, net (329,307) (1,062,351)
----------- -----------
Net cash provided by investing activities 4,377,259 865,493
</TABLE>
See notes to consolidated condensed financial statements.
6
<PAGE> 7
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS-(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES
Payments on long-term debt $ (85,169) $ (22,819)
Purchase of treasury stock (280,982) (21,884)
Proceeds from exercise of options and
warrants 50,000 67,894
Payment on preferred dividends -- (928,473)
Refund of paid in capital -- (1,391,198)
Payments on note payable -- (3,240,081)
Redemption of preferred stock, Series G -- (2,405,000)
------------ ------------
Net cash used in financing activities (316,151) (7,941,561)
Effect of exchange rate fluctuations on cash (40,323) (34,050)
------------ ------------
Decrease in cash (320,365) (11,988,402)
Cash and cash equivalents at beginning of period 2,708,317 12,873,301
------------ ------------
Cash and cash equivalents at end of period $ 2,387,952 $ 884,899
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
7
<PAGE> 8
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE A - ORGANIZATION AND CONSOLIDATION
Viragen, Inc. and its subsidiaries are engaged in the research,
development and manufacture of certain immunological products for commercial
application. The consolidated financial statements include the accounts of
Viragen, Inc., 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, 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 December 31, 1998 interim presentation.
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended and six months
ended December 31, 1998 and 1997 include, in the opinion of management of the
Company, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation of the financial condition and the results of
operations for these periods.
Operating results for the three months ended and six months ended
December 31, 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.
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 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 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.
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. The plaintiff is claiming that he is entitled to
additional shares of Common Stock of the Company 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 Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$(2,417,699) $(1,411,658) $(4,815,739) $(3,272,546)
Net loss
Other comprehensive income (expense):
Currency translation adjustment (110,941) 86,426 (40,323) (34,050)
Net unrealized gain on
marketable securities (4,312) 23,306 2,853 23,306
----------- ----------- ----------- -----------
Total comprehensive loss $(2,532,952) $(1,301,926) $(4,853,209) $(3,283,290)
=========== =========== =========== ===========
</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 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, 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 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.
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<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
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 negative
cash flows since its inception in December 1980. Losses have totaled $4,815,739
and $3,272,546, for the six month periods ended December 31, 1998 and 1997,
respectively, and $7,856,136 and $4,775,245, for fiscal years ended June 30,
1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled approximately $2,119,000 on December 31, 1998,
a decrease of $5,723,000 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 $329,000, and operational losses of $4,815,739.
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 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 transaction
will ultimately be successfully concluded. Also, the Company believes that this
transaction has been, and may continue to be, negatively affected by instability
in Asian financial markets.
While subject to significant limitation, the Company at December 31,
1998 has available approximately $31 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
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<PAGE> 12
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 October 1998, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC"), 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. Accordingly, the
Company intends to withdraw this registration statement. The Company is in the
process of evaluating documentation relative to the structuring of a new Equity
Line financing with the same investor.
To fully utilize the funding available under an Equity Line Agreement,
or similarly structured financing dependent upon the issuance of Common Stock,
the Company must obtain stockholder approval to increase the number of
authorized shares
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<PAGE> 13
in the Company. In addition, to comply with NASDAQ National Market regulations
regarding potential dilution limitations, the Company must obtain stockholder
approval of any Equity Line Financing Agreement or similar transaction.
In February 1999, the Company entered into a preliminary agreement for
funding up to $9 million through the issuance of a series of 8% Redeemable
Convertible Notes. While there can be no assurances as to the successful closing
of the transaction, the transaction provides for up to three tranches of $3
million each with the initial tranch expected to be funded on or before March
12, 1999. The Company has agreed to file a registration statement within 30
days, following the initial funding, registering the shares underlying the
Notes, related warrants and finders warrants.
