<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, 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 November 12, 1998.
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VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
The Consolidated Condensed Statements of Operations (Unaudited) for the three
month periods ended September 30, 1998 and September 30, 1997 include the
accounts of the Registrant and its subsidiaries.
Item 1. Financial Statements
1) Consolidated Condensed Statements of Operations for the three months
ended September 30, 1998 and September 30, 1997.
2) The Consolidated Condensed Balance Sheets as of September 30, 1998 and
June 30, 1998.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended September 30, 1998 and September 30, 1997.
4) Notes to Consolidated Condensed Financial Statement as of September
30, 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)
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VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
INCOME
Interest and other income $ 4,219 $ 20,283
------------ ------------
4,219 20,283
COST AND EXPENSES
Research and development costs 348,634 208,654
General and administrative expenses 192,125 136,357
Interest expense 5,206 3,493
------------ ------------
545,965 348,504
------------ ------------
NET LOSS $ (541,746) $ (328,221)
============ ============
Basic and diluted loss per common share $ (0.08) $ (0.05)
============ ============
Weighted average common shares outstanding 7,116,059 7,116,059
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 577,787 $ 656,139
Other current assets 300,149 312,282
------------ ------------
Total current assets 877,936 968,421
Property, Plant and Equipment
Leasehold improvements 2,001,875 1,947,310
Equipment and furniture 2,511,334 2,342,273
Construction in progress 49,530 48,655
------------ ------------
4,562,739 4,338,238
Less accumulated depreciation (341,574) (253,387)
------------ ------------
4,221,165 4,084,851
------------ ------------
$ 5,099,101 $ 5,053,272
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 332,184 $ 752,312
Current portion of long-term debt 2,863 2,863
------------ ------------
Total current liabilities 335,047 755,175
Long-term debt, less current portion 163,457 160,043
Advances from parent 3,248,103 2,314,431
Commitments and Contingencies
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 (6,517,812) (5,976,065)
Accumulated other comprehensive income 357,699 287,081
------------ ------------
Total stockholders' equity 1,352,494 1,823,623
------------ ------------
$ 5,099,101 $ 5,053,272
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (541,746) $ (328,221)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation expense 81,667 122,747
Increase (decrease) relating to operating activities from:
Other current assets 12,133 23,446
Accounts payable and accrued expenses (420,128) (311,971)
------------ ------------
Net cash used in operating activities (868,074) (493,999)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property plant and equipment, net (217,981) (30,209)
------------ ------------
Net cash used in investing activities (217,981) (30,209)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from parent 933,672 807
------------ ------------
Net cash provided by financing activities 933,672 807
Effect of foreign currency translation 74,031 (125,331)
------------ ------------
Net decrease in cash (78,352) (648,732)
Cash - Beginning of Period 656,139 2,144,271
------------ ------------
Cash - End of Period $ 577,787 $ 1,495,539
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
5
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VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 subsidiaries, Viragen (Scotland) Ltd.
("VSL")and Viragen (Germany) GmbH, collectively known as the Company. VSL and
VGG are private Scottish and German companies, respectively. All material
intercompany accounts and transactions have been eliminated in consolidation.
VEL is a majority-owned subsidiary of Viragen, Inc. ("Viragen").
Certain reclassifications have been made to the fiscal 1998 Financial
Statements to conform to the September 30, 1998 interim presentation.
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended September 30, 1998
and September 30, 1997 include, in the opinion of management of the Company, all
adjustments consisting of normal recurring accruals considered necessary for a
fair presentation of the financial position and the results of operations for
these periods.
Operating results for the three months ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending June 30, 1999.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these Consolidated
Condensed Financial Statements be read in conjunction with the financial
statements and notes included in the Company's latest Annual Report on Form
10-K for the year ended June 30, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
NOTE C - COMPREHENSIVE LOSS
Three Months Ended
September 30,
-------------------------
1998 1997
--------- ---------
Net loss $(541,746) $(328,221)
Other comprehensive income (expense):
Currency translation adjustment 70,618 (120,476)
--------- ---------
Total comprehensive loss $(471,128) $(448,697)
========= =========
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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, including statements regarding the Company's
expectations, hopes, intentions, beliefs, or strategies regarding the future.
Forward-looking statements include the Company's statements regarding
liquidity, anticipated cash needs and availability, and anticipated expense
levels in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" including expected product clinical trial commencement
dates, expected research and development expenditures, and related anticipated
costs. All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statement. It is
important to note 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, 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 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 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
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Through a fifteen-year license (the "License Agreement") 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 relate to the therapeutic application of human leukocyte
derived multi-species interferon for various diseases that affect the human
immune system. The License Agreement provides for two, automatic fifteen-year
extensions. 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, would assist in the manufacture of
VSL's product and upon regulatory approval with the distribution of the Product
in the EU, in return for certain fees and additional rights (the "Scottish
Agreement").
