<PAGE> 1
UNITED STATES
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 0-17827
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Sections 12, 13 or 15 (d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $.01 -16,067,153 shares at November 15, 1999.
<PAGE> 2
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, 1999 and 1998 include the accounts of
Viragen (Europe) Ltd. and subsidiaries.
Item 1. Financial Statements
1) Consolidated condensed statements of operations for the three months
ended September 30, 1999 and 1998
2) Consolidated condensed balance sheets as of September 30, 1999 and
June 30, 1999
3) Consolidated condensed statements of cash flows for the three months
ended September 30, 1999 and 1998
4) Notes to consolidated condensed financial statement as of September 30,
1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule (for SEC use only)
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VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
INCOME
Interest and other income ................. $ 416 $ 4,219
------------ -----------
416 4,219
COST AND EXPENSES
Research and development costs ............ 703,080 348,634
Licensing fee ............................. 500,000 --
General and administrative expenses ....... 212,967 192,125
Interest expense .......................... 3,910 5,206
------------ -----------
1,419,957 545,965
------------ -----------
NET LOSS ....................................... $ (1,419,541) $ (541,746)
============ ===========
BASIC AND DILUTED LOSS PER COMMON SHARE ........ $ (0.09) $ (0.08)
============ ===========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES 16,067,153 7,116,059
============ ===========
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
3
<PAGE> 4
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 53,024 $ 124,335
Prepaid expenses and other current assets 131,568 256,460
---------- ----------
Total Current Assets 184,592 380,795
PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements 1,982,203 1,893,992
Equipment and furniture 2,955,150 2,512,216
Construction in progress -- 292,152
---------- ----------
4,937,353 4,698,360
Less accumulated depreciation (674,281) (559,878)
---------- ----------
4,263,072 4,138,482
DUE FROM PARENT -- 390,319
---------- ----------
$4,447,664 $4,909,596
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,232,086 $ 955,911
Current portion of long-term debt 8,234 7,879
---------- ----------
Total Current Liabilities 1,240,320 963,790
LICENSING FEE PAYABLE 1,833,333 1,333,333
LONG-TERM DEBT, less current portion 130,528 131,973
ADVANCES FROM PARENT 36,895 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 16,067,153 shares 160,672 160,672
Additional paid-in capital 13,179,595 13,179,595
Retained deficit (12,326,060) (10,906,519)
Accumulated other comprehensive income 192,381 46,752
---------- ----------
Total Stockholders' Equity 1,206,588 2,480,500
---------- ----------
$4,447,664 $4,909,596
========== ==========
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
4
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VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,419,541) $(541,746)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation expense and amortization 87,148 81,667
Increase (decrease) relating to operating activities from:
Other current assets 124,893 12,133
Accounts payable and accrued expenses 276,174 (420,128)
Licensing fee payable 500,000 --
----------- ---------
Net cash used in operating activities (431,326) (868,074)
INVESTING ACTIVITIES
Additions to property, plant and equipment, net (211,738) (217,981)
----------- ---------
Net cash used in investing activities (211,738) (217,981)
FINANCING ACTIVITIES
Payments on long-term debt (2,058) --
Advances from parent 427,214 933,672
----------- ---------
Net cash provided by financing activities 425,156 933,672
Effect of exchange rate fluctuations on cash 146,597 74,031
----------- ---------
Decrease in cash (71,311) (78,352)
Cash and cash equivalents at beginning of period 124,335 656,139
----------- ---------
Cash and cash equivalents at end of period $ 53,024 $ 577,787
=========== =========
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
5
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VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE A -CONSOLIDATION AND BASIS OF PRESENTATION
Viragen (Europe) Ltd. and its subsidiaries are engaged in the research,
development and manufacture of certain immunological products for commercial
application. The consolidated condensed financial statements include the parent
company and all subsidiaries, including those operating outside the U.S. All
significant transactions among our businesses have been eliminated. We made
certain reclassifications to the fiscal 1999 financial statements to conform to
the September 30, 1999 interim presentation. Viragen (Europe) Ltd. is a
majority-owned subsidiary of Viragen, Inc.
NOTE B - INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The financial summaries for the three months ended September 30, 1999
and 1998 include, in the opinion of our management, all adjustments consisting
of normal recurring accruals considered necessary for a fair presentation of the
financial position and the results of operations for these periods.
Operating results for the three months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending June 30, 2000.
While our management believes that the disclosures presented are
adequate to make the information not misleading, we suggest that these
consolidated condensed financial statements be read together with the financial
statements and notes included in our annual report on Form 10-K for the year
ended June 30, 1999.
