<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, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30,
1996
( ) 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 0-17827
VIRAGEN (EUROPE) LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2788282
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2343 West 76th Street, Hialeah, FL 33016
----------------------------------------
(Address of principal executive offices)
(305) 823-0269
----------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------
(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 - 7,088,559 shares at November 11, 1996.
<PAGE> 2
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION
The Consolidated Condensed Statements of Operations (Unaudited) for the three
month periods ended September 30, 1996 and September 30, 1995 include the
accounts of the Registrant and its subsidiary.
Item 1. Financial Statements
1) Consolidated Condensed Statements of Operations for the three months
ended September 30, 1996 and September 30, 1995.
2) The Consolidated Condensed Balance Sheets as of September 30, 1996 and
June 30, 1996.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended September 30, 1996 and September 30, 1995.
4) Notes to Consolidated Condensed Financial Statement as of September 30,
1996.
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 27 - Financial Data Schedule (for SEC use only)
<PAGE> 3
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
1996 1995
-------------- -------------
<S> <C> <C>
INCOME
Interest and other income $ 59,585 $ 438
------------ ------------
59,585 438
COST AND EXPENSES
Research and development costs 41,960 -
General and administrative expenses 116,196 25,861
Depreciation and amortization
748 -
------------ ------------
158,904 25,861
------------ -------------
Net (loss) $ (99,319) $ (25,423)
============ =============
Net loss per common share $ (.01) $ (254.23)
============ =============
Weighted average common shares outstanding 6,932,710 100
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 4
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,841,987 $ 4,985,897
Advances to parent 1,113,961 882,960
Other current assets 34,802 51,313
------------- --------------
Total Current Assets 5,990,750 5,920,170
PROPERTY, PLANT AND EQUIPMENT
Equipment and furniture 9,017 5,985
Construction in progress 110,895 21,811
------------- --------------
119,912 27,796
Less accumulated depreciation (932) (183)
------------- --------------
118,980 27,613
OTHER ASSETS
Deferred Expenses 6,166
------------- --------------
$ 6,109,730 $ 5,953,949
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 85,341 $ 124,384
------------- --------------
Total Current Liabilities 85,341 124,384
------------- -------------
Stockholders' Equity
Common stock, $.01 par value. Authorized
20,000,000 shares; issued and outstanding 6,962,830
shares at September 30, 1996 and 6,922,830 shares
at June 30, 1996 69,628 69,228
Additional paid-in capital 6,487,605 6,192,005
Deficit (574,044) (474,725)
Foreign currency translation adjustment 41,200 43,057
------------- -------------
Total Stockholders' Equity 6,024,389 5,829,565
------------- -------------
$ 6,109,730 $ 5,953,949
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 5
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(99,319) $(25,423)
Adjustments to reconcile net loss to net cash used 748 ---
in operating activities 16,512 385
Depreciation expense 6,166 ---
Changes in assets and liabilities (39,043) 17,417
Decrease in other current assets (231,001) ---
--------- ---------
Decrease in other assets (345,937) (7,621)
--------- ---------
(Decrease) Increase in accounts payable and (92,116) ---
--------- ---------
accrued expenses (92,116) ---
Increase in advance to parent
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property plant and equipment, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of warrants 296,000 ---
--------- ---------
Net cash provided by financing activities 296,000 ---
Effect of foreign currency translation (1,857) ---
--------- ---------
Net decrease in cash (143,910) (7,621)
Cash - Beginning of Period 4,985,897 50,226
--------- ---------
Cash - End of Period $4,841,987 $ 42,605
========= =========
</TABLE>
See notes to consolidate condensed financial statements.
<PAGE> 6
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE - A - ORGANIZATION AND CONSOLIDATION
Viragen (Europe) Ltd. ("VEL") and its subsidiary are engaged in the
research, development and manufacture of certain immunological products for
commercial application. The consolidated financial statements include the
accounts of VEL and its wholly-owned subsidiary, Viragen (Scotland) Ltd.
("VSL"), collectively known as the Company. VSL is a private Scottish company.
All material intercompany accounts and transactions have been eliminated in
consolidation. VEL is a majority-owned subsidiary of Viragen, Inc. See Note B
for further discussion relating to basis of presentation.
