<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended - December 31,
1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 0-10252
VIRAGEN, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-2101668
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
865 SW 78th Avenue, Suite 100, Plantation, Florida 33324
--------------------------------------------------------
(Address of principal executive offices)
(954) 233-8746
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Sections 12, 13 or 15 (d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, par value $ .01 - 78,150,914 shares at February 10, 2000.
<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, 1999 and 1998 include the
accounts of Viragen, Inc. and its subsidiaries.
Item 1. Financial Statements
1) Consolidated condensed statements of operations for the three months
ended and six months ended December 31, 1999 and 1998
2) Consolidated condensed balance sheets as of December 31, 1999 and June
30, 1999
3) Consolidated condensed statements of cash flows for the six months
ended December 31, 1999 and 1998
4) Notes to consolidated condensed financial statements as of December
31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule (for SEC use only)
Current report on Form 8-K dated November 24, 1999, filed on
December 9, 1999
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME
Interest and other income $ 15,276 $ 62,285 $ 35,224 $ 169,378
------------ ------------ ------------ ------------
15,276 62,285 35,224 169,378
COSTS AND EXPENSES
Research and development costs 1,186,017 1,088,915 2,248,051 2,029,329
General and administrative expenses 1,334,864 1,300,462 2,347,598 2,903,442
Equity in losses of unconsolidated company 146,125 399,041 292,252 514,706
Interest expense 46,814 9,691 892,936 21,448
------------ ------------ ------------ ------------
2,713,820 2,798,109 5,780,837 5,468,925
------------ ------------ ------------ ------------
Loss before minority interest (2,698,544) (2,735,824) (5,745,613) (5,299,547)
Minority interest in loss of consolidated subsidiaries 188,974 318,125 373,514 483,808
------------ ------------ ------------ ------------
NET LOSS (2,509,570) (2,417,699) (5,372,099) (4,815,739)
Deduct required dividends on convertible preferred
stock, Series A 663 663 1,325 1,325
Deduct required dividends on redeemable preferred
stock, Series H -- 206,428 -- 638,652
Deduct required dividends on redeemable preferred
stock, Series I 482 97,615 2,699 302,706
============ ============ ============ ============
LOSS ATTRIBUTABLE TO COMMON STOCK $ (2,510,715) $ (2,722,405) $ (5,376,123) $ (5,758,422)
============ ============ ============ ============
BASIC AND DILUTED LOSS
PER COMMON SHARE,
after deduction for required dividends on
convertible preferred stock $ (0.03) $ (0.05) $ (0.07) $ (0.10)
============ ============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES 75,660,622 57,147,051 74,268,192 55,223,160
============ ============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
3
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 102,701 $ 1,055,587
Restricted cash 35,600 --
Prepaid expenses 222,783 254,057
Other current assets 205,296 306,433
----------- -----------
Total Current Assets 566,380 1,616,077
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 3,571,908 3,492,585
Equipment and furniture 5,993,752 5,556,106
Construction in progress 10,000 309,431
----------- -----------
9,575,660 9,358,122
Less accumulated depreciation (3,689,232) (3,337,807)
----------- -----------
5,886,428 6,020,315
INVESTMENT IN UNCONSOLIDATED
COMPANY 379,493 671,744
DEPOSITS AND OTHER ASSETS 163,971 221,218
----------- -----------
$ 6,996,272 $ 8,529,354
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
4
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS- (CONTINUED)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,361,977 $ 1,132,323
Short-term promissory notes 990,500 --
8% Convertible promissory notes -- 1,929,877
Accrued expenses and other liabilities 890,378 702,209
Current portion of long-term debt 110,401 142,109
------------ ------------
Total Current Liabilities 3,353,256 3,906,518
ROYALTIES PAYABLE 107,866 107,866
LONG-TERM DEBT, less current portion 191,945 231,107
MINORITY INTEREST IN SUBSIDIARIES 107,138 326,684
CONVERTIBLE SERIES I cumulative preferred stock,
$1.00 par value. Authorized 200 shares; issued and
outstanding 11 shares at June 30, 1999 -- 120,920
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible 10% Series A cumulative preferred stock, $1.00 par
value. Authorized 375,000 shares; issued and outstanding 2,650
shares. Liquidation preference value: $10 per share
aggregating $26,500 2,650 2,650
