<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 - December 31, 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 - 17,225,748 shares at February 10, 2000.
<PAGE> 2
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
The consolidated condensed statements of operations (unaudited) for the three
months ended and six months ended December 31, 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 and six months ended December 31, 1999 and 1998
2) Consolidated condensed balance sheets as of December 31, 1999 and June
30, 1999
3) Consolidated condensed statements of cash flows for the six months
ended December 31, 1999 and 1998
4) Notes to consolidated condensed financial statement as of December 31,
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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<PAGE> 3
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME
Interest and other income $ 41 $ 4,137 $ 457 $ 8,356
------------ ------------ ------------ ------------
41 4,137 457 8,356
COST AND EXPENSES
Research and development costs 706,543 509,074 1,409,623 857,708
Licensing fee 500,000 333,333 1,000,000 333,333
General and administrative expenses 206,076 205,771 419,043 397,896
Interest expense 3,976 3,684 7,886 8,890
------------ ------------ ------------ ------------
1,416,595 1,051,862 2,836,552 1,597,827
------------ ------------ ------------ ------------
NET LOSS $ (1,416,554) $ (1,047,725) $ (2,836,095) $ (1,589,471)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.09) $ (0.15) $ (0.18) $ (0.22)
============ ============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES 16,079,746 7,159,658 16,073,450 7,137,858
============ ============ ============ ============
</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>
December 31, June 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 977 $ 124,335
Prepaid expenses and other current assets 113,626 256,460
------------ ------------
Total Current Assets 114,603 380,795
PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements 1,947,892 1,893,992
Equipment and furniture 2,949,862 2,512,216
Construction in progress -- 292,152
------------ ------------
4,897,754 4,698,360
Less accumulated depreciation (757,360) (559,878)
------------ ------------
4,140,394 4,138,482
DUE FROM PARENT -- 390,319
------------ ------------
$ 4,254,997 $ 4,909,596
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 915,019 $ 955,911
Current portion of long-term debt 8,088 7,879
------------ ------------
Total Current Liabilities 923,107 963,790
LICENSING FEE PAYABLE 2,333,333 1,333,333
LONG-TERM DEBT, less current portion 126,428 131,973
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value. Authorized 20,000,000 shares; issued and
outstanding 17,225,748 and 16,067,153 shares at December 31, 1999 and
June 30, 1999, respectively 172,257 160,672
Additional paid-in capital 14,329,343 13,179,595
Retained deficit (13,742,614) (10,906,519)
Accumulated other comprehensive income 113,143 46,752
------------ ------------
Total Stockholders' Equity 872,129 2,480,500
------------ ------------
$ 4,254,997 $ 4,909,596
============ ============
</TABLE>
See notes to consolidated condensed financial statements
which are an integral part of these statements.
4
<PAGE> 5
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,836,095) $(1,589,471)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation expense and amortization 182,304 165,807
Compensation expense on stock options 2,739 --
Increase (decrease) relating to operating activities from:
Other current assets 142,834 70,843
Accounts payable and accrued expenses (40,892) (229,072)
Licensing fee payable 1,000,000 333,333
----------- -----------
Net cash used in operating activities (1,549,110) (1,248,560)
INVESTING ACTIVITIES
Additions to property, plant and equipment, net (184,216) (254,704)
----------- -----------
Net cash used in investing activities (184,216) (254,704)
FINANCING ACTIVITIES
Payments on long-term debt (4,044) (2,512)
Advances from parent 1,548,913 1,484,797
----------- -----------
Net cash provided by financing activities 1,544,869 1,482,285
Effect of exchange rate fluctuations on cash 65,099 (40,323)
----------- -----------
Decrease in cash (123,358) (61,302)
Cash and cash equivalents at beginning of period 124,335 656,139
----------- -----------
Cash and cash equivalents at end of period $ 977 $ 594,837
=========== ===========
</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
DECEMBER 31, 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 December 31, 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 and six months ended
December 31, 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 and six months ended
December 31, 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 you read these
consolidated condensed financial statements 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 - CAPITAL STOCK
On December 31, 1999, Viragen, Inc. contributed to capital $1,158,595
in intercompany balances. Viragen received 1,158,595 common share at the current
market price of $1.00 per share, as a result of the capital contribution.
Accordingly, Viragen's ownership interest increased from 87% on June 30, 1999,
to 88% on December 31, 1999.
NOTE D - COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(1,416,554) $(1,047,725) $(2,836,095) $(1,589,471)
Other comprehensive income (loss):
Currency translation adjustment (79,238) (110,941) 66,391 (40,323)
----------- ----------- ----------- -----------
Total comprehensive loss $(1,495,792) $(1,158,666) $(2,769,704) $(1,629,794)
=========== =========== =========== ===========
</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. These include 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
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" including expected project 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. You should note that actual results could
differ materially from those contained in the forward-looking statements. Among
the factors that may 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
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biopharmaceutical markets include product efficacy, price, 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
secrets, know-how and continuing technology innovation. While Viragen, Inc., our
parent, has recently filed two patent applications related to OMNIFERONTM, 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.