The agreement further provides that following the initial $3 million
tranch, the Notes are convertible into common stock of the Company, one third,
on the later of the day following the effective date of the related registration
or 120 days following the initial funding ("Conversion Date"), and an additional
one-third on the following 30th and 60th day, respectively. 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 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, 60th and 90th day following the Conversion Date. On each of the three
Re-Set dates, the investor is entitled to receive shares representing an
additional 20%, 22% and 24%, 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 accrued interest.
On the closing date, the Company will issue five (5) year common stock
purchase warrants exercisable at 120% of the market price at closing
representing 40% of the total common shares issuable by dividing the Note
principal by 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.
The Company will pay a 6% placement fee for amounts funded upon the
issuance of the Notes. In addition, the placement agent will receive warrants
representing 5% of the total common shares issuable by dividing the Note
principal by the market price at the time of closing.
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 pending Redeemable
Convertible Note financing and modified Equity Line Agreement, currently under
evaluation, 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
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<PAGE> 14
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
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.
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. Transfer of funds to its foreign subsidiaries are performed
infrequently, in large sums, at the then-cnrrent exchange rate.
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.
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 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
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. The second additional
funding, subject to the Company's further evaluation of clinical trial results,
provides for the issuance of 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.
During the quarter, the Company capitalized an additional $59,000 in costs
associated with warrants issued in the IFM transaction.
The Company commenced preclinical trials with OMNIFERON in the EU in
March 1998. These trials were concluded in December 1998, with receipt of the
final preclinical study results expected in March 1999. The Company intends to
commence clinical trials in the EU during the second calendar quarter of 1999
and eventually submit an Investigational New Drug
14
<PAGE> 15
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.
Subject to the successful closing of the pending Redeemable Convertible Note
financing and an Equity Line Agreement, as previously discussed, such fundings
are considered sufficient to fund the Company's operations through and including
Phase III clinical trials.
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 has
been certified as a Certified Capital Company ("CAPCO") under Section 288.99,
Florida Statutes. FCEC is one of fifteen CAPCOs qualified to seek an allocation
from $150 million anticipated to be provided this year by participating
insurance companies. The insurance companies would otherwise pay these funds to
the State of Florida as a tax on premiums collected on insurance policies
written in Florida. Under the program, each insurance company may obtain a
dollar for dollar premium state tax credit, up to $15 million, for each dollar
they invest in a CAPCO. The insurance companies will provide funding to the
qualified CAPCOs in return for offsetting tax credits. The CAPCOs must invest
these funds in qualified Florida businesses, thereby spurring economic
development and job growth within the state. The allocations of funds to the
CAPCOs will occur in April 1999.
The program is a potential opportunity for Viragen to obtain
investment capital that is necessary for future growth and development.
Management believes Viragen is ideally qualified as an investment candidate
under the CAPCO statutes and the Company intends to seek capital from FCEC and
possibly other CAPCOs immediately following allocations in April. While there
can be no assurance that FCEC will ultimately receive any premium tax credit
allocations under the program or that Viragen will obtain any investment
capital from FCEC or other CAPCOs, management intends to vigorously pursue
financing under this innovative program since it may potentially provide
Viragen with a more cost-effective and less dilutive method to finance the
Company.
In November 1998, the Company signed an exclusive supply and
distribution agreement with AGC, a Pakistan-based, multinational conglomerate,
for 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 agreement calls for AGC to purchase a minimum of $20 million of
OMNIFERON over five years commencing with, 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 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.
Under the terms of the 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 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
15
<PAGE> 16
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.
RESULTS OF OPERATIONS
No sales revenue or related costs of sales were recognized during the
three month periods or six month periods ended December 31, 1998 or 1997, or the
fiscal years ended June 30, 1998 or 1997, respectively. The Company has no
source of revenues from the sale of products unless or until it receives the
necessary regulatory approvals from the U.S. Food and Drug Administration
("FDA") 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 and concluded preclinical trials in the EU during calendar
1998 and intends to commence clinical trials in the EU during the second
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 $2,544,000 for the
first six months of fiscal 1999 compared to $1,928,000 for the same period of
the previous year. The increase of $616,000 (32%) included an increase in
research related salaries and support fees of $78,000 and an increase in
equipment maintenance costs of $73,000. The Company also recognized an
additional $515,000 in research and development expenses incurred by IFM
associated with the clinical testing of LEUKOVAX. These increases were offset by
a decrease in consolidated lab supplies expense of $120,000.