Common stock, $.01 par value. Authorized 125,000,000 and
75,000,000 shares at December 31, 1999 and June 30, 1999, respectively;
issued 78,734,191 and 69,913,762 shares at December 31, 1999 and June 30,
1999, respectively, of which 845,277 shares are held as treasury stock 787,340 699,135
Capital in excess of par value 59,974,539 55,353,205
Treasury stock, at cost (1,277,613) (1,277,613)
Retained deficit (55,897,150) (50,521,028)
Accumulated other comprehensive income 113,143 46,752
Notes due from directors (466,842) (466,842)
------------ ------------
Total Stockholders' Equity 3,236,067 3,836,259
------------ ------------
$ 6,996,272 $ 8,529,354
============ ============
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
5
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VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(5,372,099) $(4,815,739)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 336,248 313,215
Amortization of discount on short-term
promissory note 4,750 --
Amortization of discount on 8% convertible
promissory notes 70,123 --
Compensation expense on stock options 412,617 414,313
Consulting fees paid with common stock 47,000 --
Interest expense on reset shares 697,246 --
Minority interest in loss of subsidiary (373,514) (483,808)
Increase (decrease) relating to operating activities from:
Restricted cash 10,000 --
Prepaid expenses 51,860 (193,265)
Other current assets 101,137 320,380
Investment in unconsolidated company 292,251 514,706
Deposit and other assets 88,753 122,976
Accounts payable 229,654 (140,125)
Accrued expenses and other liabilities 263,860 (386,216)
Due from directors -- (7,587)
----------- -----------
Net cash used in operating activities (3,140,114) (4,341,150)
INVESTING ACTIVITIES
Additions to property, plant and equipment, net (202,361) (329,307)
Sale of marketable securities, available-for-sale, net -- 5,806,566
Investment in unconsolidated company -- (1,100,000)
----------- -----------
Net cash (used in) provided by investing
activities (202,361) 4,377,259
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
6
<PAGE> 7
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS-(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from private placement, net $ 1,144,229 $ --
Proceeds from short-term borrowings, net 887,740 --
Proceeds from sale of detachable warrants with
short-term promissory note 14,250 --
Payments on long-term debt (90,164) (85,169)
Purchase of treasury stock -- (280,982)
Proceeds from exercise of options and warrants 368,435 50,000
----------- -----------
Net cash provided by (used in) financing
activities 2,324,490 (316,151)
Effect of exchange rate fluctuations on cash 65,099 (40,323)
----------- -----------
Decrease in cash (952,886) (320,365)
Cash and cash equivalents at beginning of period 1,055,587 2,708,317
----------- -----------
Cash and cash equivalents at end of period $ 102,701 $ 2,387,952
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
7
<PAGE> 8
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE A - CONSOLIDATION AND BASIS OF PRESENTATION
Viragen, Inc. and its subsidiaries are engaged in the research,
development and manufacture of certain immunological products for commercial
application. The consolidated condensed financial statements include the parent
company and all subsidiaries, including those operating outside the U.S. All
significant transactions among our businesses have been eliminated. We made
certain reclassifications to the fiscal 1999 financial statements to conform to
the December 31, 1999 interim presentation.
Viragen owns a 10% equity interest in Inflammatics, Inc., a
biopharmaceutical company currently in the research and development stage. While
we have the option to increase our ownership interest up to 80%, the financial
accounts of Inflammatics are not consolidated with those of Viragen. We account
for our investment under the equity method of accounting. The parties that own
the remaining 90% equity in Inflammatics are not currently funding its research
and development efforts. Accordingly, while Viragen only owns 10% of
Inflammatics, it is recognizing 100% of the losses incurred by the
unconsolidated company. Costs related to this transaction include finder's fees
and warrants issued. These costs are being amortized in proportion to the losses
incurred by Inflammatics as compared to our initial cash contribution to
Inflammatics.
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended and six months ended
December 31, 1999 and 1998 include, in the opinion of our management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation of the financial condition and the results of operations for
these periods.
