Viragen Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the fiscal year ended June 30, 2006
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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 001-15823
VIRAGEN, INC.
(Exact name of registrant as specified in its charter)
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| Delaware
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59-2101668 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
865 SW 78th Avenue, Suite 100, Plantation, Florida 33324
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (954) 233-8746
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class
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Name of exchange on which registered |
| Common Stock, $0.01 Par Value
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American Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15 (d) of the Act. Yes o No x
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act).
Yes o No x
The aggregate market value, as of December 31, 2005, of the registrant’s common stock held by
non-affiliates
based on the closing price on the American Stock Exchange was approximately $19.0 million.
As of September 22, 2006, there were 47,726,773 shares of the registrant’s common stock
outstanding, par value $0.01.
DOCUMENTS INCORPORATED BY REFERENCE
None
VIRAGEN, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
Fiscal Year Ended June 30, 2006
1
PART I
Item 1. Business
Introduction
With international operations in the U.S., Scotland and Sweden, we are a bio-pharmaceutical
company engaged in the research, development, manufacture and commercialization of
therapeutic proteins for the treatment of cancers and viral diseases. Our product and product
candidate portfolio includes: Multiferon® (multi-subtype, human alpha interferon) uniquely
positioned in valuable niche indications, such as high-risk malignant melanoma, other niche cancer
indications and selected infectious diseases; VG101 (anti-GD3 antibody), a humanized monoclonal
antibody that binds selectively to an antigen over-expressed on Stage IV malignant melanoma tumors;
and VG102 (anti-CD55 antibody), a highly novel humanized monoclonal antibody that binds selectively
to an antigen that is over-expressed on nearly all solid tumors. We are also pioneering the
development of the OVA™ System (Avian Transgenics), with the renowned Roslin Institute, the
creators of “Dolly the Sheep”, as a revolutionary manufacturing platform for the large-scale,
efficient and economical production of human therapeutic proteins and antibodies, by expressing
these products in the egg whites of transgenic hens.
We were incorporated under the laws of the state of Delaware in December 1980. Our executive
offices are located at 865 SW 78th Avenue, Suite 100, Plantation, Florida 33324. Our telephone
number is (954) 233-8746; our facsimile number is (954) 233-1414. You can learn more about us by
visiting our web site at www.viragen.com. The information on our website is neither incorporated
into, nor a part of, this report. Our common stock trades on the American Stock Exchange under the
symbol “VRA”. Unless otherwise indicated, references in this report to “we,” “us” and “our” are to
Viragen, Inc., and our wholly-owned and majority-owned subsidiaries.
We currently own approximately 77.0% of Viragen International, Inc., whose shares of common
stock are traded on the over-the-counter Bulletin Board under the symbol “VGNI.” Viragen
International owns 100% of ViraNative AB, our Swedish subsidiary, and 100% of Viragen (Scotland)
Ltd., our Scottish research center.
We are required to file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission, or SEC. You may read and copy these
filings at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may
request copies of these documents by writing to the SEC and paying the required fee for copying.
Please call the SEC at 1-800-SEC-0330 for more information about the operation of the Public
Reference Room. The SEC also maintains an Internet site that contains reports, proxy and
information statements and other information filed electronically with the SEC. The address of
that site is www.sec.gov. The information on this website is not and should not be considered part
of this report and is not incorporated by reference in this document. This website is and is only
intended to be an inactive textual reference.
2
Operations
Multiferon®
We produce a human alpha interferon product under the tradename Multiferon® from human white
blood cells, also known as leukocytes. Multiferon®, is comprised of multiple subtype alpha
interferons and is unique to any other interferon alpha product in the world. Multiferon® is
currently approved for the second-line treatment of a broad range of infectious diseases and
cancers in nine countries. The product was approved in February 2006 in Sweden for the first-line
treatment of high-risk malignant melanoma following dacarbazine (DTIC) after surgical removal of
tumors. This malignant melanoma indication will be our primary focus in seeking broader approvals
throughout the European Union. The product is also approved for sale in Bulgaria, Chile, Mexico,
the Philippines and Sweden as a second-line therapy for the treatment of any and all diseases in
which patients show an initial response to recombinant alpha interferon followed by treatment
failure. It is also approved for sale in Egypt, Hong Kong, Indonesia and South Africa as a
second-line therapy for the treatment of Hairy Cell Leukemia and Chronic Myelogenous Leukemia.
Regulatory approval activities are also underway in a number of other European, South American and
Asian territories. Multiferon® is not approved for sale in the United States or European Union
countries, other than Sweden, however, we are collaborating with the Swedish and European Union
regulatory authorities to initiate the process for seeking broader European approvals through the
Mutual Recognition Procedure, or MRP. We have not yet sought the approval of Multiferon® from the
United States Food and Drug Administration, or FDA, and do not anticipate doing so in the
foreseeable future unless we secure licensees to fund such activities or other sources of funding,
including government or private grant funding.
Production of Multiferon® is dependent upon a reliable approved source of human leuckocytes.
Interruption of our supply, currently sourced from the German Red Cross, while not anticipated,
would hamper our ability to manufacture Multiferon®. All other raw materials needed in the
manufacturing process are readily available from multiple sources.
We have completed collection of data from a clinical trial in malignant melanoma conducted in
Germany, including a long-term follow-up of those patients, and this clinical trial data
demonstrated a statistically significant advantage over untreated controls in terms of survival
without distant metastasis and overall survival and was the basis for approval in Sweden. We are
currently seeking approval from the Swedish Medical Products Agency for the pre-filled syringe
presentation of Multiferon® for this indication. We are now preparing to seek approval of
Multiferon® for the treatment of malignant melanoma in parts of the European Union through the MRP
upon approval of the pre-filled syringe presentation of Multiferon® by the Swedish Medical Products
Agency. MRP permits a registrant of a new drug or biological product to use a single registration
dossier to gain marketing authorization in a number of European Union countries. The prerequisite
requirement is that any new registration must have a sponsor country that has reviewed and approved
the registration dossier. In the case of Multiferon®, and following the Swedish approval of our new
pre-filled syringe dosage form, we anticipate that Sweden will agree to act as our sponsor country
for the MRP filing. Once the dossier is approved through the MRP process, it is then permissible to
go to each country that has approved the filing and seek reimbursement authorization. All countries
are not required to approve the filing in the MRP process, and there is no guarantee that any
country will agree to reimburse for the product.
Effective March 2006, our two sales representatives in Sweden began promoting this new
malignant melanoma indication to physicians. While there can be no assurance, we expect incremental
sales gains over the next several quarters.
We have committed to conducting a new Phase III, post-marketing clinical trial in high-risk
melanoma. We anticipate approximately 1,000 patients to be enrolled in this new trial possibly in
as many as 20 different countries around the world. We plan to initiate enrollment in this trial in
early 2007.
3
While Multiferon® is approved for sale as a second-line treatment for the treatment of
hepatitis B and hepatitis C for patients that have failed to respond to treatment with recombinant
interferon alpha in certain countries, we would need to conduct additional lengthy and expensive
clinical studies in order to provide the necessary
supporting evidence that would position us to effectively market Multiferon® for these
indications. Additionally, market analysis regarding the future treatment of hepatitis strongly
suggests a diminishing role for alpha interferon and an emergence of new, more effective,
therapies. Therefore, we have deemphasized our efforts related to the hepatitis indications, and
are now focused on the treatment of malignant melanoma and other cancer and anti-viral indications.
With regard to identifying potential new indications for Multiferon®, we are collaborating
with the U.S. Army Medical Research Institute of Infectious Diseases, or USAMRIID. USAMRIID has
verbally agreed to commence with a new series of in vivo studies (nonhuman primate models) to
further determine the potential of Multiferon® as a potent, broad-acting anti-viral product capable
of fighting certain “Category A” pathogens, a class of highly virulent viral threats, which have
the potential to be used in bio-terrorism. These studies will evaluate Multiferon®’s possible
utility as a first-line of defense against unknown infectious agents or when no therapeutic or
vaccine exists. These studies are expected to be completed in 2006 and will help determine the
potential role of Multiferon® as a bio-defense product and as a candidate for development funding
under Project Bioshield or other sources of grant funding.
We are also in the process of identifying potential new oncology indications for Multiferon®.
This could result in decisions to initiate new Phase II and Phase III clinical trials in the near
future.
In June 2005, we completed the production of validation batches of Multiferon® in a new
pre-filled syringe dosage form. This new filling and packaging operation, also located in Germany,
is pending completion of stability studies and is expected to be filed with the Swedish Medical
Products Agency during calendar 2006 and approved in calendar 2007. This pre-filled syringe
presentation of Multiferon® will also be the subject of our planned European MRP application,
assuming its approval by the Swedish Medical Products Agency.
We have entered into several agreements for the distribution of Multiferon® in various
countries. To date, we have not recognized significant revenue from these agreements. The majority
of these agreements require that the distributor obtain the necessary regulatory approvals, which
may not yet be obtained. Regulatory approval is a mandatory step in the marketing of a drug, but it
is by no means the final challenge in marketing a bio-pharmaceutical product. In many countries, a
separate process may be required for obtaining reimbursement authorization. In addition,
physicians must be educated about the merits of the product over time and, in some of these
territories, hospital formularies govern the acceptance for use of a new product. Therefore, we
are unable to predict the timing of approvals or sales in these various countries.
There are challenges associated with international marketing activities including language and
cultural barriers, variations in compliance procedures in certain countries and/or changes in
regulatory requirements where our products may be marketed, performance of our distribution
channels, government’s willingness to promote cheaper generic versions of competing products, the
general population’s inability to afford private care drug products, changes in economic conditions
and instability from country to country, changes in a country’s political condition, trade
protection measures, tariffs and other trade barriers, including import and export restrictions,
and tax issues. Our future revenues, costs of operations and profit results could be materially
adversely affected by any or all of these factors. It may take significant time to overcome these
challenges with no assurance that a particular market will ever be effectively penetrated.
Any additional clinical testing that may be required by authorities for approval will be an
expensive and complex process that could take a number of years to complete, with no assurance that
regulatory approvals will eventually be obtained or maintained.
The Interferon Industry
Interferon is the body’s first defense response to foreign substances such as viruses,
interfering with the viral growth and replication processes. Interferons induce anti-viral,
anti-tumor and immunomodulatory responses within the body. Clinical studies indicate that
interferons may also inhibit malignant cell and tumor growth without affecting normal cell
activity.
4
There are two commercial production methods of interferon for medical use. They are
differentiated primarily by their source products, methods of manufacture and resulting
composition. The first, the type we produce, is a multi-subtype human leukocyte-derived alpha
interferon. This is produced by human white blood cells, induced by a virus that is not normally
pathogenic in humans, to produce a multi-subtype interferon. Our product is then purified to
produce a highly concentrated and highly pure product for clinical use. The second type of
interferon is recombinant or synthetic interferon (typically alpha or beta). Generally, it is
produced from a single human gene in bacterial cells by recombinant DNA techniques.
Prior to 1985, human interferon was the only type of interferon available. Research
institutions and other bio-pharmaceutical companies, including us, were working to solve the
problem of the high cost related to the commercial-scale production. In 1985, Hoffmann-La Roche,
Inc. and Schering-Plough Corporation, two major pharmaceutical companies, successfully developed
synthetic interferons using recombinant DNA technology. These companies subsequently received U.S.
Food and Drug Administration approval to produce and market their recombinant, or synthetic, alpha
interferon products for numerous indications.
After the emergence of recombinant alpha interferon, the medical community’s interest in human
interferon diminished. Most clinical studies thereafter utilized a recombinant product. We believe
this was primarily due to the lack of competitive clinical data on human interferon, as well as the
marketing expertise of those companies that offer recombinant products. We believe that the
clinical data we have developed, as well as new clinical trials currently under development, will
continue to demonstrate the beneficial effects and advantages of our multi-subtype alpha interferon
product. However, we cannot assure you of the success of any new clinical trials or adoption of our
product by the medical community.
Hoffmann-La Roche, Inc., which produces Roferon® and PEGASYS®, and
Schering-Plough Corporation, which produces Intron® A and Peg-Intron®,
continue to actively market their products for a wide range of indications and promote the
therapeutic benefits of their synthetic interferon products. Infergen®, which is
licensed by InterMune from Amgen, is approved by the U.S. Food and Drug Administration for the
treatment of hepatitis C.
We believe the worldwide market for interferon alpha, which is dominated by the recombinant
interferons, was approximately $3 billion in 2005. Pegylated versions of the drug have been
produced to offer patients the convenience of a weekly dosage, instead of three times a week, thus
providing a more convenient mode of administration. Pegylation is a process which helps prevent the
interferon from being broken down by the immune system. As a result, the interferon persists longer
in the body.
Applications of Interferon
Interferon is a naturally occurring protein which serves to enhance the body’s immune response
to viral infections. It has been clinically proven that interferons can arrest the progress of many
viral based infections, reducing adverse symptoms and disease related complications. In addition,
it is believed that the multi-subtype nature of human interferons may provide advantages over
single subtype recombinant forms.
Melanoma
Cancer of the skin is the most common of all cancers. Melanoma is a type of cancer which
originates in the melanocytes, the cells responsible for pigmentation of the skin. Melanoma
accounts for about 4% of skin cancer cases, but it causes most skin cancer deaths. The number of
cases of melanoma in the United States and in many other parts of the world is on the rise. The
American Cancer Society estimates that in 2006, there will be 62,190 new cases of melanoma in the
United States, and about 7,910 will die. On an international basis, the World Health Organization
reports that 48,000 deaths are caused every year by malignant melanomas.
5
We conducted a Phase II/III clinical trial in Germany with Multiferon® for the adjuvant
treatment of malignant melanoma, which indicated promising results. The study involved 252
patients with malignant melanoma in 20 centers, who were randomized to receive either Multiferon®
after dacarbazine or no adjuvant therapy. This study showed that adjuvant treatment with low doses
of Multiferon®, preceded by dacarbazine, significantly increases long
term overall survival in high-risk resected cutaneous melanoma patients. The results suggest a
survival benefit which is at least comparable to that obtained with a recombinant interferon
regimen, but over a much shorter, and thus less expensive, treatment period.
Based on the strength of this clinical data, Multiferon® was approved in Sweden in February
2006 for the first-line adjuvant treatment of high-risk malignant melanoma following dacarbazine
(DTIC) after surgical removal of tumors. This malignant melanoma indication will be our primary
focus in seeking broader approvals throughout the European Union.
Hepatitis C
The hepatitis C virus is a major worldwide cause of acute and chronic hepatitis. Hepatitis C
affects an estimated 4 million Americans and 5 million Europeans. Approximately 26,000 new cases of
hepatitis C are diagnosed each year in the U.S. and it is responsible for an estimated 10,000 to
12,000 deaths annually. Hepatitis C is currently a leading cause of liver transplantation in the
United States. The U.S. Food and Drug Administration has approved certain synthetic interferon
products for the treatment of hepatitis C.
Synthetic interferon has proven to be effective in the treatment of some cases of hepatitis C.
Based on limited clinical experience in Sweden, Multiferon® has also proven effective in the
treatment of hepatitis C in a second-line setting. However, in order to effectively market
Multiferon® for hepatitis C in any country, extensive additional clinical trials costing many
millions of dollars will be required. These studies would take several years to complete.
Additionally, market analysis regarding the future treatment of hepatitis C strongly suggests a
diminishing role for alpha interferon and an emergence of new, more effective, therapies.
Therefore, we have deemphasized our efforts related to hepatitis C, and are now focused on the
treatment of malignant melanoma and other cancer and anti-viral indications. We have no current
plans to conduct any additional studies in hepatitis C in any country, however, we may continue to
derive nominal sales in our limited markets for the second-line treatment of this indication.
Chronic Myelogenous Leukemia
Chronic myelogenous leukemia is one of a group of diseases called myeloproliferative
disorders. It is usually recognized by a distinctive cytogenetic abnormality, known as the
Philadelphia chromosome. The current treatment for chronic myelogenous leukemia is high dose
chemotherapy with bone marrow transplantation. Interferon therapy has emerged as a possible
effective initial treatment in this disease. This type of therapy affects both the presence of
leukemia cells and the number of bone marrow cells having the Philadelphia chromosome.
Multiferon® is approved in a limited number of countries for the treatment of patients with
chronic myelogenous leukemia who did not respond to treatment with recombinant interferon. We have
no current plans to conduct any additional studies in this indication in any country.
Hairy Cell Leukemia
Hairy cell leukemia is a disease in which a type of white blood cell called the lymphocyte,
present in the blood and bone marrow, becomes malignant and proliferates. It is called hairy cell
leukemia because the cells have tiny hair-like projections when viewed under the microscope. Hairy
cell leukemia is a rare cancer. There are approximately 600 new cases diagnosed every year in the
United States, making up about 2% of the adult cases of leukemia each year.
Multiferon® is approved in a limited number of countries for the treatment of patients with
hairy cell leukemia who did not respond to treatment with recombinant interferon. We have no
current plans to conduct any additional studies in these indications in any country.
6
The OVA™ System (Avian Transgenics)
Transgenics is the science of introducing a foreign gene or genetic material from another
species into the genome of the target animal. Some of the more compelling advantages hoped to be
derived from transgenic technology include: improved nutritional value of the products from the
animals with enhanced genes; improved animal productivity and welfare in supplying enough food to
support an ever-growing global population; and transgenic animals are also expected to play a key
role in lowering the soaring costs of drug production. Considerable progress has been achieved in
the development of transgenic animals such as cows, sheep, goats and chickens that are capable of
producing human therapeutic protein drugs in their milk or eggs, offering significant efficiency
and cost advantages, all of which must be thoroughly reviewed by the appropriate federal and
international regulatory agencies before entering the marketplace.
We have an ongoing avian transgenic research project in collaboration with the Roslin
Institute of Scotland. We believe that once fully developed, this technology could be used to
create hens which produce eggs containing recoverable therapeutic proteins in the egg white. We
believe this technology promises a more cost effective method of production for many promising
bio-pharmaceutical products. Avian transgenic production, based upon genetically modifying
chickens to express human drugs, is expected to offer significant economic and technological
advantages over traditional methods of protein production including: ease of scale-up; low capital
risk; deferred capital investment; and competitive costs.
In January 2006, we successfully achieved expression of significant quantities of the human
protein, interferon beta-1a, in the whites of eggs laid by transgenic hens using the OVA™ System.
Interferon-beta is a key component of the human immune system and is the active ingredient in
several leading multiple sclerosis therapies. This result is the first in a series of anticipated
milestones demonstrating “Proof-of-Principle” with an avian-expressed version of beta-interferon,
and it is expected that the OVA™ System will be capable of cost-effectively expressing many types
of therapeutic proteins. While these results suggest that the OVA™ System represents a novel
biomanufacturing system for the production of human therapeutic proteins, this technology must be
further developed in order to validate and confirm its viability and economic benefits before
entering into commercial production or initiating necessary clinical trials.
There are a total of four products involved in our avian-expression studies. We have reported
expression and recovery of a functional humanized antibody (a construct of VG101). In addition, we
have achieved promising results with interferon-beta. We are now in the process of fully
characterizing the interferon-beta that is recovered from subsequent generations of hens to confirm
the quantities and quality of this product candidate. We have two more product candidates, which
have not yet been publicly disclosed, which are also being expressed in eggs. We hope to report
the achievement of additional key milestones related to these projects during calendar 2006 and
2007.
The potential for reduced capital outlay and cost effectiveness of protein production
represent significant incentives for the use of transgenic hens. Chickens have one of the lowest
founder animal development costs of any transgenic system. The founder hen is bred or cloned to
produce a transgenic flock. We believe that eventually a large number of birds can be produced
cheaply compared to other methods. Hens can lay 250 eggs per year with each egg conservatively
projected to be capable of containing significant quantities of the target drug per egg. This
productivity, on a per egg basis, means that large amounts of proteins could be generated
relatively inexpensively.
Other key advantages include the relative ease of scale-up and normal protein modifications
such as glycosylation (the sugar structure of a protein which is critical to its function). It is
believed that chickens yield a glycosylation pattern more similar to that found in humans than
other transgenic systems such as with mammals or plants. This is believed to offer distinct
clinical advantages for patients who develop neutralizing and binding antibodies to foreign sugar
antigens on transgenic proteins which, in turn, may negate some or all of the beneficial effect of
the protein drug in the patient.
7
Humanized Monoclonal Antibodies
Substances that are foreign to the body, such as disease-causing bacteria and viruses and
other infectious agents, known as antigens, are recognized by the body’s immune system as invaders.
The human body’s natural defense against these infectious agents are antibodies, proteins that seek
out the antigens and help destroy them. A monoclonal antibody is highly specific and only binds to
one specific antigen. We are developing a portfolio of monoclonal antibodies that are extremely
specific in their binding to antigens expressed on certain cancer cells, in order to target their
destruction. Monoclonal antibodies represent the fastest growing pharmaceutical market segment,
with sales forecast to grow to approximately $20 billion by 2010.
VG101 (anti-GD3 antibody)
In December 1999, we entered into a collaborative research and development agreement with
Sloan-Kettering Institute, or Sloan-Kettering, for the joint development of an antibody to the GD3
antigen, which is over-expressed on several types of cancer cells, most notably melanoma. This
agreement was extended in February 2002 and will expire in February 2007, unless extended by mutual
consent or unless we exercise our option to negotiate an exclusive license agreement. Although we
have entered into discussions and negotiations with the Sloan-Kettering to license the anti-GD3
antibody, it is not known if or when a license agreement will be executed. The agreement provides
that the rights in work product created under the agreement including research results, data, and
records will be owned by the party that generated them and that if work product is generated
jointly, it will be jointly owned by us and Sloan-Kettering. It is believed that antibodies to the
GD3 antigen are able to elicit anti-tumor effects, thereby destroying cancer cells, which have the
over-expressed antigen on their surface.
Sloan-Kettering clinicians have previously studied the mouse form of this antibody in a fairly
extensive manner in numerous human clinical trials. However, use of mouse-derived antibodies
typically influences the outcome of testing in humans in that the human body reacts to mouse
antibody as if it was a foreign invader, thereby reducing the overall efficacy, and tolerability,
of the product. Sloan-Kettering was able to demonstrate that this antibody had beneficial effects
in patients with Stage IV melanoma. Sloan-Kettering also found that the antibody had therapeutic
utility when used alone and when used with other compounds. If the antibody can be produced in a
humanized form, thereby eliminating at least some of the undesirable effects, whether used alone or
in combination with other products, it could offer significant improvement in this disease setting.
Importantly, to date, there are no other products available to successfully treat Stage IV
melanoma. If the antibody can be shown to be efficacious against this stage of the disease, then
it would represent a significant opportunity.
At the current time, we have developed production processes for humanized forms of the
antibody, including the avian transgenics technology. These antibodies will be shared with
Sloan-Kettering clinicians for comparability testing, done in parallel with studies at our Scotland
laboratories. We are not able to predict subsequent study dates for this antibody nor are we able
to determine if we will take this candidate further into pre-clinical studies or clinical
development.
VG102 (anti-CD55 antibody)
In April 2005, we executed a global exclusive license with Cancer Research Technology UK for
the rights to develop and commercialize an anti-CD55 antibody. The murine form of this antibody was
developed through the research of Professor Lindy Durrant of the University of Nottingham, UK. The
CD55 antigen is significantly over-expressed on nearly all solid tumors in humans. Early studies at
the University of Nottingham demonstrated that the antibody was able to bind only to malignant
tumor antigen and furthermore, it was shown to bind in a highly novel manner, different from all
anti-CD55 antibodies known in the scientific literature. This novelty underpins the intellectual
property surrounding VG102, in addition to other intellectual property we have created through our
development activities. The CD55 antigen has been shown to block the body’s natural immune system
from attacking and killing cancer cells. Theoretically, if an antibody can be developed that binds
selectively to tumor CD55 antigen, this protective mechanism could be removed and the natural
immune system, or concomitantly or sequentially administered anti-tumor agents, would then be able
to destroy cancer cells.
8
Importantly, Professor Durrant has produced the mouse form of an anti-CD55 antibody and has
administered it successfully to humans in immunoscintigraphy studies (imaging). These studies
demonstrated the specificity of binding only to tumor antigen, and not normal cells, and
demonstrated tolerability in humans, albeit small numbers and dosages, without safety incident. It
is this data, and our own exploratory data in our laboratories, that has led us to license the
anti-CD55 antibody, which we believe may become an important addition to the arsenal for fighting a
number of types of cancer.
At the current time we have developed production processes for humanized versions of the
anti-CD55 antibody to continue pre-clinical studies. We have not yet selected a target indication
for this antibody, although colorectal cancer may represent a good first indication due to the
significant levels of over-expression of the CD55 antigen. At this time, we are not able to
predict any date for the start of clinical trials.
In April 2004, our Scottish subsidiary, Viragen (Scotland), was awarded a grant from the
Scottish government for approximately $833,000 for the purpose of supporting the research and
development of VG102. This grant is being funded over a three year period, with final funding to
occur in calendar 2007.
Other Potential Product Candidates
Through our internal research, review of available scientific literature, discussions with
leading researchers and institutions around the world, we continue to evaluate ideas for new
product candidates and scientific technologies. Based upon these efforts, it is highly likely that
one or more new product candidates will be added to our portfolio within the next six to twelve
months.
Distribution Agreements and Strategic Alliances
We rely, and expect to rely in the foreseeable future, upon third party marketers and
distributors to effectively market and distribute Multiferon® and our other product
candidates after receipt of regulatory approval. As discussed below, we have established
relationships for the marketing and distribution of Multiferon®; however, failure to maintain these
relationships could significantly and adversely affect our business, sales and growth.
Additionally, we are in the process of identifying potential licensees in markets in which we would
like to penetrate. If we are unable to identify and establish relationships with these third
parties, our business could be adversely affected. The ultimate success of our products also
depends in large part on our distributors’ and licensees’ ability and desire to actively distribute
our products to the target markets. The failure or inability of even a few of our distributors to
adequately market and distribute our products within their territories could harm our sales and
affect our ability to continue operations.
Multiferon®
We have entered into several agreements for the distribution of Multiferon® in various
countries, however, to date, we have not recognized significant revenue from these agreements.
These agreements may be terminated if the distributors fail to obtain or maintain the product
license or in the event of breach of the terms and conditions of the agreements. We are
considering proposals from other potential business partners for the development, marketing, sale
and distribution of Multiferon® in other territories around the world.
In November 2005, we entered into a license, development and supply agreement with Kuhnil
Pharm Co. Ltd., headquartered in Seoul, for the exclusive license to register, market, sell and
distribute Multiferon® in South Korea. While the full financial terms are required to remain
confidential, we received a small up-front license fee in exchange for providing exclusive
marketing rights to the drug in South Korea for a period of ten years. Kuhnil Pharm is a rapidly
growing, leading manufacturer, developer and marketer of pharmaceuticals in Korea with a specialty
focus in oncology, covering an expansive network of clinics, physicians and hospitals with over 300
sales representatives. This agreement provides that Kuhnil shall take all measures necessary to
achieve regulatory approval for Multiferon® in South Korea, as required by the Korean health
regulatory authority.
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In November 2003, we entered into a supply and distribution agreement with Pentafarma S.A.
(Pentafarma) to serve as our exclusive distributor of Multiferon® in Chile. Pentafarma retains its
exclusive distribution rights in the event that it generates 70% or more of the sales figures
required under the agreement. Headquartered in Santiago, Pentafarma is a wholly-owned subsidiary
of Fresenius Medical Care, the world’s largest, integrated provider of products and services for
chronic kidney failure. In June 2005, we reported that Pentafarma received notification of
registration approval for Multiferon® from the Chilean authorities. An initial stocking
order has been placed and Pentafarma is planning a market launch in the second half of 2006.
In May 2003, we entered into an exclusive supply and distribution agreement with Arriani
Pharmaceuticals S.A. to distribute Multiferon® in Greece and designated Balkan countries. The
agreement provides that Arriani Pharmaceuticals, headquartered in Athens, Greece, shall take the
measures necessary to achieve regulatory approvals for Multiferon® in Greece, Cyprus and Slovenia
following our receipt of the mutual recognition procedure, or MRP, approval in the European Union,
as well as to obtain and maintain the appropriate regulatory approvals in Bulgaria and Croatia. We
have not yet commenced the MRP registration process. As a result, we are not realizing any
financial benefit from this agreement at this time. MRP approval for Cyprus and Slovenia is subject
to their pending acceptance into the European Union. Arriani has received notification of
registration approval in Bulgaria, and reimbursement authorization is pending for that country. A
clinical trial with Multiferon® was initiated by Arriani in 2005 in rescue treatment of Hepatitis
C, but that study has been terminated due to its small size and limited value in providing
sufficient supporting evidence for future regulatory and marketing purposes.
In March 2003, the South African regulatory authorities approved an application filed by
Viragen’s distribution partner in that country, Key Oncologics Ltd. The South African regulatory
approval allows for the treatment of patients with hairy cell leukemia and chronic myelogenous
leukemia who did not respond to recombinant (synthetic) interferon regimens. Additional
applications have been filed to broaden the product’s approved indications to include the treatment
of other viral and malignant diseases.
In January 2003, we renewed and extended our distribution and supply agreement with
Laboratorios Pisa, a leading Mexican pharmaceutical company. The new agreement has a term of ten
years and provides Laboratorios Pisa with the exclusive rights to distribute Multiferon® in Mexico.
In February 2004, Multiferon® was approved in Mexico to target the treatment of hairy cell
leukemia, chronic myelogenous leukemia, renal cell carcinoma and malignant melanoma. The product
was launched in Mexico in September 2004 for the treatment of hepatitis B and C. A clinical trial
was initiated by Laboratorios Pisa in the rescue of patients with hepatitis C and this study
continues enrollment with an anticipated completion date in 2007.
