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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-17827
VIRAGEN (EUROPE) LTD.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2788282
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
865 SW 78th Avenue, Suite 100, Plantation, Florida 33324
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(Address of principal executive offices)
(954) 233-8377
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 preceding 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 - 24,586,408 shares at November 1, 2000.
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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, 2000 and 1999 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, 2000 and 1999
2) Consolidated condensed balance sheets as of September 30, 2000
and June 30, 2000
3) Consolidated condensed statements of cash flows for the three
months ended September 30, 2000 and 1999
4) Notes to consolidated condensed financial statement as of
September 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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,
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2000 1999
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<S> <C> <C>
Income
Interest and other income $ 64,017 $ 416
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64,017 416
Costs and Expenses
Research and development costs 856,599 703,080
Licensing fee 500,000 500,000
General and administrative expenses 213,600 212,967
Interest expense -- 3,910
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1,570,199 1,419,957
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NET LOSS $ (1,506,182) $ (1,419,541)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.08) $ (0.09)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES 19,715,625 16,067,153
============ ============
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
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VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
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(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,794,875 $ 4,945,063
Prepaid expenses and other current assets 119,097 256,712
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Total current assets 3,913,972 5,201,775
Property, Plant and Equipment
Leasehold improvements 1,829,485 1,898,470
Equipment and furniture 3,226,335 2,930,019
Construction in progress 56,881 59,026
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5,112,701 4,887,515
Less accumulated depreciation (961,559) (896,417)
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4,151,142 3,991,098
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$ 8,065,114 $ 9,192,873
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 561,842 $ 837,722
Current portion of long-term debt 17,781 9,494
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Total current liabilities 579,623 847,216
Licensing fee payable 3,833,333 3,333,333
Long-term debt, less current portion 17,781 --
Advances from parent 271,664 4,392,359
Commitments and Contingencies
Stockholders' Equity
Common stock, $.01 par value. Authorized 30,000,000 and 20,000,000
shares at September 30, 2000 and June 30, 2000, respectively;
issued and outstanding 24,586,408 and 19,662,100 shares at
September 30, 2000 and June 30, 2000, respectively 245,864 196,621
Additional paid-in capital 22,368,416 17,934,349
Accumulated deficit (18,785,974) (17,279,792)
Accumulated other comprehensive loss (465,593) (231,213)
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Total stockholders' equity 3,362,713 619,965
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$ 8,065,114 $ 9,192,873
============ ============
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
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VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
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2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,506,182) $(1,419,541)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation expense and amortization 98,343 87,148
Compensation expense on common stock options 2,190 --
Increase (decrease) relating to operating activities from:
Other current assets 137,615 124,893
Accounts payable and accrued expenses (275,880) 276,174
Licensing fee payable 500,000 500,000
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Net cash used in operating activities (1,043,914) (431,326)
INVESTING ACTIVITIES
Additions to property, plant and equipment, net (102,681) (211,738)
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Net cash used in investing activities (102,681) (211,738)
FINANCING ACTIVITIES
Payments on long-term debt (9,494) (2,058)
Advances from parent 88,761 427,214
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Net cash provided by financing activities 79,267 425,156
Effect of exchange rate fluctuations on cash (82,860) 146,597
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Decrease in cash and cash equivalents (1,150,188) (71,311)
Cash and cash equivalents at beginning of period 4,945,063 124,335
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Cash and cash equivalents at end of period $ 3,794,875 $ 53,024
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
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VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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. 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, 2000
and 1999 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, 2000 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending June 30, 2001.
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, 2000.
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 - CAPITAL STOCK
On September 30, 2000, Viragen, Inc. contributed to capital $4,481,120
in intercompany balances. Viragen received 4,924,308 common shares at the then
current market price of $0.91 per share, as a result of the capital
contribution. Accordingly, Viragen's ownership interest increased from 89% on
June 30, 2000, to 91% on September 30, 2000.