Operating results for the three months ended and six months ended
December 31, 1999 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending June 30, 2000.
While our management believes that the disclosures presented are
adequate to make the information not misleading, we suggest that you read these
consolidated condensed financial statements together with the financial
statements and notes included in our annual report on Form 10-K/A for the year
ended June 30, 1999.
In preparing the financial statements, we must use some estimates and
assumptions that may affect reported amounts and disclosures. Estimates are used
when
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accounting for depreciation, amortization, and asset valuation allowances. We
are also subject to risks and uncertainties that may cause actual results to
differ from estimated results, such as changes in the health care environment,
competition, foreign exchange and changes in legislation.
NOTE C - SHORT-TERM PROMISSORY NOTES
On August 10, 1999, Viragen mortgaged its Florida-based research
facility for $600,000. We must pay interest on the promissory note in eleven
monthly installments, which began on September 10, 1999. Interest is calculated
at the rate of 1% over the prime rate per annum, as quoted by the Wall Street
Journal, and the rate is adjusted on a daily basis. The principal balance of
$600,000 plus any unpaid interest is due on July 10, 2000.
On November 3, 1999, Viragen secured a $400,000 short-term loan by
pledging its domestic scientific equipment and a second mortgage on our Florida
based research facility as collateral. We must pay interest on the promissory
note in 6 monthly installments, which began on December 3, 1999. Interest is
calculated at the rate of 12% per annum. The principal balance of $400,000 plus
any unpaid interest is due on May 3, 2000. The lender also received 25,000
detachable warrants exercisable at $0.95 per share through October 31, 2004. We
valued the warrants at $14,250 using a Black-Scholes valuation model. The value
of the warrants was recorded as a discount on principal.
NOTE D - CAPITAL STOCK
On November 24, 1999, Viragen entered into a common stock and warrants
purchase agreement with:
o AMRO International, S.A.,
o Markham Holdings, Limited, and
o Tashdale Ltd.
The agreement was for gross proceeds of $2.5 million. Viragen contracted to
issue, in three tranches, 4,600,000 shares of common stock and warrants to
purchase 375,000 shares of common stock. We entered into this financing under
Regulation S of the Securities Act of 1933. Gross proceeds from the first
tranche totaled $650,000, in exchange for:
o the sale of 1,000,000 shares and warrants to purchase 50,000
shares to AMRO International, and
o the sale of 300,000 shares and warrants to purchase 15,000 shares
to Markham Holdings Limited.
The warrants are exercisable at $1.15 per share and expire on November 30, 2002.
9
<PAGE> 10
When Viragen filed the related registration statement on Form S-1 (File
No. 333-93425) on December 22, 1999, we received an additional $650,000. In this
tranche:
o AMRO International acquired an additional 1,000,000 shares of
common stock and warrants to purchase 50,000 shares, and
o Markham Holdings acquired, at the same time, 300,000 additional
shares and warrants to purchase 15,000 shares.
The warrants are also exercisable at $1.15 per share and expire on November 30,
2002.
The Securities and Exchange Commission declared the registration
statement effective on February 11, 2000. Accordingly, Viragen issued 2,000,000
shares and warrants to purchase 120,000 shares to Tashdale Ltd., for
consideration of $1,200,000. The warrants are exercisable at $1.15 per share and
will expire on November 30, 2002.
In connection with this transaction, Viragen paid a fee of 7% of the
amount invested to AMRO International in consideration of locating the other two
investors. They also received warrants to purchase 125,000 shares of common
stock. The warrants are exercisable at $1.15 per share through November 30,
2002.