The OVA™ System (Avian Transgenics)
On November 15, 2000, we entered into a development, license and collaboration agreement with
the Roslin Institute (Edinburgh). The agreement provides for joint continued development of
transgenics technology in chickens. The OVA™ System will be used to create chickens which produce
eggs containing targeted new drugs in the egg white to treat many serious diseases, including
cancer. We believe this technology promises a much faster and cost effective method of production
for many promising bio-pharmaceutical products. In March 2004, we extended our agreement with the
Roslin Institute to develop avian transgenic technology. The agreement continues to provide us
with the worldwide exclusive rights to continue development and the ability to commercialize
Roslin’s proprietary avian transgenic biomanufacturing technology in consideration for royalty
payments to Roslin in the amounts 3.5% of sales of products developed under the agreement and 17.5%
in connection with the sales or transfers of certain intellectual property. We have not paid any
royalties under the agreement to date. In September 2005, we executed a one-year extension to this
agreement with Roslin to December 2006 to successfully complete the research and development
process and to develop new science for the future of the technology. In June 2006, we extended the
September 2005 agreement by six months to June 2007.
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In March 2003, we entered into an agreement with Oxford BioMedica plc to obtain rights to a
technology for use in our collaboration with Roslin Institute to develop avian transgenic
technology as a novel platform for the efficient, cost-effective manufacturing of protein drugs.
The agreement provided Viragen with an option to acquire an exclusive worldwide license for
proprietary gene transfer vectors, biotechnology tools designed to transfer genes into cells at
high efficiency. In June 2004, we exercised the option, entering into a license agreement for
Oxford BioMedica’s Lentivector gene delivery technology, which provided us with worldwide exclusive
rights to use this technology in the creation of transgenic avians for bio-pharmaceutical
production. Initial studies evaluating a novel use for these vectors, which transfer genes for
therapeutic proteins into developing chicken embryos, have yielded successful and consistent
results. However, it should be noted that additional work is necessary to be able to express the
targeted proteins in the egg whites of transgenic chickens in sufficient quantities to make the
process commercially viable. This work is currently underway at the Roslin Institute and our own
research and development facility in Scotland.
Humanized Monoclonal Antibodies
VG101 (anti-GD3 antibody)
In December 1999, we entered into a collaborative research agreement with Sloan-Kettering
Institute in New York City. The agreement is for the development of a human monoclonal antibody
targeting the ganglioside GD3, which may be used alone or in combination with our Multiferon®
product as well as other products, for the treatment of melanoma, a potentially fatal skin cancer.
This technology could also prove useful in the treatment of certain other cancers. In February
2002, the agreement was extended through February 2007. The agreement provides that the rights in
work product created under the agreement including research results, data, and records will be
owned by the party that generated them and that if work product is generated jointly, it will be
jointly owned by us and Sloan-Kettering Institute. While working with traditional monoclonal
antibody manufacturing methods, we are also engaged in working with our avian transgenics team on
producing VG101.
Although we have entered into discussions and negotiations with Sloan-Kettering Institute to
license the anti-GD3 antibody, it is not known if or when a license agreement will be executed. We
are currently continuing the collaborative research agreement and have created a humanized form of
this antibody for further studies.
VG102 (anti-CD55 antibody)
In July 2000, we entered into a research agreement for VG102 with Cancer Research Technology
UK in the United Kingdom and the University of Nottingham to evaluate therapeutics based on the
CD55 antigen, which we believe may have potential in the treatment of several indications including
breast, ovarian and colorectal cancers. This project is based on the development of monoclonal
antibodies designed to block the protective effect of the protein CD55 on the surface of tumor
cells. The initial development work was carried out in collaboration with the Cancer Research
Technology UK Department of Clinical Oncology at the University of Nottingham in England.
In April 2005, we executed an exclusive global license with Cancer Research Technology UK for
VG102 to be developed for the treatment of human disease. Rights include the use of the antibody as
a therapeutic and a diagnostic agent in cancers. We have created a humanized form of this antibody
and are currently developing optimized manufacturing processes in preparation for final
pre-clinical testing.
Our license imposes various commercialization milestone payments and other payment obligations
on us. If we fail to reach the material milestones set forth in our development plan contained in
the agreement by more than six months, the licensor may have the right to terminate the license
specified in the agreement, in which event we would lose valuable rights and our ability to develop
our product candidates.
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Research and Development
Our research and development programs include ongoing studies in support of Multiferon®, our
avian transgenics platform, two humanized antibodies and potential new product candidates. For the
fiscal years ended June 30, 2006, 2005 and 2004, we incurred research and development costs of
approximately $4.60 million, $4.96 million and $3.59 million, respectively.
The timelines and costs for the completion of bio-pharmaceutical research and product
development programs are difficult to accurately predict for various reasons, including the
inherent exploratory nature of the work. The achievement of project milestones is dependent on
issues which may impact development timelines and can be unpredictable and beyond our control.
These issues include: availability of capital funding, presence of competing technologies,
unexpected experimental results which may cause the direction of research to change, accumulated
knowledge about the intrinsic properties of the candidate product, the availability of Good
Manufacturing Practices grade material, results from pre-clinical and clinical studies, potential
changes in prescribing practice and patient profiles and regulatory requirements.
The completion of our ongoing and contemplated research and development projects is dependent
upon our ability to raise significant additional funding or our ability to identify potential
collaborative partners that would share in project costs. Our future capital requirements are
dependent upon many factors, including: revenue generated from the sale of Multiferon®; progress
with future clinical trials; the costs associated with obtaining regulatory approvals; the costs
involved in patent applications; competing technologies and market developments; and our ability to
establish collaborative arrangements and effective commercialization activities.
Multiferon®
Our human leukocyte-derived multi-subtype interferon alpha product, Multiferon® was originally
developed as an alternative to synthetic (recombinant), single-subtype products, and is currently
approved in nine countries in second-line indications. In February 2006, Multiferon® was approved
as a first-line adjuvant treatment for malignant melanoma in Sweden. Multiferon® is actively
marketed in five countries through local distribution partners, and our own two-person sales team
in Sweden.
Interferon alpha is the human body’s first line of defense against infectious disease. Human
leukocytes, in the blood, secrete a number of different types of interferon alphas when exposed to
attack by viruses and bacteria. Viragen collects human leukocytes, a by-product of blood
collection, and under highly exacting procedures, subjects these to a viral challenge that is known
to be benign to humans, but stimulates the leukocytes to produce a unique mixture of interferon
alpha subtypes. We then collect and purify the resultant interferon alphas using our proprietary
technologies to manufacture Multiferon®. The mixture of subtypes contained in Multiferon® is unique
among all interferon alpha products.
To date, Multiferon® has been primarily marketed as rescue therapy for patients who have been
treated with synthetic interferon alpha products but who have for various reasons not responded to
that treatment. With the approval of Multiferon® in Sweden in February 2006, we are now
progressing with regulatory strategies to expand approvals for Multiferon® with a focus on treating
malignant melanoma.
We are collaborating with the Swedish Medical Products Agency and European Union regulatory
authorities to initiate the process for seeking broader European approvals through the MRP. We
have initiated the process to conduct a Phase III post-marketing clinical trial with Multiferon® on
an international basis. This trial is planned to include up to 1,000 patients and is expected to
build additional clinical evidence of the value of Multiferon® in high-risk melanoma therapy. This
trial is expected to cost approximately $16 million to $18 million and take six to eight years to
complete.
Multiferon® is believed to have other potential uses in other cancer treatment regimens and we
are currently evaluating a number of other possible indications for which clinical trials would be
required in order to gain approvals.
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In order to identify potential new anti-viral indications for Multiferon®, we are
collaborating on studies using Multiferon® being conducted by the U.S. Army Medical Research
Institute of Infectious Diseases, or USAMRIID. Based on previous positive in vitro study results
reported in February 2006, USAMRIID has verbally agreed to commence with a new series of in vivo
studies (nonhuman primate models) to further determine the potential of Multiferon® as a potent,
broad-acting anti-viral product capable of fighting certain Category A pathogens, a class of highly
virulent viral threats, which have the potential to be used in bio-warfare. These studies will
evaluate Multiferon®’s possible utility as a first-line of defense against unknown infectious
agents or when no therapeutic or vaccine exists. These studies are expected to be completed in
2006 and will help determine the potential role of Multiferon® as a bio-defense product and as a
candidate for development funding under Project Bioshield or other sources of grant funding.
The OVA™ System (Avian Transgenics)
Our avian transgenic manufacturing program is designed to enable us to produce protein-based
drugs, including monoclonal antibodies, in the whites of eggs laid by transgenic chickens. Our goal
is to develop a technology which will enable us to offer a viable and cost-effective alternative
for the large-scale production requirements of the bio-pharmaceutical industry and also for our own
therapeutic protein products. Existing protein production technologies are often inefficient and
costly. We believe that this technology will allow us to offer the bio-pharmaceutical industry an
efficient method of production of their protein-based products. It is envisaged that this
technology will have a higher capacity, lower manufacturing costs and may be able to offer
improvements to the products themselves.
We believe our avian transgenics project could offer an efficient and cost effective way to
produce large volumes of therapeutic proteins. In addition to meeting the current and future
alternative production demands of the bio-pharmaceutical industry and generating significant
revenue for us, this project could also accelerate the progress of several life-saving drugs to the
market.
To date, we have succeeded in proof-of-principle of our avian transgenics system with two
product candidates: a construct of VG101, the anti-GD3 antibody was successfully expressed as
reported in June 2005; and interferon beta-1a was successfully expressed in January 2006. We
continue to evaluate methods to optimize expression levels as well as methods for recovery and
purification of these active ingredients.
While our results to date suggest that the OVA™ System represents a novel biomanufacturing
system for the production of human therapeutic proteins, this technology must be further developed
in order to validate and confirm its viability and economic benefits before entering into
commercial production or initiating necessary clinical trials.
For the fiscal years ended June 30, 2006, 2005 and 2004, we incurred research and development
costs related to the avian transgenics project totaling approximately $1.61 million, $1.69 million
and $1.90 million, respectively. Since the date of inception of this project, we have incurred
approximately $7.41 million in research and development costs.
Humanized Monoclonal Antibodies
There have been a great number of developments in the treatment of cancer in humans over the
years. Monoclonal antibodies have been shown to be able to offer significant advantages over other
therapies, yet even with this success, current products still fall far short of the ideal with
respect to both efficacy and to a lesser extent, safety. Trends in treatment options are tending to
favor multiple agents and therapies in combination or sequential administration as well as targeted
therapeutics. Still, there remains much room for improvement.
We have selected two monoclonal antibodies for our research and development projects based
largely upon prior pre-clinical information and prior testing in humans. Both of our current
antibody projects appear to present significant advantages in these respects and both offer the
potential to be developed into a platform based technology.
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VG101 (anti-GD3 antibody)
In 1999, we entered into a collaborative research and development agreement with
Sloan-Kettering Institute, or Sloan-Kettering, for the joint development of an antibody to the GD3
antigen, which is over-expressed on several types of cancer cells, most notably melanoma. This
agreement was extended in February 2002 and will expire in February 2007, unless extended by mutual
consent or unless we exercise our option for an exclusive license agreement. It is believed that
antibodies to the GD3 antigen are able to elicit anti-tumor effects, thereby destroying cancer
cells, which have the over-expressed antigen on their surface.
Sloan-Kettering clinicians have previously studied the mouse form of this antibody in a fairly
extensive manner in numerous human clinical trials. However, use of mouse-derived antibodies
typically influences the outcome of testing in humans in that the human body reacts to mouse
antibody as if it was a foreign invader, thereby reducing the overall efficacy, and tolerability,
of the product. Sloan-Kettering was able to demonstrate that this antibody had beneficial effects
in patients with Stage IV melanoma. Sloan-Kettering also found that the antibody had therapeutic
utility when used alone, but greater therapeutic utility when used with other compounds. If the
antibody can be produced in a humanized form, thereby eliminating at least some of the undesirable
effects, whether used alone or in combination with other products, it could offer significant
improvement in this disease setting. Importantly, to date, there are no other products available to
successfully treat Stage IV melanoma. If the antibody can be shown to be efficacious against this
stage of the disease, then it would represent a significant opportunity.
At the current time, we have developed production processes for humanized forms of the
antibody, including the avian transgenics technology. These antibodies will be shared with
Sloan-Kettering clinicians for comparability testing, done in parallel with studies at our Viragen
(Scotland) laboratories. We are not able to predict subsequent study dates for this antibody.
For the fiscal years ended June 30, 2006, 2005 and 2004, we incurred minimal research and
development costs associated with our VG101 project. Since the date of inception of this project,
we have incurred approximately $1.55 million in research and development costs.
VG102 (anti-CD55 antibody)
In April 2005, we executed a global exclusive license with Cancer Research Technology UK for
the rights to develop and commercialize an anti-CD55 antibody. This specific antibody was developed
through the research of Professor Lindy Durrant of the University of Nottingham, UK. The CD55
antigen is significantly over-expressed on nearly all solid tumors in humans. Early studies at
Nottingham demonstrated that the antibody was able to bind only to malignant tumor antigen and
furthermore, it was shown to bind in a highly novel manner, different from all anti-CD55 antibodies
known in the scientific literature. This novelty underpins the intellectual property surrounding
VG102, in addition to other intellectual property we have created through our development
activities. The CD55 antigen has been shown to block the body’s natural immune system from
attacking and killing cancer cells. Theoretically, if an antibody can be developed that binds
selectively to tumor CD55 antigen, this protective mechanism could be removed and the natural
immune system, or concomitantly or sequentially administered anti-tumor agents, would then be able
to destroy cancer cells.
Importantly, Professor Durrant has produced the mouse form of this antibody and has
administered it successfully to humans in immunoscintigraphy studies (imaging). These studies
demonstrated the specificity of binding only to tumor antigen, and not normal cells, and
demonstrated tolerability in humans, albeit small numbers and dosages, without safety incident. It
is this data, and our own exploratory data in our laboratories, that has led us to license what we
believe may become an important addition to the arsenal for fighting a number of types of cancer.
At the current time we have developed production processes for humanized versions of this
antibody to continue pre-clinical studies. We have not yet selected a target indication for this
antibody. At this time, we are not able to predict any date for the start of clinical trials.
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For the fiscal years ended June 30, 2006, 2005 and 2004, we incurred research and development
costs related to the VG102 project totaling approximately $586,000, $575,000 and $200,000,
respectively. Since the date of inception of this project, we have incurred approximately $2.06
million in research and development costs.
Other Potential Product Candidates
Through our internal research, review of available scientific literature, discussions with
leading researchers and institutions around the world, we continue to evaluate ideas for new
product candidates and scientific technologies. Based upon these efforts, it is highly likely that
one or more new product candidates will be added to our portfolio within the next six to twelve
months.
Intellectual Property
Intellectual property is important to any bio-pharmaceutical company to protect its investment
in new products and ideas. Whether through patents, trademarks, copyrights or any other means, we
endeavor to seek out new intellectual property in our business and at all levels. In general, we
intend to invest in projects and product candidates that afford the longest possible intellectual
property protection. Our business is international in nature and intellectual property protection
may differ between territories, including duration of that protection. Some of our products and
technologies may have patents pending or new patents under internal consideration or may be under
consideration by patent counsel. Due to the competitive nature of our industry, we do not disclose
patents, trademarks or copyrights that are pending.
We believe that our multi-subtype human alpha interferon production techniques are unique and
are capable of yielding a superior quality product and will allow us to produce the product at
relatively low costs. We have developed a broad and valuable intellectual property portfolio on
the manufacturing methods used to produce Multiferon® and continue to develop this portfolio
through in-house research and development.
In November 2005, we were notified by the US Patent and Trademark Office that it issued patent
no. 6,962,695 to a wholly-owned subsidiary of Viragen International, our majority-owned subsidiary.
This patent, entitled “Modification of Interferon Alpha Production”, describes a process relating
to the manufacture of Multiferon® and relates to the novel use of an enhancing agent to optimize
the yield of interferon from the cell preparation during the production process. This patent
expires in December 2018.
In February 2004, we filed a provisional patent application with the UK Patent Office covering
the use of multi-subtype human alpha interferon for human treatment and prevention of avian
influenza virus, commonly known as avian flu, and this lapsed in February 2005. Subsequent
applications were filed with the UK Patent Office in February and May 2005 and a provisional
application was filed with the US Patent and Trademark Office in March 2005. Avian influenza is an
infectious viral disease of birds caused by type A influenza strain. The type A influenza group of
viruses has certain characteristics that make them of particular concern to the human population.
They have a tendency to undergo mutation, resulting in new variants for which no vaccine is
available. In addition, such viruses have the potential to combine with viruses from other
species, leading to pandemics due to the resulting difficulties in developing effective treatments
or preventative measures. At the current time, we have no plans to conduct any significant studies
of Multiferon® in avian influenza.
As mentioned previously, we continue to develop our knowledge base of the Multiferon® product,
to evaluate new and beneficial ways of manufacturing. As a result of research and development work
performed in house, a provisional application for a modification to the Multiferon® production
process was filed with the UK Patent Office in February 2005. A provisional patent application was
also filed with the US Patent and Trademark Office in June 2005 and a patent cooperation treaty, or
PCT, application was filed in February 2006.
We are developing a broad intellectual property portfolio in the area of avian transgenics.
In May 2005 our International application WO04047531 entitled ‘Protein Production in Transgenic
Avians’, filed jointly with Oxford BioMedica UK Ltd. entered into the National Phase in the US,
Canada, Europe, China, Japan and Australia. This patent application describes the use of specific
viral based vectors as gene delivery vehicles in creating transgenic
birds that may be used to produce proteins of interest in their eggs.
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In May 2005, our patent application NZ532709 derived from the International application
WO03049537 entitled ‘Methods of Preparing Eggs for Nuclear Transfer and Uses Thereof’ was accepted
for grant by the Intellectual Property Office of New Zealand. This patent expires in December
2021. Other regional applications for this invention are progressing through the normal
prosecution process. This patent application describes the use of gamma irradiation in the
enucleation of avian cells in preparation for nuclear transfer. This process may be one of the
preparatory steps used in creating transgenic birds.
In September 2004, a provisional patent application (06/024867) was filed with the UK Patent
Office describing a method to optimize gene vector constructs so that expression of the protein is
maximized and may be used as one of the steps in the process of creating transgenic birds which
produce proteins of interest in their eggs.
In September 2004, a provisional patent application (06/027606) was filed jointly by Viragen
(Scotland) Limited and Oxford BioMedica with the UK Patent Office describing a system that allows
pre-screening of gene vector constructs to determine their utility in creation of transgenics and
this method may be used as one of the steps in the process of creating transgenic birds which
produce proteins of interest in their eggs.
In May 2005, a provisional patent application was filed with the UK Patent Office describing a
novel promoter construct to be used in creation of transgenics. This promoter may be used in the
creation of transgenic birds which produce proteins of interest in their eggs. A PCT application
was filed in May 2006.
United States and foreign patents have been issued to others for genetically engineered and
human-derived interferons and methods and processes for producing transgenic birds. In the event of
valid claims, we may have to negotiate license agreements with patent holders to use some processes
and products. We believe that we do not infringe upon any current patent. We have not received any
communications or had any conversations with the owners of related patents that may potentially
make claims or who have threatened to make a claim that our patents infringe their patents.
It is possible to challenge the validity and enforceability of a patent by litigation after
its issuance. If the outcome is against the owner of the patent, other parties may be free to use
the subject matter of the patent. Protection provided by foreign patents may be different than in
the United States. The actual protection we receive from a foreign patent may vary from one country
to another. Protection realized may also depend on the type of patent, scope of coverage granted
and the legal remedies available in each country. We cannot guarantee that any future patents will
offer substantial protection or commercial benefit to us.
Regulation
Our activities, products and processes are subject to substantial government regulation for
safety, effectiveness and quality by many governmental agencies within the United States, the
European Union and other foreign jurisdictions, and will be subject to further regulation if
approved for commercial sale. The U.S. Food and Drug Administration, foreign jurisdictions and
state and local agencies regulate the testing, manufacturing, safety, effectiveness, advertising,
packaging, labeling, storage, record keeping and sale of biologic substances and pharmaceutical
products. Regulatory authorities have stringent mandatory procedures and standards, which apply to
the clinical testing, manufacture and marketing of any biologic products, including ours.
Regulatory approvals for commercialization of any new product take significant time and capital.
The steps ordinarily required before a drug or biological product may be marketed include:
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Submission to the relevant regulatory agency, such as the FDA in the United
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Adequate and well-controlled clinical trials to establish the safety and
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Submission of a marketing application to the relevant regulatory agency for
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Approval of the marketing application, which encompasses inspection and
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Pre-clinical testing includes laboratory evaluation of product chemistry, formulation and
stability, as well as animal studies to assess the potential safety and efficacy of each product.
Laboratories that conduct pre-clinical testing must comply with regulations regarding good
laboratory practices.
In Europe and the United States, human clinical trial programs generally involve a three-phase
process. Typically, Phase I trials are conducted in healthy volunteers to determine any early side
effects and the pattern of drug distribution and metabolism. Phase II trials are conducted in a
limited patient population afflicted with the target disease to provide preliminary data on the
effectiveness and safety of a new drug product and to determine the amount of the drug that works
best and how much can be tolerated. If Phase II evaluations indicate potential effectiveness with
an acceptable safety profile, Phase III trials are performed. Phase III is performed to demonstrate
clinical effectiveness and safety within an expanded patient population from multiple clinical
study sites. Regulatory authorities may also require Phase IV studies to further confirm safety and
efficacy and to monitor patients after a product has been used in clinical practice. The relevant
regulatory authority may suspend or cancel clinical trials at any time if it is felt that patients
are being exposed to an unacceptable health risk or if the information submitted to the agency is
incomplete or incorrect, or due to the conduct of the investigation.
The results of the drug development, pre-clinical studies and clinical studies are submitted
to the relevant regulatory authorities in various countries, such as the U.S. Food and Drug
Administration, in the application for marketing authorization, which if accepted clears the way
for commercial sale of the drug. Third party manufacturers and collaborators may be required to
pass on-site inspections prior to obtaining regulatory approval.
The process of obtaining marketing approvals takes many years and substantial funding. If we
fail to comply with certain regulatory requirements, we could be subject to sanctions, such as
warning letters, penalties, criminal prosecution, injunctions, product seizure, product recalls,
total or partial suspension of production, and refusal to approve pending applications or costly
supplements to approved applications.
Once regulatory approval is obtained, third party collaborators and manufacturers will be
required to comply with regulations setting forth current Good Manufacturing Practices. Good
Manufacturing Practice regulations include requirements relating to quality control and quality
assurance, as well as corresponding maintenance of records and documentation. Facilities may be
subject to period and unannounced inspections to confirm compliance with applicable regulations.
Extension of the number of licenses held in the European Union can be achieved for products
like Multiferon® through the Mutual Recognition Procedure, or MRP. This process makes it possible
to hold marketing authorizations in all, or some, member states. MRP is administered by and between
the competent authorities of the member states where marketing authorizations are sought. Subject
to the successful completion of clinical trials, we believe this is the regulatory route that we
will use to secure regulatory approval in the European Union. MRP permits a registrant of a new
drug or biological product to use a single registration dossier to gain marketing authorization in
a number of European Union countries. A prerequisite requirement is that any new registration must
have a sponsor country that has reviewed and approved the registration dossier. In the case of
Multiferon®, and following the expected Swedish approval of our dossier, we anticipate that Sweden
will agree to act as our sponsor country for the MRP filing. Once the dossier is approved through
the MRP process, it is then permissible to go to each country that has approved the filing and seek
reimbursement authorization. All countries are not required to approve the filing in the MRP
process, and there is no guarantee that any country will agree to reimburse for the product.
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We are also subject to numerous laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous
or potentially hazardous substances. We may incur significant costs to comply with such laws and
regulations now or in the future.
Competition
Competition in the research, development and production of interferon and other immunological
products is intense and growing. Our competition includes many major, well-established and
well-financed pharmaceutical and commercial entities, as well as major educational and scientific
institutions. Many researchers, some of whom have substantial private and government funding, are
involved with interferon production, including production of interferon through synthetic DNA
technology. A number of large companies, including Hoffmann-La Roche, Inc. and Schering-Plough
Corporation are producing, selling and conducting clinical trials with their recombinant
interferons (alpha interferons) and other immunological products in the areas of cancer and viral
infections, including hepatitis C.
We believe that competition is also based on production ability, technological superiority,
regulatory expertise in obtaining governmental approvals for testing and manufacturing and the
capabilities of companies in marketing and selling the product.
We are aware of a number of companies that are engaged in research and development of various
transgenic systems and models that are hoped to be used to efficiently and productively manufacture
proteins for human therapeutic use. These include but are not limited to the use of cattle, goats,
plants and avians. Some of these companies are larger, well-funded enterprises and that have been
working in this field for many more years than we have. There can be no assurance that any of these
companies will not complete their research, enlist large, multinational pharmaceutical and
biotechnology companies to invest in their technology and produce a therapeutic product that comes
to market before us.
There are a large number of companies around the world that have monoclonal antibodies in
their research, development or commercial pipelines. There are large, well-financed multinational
pharmaceutical and biotechnology companies that have monoclonal antibodies which have been approved
for marketing for a number of years and there are small, essentially start-up companies,
researching and developing new antibodies and complementary technologies for delivery of antibodies
for therapeutic use. Competition in the field of antibodies is extensive and intense. Intellectual
property on monoclonal antibodies is equally extensive making it difficult for new entries to this
field to generate new patents. Although we monitor competitive activity in the field, there can be
no assurances that our antibody projects will be competitive, will have secure intellectual
property free of licenses from third parties, or will ever be clinically proven to be safe and
efficacious in comparison to competitive products.
The timing of the entry of a new pharmaceutical product into the market is an important factor
in determining that product’s eventual success. Early market entry has advantages in gaining
product acceptance and market share. Our ability to develop products, complete clinical studies and
obtain governmental approvals in the past has been hampered by a lack of adequate capital. We are
not presently a competitive factor in the interferons market, nor are any of our distributors.
Employees
As of September 22, 2006, we have 54 employees. Of these, 38 are research and development,
manufacturing and quality assurance/quality control personnel. The remaining 16 employees are
management, sales and/or administrative personnel. Our domestic and Scottish-based employees are
not represented by any collective bargaining agreements. The majority of our Swedish-based
employees are members of a Swedish union representing scientific personnel. We have never
experienced a work stoppage. We believe our relations with our employees and the Swedish unions to
be good.
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Item 1A. Risk Factors
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements. Also, our management may make forward-looking
statements orally to investors, analysts, the media and others. Forward-looking statements express
our expectations or predictions of future events or results. They are not guarantees and are
subject to many risks and uncertainties. There are a number of factors — many beyond our control
— that could cause actual events or results to be significantly different from those described in
the forward-looking statement. Any or all of our forward-looking statements in this report or in
any other public statements we make may turn out to be wrong.
We caution that these statements are further qualified by important factors that could cause
actual results to differ materially from those contemplated in the forward-looking statements,
including, without limitation, the following:
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our failure to achieve significant revenues; |
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our failure to service our debt and preferred stock; |
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our ability to procure additional funding; |
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regulation by federal, state and foreign regulatory authorities in the
manufacturing and selling of our Multiferon® product; |
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our failure to develop and commercialize our avian transgenics platform and
antibody product candidates; |
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our reliance on third parties to market and distribute our Multiferon® product; |
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the effect of competition in the pharmaceutical and biotechnology industry; |
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our reliance on foreign third party manufacturers; |
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the availability of human leukocytes and other materials used in the production of our products; |
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an adverse change in foreign currency exchange rates; |
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our ability to protect our intellectual property; |
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our exposure to litigation; |
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our dependence on our key managers and scientific personnel and our scientific collaborators; |
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a decline in demand for shares of our common stock; |
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volatility in the market for shares of our common stock; |
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ability of holders to effect resales of securities if we are delisted from AMEX; |
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our ability to regain compliance with American Stock Exchange listing standards; |
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our ability to redeem and/or pay dividends on preferred stock
under Delaware law; |
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the effect of economic conditions generally; and |
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regulation by federal, state and foreign regulatory authorities in connection
with developing, marketing, manufacturing and selling our product candidates. |
Forward-looking statements can be identified by the fact that they do not relate strictly to
historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,”
“intend,” “plan,” “believe” or words of similar meaning. They may also use words such as, “would,”
“should,” “could” or “may”. Factors that may cause our actual results to differ materially include
the risks described herein. These risks and uncertainties are not the only ones we face. There may
be additional risks and uncertainties that are not known to us or that we do not consider to be
material at this time. If the events described in these risks occur, our business, financial
condition and results of operations could be adversely affected.
19
Risks Related to Our Financial Condition and Business
We have a history of operating losses and we expect to continue to incur losses and may never be
profitable. If we do not develop profitable operations, we will have to terminate our operations.
As a result, investors will lose their entire investment.
Since our organization, we have incurred operating losses and negative cash flow from
operating activities as a result of minimal sales coupled with our significant clinical
development, research and development, general and administrative, sales and marketing and business
development expenses. We expect to incur losses for at least the next several years as we expand
our sales and marketing capabilities, make use of the sales and marketing capabilities of third
parties and continue our clinical trials and research and development activities. Losses have
totaled approximately:
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$18.2 million for the fiscal year ended June 30, 2006; |
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$26.2 million for the fiscal year ended June 30, 2005; and |
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$18.2 million for the fiscal year ended June 30, 2004. |
At June 30, 2006, we had cash on-hand of approximately $443,000, working capital of
approximately $229,000, an accumulated deficit since organization of approximately $166.2 million
and a stockholders’ deficit of approximately $1.6 million. These losses, among other things, have
had and will continue to have an adverse effect on our working capital, total assets and
stockholders’ (deficit) equity. In light of our recurring losses, accumulated deficit and cash
flow difficulties, the report of our independent registered public accounting firm on our financial
statements for the fiscal year ended June 30, 2006 contains an explanatory paragraph raising
substantial doubt about our ability to continue as a going concern. Our financial statements do
not include any adjustments that may be necessary in the event we are unable to continue as a going
concern.