Viragen (Europe) continues incurring operational losses and operating
with negative cash flows. Losses have totaled $2,836,095, $4,930,453, and
$4,642,126, for the six month period ended December 31, 1999, and fiscal years
ended June 30, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of February 10, 2000, 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, we will
need to significantly reduce or completely suspend all operations.
Our working capital deficit totaled approximately $809,000 on December
31, 1999. This is a further reduction in working capital of approximately
$226,000 from the previous year end balance.
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.
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.
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We will incur additional future losses as we conduct our clinical
trials. Accordingly, Viragen, Inc., our parent, has agreed to provide us, to the
extent they are able, with the working capital necessary to fund operations at
least through December 31, 2000. Viragen (Europe) has funded operations during
fiscal 2000 through intercompany advances provided by Viragen, Inc.
During the first half of fiscal 2000, Viragen paid $1,549,000 to help
fund our operations. During fiscal 1999, Viragen contributed to capital
approximately $5,828,000 in intercompany advances in exchange for an additional
8,951,094 shares of our common stock. On December 31, 1999, Viragen contributed
to capital $1,159,000 in intercompany balances, in exchange for 1,158,595 shares
of our common stock. Viragen's capital contributions have been at the
then-current market price of our common stock. Market prices have ranged between
$0.38 and $1.00 per share. Viragen has made these capital contributions in order
to alleviate the burden of Viragen (Europe) having to repay approximately
$7,000,000 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
December 31, 1999, we have accrued $2,333,333 in licensing fees payable to
Viragen.
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. We began our clinical trials in the
European Union during the fourth calendar quarter of 1999. Approvals of these
projects cannot be assured and 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.
We need additional funding to conduct 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.
If we are unable to attract new investment capital in the near-term, we
will need to significantly reduce or completely suspend all operations.
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.
Viragen (Europe) has recognized no sales revenue or related costs for
the three months ended or six months ended December 31, 1999 or 1998, or the
fiscal years ended
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June 30, 1999 or 1998, 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 the end of calendar 2000 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.
Income for the three months ended and six months ended December 31,
1999 represents interest earned on cash investments. The decline in interest
income compared to the same periods of the previous year reflects the reduction
in principal invested between the periods resulting primarily from operational
losses.
Research and development costs for the quarter ended December 31, 2000,
totaled $706,543, an increase of approximately $197,000 (39%) 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 product.
Components of this increase include an increase of $223,000 in scientific
salaries and support fees, as well as an increase in laboratory supplies expense
of $14,000.
Research and development costs totaled approximately $1,410,000 and
$858,000 for the six months ended December 31, 1999 and 1998, respectively. The
increase of $552,000 was due to an increase in scientific salaries and support
fees, as well as an increase in laboratory supplies expense, of $443,000 and
$117,000, respectively.
The increase in licensing fee expense of $167,000 between quarters and
the increase in licensing fee expense of $667,000 between six month periods
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 $206,076 for the quarter
ended December 31, 1999 compared with $205,771 for the same period of the
preceding year. There were no significant changes in the cost components of
general and administrative expenses during the quarter.
General and administrative expenses totaled approximately $419,000 and
$398,000 for the six months ended December 31, 1999 and 1998, respectively.
There were no significant changes in the cost components of general and
administrative expenses during the period.
Our management anticipates operational losses will continue increasing.
Specifically, research and development costs will continue increasing, as we
conduct our clinical trials of OMNIFERON. Our ability to successfully conclude
our clinical trials, a
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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 clinical trials and, subject to regulatory approval, for commercial
scale production.
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 previously 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
will continue to evaluate, in the future, additional the third party responses,
and intend to mitigate third party Year 2000 issues, as necessary. For example,
while we believe our current suppliers of white blood cells, a critical
component to our manufacturing process, are Year 2000 compliant, we have
identified and confirmed alternate sources of this material, if needed.
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. This could
negatively affect our financial condition, results of operations and cash flows.
To date, we have not experience any Year 2000 computer problems. Also,
we are not aware of any Year 2000 computer problems experienced by our vendors.
We will, however, continue to monitor the situation, in the event any problems
occur during the year.
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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
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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: February 12, 2000
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EXHIBIT 11
VIRAGEN (EUROPE) LTD. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ---------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Basic and diluted weighted average common shares 16,079,746 7,159,658 16,073,450 7,137,858
=========== ============ =========== ===========
Net Loss $(1,416,554) $ (1,047,725) $(2,836,095) $(1,589,471)
=========== ============ =========== ===========
Basic and diluted loss per common share $ (0.09) $ (0.15) $ (0.18) $ (0.22)
=========== ============ =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 977
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 114,603
<PP&E> 4,897,754
<DEPRECIATION> 757,360
<TOTAL-ASSETS> 4,254,997
<CURRENT-LIABILITIES> 923,107
<BONDS> 126,428
0
0
<COMMON> 172,257
<OTHER-SE> 699,872
<TOTAL-LIABILITY-AND-EQUITY> 4,254,997
<SALES> 0
<TOTAL-REVENUES> 457
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,828,666
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,886
<INCOME-PRETAX> (2,836,095)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,836,095)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,836,095)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