NOTE E - COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(2,509,570) $(2,417,699) $(5,372,099) $(4,815,739)
Other comprehensive income (loss):
Currency translation adjustment (79,238) (110,941) 66,391 (40,323)
Net unrealized gain (loss) on
marketable securities -- (4,312) -- 2,853
----------- ----------- ----------- -----------
Total comprehensive loss $(2,588,808) $(2,532,952) $(5,305,708) $(4,853,209)
=========== =========== =========== ===========
</TABLE>
10
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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. These include statements regarding Viragen's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward-looking
statements include our statements regarding liquidity, anticipated cash needs
and availability, and anticipated expense levels discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including expected project commencement dates, product introductions, expected
research and development expenditures and related anticipated costs. All
forward-looking statements included in this document are based on information
available on this date, and we assume no obligation to update any
forward-looking statements. You should note that actual results could differ
materially from those contained in the forward-looking statements. Among the
factors that may cause our actual results to differ materially are the factors
detailed below and the risks discussed in the "Risk Factors" section, included
in our amendment no. 2 to Form S-1 registration statement, as filed with the
Securities and Exchange Commission on February 10, 2000 (File No. 333-93425).
You should also consult the risk factors listed from time to time in Viragen's
reports and amendments, if applicable, on Forms 10-Q, 8-K, 10-K and annual
reports to our stockholders.
The biopharmaceutical industry is highly competitive and subject to
rapid technological change. Significant competitive factors in the
pharmaceutical and biopharmaceutical markets include product efficacy, price,
timing of new product introductions and availability of investment capital.
Increased competition from existing biopharmaceutical companies, as well as the
entry into the market of new competitors, could adversely affect our financial
condition or results of operations.
Our future success depends in part upon intellectual property,
including patents, trade secrets, know-how and continuing technological
innovation. We cannot provide assurances that any steps we take to protect our
intellectual property will be adequate to prevent misappropriation or that
others will not develop competitive technologies or products. We cannot offer
any assurances that any current or future patent, if any, owned by us will not
be invalidated, circumvented or challenged, that the rights granted to us will
provide competitive advantages, or that any future patent applications will be
issued with the scope of the claims sought by us, if at all. Furthermore, we
cannot assure you that others will not develop technologies that are similar or
superior to ours, duplicate our technology or design around any patents held by
us.
Viragen has incurred operational losses and operated with negative cash
flows since its inception in December 1980. Losses have totaled $5,372,099,
$10,650,832, and $7,856,136, for the six month period ended December 31, 1999
and fiscal years ended June 30, 1999 and 1998, respectively.
11
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LIQUIDITY AND CAPITAL RESOURCES
As of February 10, 2000, Viragen has limited capital to sustain its
operations. The fiscal 1999 report of independent certified public accountants,
included in our annual report on Form 10-K/A, noted our financial condition
raises substantial doubt as to our ability to continue as a going concern. Our
financial condition has not improved since this report was issued. We are
actively seeking new investment capital. However, we cannot assure you as to the
timing of any new investment, if at all. If we are unable to attract new
investment capital in the near-term, we will need to significantly reduce or
completely suspend all operations.
Our working capital deficit totaled approximately $2,787,000 on
December 31, 1999, a decrease in working capital of $497,000 from the previous
year end balance. This decrease in working capital is attributable to
operational losses of approximately $5,372,000 and additions to property, plant
and equipment of $202,000. This decrease was partially offset, however, by the
conversion of $2,000,000 in convertible notes plus related interest into
5,210,412 shares of common stock and the sale of 2,600,000 shares of common
stock for $1,144,000, net of related fees.
On March 17, 1999, we entered into a purchase agreement with the
Isosceles Fund Limited and Cefeo Investments Limited, which was amended on June
16, 1999. Under the purchase agreement, we issued Isosceles and Cefeo 8%
convertible promissory notes in the aggregate principal amount of $2,000,000 and
warrants to purchase shares of our common stock.
Because the related registration statement (File No. 333-75749) was not
effective by July 7, 1999, we began incurring $40,000 in penalties per month,
until the registration statement became effective on February 11, 2000. We
incurred approximately $320,000 in penalties in that time.
In May 1999, Viragen completed a private placement for the sale of
2,750,000 shares of common stock. The common shares were sold to three
accredited investors at $0.50 per share. Viragen received proceeds of $1,375,000
from the sale of these shares.