While, subsequent to June 30, 2006, our majority-owned subsidiary, Viragen International,
received net proceeds of approximately $1.9 million from the sale of its preferred stock and common
stock, we continue to experience operating losses and cash flow difficulties. We believe that this
additional funding will provide sufficient cash to support our operations through at least
September 2006. However, we will require substantial additional funding to support our operations
subsequent to September 2006. Our inability to generate substantial revenue or obtain additional
capital through equity or debt financings would have a material adverse effect on our financial
condition and our ability to continue operations. Accordingly, if we are unable to obtain
additional financing by the end of September 2006, we could be forced to significantly curtail or
suspend our operations, including laying-off employees, recording asset impairment write-downs and
other measures.
We must generate significant revenues to achieve and maintain profitability. While
Multiferon® is in its early stage of commercialization deriving nominal revenue, most of our
products and technologies are either in the research stage or in pre-clinical stages of development
and will require substantial additional funding to reach the commercialization stage. Even if we
succeed in developing and commercializing one or more of our product candidates, we may not be able
to generate sufficient revenues or achieve or maintain profitability. Our failure to achieve and
maintain profitability would depress the market price of our common stock and could impair our
ability to raise additional capital, expand our business, diversify our product offerings and
continue operations. Additionally, investors could lose their entire investment in our securities.
Our business is capital intensive, and we do not currently generate sufficient revenues to offset
our debt service obligations, research and development activities and other operating expenses. If
we are unable to obtain additional funding, as and when required, we may have to significantly
curtail or completely terminate our operations.
We will require substantial future capital in order to continue to complete research,
development and commercialization of our products and technologies, to meet our debt service
obligations, to fund other operating expenses and to otherwise execute our business plan. If we
are unable to obtain additional financing or generate licensing and sales revenue sufficient to
sustain our operations, as needed, we could be forced to significantly curtail or
20
suspend our operations, including laying-off employees, recording asset impairment write-downs
and other measures.
Additional capital may not be available to us when needed, or on terms that are acceptable to
us, or at all. For instance, our common stock price may not permit us to conduct future
financings. Additionally, pursuant to the terms of our convertible debt issued in June 2004 and
September 2005, we are not permitted to incur additional indebtedness except in limited
circumstances. Our ability to raise additional funds through the issuance of additional debt will
be limited absent a waiver from debt holders. There can be no assurance that debt holders will
provide waivers, if required.
We anticipate research and development costs to increase over the next twelve months,
particularly in the area of regulatory-related consulting fees, toxicology studies and clinical
trial costs. We also anticipate selling related expenses will increase over the next twelve months
due to the planned expansion of our Multiferon® sales and related marketing efforts. Our future
capital requirements will depend on many factors including:
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revenue generated from licensing Multiferon®, our antibody product candidates or our
avian transgenics technology; |
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revenue generated from the sale of Multiferon®; |
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our ability to conduct future financings; |
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our ability to service our convertible debt and convertible preferred stock; |
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progress with future research, development, pre-clinical studies and clinical trials; |
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the costs associated with obtaining regulatory approvals; |
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the costs involved in patent applications and potential patent enforcement; |
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competing technologies and market developments; and |
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our ability to establish collaborative arrangements and effective commercialization activities. |
Based on our operating plans, for the fiscal year ending June 30, 2007, we anticipate that we will
need approximately $9.0 million for operating activities,
$500,000 for investing activities and $10.2 million to redeem our outstanding Series J cumulative convertible preferred stock,
Viragen International’s outstanding Series C and Series D cumulative preferred stock and service
our current debt obligations. Actual expenditures in these areas could
vary based on the net proceeds realized from our proposed secondary
offering.
We have received deficiency notices from the American Stock Exchange, or AMEX, and if we are
unable to satisfy the AMEX that we will regain compliance with its continued listing criteria, our
common stock and any other security approved for listing on AMEX may be delisted from AMEX, which
could accelerate repayment of outstanding indebtedness, adversely affecting investor perception and
may result in institutional and other investors refraining from purchasing our common stock, which
would adversely affect our ability to raise capital. If adequate funds are not available to us on
a timely basis, we may be required to significantly curtail or suspend a portion or all of our
operations. Further, sufficient funding may not be available to finance planned future scientific
collaborations, planned marketing efforts or planned capital expenditures. Any failure to raise
additional funds in the future may also result in our inability to successfully promote
Multiferon®, complete existing and/or undertake new research and development projects, take
advantage of business opportunities or respond to competitive pressures, any of which would have a
material adverse effect on our financial condition, results of operations and ability to continue
operations.
We will be substantially dependent on licensing fees and sales of our human alpha interferon
product, Multiferon®, to generate revenue for the foreseeable future. If we are unable to obtain
or maintain the necessary required regulatory approvals to manufacture and sell Multiferon®
throughout the European Union, or if Multiferon® is not widely accepted by the markets in which we
manufacture and sell it, we may have to significantly curtail or cease operations and our investors
may lose their entire investment.
Our prospects for achieving profitability will depend primarily on how successful we are in
executing our business plan to license, market and sell our human alpha interferon product under
the brand Multiferon®. We expect sales of Multiferon® to be a significant source of
income for the foreseeable future. We cannot assure you of the success of our commercialization
efforts. The product is approved in Sweden for the first-line adjuvant treatment of high-risk
(Stages IIb-III) malignant melanoma following dacarbazine (DTIC) after surgical removal of tumors.
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The product is also approved for sale in Bulgaria, Chile, Mexico, the Philippines and Sweden as a
second-line treatment of any and all diseases in which patients show an initial response to
recombinant alpha interferon followed by treatment failure, likely to be caused by neutralizing
antibodies. The product is also approved for sale in Egypt, Hong Kong, Indonesia and South Africa
as a second-line therapy for the treatment of chronic myelogenous leukemia and hairy cell leukemia.
Multiferon® is not approved for sale in the United States or European Union countries,
other than Sweden. We have not sought the approval of Multiferon® from the United
States Food and Drug Administration or its European Union counterparts, except Sweden. We will
focus on seeking new approvals for Multiferon® in the European Union for the same
indications for which it is approved in Sweden. We may seek approval for other indications in the
European Union in the future. In the foreseeable future, we do not expect to seek regulatory
approval in the United States unless we secure licensees to fund such activities or other sources
of funding, including government or private grant funding. We cannot assure you that we will be
able to obtain regulatory approval of Multiferon® for the indications for which Multiferon® is
approved in Sweden or for other indications in the European Union or in the United States.
Our ability to generate sufficient revenues to attain profitable operations depends in part
upon our ability to establish and maintain manufacturing and distribution agreements with third
parties. We will not be able to significantly reduce our losses or operate profitably until we
obtain the necessary approvals to manufacture and sell Multiferon® on a widely accepted
basis throughout the European Union. The successful commercialization of Multiferon® will require
additional marketing and promotional activities and the completion of planned clinical trials,
which are dependent upon our ability to raise significant additional funding, or our ability to
generate sufficient cash flow from operating activities. Investors must understand that
Multiferon® may never receive new approvals sought from regulatory authorities, or be able to
maintain current approvals over time. In addition, even if new approvals are received, we may not
be able to achieve sufficient profit from the sale of Multiferon®, unless we successfully meet our
long-term sales objectives. If we do not obtain the required approvals, or we do not achieve
profitable operations from the sale of Multiferon®, we may be forced to significantly curtail or
cease operations. In the event we cease operations, our investors will lose their entire
investment.
We may not be able to successfully develop and commercialize our antibody product candidates, which
are in early stage development where there is a significant risk of failure.
Our future growth will depend on our ability, or our licensees’ ability, to successfully
develop, obtain regulatory approval for and commercialize our product candidates, including VG101
and VG102.
We will have to conduct significant additional tests with respect to these product candidates,
including pre-clinical studies and clinical trials, and obtain regulatory approval before
commercialization may commence. We must demonstrate to the applicable regulatory authorities that
each product candidate is safe and effective for their intended use. Product development is time
consuming, expensive and an uncertain process. Pre-clinical studies consist of laboratory testing
using chemical and animal models, and must be completed in order to submit an investigational new
drug application for authorization to conduct human studies. There can be no assurance that a
submission of an investigational new drug application will result in authorization to start
clinical trials. Clinical testing consists of assessment of product safety and efficacy of the
product candidate in humans under rigidly controlled conditions. We are currently conducting
pre-clinical research studies on VG101 and VG102. We expect to conduct additional studies in the
future. It may take several years to complete the various stages of testing for each product
candidate, and failure can occur at any stage. Many factors may delay our commencement and
completion of clinical trials, including:
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the number of patients that participate in the trial; |
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the length of time required to enroll suitable subjects; |
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the duration of patient follow-up; |
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the number of clinical sites included in the trial; |
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changes in regulatory requirements or regulatory delays or clinical holds requiring
suspension or termination of the trials; |
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delays, suspensions or termination of clinical trials due to the institutional
review board overseeing the study at a particular site; |
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unforeseen safety issues; and |
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inability to manufacture, through third party manufacturers, adequate supplies of
the product candidate being tested. |
We may suffer significant setbacks in advanced clinical trials, even after obtaining promising
results from earlier studies. At any point during clinical trials, undesirable side effects could
be detected. These side effects could interrupt, delay or halt clinical trials of the product
candidates being tested and related product candidates and could result in regulatory authorities
denying approval of such product candidates for any or all targeted uses. Also, we rely on third
party consultants to conduct studies of the effects of our product candidates on animals and
humans. Our reliance on these third parties may result in delays in completing, or in failure to
complete, these trials if the third parties fail to perform under our agreements with them.
Based on results at any stage of product development, we may decide to repeat or redesign
pre-clinical studies or clinical trials, conduct entirely new studies or discontinue development of
one or more of our product candidates. In addition, our product candidates may not demonstrate
sufficient safety and efficacy in pending or any future pre-clinical testing or clinical trials to
obtain the requisite regulatory approvals and even if such approvals are obtained for a product
candidate, it may not be accepted in the market as a viable alternative to other products already
approved or pending approvals.
Additionally, the conduct of clinical trials is expensive and competition in the
bio-pharmaceutical industry is intense. We have a very limited source of revenue at this time, and
we will require significant additional funding to conduct the clinical trials that will be
necessary in order to receive regulatory approvals. We must obtain additional funding from outside
sources to conduct these trials. If we are unable to locate funding or obtain funding on
reasonable terms, we may be forced to cease operations. In that case, our investors will lose
their entire investment.
If we are unable to produce safe, efficacious, proteins in egg whites of transgenic chickens in
commercially viable quantities and required quality, we may be unable to recoup our research and
development expenses and we may be unable to successfully market the OVA™ System used to
manufacture these drugs.
Our avian transgenics project, still in the research stage, is designed to enable us to
produce therapeutic proteins and antibodies inside the egg whites of transgenic hens. To date,
neither we nor any competitor has commercialized any therapeutic proteins or antibody therapeutic
products based on avian transgenics technologies. Even if we are successful in producing the
targeted commercial proteins in egg whites, we are unable to predict whether this technology will
yield commercially viable quantities of products that are safe and efficacious for patients or that
regulators may approve for human use. Our inability to produce commercially viable quantities of
high quality protein-based drugs may require us to discontinue our avian transgenics activities.
Success in early pre-clinical studies may not be indicative of results obtained in later trials and
studies and our product candidates may not commercialize and we may not recover our investment.
Results of our early pre-clinical studies and those of our partners using our humanized
antibody products, including our VG101 and VG102 projects, are based on a limited number of studies
and may, upon review, be revised or negated by further analysis or by later stage study results,
which may prevent them from ever reaching human clinical evaluations. Historically, the results
from pre-clinical studies and early clinical trials have often not been predictive of results
obtained in later clinical trials. A number of new drugs and biologics have shown promising results
in initial clinical trials, but subsequently failed to establish sufficient safety and
effectiveness data to obtain necessary regulatory approvals. Data obtained from pre-clinical and
clinical activities are subject to varying interpretations, which may delay, limit or prevent
regulatory approval.
In addition, regulatory delays or rejections may be encountered as a result of many factors,
including changes in regulatory policy during the period of product development.
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We rely, and expect to rely in the foreseeable future, on third parties in various international
territories to effectively market and distribute Multiferon® and our other product candidates after
receipt of regulatory approval. If these third parties are unable to effectively market
Multiferon®, we may be unable to achieve
significant product sales.
One of our business strategies is to license our technologies and products to third parties
for marketing and distribution. For instance, we have entered into agreements with third parties
in Mexico, Greece, Chile and South Africa for the distribution of Multiferon®. These third parties
are not our employees and we do not have control over their performance. To date, we have not
recognized significant revenue from these agreements, as some of these markets are relatively small
and highly competitive. The majority of these agreements require that the distributor obtain the
necessary regulatory approvals, which, in some cases, have not yet been obtained. Regulatory
approval is a mandatory step in the marketing of a drug, but it is by no means the final challenge
in marketing a bio-pharmaceutical product. In many countries, a separate process may be required
for obtaining reimbursement authorization. In addition, physicians must be educated about the
merits of the product over time and, in some of these territories, government and/or hospital
formularies govern the acceptance for use of a new product. Therefore, we are unable to predict
the timing of approvals or sales in these various countries and we have previously terminated such
third party agreements due to non-performance. The failure of these third parties to sell our
product or reach targeted sale amounts would negatively impact our sales growth. To the extent
that we transfer technology to third parties on an exclusive basis, we will be precluded from
granting other parties the opportunity to conduct successful marketing activities.
If we are unable to establish sales and marketing capabilities or enter into agreements with third
parties to market and sell product candidates, we may be unable to generate significant product
revenue to support our continuing operations.
We have no commercial products, other than Multiferon®, and we do not currently have an
organization for the sales, marketing and distribution of these products. We do have two sales
representatives in Sweden to promote Multiferon® to prescribing physicians. In order to
successfully commercialize these products that may be approved in the future by applicable
regulatory authorities, we must either build our sales and marketing capabilities or make
arrangements with third parties to perform these services. If we do enter into arrangements with
third parties to perform sales and marketing services, our net product revenues will be lower than
if we directly sold and marketed our products and any revenues received under such arrangements
will depend on the skills and efforts of others. If we are unable to establish adequate sales,
marketing, and distribution capabilities, whether independently or with third parties, we may not
be able to generate significant product revenue to support our continuing operations.
Possible side effects from the use of Multiferon® could adversely affect potential revenues and
physician/patient acceptability of our product.
Like any medication Multiferon® can have side effects. The most common side effects are:
fever, chills, sweats, fatigue, stiffness, joint and muscle pain, headache, loss of appetite and
nausea. These acute side effects can usually be relieved by taking acetaminophen and often decrease
during the course of treatment.
There can be no assurance that unexpected or unacceptable side effects will not be found in
the future for this use or other potential uses of Multiferon® which could threaten or limit such
product’s usefulness.
Our products may not gain market acceptance among physicians, patients and the medical community,
thereby limiting our potential to generate revenue.
Market acceptance of our products will depend on the benefits of our products in terms of
safety, efficacy, convenience, ease of administration and cost effectiveness and our ability to
demonstrate these benefits to physicians, payers and patients. Additionally, there can be no
assurance that our products will not have unexpected or unacceptable side effects that limit the
usefulness of the products. We believe that market acceptance also depends on the pricing of our
products and the reimbursement policies of government and third-party payers, as well as the
effectiveness of our sales and marketing activities. Physicians may not prescribe our products,
and patients may determine, for any reason, that our products are not useful to them. The failure
of any of our products, once approved, to achieve market acceptance would limit our ability to
generate revenue and would adversely affect our results of
operations.
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Some of the indications we are targeting represent smaller patient populations with currently unmet
medical needs, which may not result in significant revenue.
As we identify new indications for our approved product and initial indications for our
product candidates, we tend to focus on urgent unmet medical needs. The market potential for these
indications may be small and there can be no assurances that any one or multiple approvals for an
indication will result in significant revenue. While competition in these indications may be less
than for other indications, there can be no assurances that there will not be competition with
better products and technologies and more funding to conduct necessary clinical trials than we are
able to provide.
Our potential products may not be commercially viable if we fail to obtain an adequate level of
reimbursement for those products by governments, private health coverage insurers and other
organizations, our revenues from these products could be less than anticipated, which could have a
negative impact on our ability to achieve profitable operations.
Sales of pharmaceutical products such as ours largely depend on the reimbursement of patients’
medical expenses by government health care programs and private health insurers. Without the
financial support of the governments or third-party payers, the market opportunity for our products
will be limited. These third-party payers are increasingly challenging the price and examining the
cost effectiveness of medical products and services. In addition, significant uncertainty exists as
to the reimbursement status of newly approved pharmaceutical products and services. We may need to
conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products. Such
studies may require us to dedicate a significant amount of resources including funding. Our product
candidates may not be considered cost-effective. Third-party payers may elect not to reimburse for
our products, or enable us or our partners to sell them at profitable price. If third party payers
decline or limit reimbursement for our products, our product revenue would be less than
anticipated, which would negatively impact our ability to achieve profitable operations.
If our competitors develop and market products faster than we do or if those products are more
effective, safer or less expensive than our approved products, our commercial opportunity will be
reduced or may not exist and we may be forced to suspend operations.
Competition in the pharmaceutical and biotechnology industries is intense and is expected to
increase. We face competition from pharmaceutical and biotechnology companies, as well as numerous
academic and research institutions and governmental agencies, both in the United States and abroad.
Many of our competitors, including major pharmaceutical companies, have more experience in
research, development and clinical testing of bio-pharmaceutical products. We have not yet
developed a pharmaceutical product and gained regulatory approvals such that it can be widely
marketed in an international competitive environment. Many of our competitors also have greater
financial, marketing and human resources capabilities that we do.
Some of our competitors in the alpha interferon markets include Hoffmann-La Roche, Inc. and
Schering-Plough Corporation, both of whom have received approvals for their recombinant and
sustained-release alpha interferon products. These companies have been researching, developing and
marketing their products and have received wide acceptance from the medical community, payers and
the patient population for their products. This may make it more difficult for us to introduce our
alpha interferon product and penetrate the market, in certain indications, if and when we receive
the necessary regulatory approvals.
We are aware of many pharmaceutical and biotechnology companies actively engaged in research
and development of antibody-based products that have commenced human clinical trials with or have
successfully commercialized antibody products. Some of these companies, such as Pfizer Inc.,
ImClone Systems Incorporated, Johnson & Johnson, Medarex, Inc., Wyeth, Inc., Amgen Inc., Abbott
Laboratories, UCB Pharma, Biogen Idec, Inc., Abgenix, Inc., Genentech, Inc., Human Genome Sciences,
Inc. and Millennium Pharmaceuticals, Inc. are addressing diseases and disease indications that are
being targeted by us and certain of our research partners. Additionally, there
are many more antibody-based products in various stages of discovery, research and
development.
25
Despite the receipt of regulatory approvals there can be no assurance that our products will
be accepted as a treatment superior to our competitors.
Several companies are attempting to develop avian transgenic biomanufacturing systems similar
to our OVA™ System. Some of these companies include AviGenics, Inc., Origen Biomedical, Inc. and
GeneWorks, Inc., however, none have commercialized such technology to date.
In addition, technological advances made by our competitors may reduce the market potential
for our products. We may not be able to keep pace with technological advances by others, either
because we do not have sufficient resources or because we cannot achieve greater improvements in
our technology. If we are unable to compete with our larger, more experienced competitors, we will
likely cease operations or eliminate products with limited potential returns.
Our competitors may succeed in developing products that are more effective, safer and less
expensive than our products or the ones we have under development or that render our approved or
proposed products or technologies noncompetitive or obsolete. In addition, our competitors may
achieve product commercialization before we do. If any of our competitors develop a product that
is more effective, safer or more convenient for patients, or is able to obtain regulatory approval
for commercialization before we do, we may not be able to achieve market acceptance for our
products, which would adversely affect our ability to generate revenue and recover the substantial
development costs we have incurred and will continue to incur.
The regulatory approval process for Multiferon® and our product candidates is lengthy, and we may
not be able to obtain all of the regulatory approvals required to manufacture and commercialize
Multiferon® and our product candidates, which could limit our revenue and, ultimately, could
require us to cease operations.
All pharmaceutical manufacturers are subject to local, state, federal and foreign rules and
regulations, such as those of the United States Food and Drug Administration and the European Union
regulatory authorities. In the United States and in many foreign jurisdictions, rigorous
pre-clinical testing and clinical trials and an extensive regulatory review process must be
successfully completed before a new drug can be sold. We and our collaboration partners must
demonstrate to the satisfaction of the applicable regulatory authority that Multiferon® and our
product candidates are safe and effective for their intended uses. Multiferon® and our product
candidates may not be approved for all of the intended uses that we request, which would limit the
uses for which we can promote them and adversely impact our ability to generate revenues. If the
approvals we obtain are limited, we may choose to conduct costly, post-marketing follow-up studies
to expand the product uses, but those studies may not produce data sufficient to permit approval
for an expanded product use. We have only received regulatory approval for Multiferon® in
Bulgaria, Chile, Mexico, Sweden, Egypt, Hong Kong, Indonesia, the Philippines and South Africa for
certain indications. We have not received regulatory approval for Multiferon® in the United States
or in the European Union, other than Sweden. We are in preparations for requesting approval of
Multiferon® in other countries in the European Union for the same indication for which it was
approved in Sweden, however, there are no assurances it will be approved. We have not received
regulatory approval for any of our product candidates. Satisfaction of these and other regulatory
requirements is costly, time consuming, uncertain and subject to unanticipated delays. For
instance, we have initiated the process to conduct a Phase III post-marketing clinical trial with
Multiferon® on an international basis, which is expected to cost between $16 million to $18 million
and take six to eight years to complete. Additionally, these rules and regulations may be
different in each jurisdiction that we seek regulatory approval and can involve additional and
costly pre-clinical and clinical testing and data review. Despite the time, expense and resources
invested by us in the approval process, we may never receive these regulatory approvals for any
specific illness or range of illnesses that we are attempting to treat with our product candidates.
The time required to obtain approval from the appropriate regulatory authority is
unpredictable and the type and magnitude of the testing required for regulatory approval varies
depending on the regulatory authority, the product candidate and the disease or condition for which
it is being developed. Regulatory agencies can delay, limit or deny approval of a product for many
reasons, including:
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our failure to demonstrate to the satisfaction of the regulatory authority that a
product candidate is safe and effective for a particular use; |
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the results of clinical trials may not meet the level of statistical significance
required by the regulatory authority for approval; |
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our inability to demonstrate that a product candidate’s benefits outweigh its risks; |
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our inability to demonstrate that the product candidate presents an advantage over existing therapies; |
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the regulatory authority’s disagreement with the manner in which we interpret the
data from pre-clinical studies and clinical trials; |
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the regulatory authority’s failure to approve the manufacturing processes or
facilities of third-party manufacturers with which we contract for clinical and
commercial supplies; and |
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a change in the approval policies or regulations of the regulatory authority or a
change in the laws governing the approval process. |
Any delay or failure by us or our collaboration partners to obtain regulatory approvals for
Multiferon® or our product candidates would adversely affect our ability to generate revenues from
them and could impose significant additional costs on us. Regulatory approval in one country does
not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval
in one country may negatively impact the regulatory approval process in others. Identification of
side effects or occurrence of manufacturing problems could cause subsequent withdrawal of approval.
Our inability to receive and maintain regulatory approvals will limit our revenues and,
ultimately, could require us to cease operations.
Our product candidates will remain subject to ongoing regulatory requirements even if they receive
marketing approval, and if we fail to comply with these requirements, we could lose these
approvals, and the sale of any approved commercial products could be suspended, and fines could be
imposed on us.
Even if we receive regulatory approval to market a particular product candidate, the product
will remain subject to extensive regulatory requirements, including requirements relating to
manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion,
distribution and record keeping. Even if regulatory approval of a product is granted, the approval
may be subject to limitations on the uses for which the product may be marketed or to the
conditions of approval, or contain requirements for costly post-marketing testing and surveillance
to monitor the safety or efficacy of the product, which could reduce our revenues, increase our
expenses and render the approved product candidate not commercially viable. In addition, as
clinical experience with a drug expands after approval because it is typically used by a greater
number and more diverse group of patients after approval than during clinical trials, side effects
and other problems may be observed after approval that were not seen or anticipated during
pre-approval clinical trials or other studies. Any adverse effects observed after the approval and
marketing of a product candidate could result in limitations on the use of or withdrawal of any
approved product from the marketplace. Absence of long-term safety data may also limit the
approved uses of our products, if any. If we fail to comply with the regulatory requirements of
the applicable regulatory authority, or previously unknown problems with any approved commercial
products, manufacturers or manufacturing processes are discovered, we could be subject to
administrative or judicially imposed sanctions or other setbacks, including:
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restrictions on the product, manufacturer or manufacturing process; |
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warning letters; |
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civil or criminal penalties; |
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fines; |
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injunctions; |
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product seizure or detention; |
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import or export bans or restrictions; |
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voluntary or mandatory product recalls and related publicity requirements; |
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suspension or withdrawal of regulatory approvals; |
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total or partial suspension of production; and |
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refusal to approve pending applications for marketing approval of new products or
supplements to approved applications. |
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If we or our collaboration partners are slow to adapt, or are unable to adapt, to changes in
existing regulatory requirements or adoption of new regulatory requirements or policies, we or our
collaboration partners may lose marketing approval for our products when and if any of them are
approved, resulting in decreased revenue.
If we and our third-party suppliers do not maintain high standards of manufacturing in accordance
with all applicable regulations, our development and commercialization activities could suffer
significant interruptions or delays and thus prevent us from realizing revenues and may cause us to
significantly curtail or cease operations.
We and our third-party suppliers on which we currently or may in the future rely, must
continuously adhere to corresponding regulations. In complying with these regulations, we and our
third-party suppliers must expend significant time, money and effort in the areas of design and
development, testing, production, validation, inspection, record-keeping and quality control to
assure that our products meet applicable specifications and other regulatory requirements. The
failure to comply with these regulations could result in an enforcement action against us,
including seizure of products and shutting down of production. Any of these third-party suppliers
and we also may be subject to audits by the applicable regulatory authorities. If any of our
third-party suppliers or we fail to comply with applicable manufacturing regulations, our ability
to develop and commercialize our products could suffer significant interruptions and prevent us
from realizing revenues and may cause us to significantly curtail or cease operations.
Our reliance on foreign third party manufacturers may disrupt operations, which could materially
harm our business and financial condition.
We depend and will continue to depend upon third parties for the processing of materials to
manufacture Multiferon® and our product candidates and for the filling, labeling and packaging of
our products. Third party manufacturers may encounter difficulties involving production yields,
quality control and assurance, shortage of qualified personnel, shortage of capacity, compliance
with applicable regulations, production costs, and development of advanced manufacturing techniques
and process controls. Also, third party manufacturers may not perform as agreed to or may not
remain in the contract manufacturing business for the time required by us to successfully produce
and market our products. Any failure of third party manufacturers to deliver the required
quantities of Multiferon® and our product candidates for clinical use on a timely basis and at
commercially reasonable prices, and our failure to find replacement manufacturers could materially
harm our business and financial condition.
Foreign manufacturing could expose us to risks involved with fluctuations in exchange rates of
foreign currencies. In addition, reliance on international vendors exposes us to all the risks of
dealing with a foreign manufacturing source. These risks include:
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unexpected changes in regulatory requirements; |
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tariffs and other trade barriers, including import and export restrictions; |
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political or economic instability; |
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compliance with foreign laws; |
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transportation delays and interruptions; |
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difficulties in protecting intellectual property rights in foreign countries; and |
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currency exchange risks. |
Foreign manufacturing arrangements may also limit our control, and could disrupt our operations,
which, in turn, could negatively impact upon your investment in us.
The process of manufacturing antibody therapeutic products is complex. Third party
manufacturing facilities must adhere to current Good Manufacturing Practice regulations, enforced
through facility inspection programs. If we are unable to manufacture product candidates in
accordance with Good Manufacturing Practices and applicable regulations, we may not be able to
obtain regulatory approval for our products, which could materially harm our business and financial
condition.
28
Our operations involve hazardous materials and are subject to environmental, health and safety
controls and regulations, which can be expensive to comply with and we may be liable for damages.
As a bio-pharmaceutical company, we are subject to environmental, health and safety laws and
regulations, including those governing the use of hazardous materials. The cost of compliance with
environmental, health and safety regulations may be substantial. Our business activities involve
the controlled use of hazardous materials and we cannot eliminate the risk of accidental
contamination or injury from these materials. In the event of an accident or environmental
discharge, we may be held liable for any resulting damages, which may exceed our financial
resources and could materially harm our business, financial condition and results of operations.
If third-party contract research organizations and consultants do not perform in an acceptable and
timely manner, our pre-clinical studies or clinical trials could be delayed or unsuccessful.
We do not have the ability to conduct all aspects of our pre-clinical studies or clinical
trials ourselves. We rely and will continue to rely on clinical investigators, third-party
contract research organizations and consultants to perform some or all of the functions associated
with pre-clinical testing or clinical trials. The failure of any of these vendors to perform in an
acceptable and timely manner in the future, including in accordance with any applicable regulatory
requirements, such as good clinical or laboratory practices, or pre-clinical testing or clinical
trial protocols, could cause a delay or otherwise adversely affect our pre-clinical testing or
clinical trials and ultimately the timely advancement of our development programs. Additionally,
competition for consultants, animal colonies and human patients may be intense and we may
experience delays in development projects or suspension of studies if we are unable to fund or gain
access to consultants, animals or human patients.
We conduct most of our operations in foreign countries and we anticipate marketing our products in
foreign countries, which presents numerous challenges. If we are unable to efficiently manage
these challenges, our revenue, cost of operations and ability to attain profitable operations could
be materially adversely affected.
