<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/A
(MARK ONE)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended - March 31, 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 0-17827
VIRAGEN (EUROPE) LTD.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2788282
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
865 SW 78TH AVENUE, SUITE 100, PLANTATION, FLORIDA 33324
--------------------------------------------------------
(Address of principal executive offices)
(954) 233-8377
---------------------------------------------------
(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 - 7,116,059 shares at May 12, 1998.
<PAGE> 2
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION
The Consolidated Condensed Statements of Operations (Unaudited) for the three
months ended and nine months ended March 31, 1998 and 1997 include the accounts
of the Registrant and its subsidiary.
Item 1. Financial Statements
1) Consolidated Condensed Statements of Operations for the three months
ended and nine months ended March 31, 1998 and 1997.
2) The Consolidated Condensed Balance Sheets as of March 31, 1998 and June
30, 1997.
3) Consolidated Condensed Statements of Cash Flows for the nine months
ended March 31, 1998 and 1997.
4) Notes to Consolidated Condensed Financial Statement as of March 31,
1998.
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)
2
<PAGE> 3
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME
Interest and other income $ 6,297 $ 72,516 $ 35,768 $194,684
----------- --------- ----------- ---------
6,297 72,516 35,768 194,684
COST AND EXPENSES
Research and development costs 297,004 112,342 635,313 174,201
General and administrative expenses 276,105 217,846 723,207 487,468
Licensing fee -- -- 2,000,000 --
Depreciation and amortization 96,174 1,125 260,325 2,832
Interest expense 3,534 -- 10,592 --
----------- --------- ----------- ---------
672,817 331,313 3,629,437 664,501
----------- --------- ----------- ---------
NET LOSS $ (666,520) $(258,797) $(3,593,669) $(469,817)
----------- --------- ----------- ---------
Net loss per common share $ (0.09) $ (0.04) $ (0.51) $ (0.07)
=========== ========== =========== =========
Weighted average common shares outstanding 7,116,059 7,098,159 7,116,059 7,026,714
=========== ========== =========== =========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 991,524 $ 2,144,271
Prepaid licensing fee -- 2,000,000
Other current assets 282,025 193,908
----------- -----------
Total current assets 1,273,549 4,338,179
PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements 1,919,652 1,815,409
Equipment and furniture 2,280,063 1,606,406
----------- -----------
4,199,715 3,421,815
Less accumulated depreciation (274,701) (9,257)
----------- -----------
3,925,014 3,412,558
Other Assets 31,251 --
----------- -----------
$ 5,229,814 $ 7,750,737
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 268,661 $ 679,514
Current Portion of long-term debt 6,225 6,225
Advances from parent 1,914,867 455,175
----------- -----------
Total current liabilities 2,189,753 1,140,914
Long-term debt, less current portion 159,316 157,686
Stockholders' Equity
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 7,116,059 shares 71,160 71,160
Additional paid-in capital 7,441,447 7,441,447
Retained deficit (4,927,609) (1,333,939)
Foreign currency translation adjustment 295,747 273,469
----------- -----------
Total stockholders' equity 2,880,745 6,452,137
----------- -----------
$ 5,229,814 $ 7,750,737
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(3,593,669) $(469,817)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 260,325 2,832
Increase (decrease) relating to operating
activities from:
Prepaid licensing fee 2,000,000 --
Other current assets (88,117) (243,663)
Other assets (31,251) (3,596)
Accounts payable and accrued expenses (410,853) 116,766
----------- -----------
Net cash used in operating activities (1,863,565) (597,478)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property plant and equipment, net (772,781) (2,371,465)
----------- -----------
Net cash used in investing activities (772,781) (2,371,465)
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Advances from parent 1,459,692 1,337,349
Exercise of warrants -- 1,203,375
Proceeds from loan -- 164,000
----------- -----------
Net cash provided by financing activities 1,459,692 2,704,724
----------- -----------
Effect of foreign currency translation 23,907 181,230
----------- -----------
Net decrease in cash (1,152,747) (82,989)
Cash - Beginning of Period 2,144,271 4,985,897
----------- -----------
Cash - End of Period $ 991,524 $ 4,902,908
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
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. ("Viragen").