In June 1999, we modified our agreements with Isosceles and Cefeo to
lower the conversion price of the promissory notes. We did this in order to
obtain a waiver from them to permit the interim financing in May 1999. Since we
had a pending registration
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statement at the time of the May 1999 interim financing and June 1999
modification, the Securities and Exchange Commission has informed us that we may
have violated Section 5 of the Securities Act of 1933. Accordingly, we may have
a contingent liability to Isosceles, Cefeo and the three investors in the
interim financing since they may have a right to rescind their transactions. We
have, however, obtained waivers from both the promissory note investors and the
May 1999 investors of their rescission rights under Section 5 of the Securities
Act of 1933.
While subject to significant limitation, Viragen, at December 31, 1999,
has available approximately $36 million in net tax operating loss carryforwards
expiring between 2000 and 2019. We can use these carryforwards to offset taxable
income, if any, during those periods. Our ability to generate revenues during
future periods is dependent upon obtaining regulatory approvals of our
OMNIFERON(TM) and/or LEUKOVAX products. As we cannot determine that we will be
successful in obtaining the necessary regulatory approvals, we are unable to
conclude that realization of benefits from our deferred tax assets is more
likely than not, as prescribed by SFAS 109. As a result, we have recognized a
valuation allowance to offset 100% of the deferred tax assets related to these
carryforwards.
We believe that our OMNIFERON product, which is currently under
development, can be manufactured in sufficient quantity and be priced at a level
to offer patients an attractive alternative treatment to the synthetic
interferons currently being marketed. We began our clinical trials in the
European Union during the fourth calendar quarter of 1999 and intend to
eventually submit an Investigational New Drug Application to the U.S. Food and
Drug Administration. Approvals of these projects cannot be assured and are
subject to the successful completion of lengthy and costly clinical trials. The
completion of the project also depends on our ability to raise significant
additional investment capital.
We need additional funding to conduct the clinical trial process
relating to OMNIFERON both in the European Union and domestically, prior to
receiving regulatory approval to market OMNIFERON. Management estimates our
funding requirements related to approval of OMNIFERON for hepatitis C, the first
approval we are seeking in the European Union, are as follows:
o Phase I and Phase II trials -- $3.2 million, and
o Phase III studies -- $9.1 million.
We estimate that we will require funding of approximately $30 million,
over the next three years. These funds would be used to fund operations
including clinical trials.
In addition, anticipated funding requirements for U.S. operations
include:
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o the establishment of domestic manufacturing capacity -- $6
million;
o joint research and development projects -- $4 million; and
o commencement of domestic preclinical Phase I and Phase II studies
-- $1.5-$2.0 million.
We will also use future funding, if any, for continued product
development, general working capital purposes, including administrative support
functions, and possible equity investments in businesses complementary to our
operations.
In August 1998, Viragen entered into a strategic alliance concurrent
with the purchase of a 10% equity interest in Inflammatics, Inc., a private drug
development company, headquartered in Philadelphia, PA. Inflammatics has
focussed on the development of LEUKOVAX, an immunomodulating white blood cell
(leukocyte) preparation. LEUKOVAX is currently in U.S. Food and Drug
Administration Phase I/II clinical trials for rheumatoid arthritis. Under the
terms of this agreement, we have options to acquire an additional 70% equity
position in Inflammatics through two additional fundings.
We will make the additional funding, if any, at our sole option, based
upon our evaluation of LEUKOVAX clinical trial data. This funding will be used
to underwrite a Phase III clinical trial. The agreement also provides for us to
issue up to 3 million shares of common stock and warrants to acquire 300,000
shares of common stock, in exchange for additional series A convertible
preferred shares of Inflammatics, if all funding phases are completed.
Preliminary estimates for the funding of Phase III clinical trials of LEUKOVAX
range between $6.0 million and $10.0 million.
Viragen has funded operations during the first half of fiscal 2000 by
using the proceeds from short-term borrowings, a private placement, and the
exercises of commons stock options and warrants.
On August 10, 1999, Viragen mortgaged its Florida-based research
facility for $600,000. We must pay interest on the promissory note in eleven
monthly installments, which began on September 10, 1999. Interest is calculated
at the rate of 1% over the prime rate per annum, as quoted by the Wall Street
Journal, and the rate is adjusted on a daily basis. The principal balance of
$600,000 plus any unpaid interest is due on July 10, 2000.