There are challenges associated with international marketing activities including language and
cultural barriers, variations in compliance procedures in certain countries and/or changes in
regulatory requirements where our products may be marketed, performance of our distribution
channels, government’s willingness to promote cheaper generic versions of competing products, the
general population’s inability to afford private care drug products, changes in economic conditions
and instability from country to country, changes in a country’s political condition, trade
protection measures, tariffs and other trade barriers, including import and export restrictions,
and tax issues. Our future revenues, costs of operations and profit results could be materially
adversely affected by any or all of these factors. It may take significant time to overcome these
challenges with no assurance that a particular market will ever be effectively penetrated.
Our international operations expose us to the risk of fluctuations in currency exchange rates,
which could negatively impact our revenues and anticipated sales margins.
We conduct operations in several different countries. The balance sheet accounts of our
operations in Scotland and Sweden, including intercompany accounts that are considered long-term in
nature, are translated to U.S. dollars for financial reporting purposes and resulting adjustments
are made to stockholders’ (deficit) equity. The value of the respective local currency may
strengthen or weaken against the U.S. dollar, which would impact the value of stockholders’
investment in our common stock. Fluctuations in the value of the British Pound and Swedish Krona
against the U.S. dollar have occurred during our history, which have resulted in unrealized foreign
currency translation gains and losses, which are included in accumulated other comprehensive income
and shown in the stockholders’ (deficit) equity section of our consolidated balance sheet.
Intercompany trading accounts, which are short-term in nature, are remeasured at current exchange
rates as of the balance sheet dates and any gains or losses are recorded in other expense (income),
net.
We also conduct transactions that are denominated in currencies other than the U.S. dollar,
British Pound and Swedish Krona. Transactions denominated in other currencies are accounted for in
the respective local currency at the
time of the transaction. Upon settlement of this type of transaction, any foreign currency
gain or loss results in an adjustment to income.
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Our results of operations may be impacted by the fluctuating exchange rates of foreign
currencies, especially the British Pound and Swedish Krona, in relation to the U.S. dollar. Most of
the revenue and expense items of our foreign subsidiaries are denominated in the respective local
currencies. The strengthening of these local currencies against the U.S. dollar will result in
higher expenses and liabilities when translated into U.S. dollars, which would lower or possibly
eliminate completely our revenues and anticipated sales margins on product sales.
We do not currently engage in hedging activities with respect to our foreign currency
exposure.
If we cannot protect our intellectual property, our ability to develop and commercialize our
products could be severely limited and may cause us to terminate activities on such products and
never realize a return on our investments in such products.
Our success is dependent in part on our ability to obtain, maintain and enforce our
intellectual property rights (owned and licensed) domestically and abroad. The patent position of
biotechnology and pharmaceutical companies is highly uncertain, involves complex legal and factual
issues and has in recent years been the subject of much litigation. The validity, enforceability
and commercial value of these rights, therefore, are highly uncertain.
Fundamentally, a patent is a grant of a right to exclude others from making, using or selling
an invention. However, our patents may not protect us against our competitors. The issuance of a
patent is not conclusive as to its scope, validity or enforceability. The scope, validity or
enforceability of our patents can be challenged in litigation. Such litigation can involve
substantial costs and distraction. If the outcome of such litigation is adverse to us, third
parties may be able to use our patented inventions and compete directly with us, without payment to
us. Third parties may also be able to circumvent our patents by design innovations. We may not
receive any additional patents based on the applications currently pending.
Our patents may not contain claims that are sufficiently broad to prevent others from
practicing our technologies or developing competing products. Competitors may be able to use
technologies in competing products that perform substantially the same function as our technologies
but avoid infringing our patent claims. Under such “workaround” circumstances, our patents would
be of little commercial value to us.
Patent applications we file may not result in the issuance of a patent. Because patent
applications are typically not published for several months after filing, or in some cases, not at
all, and because publications of discoveries in the scientific literature often lag behind actual
discoveries, neither we nor our licensors or collaborators can be certain that we or they were the
first to make the inventions claimed in patents or pending patent applications, or that we or they
were the first to file for protection of the inventions set forth in these patent applications.
Assuming the other requirements for patentability are met, in the United States, the first to
invent is entitled to the patent, and outside of the United States, the first to file is entitled
to the patent.
Intellectual property rights are fundamentally territorial in nature, and depend on the
differing laws of separate nations and entities. Accordingly, we may not be able, alone or with
our licensors or collaborators, to prevent misappropriation of our proprietary rights, particularly
in countries where the laws may not protect such rights as fully as in the United States. The
actual protection we receive from a foreign patent may vary from one country to another. Thus, any
patents that we own or license from third parties may not provide commercially meaningful
protection from competition.
We rely on maintaining as trade secrets our competitively sensitive know-how and other information.
Intentional or unintentional disclosure of this information could impair our competitive position.
As to many technical aspects of our business, we have concluded that competitively sensitive
information is either not patentable or that for competitive reasons it is not commercially
advantageous to seek patent protection. In these circumstances, we seek to protect this know-how
and other proprietary information by maintaining it in
confidence as a trade secret. To maintain the confidentiality of our trade secrets, we
generally enter into confidentiality agreements with our employees, consultants, collaborators,
contract manufacturers and advisors upon commencement of their relationships with us. These
agreements require that all confidential information developed by the individual or made known to
the individual by us during the course of the individual’s relationship with us be kept
confidential and not disclosed to third parties. We may not obtain these agreements in all
circumstances, and the agreements we have may be breached. We may not become aware of, or have
adequate remedies in the event of, any such breach. In addition, in some situations, these
agreements may conflict with, or be subject to, the rights of third parties with whom our
employees, consultants, collaborators, contract manufacturers or advisors have previous employment
or consulting relationships. To the extent that our employees, consultants, collaborators,
contract manufacturers or advisors use trade secrets or know-how owned by others in their work for
us, disputes may arise as to the ownership of relative inventions. Also, others may independently
develop substantially equivalent trade secrets, processes and know-how, and competitors may be able
to use this information to develop products that compete with our products, which could adversely
impact our business. The disclosure of our trade secrets could impair our competitive position.
Adequate remedies may not exist in the event of unauthorized use or disclosure or our confidential
information.
30
If we fail to comply with our obligations in the agreements under which we license development or
commercialization rights to products or technology from third parties, we could lose license rights
that are important to our business and incur financial obligations based on our exercise of such
license rights.
In April 2005, we executed a global exclusive license with Cancer Research Technology UK for
the rights to develop and commercialize an anti-CD55 antibody. This license provides to us use of
intellectual property that is important to our business, and we may enter into additional
agreements with other partners in the future that provide license to us of valuable technology.
The license imposes, and future licenses may impose, various commercialization milestone payments
and other payment obligations on us. If we fail to reach the material milestones set forth in our
development plan contained in the agreement by more than six months, the licensor may have the
right to terminate the license specified in the agreement, in which event we would lose valuable
rights and our ability to develop our product candidates.
In addition, we entered in a collaborative research and development agreement with
Sloan-Kettering Institute for the joint development of an antibody to the GD3 antigen. This
agreement will expire in February 2007, unless extended by mutual consent or unless we exercise our
option to negotiate an exclusive license agreement. The agreement provides that the rights in work
product created under the agreement including research results, data, and records will be owned by
the party that generated them and that if work product is generated jointly, it will be jointly
owned by us and Sloan-Kettering. We do not have payment obligations pursuant to Sloan-Kettering
collaboration. Although we have entered into discussions and negotiations with the Sloan-Kettering
Institute to license the anti-GD3 antibody, it is not known if or when a license agreement will be
executed.
If third parties successfully assert that we have infringed their patents and proprietary rights,
or successfully challenge the validity of our patents and proprietary rights, we may become
involved in intellectual property disputes and litigation that would be costly, time consuming, and
which could delay or prevent the development or commercialization of our product candidates and may
cause us to seek a license to continue to develop or commercialize our product candidates, which
could have a material adverse affect on our business.
Our ability to commercialize our product candidates depends on our ability to develop,
manufacture, market and sell our product candidates without infringing the proprietary rights of
third parties. In the event that our technologies infringe or violate the patent or other
proprietary rights of third parties, we may be prevented from pursuing product development,
manufacturing, marketing and selling of our product that utilizes such technologies. There may be
patents held by others of which we are unaware that contain claims that our products or operations
infringe. In addition, given the complexities and uncertainties of patent law, there may be
patents of which we know that we may ultimately be held to infringe, particularly if the claims of
the patent are determined to be broader than we believe them to be. For instance, United States
and foreign patents have been issued to others for genetically engineered and human-derived
interferons and methods and processes for producing transgenic birds. While we are not currently
aware of any patent issues, this does not preclude a third party from filing a claim against us.
In the event
a third party claims that we infringe its patents, any of the following may occur:
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we may become liable for substantial damages for past infringement if a court
decides that our technologies infringe upon a competitor’s patent; |
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a court may prohibit us from selling or licensing our product without a license from
the patent holder, which may not be available on commercially acceptable terms or at
all, or which may require us to pay substantial royalties or grant cross-licenses to
our patents; and |
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we may have to redesign our product so that it does not infringe upon others’ patent
rights, which may not be possible or could require substantial funds or time. |
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Additionally, licenses may not be exclusive in which case our competitors might gain access to the
same technology as to that which was licensed to us. If we failed to obtain a required license or
were unable to alter the design of our product candidates to make the licenses unnecessary, we
might be unable to commercialize one or more of our product candidates, which could significantly
affect our ability to establish and grow our commercial business.
Many of our employees, consultants, contractors and others may use the trade secret
information of others in their work for us or they may disclose our trade secret information to
others. Either of these events could lead to disputes over the ownership of inventions derived
from that information or expose us to potential damages or other penalties.
If any of these events occurs, our business will suffer.
We may incur substantial costs as a result of litigation or other proceedings relating to patent or
other intellectual property rights.
There has been substantial litigation and other proceedings regarding patent and intellectual
property rights in the bio-pharmaceutical industry. We may be forced to defend claims of
infringement brought by our competitors and others, and we may institute litigation against others
who we believe are infringing our intellectual property rights. In the future, we expect our
license agreements may include certain provisions that could require us to defend claims against
our licensed patents and could subject us to significant legal expenses in defense and enforcement
activities. The outcome of intellectual property litigation is subject to substantial
uncertainties and may, for example, turn on the interpretation of claim language by the court,
which may not be to our advantage, or on the testimony of experts as to technical facts upon which
experts may reasonably disagree. Our involvement in intellectual property litigation could result
in a significant expense to us. Some of our competitors have considerable resources available to
them and a strong economic incentive to undertake substantial efforts to stop or delay us from
commercializing products. We, on the other hand, are a relatively small company with comparatively
few resources available to us to engage in costly and protracted litigation. Moreover, regardless
of the outcome, intellectual property litigation against or by us could significantly disrupt our
development and commercialization efforts, divert our management’s attention, quickly consume our
financial resources or require us to disclose confidential information. In addition, if third
parties file patent applications or issue patents claiming technology that is also claimed by us in
pending applications, we may be required to participate in interference proceedings with the
applicable regulatory authority, including oppositions, to determine priority of invention or
patentability. Even if we are successful in these proceedings, we may incur substantial costs, and
the time and attention of our management and scientific personnel will be diverted in pursuit of
these proceedings.
Licenses to third parties may not result in revenue to us and exclusive licenses will preclude us
from seeking alternative revenue streams.
One of our business strategies is to license our products or technologies to third parties.
They, in turn, will use this license to produce and/or market our products and technologies. We
cannot guarantee that these third parties will be able to successfully produce or market the
products or technologies or that we will receive revenue from their efforts. To the extent that we
grant exclusive licenses to third parties, we may be precluded from granting other parties the
opportunity to conduct successful marketing activities.
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Our copyrightable and trademark works are assets that must be protected. If we are unable to
protect these assets, our competitive position could be weakened.
Copyright law in the U.S. protects those original works of authorship fixed in a tangible
medium of expression. While our intellectual property largely resides in our portfolio of patents,
trademarks, and trade secrets, our works of authorship embody certain rights and may deserve
protection. To the extent we create written works such as brochures, web sites, or trade show
presentations, we are publishing works of authorship that may well be presented to competitors.
While copyright protection subsists in such works once they are fixed (e.g., on paper or in
electronic format), the added layer of protection that comes from registration is important.
Without registration of a work at the appropriate territorial copyright office, it may be
difficult, if not impossible, to initiate actions against alleged infringement.
We may be exposed to product liability claims, and our product liability insurance may not be
sufficient to cover all claims or continue to be available to us.
We are exposed to the risk of product liability claims. We may be subject to claims against
us even if the injury is due to the actions of others. For example, if the medical personnel that
use our products on patients are not properly trained or are negligent in the use of our products,
the patient may be injured through the use of our products, which may subject us to claims. The
use of our product candidates in clinical trials could also expose us to product liability claims.
Persons who claim to be injured from use of our products or processes, may file claims for personal
injuries or other damages against us. Directives in the European Union, for example, provide for
strict liability and permit compensation claims to be made within a ten year period from when the
product is placed on the market, and three years from the event giving rise to the claim, thereby
creating a 13 year period within which compensation claims could be asserted. Regulations in other
countries and regions may differ and may expose us to incremental risks of liability. We maintain
product liability insurance in the amount of $10 million.
Generally, our clinical trials, including our melanoma trials, are conducted in patients with
serious life-threatening diseases for whom conventional treatments have been unsuccessful or for
whom no conventional treatment exists, and in some cases, our product is used in combination with
approved therapies that themselves have significant adverse event profiles. During the course of
treatment, these patients could suffer adverse medical events or die for reasons that may or may
not be related to our products.
We cannot predict all of the possible harms or side effects that may result form the use of
our products to cover all liabilities or defense costs we might incur. We cannot be sure that our
insurance coverage will be adequate to insulate us from liabilities that may result from the use of
our products. Also, in the future this type of insurance may not be available, or we may not be
able to afford this form of insurance. A product liability claim or series of claims brought
against us could give rise to substantial liability that could exceed our resources. Even if
claims are not successful, the costs of defending such claims and potential adverse publicity could
be harmful to our business.
Our reliance on third party suppliers to supply our raw materials may disrupt operations and our
ability to develop and commercialize products.
We currently rely, and we expect to rely on third-party suppliers to supply our raw materials
to produce our products and develop our product candidates. All of these suppliers are outside of
the United States. Reliance on third-party suppliers exposes us to risks. These risks include:
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unexpected changes in regulatory requirements; |
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tariffs and other trade barriers, including import and export restrictions; |
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political or economic instability; |
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compliance with foreign laws; |
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possible breach of the manufacturing agreement by the third party because of
factors beyond our control; |
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the possible termination or non-renewal of the agreement by the third party,
based on its own business priorities, at a time that is costly and inconvenient for
us; |
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transportation delays and interruptions; |
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limitations on supply availability resulting from capacity and scheduling
constraints of the third party; |
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difficulties in protecting intellectual property rights in foreign countries; and |
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currency exchange risks. |
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Foreign supply arrangements may also limit our control, and could disrupt our operations, which, in
turn, could negatively impact upon your investment in us. Our dependence upon others for the raw
materials to produce our products and product candidates may adversely affect our business and our
ability to develop our product candidates and commercialize any products that receive regulatory
approval on a timely basis.
The production of Multiferon® is highly dependent on the availability of human leukocytes, and any
interruption in supply could adversely affect our ability to manufacture Multiferon®.
We are dependent upon third party blood collection agencies to supply human leukocytes as a
key raw material in the manufacture of Multiferon®. We currently maintain supply agreements,
including, through our Swedish subsidiary, with the German Red Cross. The failure to maintain such
agreements or obtain new ones could have a material adverse affect on us.
If we are unable to obtain the necessary leukocytes, we may be required to scale back our
operations or stop manufacturing Multiferon®. The costs and availability of leukocytes are subject
to fluctuation depending on a variety of factors beyond our control, including competitive factors,
changes in technology, and governmental regulations that may limit or prevent their availability.
The financings that we have consummated are, and future financings may be, dilutive to stockholders
and may adversely affect the market price for our shares of common stock.
Our success in attracting additional funding has been limited to transactions in which our
equity is used as currency. Financing activities during this period often have consisted of sales
of our common stock at a discount to the market price and the issuance of securities convertible
into or exercisable for shares of our common stock, sometimes at a discount to prevailing market
prices. In light of the availability of this type of financing, and the lack of alternative
proposals, our board of directors has determined that the continued use of our equity for these
purposes may be necessary if we are to sustain operations. Equity financings of the type we have
been required to pursue are dilutive to our stockholders and may adversely impact the market price
for our shares of common stock.
If we lose the services of our key management or scientific personnel, scientific collaborators or
other advisors, our business and ability to attain profitable operations would suffer.
The success of our business is highly dependent on our management as well as our senior
manufacturing and scientific personnel. We also rely on our scientific collaborators and other
advisors, particularly with respect to our research and development efforts. In addition, we
require skilled personnel in areas such as business and clinical development. We do not maintain
key-person life insurance on any of our officers, employees or consultants. In addition, although
we have employment agreements with key members of management, each of our employees, subject to
applicable notice requirements, may terminate his or her employment at any time. The pool of
individuals with relevant experience in bio-technology is limited, and retaining and training
personnel with the skills necessary to operate our business effectively is challenging, costly and
time-consuming. If we lose the services of any key personnel, our business, financial condition
and results of operations could be materially and adversely affected.
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Risks Related to our Common Stock
We have received deficiency notices from the American Stock Exchange, or AMEX, and if we are unable
to satisfy the AMEX that we will regain compliance with its continued listing criteria, our common
stock may be delisted from AMEX, which could accelerate repayment of outstanding indebtedness,
adversely affect investor perception and may result in institutional and other investors refraining
from purchasing our common stock, units or warrants, which would adversely affect your ability to
sell our common stock, units or warrants.
We have received two deficiency letters from the AMEX, dated September 20, 2005 and March 1,
2006, advising us that, based upon our Annual Report on Form 10-K for the fiscal year ended June
30, 2005 and our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005,
respectively, we were not in compliance with AMEX’s continued listing standards.
On September 22, 2005, we received a deficiency letter from the AMEX, dated September 20,
2005, advising we are not in compliance with continued listing standards. Specifically, since the
filing of our financial statements for the fiscal year ended June 30, 2005, we have not been in
compliance with Section 1003(a)(ii) of the AMEX Company Guide with stockholders’ equity of less
than $4 million and losses from continuing operations and/or net losses in three out of its four
most recent fiscal years and Section 1003(a)(iii) with stockholders’ equity of less than $6 million
and losses from continuing operations and/or net losses in its five most recent fiscal years.
In order to maintain our current listing, we submitted a compliance plan on October 19, 2005
advising of the actions we are taking to regain compliance with AMEX’s continued listing standards.
This plan was approved by AMEX on October 25, 2005, and AMEX granted us a conditional trading
extension until March 20, 2007 to regain compliance with their continued listing standards.
Additionally, on March 1, 2006, the AMEX notified us that we failed to meet an additional
continued listing standard, Section 1003(a)(i) of the AMEX Company Guide with stockholders’ equity
of less than $2 million and losses from continuing operations and/or net losses in two of our three
most recent fiscal years. AMEX noted that if we are not in compliance with all continued listing
standards by March 20, 2007 or do not make progress consistent with the plan during the plan
period, AMEX will initiate delisting proceedings.
We will be subject to periodic review by AMEX during the extension period granted by AMEX.
Failure to make progress consistent with the plan we submitted to AMEX or to regain compliance with
the continued listing standards by the end of the extension period could result in our common stock
being delisted from AMEX. In the event our common stock is delisted from AMEX, we would apply to
have our common stock listed on the over-the-counter bulletin board; however, certain institutional
investors have policies against investments in bulletin board companies and other investors may
refrain from purchasing our common stock if it is not listed on a national securities exchange.
Also, we would lose some of our existing analyst coverage and our efforts to obtain new analyst
coverage would be significantly impaired. Further, our ability to sell our equity securities and
debt would be significantly limited in numerous states because the exemption we utilize to sell
these securities without registration under applicable state securities laws requires that our
common stock be listed on AMEX. If we were required to register our equity securities or debt
offerings under the securities laws of various states, no assurance will be given as to whether we
would be able to obtain the necessary approvals from states’ securities administrators. To the
extent our common stock were to be delisted from trading on AMEX, the value of our equity
securities and our ability to sell equity securities and debt would be negatively impacted. The
occurrence of these events could have a material adverse effect on our ability to repay our
outstanding debt and other obligations.
35
Additionally, if we are delisted from AMEX, and the price of our common stock does not
increase significantly, our common stock would be a “low-priced” security under the “penny stock”
rules promulgated under the Securities Exchange Act of 1934, as amended. In accordance with these
rules, broker-dealers participating in transactions in low-priced securities must first deliver a
risk disclosure document that describes the risks associated with such stocks, the broker-dealer’s
duties in selling the stock, the customer’s rights and remedies and certain market and other
information. Furthermore, the broker-dealer must make a suitability determination approving the
customer for low-priced stock transactions based on the customer’s financial situation, investment
experience and objectives. Broker-dealers must also disclose these restrictions in writing to the
customer, obtain specific written consent from the customer, and provide monthly account statements
to the customer. The effect of these restrictions may decrease the willingness of broker-dealers
to make a market in our common stock, decrease liquidity of our common stock and increase
transaction costs for sales and purchases of our common stock as compared to other securities. Our
management is aware of the abuses that have occurred historically in the penny stock market.
Although we do not expect to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, management will strive within the confines of
practical limitations to prevent abuses normally associated with “low-
priced” securities from being established with respect to our securities.
In addition, our outstanding convertible debt contains a provision that in the event our
common stock is no longer traded on the AMEX, New York Stock Exchange or NASDAQ, the debt holders
have the right to request repayment of their investment with related accrued interest. Given our
current financial position and our failure to meet the AMEX continued listing requirements, if our
common stock was delisted from AMEX, we would be unable to repay these amounts and would be in
default of these agreements, which would significantly hamper our ability to raise additional
capital to fund our ongoing operations.
The issuance of our shares upon the exercise or conversion of securities we have outstanding may
cause significant dilution to our stockholders and may have an adverse impact on the market price
of our common stock.
As of June 30, 2006, there were 45,765,687 shares of our common stock outstanding. The
issuance of our shares upon the exercise or conversion of securities we have outstanding will
increase the number of our publicly traded shares, which could depress the market price of our
common stock.
The perceived risk of dilution may cause our stockholders to sell their shares, which would
contribute to a downward movement in the stock price of our common stock. Moreover, the perceived
risk of dilution and the resulting downward pressure on our stock price could encourage investors
to engage in short sales of our common stock. By increasing the number of shares offered for sale,
material amounts of short selling could further contribute to progressive price declines in our
common stock.
As of June 30, 2006, there were 34,709,366 shares of our common stock issuable upon exercise
or conversion of the following securities. These securities represent approximately 76% of our
outstanding shares of common stock as of June 30, 2006.
| |
|
|
|
|
Convertible preferred stock, Series A |
|
|
916 |
|
Convertible preferred stock, Series J (convertible at $1.25 per share) |
|
|
4,172,000 |
|
Officers, employees, and directors options (exercisable at an average price
of $1.58 per share through March 2014)** |
|
|
1,139,783 |
|
Consultant warrants (exercisable at an average price of $38.70 per share
through February 2009) |
|
|
7,500 |
|
Debt and equity offering warrants (exercisable at an average price of
$1.13 per share through March 2011) |
|
|
16,424,877 |
|
Convertible notes or related warrants issued upon redemption of the
notes (convertible/exercisable at $1.05 per share through
August 2008) |
|
|
11,476,194 |
|
Convertible debentures (convertible at $1.05 per share through
September 2008) |
|
|
1,488,096 |
|
|
|
|
|
|
|
|
|
34,709,366 |
|
|
|
|
|
|
|
|
|
| ** |
|
Includes options to purchase an aggregate of 843,000 shares of our common stock, which were
granted in April 2006 under our 2006 Equity Compensation Plan. No shares issuable upon exercise of
these options can be issued until our 2006 Equity Compensation Plan is approved by our
stockholders. We intend to seek stockholder approval of our 2006 Equity Compensation Plan at our
next annual stockholders’ meeting. |
36
The conversion and exercise prices of outstanding securities may be reduced, and the number of
shares that we issue on conversion or exercise may be increased, in the event that we issue common
stock or securities convertible into common stock in the future for consideration that is less than
the conversion or exercise prices of the outstanding securities.
The terms of certain of our outstanding convertible debt and warrants provide for a downward
adjustment in the conversion and exercise prices in the event that we subsequently issue shares of
our common stock, or securities
convertible into or exercisable for our common stock, for consideration that is less than the
conversion or exercise prices of the previously issued securities. Any reduction of the conversion
or exercise prices of outstanding securities as a result of these adjustment provisions will
require that we issue a greater number of shares upon conversion of convertible debt or exercise of
warrants than we would have issued in the absence of these provisions. Any additional shares that
we issue as a result of the adjustment provisions of these securities will cause further dilution
to our existing stockholders.
We are engaged in the bio-pharmaceutical industry; as a result, the market for our shares of common
stock may be subject to extreme volatility.
The market for securities of bio-pharmaceutical companies, including ours, has historically
been more volatile than the market for stocks in general. As a result, the price and volume of our
shares may be subject to wide fluctuations in response to factors, some of which are beyond our
control, including, without limitation:
| |
• |
|
quarter-to-quarter variations in our operating results; |
| |
| |
• |
|
our announcement of material events; |
| |
| |
• |
|
price fluctuations in sympathy to others engaged in our industry; and |
| |
| |
• |
|
the effects of media coverage of our business. |
Price and volume volatility may prevent you from selling your shares of our common stock when you
desire to do so, and the inability to sell your shares in a rapidly declining market may
substantially increase your risk of loss. Our shares have traded between a high of $1.03 and a low
of $0.25 since January 1, 2005. The daily trading volume of our shares since January 1, 2005 has
been volatile ranging between 23,500 and approximately 11.6 million shares in a single day.
We may not have sufficient surplus to redeem our Series J cumulative convertible preferred stock or
for Viragen International to redeem its Series C cumulative preferred stock or Series D cumulative
preferred stock. Additionally, we may not have sufficient surplus or net profits to be able to pay
dividends on such preferred stock.
As a Delaware corporation, we may not declare and pay dividends on our capital if the amount
paid exceeds an amount equal to the surplus which represents the excess of our net assets over
paid-in-capital or, if there is no surplus, our net profits for the current and/or immediately
preceding fiscal year. Also, under applicable Delaware case law, dividends may not be paid on
our Series J cumulative convertible preferred stock or common stock and Viragen International’s
Series C cumulative preferred stock and Series D cumulative preferred stock, if we become insolvent
or the payment of dividend will render us insolvent. In addition, to the extent we pay dividends
and we are deemed to be insolvent or inadequately capitalized, a bankruptcy court could direct the
return of any dividends.
Our ability to redeem the Series J cumulative preferred stock, and the ability of Viragen
International to redeem its Series C cumulative preferred stock or Series D cumulative preferred
stock, will generally depend upon the amount of surplus that each corporation possesses.
Additionally, a corporation may redeem shares of its preferred stock by applying some or all of the
capital represented by the shares being redeemed to the redemption so long as the assets of the
corporation remaining after such reduction is sufficient to pay any debts of the corporation for
which payment has not otherwise been provided.
37
We do not expect to pay dividends on our common stock in the foreseeable future.
We have never paid cash dividends on our common stock. We do not expect to pay cash dividends
on our common stock any time in the foreseeable future. Our convertible debentures prohibit us from
directly or indirectly paying cash dividends or distributions on our common stock. Provisions of
our convertible debentures and Series A cumulative convertible preferred stock also prohibit the
payment of dividends on our common stock, subject to certain exceptions. Additionally, any future
payment of dividends will directly depend upon our future earnings, capital requirements, financial
requirements and other factors that our board of directors will consider. For the foreseeable
future, we will use earnings from operations, if any, to finance our growth, and we will not pay
dividends to our common stockholders. You should not rely on an investment in our common stock if
you require dividend income.
The only return on your investment in our common stock, if any, would most likely come from
any appreciation of our common stock.
As a Delaware corporation, we may not declare and pay dividends on our capital if the amount
paid exceeds an amount equal to the surplus which represents the excess of our net assets over
paid-in-capital or, if there is no surplus, our net profits for the current and/or immediately
preceding fiscal year. To the extent we pay dividends and we are deemed to be insolvent or
inadequately capitalized, a bankruptcy court could direct the return of any dividends.
We could use preferred stock to fund operations or resist takeovers, and the issuance of preferred
stock may cause additional dilution.
Our certificate of incorporation authorizes the issuance of up to 1,000,000 shares of
preferred stock, of which 2,150 shares of Series A cumulative convertible preferred stock and
52,150 shares of Series J cumulative convertible preferred stock are issued and outstanding as of
June 30, 2006. Our certificate of incorporation gives our board of directors the authority to issue
preferred stock without the approval of our stockholders. We may issue additional shares of
preferred stock to raise money to finance our operations. We may authorize the issuance of the
preferred stock in one or more series. In addition, we may set the terms of preferred stock,
including:
| |
• |
|
dividend and liquidation preferences; |
| |
| |
• |
|
voting rights; |
| |
| |
• |
|
conversion privileges; |
| |
| |
• |
|
redemption terms; and |
| |
| |
• |
|
other privileges and rights of the shares of each authorized series. |
The issuance of large blocks of preferred stock could possibly have a dilutive effect to our
existing stockholders. It can also negatively impact our existing stockholders’ liquidation
preferences. In addition, while we include preferred stock in our capitalization to improve our
financial flexibility, we could possibly issue our preferred stock to friendly third parties to
preserve control by present management. This could occur if we become subject to a hostile takeover
that could ultimately benefit us and our stockholders.
38
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2. Properties
In November 1996, Viragen entered into a ten year lease commencing April 1997 for a 14,800
square foot facility located at 865 SW 78th Avenue, Suite 100, Plantation, Florida 33324. This
location contains our domestic administrative and executive offices. The lease contains an option
for up to two additional five-year terms. Current monthly rental on the property, including common
area maintenance charges and applicable taxes, is approximately $31,000. If we are unable to
reduce the amount of square footage we lease at this location, we will seek a new location for
occupancy, with less square footage, upon expiration of this lease.
