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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 0-17827
 
 
VIRAGEN INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
  
11-2788282
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
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)
 
 
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  ¨
 
As of November 12, 2002, there were 46,491,740 shares of the issuer’s common stock outstanding, par value $0.01.
 

Table of Contents
 
VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES
 
INDEX
 
PART I - FINANCIAL INFORMATION
     
Item 1.
   
Financial Statements
     
    
1)
      
2
    
2)
      
3
    
3)
      
4
    
4)
      
5
Item 2.
      
13
Item 3.
      
21
Item 4.
      
22
PART II - OTHER INFORMATION
     
Item 6.
      
23
  
24
  
26

Table of Contents
 
VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
    
Three Months Ended
September 30,
  
    
2002
     
2001
  
Product sales
   
$
344,885
 
   
$
—  
 
Costs and expenses
                  
Cost of sales
   
 
318,173
 
   
 
—  
 
Research and development
   
 
231,600
 
   
 
918,004
 
Selling, general and administrative
   
 
849,276
 
   
 
294,193
 
Licensing fee
   
 
—  
 
   
 
500,000
 
Amortization of intangible assets
   
 
57,017
 
   
 
—  
 
Interest and other income
   
 
(35,612
)
   
 
(27,140
)
Interest expense
   
 
49,719
 
   
 
751
 
    
  
Loss before income taxes
   
 
(1,125,288
)
   
 
(1,685,808
)
Income tax benefit
   
 
19,386
 
   
 
73,314
 
    
  
Net loss
   
$
(1,105,902
)
   
$
(1,612,494
)
    
  
Basic and diluted loss per share of common stock
   
$
(0.02
)
   
$
(0.05
)
    
  
Weighted average common shares—basic and diluted
   
 
46,491,740
 
   
 
34,854,628
 
    
  
 
See notes to consolidated condensed financial statements which are an integral part of these statements.

2

Table of Contents
 
VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
 
    
September 30,
2002
     
June 30,
2002
  
ASSETS
                  
Current assets
                  
Cash and cash equivalents
   
$
210,935
 
   
$
77,405
 
Accounts receivable
   
 
294,951
 
   
 
349,965
 
Inventories
   
 
2,108,323
 
   
 
1,866,568
 
Prepaid expenses and other current assets
   
 
758,828
 
   
 
1,100,773
 
    
  
Total current assets
   
 
3,373,037
 
   
 
3,394,711
 
Property, plant and equipment
                  
Land, building and improvements
   
 
2,908,328
 
   
 
2,874,590
 
Equipment and furniture
   
 
4,449,980
 
   
 
4,203,195
 
Construction in progress
   
 
429,511
 
   
 
375,373
 
    
  
    
 
7,787,819
 
   
 
7,453,158
 
Less accumulated depreciation
   
 
(2,182,211
)
   
 
(1,971,667
)
    
  
    
 
5,605,608
 
   
 
5,481,491
 
Goodwill
   
 
8,387,913
 
   
 
8,460,940
 
Developed technology, net
   
 
1,717,763
 
   
 
1,765,618
 
Other intangible assets, net
   
 
25,091
 
   
 
50,619
 
    
  
    
$
19,109,412
 
   
$
19,153,379
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Current liabilities
                  
Accounts payable and accrued expenses
   
$
1,979,457
 
   
$
1,818,757
 
Line of credit
   
 
870,702
 
   
 
831,965
 
Licensing fee payable
   
 
500,000
 
   
 
500,000
 
Current portion of long-term debt
   
 
41,946
 
   
 
72,374
 
Deferred tax liability, current
   
 
52,257
 
   
 
60,686
 
    
  
Total current liabilities
   
 
3,444,362
 
   
 
3,283,782
 
Long-term debt, less current portion
   
 
1,029,502
 
   
 
1,023,948
 
Advances from parent
   
 
5,704,698
 
   
 
4,749,982
 
Deferred tax liability
   
 
533,239
 
   
 