On November 3, 1999, Viragen secured a $400,000 short-term loan by
pledging its domestic scientific equipment and a second mortgage on our Florida
based research facility as collateral. We must pay interest on the promissory
note in 6 monthly installments, which began on December 3, 1999. Interest is
calculated at the rate of 12% per annum. The principal balance of $400,000 plus
any unpaid interest is due on May 3, 2000.
On November 24, 1999, Viragen entered into a common stock and warrants
purchase agreement with:
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o AMRO International, S.A.,
o Markham Holdings, Limited, and
o Tashdale Ltd.
The agreement was for gross proceeds of $2.5 million. Viragen contracted to
issue in three tranches, 4,600,000 shares of common stock and warrants to
purchase 375,000 shares of common stock. We entered into this financing under
Regulation S of the Securities Act of 1933. Gross proceeds from the first
tranche totaled $650,000, in exchange for:
o the sale of 1,000,000 shares and warrants to purchase 50,000
shares to AMRO International, and
o the sale of 300,000 shares and warrants to purchase 15,000 shares
to Markham Holdings Limited.
The warrants are exercisable at $1.15 per share and expire on November 30, 2002.
When Viragen filed the related registration statement on Form S-1 (File
No. 333-93425) on December 22, 1999, we received an additional $650,000. In this
tranche:
o AMRO International acquired an additional 1,000,000 shares of
common stock and warrants to purchase 50,000 shares, and
o Markham Holdings acquired, at the same time, 300,000 additional
shares and warrants to purchase 15,000 shares.
The warrants are also exercisable at $1.15 per share and expire on November 30,
2002.
The Securities and Exchange Commission declared the registration
statement effective on February 11, 2000. Accordingly, Viragen issued 2,000,000
shares and warrants to purchase 120,000 shares to Tashdale Ltd., for
consideration of $1,200,000. The warrants are exercisable at $1.15 per share and
will expire on November 30, 2002.
In connection with this transaction, Viragen paid a fee of 7% of the
amount invested to AMRO International in consideration of locating the other two
investors. They also received warrants to purchase 125,000 shares of common
stock. The warrants are exercisable at $1.15 per share through November 30,
2002.
Between July and December 1999, Viragen has received approximately
$370,000 from the exercise of common stock options and warrants.
In December 1999, we retained the investment banking firm of Ladenburg
Thalmann & Co., Inc. to aid us in identifying and developing financing sources.
We
15
<PAGE> 16
cannot assure you that any financing will result from this relationship. If
we are unable to attract new investment capital in the near-term, we will need
to significantly reduce or completely suspend all operations.
RESULTS OF OPERATIONS
As the discussion of Liquidity and Capital Resources noted, our fiscal
1999 report of independent certified public accountants noted our financial
condition raises substantial doubt as to our ability to continue as a going
concern.
Viragen has recognized no sales revenue or related costs for the three
months ended or six months ended December 31, 1999 or 1998 or the fiscal years
ended June 30, 1999 or 1998, respectively. We have limited potential for sales
prior to receiving the necessary regulatory approvals from the U.S. Food and
Drug Administration and/or comparable European authorities. We could commence
generating sales revenue through export sales of OMNIFERON prior to the end of
calendar 2000 under an agreement with the AGC group of companies. These sales,
however, are contingent upon AGC's receipt of the required regulatory approvals
for product commercialization in the designated territories, and our receipt of
the requisite regulatory approvals.
We received approval of our Clinical Trial Exemption Application from
the European Union regulatory authorities to begin clinical trials of OMNIFERON,
our multi-species natural human leukocyte-derived alpha interferon, and began
these trials during the fourth calendar quarter of 1999. We intend to eventually
submit an Investigational New Drug Application to the Food and Drug
Administration. We cannot assure you we will receive these approvals. These
approvals are subject to the successful completion of clinical trials and our
ability to raise significant additional investment capital to fund the
completion of these trials.
Research and development costs totaled approximately $1,186,000 for the
quarter ended December 31, 1999. This is an increase of 9% from the same period
of the previous year. The significant changes in the cost components included an
increase in research related salaries and support fees of $130,000, being offset
by a decrease in laboratory supplies expense of $109,000.