In November 1996, Viragen (Scotland) executed a five year lease, subsequently modified for
additional space, for a newly constructed laboratory and manufacturing facility located in
Pentlands Science Park near Edinburgh, Scotland. The facility consists of approximately 17,000
square feet with base monthly rental payments of approximately $35,000 plus common area and
maintenance charges. The lease further provides for up to four five year extensions at our option.
In October 2001, we exercised our first option to extend the lease through October 2006 and we
intend to extend the lease for an additional five years. In March 2002 and September 2003, we
entered into sub-lease agreements, sub-leasing a portion of our space to third parties, with
initial terms of one year, thereafter renewable on a monthly basis. The area covered in these
sub-lease agreements totals approximately 4,000 square feet generating monthly sub-lease rent of
approximately $9,000.
Through ViraNative, we lease approximately 25,500 square feet of laboratory, production and
office facilities in Umeå, Sweden under two separate leases. One of the leases representing
approximately 21,000 square feet was recently renewed through March 2009 at a total lease cost of
approximately $28,000 per month. The initial stages of the manufacture of Multiferon® are
conducted in this facility. The other lease representing approximately 4,500 square feet of office
space at a total lease cost of approximately $6,000 per month will expire in December 2006 and will
not be renewed. In June 2005, we initiated final modifications at this facility in order to
upgrade specific equipment used in the Multiferon® manufacturing process. These modifications have
been presented to and agreed upon with the medical products agency in Sweden. We do not expect any
significant delays or interruptions to operations as a result of these modifications.
ViraNative also owns a 21,500 square foot building in Umeå, Sweden, which contains a portion
of our Multiferon® production. This building was purchased prior to our acquisition of ViraNative
to provide expanded production capacity and is intended to potentially house all of ViraNative’s
research, production and administrative facilities. This facility carries a 25 year mortgage held
by a Swedish bank with an outstanding balance of approximately $637,000.
We believe our properties are in good condition, well-maintained and generally suitable and
adequate to carry on our business. We also believe that we maintain sufficient insurance coverage
on all of our real and personal property.
Item 3. Legal Proceedings
We are not currently a party to any legal proceedings. We may from time to time become
involved in litigation relating to claims arising from our ordinary course of business. These
claims, even if not meritorious, could result in the expenditure of significant financial and
managerial resources.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of our fiscal year ended June 30, 2006 to a
vote of security holders through the solicitation of proxies or otherwise.
39
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock began trading on the American Stock Exchange on April 17, 2000, under the
symbol “VRA.” The following table sets forth the high and low sales prices as reported on the
American Stock Exchange for the periods indicated, as adjusted for Viragen’s one for ten reverse
stock split effective June 15, 2004.
| |
|
|
|
|
|
|
|
|
| |
|
High |
|
Low |
2005-2006 Period |
|
|
|
|
|
|
|
|
Fourth Quarter ended June 30, 2006 |
|
$ |
0.61 |
|
|
$ |
0.36 |
|
Third Quarter ended March 31, 2006 |
|
|
0.80 |
|
|
|
0.42 |
|
Second Quarter ended December 31, 2005 |
|
|
0.79 |
|
|
|
0.30 |
|
First Quarter ended September 30, 2005 |
|
|
0.83 |
|
|
|
0.44 |
|
|
|
|
|
|
|
|
|
|
2004-2005 Period |
|
|
|
|
|
|
|
|
Fourth Quarter ended June 30, 2005 |
|
$ |
0.87 |
|
|
$ |
0.54 |
|
Third Quarter ended March 31, 2005 |
|
|
1.03 |
|
|
|
0.63 |
|
Second Quarter ended December 31, 2004 |
|
|
1.34 |
|
|
|
0.90 |
|
First Quarter ended September 30, 2004 |
|
|
1.42 |
|
|
|
0.83 |
|
The above quotations represent prices between dealers, and do not include retail mark-ups,
markdowns or commissions and do not represent actual transactions.
As of September 22, 2006, we had approximately 2,600 stockholders of record. On September 22,
2006, the closing price of our common stock was $0.36 per share.
We have never paid any dividends on our common stock. We do not anticipate paying any cash
dividends on our common stock in the foreseeable future because:
| |
• |
|
provisions of our convertible debentures prohibit us from directly or indirectly
paying cash dividends or distribution on our common stock; |
| |
| |
• |
|
provisions of our Series A cumulative convertible preferred stock and Series J
cumulative convertible preferred stock prohibit the payment of dividends on our common
stock, subject to certain exceptions; |
| |
| |
• |
|
applicable provisions of Delaware law described below limit our ability to pay
dividends if we do not have net income; |
| |
| |
• |
|
we have experienced losses since inception; |
| |
| |
• |
|
we have significant capital requirements in the future; and |
| |
| |
• |
|
we presently intend to retain future earnings, if any, to finance the expansion of our business. |
Future dividend policy will depend on:
| |
• |
|
our earnings, if any; |
| |
| |
• |
|
applicable provisions of Delaware law described below governing the payment of dividends; |
| |
| |
• |
|
capital requirements; |
| |
| |
• |
|
expansion plans; |
| |
| |
• |
|
legal or contractual limitations; |
| |
| |
• |
|
financial condition; and |
| |
| |
• |
|
other relevant factors. |
40
The payment of dividends will also depend on our ability to declare dividends under Delaware
law. Dividends may be paid only out of “surplus,” as that term is defined in the Delaware General
Corporation Law, or, in the event there is no surplus, out of the net profits of the corporation
for the fiscal year in which the dividend is declared and/or the immediately preceding fiscal year.
Dividends may not be paid, however, out of net profits of the corporation if the capital
represented by the issued and outstanding stock of all classes having a preference upon the
distribution of assets is impaired.
Our ability to redeem our Series J cumulative preferred stock and the ability of Viragen
International to redeem its Series C cumulative preferred stock and Series D cumulative preferred
stock will generally depend on the amount of surplus that each corporation possesses.
Additionally, a corporation may redeem shares of its outstanding preferred stock by applying some
or all of the capital represented by the shares being redeemed to the redemption as long as the
assets of the corporation remaining after such reduction is sufficient to pay any debts of the
corporation for which payment has not otherwise been provided.
Information relating to our equity compensation plans is contained in Item 12 below.
41
Item 6. Selected Financial Data
The following selected financial data should be read together with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” the consolidated financial
statements and notes thereto and other financial information included elsewhere in this Annual
Report on Form 10-K. The consolidated statements of operations data set forth below of Viragen for
the fiscal years ended June 30, 2006, 2005 and 2004 and the consolidated balance sheet data as of
June 30, 2006 and 2005 have been derived from Viragen’s audited consolidated financial statements
which are included elsewhere in this Annual Report on Form 10-K. The consolidated statement of
operations data set forth below for the fiscal years ended June 30, 2003 and 2002 and the
consolidated balance sheet data as of June 30, 2004, 2003 and 2002 have been derived from Viragen’s
audited consolidated financial statements which are not included in this Annual Report on Form
10-K.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended June 30, |
| |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
STATEMENTS OF OPERATIONS DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
391,213 |
|
|
$ |
278,784 |
|
|
$ |
266,137 |
|
|
$ |
630,785 |
|
|
$ |
1,275,264 |
|
Other (expense) income, net. |
|
|
(145,873 |
) |
|
|
1,538,067 |
|
|
|
632,378 |
|
|
|
535,428 |
|
|
|
333,130 |
|
Net loss (a) |
|
|
(18,214,897 |
) |
|
|
(26,207,706 |
) |
|
|
(18,177,164 |
) |
|
|
(17,348,686 |
) |
|
|
(11,088,832 |
) |
Net loss attributable to common stock |
|
|
(19,496,484 |
) |
|
|
(26,209,856 |
) |
|
|
(18,179,714 |
) |
|
|
(17,351,336 |
) |
|
|
(11,091,482 |
) |
Basic and diluted net loss per
common share (b) |
|
|
(0.46 |
) |
|
|
(0.71 |
) |
|
|
(0.55 |
) |
|
|
(1.21 |
) |
|
|
(1.10 |
) |
Weighted average common shares
outstanding (b) |
|
|
42,018,617 |
|
|
|
36,697,852 |
|
|
|
33,183,832 |
|
|
|
14,393,803 |
|
|
|
10,041,571 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At June 30, |
| |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
BALANCE SHEET DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit) |
|
$ |
229,056 |
|
|
$ |
(7,300,733 |
) |
|
$ |
25,181,900 |
|
|
$ |
4,070,504 |
|
|
$ |
(209,519 |
) |
Total assets |
|
|
13,973,966 |
|
|
|
21,984,792 |
|
|
|
48,219,996 |
|
|
|
27,867,417 |
|
|
|
20,796,604 |
|
Convertible notes and debentures,
current (c) |
|
|
453,918 |
|
|
|
16,104,994 |
(d) |
|
|
— |
|
|
|
2,224,599 |
|
|
|
711,982 |
|
Convertible notes and debentures,
long-term (c) |
|
|
11,145,816 |
(d) |
|
|
— |
|
|
|
12,490,919 |
|
|
|
1,827,163 |
|
|
|
— |
|
Long-term debt, less current portion |
|
|
627,265 |
|
|
|
598,104 |
|
|
|
1,072,087 |
|
|
|
1,124,335 |
|
|
|
1,023,948 |
|
Stockholders’ (deficit) equity |
|
|
(1,613,647 |
) |
|
|
2,593,617 |
|
|
|
29,189,581 |
|
|
|
15,720,208 |
|
|
|
11,470,620 |
|
|
|
|
| (a) |
|
Net loss for the fiscal year ended June 30, 2005 includes a goodwill impairment charge of
approximately $6.9 million. |
| |
| (b) |
|
Outstanding share and per share amounts have been adjusted retroactively to reflect the 1:10
reverse stock split that became effective on June 15, 2004. |
| |
| (c) |
|
Net of discounts |
| |
| (d) |
|
Subsequent to June 30, 2005, we entered into agreements to extend the maturity date of our
convertible notes from March 31, 2006 to August 31, 2008. As a result of the extension of the
maturity date, the convertible notes were reclassified from current to long-term. |
42
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except for the historical information contained herein, the following discussion contains
forward-looking statements that are subject to known and unknown risks, uncertainties and other
factors that may cause actual results to differ materially from those expressed or implied by such
forward-looking statements. We discuss such risks, uncertainties and other factors throughout this
report and specifically in Item 1A of this annual report on Form 10-K. In addition, the following
discussion of our results of operations and financial condition should be read together with our
consolidated financial statements and the notes to those statements, which are included elsewhere
in this report.
Overview
Viragen, Inc. is a bio-pharmaceutical company engaged in the research, development,
manufacture and commercialization of products for the treatment of cancers and viral diseases. We
operate from three locations: Plantation, Florida, which contains our administrative offices and
support; Viragen (Scotland) Ltd., located outside Edinburgh, Scotland, which conducts our research
and development activities; and ViraNative, located in Umeå, Sweden, which houses our human alpha
interferon manufacturing facilities.
Management believes that developing new and improved products or production techniques through
targeted scientific exploration in an effort to identify novel therapeutics that satisfy clinician
and patient needs, while controlling costs, are the key ingredients to our long-term success. We
believe that Multiferon® represents an opportunity to address the market of later stage (Stage
IIb-III) malignant melanoma patients who have, to date, few alternative treatments from which to
choose. Our biggest challenge is successfully funding the programs necessary to achieve the
scientific milestones, including costly clinical trials which may or may not demonstrate the hoped
for safety and efficacy levels, and regulatory approvals necessary to commercialize our products to
a level that will support our operations. We continue to focus our efforts and limited resources
on those projects we believe most likely to produce revenue in the near term. To-date we have
relied primarily on the equity markets to provide the necessary funding.
We have focused our efforts in three areas:
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Multiferon® — a human alpha interferon product derived from human white blood cells.
Multiferon® is currently approved in nine countries for the second-line treatment of a
broad range of infectious diseases and cancers. While we believe the worldwide market
for interferon alpha in 2005 was approximately $3 billion, our sales have been relatively
insignificant. In February 2006, Multiferon® was approved in Sweden for the first-line
treatment of high-risk malignant melanoma following treatment with dacarbazine after
surgical removal of tumors. Our plans are to increase sales of this product throughout
the European Union through the European Union’s mutual recognition procedures. |
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Antibody development — through our collaborative agreements with the Sloan Kettering
Institute and Cancer Research Technology UK, we are researching antibodies believed to
offer potential in the treatment of numerous cancers. Working with the Sloan Kettering
Institute, we are researching the anti-tumor effects of antibodies to the GD3 antigen,
which is over expressed on certain tumors. Our collaboration with Cancer Research
Technology UK is aimed at the development of an anti-CD55 antibody. This antibody
initially developed at the University of Nottingham, UK, targets the CD55 antigen, which
is significantly over-expressed on nearly all solid tumors. The University of Nottingham
was able to demonstrate that this antibody was able to bind only to malignant tumor
antigen theoretically removing the tumor’s protective mechanism. If an antibody can be
developed that binds selectively to tumor CD55 antigen, the natural immune system or
administered anti-tumor agents may be able to destroy the cancer cells. |
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Avian transgenics — is a technology, not yet fully developed which, if successful,
would provide for the manufacture of promising bio-pharmaceutical products in the whites
of eggs of genetically modified chickens. In January 2006, we successfully achieved
expression of significant quantities of interferon beta-la, using our proprietary OVA™
system. We continue to work with the Roslin Institute of Scotland, our |
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collaborative partner in this project, towards a cost-efficient alternative method for the
production of human proteins. |
Our ultimate success is dependent upon achieving commercially viable levels of revenue, in an
extremely competitive environment, from one or more of the above projects.
Upon receipt of approval from the Swedish Medical Products Agency for the pre-filled syringe
presentation of Multiferon® for the first line adjuvant treatment of high-risk (Stages IIb-III)
malignant melanoma following dacarbazine after surgical removal of tumors, we expect to work with
the Swedish authorities and external regulatory consultants to apply for broad European
registration for Multiferon® for this indication using the mutual recognition procedure. We cannot
assure you of the success of our commercialization efforts or that Multiferon® will be approved by
countries in the European Union.
Competition in the pharmaceutical and biotechnology industries is intense and is expected to
increase. We face competition from pharmaceutical and biotechnology companies, as well as numerous
academic and research institutions and governmental agencies, both in the United States and abroad.
Many of our competitors, including major pharmaceutical companies, have more experience in
research, development and clinical testing of bio-pharmaceutical products. We have not yet
developed a pharmaceutical product and gained regulatory approvals such that it can be widely
marketed in an international competitive environment. Many of our competitors also have greater
financial, marketing and human resources capabilities that we do.
Since our organization in December 1980, we have incurred operating losses. Our operating
losses were approximately $18.2 million, $26.2 million and $18.2 million for the fiscal years ended
June 30, 2006, 2005 and 2004. At June 30, 2006, we had cash on hand of approximately $443,000,
working capital of approximately $229,000, an accumulated deficit since organization of
approximately $166.2 million and a stockholders’ deficit of approximately $1.6 million. These
losses, among other things, have had and will continue to have an adverse effect on our working
capital, total assets and stockholders’ (deficit) equity. In light of our recurring losses,
accumulated deficit and cash flow difficulties, the report of our independent registered public
accounting firm on our financial statements for the fiscal year ended June 30, 2006 contains an
explanatory paragraph raising substantial doubt about our ability to continue as a going concern.
We received deficiency letters from the American Stock Exchange, or AMEX, advising us that we
did not meet AMEX’s continued listing standards. Specifically, we have not met AMEX’s combined
minimum stockholders’ equity and net losses requirements since June 30, 2005. We submitted a plan
to AMEX to regain compliance with AMEX’s continued listing standards, which was accepted by AMEX.
AMEX has granted us a conditional extension of time until March 20, 2007 to regain compliance with
AMEX’s continued listing standards. We are subject to periodic review by AMEX during the extension
period and if we fail to make progress consistent with the plan or to regain compliance with the
continued listing standards by the end of the extension period, our shares of common stock will be
delisted from AMEX.
We anticipate research and development costs to increase over the next twelve months,
particularly in the area of regulatory related consulting fees, toxicology studies and clinical
trial costs. We believe that the net proceeds from our proposed secondary offering, if completed as
currently contemplated and we raise the level of proceeds anticipated, will be sufficient to fund
our operations through our fiscal year ending June 30, 2007. See “— Recent Developments”. In the
event that licensing and sales revenue are insufficient to sustain our operations after such time,
we anticipate that it will be necessary for us to raise additional capital in order to continue our
operating activities.
Our future capital requirements will depend on many factors including:
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revenue generated from licensing Multiferon®, our antibody product candidates or our
avian transgenics technology; |
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revenue generated from the sale of Multiferon®; |
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our ability to conduct future financings; |
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our ability to service our convertible debt and convertible preferred stock; |
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progress with future research, development, pre-clinical studies and clinical trials; |
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the costs associated with obtaining regulatory approvals; |
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the costs involved in patent applications and potential patent enforcement; |
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competing technologies and market developments; and |
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our ability to establish collaborative arrangements and effective commercialization activities. |
Based on our operating plans, for the fiscal year ending June 30, 2007, we anticipate that we
will need approximately $9.0 million for operating activities,
$500,000 for investing activities and $10.2 million to redeem our outstanding Series J cumulative convertible preferred
stock, Viragen International’s outstanding Series C and Series D cumulative preferred stock and
service our current debt obligations. Actual expenditures in these areas could
vary based on the net proceeds realized from our proposed secondary
offering.
Recent Developments
We have experienced significant losses and a negative cash flow from operating activities
since inception. In July 2006, we filed a registration statement to register 67 million units (not
including 10.05 million units to cover underwriters’ over-allotment option if exercised). We
believe that the net proceeds from our proposed secondary offering, if completed as currently
contemplated and we raise the level of proceeds anticipated, will be sufficient to fund our
operations through our fiscal year ending June 30, 2007. In the event that our proposed secondary
offering is not completed as contemplated or we raise fewer net proceeds than anticipated, and if
we are unable to obtain additional financing or generate licensing and sales revenue sufficient to
sustain our operations, as needed, we could be forced to significantly curtail or suspend our
operations, including laying-off employees, recording asset impairment write-downs and other
measures. Additional capital may not be available to us when needed, or on terms that are
acceptable to us, or at all. We are contractually not permitted to incur additional indebtedness
except in limited circumstances, and our ability to raise additional funds through the issuance of
additional debt will be limited absent a waiver from debt holders. There can be no assurance that
debt holders will provide waivers, if required.
In August 2006, our majority-owned subsidiary, Viragen International, Inc., completed a
private placement of 3,154 shares of Viragen International Series D 24% cumulative preferred stock.
Viragen International received net proceeds of approximately $284,000 in connection with this
transaction.
In July 2006, Viragen International completed a private placement of 18,000 units with each
unit consisting of one share of Viragen International Series C 24% cumulative preferred stock and
200 shares of Viragen International common stock. Accordingly, 18,000 shares of its Series C
cumulative preferred stock and 3,600,000 shares of its common stock were issued. Viragen
International received net proceeds of approximately $1.6 million in connection with this
transaction.
Liquidity and Capital Resources
We have experienced significant losses and a negative cash flow from operating activities
since inception. During the fiscal years ended June 30, 2006, 2005 and 2004, we incurred
significant net losses of approximately $18.2 million, $26.2 million and $18.2 million,
respectively, and had an accumulated deficit of approximately $166.2 million as of June 30, 2006.
While, subsequent to June 30, 2006, our majority-owned subsidiary, Viragen International, received
net proceeds of approximately $1.9 million from the sale of its preferred stock and common stock,
we continue to experience operating losses and cash flow difficulties. We believe that this
additional funding will provide sufficient cash to support operations through at least September
2006. However, we will require substantial additional funding to support our operations subsequent
to September 2006. We believe that the net proceeds from our proposed secondary offering, if
completed as currently contemplated and we raise the level of proceeds anticipated, will be
sufficient to fund our operations through our fiscal year ending June 30, 2007. In the event that
our proposed secondary offering is not completed as contemplated or if we raise fewer net proceeds
than anticipated and if we are unable to obtain additional financing or generate licensing and
sales revenue sufficient to sustain our operations, as needed, we could be forced to significantly
curtail or suspend our operations, including laying-off employees, recording asset impairment
write-downs and other measures.
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We anticipate additional future losses as we commercialize Multiferon® and conduct additional
research
activities and clinical trials on our product candidates to obtain additional regulatory
approvals. In addition, extensive research and development activities, including costly clinical
trial expenditures will be necessary to commercialize our antibodies and avian transgenics
technology. Additional capital may not be available to us when needed, or on terms that are
acceptable to us, or at all. For instance, our common stock price may not permit us to conduct
future financings. Additionally, pursuant to the terms of our convertible debt issued in June 2004
and September 2005, we are not permitted to incur additional indebtedness except in limited
circumstances. Our ability to raise additional funds through the issuance of additional debt will
be limited absent a waiver from debt holders. There can be no assurance that debt holders will
provide waivers, if required.
As of June 30, 2006, we had approximately $443,000 in cash and cash equivalents down from
approximately $6.9 million as of June 30, 2005. As of June 30, 2006, we had working capital of
approximately $229,000, compared to a working capital deficit of approximately $7.3 million as of
June 30, 2005. The change in working capital was primarily attributed to the reclassification of
our convertible notes from current to long-term as a result of the amendments dated September 15,
2005, which extended the due date of the notes from March 31, 2006 to August 31, 2008, and cash
used to fund operations. Cash used to fund operating activities for the fiscal year ended June 30,
2006 totaled approximately $10.9 million. In addition, we made capital investments of
approximately $534,000, primarily for equipment and renovations at our Swedish subsidiary as well
as research and development equipment at our Scottish subsidiary. The equipment purchases and
renovations at our Swedish subsidiary were necessary to replace or modernize certain portions of
our production and administrative facilities. During the fiscal year ended June 30, 2006, we
received aggregate net proceeds of approximately $5.9 million from the sale of our Series J
cumulative convertible preferred stock with a stated value of approximately $5.2 million and the
sale of our convertible debentures with a principal amount of $2.0 million. These financing
transactions are discussed in further detail below. Principal and interest payments on our
convertible notes and debentures totaled approximately $739,000 for the fiscal year ended June 30,
2006. Principal payments on our short and long-term financing obligations, excluding convertible
notes and debentures, totaled approximately $348,000 for the fiscal year ended June 30, 2006.
In July 2006, our majority-owned subsidiary, Viragen International, received net proceeds of
approximately $1.6 million from the sale of 18,000 units with each unit consisting of one share of
Viragen International Series C 24% cumulative preferred stock and 200 shares of Viragen
International common stock. In August 2006, Viragen International completed a private placement of
3,154 shares of Viragen International Series D 24% cumulative preferred stock. Viragen
International received net proceeds of approximately $284,000 in connection with this transaction.
We are engaged in active discussions with prospective licensees of Multiferon® in the European
Union. We anticipate that a component of any licensing arrangements we may enter into will include
our receipt of license fees, our receipt of which will have a positive effect on our working
capital. At this time we are unable to predict whether we will consummate license arrangements for
Multiferon® in the European Union or when we will receive license fees from any license agreement
that we may enter into.
Due to our financial condition, the report of our independent registered public accounting
firm on our June 30, 2006 consolidated financial statements includes an explanatory paragraph
indicating that these conditions raise substantial doubt about our ability to continue as a going
concern. The accompanying consolidated 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.
Our future capital requirements are dependent upon many factors, including:
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revenue generated from licensing Multiferon®, our product candidates or avian
transgenics technology; |
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revenue generated from the sale of Multiferon®; |
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our ability to conduct future financings; |
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our ability to service our convertible debt and convertible preferred stock; |
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progress with future research, development, pre-clinical studies and clinical trials; |
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the costs associated with obtaining regulatory approvals; |
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the costs involved in patent applications and potential patent enforcement; |
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competing technologies and market developments; and |
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our ability to establish collaborative arrangements and effective commercialization activities. |
For
the fiscal year ending June 30, 2007, we anticipate the need of approximately $9.0
million for operating activities, $500,000 for investing activities
and $10.2 million to redeem
our outstanding Series J cumulative convertible preferred stock, Viragen International’s
outstanding Series C and Series D cumulative preferred stock and service our current debt
obligations. Actual expenditures in these areas could
vary based on the net proceeds realized from our proposed secondary
offering.
Series J 24% Cumulative Convertible Preferred Stock
On March 21, 2006, we completed a private placement of Series J cumulative convertible
preferred stock and warrants to purchase shares of our common stock. We received gross proceeds of
approximately $5.2 million in connection with this transaction.
Each share of Series J cumulative convertible preferred stock, par value $1.00 per share, has
a stated value of $100. The holders of outstanding Series J cumulative convertible preferred stock
are entitled to receive preferential dividends in cash out of any funds of Viragen before any
dividend or other distribution will be paid or declared and set apart for payment on any shares of
any Viragen common stock, or other class of stock presently authorized or to be authorized, except
for Viragen’s Series A cumulative convertible preferred stock, at the rate of 24% per annum on the
stated value, payable in cash on the earlier of (a) annually in arrears commencing February 28,
2007 and annually thereafter in cash or (b) upon redemption, as hereinafter provided, following the
closing of any subsequent financing (whether done in one or more financings of debt or equity) by
Viragen with gross proceeds equal to or greater than $5 million. To the extent not prohibited by
law, dividends must be paid to the holders not later than five business days after the end of each
period for which dividends are payable.
The Series J cumulative convertible preferred stock is convertible into Viragen common stock,
at the option of the investors, together with accrued and unpaid dividends if elected by the
investors, at a conversion price or rate of $1.25 per share, subject to adjustment. Viragen and
the investors each have the option at such time as we complete a subsequent financing for gross
proceeds of $5 million or more to have Viragen redeem all or a portion of their Series J cumulative
convertible preferred stock and any accrued and unpaid dividends, rounded up to February 28, 2007
and to each February 28 thereafter (i.e., if such redemption occurs, dividends will be accrued and
payable through the next February 28 despite redemption prior to that date). In addition, under
certain circumstances, we have the right to redeem the Series J cumulative convertible preferred
stock if our common shares trade at $2.50 or higher for a period of 10 consecutive trading days.
If permitted under applicable law, we intend to redeem our Series J cumulative convertible
preferred stock, including payment of dividends accrued thereon, with the proceeds of our proposed
secondary offering assuming the offering is completed as contemplated and we raise the level of
proceeds anticipated.
For each share of Series J cumulative convertible preferred stock purchased, investors
received warrants to purchase 80 shares of common stock at an exercise price of $1.25 per share,
subject to adjustment, for a term of five years from the date of issuance. The warrants include a
cashless exercise provision. No redemption rights for the warrants are provided to either Viragen
or the investors.
Resale of the shares issuable upon conversion of the Series J cumulative convertible preferred
stock and exercise of the related warrants are registered under our Form S-3 registration statement
(File No. 333-133397) filed with the Securities and Exchange Commission, which was declared
effective on May 23, 2006. If we are unable to maintain the effectiveness of the registration
statement related to the Series J cumulative convertible preferred stock, we are obligated to pay
investors liquidated damages in cash equal to 1.5% of the stated value of the Series J cumulative
convertible preferred stock per month. Liquidated damages will not accrue nor be payable for times
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during which the shares covered by the related prospectus are transferable by the holder pursuant
to Rule 144(k) under the Securities Act of 1933, as amended.
The net proceeds from the offering of approximately $4.7 million are being used for working
capital purposes.
Dawson James Securities, Inc. served as placement agent for the transaction, and received a
placement agent cash fee of 8% of monies raised and a non-accountable expense fee of an additional
2% of monies raised. The placement agent also received warrants to purchase common stock in an
amount equal to 8% of the shares issuable upon conversion of the Series J cumulative convertible
preferred stock and exercise of the related warrants (an aggregate of 667,520 warrants). The
placement agent warrants are exercisable at $1.25 per warrant share for a 60-month period.
Viragen International Series C 24% Cumulative Preferred Stock
In July 2006, our majority-owned subsidiary, Viragen International, Inc., completed a private
placement of 18,000 units with each unit consisting of one share of Viragen International Series C
24% cumulative preferred stock and 200 shares of Viragen International common stock. Accordingly,
18,000 shares of its Series C cumulative preferred stock and 3,600,000 shares of its common stock
were issued. Viragen International received net proceeds of approximately $1.6 million in
connection with this transaction, after payment of a placement agent fee of $144,000 and a
non-accountable expense allowance of $36,000 to the placement agent. In addition, the placement
agent received an aggregate of 396,000 shares of Viragen International common stock, which
represented 22 shares of Viragen International common stock for each share of Series C cumulative
preferred stock sold. If permitted under applicable law, we intend to permit Viragen International
to redeem its Series C cumulative preferred stock, including payment of dividends accrued thereon,
with a portion of the proceeds of our proposed secondary offering, if the offering is completed as
contemplated and depending upon the proceeds available from the offering.
Each share of Series C cumulative preferred stock, par value $0.01 per share, has a stated
value of $100. The holders of outstanding Series C cumulative preferred stock are entitled to
receive preferential dividends in cash out of any funds of Viragen International before any
dividend or other distribution will be paid or declared and set apart for payment on any shares of
any Viragen International common stock, or other class of stock to be authorized, at the rate of
24% per annum on the stated value, payable in cash on the earlier of (a) annually in arrears
commencing July 14, 2007 and annually thereafter in cash or (b) upon redemption, as hereinafter
provided, following the closing of any subsequent financing (whether done in one or more financings
of debt or equity) by us or Viragen International with gross proceeds equal to or greater than $5
million. To the extent not prohibited by law, dividends must be paid to the holders not later than
five business days after the end of each period for which dividends are payable.