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. See
Liquidity and Capital Resources above.
Research and development costs increased by $630,000 during the second
fiscal quarter, an increase of 73% over the second quarter of the prior year.
This increase included an increase in research related salaries and support
fees of $82,000, an increase in equipment maintenance costs of $48,000 and an
increase in lab supplies expense of $74,000. These increases were attributable
primarily to expanded process scale-up projects in the Company's Scottish
facility. This increase between the periods also included $399,000 attributable
to expenses incurred related to clinical testing of LEUKOVAX.
General and administrative expenses totaled approximately $2,903,000
for the six months ended December 31, 1998, an increase of approximately
$363,000 from the same period of the preceding year. This increase reflects an
increase in administrative salaries and support fees of $153,000 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
increased expenses are offset by a decrease in insurance costs of $47,000 from
the prior year due to favorable rates obtained on policy renewals.
General and administrative expenses decreased $172,000 during the
second 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 attributable to the Company's investment in IFM
not incurred during the current year, of $142,000 and a decrease in insurance
costs of $28,000 during the same period. These decreases were offset in part
by an increase in administrative salaries of $59,000.
General and administrative expenses are expected to remain relatively
stable or possibly decline over the next year as the Company has no plans to add
to its administrative staff or related costs and expects, while there can be no
assurance, that legal fees associated with litigation (see Note C of Notes to
Consolidated Condensed Financial Statements) are expected to decline as the
litigation nears conclusion.
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.
16
<PAGE> 17
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 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 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.
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.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 5. Other Information
The Company has 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 has indicated that
the Company has been provided with a 90-day period, 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 is afforded with
the right to request a hearing to present its basis for compliance with
applicable maintenance listing requirements. Failure to demonstrate long term
compliance may result in the delisting of the Company's Common Stock from
NASDAQ.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Per Share Earnings
(12) Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None.
18
<PAGE> 19
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: February 12, 1999
19
<PAGE> 1
EXHIBIT 11
VIRAGEN, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC AND DILUTED
Weighted average shares outstanding 57,147,051 49,678,398 55,223,160 48,532,715
============ ============ ============ ============
Net Loss $ (2,417,699) $ (1,411,658) $ (4,815,739) $ (3,272,546)
Deduct required dividends on convertible
preferred stock, Series A 663 663 1,325 1,325
Deduct required dividends on convertible
preferred stock, Series D -- -- -- 169,221
Deduct required dividends on convertible
preferred stock, Series E -- -- -- 65,418
Deduct required dividends on convertible
preferred stock, Series F -- 141,459 -- 191,903
Deduct required dividends on redeemable
preferred stock, Series G -- 50,811 -- 77,660
Deduct required dividends on redeemable
preferred stock, Series H 206,428 -- 638,652 --
Deduct required dividends on redeemable
preferred stock, Series I 97,615 -- 302,706 --
------------ ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCK
$ (2,722,405) $ (1,604,591) $ (5,758,422) $ (3,778,073)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE after
deduction for required dividends
on convertible preferred stock $ (0.05) $ (0.03) $ (0.10) $ (0.08)
============ ============ ============ ============
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,387,952
<SECURITIES> 303,187
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,304,693
<PP&E> 9,226,025
<DEPRECIATION> 3,055,852
<TOTAL-ASSETS> 10,455,990
<CURRENT-LIABILITIES> 1,185,751
<BONDS> 194,925
2,594,851
2,650
<COMMON> 607,206
<OTHER-SE> 4,859,032
<TOTAL-LIABILITY-AND-EQUITY> 10,455,990
<SALES> 0
<TOTAL-REVENUES> 169,378
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,447,477
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,448
<INCOME-PRETAX> (4,815,739)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,815,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,815,739)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