Research and development costs totaled approximately $2,248,000 for the
first six months of fiscal 2000 compared to $2,029,000 for the same period of
the previous year. The increase of $219,000 included an increase in research
related salaries and support fees of $291,000. This increase was offset by a
decrease in laboratory supplies expense of $85,000.
The aggregate increase in research and development costs is net of the
decrease in domestic development activity, related to OMNIFERON, as the
technology transfer to our Scottish facility was deemed completed. In November
1999, we ceased all research projects being conducted in our Florida laboratory
facility. All research related projects,
16
<PAGE> 17
including research related to production scale-up, are now being conducted in
our Edinburgh, Scotland facility. We believe that this consolidation step will
improve and streamline our scientific development efforts, as well as reduce
operating costs by consolidating operations in one facility. During the quarter
ended December 31, 1999, domestic laboratory supplies expense and research
related salaries and support fees decreased by $123,000 and $67,000,
respectively, when compared to the same period of the previous year. During the
six month period ended December 31, 1999, domestic laboratory supplies expense
and research related salaries and support fees decreased by $203,000 and
$152,000 respectively, when compared to the same period of the previous year.
Total research and development costs, however, will continue to increase in the
following periods as we commence our clinical trials of OMNIFERON.
General and administrative expenses totaled approximately $1,335,000
and $1,300,000 for the quarters ended December 31, 1999 and 1998, respectively.
This represents an increase of $35,000 or 3% between periods. The significant
changes in cost components included an increase in compensation expense on stock
options granted of $166,000 and a decrease in administrative salaries and
support fees of $218,000. The decrease in administrative salaries and support
fees is related to the implementation of our cost reduction program.
General and administrative expenses totaled approximately $2,348,000
for the six month period ended December 31, 1999, a decrease of approximately
$555,000 from the same period of the preceding year. This decrease reflects a
decrease in administrative salaries and support fees of $406,000 due to the
implementation of our cost reduction program.
We recognized approximately $292,000 in losses related to our
investment in Inflammatics, Inc. during the first half of fiscal 2000. This is
down from $515,000 in the prior year. This loss reflects 100% of the losses
incurred by Inflammatics associated with the clinical testing of LEUKOVAX. The
loss also includes the amortization of the capitalized finders fee and warrant
costs. These costs are being amortized in proportion to the losses incurred by
Inflammatics as compared to our initial cash capital contribution to
Inflammatics.
The significant increase in interest expense is related to debt
instruments that were outstanding during the first half of fiscal 2000, but not
outstanding during the same period of fiscal 1999. Specifically, Viragen had
outstanding 8% convertible promissory notes with a principal balance of
$2,000,000, during the first quarter of fiscal 2000. Also, Viragen incurred
approximately $700,000 of interest expense on reset shares issued to investors
upon the conversion of the promissory notes during the first fiscal quarter.
Viragen also borrowed $1,000,000 during the current fiscal year through two
short-term promissory notes.
Our management anticipates operational losses will continue increasing
as we began our clinical trials of OMNIFERON during the fourth calendar quarter
of 1999. In January 1999, we began implementing a cost-reduction plan. Planned
cost reductions implemented in calendar 1999 are expected to save approximately
$2.4 million annually in operating expenses. The reductions include the
elimination of administrative and research positions in the U. S. saving
approximately $1.6 million. We also closed our
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<PAGE> 18
Florida-based research facility, consolidating these operations in our Scottish
facility and saving approximately an additional $800,000 annually. We are
currently trying to sell our Florida-based research facility. These changes in
operations reflect the shift from developing OMNIFERON in our domestic
laboratories to scale-up development and conducting clinical research in the
European Union. As a result, while significant savings will be realized in the
U.S., particularly in general and administrative expenses, these savings will be
more than offset by increasing expenses in our Scottish facilities.
On February 7, 2000, the board of directors voted to modify the terms
of an option to purchase 1.4 million shares of common stock, which had been
granted to Viragen's president during October 1995. The board of directors
delayed the expiration of this common stock option by three years. Under the
modified terms, the common stock option will now expire on October 5, 2003. No
other terms were changed. Under the provisions of APB 25, we will recognize
compensation expense of $1,028,000 relating to the modification of the grant,
during the fiscal quarter ending March 31, 2000.