Each holder of the Series C cumulative preferred stock may require Viragen International to
redeem all or a portion of such holder’s Series C cumulative preferred stock at its stated value,
plus any accrued and unpaid dividends, rounded up to July 14, 2007 and to each July 14 thereafter
(i.e., if such redemption occurs, dividends will be accrued and payable through the next July 14
despite redemption prior to that date), upon the closing of any subsequent financing by us or
Viragen International with gross proceeds equal to or greater than $5 million. At the time of any
such financing by us or Viragen International, Viragen International has the right to redeem all,
but not less than all, of the Series C cumulative preferred stock at its stated value, plus any
accrued and unpaid dividends, rounded up to July 14, 2007 and to each July 14 thereafter (i.e. if
such redemption occurs, dividends will be accrued and payable through the next July 14 despite
redemption prior to that date).
Viragen International is obligated to file a registration statement for the resale of the
shares of common stock issued in the offering for the benefit of the holders of the common stock by
October 15, 2006, and to cause the registration statement to be declared effective within 90 days
of the filing date. Viragen International is obligated to pay investors liquidated damages in cash
equal to 1.5% of the stated value of the preferred shares for each 30 days or part thereof for any
failure to timely file or obtain an effective registration statement.
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Viragen International Series D 24% Cumulative Preferred Stock
In August 2006, Viragen International completed a private placement of $315,400 consisting of
3,154 shares of Series D 24% Cumulative Preferred Stock. Viragen International received net
proceeds of approximately $284,000 in connection with this transaction, after payment of a
placement agent fee of approximately $25,000 and a non-accountable expense allowance of
approximately $6,000 to the placement agent. If permitted under applicable law, we
intend to permit Viragen International to redeem its Series D cumulative preferred stock,
including payment of dividends accrued thereon, with a portion of the proceeds of our proposed
secondary offering, if the offering is completed as contemplated and depending upon the proceeds
available from the offering.
Each share of Series D cumulative preferred stock, par value $0.01 per share, has a stated
value of $100 per share. The holders of the Series D preferred stock are entitled, subject to the
terms of Viragen International’s Certificate to Set Forth Designations, Preferences and Rights with
respect to its Series C 24% Cumulative Preferred Stock, to receive a cumulative dividend of 24% per
annum on the stated value. The dividend is payable in cash at the earlier of (a) annually in
arrears commencing August 18, 2007 and annually thereafter on each August 18th or (b)
upon redemption following the closing of any subsequent financing by Viragen International or the
Company, with gross proceeds equal to or greater than $7 million. To the extent not prohibited by
law, dividends must be paid to the holders not later than five business days after the end of each
period for which dividends are payable.
Subject to the priority of the Series C cumulative preferred stock and restrictions contained
in the Certificate to Set Forth Designations, Preferences and Rights of Series C cumulative
preferred stock, the Series D cumulative preferred stock is redeemable by Viragen International or
the holder of the Series D cumulative preferred stock upon the earlier of eighteen months from
issuance or upon the closing of any subsequent financing in a single transaction or series of
related transactions resulting in the receipt of aggregate gross proceeds equal to or greater than
$7 million to Viragen International or the Company. The holder of the Series D cumulative
preferred stock may require Viragen International to redeem all or a portion of such holder’s
Series D cumulative preferred stock at its stated value, plus any accrued and unpaid dividends,
rounded up to August 18 of the year of redemption (i.e., if such redemption occurs, dividends will
be accrued and payable through the next August 18 despite redemption prior to that date). At the
time of any such financing by Viragen International or the Company, Viragen International has the
right to redeem all, but not less than all, of the Series D cumulative preferred stock at its
stated value, plus any accrued and unpaid dividends, rounded up to August 18 of the year of
redemption (i.e., if such redemption occurs, dividends will be accrued and payable through the next
August 18, despite redemption prior to that date).
Line of Credit
Our Swedish subsidiary maintained an overdraft facility, denominated in Swedish Krona, with a
bank in Sweden. The maximum borrowing capacity on this overdraft facility was approximately
$767,000 at June 30, 2005, but there was no outstanding balance at June 30, 2005. Borrowings
outstanding under this overdraft facility were at a floating rate of interest, which was
approximately 5.25% at June 30, 2005. The overdraft facility expired at the end of February 2006
and there was no outstanding balance at June 30, 2006. This overdraft facility was secured by
certain assets of ViraNative including inventories and accounts receivable.
Convertible Notes
On June 18, 2004, we consummated the sale of $20 million in convertible promissory notes and
common stock purchase warrants to eight accredited and institutional investors. We received
approximately $18.96 million, net of finder’s fees and legal expenses. The notes were due to
mature on March 31, 2006. On September 15, 2005, we entered into agreements with each of the eight
holders of our convertible promissory notes in the aggregate principal amount of $20 million to:
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extend the maturity date of the notes from March 31, 2006 to August 31, 2008; |
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reduce the conversion price from $1.516 to $1.05 per share. This conversion
price, with certain exceptions, is subject to reductions if we enter into
additional financing transactions for the sale of our common stock below the
public trading price and below the conversion price; |
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provide for mandatory conversion of the notes if the volume weighted average
price for our common stock exceeds $2.00 per share for 30 consecutive trading days; |
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amend the adjustment provisions of the notes and the warrants to provide for
“full ratchet” rather than “weighted average” adjustments in the event that we
issues securities in the future (other than an “exempt issuance” as defined in the
notes) for a price of less than the then current conversion price of the notes or
119% of the then current exercise price of the warrants, as the case may be. Full
ratchet adjustments reduce the conversion and exercise prices to the lowest price at
which we may issue securities in the future. Weighted average adjustments reduce the
conversion and exercise prices to a lower price, weighted based upon the average
price at which our shares have been sold; and |
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expand the definition of “exempt issuance” under the notes and related warrants
to exclude from the adjustment provisions of the notes and related warrants, our
issuance of shares (a) in a firm commitment public offering by a reputable
underwriter, (b) under equity compensation plans approved by a majority of our
independent directors or a majority of the non-employee members of a committee of
the board, (c) in connection with any future acquisition of the minority interest
in Viragen International, Inc. and (d) in connection with strategic transactions
not undertaken with the primary purpose of raising capital. |
Interest under the convertible promissory notes remains payable quarterly at an annual rate of
7%. Quarterly interest payments are payable in cash or, at our option, in shares of our common
stock based upon the average market price of our common stock during the 20 consecutive trading
days prior to and including the interest payment date, subject to certain conditions.
These notes may be prepaid at 110% of their face amount, plus the issuance to note holders of
additional warrants to purchase the number of shares of our common stock into which the notes would
otherwise have been convertible, at an exercise price equal to the prevailing conversion price of
the notes. If issued on prepayment, the warrants may be exercised for the period that would have
been the remaining life of the notes had they not been prepaid. We also have the right to require
note holders to convert their notes, subject to certain limitations; if the volume weighted average
price of our common stock exceeds $2.00 per share for 30 consecutive trading days.
Our convertible notes are subject to acceleration in the event of our default under the notes,
which events of default include, among others:
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our failure to pay the principal on the notes when due or any installment of
interest on the notes when due, and such failure continues for a period of five
business days after the due date; or |
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our failure to issue shares of our common stock to a note holder upon exercise
of the holder’s conversion or purchase rights within two trading days after the due
date therefore. |
If any event of default occurs under the notes, at the option of the note holder, we are
required to pay to the holder an amount equal to 110% of the sum of the outstanding principal
amount of the notes, plus accrued and unpaid interest on the principal amount to the date of
payment, plus accrued and unpaid default interest, if any.
As of June 30, 2006, $12.05 million of the principal amount of these convertible notes
remained outstanding. Interest on these notes for the fiscal year ended June 30, 2006 at 7% totaled
approximately $1.07 million. The quarterly interest due July 1, 2006 of approximately $211,000 was
satisfied through the issuance of 532,515 shares of our common stock valued at $0.40 per share.
The quarterly interest due April 1, 2006 of approximately $232,000 was satisfied through the
issuance of 387,403 shares of our common stock valued at $0.60 per share. The quarterly interest
due January 1, 2006 of approximately $284,000 was satisfied through the issuance of 576,857 shares
of our common stock valued at $0.49 per share. The quarterly interest due October 1, 2005 of
approximately $345,000 was satisfied through the payment of approximately $258,000 in cash and the
issuance of 142,322 shares of our common stock valued at $0.61 per share.
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Convertible Debentures
On September 15, 2005, we entered into a securities purchase agreement under which we sold our
convertible, amortizing debentures in the aggregate principal amount of $2.0 million to four
returning institutional investors. Under the terms of the agreement, we received approximately $1.2
million, net of original issue discounts of $570,000, a $200,000 finder’s fee and legal and
accounting expenses. This agreement also provided for the issuance to the purchasers of an
aggregate of 952,381 three-year common stock purchase warrants exercisable at a price of $1.25 per
share.
The debentures are convertible at a conversion price of $1.05 per share, subject to
adjustment, including in the event that we subsequently issue securities at less than the
conversion price then in effect. The debentures provide for amortization in 32 equal monthly
installments of principal, commencing on January 1, 2006. Monthly amortization payments may be
made, at our option, in cash, accompanied by a 10% premium, or in shares of its common stock at a
5% discount to market price (computed by reference to the volume weighted average price of our
common stock during the five trading day period immediately preceding the amortization due date).
We have the right to require the debenture holders to convert their debentures in the event that
the volume weighted average price of our common stock exceeds $2.00 per share for 30 consecutive
trading days, the resale of the shares issuable upon conversion of the debentures are covered by an
effective registration statement, and certain other conditions are met.
In lieu of interest, the debentures provided for an original issue discount equal to $570,000,
the equivalent of 9.5% interest over the three year life of the debentures.
During the fiscal year ended June 30, 2006, we made cash payments aggregating $481,000 to the
holders of these convertible debentures, which represented seven monthly installments, including
the additional 10% premium for principal payments made in cash.
Our debentures are also subject to acceleration in the event of our default under the
debenture agreements, which events of default include, among others:
| |
• |
|
any default in our payment of the principal amount of the debentures or
liquidated damages in respect of the debentures, when due and payable; or |
| |
| |
• |
|
our common stock is not eligible for quotation on or quoted for trading on a
trading market and shall not again be eligible for and quoted or listed for trading
thereon within five trading days. |
If any event of default occurs under the debentures, the full principal amount of the
debentures, together with other amounts owing on the debentures, to the date of acceleration, shall
become at the debenture holder’s election, immediately due and payable in cash. Commencing five
days after the occurrence of any event of default that results in the acceleration of the
debentures, the interest rate on the debentures shall accrue at the rate of 18% per annum, or such
lower maximum amount of interest permitted to be charged under applicable law.
Follow-On Registered Offering of Units
We have filed a registration statement relating to a proposed underwritten offering of up to
67 million units consisting of one share of common stock and one common stock purchase warrant (not
including up to an additional 10.05 million units that may be issued by us upon exercise of the
underwriters’ over-allotment option). If this offering is completed, we intend to use the net
proceeds we receive to redeem our Series J cumulative convertible preferred stock and make payment
of dividends accrued thereon and permit Viragen International to redeem its Series C cumulative
preferred stock and Series D cumulative preferred stock and make payment of dividends accrued
thereon, make monthly principal payments, plus a 10% premium, on our outstanding convertible
debentures, and quarterly interest payments on the outstanding balance or our convertible
promissory notes with the balance of the net proceeds to pay for research and development
activities, sales and marketing activities, administrative expenses and working capital needs. See
“Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities” and “Item 1A. Risk Factors — We may not have sufficient surplus to redeem our
Series J cumulative convertible preferred stock or for Viragen International to redeem its Series C
cumulative preferred stock or Series D cumulative preferred stock. Additionally, we may not have
sufficient surplus or net profits to be able to pay dividends on such preferred stock.” We believe
the net proceeds of this offering, if completed as contemplated and we raise the level of proceeds
anticipated, will be sufficient to fund our operations through our fiscal year ending June 30,
2007.
51
Payment of Dividends on and Redemption of Preferred Stock
The payment of dividends will also depend on our ability to declare dividends under Delaware
law. Dividends may only be paid out of “surplus,” as that term is defined in the Delaware General
Corporation Law, or, in the event there is no surplus, out of the net profits of the corporation
for the fiscal year in which the dividend is declared and/or the immediately preceding fiscal year.
Dividends may not be paid, however, out of the net profits of the corporation if the capital
represented by the issued and outstanding stock of all classes having a preference upon the
distribution of assets is impaired.
Our ability to redeem the Series J cumulative preferred stock, and the ability of Viragen
International to redeem its Series C cumulative preferred stock or Series D cumulative preferred
stock, will generally depend upon the amount of surplus that each corporation possesses.
Additionally, a corporation may redeem shares of its preferred stock by applying some or all of the
capital represented by the shares being redeemed to the redemption so long as the assets of the
corporation remaining after such reduction is sufficient to pay any debts of the corporation for
which payment has not otherwise been provided.
Contractual Obligations
Our significant contractual obligations for the next five years and thereafter as of June 30,
2006 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Payments due by period |
| |
|
|
|
|
|
Less Than |
|
1-3 |
|
3-5 |
|
More Than |
| Contractual obligations |
|
Total |
|
1 Year |
|
Years |
|
Years |
|
5 Years |
Convertible notes, including interest (1) |
|
$ |
13,878,000 |
|
|
$ |
844,000 |
|
|
$ |
13,034,000 |
|
|
$ |
— |
|
|
$ |
— |
|
Convertible debentures (2) |
|
|
1,719,000 |
|
|
|
825,000 |
|
|
|
894,000 |
|
|
|
— |
|
|
|
— |
|
Long-term debt (3) |
|
|
698,000 |
|
|
|
69,000 |
|
|
|
98,000 |
|
|
|
71,000 |
|
|
|
460,000 |
|
Dividends on Series J Cumulative
Convertible Preferred Stock (4) |
|
|
1,252,000 |
|
|
|
1,252,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Operating leases (5) |
|
|
3,538,000 |
|
|
|
1,115,000 |
|
|
|
1,456,000 |
|
|
|
858,000 |
|
|
|
109,000 |
|
Research and development agreements (6) |
|
|
905,000 |
|
|
|
863,000 |
|
|
|
42,000 |
|
|
|
— |
|
|
|
— |
|
Officers and key employee agreements (7) |
|
|
670,000 |
|
|
|
670,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Insurance financing (8) |
|
|
225,000 |
|
|
|
225,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
License fees (9) |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
23,135,000 |
|
|
$ |
6,113,000 |
|
|
$ |
15,524,000 |
|
|
$ |
929,000 |
|
|
$ |
569,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Consists of outstanding principal balance on the June 2004 convertible notes. These notes
mature on August 31, 2008 and accrue interest at 7% payable quarterly. |
| |
| (2) |
|
Consists of outstanding principal balance on the September 2005 convertible debentures.
These debentures provide for 32 monthly amortization payments of $62,500 that commenced
January 1, 2006, plus a 10% premium if the payments are made in cash instead of with shares of
our common stock. |
| |
| (3) |
|
Long-term debt consists of a mortgage loan with a Swedish bank and equipment financing
agreements in Scotland. |
| |
| (4) |
|
Includes dividends payable on Series J cumulative convertible preferred stock. The
calculation of dividends payable assumes the Series J cumulative convertible preferred stock
will be redeemed within one year of issuance. The redemption of the Series J cumulative
convertible preferred is not reflected in the table. |
| |
| (5) |
|
Operating leases consist of facility and equipment lease agreements. |
| |
| (6) |
|
Research and development agreements include agreements related to our avian transgenic and
monoclonal antibody projects. |
| |
| (7) |
|
Includes agreements entered into with officers and other key employees. |
| |
| (8) |
|
Short-term financing agreement for premium on corporate insurance policy. |
| |
| (9) |
|
License fees represent the annual license fee payable to Oxford BioMedica. |
52
American Stock Exchange Notice
We received a deficiency letter from the AMEX dated March 1, 2006, advising that, based upon
its review of our financial statements included in our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2005, we do not meet the AMEX’s combined minimum stockholders’ equity
and operating losses requirements. Specifically, we are not in compliance with Section 1003(a)(i)
of the AMEX Company Guide, because our stockholders’ equity is less than $2 million and we have
sustained losses from continuing operations and/or net losses in two of our three most recent
fiscal years. Previously, we received a deficiency letter from the AMEX dated September 20, 2005,
advising that, based upon its review of our financial statements included in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2005, we are not in compliance with AMEX’s continued
listing standards. Specifically, we are not in compliance with Section 1003(a)(ii) of the AMEX
Company Guide, because our stockholders’ equity is less than $4 million and we have sustained
losses from continuing operations and/or net losses in three out of our four most recent fiscal
years, and Section 1003(a)(iii) of the AMEX Company Guide, because our stockholders’ equity is less
than $6 million and we have sustained losses from continuing operations and/or net losses in our
five most recent fiscal years. We submitted a plan to AMEX which outlines our plans to regain
compliance with AMEX’s continued listing standards. On October 25, 2005, AMEX notified us that it
accepted our plan of compliance and granted us an extension of time until March 20, 2007 to regain
compliance with AMEX’s continued listing standards. We will be subject to periodic review by AMEX
during the extension period granted by AMEX. Failure to make progress consistent with the plan we
submitted to AMEX or to regain compliance with the continued listing standards by the end of the
extension period could result in our common stock and other securities, if approved for listing on
AMEX, being delisted from AMEX. We have provided quarterly updates to AMEX regarding our progress
with the plan.
In the event our common stock are delisted from AMEX, we would apply to have our common stock
listed on the over-the-counter bulletin board; however, certain institutional investors have
policies against investments in bulletin board companies and other investors may refrain from
purchasing our common stock if it is not listed on a national securities exchange. Also, we would
lose some of our existing analyst coverage and our efforts to obtain new analyst coverage would be
significantly impaired. Further, our ability to sell our equity securities and debt would be
significantly limited in numerous states because the exemption we utilize to sell these securities
without registration under applicable state securities laws requires that our common stock be
listed on AMEX. If we were required to register our equity securities or debt offerings under the
securities laws of various states, no assurance will be given as to whether we would be able to
obtain the necessary approvals from states’ securities administrators. To the extent our common
stock were to be delisted from trading on AMEX, the value of our equity securities and our ability
to sell equity securities and debt would be negatively impacted. The occurrence of these events
could have a material adverse effect on our ability to repay our outstanding debt and other
obligations.
In addition, our outstanding convertible debt contains a provision that in the event our
common stock is no longer traded on the AMEX, New York Stock Exchange or NASDAQ, the debt holders
have the right to request repayment of their outstanding principal balance with related accrued
interest. Given our current financial position, if our common stock was delisted from AMEX, and if
the convertible debt holders were to request repayment, we would be unable to repay these amounts
and would be in default under these agreements, which would significantly hamper our ability to
raise additional capital to fund our ongoing operations.
Change in Filer Status
Effective December 31, 2005, we computed our market capitalization in the manner prescribed by
rules of the Securities and Exchange Commission. Based upon that computation, our public float was
less than $50 million as of December 31, 2005. As a result, SEC rules provide that effective June
30, 2006, we no longer met the SEC’s definition of an “accelerated filer” and, based upon current
SEC rules, our compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the requirement
that we provide management’s report on the effectiveness of our internal controls over financial
reporting in our annual reports on Form 10-K will be suspended until the earlier of our regaining
accelerated filer status or our fiscal year ending June 30, 2008. As a result of this change in
filer status, we experienced cost savings over prior year with respect to Section 404 compliance
costs, including lower compliance related professional fees.
53
Results of Operations
Fiscal Year Ended June 30, 2006 Compared to Fiscal Year Ended June 30, 2005
Product Sales
For the fiscal year ended June 30, 2006, product sales totaled approximately $391,000 compared
to approximately $279,000 for the fiscal year ended June 30, 2005. This increase in product sales
was attributed to an increase in Multiferon® sales volume in Sweden and South Africa.
We have entered into several agreements for the distribution of Multiferon® in various
countries. To date, we have recognized minimal revenue from these agreements. The majority of these
agreements require that the distributor obtain the necessary regulatory approvals, which, in some
cases, have not yet been obtained. Regulatory approval is a mandatory step in the marketing of a
drug, but it is by no means the final challenge in marketing a bio-pharmaceutical product. In most
countries, product pricing and reimbursement authorization must also be approved before a drug
product can be marketed.
There are challenges associated with international marketing activities including language and
cultural barriers, variations in compliance procedures in certain countries and/or changes in
regulatory requirements where our products may be marketed, performance of our distribution
channels, government’s willingness to promote cheaper generic versions of competing products, the
general population’s inability to afford private care drug products, changes in economic conditions
and instability from country to country, changes in a country’s political condition, trade
protection measures, tariffs and other trade barriers, including import and export restrictions,
and tax issues. Our future revenues, costs of operations and profit results could be materially
adversely affected by any or all of these factors. It may take significant time to overcome these
challenges with no assurance that a particular market will ever be effectively penetrated.
Cost of Sales
Cost of sales totaled approximately $2.43 million for the fiscal year ended June 30, 2006
compared to approximately $2.61 million for the fiscal year ended June 30, 2005. This decrease in
cost of sales was primarily attributed to decreased excess/idle capacity as a result of cost
cutting measures while production levels were at a minimum. Excess/idle capacity represents fixed
production costs incurred at our Swedish manufacturing facilities, which were not absorbed as a
result of the production of inventory at less than normal operating levels. For the fiscal years
ended June 30, 2006 and 2005, excess/idle capacity costs were primarily due to minimal production
activities as a result of low sales demand. We will continue to incur excess/idle production costs
until we generate higher sales demand and resume production at normal operating levels that absorb
our fixed production costs.
Inventory Write-down, net
During the quarter ended December 31, 2005, we determined that a portion of our work in
process inventory would not be converted to finished product prior to expiration. Therefore, we
recorded a write-down for this inventory of approximately $104,000. During the quarter ended
September 30, 2005, a freezer at our facility in Sweden malfunctioned causing the temperature of
certain work in process inventory to rise above the approved levels for frozen product.
Accordingly, we recorded a net write-down of approximately $91,000 of work in process inventory.
This loss is net of an insurance recovery of approximately $486,000, which we collected in October
2005.
During our fiscal year ended June 30, 2005, we recorded write-downs of our finished product
inventory aggregating approximately $720,000. Upon evaluating the shelf-life of certain lots of our
Multiferon® inventory, near-term sales forecasts and consideration of alternative uses, a
write-down of the value of this inventory was deemed necessary.
54
The determination of excess or non-saleable inventories requires us to estimate the future
demand for our product and consider the shelf life of the inventory. If actual demand is less than
our estimated demand, we could be required to record additional inventory write-downs, which would
have an adverse impact on our results of operations.
Research and Development Costs
Research and development costs include scientific salaries and support fees, laboratory
supplies, consulting fees, contracted research and development, equipment rentals, repairs and
maintenance, utilities and research related travel. For the fiscal year ended June 30, 2006,
research and development costs totaled approximately $4.60 million compared to approximately $4.96
million for the fiscal year ended June 30, 2005. Research and development expenses for the fiscal
year ended June 30, 2005 reflect the reversal of a long-standing trade liability of approximately
$182,000. Excluding the impact of this reversal, period over period research and development
expenses were lower for the fiscal year ended June 30, 2006 due to a decrease in consulting fees
for regulatory matters, contracted research and development and legal fees related to intellectual
property.
We will continue incurring research and development costs, including projects associated with
Multiferon® as well as other projects to more fully develop potential commercial applications of
Multiferon®, as well as broaden our potential product lines in the areas of avian transgenics and
oncology. We anticipate research and development costs to increase over the next 12 months,
particularly in the area of regulatory-related consulting fees, toxicology studies and clinical
trial costs. Our ability to successfully conclude additional clinical trials, a prerequisite for
expanded commercialization of any product, is dependent upon our ability to generate licensing and
sales revenue and to raise significant additional funding necessary to conduct and complete these
trials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include administrative personnel salaries and
related expenses, office and equipment leases, utilities, repairs and maintenance, insurance,
legal, accounting, consulting, depreciation and amortization expenses. For the fiscal year ended
June 30, 2006, selling, general and administrative expenses totaled approximately $6.42 million
compared to approximately $8.64 million for the fiscal year ended June 30, 2005. The decrease of
approximately $2.22 million over the prior period was primarily attributed to a decrease in
personnel related expenses, professional services incurred in connection with our compliance with
Section 404 of the Sarbanes-Oxley Act of 2002, accounting fees, travel related expenses, consulting
and legal fees.
Our successful commercialization of Multiferon® will require additional marketing and
promotional activities and planned clinical trials, which are dependent upon our ability to raise
significant additional funding, or our ability to generate sufficient cash flow from operating
activities.
If we are unsuccessful in obtaining a licensing agreement related to the marketing of
Multiferon® that provides for third-party marketing support, we anticipate that selling related
expenses will increase over the next twelve months. This increase is expected due to the planned
expansion of our Multiferon® sales and marketing efforts. These increases will be incurred in sales
personnel related expenses, consulting fees, travel related expenses, promotional materials and
other marketing related costs.
Amortization of Intangible Assets
Amortization of intangible assets represents the amortization of our acquired developed
technology. This developed technology is being amortized over its estimated useful life of
approximately 14 years. For the fiscal year ended June 30, 2006, amortization of intangible assets
totaled approximately $157,000, compared to approximately $169,000 for the fiscal year ended June
30, 2005. The period over period decrease was due to the strengthening of the U.S. dollar against
the Swedish Krona.
55
Interest Expense
Interest expense for the fiscal year ended June 30, 2006 totaled approximately $4.71 million
compared to approximately $5.65 million for the fiscal year ended June 30, 2005. For the fiscal
year ended June 30, 2006, interest expense primarily represented interest expense on our June 2004
convertible notes and our September 15, 2005 convertible debentures. This interest expense was
primarily comprised of principal interest totaling $1.07 million, of which approximately $258,000
was paid in cash and approximately $814,000 was settled through the issuance of approximately 1.6
million shares of our common stock, and non-cash interest expense related to the amortization of
the discounts on these notes and debentures and related closing costs totaling approximately $3.54
million. For the fiscal year ended June 30, 2005, interest expense primarily represented interest
expense on our June 2004 convertible notes consisting of principal interest totaling $1.40 million,
of which $1.05 million was paid in cash and $350,000 was settled through the issuance of
approximately 519,000 shares of our common stock, and non-cash interest expense related to the
amortization of the discounts on these notes and related closing costs totaling approximately $4.16
million.
Also included in interest expense was interest incurred on the debt facilities maintained by
our Swedish and Scottish subsidiaries. These debt facilities had interest rates ranging from 5.75%
to 7.92% at June 30, 2006 and an interest rate of 5.25% at June 30, 2005. Interest expense on
these debt facilities for the fiscal year ended June 30, 2006 totaled approximately $42,000,
compared to approximately $85,000 for the fiscal year ended June 30, 2005. This decrease was due to
the repayment in September 2004 of one of our loans in Sweden and a reduction in the interest rate
and average outstanding balance on our line of credit in Sweden. Our line of credit in Sweden
expired at the end of February 2006 at which time outstanding borrowings were paid in full.
Other Expense (Income), net
The primary components of other expense (income), net, are interest earned on cash and cash
equivalents and short-term investments, grant income from government agencies in Scotland, sublease
income on certain office space in our facility in Scotland, transaction gains or losses on foreign
exchange, remeasurement gains or losses on assets and liabilities denominated in currencies other
than the functional currency, gains or losses on the disposal of property, plant and equipment, and
income generated from research and development support services provided by our Swedish subsidiary.
Other expense, net, for the fiscal year ended June 30, 2006, totaled approximately $146,000
compared to other income, net, of approximately $1.54 million for the fiscal year ended June 30,
2005. During the fourth quarter of the fiscal year ended June 30, 2006, and as a result of our
efforts to reduce our operating expenses by decreasing the amount of lease space utilized by our
operations, we recorded a write-off of approximately $930,000 related to certain leasehold
improvements and equipment located at our facility in Scotland. During the fiscal year ended June
30, 2006, we also earned less interest income compared to the fiscal year ended June 30, 2005 due
to lower average cash balances during the period.
Other income, net, for the fiscal year ended June 30, 2005 included a gain of approximately
$596,000 recorded in December 2004 due to the remeasurement of the intercompany payable from
Viragen (Scotland) Ltd. Our foreign exchange gains and losses arose from the remeasurement of
British Pound denominated accounts and short-term investments.
Income Tax Benefit
We are subject to tax in the United States, Sweden, and the United Kingdom. These
jurisdictions have different marginal tax rates. For the fiscal year ended June 30, 2006, our
income tax benefit totaled approximately $44,000, which was the same as for the fiscal year ended
June 30, 2005. Income tax benefit for these periods arose from the amortization expense on certain
intangible assets. Due to the treatment of the identifiable intangible assets under Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, our consolidated
balance sheet reflects a deferred income tax liability of approximately $413,000 as of June 30,
2006, all of which was related to our developed technology intangible asset acquired on September
28, 2001.
56
Based on our accumulated losses, a full valuation allowance is provided to reduce deferred
income tax assets to the amount that will more likely than not be realized. As of June 30, 2006, we
had net operating loss carry-forwards of approximately $91.2 million for U.S. federal income tax
purposes. The expiration dates on these net operating loss carry-forwards range from 2007 through
2026. Approximately $15.5 million of this amount will expire by the year 2012. These losses may be
used to offset taxable income, if any, during those periods. At June 30, 2006, Viragen (Scotland)
and ViraNative had net operating loss carry-forwards totaling approximately $27.3 million and $19.2
million, respectively. The net operating losses at Viragen (Scotland) and ViraNative do not expire.
Fiscal Year Ended June 30, 2005 Compared to Fiscal Year Ended June 30, 2004
Product Sales
For the fiscal year ended June 30, 2005, product sales totaled approximately $279,000 compared
to approximately $266,000 for the fiscal year ended June 30, 2004. This five percent increase in
product sales of approximately $13,000 was attributed to an increase in sales of Multiferon®
in Sweden and South Africa, which was partially offset by decreases in Indonesia and Mexico.