Effective May 2, 1996, the Company's name was changed from Sector
Associates, Ltd. to Viragen (Europe) Ltd. The common stock was reverse split
one share for fourteen (1:14) and the par value was changed from $.10 per share
to $.01 per share. The number of authorized common shares was reduced from 50
million shares to 20 million shares.
The effect of the reverse split has been reflected in the consolidated
financial statements for the quarter ended September 30, 1996 and fiscal year
ended June 30, 1996.
NOTE - B - ACQUISITION - BASIS OF PRESENTATION
On September 20, 1995, Sector Associated, Ltd. ("Sector"), (now named
VEL) entered into an agreement and Plan of Reorganization (the "Agreement")
with Viragen, Inc. ("Viragen"), a Delaware corporation. Under the terms of the
Agreement, Sector was to acquire a 100% interest in VSL, in consideration for
Viragen receiving a 94% interest in Sector.
On November 7, 1995, the Agreement was amended to provide for an
interim loan of $500,000 by Sector to VSL, the filing of certain financial
reports by Sector prior to closing, a capital contribution of $300,000 into
Sector within thirty days, and the modification of a related investment banking
agreement. The $500,000 loan was funded November 9, 1995, bearing interest at
4% per annum, secured by a 3.77% equity interest in VSL, and was guaranteed by
Viragen. Upon closing of the Agreement on December 8, 1995, the principal
amount of the note was deemed contributed capital to Sector.
On December 8, 1995, Sector finalized the Agreement and acquired 100%
of the stock of VSL in exchanged for 2,000,000 voting shares of Series B
Convertible Preferred Stock, convertible into 5,600,000 shares of common stock
or approximately 94% of then issued and outstanding shares, as well as 94% of
the voting privileges, of Sector. Viragen retained an 84% ownership interest
in Sector, as 71,429 of the preferred shares (convertible into 200,000 common
shares) were disbursed as finders' fees, and 142,857 of the preferred shares
(convertible into 400,000 common shares) were issued to the Directors and an
affiliate, in exchange for their common shares of VSL. The Company recognized
$243,000 in compensation expense related to the disbursement of stock to the
Directors and affiliate. As the Parent Company of VSL gained voting control of
Sector in this transaction, VSL became the acquiring entity and accounting
survivor. Accordingly, the transaction was accounted for as a reverse
acquisition whereby the historical financial statements contained herein
reflect those of the accounting acquirer, VSL, not the financial statements of
the legal acquirer, VEL (formerly Sector). The historical financial statements
for all periods presented up to December 8, 1995 included herein are,
therefore, those of the predecessor, or VSL, the accounting survivor of the
reverse acquisition. Moreover, since at the time of the acquisition the legal
acquirer, VEL, was a shell corporation with no operations, the stockholder's
equity of the conformed entity was recapitalized to reflect the capital
structure of the surviving legal entity and the accumulated deficit of VSL.
<PAGE> 7
NOTE C - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended September 30, 1996
and September 30, 1995 included, in the opinion of management of the company,
all adjustments consisting of normal recurring accruals, considered necessary
for a fair presentation of the financial position and the results of operations
for these periods.
Operating results for the three months ended September 30, 1996 are
not necessary indicative of the results that may be expected for the entire
year ending June 30, 1997.
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, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
NOTE D - COMMON STOCK OPTIONS AND WARRANTS
Shares of the Company's common stock reserved at September 30, 1996
and June 30, 1996 for possible future issuance are as follows:
<TABLE>
<CAPTION>
Exercise September 30, June 30,
Price 1996 1996
----- ---- ----
<S> <C> <C> <C>
December 1995 Private Placement Warrants $ 6.00 828,000 840,000
Employee options 7.00 50,000 50,000
March 1996 Private Placement Warrants 8.00 422,000 450,000
March 1996 Private Placement Warrants 12.00 216,500 216,500
Class F Warrant (exercisable through November 1, 1998) 105.00 44,196 44,196
-------- ---------
1,560,696 1,600,696
========= =========
</TABLE>
During the quarter ended September 30, 1996, 12,000 warrants with an
exercise price of $6.00 per share issued in connection with the Company's
December 1995 Private Placement and 28,000 warrants with an exercise price of
$8.00 per share issued to March 1996 Private Placement investors were
exercised. No additional options or warrants were issued during the quarter.
On June 30, 1996, 10,120 Class B Warrants having an exercise price of
$133.00 per share expired.