YEAR 2000
Viragen recognizes the potential problem posed to its operations by its
dependence upon date sensitive computer systems and applications throughout its
business and the operations of third parties upon whom we are dependent. We rely
heavily on computerized laboratory equipment both for ongoing research and
production scale-up projects as well as computer controlled commercial scale
manufacturing equipment. In addition, through strategic alliance and supply
agreements currently in place, we are also dependent upon Year 2000 compliance
by third parties for the supply of critical raw materials as well as certain
manufacturing steps and storage of products produced for clinical trials and
eventually for commercial scale production.
We have been utilizing both internal and external resources to isolate
and as necessary, reprogram, update or replace hardware or software found to be
non-Year 2000 compliant. Due to the limited size of our administrative staff,
most of this work has been performed by outside contractors retained
specifically for this project. We believe that all of our significant computer
dependent systems, both administrative and scientific, are now Year 2000
compliant. The total estimated cost to us to complete our internal Year 2000
project was approximately $50,000, including hardware replacements where
indicated. Funding for the evaluation and corrective phases was provided from
general working capital.
We previously contacted certain external third parties, including raw
material vendors and scientific equipment manufacturers considered critical to
our current and planned future operations to discuss and evaluate their own
compliance programs. We will continue to evaluate, in the future, additional
third party responses, and intend to mitigate third party Year 2000 issues, as
necessary. For example, while we believe our current suppliers of white blood
cells, a critical component to our manufacturing process,
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<PAGE> 19
are year 2000 compliant, we have identified and confirmed alternate sources of
this material, if needed.
The ultimate success of our Year 2000 compliance program is dependent
in large part upon compliance programs of external third parties or scientific
equipment and software vendors over whom we have no direct control. Accordingly,
the inability of critical vendors to meet Year 2000 compliance deadlines could
have a material adverse impact on our operations from a product development,
clinical trial or commercial manufacturing standpoint. This would negatively
affect our financial condition, results of operations and cash flows.
To date, we have not experienced any Year 2000 computer problems. Also,
we are not aware of any Year 2000 computer problems experienced by our vendors.
We will, however, continue to monitor the situation, in the event any problems
occur during the year.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Per Share Earnings
(27) Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Current report on Form 8-K dated November 24, 1999, filed
on December 9, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIRAGEN, INC.
By: /s/ Dennis W. Healey
-------------------------------
Dennis W. Healey
Executive Vice President and
Principal Financial Officer
By: /s/ Jose I. Ortega
-------------------------------
Jose I. Ortega
Controller and
Principal Accounting Officer
Dated: February 12, 2000
21
<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,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES 75,660,622 57,147,051 74,268,192 55,223,160
============ ============ ============ ============
NET LOSS $ (2,509,570) $ (2,417,699) $ (5,372,099) $ (4,815,739)
Deduct required dividends on convertible
preferred stock, Series A 663 663 1,325 1,325
Deduct required dividends on redeemable
preferred stock, Series H -- 206,428 -- 638,652
Deduct required dividends on redeemable
preferred stock, Series I 482 97,615 2,699 302,706
------------ ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCK $ (2,510,715) $ (2,722,405) $ (5,376,123) $ (5,758,422)
============ ============ ============ ============
BASICAND DILUTED LOSS PER
COMMON SHARE
after deduction for required
dividends on convertible preferred
stock $ (0.03) $ (0.05) $ (0.07) $ (0.10)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 102,701
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 566,380
<PP&E> 9,575,660
<DEPRECIATION> 3,689,232
<TOTAL-ASSETS> 6,996,272
<CURRENT-LIABILITIES> 3,353,256
<BONDS> 191,945
0
2,650
<COMMON> 787,340
<OTHER-SE> 2,446,077
<TOTAL-LIABILITY-AND-EQUITY> 6,996,272
<SALES> 0
<TOTAL-REVENUES> 35,224
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,887,901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 892,936
<INCOME-PRETAX> (5,372,099)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,372,099)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,372,099)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