Of the $279,000 in total product sales in our fiscal year ended June 30, 2005, approximately 70%
occurred in the last two fiscal quarters.
Cost of Sales
Cost of sales, which includes excess/idle production costs, totaled approximately $2.61
million for the fiscal year ended June 30, 2005 compared to approximately $2.05 million for the
fiscal year ended June 30, 2004. The increases in cost of sales for the fiscal year ended June 30,
2005 was primarily attributed to increased excess/idle capacity. Excess/idle capacity represents
fixed production costs incurred at our Swedish manufacturing facilities, which were not absorbed as
a result of the production of inventory at less than normal operating levels. For the fiscal year
ended June 30, 2005, excess/idle capacity costs were due to minimal production activities as a
result of low sales demand. For the fiscal year ended June 30, 2004, the excess/idle capacity costs
were the result of the suspension of routine manufacturing as of March 31, 2003. This planned break
in routine manufacturing was dictated by the Swedish regulatory authorities and was necessary to
allow for certain steps of our production process to be segregated and transferred to our owned
facility located in Umeå, Sweden.
Inventory Write-down
During the fiscal year ended June 30, 2005, we recorded write-downs of approximately $720,000
of our finished product inventory. Upon evaluating the shelf-life of certain lots of our
Multiferon® inventory, near-term sales forecasts and consideration of alternative uses, write-downs
of the value of this inventory were deemed necessary.
Research and Development Costs
For the fiscal year ended June 30, 2005, research and development costs totaled approximately
$4.96 million compared to approximately $3.59 million for the fiscal year ended June 30, 2004. This
increase of approximately $1.37 million was attributed to an increase in costs incurred related to
our antibody projects totaling approximately $436,000, with the remainder due to an increase in
consulting fees, licensing fees and other expenses related to Multiferon®. These increases were
partially offset by the reversal of a long-standing trade liability of approximately $182,000
during the quarter ended December 31, 2004.
Selling, General and Administrative Expenses
For the fiscal year ended June 30, 2005, selling, general and administrative expenses totaled
approximately $8.64 million compared to approximately $7.37 million for the fiscal year ended June
30, 2004. This increase of approximately $1.27 million was primarily attributed to increases in
personnel-related costs of approximately $667,000, consulting fees of approximately $60,000, and
accounting fees of approximately $423,000, primarily associated with efforts necessary to comply
with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 at
our Florida headquarters.
57
Impairment of Goodwill
SFAS No. 142, Goodwill and Other Intangible Assets, requires that purchased goodwill and
certain indefinite-lived intangibles be tested for impairment on at least an annual basis. Due to a
lack of significant revenues from Multiferon® and a longer than anticipated timeframe to receive
regulatory approvals in certain markets, revenue, operating profits and cash flows for the
ViraNative reporting unit were lower than expected in our fiscal year ended June 30, 2005.
Primarily based on this trend, the revenue projections for the next several years were revised
downward. As a result of these revised projections, the present value of the future estimated cash
flows from the reporting unit were significantly less than those estimated in prior periods. The
fair value of the ViraNative reporting unit was estimated using a combination of the present value
of estimated future cash flows, quoted market prices and market multiples from comparable
businesses. After evaluating the results of these valuation methods a goodwill impairment charge
of approximately $6.94 million was recognized in April 2005 on the ViraNative reporting unit.
Amortization of Intangible Assets
Amortization of intangible assets represents the amortization of our acquired developed
technology. This developed technology is being amortized over its estimated useful life of
approximately 14 years. For the fiscal year ended June 30, 2005, amortization of intangible assets
totaled approximately $169,000 compared to approximately $158,000 during the fiscal year ended June
30, 2004. This increase in amortization expense of approximately $11,000 was due to foreign
exchange fluctuations.
Interest Expense
Interest expense for the fiscal year ended June 30, 2005 totaling approximately $5.65 million
primarily represented interest expense on our June 2004 convertible notes consisting of $1.40
million of principal interest, of which $1.05 million was paid in cash and $350,000 was settled
through the issuance of approximately 519,000 shares of our common stock, and non-cash interest
expense related to the amortization of the discounts on these notes and related closing costs
totaling approximately $4.16 million.
Interest expense for the fiscal year ended June 30, 2004 totaling approximately $7.39 million
primarily represented interest expense on our April and June 2003 convertible debentures of
approximately $6.74 million. Approximately $6.3 million of this amount represented non-cash
interest expense, which was comprised of the amortization of the discounts on the debentures, which
arose from detachable warrants and shares of common stock issued with the debentures, as well as
the debentures’ beneficial conversion feature.
Included in interest expense for the fiscal year ended June 30, 2004, was an adjustment to
record non-cash interest expense totaling approximately $1.42 million as a result of the
revaluation of warrants issued in connection with our April and June 2003 convertible debentures.
At the time of issuance, the warrants were valued using their expected lives, which was less than
their contractual lives. Ernst & Young LLP, our independent registered public accounting firm,
concurred with this approach. In January 2004, we were informed by Ernst & Young LLP that they had
reevaluated their interpretation of the accounting literature as it relates to the accounting for
common stock purchase warrants issued in connection with financing transactions. As a result of
this subsequent interpretation, we and Ernst & Young LLP determined that valuing the warrants
issued in connection with our April and June 2003 securities purchase agreements using their
expected lives was not correct. By using the expected lives of the warrants, less value was
attributed to them than if we had used the contractual lives. Thus, by using the contractual lives
on the warrants, an additional discount of approximately $1.42 million would have been recorded on
the convertible debentures issued under the April and June 2003 securities purchase agreements.
This additional discount associated with the convertible debentures resulted in an understatement
of our non-cash interest expense of approximately $436,000 in the quarter ended June 30, 2003 and
$477,000 in the quarter ended September 30, 2003. After consideration of all of the facts and
circumstances, we recognized the full amount of the prior period non-cash interest expense in the
quarter ended December 31, 2003, as management believed it was not material to any period affected.
Also, we recorded additional non-cash interest expense of approximately $509,000 in the quarter
ended December 31,
2003 relating to this matter.
58
Also included in interest expense is interest incurred on the debt facilities maintained by
our Swedish subsidiary. These debt facilities had an interest rate of approximately 5.25% at June
30, 2005 and interest rates ranging from 5.25% to 9.30% at June 30, 2004. Interest expense on these
debt facilities for the fiscal years ended June 30, 2005 and 2004 totaled approximately $85,000 and
$165,000, respectively.
Other Income, net
The primary components of other income, net are interest earned on cash and cash equivalents
and short-term investments, grant income from government agencies in Scotland, sublease income on
certain office space in our facility in Scotland, transaction gains or losses on foreign exchange,
remeasurement gains or losses on assets and liabilities denominated in currencies other than the
functional currency, gains or losses on the disposal of property, plant and equipment, and income
generated from research and development support services provided by our Swedish subsidiary.
Other income, net for the fiscal year ended June 30, 2005, totaled approximately $1.54 million
compared to approximately $632,000 for the fiscal year ended June 30, 2004. This increase of
approximately $906,000 was primarily attributed to an increase in interest earned on cash and cash
equivalents and short-term investments and remeasurement gains on foreign exchange. Interest
earned on cash and cash equivalents and short-term investments totaled approximately $441,000 for
our fiscal year ended June 30, 2005 compared to approximately $115,000 for our fiscal year ended
June 30, 2004. Remeasurement gains on foreign exchange totaled approximately $570,000 for our
fiscal year ended June 30, 2005 compared to a loss of approximately $32,000 for our fiscal year
ended June 30, 2004. These foreign exchange gains and losses arose from the remeasurement of
British Pound denominated bank accounts and short-term investments to U.S. dollars as well as the
remeasurement of a U.S. dollar denominated intercompany liability. During our fiscal year ended
June 30, 2005, we recorded a gain of approximately $596,000 on the remeasurement of a liability to
Viragen by Viragen (Scotland), which was denominated in U.S. dollars. In prior periods, this
liability had been translated at historical exchange rates since this liability was determined to
be long-term in nature. This determination was based on the fact that Viragen (Scotland) did not
have the ability or intent to repay the liability to Viragen. In recent periods, Viragen (Scotland)
has been gradually settling the liability by charging Viragen for services performed on our behalf.
Management anticipates the liability will be settled through these charges in the near term.
Therefore, it was determined that the account should no longer be considered long-term and thus
translation at current exchange rates is appropriate. Since the liability was denominated in U.S.
dollars and the Pound Sterling has been strengthening against the U.S. dollar over the last few
years, the remeasurement of the liability resulted in a gain. Had the determination been made when
Viragen (Scotland) began settling the liability with charges to Viragen in prior periods and the
liability been remeasured at then current exchange rates, the impact on the statements of
operations would not have been material and there would have been no effect on stockholders’ equity
as such currency gains were reclassifications from accumulated other comprehensive income.
Income Tax Benefit
We are subject to tax in the United States, Sweden, and the United Kingdom. These
jurisdictions have different marginal tax rates. For the fiscal years ended June 30, 2005 and 2004,
income tax benefit totaled approximately $44,000 and $44,000, respectively. Income tax benefits for
these periods arose from the amortization expense on certain intangible assets. Due to the
treatment of the identifiable intangible assets under SFAS No. 109, Accounting for Income Taxes,
our consolidated balance sheet reflects a deferred income tax liability of approximately $457,000
as of June 30, 2005, all of which was related to our developed technology intangible asset acquired
on September 28, 2001.
Based on our accumulated losses, a full valuation allowance is provided to reduce deferred
income tax assets to the amount that will more likely than not be realized. As of June 30, 2005, we
had net operating loss carry-forwards of approximately $85.1 million for U.S. federal income tax
purposes. The expiration dates on these net operating loss carry-forwards range from 2005 through
2025. At June 30, 2005, Viragen (Scotland) and ViraNative had net operating loss carry-forwards
totaling approximately $25.8 million and $13.8 million, respectively. The net operating losses at
Viragen (Scotland) and ViraNative do not expire.
59
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon
our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements 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 periods. On an on-going basis, we evaluate our estimates, including those related to
inventories, depreciation, amortization, asset valuation allowances and contingencies. We base our
estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. We
believe that the following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our financial statements.
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Inventories. Inventories consist of raw materials and supplies, work in process and
finished product. Finished product consists of purified human alpha interferon that is
available for sale. Costs of raw materials and supplies are determined on a first-in,
first-out basis. Costs of work in process and finished product, consisting of raw
materials, labor and overhead are recorded at a standard cost (which approximates actual
cost). Excess/idle capacity costs are expensed in the period in which they are incurred
and are recorded in cost of sales. Our inventories are stated at the lower of cost or
market (estimated net realizable value). If the cost of our inventories exceeds their
expected market value, provisions are recorded currently for the difference between the
cost and the market value. These provisions are determined based on estimates. The
valuation of our inventories also requires us to estimate excess inventories and
inventories that are not saleable. The determination of excess or non-saleable inventories
requires us to estimate the future demand for our product and consider the shelf life of
the inventory. If actual demand is less than our estimated demand, we could be required to
record inventory write-downs, which would have an adverse impact on our results of
operations. |
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Long-lived assets. In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we review our long-lived assets, including intangible
assets, for impairment whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be fully recoverable. The assessment of possible
impairment is based on our ability to recover the carrying value of our asset based on our
estimate of its undiscounted future cash flows. If these estimated future cash flows are
less than the carrying value of the asset, an impairment charge is recognized for the
difference between the asset’s estimated fair value and its carrying value. As of the date
of these financial statements, we are not aware of any items or events that would cause us
to adjust the recorded value of our long-lived assets, including intangible assets, for
impairment. |
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Goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill is not amortized. Goodwill is reviewed for impairment on an annual basis or sooner
if indicators of impairment arise. Management has selected April 1st as the
date of our annual impairment review. All of our goodwill arose from the acquisition of
ViraNative in September 2001 and the subsequent achievement of certain milestones defined
in the acquisition agreement. We periodically evaluate that acquired business for
potential impairment indicators. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions, and the operational performance
of the acquired business. During the fourth quarter of our fiscal year ended June 30, 2006,
we completed our annual impairment review of our goodwill. The impairment review indicated
that our goodwill was not impaired. During the fourth quarter of our fiscal year ended June
30, 2005, we completed our annual impairment review of our goodwill. That impairment review
indicated that our goodwill was impaired and, as a result, an impairment charge of
approximately $6.9 million was recorded during the fourth quarter of our fiscal year ended
June 30, 2005. Changes in the estimates used to conduct our impairment review, including
revenue projections or market values, could cause our analysis to indicate that our
goodwill is further impaired in subsequent periods and result in a write-off of a portion
or all of our goodwill. |
60
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Stock-based compensation. Effective July 1, 2005, we adopted the fair value recognition
provisions of SFAS No. 123(R), Share-Based Payment, using the
modified-prospective-transition method. Under that transition method, stock-based
compensation cost recognized subsequent to July 1, 2005 includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as of July 1, 2005, based on
the grant date fair value estimated in accordance with the original provisions of SFAS No.
123, and (b) compensation cost for all stock-based compensation granted subsequent to July
1, 2005, based on the grant-date fair value estimated in accordance with the provisions of
SFAS No. 123(R). The amount of stock-based compensation expense included in our
consolidated statement of operations for our fiscal year ended June 30, 2006 for stock
options granted to employees and directors prior to July 1, 2005, which were not fully
vested as of July 1, 2005, was immaterial to our results of operation. |
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In April 2006, our Board of Directors adopted, subject to approval by our stockholders, the
Viragen 2006 Equity Compensation Plan, reserving an aggregate of 4 million shares of our
common stock. The Board of Directors also issued options to purchase an aggregate of
843,000 shares to directors, officers and certain employees. The exercise price of each
option is $0.57 per share, and each option vests half upon the date of issuance and the
remaining half upon the first anniversary of the date of issuance. As no shares issuable
upon exercise of the options can be issued until the 2006 Equity Compensation Plan is
approved by our stockholders, no measurement date can be established under SFAS No. 123(R).
Accordingly, no stock-based compensation expense has been recognized in our consolidated
statement of operations for our fiscal year ended June 30, 2006 in connection with this
issuance of options. Following, and subject to stockholder approval of the Viragen 2006
Equity Compensation Plan, we will recognize the fair value of the options granted under the
provisions of SFAS No. 123(R). The issuance of stock-based compensation requires the use of
estimates when determining the fair value of the stock-based compensation for purposes of
expense recognition in our consolidated statement of operations. We intend to use the
Black-Scholes valuation model and estimates consistent with those we have historically used
for pro forma disclosures of stock-based compensation. |
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We account for our stock-based compensation arrangements with non-employees in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation and related guidance, including
Emerging Issues Task Force (EITF) No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. Accordingly, we recognize as expense the estimated fair value of such instruments
as calculated using the Black-Scholes valuation model. The estimated fair value is
re-determined each quarter using the methodologies allowable by SFAS No. 123 and EITF No.
96-18 and the expense is amortized over the vesting period of each option or the recipient’s
contractual arrangement, if shorter. |
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Convertible debt and equity issued with stock purchase warrants. Viragen accounts for
the issuance of and modifications to its convertible debt issued with stock purchase
warrants in accordance with APB No. 14, Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants, EITF No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, EITF No.
00-27, Application of Issue No. 98-5 to Certain Convertible Instruments and SFAS No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings. The determination of
the relative fair value of the components of our convertible debentures issued with common
stock purchase warrants requires the use of estimates. Changes in those estimates would
result in different relative values being attributed to the components, which could result
in more or less discount on the principal amount of the debt and more or less related
interest expense. In addition, the accounting guidance for these transactions is highly
complex and evolving. Future interpretations of the existing guidance or newly issued
guidance in this area could require us to change our accounting for these transactions. |
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Revenue recognition. We recognize revenue from sales of our human alpha interferon
product when title and risk of loss has been transferred, which is generally upon shipment.
Moreover, recognition requires persuasive evidence that an arrangement exists, the price is
fixed and determinable, and collectibility is reasonably assured. |
61
Off Balance Sheet Arrangements
Under SEC regulations, we are required to disclose any off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors. An off-balance sheet
arrangement means a transaction, agreement or contractual arrangement to which any entity that is
not consolidated with us is a party, under which we have:
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Any obligation under certain guarantee contracts; |
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Any retained or contingent interest in assets transferred to an unconsolidated entity or
similar arrangement that serves as credit, liquidity or market risk support to that entity
for such assets; |
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Any obligation under a contract that would be accounted for as a derivative instrument,
except that it is both indexed to our stock and classified in stockholders’ (deficit)
equity in our statement of financial position; and |
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Any obligation arising out of a material variable interest held by us in an
unconsolidated entity that provides financing, liquidity, market risk or credit risk
support to us, or engages in leasing, hedging or research and development services with us. |
As of the date of this annual report, we do not have any off-balance sheet arrangements that
we are required to disclose pursuant to these regulations. In the ordinary course of business, we
enter into operating lease commitments, purchase commitments and other contractual obligations.
These transactions are recognized in our consolidated financial statements in accordance with
accounting principles generally accepted in the United States.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — a
replacement for APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on
accounting for and reporting of accounting changes and error corrections. It requires prior period
financial statements to be restated for voluntary changes in accounting principles. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We have no plans to adopt a voluntary change in accounting principle and believe
that the adoption of SFAS No. 154 will not have an effect on our consolidated financial statements.
In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF)
on EITF Issue No. 05-02 The Meaning of “Conventional Convertible Debt Instrument” in Issue No.
00-19 (EITF No. 05-02). The abstract clarified the meaning of “conventional convertible debt
instruments” and confirmed that instruments which meet its definition should continue to receive an
exception to certain provisions of EITF Issue No. 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (EITF No. 00-19). The
guidance should be applied to new instruments entered into and instruments modified in periods
beginning after June 29, 2005. The adoption of EITF No. 05-02 has not had a material impact on our
consolidated financial statements.
In September 2005, the FASB reported that the EITF postponed further deliberations on Issue
No. 05-04 The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject
to Issue No. 00-19 (EITF No. 05-04) pending the FASB reaching a conclusion as to whether a
registration rights agreement meets the definition of a derivative instrument. The legal agreements
related to our convertible notes and debentures include a freestanding registration rights
agreement. Once the FASB ratifies the then-completed consensus of the EITF on EITF No. 05-04, we
will assess the impact on our consolidated financial statements of adopting the standard and, if an
impact exists, follow the transition guidance for implementation.
62
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments—an amendment of FASB Statements No. 133 and 140, which resolves issues addressed in
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, Implementation Issue
No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS
No. 155, among other things, permits the fair value remeasurement of any hybrid financial
instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies
which interest-only strips and principal-only strips are not subject to the requirements of SFAS
No. 133; and establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid financial instruments
that contain an embedded derivative requiring bifurcation. SFAS No. 155 is effective for all
financial instruments acquired or issued in a fiscal year beginning after September 15, 2006. We
will be required to adopt SFAS No. 155 for our fiscal year beginning July 1, 2007. The impact the
adoption of SFAS No. 155 will have on our financial position and results of operations is not known
at this time.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48), Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, which clarifies the
accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting
for Income Taxes. FIN No. 48 clarifies the application of SFAS No. 109 by defining criteria that an
individual tax position must meet for any part of the benefit of that position to be recognized in
the financial statements. Additionally, FIN No. 48 provides guidance on the measurement,
derecognition, classification and disclosure of tax positions, along with accounting for the
related interest and penalties. The provisions of FIN No. 48 are effective for fiscal years
beginning after December 15, 2006, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We will be required to adopt FIN No. 48 for
our fiscal year beginning July 1, 2007. We believe the adoption of FIN No. 48 will not have a
material effect on our consolidated financial statements.
63
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk generally represents the risk of loss that may result from the potential change in
value of a financial instrument as a result of fluctuations in interest rates and market prices.
Our market risk exposure relates to cash and cash equivalents and short-term investments. We
invest excess cash in highly liquid instruments with maturities of less than twelve months as of
the date of purchase. These investments are not held for trading or other speculative purposes.
Changes in interest rates affect the investment income we earn on our investments and, therefore,
impact our cash flows and results of operations.
We have not traded or otherwise transacted in derivatives nor do we expect to do so in the
future. We have established policies and internal processes related to the management of market
risks which we use in the normal course of our business operations.
Interest Rate Risk
The fair value of long-term debt is subject to interest rate risk. While changes in market
interest rates may affect the fair value of our fixed-rate long-term debt, we believe a change in
interest rates would not have a material impact on our financial condition, future results of
operations or cash flows.
Foreign Currency Exchange Risk
We conduct operations in several different countries. The balance sheet accounts of our
operations in Scotland and Sweden, including intercompany accounts that are considered long-term in
nature, are translated to U.S. dollars for financial reporting purposes and resulting adjustments
are made to stockholders’ equity. The value of the respective local currency may strengthen or
weaken against the U.S. dollar, which would impact the value of stockholders’ investment in our
common stock. Fluctuations in the value of the British Pound and Swedish Krona against the U.S.
dollar have occurred during our history, which have resulted in unrealized foreign currency
translation gains and losses, which are included in accumulated other comprehensive income and
shown in the equity section of our consolidated balance sheet. Intercompany trading accounts,
which are short-term in nature, are remeasured at current exchange rates as of the balance sheet
dates and any gains or losses are recorded in other income.
While most of the transactions of our U.S. and foreign operations are denominated in the
respective local currency, some transactions are denominated in other currencies. Transactions
denominated in other currencies are accounted for in the respective local currency at the time of
the transaction. Upon settlement of this type of transaction, any foreign currency gain or loss
results in an adjustment to income.
Our results of operations may be impacted by the fluctuating exchange rates of foreign
currencies, especially the British Pound and Swedish Krona, in relation to the U.S. dollar. Most of
the revenue and expense items of our foreign subsidiaries are denominated in the respective local
currencies. The strengthening of these local currencies against the U.S. dollar will result in
greater revenue, expenses, assets and liabilities of our foreign subsidiaries, when translated into
U.S. dollars. As of June 30, 2006, the British Pound and Swedish Krona strengthened against the
U.S. dollar by approximately 0.6% and 6.5%, respectively, compared to June 30, 2005.
We do not currently engage in hedging activities with respect to our foreign currency
exposure. However, we continually monitor our exposure to currency fluctuations. We have not
incurred significant realized losses on exchange transactions. If realized losses on foreign
transactions were to become significant, we would evaluate appropriate strategies, including the
possible use of foreign exchange contracts, to reduce such losses.
We were not adversely impacted by the European Union’s adoption of the “Euro” currency. Our
foreign operations to date have been located in Scotland and Sweden, which have not participated in
the adoption of the Euro as of June 30, 2006.
64
Item 8. Financial Statements and Supplementary Data
Our Financial Statements begin on page F-1 of this Annual Report on Form 10-K and are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Disclosure Controls Evaluation and Related CEO and CFO Certifications
We conducted an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934, as amended, (the “Exchange Act”)) as of the end of the period covered by this Annual
Report on Form 10-K. The controls evaluation was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO).
Attached as exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are certifications of
the CEO and the CFO, which are required in accord with Rule 13a-14 of the Exchange Act. This Item
9A, Controls and Procedures, includes the information concerning the controls evaluation referred
to in the certifications and it should be read in conjunction with the certifications for a more
complete understanding of the topics presented.
Definition of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to reasonably assure that information required
to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form
10-K, is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also
designed to reasonably assure that such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures include components of our internal control over
financial reporting, which consist of control processes designed to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of financial statements in
accordance with accounting principles generally accepted in the United States.
Limitations on the Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls and
procedures or our internal control over financial reporting will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected, thus misstatements due to error or fraud may
occur and not be detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of control.
65
Conclusions
Based upon the controls evaluation, our CEO and CFO have concluded that, subject to the
limitations noted above, as of the end of the period covered by this Annual Report on Form 10-K,
our disclosure controls and procedures were effective in reaching a reasonable level of assurance
that (a) information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and (b) information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
There has been no change in our internal control over financial reporting (as defined in Rules
13A-15(f) of the Exchange Act) that occurred during the fourth quarter of our fiscal year ended
June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
None.
66
PART III
Item 10. Directors and Executive Officers of the Registrant
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Served as |
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Officer and/or |
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| Name |
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Age |
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Position
with the Company |
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Director Since |
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Class |
Charles A. Rice |
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55 |
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Chief Executive Officer |
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2004 |
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President |
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2004 |
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Director |
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2004 |
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A |
Dennis W. Healey |
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58 |
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Chief Financial Officer |
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1980 |
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Treasurer |
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1980 |
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Executive Vice President |
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1993 |
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Secretary |
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1994 |
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Carl N. Singer |
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90 |
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Chairman of the Board |
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1997 |
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C |
Randolph A. Pohlman |
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61 |
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Director |
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2003 |
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B |
Robert C. Salisbury |
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62 |
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Director |
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1998 |
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A |
Charles J. Simons |
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88 |
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Director |
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1998 |
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A |
Nancy A. Speck |
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51 |
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Director |
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2005 |
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B |
C. Richard Stafford |
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70 |
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Director |
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2003 |
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C |
Nicholas M. Burke |
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34 |
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Vice President |
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2004 |
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Controller |
|
2001 |
|
|
On February 28, 1997, we amended our Certificate of Incorporation and established a classified
board of directors commencing with the 1997 annual meeting of stockholders. Following that meeting,
we divided directors into three subclasses consisting of class A, class B and class C. The initial
term of the class A directors expired after the 1998 annual meeting of stockholders, the term of
the class B directors initially expired after the 1999 annual meeting of stockholders; and the term
of the class C directors initially expired after the 2000 annual meeting of stockholders.
Each director holds office for a three-year term expiring at the annual meeting of
stockholders held three years following the annual meeting at which he or she was elected. At each
annual meeting of stockholders, a slate of directors selected by the board of directors will stand
for election to serve as directors of the respective class whose term has expired. Terms of our
directors expire as follows:
| |
• |
|
class A — at our 2007 annual meeting of stockholders; |
| |
| |
• |
|
class B — at our 2008 annual meeting of stockholders; and |
| |
| |
• |
|
class C — at our 2006 annual meeting of stockholders. |
In March 2004, Charles A. Rice was appointed our president and chief executive officer and
director of our board. In March 2005, Mr. Rice was appointed president and chief executive officer
and director of Viragen International, Inc. From January 2003 to September 2003, Mr. Rice served
as group president of KV Pharmaceutical Company, a pharmaceutical company that develops,
manufactures and markets and acquires technology-distinguished branded and generic/non-branded
prescription pharmaceutical products, with responsibility for commercial activities. From
August 1992 to November 2002, Mr. Rice served as president and chief executive officer of Dey,
Inc., a division of Germany’s Merck KGaA, where he developed and implemented strategies to create a
rapidly growing and profitable business. Mr. Rice has a degree in Biology from Georgia College and
extensive business education and experience through training and coursework at a variety of
domestic and international universities, in addition to continuous participation in industry
organizations.
Dennis W. Healey is a certified public accountant. He has served as our chief financial
officer and treasurer since 1980. He was appointed our executive vice president in 1993 and
secretary in 1994. Mr. Healey is also executive vice president, treasurer, secretary and a director
of Viragen International, Inc.
67
Carl N. Singer was elected a director of our board in August 1997 and currently serves as
chairperson of our board of directors and chairperson of our executive committee. Since 1981, Mr.
Singer has served as chairperson of Fundamental Management Corporation, a Florida-based
institutional investment company. Mr. Singer has also served as a director, president and CEO of
Sealy, Inc., Scripto, Inc. and the BVD Company. Mr. Singer also serves as chairperson of the board
of Viragen International, Inc.
Randolph A. Pohlman, PhD., was appointed to our board of directors in December 2003. He
currently serves as a member of our executive and audit and finance committees. Since 1995, Dr.
Pohlman has served as the Dean of the H. Wayne Huizenga School of Business and Entrepreneurship at
Nova Southeastern University. Prior to his arrival at Nova Southeastern University, Dr. Pohlman
served as a senior executive at Koch Industries, the second-largest privately held company in the
United States from 1990 to 1995. Prior to his tenure at Koch Industries, Dr. Pohlman was associated
with Kansas State University, where he served for fourteen years in a variety of administrative and
faculty positions, including holding the L.L. McAninch Chair of Entrepreneurship and Dean of the
College of Business. Dr. Pohlman also served as a Visiting Research Scholar at the University of
California, Los Angeles in 1983, and was a member of the Executive Education Advisory Board of the
Wharton School of the University of Pennsylvania.
In March 2004, upon the appointment of Mr. Rice as president and chief executive officer,
Robert C. Salisbury resigned his positions as our president and chief executive officer, positions
he had held since January 2003. Mr. Salisbury has been a director of our board since December 1998
and serves as chairperson of our nominating and governance committee and as a member of our audit
and finance and compensation committees. From 1974 to 1995, Mr. Salisbury was employed by the
Upjohn Company serving in several financial related positions. These positions included manager of
cash management, internal control and corporate finance from 1975 to 1981. He also served as a vice
president from 1985 to 1990, senior vice president from 1991 to 1994, and executive vice president
for finance and chief financial officer from 1994 to 1995. Following the merger of Pharmacia and
Upjohn, Inc. in 1995, Mr. Salisbury served as executive vice president and chief financial officer
until 1998. Mr. Salisbury also serves as a director of Enzon Pharmaceuticals, Inc., a
biopharmaceutical company, and a director of Fundamental Management Corporation, a Florida-based
institutional investment company.
Charles J. Simons was elected a director of our board in July 1998. He currently serves as
chairperson of our audit and finance committee and as a member of our executive and nominating and
governance committees. Mr. Simons is an independent management and financial consultant. From 1940
to 1981, he was employed by Eastern Airlines, last serving as vice chairman, executive vice
president and as a director. Mr. Simons is the vice-chairman of the board of G.W. Plastics, Inc., a
plastic manufacturer. Mr. Simons is also a director of Diasa, Inc. and Renal CarePartners, Inc.
On February 7, 2005, our board of directors of Viragen appointed Professor Nancy A. Speck,
Ph.D. as a director. Dr. Speck also serves as a member of our nominating and governance committee.