NOTE E - CONTINGENCY
An action is pending against VEL (formerly Sector) alleging that
Sector mishandled payment of amounts due to a secured creditor. Sector has
denied the claim and has filed a counterclaim. Further, a shareholder of
Sector has agreed to indemnify VEL relating to this matter. The ultimate
liability, if any, cannot be determined at this time. Management intends to
vigorously defend its position.
NOTE F - COMMITMENTS
In June 1996, the Company executed a five-year lease on property
located in Edinburgh, Scotland that will serve as the Company's laboratory and
production facilities. Monthly rental on the property is approximately
$10,000. In addition, the Company may extend the term of the lease at its
option, for four five-year periods.
<PAGE> 8
In November 1996, the Company entered into scientific equipment
purchase agreements relating to the Edinburgh Scotland laboratory facility
totaling approximately $1,550,000.
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION 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 introductions,
expected research and development expenditures, new facility completion dates
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 that 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 SB-2 declared effectively, as the
Securities and Exchange Commission on July 12, 1996. You should also consult
the risk factors listed from time to time in the Company's Reports on Form 10-Q,
8-K, 10-K and Annual Reports to the Shareholders.
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 and results
of operations.
The Company's future success depends in part upon its intellectual
property, including patents, trade secrets, know-how and continuing technology
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 patent owned by he 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
owned by the Company.
LIQUIDITY AND CAPITAL RESOURCES
On December 8, 1995, the Company (then named Sector Associates, Ltd.)
acquired 100%of the Viragen (Scotland) Ltd. ("VSL") for 2,000,000 shares of
Series B Convertible Preferred Stock of the Company which, upon conversion,
represented 5,600,000 shares of Common Stock or approximately 94% of the then
issued and outstanding capital stock interest of the Company. As the
stockholders of VSL gained voting control of the Company in this transaction,
they became the acquiring entity and accounting survivor. Accordingly, the
acquisition was accounted for as a reverse acquisition whereby the historical
financial statements reflect those of the accounting acquirer, VSL, not the
financial statements of the legal acquirer, the Company. The historical
financial statements for all periods presented up to December 8, 1995 included
herein are therefore those of the predecessor, or VSL, the accounting survivor
of the reverse acquisition. Moreover, since at the time of the acquisition the
legal acquirer, the Company, was a shell corporation with no operations,
stockholders' equity of the combined entity was recapitalized to reflect the
capital structure of the surviving legal entity and the accumulated deficit of
VSL.
VSL was organized during April 1995 by Viragen, Inc. as a Scottish
private company to undertake clinical trials in the EU and for sales of
Viragen's Product, in the EU and other countries outside the United States.
Accordingly, no financial data is available for Viragen (Europe) Ltd. and its
subsidiary, VSL, prior to April 1995.
<PAGE> 10
Through a license granted by Viragen, VSL's ultimate parent, VSL
secured certain rights to engage in the research, development and manufacture
of certain proprietary products and technologies that relate to the therapeutic
application of human leukocyte interferon for various diseases that affect the
human immune system. Pursuant to these rights, on July 20, 1995, VSL entered
into a License and Manufacturing Agreement with the Common Services Agency, an
agency acting on behalf of the Scottish National Blood Transfusion Services,
("SNBTS") pursuant to which SNBTS, on behalf of VSL, will manufacture and
supply VSL's Product to VSL for distribution in the EU in return for certain
fees and additional rights. SNBTS' services will be subject to all
governmental regulations and procedures pertaining to the manufacture and
distribution of the Product. SNBTS has committed to manufacture the Product in
sufficient scale to accommodate the EU clinical trials and may simultaneously
engage in commercial sales in amounts to be agreed upon by the parties and the
European regulatory authorities. SNBTS will also cooperate with the Company in
studies relevant to the Product and with eventual production, clinical trials
and distribution. Management considers it critical to the Company's operation
and to planned clinical trials to secure a sufficient qualified source of human
leukocytes, a critical component in the manufacture of the Product. VSL was a
newly formed company which commenced operations concurrent with the execution
of its agreements with SNBTS.
The Company initiated a series of Private Placements to accredited
investors to raise capital necessary to complete the planned reverse
acquisition, raise the funding necessary to complete construction of its
Scottish facility and for initial Product testing phases by VSL in Scotland.