NOTE D - COMPREHENSIVE LOSS
Three Months Ended
September 30,
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2000 1999
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Net loss $(1,506,182) $(1,419,541)
Other comprehensive (loss) income:
Currency translation adjustment (234,380) 145,629
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Total comprehensive loss $(1,740,562) $(1,273,912)
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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 our 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 discussed 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 to us on
this date and we assume no obligation to update any of our forward-looking
statements. It is important to note that our actual results could differ
materially from those contained in our 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 15, 1997 (File No.
333-7303). These "Risk Factors" are incorporated by reference from the
post-effective amendment on Form S-3 (File No. 333-7303). You should also
consult updated risk factors, which will be listed from time to time in future
reports on Forms 10-Q, 8-K, 10-K and annual reports to the stockholders.
The biopharmaceutical industry is highly competitive and subject to
rapid technological change. Significant competitive factors in the
pharmaceutical and biopharmaceutical markets include product efficacy, price and
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timing of new product introductions. Increased competition from existing
biopharmaceutical companies, as well as the entry into the market of new
competitors, could adversely affect 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 our intellectual property, including future patents, trade
secrets, know-how and continuing technology innovation. While Viragen, Inc., our
parent, has filed three patent applications related to OMNIFERON, there can be
no assurance that the steps taken by Viragen or us to protect its intellectual
property will be adequate to prevent misappropriation or that others will not
develop competitive technologies or products. We cannot assure you that any
patent owned by us or Viragen in the future, will not be invalidated,
circumvented or challenged, or that the rights granted to us will provide
competitive advantages. Also, we cannot be sure that any of our or Viragen's
future patent applications will be issued with the scope of the claims sought,
if at all. Furthermore, we cannot assure you that others will not develop
technologies that are similar or superior to our technology, duplicate our
technology or design around possible patents owned by us or Viragen.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital totaled approximately $3,334,000 on September 30,
2000. This is a decrease in working capital of approximately $1,020,000 from the
previous year end balance. This decrease was due to operational losses totalling
approximately $1,506,000 during the quarter ended September 30, 2000.
As we do not have regulatory approvals to distribute OMNIFERON or any
other product, we are currently dependent upon advances or capital contributions
by Viragen to fund our operations.
During the first quarter of fiscal 2001 and during fiscal years 2000
and 1999, Viragen contributed intercompany balances of $4,481,000, $4,785,000
and $5,828,000, respectively, to capital. As a result of these contributions, we
issued Viragen 4,924,308 shares in the first fiscal quarter of 2001; 3,593,347
shares in fiscal 2000; and 8,951,094 shares in fiscal 1999.
Viragen's capital contributions have been made at the then-current
market price of our common stock. Market prices have ranged between $0.38 and
$1.50 per share. Viragen has made these capital contributions in order to
alleviate the burden of Viragen (Europe) having to repay approximately
$15,094,000 in intercompany balances. 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. Through
September 30, 2000, we have accrued $3,833,333 in licensing fees payable to
Viragen.
Our present focus is the continued development of OMNIFERON, initially
for the treatment of hepatitis C, and the development of a monoclonal antibody
to be used with OMNIFERON in the treatment of certain cancers. 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.
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We believe that our OMNIFERON product, which is currently under
development, can be manufactured in sufficient quantity and be priced at a level
to offer patients an attractive alternative treatment to the synthetic
interferons currently being marketed. However, we cannot assure you of approval
of these projects. Required regulatory approvals are subject to the successful
completion of lengthy and costly clinical trials. The completion of the project
also depends on our ability to raise significant additional investment capital.
In July 1999, our Clinical Trial Exemption Application to commence
human clinical trials was approved by the European regulatory authorities. We
commenced our clinical trials in the fourth calendar quarter of 1999.