544,196
 
Commitments and contingencies
                  
Stockholders’ equity
                  
Common stock, $.01 par value. Authorized 90,000,000 shares at September 30, 2002 and June 30, 2002; issued and outstanding 46,491,740 shares at September 30, 2002 and June 30, 2002
   
 
464,917
 
   
 
464,917
 
Additional paid-in capital
   
 
39,216,624
 
   
 
39,216,624
 
Accumulated deficit
   
 
(31,892,209
)
   
 
(30,786,307
)
Accumulated other comprehensive income
   
 
608,279
 
   
 
656,237
 
    
  
Total stockholders’ equity
   
 
8,397,611
 
   
 
9,551,471
 
    
  
    
$
19,109,412
 
   
$
19,153,379
 
    
  
 
See notes to consolidated condensed financial statements which are an integral part of these statements.

3

Table of Contents
 
VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
    
Three Months Ended
September 30,
  
    
2002
     
2001
  
OPERATING ACTIVITIES
                  
Net loss
   
$
(1,105,902
)
   
$
(1,612,494
)
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Depreciation and amortization
   
 
175,644
 
   
 
116,070
 
Amortization of intangible assets
   
 
57,017
 
   
 
—  
 
Income tax benefit
   
 
(19,386
)
   
 
—  
 
Increase (decrease) relating to operating activities from:
                  
Accounts receivable
   
 
55,014
 
   
 
—  
 
Inventories
   
 
(241,755
)
   
 
—  
 
Prepaid expenses and other current assets
   
 
341,945
 
   
 
203,704
 
Other assets
   
 
—  
 
   
 
20,154
 
Accounts payable and accrued expenses
   
 
160,700
 
   
 
(633,185
)
Licensing fee payable
   
 
—  
 
   
 
500,000
 
    
  
Net cash used in operating activities
   
 
(576,723
)
   
 
(1,405,751
)
INVESTING ACTIVITIES
                  
Additions to property, plant and equipment, net
   
 
(241,161
)
   
 
(22,130
)
Acquisition of ViraNative, net of cash acquired
   
 
—  
 
   
 
(30,695
)
    
  
Net cash used in investing activities
   
 
(241,161
)
   
 
(52,825
)
FINANCING ACTIVITIES
                  
Advances from parent
   
 
954,716
 
   
 
1,683,393
 
Net borrowing on line of credit
   
 
45,369
 
   
 
—  
 
Payments on long-term debt
   
 
(15,972
)
   
 
(2,923
)
    
  
Net cash provided by financing activities
   
 
984,113
 
   
 
1,680,470
 
Effect of exchange rate fluctuations on cash
   
 
(32,699
)
   
 
(52,232
)
    
  
Increase in cash and cash equivalents
   
 
133,530
 
   
 
169,662
 
Cash and cash equivalents at beginning of period
   
 
77,405
 
   
 
2,266,168
 
    
  
Cash and cash equivalents at end of period
   
$
210,935
 
   
$
2,435,830
 
    
  
 
See notes to consolidated condensed financial statements which are an integral part of these statements.

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VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
NOTE A – CONSOLIDATION AND BASIS OF PRESENTATION
 
Viragen International, Inc. and its subsidiaries are engaged in the research, development, manufacture and sale of certain immunological products for commercial application.
 
The consolidated financial statements include Viragen International, Inc. and all subsidiaries, including those operating outside the United States of America. All significant transactions among our businesses have been eliminated.
 
During fiscal years 2002, 2001 and 2000, Viragen International incurred significant losses of approximately $5,591,000, $7,915,000 and $6,373,000, respectively, and has an accumulated deficit of approximately $31,892,000 as of September 30, 2002. Additionally, the Company had a cash balance of approximately $211,000 and working capital deficit of approximately $71,000 at September 30, 2002. Management anticipates additional future losses as it commercializes its natural human interferon product and conducts additional research activities and clinical trials to obtain additional regulatory approvals. Accordingly, the Company will require substantial additional funding. Historically, Viragen, our parent company, has provided us with the working capital necessary to fund operations. Viragen has agreed to provide us the working capital necessary to fund operations through June 30, 2003. However, Viragen is also required to raise additional capital to support its operations and fund ours. Management’s plans include obtaining additional capital through equity and debt financing. No assurance can be given that additional capital will be available when required or upon terms acceptable to the Company. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties.
 