SNBTS has committed to assist in the manufacture of Omniferon(TM), the
Company's natural, human-leukocyte derived, alpha-interferon (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 provide human leukocytes and
cooperate with the Company in studies relevant to the Product and with eventual
production, pre-clinical (currently underway) and clinical trials and
distribution. Management considers it critical to the Company's operations and
to planned clinical trials to have secured a sufficient qualified 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.
During fiscal 1998, the Company received notification that due to
concerns over the possible presence of New Varient Creutzfelt-Jacob Disease
("nvCJD"), also known as Mad Cow Disease, in the UK blood supply, human
leukocytes collected in Scotland, including those intended to be supplied under
the Scottish Agreement, would not be approved for use in the Company's planned
clinical trials or potential commercial production until the European
regulatory authorities are satisfied that the risk of nvCJD contamination of
any product using these leukocytes had been minimized. The Company intends to
utilize leukocytes produced in Germany under Viragen's German contractual
arrangements, as well as other approved sources to continue with its planned
clinical trials and possibly the commencement of commercial scale production,
if needed.
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
8
<PAGE> 9
of the License Agreement, the Initial Prepayment would have been refunded to
VSL. The transfer of technology was deemed complete on November 1, 1997. The
License Agreement has been further amended making the minimum annual licensing
fee of $2,000,000 payable in monthly installments of $166,667, commencing on
November 1, 1998.
The Company commenced safety and preclinical trials of the Product in
March 1998. The Company's present focus is the continued development of the
Company's Product for the treatment of hepatitis B and C, Multiple Sclerosis,
HIV/AIDS and Herpes. The entire process of research, development and EU
regulatory approvals, if obtained, of a new biopharmaceutical product takes
several years and requires substantial funding. The Company expects to obtain
the necessary funding through direct investor capital contributions or through
contributions from the Parent, Viragen, Inc. Management believes that following
the completion of the Phase I Clinical Studies, scheduled to commence in the
first calendar quarter of calendar 1999 and to be completed during the third
quarter 1999, additional financing is expected to be more readily available.
Viragen, Inc. is also raising additional capital which will also be available to
fund operations of the Company. No assurances can be provided, however, that
financing will be available on terms favorable to the Company and its
stockholders.
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 12,000 sq. ft., contains the Company's European
laboratory and production facilities. Monthly rental for the facility is 5,974
British Pounds or approximately US$9,975, 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 to the Company under the Scottish Agreement.
During the first fiscal quarter of 1999 and fiscal years ended June
30, 1998 and 1997 respectively, the Company expended approximately $218,000,
$914,000 and $3,400,000 respectively, in property, plant and equipment
primarily related to the continued development of its Scottish manufacturing
facility. The Company had commitments for additional equipment purchases of
approximately $ 194,000 at September 30, 1998.
The Company anticipates additional future losses as it continues with
safety and preclinical trials and enters the clinical trial phase scheduled to
commence in March, 1999. Accordingly, Viragen has agreed to provide the Company
the working capital necessary to fund operations through September 30, 1999.
Advances from parent at September 30, 1998 and June 30, 1998 represent cash
advanced by Viragen. Viragen has agreed to defer repayment of the intercompany
advances through September 30, 1999. The amount is non-interest bearing. Viragen
has also agreed to defer the $166,667 minimum monthly payments due under the
Licensing Agreement that began November 1, 1998 until the Company is able to
fund this obligation. Accordingly, management believes that its working capital
currently on-hand and the additional capital to be provided by Viragen is
adequate to maintain its Product development operations through September 30,
1999. Significant additional funding will be required to complete the clinical
trials and administrative filings necessary to apply for final EU regulatory
approvals. Management believes that such additional funding will be more readily
available as the Company completes various phases of its clinical trials.
9
<PAGE> 10
RESULTS OF OPERATIONS
Income for the quarter ended September 30, 1998 of $4,219 represents
interest earned on cash investments. The decline in interest income compared to
the same quarter of the previous year reflects the reduction in principal
invested between the periods resulting primarily from operational loses and
expenditures associated with the establishment and equipping of the Company's
laboratory and manufacturing facility in Scotland.
