<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 - December 31, 1997
( ) 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.)
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
---- ----
<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 six months ended December 31, 1997 and 1996 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 six months ended December 31, 1997 and 1996.
2) The Consolidated Condensed Balance Sheets as of December 31, 1997 and
June 30, 1997.
3) Consolidated Condensed Statements of Cash Flows for the six months
ended December 31, 1997 and 1996.
4) Notes to Consolidated Condensed Financial Statement as of December 31,
1997.
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 Six Months End
December 31, December 31,
----------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME
Interest and other income $ 9,188 $ 62,583 $ 29,471 $ 122,168
----------- ----------- ----------- -----------
9,188 62,583 29,471 122,168
COST AND EXPENSES
Research and development costs 243,810 19,899 338,309 61,859
General and administrative expenses 319,337 153,426 447,102 269,622
Licensing fee 2,000,000 -- 2,000,000 --
Depreciation and amortization 41,404 959 164,151 1,707
Interest expense 3,565 -- 7,058 --
----------- ----------- ----------- -----------
2,608,116 174,284 2,956,620 333,188
----------- ----------- ----------- -----------
NET LOSS $(2,598,928) $ (111,701) $(2,927,149) $ (211,020)
=========== =========== =========== ===========
Net loss per common share $ (0.37) $ (0.02) $ (0.41) $ (0.03)
=========== =========== =========== ===========
Weighted average common shares outstanding 7,116,059 7,049,012 7,116,059 6,990,844
=========== =========== =========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 685,575 $ 2,144,271
Prepaid licensing fee -- 2,000,000
Other current assets 228,694 193,908
----------- -----------
Total current assets 914,269 4,338,179
PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements 1,882,356 1,815,409
Equipment and furniture 1,987,819 1,606,406
----------- -----------
3,870,175 3,421,815
Less accumulated depreciation (174,071) (9,257)
----------- -----------
3,696,104 3,412,558
Other Assets 9,819 --
----------- -----------
$ 4,620,192 $ 7,750,737
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 175,663 $ 679,514
Current Portion of long-term debt 6,225 6,225
Advances from parent 790,708 455,175
----------- -----------
Total current liabilities 972,596 1,140,914
Long-term debt, less current portion 156,659 157,686
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 (4,261,089) (1,333,939)
Foreign currency translation adjustment 239,419 273,469
----------- -----------
Total stockholders' equity 3,490,937 6,452,137
----------- -----------
$ 4,620,192 $ 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>
Six Months Ended
December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(2,927,149) $ (211,020)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation expense 164,151 959
Increase (decrease) relating to operating activities
from:
Prepaid licensing fee 2,000,000 --
Other current assets (34,786) (1,229)
Other assets (9,819) (3,953)
Accounts payable and accrued expenses (503,851) 528,743
----------- -----------
Net cash (used in) provided by operating
activities (1,311,454) 313,500
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property plant and equipment, net (447,697) (1,222,243)
----------- -----------
Net cash used in investing activities (447,697) (1,222,243)
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Advances from (to) parent 335,533 (278,343)
Exercise of warrants -- 1,128,375
----------- -----------
Net cash provided by financing activities 335,533 850,032
----------- -----------
Effect of foreign currency translation (35,078) 250,541
----------- -----------
Net (decrease) increase in cash (1,458,696) 191,830
Cash - Beginning of Period 2,144,271 4,985,897
----------- -----------
Cash - End of Period $ 685,575 $ 5,177,727
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 six months ended
December 31, 1997 and 1996 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 six month period ended
December 31, 1997 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
(No. 333-7303) declared effective by the Securities and Exchange Commission on
July 12, 1996 and related Post-Effective Amendment on Form S-3 (No. 333-7303)
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 position 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. While Viragen has recently filed two patent applications related to
Omniferon, there can be no assurance that the steps taken by the Company or
Viragen 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
or Viragen 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 or Viragen's future patent applications will be issued with
the scope of the claims sought by the applicant, 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 or Viragen.
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 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 in
the manufacture of VSL's product and upon 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 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, 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 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.
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. The technology transfer was
completed on November 1, 1997, and the prepaid licensing fee was fully expensed
at that time. This accounting treatment is consistent with SFAS No. 2,
"Accounting for Research and Development Costs," as the Company is in the
process of obtaining EU regulatory approval for marketing the licensed
technology. The approval process entails performing preclinical and clinical
research.
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, such as filling, packing, and
storage equipment, located within the SNBTS facility are available, on a fee
basis, to the Company under the Scottish Agreement.
8
<PAGE> 9
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 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 and
administrative filings necessary to obtain final EU regulatory approvals.
RESULTS OF OPERATIONS
Income for the six months and three months ended December 31, 1997
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 Initial 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 $338,309 and $243,810 for the
six months and three months ended December 31, 1997, 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 increased scientific salaries and support fees of approximately $118,000
and $121,000 for the six month and three month periods, respectively and
increased laboratory supplies expense of $33,000 and $24,000, 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 pre-clinical trials of
the Product in the first calendar quarter of 1998 and commencement of clinical
trials scheduled for the second half of calendar 1998.
General and administrative expenses increased sharply during the year
totaling $447,102 and $319,337 for the six month and three month periods ending
December 31, 1997 when compared to $269,622 and $153,426 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 $45,000 and $18,000 during
the six month and three month periods, respectively. Rent expenses also
increased during the same periods by approximately $70,000 and $35,000,
respectively. Increases were also experienced in repairs and maintenance
expenses during the six month and three month periods of approximately $20,000
and $15,000, respectively.
9
<PAGE> 10
Licensing fee expenses 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 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 the first half of fiscal 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: April 5, 1999
<PAGE> 1
EXHIBIT - 11
COMPUTATION OF PER SHARE EARNINGS
<PAGE> 2
VIRAGEN (EUROPE) LTD. AND SUBSIDIARY
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- ------------------------------
1997 1996 1997 1996
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
BASIC AND DILUTED
Weighted average shares outstanding 7,116,059 7,049,012 7,116,059 6,990,844
============= ============ ============ ===========
Net Loss $ (2,598,928) $ (111,701) $ (2,927,149) $ (211,020)
============= ============ ============ ===========
Net loss per common share $ (0.37) $ (0.02) $ (0.41) $ (0.03)
============= ============ ============ ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 685,575
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 914,269
<PP&E> 3,870,175
<DEPRECIATION> 174,071
<TOTAL-ASSETS> 4,620,192
<CURRENT-LIABILITIES> 972,596
<BONDS> 156,659
0
0
<COMMON> 71,160
<OTHER-SE> 3,419,777
<TOTAL-LIABILITY-AND-EQUITY> 4,620,192
<SALES> 0
<TOTAL-REVENUES> 29,471
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,949,562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,058
<INCOME-PRETAX> (2,927,149)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,927,149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,927,149)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