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended and nine months
ended March 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 position and the results of
operations for these periods.
Operating results for the three month period and nine month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending June 30, 1998.
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, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
NOTE C - RECENT PRONOUNCEMENTS
Effective during the quarter ended December 31, 1997, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Common Share. All periods presented reflect the implementation of SFAS No. 128.
6
<PAGE> 7
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 Position and Results of Operations"
including expected product clinical trial introductions, expected research and
development expenditures, and related anticipated costs. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statement. It is important to note 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 on Form SB-2
declared effective by the Securities and Exchange Commission on July 12, 1996
and related Post-Effective Amendment dated April 18, 1997. 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 Shareholders.
The biopharmaceutical industry is highly competitive and subject to
rapid technological changes. 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 of new competitors into the
market could adversely affect the Company's financial position and results of
operations.
The Company's future success depends in part upon its intellectual
property, including future 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 future patent 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.
7
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Through a license granted by Viragen, VSL's ultimate parent, VSL
secured certain rights to engage in the development, manufacture and
distribution of certain proprietary products and technologies that related to
the therapeutic application of human leukocyte interferon (the "Product") 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 assist within the manufacture of VSL's product and, subject to regulatory
approval, with the 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 assist in the manufacture of the Product in
sufficient scale to accommodate the EU clinical trials and potentially 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, pre-clinical and clinical
trials and distribution. Management considers it critical to the Company's
operations and to planned clinical trials to have secured a sufficient source of
human leukocytes, a critical component in the manufacture of the Product. VSL
commenced operations concurrent with the execution of its agreement with SNBTS.
Pursuant to the provisions of the License Agreement between VSL and
Viragen, a $2,000,000 Initial Prepayment and Deposit was paid to Viragen in June
1997. In September 1997, VSL and Viragen mutually agreed to extend the
technology transfer completion dates. Accordingly, the agreement was modified
such that the $2,000,000 Initial Prepayment would represent the contractual
prepayment for the one year period commencing November 1, 1997. The agreement
was further modified to provide that in the event the proprietary technology was
not transferred pursuant to the provisions of the agreement, the Initial
Prepayment would have been refunded to VSL.
In November 1996, the Company executed a five-year lease agreement in a
biotechnology park in the Edinburgh area of Scotland. This facility, comprised
of approximately 10,000 sq. ft., contains the Company's European laboratory and
production facilities. Monthly rental for the facility is 7,109 UK Pounds or
approximately US$11,500 subject to adjustment for common area maintenance
charges. The lease provides for four-five year extensions at the option of the
Company. Other augmenting productive assets located within the SNBTS facility
are available on a fee basis to the Company under the Scottish Agreement.
Management believes that the working capital currently on-hand,
supplemented if and as needed by advances from Viragen, its Parent, is adequate
to maintain its research and product development operations for the foreseeable
future, including projects
8
<PAGE> 9
associated with process scale-up, the preclinical trial phase of the Product's
development and the commencement of clinical trials. Additional funding will be
required to complete the clinical trials process and administrative filings
necessary to obtain final EU regulatory approvals.
RESULTS OF OPERATIONS
Income for the nine months and three months ended March 31, 1998
primarily represents interest earned on the investment of proceeds from a series
of private placements completed in fiscal 1996. The decline in interest income
for the comparable periods of the preceding year reflect the reduction in
principal invested between the periods resulting primarily from the payment of a
$2 million Royalty Prepayment and Deposit to Viragen in June 1997 pursuant to
the License Agreement between VSL and Viragen (see Liquidity and Capital
Resources-above), operational loses and expenditures associated with the
establishment and equipping of the Company's laboratory and manufacturing
facility in Scotland.