Research and development costs for the first quarter of fiscal 1999
totaled $348,634, an increase of approximately $140,000 (67%) over the same
period of the preceding year. This increase reflects increased costs associated
with 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 include $62,200 in
scientific salaries and support fees, increases in laboratory supplies expense
of $75,000 and increased travel expenditures by scientific personnel associated
with travel between Viragen, Inc.'s Florida facility and the Company's Scottish
facility.
General and administrative expenses totaled $192,125 for the quarter
ended September 30, 1998 compared with $136,357 for the same period of the
preceding year. This increase, representing a 41% increase between the periods,
reflects an increase of $33,200 in the administrative salaries and support fees
associated with establishment of the Company's laboratory and manufacturing
facility in Scotland and related transfer of technology activities. The Company
also incurred an increase in accounting and legal fees associated with increased
operations totalling $18,600 over the same period in the prior year.
YEAR 2000
The Company recognizes the potential problem posed to its operations by
its dependence upon date sensitive computer systems and applications throughout
its business, as well as the operations of third parties upon whom the Company
is dependent. The Company relies heavily on computerized laboratory equipment
both for its ongoing research and production scale-up projects as well as
computer controlled commercial scale manufacturing equipment in place in the
Company's Scottish facility. In addition, the Company, through strategic
alliance and supply agreements currently in place, is also dependent upon Year
2000 compliance by third parties for the supply of critical raw materials as
well as certain manufacturing steps and storage of Product produced for planned
clinical trials and, subject to regulatory approval, for commercial scale
production.
The Company will utilize both internal and external resources to
isolate and, as necessary, reprogram, update or replace hardware or software
found to be non-Year 2000 compliant. The evaluation phase of the Company's Year
2000 compliance program. After evaluation of the third party responses, the
Company will prepare a contingency plan to mitigate third party Year 2000
issues, if necessary.
10
<PAGE> 11
began in the fourth fiscal quarter of 1998. Due to the limited size of the
Company's administrative staff, it is expected that most of this work will be
performed by outside contractors retained specifically for this project. The
Company expects to complete its internal Year 2000 project by March 1999. The
total estimated cost to the Company to complete its internal Year 2000 project
is $30,000 to $40,000, including projected hardware replacements indicated.
Funding for the evaluation and correction phases will be provided from general
working capital.
The Company has contacted certain external third parties, including
raw material vendors and scientific equipment manufacturers considered critical
to its ongoing operations to discuss and evaluate their own compliance
programs.
The costs and projected completion dates of the Company's Year 2000
compliance program is based on management's best estimates and is dependant in
large part upon compliance programs of external third parties or scientific
equipment and software vendors over whom the Company has no direct control.
Accordingly, the inability of the Company or critical vendors to meet Year 2000
compliance deadlines could have a material adverse impact on the Company's
operations, product development, clinical trial or commercial manufacturing
standpoint, negatively affecting its financial condition, results of operations
and cash flows.
PART II - OTHER INFORMATION
Item 5. Other Information
The Company has received notice from the Nasdaq Stock Market, Inc.
("Nasdaq") of its intention to delist the Company's Common Stock from Nasdaq
based on non-compliance with certain quantitative listing criteria of Nasdaq.
In particular, the Company did not have net tangible assets of at least $2
million at June 30, 1998, as reported in its Annual Report on Form 10-K. Nasdaq
has raised issues as to whether certain revenues, licensing fees and royalties
will be available in the future to sustain operations in the long-term. The
Company has requested a hearing, and believes that it will be able to provide
substantial arguments as to its ability to sustain operations including
additional funding by its Parent, Viragen, Inc. and still satisfy Nasdaq
quantitative criteria. However, there can be no assurance that Nasdaq will
continue to list the Company's Common Stock.
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
11
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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 (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: November 12, 1998
12
<PAGE> 1
EXHIBIT - 11
COMPUTATION OF PER SHARE EARNINGS
13
<PAGE> 2
EXHIBIT 11
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
BASIC AND DILUTED
Weighted average shares outstanding 7,116,059 7,116,059
============ ============
Net Loss $ (541,746) $ (328,221)
============ ============
Basic and diluted loss per common share $ (0.08) $ (0.05)
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 577,787
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 877,936
<PP&E> 4,562,739
<DEPRECIATION> 341,574
<TOTAL-ASSETS> 5,099,101
<CURRENT-LIABILITIES> 335,047
<BONDS> 163,457
0
0
<COMMON> 71,160
<OTHER-SE> 1,281,334
<TOTAL-LIABILITY-AND-EQUITY> 5,099,101
<SALES> 0
<TOTAL-REVENUES> 4,219
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 540,759
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,206
<INCOME-PRETAX> (541,746)
<INCOME-TAX> 0
<INCOME-CONTINUING> (541,746)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (541,746)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