In preparing the financial statements, we must use some estimates and
assumptions that may affect reported amounts and disclosures. Estimates are used
when accounting for depreciation, amortization, and asset valuation allowances.
We are also subject to risks and uncertainties that may cause actual results to
differ from estimated results such as changes in the health care environment,
competition, foreign exchange and changes in legislation.
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NOTE C - COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------------------
1999 1998
-------------------- ------------------
<S> <C> <C>
Net loss $(1,419,541) $(541,746)
Other comprehensive income:
Currency translation adjustment 145,629 70,618
------------ ----------
Total comprehensive loss $(1,273,912) $(471,128)
============ ==========
</TABLE>
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 Viragen (Europe) Ltd.'s
expectations, hopes, intentions, beliefs, or strategies regarding the future.
Forward-looking statements include our statements regarding liquidity,
anticipated cash needs and availability, and anticipated expense levels dicussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" including expected product clinical trial commencement dates,
product introductions, expected research and development expenditures, and
related anticipated costs. All forward-looking statements included in this
document are based on information available on this date, and we assume no
obligation to update any forward-looking statements. It is important to note
that actual results could differ materially from those contained in the
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 our registration statement on Form SB-2 (File
No. 333-7303) declared effective by the Securities and Exchange Commission on
July 12, 1996 and the related post-effective amendment dated April 18, 1997
(File No. 333-7303). You should also consult the risk factors listed from time
to time in Viragen (Europe)'s reports and amendments if applicable, on Forms
10-Q, 8-K, 10-K and annual reports to our stockholders.
The biopharmaceutical industry is highly competitive and subject to
rapid technological changes. Significant competitive factors in the
pharmaceutical and biopharmaceutical markets include product efficacy, price and
timing of new product introductions and availability of investment capital.
Increased competition from existing biopharmaceutical companies, as well as the
entry into the market of new competitors, could adversely affect our financial
condition and results of operations.
Our future success depends greatly on our ability to obtain additional
financing capital. We cannot assure you that we will be able to obtain the
capital necessary to continue with our operations. Our future success also
depends in part upon intellectual property, including future patents, trade
7
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secrets, know-how and continuing technology innovation. While Viragen, Inc., our
parent, has recently filed two patent applications related to OMNIFERON, there
can be no assurance that the steps taken by Viragen or steps we have taken to
protect intellectual property will be adequate to prevent misappropriation or
that others will not develop competitive technologies or products. We cannot
provide assurance that any patent owned by Viragen or us, in the future, will
not be invalidated, circumvented or challenged, or that the rights granted to us
will provide competitive advantages or will be issued with the scope of the
claims sought, if at all. Furthermore, we cannot provide assurances that others
will not develop technologies that are similar or superior to our technology,
duplicate our technology or design around the patents owned by Viragen or us.
LIQUIDITY AND CAPITAL RESOURCES
As of November 15, 1999, Viragen (Europe) has limited capital to
sustain its operations. The fiscal 1999 report of independent certified public
accountants noted our financial condition raises substantial doubt as to our
ability to continue as a going concern. Our financial condition has not improved
since the report was issued. We are actively seeking new investment capital,
however, we cannot assure you as to the timing of any new investment, if at all.
If we are unable to attract new investment capital in the near-term, it would be
necessary for us to significantly reduce or completely suspend all operations.
We commenced safety and preclinical trials of OMNIFERON in March 1998,
These trials were concluded in December 1998. We received the final preclinical
study results in April 1999. Results of the study indicated no unexpected
toxicity. In July 1999, our Clinical Trial Exemption Application to commence
human clinical trials was approved. We intend to commence our clinical trials in
the fourth calendar quarter of 1999.
Our present focus is the continued development of OMNIFERON, initially
for the treatment of hepatitis C. The entire process of research, development
and European Union regulatory approvals, if obtained, of a new biopharmaceutical
product takes several years and requires substantial funding.
We will incur additional future losses as we enter the clinical trial
phase scheduled to commence in the fourth calendar quarter of 1999. Accordingly,
Viragen has agreed to provide us, to the extent they are able, with the working
capital necessary to fund operations at least through calendar 2000. Advances
from parent and affiliates at June 30, 1999 and 1998, represent cash advanced by
Viragen and its subsidiaries. During the first fiscal quarter 2000, Viragen paid
$427,000 used to fund our operations. During fiscal 1999, Viragen had
contributed to capital approximately $5,828,000 in intercompany advances in
exchange for an additional 8,951,094 shares of our common stock. Viragen has
additionally agreed to defer the $166,667 minimum monthly payments due under the
Licensing Agreement that began November 1, 1998 until we are able to fund this
obligation.