We will need significant additional funding to complete the clinical
trials and administrative filings necessary to apply for final European Union
regulatory approvals. Our management believes that additional funding may be
more readily available as we complete various phases of our clinical trials.
Management estimates that our funding requirements related to the approval of
OMNIFERON for hepatitis C, the first approval we are seeking in the European
Union, include: Phase I/II trials -- $3.2 million, and Phase III studies -- $9.1
million. We will also use future funding, if any, for continued product
development and general working capital purposes, including administrative
support functions.
RESULTS OF OPERATIONS
We have recognized no sales revenue or related costs for the fiscal
quarter ended September 30, 2000 or the fiscal years ended June 30, 2000 or
1999, respectively. We have limited potential for sales prior to receiving the
necessary regulatory approvals from the European regulatory authorities. We
could commence generating sales revenue through export sales of OMNIFERON, prior
to receiving EU regulatory approvals from marketing, under an agreement with the
AGC group of companies. These sales, however, are contingent upon AGC's receipt
of the required regulatory approvals for product commercialization in the
designated territories, and our receipt of the requisite regulatory approvals to
export the product.
Income for the quarter ended September 30, 2000, represents interest
earned on cash investments. The increase in interest income compared to the same
quarter of the previous year reflects the increase in principal invested between
the periods resulting primarily from capital contributions made by Viragen, Inc.
Research and development costs for the first quarter of fiscal 2000
totaled $856,599, an increase of approximately $154,000 (22%) 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 OMNIFERONTM product.
Components of this overall increase include an increase of $23,900 in scientific
salaries and support fees, which was offset by a decrease in laboratory supplies
expense of $41,600. However, we also recognized $141,400 in new research and
licensing fees, which were related to new collaborative agreements with Cancer
Research Campaign Technology Ltd. and PolyMASC Pharmaceuticals plc. These
collaborations are indicative of our continued commitment to fully developing
our OMNIFERON product. These two collaborations are intended to improve the
delivery system of this product, as well as broadening the possible target
indications of OMNIFERON.
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General and administrative expenses totaled $213,600 for the quarter
ended September 30, 2000 compared with $212,967 for the same period of the
preceding year. There were no significant changes in the cost components of
general and administrative expenses between periods.
Our management anticipates operational losses will continue increasing.
Specifically, research and development costs will continue to increase as we
continue to expand our clinical trials of OMNIFERON, along with continuing
research projects to further develop the product. Our ability to successfully
conclude the clinical trials, a prerequisite to eventual commercialization of
the product, is dependent upon Viragen's continued funding of operations and our
ability to raise significant additional investment capital.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In July 1994, an action was filed in the Circuit Court of Dade County,
Florida against Viragen (Europe), then named Sector Associates, Ltd., alleging
that Sector Associates, Ltd., prior to the reverse acquisition by Viragen and
Viragen (Scotland), mishandled payment of amounts due to Roy Woods, a secured
creditor (ROY WOODS AS TRUSTEE V. SECTOR ASSOCIATES, LTD.). Specifically, the
suit alleged (i) that Sector collected certain receivables of Drew
Communications Group, Inc. in which the plaintiff held a security interest, and
(ii) that Sector had a duty as a stockholder to liquidate Drew Communications
Group, Inc. for the benefit of the creditors. The suit sought recovery of
damages in the amount of $200,000 plus an additional unspecified monetary
amount. We denied the claim and filed a counterclaim. In addition, Mr. George
Levin of Miami, FL, a former principal stockholder of Sector Associates, Ltd.,
was obligated and had agreed to indemnify us in this matter. He had assumed
responsibility for defense of this lawsuit.
In October 2000, the parties reached a settlement in this matter. The
plaintiff received $10,000 in settlement of all claims, which were paid by Mr.
Levin.
We know of no other material litigation or claims pending, threatened
or contemplated to which we are or may become a party.
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
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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
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Jose I. Ortega
Controller and
Principal Accounting Officer
Dated: November 13, 2000
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