The accompanying unaudited interim consolidated condensed financial statements for Viragen International have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. The accompanying consolidated condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern.
 
The balance sheet at June 30, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain amounts in prior year’s consolidated condensed financial statements have been reclassified to conform to the current year’s presentation. The reclassifications had no effect on previously reported results of operations.

5

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VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (Continued)
 
NOTE B – INTERIM ADJUSTMENTS AND USE OF ESTIMATES
 
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included.
 
Operating results for the three month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 2003.
 
The unaudited interim consolidated condensed financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2002, filed with the Securities and Exchange Commission.
 
NOTE C – ACQUISITION
 
On September 28, 2001, Viragen International, Inc. acquired all of the outstanding shares of BioNative AB (“BioNative”), a privately held biotechnology company located in Umeå, Sweden. BioNative manufactured a human leukocyte interferon (alpha) product called Interferon Alfanative®. Subsequent to the acquisition, BioNative was renamed ViraNative and Interferon Alfanative was further developed into our new product, Multiferon®.
 
The initial purchase consideration consisted of 2,933,190 shares of Viragen International common stock, which was valued at approximately $2.2 million based on the market price of Viragen International common stock at the date of the acquisition. In addition, Viragen International incurred approximately $204,000 in acquisition related costs. In January 2002, ViraNative received notification from the Medical Products Agency in Sweden that ViraNative’s Re-registration certificate was approved and as a second line treatment for any indication where patients did not respond to recombinant interferon. At that time, the former shareholders of ViraNative were issued an additional 8,799,570 shares of Viragen International common stock, which represented achievement of the first two milestones as defined in the acquisition agreement. The additional shares of Viragen International common stock were valued at approximately $6.6 million, based on the market price of Viragen International common stock at the time the milestones were achieved, all of which was allocated to goodwill.

6

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VIRAGEN INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (Continued)
 
NOTE C – ACQUISITION – (Continued)
 
In connection with the acquisition, the former shareholders of ViraNative are entitled to additional shares of Viragen International common stock contingent upon the attainment of certain milestones related to regulatory approvals:
 
 
•
 
8,799,570 additional shares when and if the Mutual Recognition Procedures application has received the approval of the requisite national and EU regulatory authorities for the use, sale and marketing of Multiferon in certain countries which must include Germany; and
 
•
 
2,933,190 additional shares when and if Multiferon has been approved by the requisite regulatory bodies in the EU for the treatment of Melanoma or when Multiferon has been approved by the requisite regulatory bodies for sale in the USA.
 
As each of these milestones is met, the additional shares of Viragen International will be issued, which will result in the recognition of additional intangible assets.
 
The acquisition, completed on September 28, 2001, was accounted for as a purchase under Statement of Financial Accounting Standards No. 141 and, accordingly, the results of ViraNative’s operations are included in the Company’s consolidated results from the date of the acquisition.
 
NOTE D – GOODWILL AND OTHER INTANGIBLE ASSETS
 
The goodwill reported in our balance sheet as of September 30, 2002 arose from our acquisition of ViraNative in September 2001 and the subsequent achievement of certain milestones by ViraNative in January 2002 as discussed in Note C. In accordance with the provisions of SFAS No. 142, goodwill will not be amortized but will be reviewed for impairment on an annual basis or sooner if indicators of impairment arise. The following table reflects the changes in the carrying amount of goodwill for the quarter ended September 30, 2002.
          
Balance as of June 30, 2002
   
$
8,460,940
 
Goodwill acquired during the year
   
 
—  
 
Foreign exchange adjustment
   
 
(73,027
)
    
Balance as of September 30, 2002
   
$
8,387,913
 
    
 
The intangible assets reported in our balance sheet as of September 30, 2002 arose from our acquisition of ViraNative in September 2001. As of September 30, 2002, intangible assets consist of the following:
 
    
Gross Carrying Amount