Significant additional funding will be required to complete the
clinical trials and administrative filings necessary to apply for final European
Union regulatory approvals. Our management believes that these additional
fundings may be more readily available as we complete various phases of our
clinical trials. Estimated funding requirements related to the approval of
OMNIFERON for hepatitis C, the first approval we are seeking, include: Phase
I/II trials -- $3.2 million and Phase III studies -- $9.1 million.
8
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RESULTS OF OPERATIONS
As our discussion of Liquidity and Capital Resources noted, our fiscal
1999 report of independent certified public accountants noted our financial
condition raises substantial doubt as to our ability to continue as a going
concern.
Income for the quarter ended September 30, 1999 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 losses.
Research and development costs for the first quarter of fiscal 2000
totaled $703,080, an increase of approximately $354,000 (102%) over the same
period of the preceding year. This increase reflects increased costs incurred
with development and scale-up projects associated with the transfer of
technology from our parent, Viragen, relating to our OMNIFERON(TM) product.
Components of this increase include $215,000 in scientific salaries and support
fees, as well as an increase in laboratory supplies expense of $103,300.
The increase in licensing fee expense of $500,000 between quarters
reflects the modification of the terms of our license agreement with Viragen. On
November 1, 1998, we began recognizing the $2,000,000 per year minimum licensing
fee on a monthly basis. During the prior fiscal year, before the licensing
agreement was modified, the entire $2,000,000 minimum licensing fee was
recognized on November 1, 1997, the day the technology transfer was deemed
complete.
General and administrative expenses totaled $212,967 for the quarter
ended September 30, 1999 compared with $192,125 for the same period of the
preceding year. This increase, representing an 11% increase between the periods,
was due primarily to an increase of $14,000 in the administrative salaries and
support fees associated with transfer of technology activities and the
manufacture of OMNIFERON to be used in planned clinical trials.
Our management anticipates operational losses will continue increasing
as we begin planned clinical trials of OMNIFERON. Our ability to successfully
conclude the planned clinical trials, a prerequisite to eventual
commercialization of the product, is dependent upon our ability to raise
significant additional investment capital.
YEAR 2000
Viragen (Europe) recognize 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 we are dependent. We rely heavily on computerized laboratory
equipment both for our ongoing research and production scale-up projects as well
as computer controlled commercial scale manufacturing equipment. In addition,
through strategic alliance and supply agreements currently in place, we are also
dependent upon Year 2000 compliance by third parties for the supply of critical
raw materials as well as certain manufacturing steps and storage of Product
produced for planned clinical trials and, subject to regulatory approval, for
commercial scale production.
9
<PAGE> 10
We have been utilizing both internal and external resources to isolate
and, as necessary, reprogram, update or replace hardware or software found to be
non-Year 2000 compliant. Due to the limited size of our administrative staff,
most of this work has been performed by outside contractors retained
specifically for this project. We believe that all of our significant computer
dependent systems, both administrative and scientific, are now Year 2000
compliant. The total estimated cost to us to complete our internal Year 2000
project was approximately $30,000, including projected hardware replacements
where indicated. Funding for the evaluation and correction phases was provided
from general working capital.
We have 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. We
are still evaluating the third party responses, and will prepare a contingency
plan to mitigate third party Year 2000 issues, if necessary.
The ultimate success of our Year 2000 compliance program is dependant
in large part upon compliance programs of external third parties or scientific
equipment and software vendors over whom we have has no direct control.
Accordingly, the inability of critical vendors to meet Year 2000 compliance
deadlines could have a material adverse impact on our operations, product
development, clinical trial or commercial manufacturing standpoint, negatively
affecting our financial condition, results of operations and cash flows.
10
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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
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 15, 1999
12
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EXHIBIT - 11
COMPUTATION OF PER SHARE EARNINGS
13
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EXHIBIT 11
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
Basic and diluted weighted average common shares 16,067,153 7,116,059
========== =========
Net Loss $(1,419,541) $(541,746)
============ ==========
Basic and diluted loss per common share $ (0.09) $ (0.08)
========== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 53,024
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 184,592
<PP&E> 4,937,353
<DEPRECIATION> 674,281
<TOTAL-ASSETS> 4,447,664
<CURRENT-LIABILITIES> 1,240,320
<BONDS> 130,528
0
0
<COMMON> 160,672
<OTHER-SE> 1,045,916
<TOTAL-LIABILITY-AND-EQUITY> 4,447,664
<SALES> 0
<TOTAL-REVENUES> 416
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,416,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,910
<INCOME-PRETAX> (1,419,541)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,419,541)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,419,541)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