Research and development costs totaled $635,313 and $297,004 for the
nine months and quarter months ended March 31, 1998, respectively. These totals
reflect sharp increases over the comparable periods of the preceding year and
are attributable to the development and scale-up projects associated with the
transfer of technology from the Company's parent, Viragen, relating to the
Company's OMNIFERON(TM) product. Components of this increase during fiscal 1998
include increases in scientific salaries and support fees of approximately
$240,000 and $33,000 for the nine month and three month periods, respectively
and increases in laboratory supplies expense of approximately $151,000 and
$123,000, respectively between the periods. Research and development costs will
continue to increase over preceding periods as the Company continues its process
development and scale-up projects prior to the planned commencement of clinical
trials of the Product scheduled for the second half of calendar 1998.
General and administrative expenses increased sharply during the year
totaling $723,207 and $276,105 for the nine month and three month periods ending
March 31, 1998 when compared to $487,468 and $217,846 for the comparable periods
of the preceding year. These increases between the periods reflect the increase
in the administrative support functions associated with establishment of the
Company's laboratory and manufacturing facility in Scotland and related transfer
of technology and process scale-up projects during fiscal 1998. Administrative
salaries increased by approximately $33,000 and $1,000 during the nine month and
three month periods, respectively. Rent expenses also increased during the same
periods by approximately $150,000 and $81,000, respectively. Increases in
general and administrative expenses were offset by decreases in accounting fees
totally approximately $29,000 and $31,000 during the nine month and three month
periods, respectively.
Licensing fee expense of $2,000,000 represents expensing of the
$2 million Initial Prepayment and Deposit paid by the Company to Viragen
pursuant to the provisions of the License Agreement between VSL and Viragen. The
$2 million was paid in June 1997 and was expensed
9
<PAGE> 10
on November 1, 1997, the date that technology transfer was deemed complete. The
Company will be required to pay a minimum $2 million in licensing fees annually
for the duration of the License Agreement.
The sharp increase in depreciation expense reflects the acquisition and
utilization of laboratory equipment in the Company's Scottish laboratory and
manufacturing facility during fiscal 1997 and 1998. Depreciation expense will
continue to increase over comparable periods of the preceding year as the
Company continues its process development projects related to its Omniferon
product.
The Securities and Exchange Commission has issued Staff Legal Bulletin
No. 5 stating that public companies should consider whether there will be any
anticipated costs, problems and uncertainties associated with the Year 2000
issue, which affects many existing computer programs that use only two digits to
identify a year in the date field. To the best of the Company's knowledge, all
software critical to the Company's operations is Year 2000 compliant and the
Company will continue to address this issue with all software systems used or
intended for use by the Company.
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)
(b) Reports on Form 8-K
None
10
<PAGE> 11
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 and
Principal Financial Officer
By: /s/ Jose I. Ortega
---------------------------------
Jose I. Ortega
Controller and
Principal Accounting Officer
Dated: October 9, 1998
11
<PAGE> 1
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
BASIC AND DILUTED
Weighted average shares outstanding 7,116,059 7,098,159 7,116,059 7,026,714
=========== ========== =========== ==========
Net Loss $ (666,520) $ (258,797) $(3,593,669) $ (469,817)
=========== ========== =========== ==========
Net loss per common share $ (0.09) $ (0.04) $ (0.51) $ (0.07)
=========== ========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 991,524
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,273,549
<PP&E> 4,199,715
<DEPRECIATION> 274,701
<TOTAL-ASSETS> 5,229,814
<CURRENT-LIABILITIES> 2,189,753
<BONDS> 159,316
0
0
<COMMON> 71,160
<OTHER-SE> 2,809,585
<TOTAL-LIABILITY-AND-EQUITY> 5,229,814
<SALES> 0
<TOTAL-REVENUES> 35,768
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,618,845
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,592
<INCOME-PRETAX> (3,593,669)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,593,669)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,593,669)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