In December 1995, the Company completed a Private Placement, raising
approximately $750,000 through the sale of 336,000 units for a purchase price
of $2.23 per Unit. Each Unit consists of 0.71 shares of Common Stock and 2.5
Common Stock Purchase Warrants having an exercise price of $6.00 per share,
representing a total of 240,000 Shares and 840,000 Warrants. In March 1996,
the Company completed two additional Private Placements, issuing a total of
768,000 shares of Common Stock and 216,500 Warrants having an exercise price of
$12.00 per share. These offerings yielded net cash proceeds of $5,102,000.
The completion of the Private Placements provided the Company with initial
capital necessary (I) for the construction of a building and related facilities
in Scotland, (ii) for the purchase of equipment at the Company's Scottish
facilities, (iii) to provide a minimum royalty to the Company's affiliate, VTI
to commence in calendar year 1997 (iv) to expand the number of employees of VEL
and (v) for general working capital. However, the Company will require
additional financing to engage in clinical trials for the purpose of obtaining
EU approval for the Product. The entire process of research, development and
EU regulatory approvals (if obtained), of a new pharmaceutical product takes
several years and requires substantial funding. Pursuant to its Licensing
Agreement with SNBTS, the Company and SNBTS intend to commence EU preclinical
trials in calendar 1997. The Company's present focus is the continued research
and development of the Company's Product for the treatment of Multiple
Sclerosis, Hepatitis B and C, and HIV/AIDS.
Following the receipt of additional funding from the Company's Private
Placement completed in March 1996, research efforts commenced and related costs
were incurred which can be expected to increase as the Company continues its
development efforts for its proprietary production technology for its product.
In June 1996, the Company executed a five year lease agreement in a
biotechnology park in the Edinburgh area of Scotland. This facility, comprised
of approximately 8,100 sq. ft., will contain the Company's laboratory and
production facilities. The monthly rental for the facility is approximately
$10,000 per month. This location will augment other productive assets located
within the SNBTS facility which are available to the Company under the Scottish
Agreement.
The construction and equipping of the Company's Scottish laboratory
and production facility is expected to be completed during the first quarter of
calendar 1997. Estimated costs to complete the facilities, including
equipment, total approximately $3,700,000.
Management believes that the working capital currently on-hand is
adequate to complete the planned construction phase of its Edinburgh production
facility and maintain its research and product
<PAGE> 11
development operations for the foreseeable future. Additional funding will be
required to undertake and complete planned EU trials necessary for requisite
regulatory approvals.
Results of Operations
Income reflected for this quarter represents interest earned on investment of
the proceeds from the Private Placements completed during fiscal 1996.
Research and development costs are reflected during the first fiscal quarter of
1997 as the Company, through Viragen (Scotland) Ltd., began conducting limited
research projects associated with the transfer of technology from the Company's
Omniform (TM) product. These costs will continue to increase at least through
fiscal 1997.
General and administrative expenses increased significantly between the periods
reflecting the hiring of a Managing Director in Scotland and the establishing
of the administrative support functions associated with construction of the
Edinburgh, Scotland facility and technology transfer activities.
<PAGE> 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule (for SEC use only)
(a) Reports on Form 8-K
None
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 (EUROPE) LTD.
By: /s/ Dennis W. Healey
---------------------------
Dennis W. Healey
Executive Vice President
Principal Financial Officer
By: /s/ Jose Ortega
---------------------------
Jose Ortega
Controller
Chief Accounting Officer
Dated: November 12, 1996
<PAGE> 1
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
EXHIBIT 11 COMPUTATION OF LOSS PER COMMON SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
<S> <C> <C>
PRIMARY AND FULLY DILUTED
Weighted average shares outstanding 6,932,710 100
========= ========
Net Loss $ (99,319) $(25,423)
========= ========
Net loss per common share $ (.01) $(254.23)
========= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,841,987
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,990,750
<PP&E> 119,912
<DEPRECIATION> 932
<TOTAL-ASSETS> 6,109,730
<CURRENT-LIABILITIES> 85,341
<BONDS> 0
0
0
<COMMON> 69,628
<OTHER-SE> 5,945,761
<TOTAL-LIABILITY-AND-EQUITY> 6,109,730
<SALES> 0
<TOTAL-REVENUES> 59,585
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 158,904
<LOSS-PROVISION> (99,319)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (99,319)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,319)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