Dr. Speck is a distinguished professor and researcher in the field of cancer at Dartmouth Medical
School and holds the James J. Carroll Chair in Oncology. Dr. Speck moved to Dartmouth Medical
School in 1989 as an Assistant Professor. She is currently a Professor of Biochemistry, the
Associate Director for Basic Science at the Norris Cotton Cancer Center at Dartmouth and holds the
prestigious James J. Carroll Chair in Oncology.
C. Richard Stafford was appointed to our board of directors in June 2003. He currently serves
as a member of our audit and finance committee and chairperson of our compensation committee. Since
2001, Mr. Stafford has served on the boards of directors of several companies. He currently serves
as a director of Derma Sciences, Inc., a manufacturer and supplier of wound and skin care products.
From 1977 to 2001, Mr. Stafford was vice president responsible for worldwide mergers and
acquisitions for Carter-Wallace, Inc., a former New York Stock Exchange listed international
pharmaceutical, diagnostics, and toiletries company. From 1974 to 1977, Mr. Stafford was president
of Caithness Corporation, an oil, gas and mineral exploration firm. From 1971 to 1974, he served
as a vice president of corporate finance at the global investment banker, Bear Stearns. Mr.
Stafford also served as director of corporate development of the Bristol-Myers Company from 1966 to
1971, and as an associate at Milbank, Tweed, Hadley & McCloy from 1960 to 1965. He is a cum laude
graduate of Harvard College and a graduate of Harvard Law School.
68
Nicholas M. Burke is a certified public accountant and joined us as our controller in October
2001. He was appointed vice president in March 2004. Prior to joining us, Mr. Burke served as
corporate controller of SmartDisk Corporation, a computer peripherals technology company, from
October 1999 to October 2001. From September 1994 until September 1999, Mr. Burke was a senior
member of the audit staff of Ernst & Young LLP, our independent registered public accounting firm,
concentrating his practice in the computer technology and biotechnology industries.
There is no family relationship between any of the officers and directors.
During the fiscal year ended June 30, 2006, our board of directors met on ten occasions.
We have not adopted a formal policy on board members’ attendance at our annual meetings of
stockholders, although all board members are encouraged to attend. Randolph A. Pohlman, Charles A.
Rice, Robert C. Salisbury and C. Richard Stafford attended our 2005 annual meeting of stockholders.
Committees of the Board of Directors
Our board of directors has established an executive committee, an audit and finance committee,
a compensation committee and a nominating and governance committee. All committees operate under a
written charter adopted by the board of directors. The following table identifies the members of
our board of directors who serve on each of those committees.
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|
| |
|
|
|
|
|
|
|
Nominating and |
| |
|
|
|
Audit and Finance |
|
Compensation |
|
Governance |
| Name |
|
Executive Committee |
|
Committee |
|
Committee |
|
Committee |
Carl N. Singer |
|
X* |
|
|
|
|
|
|
Randolph A. Pohlman |
|
X |
|
X |
|
|
|
|
Robert C. Salisbury |
|
|
|
X |
|
X |
|
X* |
Charles J. Simons |
|
X |
|
X* |
|
|
|
X |
Nancy A. Speck |
|
|
|
|
|
|
|
X |
C. Richard Stafford |
|
|
|
X |
|
X* |
|
|
Audit and Finance Committee
Our audit and finance committee was organized as a separately designated committee of our
board of directors in February 1998. Each member of our audit and finance committee is
“independent” within the meaning of Rule 10A-3 under the Securities Exchange Act of 1934 and
satisfies the independence standards of Section 121A of the Rules of the American Stock Exchange.
The role of our audit and finance committee is to assist our board of directors in monitoring
(a) the integrity of our financial statements, (b) our compliance with legal and regulatory
requirements, (c) the independent registered public accounting firm’s qualifications, independence,
and fees, (d) the development, implementation and performance of our internal control function and
(e) the performance of our independent registered public accounting firm. Our audit and finance
committee is also charged with selecting on an annual basis our independent registered public
accounting firm.
Audit Committee Financial Expert
Our board of directors has determined that our “audit committee financial expert” within the
meaning of Item 401(h) of Regulation S-K is Charles J. Simons. In general, an “audit committee
financial expert” is an individual member of the audit committee who (a) understands generally
accepted accounting principles and financial statements, (b) is able to assess the general
application of such principles in connection with accounting for estimates, accruals and reserves,
(c) has experience preparing, auditing, analyzing or evaluating financial statements comparable to
the breadth and complexity to the company’s financial statements, (d) understands internal control
over financial reporting and (e) understands audit committee functions.
69
An “audit committee financial expert” may qualify as such through: education and experience as
a principal financial officer, principal accounting officer, controller, public accountant, auditor
or person serving similar functions; experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor or person serving similar
functions; experience overseeing or assessing the performance of companies or public accountants
with respect to the preparation, auditing or evaluation of financial statements; or, other relevant
experience.
Code of Ethics
We have adopted a Code of Ethics for Senior Finance Personnel (“Code of Ethics”) that applies
to our chief executive officer, chief financial officer, controller, and persons performing similar
functions. We have also adopted a Business Ethics and Conflict of Interest Statement (“Business
Ethics and Conflict of Interest Statement”) that applies to directors, executive officers and
employees of Viragen and its subsidiaries. The Code of Ethics and Business Ethics and Conflict of
Interest Statement are available on our web site, free of charge, at www.viragen.com under the
“Corporate Governance” section. We will also provide a copy of this document, free of charge, upon
request. Any amendments to, or waivers of, the Code of Ethics will be disclosed on our website or
on Form 8-K promptly following the date of such amendment or waiver.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the information described in Item 405 of Regulation S-K, no
director, officer or beneficial owner of more than 10% of Viragen’s common stock failed to file on
a timely basis, reports required by Section 16(a) of the Exchange Act during the fiscal year ended
June 30, 2006.
70
Item 11. Executive Compensation
The following table includes information for the last three fiscal years concerning the
compensation of (a) Viragen’s chief executive officer during our fiscal year ended June 30, 2006
(“CEO”), regardless of compensation level; (b) Viragen’s four most highly compensated executive
officers other than the CEO who were serving as executive officers as of June 30, 2006, whose total
annual salary and bonus is $100,000 or more; and (c) up to two additional individuals for whom
disclosure would have been provided pursuant to paragraph (b), but for the fact that the individual
was not serving as an executive officer as of June 30, 2006.
Summary Compensation Table
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|
| |
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|
|
|
|
|
|
|
|
|
|
Long- Term |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards |
| |
|
|
|
|
|
Annual |
|
Securities |
| |
|
|
|
|
|
Compensation |
|
Underlying |
| |
|
Fiscal |
|
|
|
|
|
|
|
|
|
Options/SARs |
| Name and Principal Position |
|
Year |
|
Salary ($) |
|
Bonus ($) |
|
(#) |
Charles A. Rice |
|
|
2006 |
|
|
$ |
300,000 |
|
|
$ |
— |
|
|
|
150,000 |
|
CEO, President and Director |
|
|
2005 |
|
|
|
300,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
2004 |
|
|
|
78,750 |
|
|
|
— |
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis W. Healey |
|
|
2006 |
|
|
$ |
210,000 |
|
|
|
— |
|
|
|
100,000 |
|
Executive V.P., CFO, |
|
|
2005 |
|
|
|
205,000 |
|
|
|
— |
|
|
|
|
|
Secretary and Treasurer |
|
|
2004 |
|
|
|
200,000 |
|
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas M. Burke |
|
|
2006 |
|
|
$ |
145,000 |
|
|
|
— |
|
|
|
75,000 |
|
V.P. and Controller |
|
|
2005 |
|
|
|
145,000 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
2004 |
|
|
|
120,000 |
|
|
|
— |
|
|
|
20,000 |
|
Employment Agreements
Executive officers are appointed annually and, except to the extent governed by employment
contracts, serve at the discretion of the board of directors.
In March 2004, Charles A. Rice was appointed president and chief executive officer. Mr. Rice
entered into a three year employment agreement with Viragen. Following the initial three-year term,
the agreement is automatically extended for an additional year on each anniversary unless either
party provides at least ninety days notice of their intent not to extend. The agreement provides
for a base salary of $300,000 per year and an incentive bonus. The incentive bonus is based upon
performance and achievement of agreed standards, including achievement of targeted Multiferon®
sales levels, international Multiferon® marketing milestones, including licensing agreements, and
qualitative performance evaluations. The incentive bonus program is reevaluated by the board of
directors each calendar year. In calendar 2006, the board of directors recommended an annual
incentive bonus, which if targeted milestones are achieved, will not be less than $75,000. Mr. Rice
also was granted options to purchase 150,000 shares of our common stock, exercisable at $2.10 per
share for a five year period from their vest date. These options vest as follows:
| |
• |
|
50,000 upon the effective date of the employment agreement; |
| |
| |
• |
|
50,000 upon the first anniversary of the effective date; |
| |
| |
• |
|
25,000 when, and if, the volume weighted average price of our common stock trades at or
above $5.00 per share for thirty consecutive trading days; |
| |
| |
• |
|
25,000 when, and if, the volume weighted average price of our common stock trades at or
above $10.00 per share for thirty consecutive trading days; and |
| |
| |
• |
|
with regard to the 50,000 price based vesting, in their entirety upon the tenth
anniversary of the effective date. |
71
Mr. Healey serves as executive vice president, chief financial officer, secretary and
treasurer of Viragen. On March 1, 2001, Mr. Healey entered into a two year employment agreement.
Following the initial two year term, the agreement was and will continue to be automatically
extended for one additional year on each anniversary unless either party provides at least 90 days
notice of their intent not to renew. Under this agreement, Mr. Healey currently receives an annual
salary of $210,000. Mr. Healey is entitled to participate in all employee benefit programs
generally available to all employees. In the event Mr. Healey’s employment is terminated without
cause, he is entitled to receive the greater of two years compensation and benefits or compensation
and benefits through the remainder of the employment term under the agreement.
Mr. Healey’s employment agreement contains a provision that in the event Viragen were to
spin-off or split-off any present or future subsidiaries, he would be entitled to receive a certain
number of options in the spun-off company. The number of options he would receive would be based on
a formula reflecting his then current option position relative to the fully diluted common stock of
Viragen then outstanding. The pricing of the new options would be based on the relationship of the
exercise price of his existing options with the fair market value of Viragen’s stock at the date of
the transaction.
In October 2001, Mr. Burke joined Viragen as Controller. Upon his employment, Mr. Burke
entered into a two year employment agreement, which currently provides for an annual salary of
$145,000. Following the initial two year term of his employment agreement, the agreement was and
will continue to be automatically extended for one additional year on each anniversary unless
either party provides at least 90 days notice of their intent not to extend. Mr. Burke is entitled
to participate in all employee benefit programs generally available to all employees. In the event
Mr. Burke’s employment is terminated without cause, he is entitled to receive the greater of two
years compensation and benefits or compensation and benefits through the remainder of the
employment term under the agreement.
72
Option/SAR Grants in Last Fiscal Year
The following table includes information as to the grant of options to purchase shares of our
common stock during our fiscal year ended June 30, 2006 to each person named in the Summary
Compensation Table.
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|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Individual Grants |
|
Potential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Value at |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Annual |
| |
|
Number of |
|
% of Total |
|
|
|
|
|
|
|
|
|
Rates of Stock |
| |
|
Securities |
|
Options/SARs |
|
|
|
|
|
|
|
|
|
Price Appreciation |
| |
|
Underlying |
|
Granted to |
|
Exercise or |
|
|
|
|
|
for Option Term (1) |
| |
|
Options/SARs |
|
Employees in |
|
Base Price |
|
Expiration |
|
|
|
|
| Name |
|
Granted (#) |
|
Fiscal Year |
|
($/Share) |
|
Date |
|
5% |
|
10% |
Charles A. Rice |
|
|
75,000 |
|
|
|
8.9 |
% |
|
$ |
0.57 |
|
|
|
4/7/11 |
|
|
$ |
11,811 |
|
|
$ |
26,099 |
|
Charles A. Rice |
|
|
75,000 |
|
|
|
8.9 |
|
|
|
0.57 |
|
|
|
4/7/12 |
|
|
|
14,539 |
|
|
|
32,894 |
|
Dennis W. Healey |
|
|
50,000 |
|
|
|
5.9 |
|
|
|
0.57 |
|
|
|
4/7/11 |
|
|
|
7,874 |
|
|
|
17,400 |
|
Dennis W. Healey |
|
|
50,000 |
|
|
|
5.9 |
|
|
|
0.57 |
|
|
|
4/7/12 |
|
|
|
9,693 |
|
|
|
21,989 |
|
Nicholas M. Burke |
|
|
37,500 |
|
|
|
4.4 |
|
|
|
0.57 |
|
|
|
4/7/11 |
|
|
|
5,906 |
|
|
|
13,050 |
|
Nicholas M. Burke |
|
|
37,500 |
|
|
|
4.4 |
|
|
|
0.57 |
|
|
|
4/7/12 |
|
|
|
7,270 |
|
|
|
16,492 |
|
|
|
|
| (1) |
|
This column shows the hypothetical gain or option spreads of the options granted based on
assumed annual compound stock appreciation rates of 5% and 10% over the full term of the options.
The 5% and 10% assumed rates of appreciation are mandated by the rules of the SEC and do not
represent our estimate or projection of future common stock prices. The gains shown are net of the
option exercise price, but do not include deductions for taxes or other expenses associated with
the exercise of the option or the sale of the underlying shares, or reflect non-transferability,
vesting or termination provisions. The actual gains, if any, on the exercise of stock options will
depend on the future performance of our common stock. |
Option Exercises and Holdings
The following table includes information as to the exercise of options to purchase shares of
our common stock during our fiscal year ended June 30, 2006 by each person named in the Summary
Compensation Table and the unexercised options held as of June 30, 2006.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option Values
| |
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of Securities |
|
Value of Unexercised |
| |
|
|
|
|
|
|
|
|
|
Underlying Unexercised |
|
In-The-Money |
| |
|
Shares |
|
|
|
|
|
Options at FY End (#) |
|
Options at FY End ($) |
| |
|
Acquired on |
|
Value |
|
|
|
|
|
|
|
|
| Name |
|
Exercise (#) |
|
Realized ($) |
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
Charles A. Rice |
|
|
— |
|
|
$ |
— |
|
|
|
175,000 |
|
|
|
125,000 |
|
|
$ |
— |
|
|
$ |
— |
|
Dennis W. Healey |
|
|
— |
|
|
|
— |
|
|
|
92,500 |
|
|
|
50,000 |
|
|
|
— |
|
|
|
— |
|
Nicholas M. Burke |
|
|
— |
|
|
|
— |
|
|
|
70,000 |
|
|
|
37,500 |
|
|
|
— |
|
|
|
— |
|
Director Compensation
In March 2004, the board of directors approved and implemented a modified structure for
non-employee director compensation. Compensation received by individual directors may vary
depending upon committee membership and participation and number of meetings attended. The approved
fees provide:
| |
• |
|
Attendance fee per meeting of the board of directors: $1,500 |
| |
| |
• |
|
Audit and finance committee: |
| |
° |
|
Chairperson annual retainer — $10,000 |
| |
| |
° |
|
Committee member annual retainer — $5,000 |
| |
| |
° |
|
Attendance fee per meeting — $750 |
73
| |
• |
|
Executive committee, nominating and governance committee and compensation committee: |
| |
° |
|
Chairperson of the nominating and governance committee and compensation
committee annual retainer — $5,000 |
| |
| |
° |
|
Committee member annual retainer — $2,500 |
| |
| |
° |
|
Attendance fee per meeting — $750 |
All attendance fees are reduced by one-half for telephonic attendance.
Commencing in March 2000, Mr. Carl N. Singer receives $100,000 per year for his services as
chairperson of the board of directors and chairperson of the executive committee. He receives no
other director fees.
On April 7, 2006, each non-employee director received 33,000 options to purchase shares of our
common stock under our 2006 Equity Compensation Plan. The exercise price of each option is $0.57
per share, and each option vests half upon the date of issuance and the remaining half upon the
first anniversary of the date of issuance. No shares issuable upon exercise of the options can be
issued until the 2006 Equity Compensation Plan is approved by our stockholders. We intend to seek
stockholder approval of our 2006 Equity Compensation Plan at our next annual stockholders’ meeting.
1995 Amended Stock Option Plan
On May 15, 1995 the board of directors adopted, subject to approval by the stockholders, a
stock option plan, called the 1995 Stock Option Plan. The board of directors reserved 400,000
shares of common stock under the 1995 Stock Option Plan. On September 22, 1995, the board of
directors amended the 1995 Stock Option Plan to define certain terms and clarify the minimum
exercise price of the non-qualified options. Viragen stockholders ratified the 1995 Stock Option
Plan at the annual meeting held on December 15, 1995. The 1995 Stock Option Plan expired in May
2005. This expiration did not affect the validity of outstanding stock options previously granted
under the 1995 Stock Option Plan.
1997 Amended Stock Option Plan
On January 27, 1997 the board of directors adopted, subject to approval by the stockholders, a
stock option plan called the 1997 Stock Option Plan. Viragen stockholders ratified the 1997 Stock
Option Plan at the annual meeting held on February 28, 1997. On April 24, 1998 the board of
directors adopted, subject to ratification by the stockholders, an amendment to the 1997 Stock
Option Plan. This amendment reserved an additional 100,000 shares of common stock for issuance
under the plan. On July 31, 1998, the stockholders ratified this amendment to the 1997 Stock Option
Plan. This amendment brought the total shares reserved under the 1997 Stock Option Plan to 400,000
shares. As of June 30, 2006, there were 158,676 shares available under the 1997 Stock Option Plan.
The board of directors may amend, suspend or terminate the 1997 Stock Option Plan at any time.
However, no amendment can be made which changes the minimum purchase price, except in the event of
adjustments due to changes in Viragen’s capitalization. Unless the 1997 Stock Options Plan has been
suspended or terminated by the board of directors, the plan will expire on January 27, 2007. The
termination or expiration of the plan would not affect the validity of any plan options previously
granted.
The compensation committee of the board of directors and the board of directors currently
administer the 1997 Stock Option Plan. Administration of the plan includes determining:
| |
• |
|
the persons who will be granted plan options, |
| |
| |
• |
|
the type of plan options to be granted, |
| |
| |
• |
|
the number of shares subject to each plan options, and |
| |
| |
• |
|
the exercise price of plan options. |
74
Stock options granted under the 1997 Stock Option Plan may qualify as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended. In addition, the plan also
includes a reload option provision. This provision permits an eligible person to pay the exercise
price of the plan option with shares of common stock owned by the eligible person. The person then
receives a new plan option to purchase shares of common stock equal in number to
the tendered shares. Any incentive option, which is granted under the plan must provide for an
exercise price of not less than 100% of the fair market value of the underlying shares, on the date
of such grant. The exercise price of any incentive option granted to an eligible employee owning
more than 10% of our common stock must be at least 110% of the fair market value, as determined on
the date of the grant. The board of directors or the compensation committee determine the term of
stock options granted under the plan and the manner in which they may be exercised. No stock
options granted under the plan may be exercisable more than 10 years after the date of its grant.
In the case of an incentive option granted to an eligible employee owning more than 10% of
Viragen’s common stock, no plan option may be exercisable more than five years after the date of
the grant.
Officers, directors, key employees and consultants of Viragen and its subsidiaries are
eligible to receive non-qualified options under the 1997 Stock Option Plan. Only officers,
directors and employees who are employed by Viragen or by any of its subsidiaries are eligible to
receive incentive options.
Incentive options are non-assignable and nontransferable, except by will or by the laws of
descent and distribution during the lifetime of the optionee. Only the optionee may exercise
incentive options. Under an amendment to the 1997 stock option plan, non-qualified options may be
transferable under limited circumstances for estate planning, if authorized by the board of
directors or the compensation committee. If an optionee’s employment is terminated for any reason,
other than his or her death or disability, or if an optionee is not an employee but is a member of
Viragen’s board of directors and his or her service as a director is terminated for any reason,
other then death or disability, the plan option granted will lapse to the extent unexercised on the
earlier of the expiration date or 90 days following the date of termination. If the optionee dies
during the term of his or her employment, the plan option granted will lapse to the extent
unexercised on the earlier of the expiration date of the plan option or the date one year following
the date of the optionee’s death. If the optionee is permanently and totally disabled, the plan
option granted lapses to the extent unexercised on the earlier of the expiration date of the option
or one year following the date of the disability.
2006 Equity Compensation Plan
On April 7, 2006 the board of directors adopted, subject to the approval of the stockholders,
the 2006 Equity Compensation Plan, or 2006 Plan. The board of directors reserved 4 million shares
of common stock under the 2006 Plan. The Plan is administered by the compensation committee, the
board of directors or a committee designated by the board.
The 2006 Plan provided for the grant of (a) Stock Options, (b) Stock Appreciation Rights, (c)
Restricted Stock Awards and (d) Other Stock Based Awards.
Stock options granted under the 2006 Plan may be either Incentive Stock Options or
Nonqualified Stock Options. Any Incentive Stock Option granted under the 2006 Plan must qualify
with the provisions of Section 422 of the Internal Revenue Code of 1986, as amended. No stock
option granted under the 2006 Plan may be granted at less than 100% of the fair market value of the
Company’s common stock on the date of grant; provided, however, that the exercise price of an
Incentive Stock Option grant to a 10% or larger stockholder can not be less than 110% of the fair
market value on the grant date. All Incentive Stock Options must be exercised within ten years of
the date of grant or within five years in the case of a 10% or larger stockholder.
Stock options granted under the 2006 Plan may be exercised in whole or in part any time during
the term of the stock option following written notice to the Company accompanied by payment in full
of the purchase price, which shall be in cash or, if provided in an individuals grant agreement,
either in shares of common stock (including restricted stock or other contingent awards under the
2006 Plan) or partly in cash and partly in common stock, or other means the board of directors or
its designee may determine that is consistent with the 2006 Plan’s purpose and applicable law.
75
Except as may be provided in an individual grant agreement, no stock option granted may be
transferred by the holder other than by will or by the laws of distribution, and all stock options
granted must be exercised by the option holder during his or her lifetime or, to the extent of
legal incapacity or incompetency, by the holders legal guardian or legal representative. If a
holder terminates by reason of disability, unless otherwise provided on the
holders agreement, the stock option shall automatically terminate, except any vested portion
of the grant shall be exercisable for a period of one year or expiration of the stated term of the
grant, whichever is shorter. If the holders employment is terminated for any reason other than
death of disability, the stock option will automatically terminate unless employment was terminated
by the Company without cause or due to normal retirement, then the vested portion of the grant at
the date of termination may be exercised for the lesser of three months from termination or the
balance of the stock option term.
The board of directors or its designee may grant Stock Appreciation Rights to 2006 Plan
participants who have been or are being granted stock options as a means to allow the participants
to exercise their stock options without the need to pay the exercise price in cash. In the case of
an Incentive Stock Option, the Stock Appreciation Right must be granted at the time of the stock
option grant. Stock Appreciation Rights may be exercised only if provided in an individuals grant
agreement and by surrendering the applicable portion of their related stock option. Upon the
exercise and surrender, the holder shall be entitled to receive a number of shares of common stock
equal to the stock appreciation value divided by the fair market value of the common stock on the
date exercised.
The 2006 Plan provides for the grant of Restricted Stock Awards either above or in addition to
other awards under the plan. Restricted stock granted under the 2006 Plan shall constitute issued
and outstanding common stock for corporate purposes. The holders of the restricted stock have the
right to vote their shares and retain cash dividends, if any, and exercise all rights and
privileges of a holder of the common stock with the exception that:
| |
• |
|
the holder is not entitled to physical delivery of the stock certificates until the
restriction period has expired and all other vesting requirements have been fulfilled; |
| |
| |
• |
|
the Company shall retain custody of the stock certificates during the restriction period; |
| |
| |
• |
|
other than regular cash dividends, the Company will retain custody of all distributions; |
| |
| |
• |
|
a breach of any restrictions, terms or conditions contained in the 2006 Plan or
established by the board of directors will cause forfeiture of the restricted stock and any
related retained distributions. |
Unless otherwise terminated by the board of directors, the 2006 Plan shall continue to remain
effective until the earlier of ten years or until no further awards may be granted and all awards
granted under the 2006 Plan are no longer outstanding.
On April 7, 2006, our board of director issued options to purchase an aggregate of 843,000
shares to directors, officers and certain employees. The exercise price of each option is $0.57 per
share, and each option vests half upon the date of grant and the remaining half upon the first
anniversary of the date of grant. No shares issuable upon exercise of the options can be issued
until the 2006 Equity Compensation Plan is approved by our stockholders. We intend to seek
stockholder approval of our 2006 Equity Compensation Plan at our next annual stockholders’ meeting.
As of June 30, 2006, there were 3,157,000 shares of common stock available under the 2006 Plan.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee during the last completed fiscal year: (a) was an
officer or employee of Viragen or any of its subsidiaries, (b) was formerly an officer or employee
of Viragen or any of its subsidiaries, or, (c) had any relationship requiring disclosure by Viragen
under any paragraph of Item 404 of Regulation S-K.
76
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table shows certain information known to us regarding Viragen’s common stock
beneficially owned at September 22, 2006, by:
| |
• |
|
each person who is known by us to own beneficially or exercise
voting or dispositive control over 5% or more of Viragen’s common
stock; |
| |
| |
• |
|
each of Viragen’s directors; |
| |
| |
• |
|
each of Viragen’s named executive officers, as such term is defined in Item
402(a)(3) of Regulation S-K; and |
| |
| |
• |
|
all officers and directors as a group. |
Under federal securities law, a person is considered a beneficial owner of any securities that
the person owns or has the right to acquire beneficial ownership of within 60 days. Beneficial
ownership may also attribute shares owned of record by one person to another person, such as the
record holder’s spouse, minor children, corporation or other business entity. As of September 22,
2006, there were 47,726,773 shares of Viragen common stock, the sole outstanding class of voting
securities, outstanding. Except as otherwise indicated, we have been informed that the persons
identified in the table have sole voting and dispositive power with respect to their shares.
This table does not give effect to the issuance of up to 33,156,248 shares that would be
issued in the event outstanding options and warrants are exercised and upon the conversion of
convertible notes, convertible debentures or preferred stock, except to the extent beneficial
ownership of shares attributable to the named person in accordance with Securities and Exchange
Commission rules.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name of Beneficial Owner |
|
Number of Shares Beneficially Owned |
|
|
| |
|
Total |
|
|
|
|
|
|
| |
|
Beneficial |
|
Shares Currently |
|
Shares Acquirable |
|
Percent |
| |
|
Ownership |
|
Outstanding |
|
Within 60 Days |
|
of Class |
Charles A. Rice (1) |
|
|
325,000 |
|
|
|
100,000 |
|
|
|
225,000 |
|
|
|
* |
|
Randolph A. Pohlman (2) |
|
|
20,612 |
|
|
|
1,112 |
|
|
|
19,500 |
|
|
|
* |
|
Robert C. Salisbury (3) |
|
|
55,250 |
|
|
|
20,500 |
|
|
|
34,750 |
|
|
|
* |
|
Charles J. Simons (4) |
|
|
37,697 |
|
|
|
19,447 |
|
|
|
18,250 |
|
|
|
* |
|
Carl N. Singer (5) |
|
|
386,519 |
|
|
|
353,185 |
|
|
|
33,334 |
|
|
|
* |
|
Nancy A. Speck (6) |
|
|
19,000 |
|
|
|
— |
|
|
|
19,000 |
|
|
|
* |
|
C. Richard Stafford (7) |
|
|
119,500 |
|
|
|
100,000 |
|
|
|
19,500 |
|
|
|
* |
|
Dennis W. Healey (8) |
|
|
195,065 |
|
|
|
102,565 |
|
|
|
92,500 |
|
|
|
* |
|
Nicholas M. Burke (9) |
|
|
70,000 |
|
|
|
— |
|
|
|
70,000 |
|
|
|
* |
|
Officers and Directors as a group (9
persons) (10) |
|
|
1,228,643 |
|
|
|
696,809 |
|
|
|
531,834 |
|
|
|
2.5 |
% |
Alexandra Global Master Fund Ltd. (11) |
|
|
4,831,860 |
|
|
|
154,672 |
|
|
|
4,677,188 |
|
|
|
9.2 |
% |
|
|
|
| * |
|
less than 1% |
| |
| (1) |
|
Includes 225,000 shares subject to options either currently exercisable or exercisable
by Mr. Rice within 60 days of September 22, 2006. |
| |
| (2) |
|
Includes 19,500 shares subject to options either currently exercisable or exercisable
by Dr. Pohlman within 60 days of September 22, 2006. |
| |
| (3) |
|
Includes 34,750 shares subject to options either currently exercisable or exercisable
by Mr. Salisbury within 60 days of September 22, 2006. |
| |
| (4) |
|
Includes 18,250 shares subject to options either currently exercisable or exercisable
by Mr. Simons within 60 days of September 22, 2006. |
| |
| (5) |
|
The beneficial ownership attributed to Carl N. Singer includes 279,635 shares of common
stock held by various limited partnerships for which Fundamental Management Corporation
serves as the general partner. Mr. Singer serves as the chairperson of Fundamental
Management Corporation. Also, includes 19,500 shares |
77
|
|
|
| |
|
subject to options either currently exercisable or exercisable by Mr. Singer within 60 days
of September 22, 2006. |
| |
| (6) |
|
Includes 19,000 shares subject to options either currently exercisable or exercisable
by Dr. Speck within 60 days of September 22, 2006. |
| |
| (7) |
|
Includes 19,500 shares subject to options either currently exercisable or exercisable
by Mr. Stafford within 60 days of September 22, 2006. |
| |
| (8) |
|
Includes 92,500 shares subject to options either currently exercisable or exercisable
by Mr. Healey within 60 days of September 22, 2006. |
| |
| (9) |
|
Includes 70,000 shares subject to options either currently exercisable or exercisable
by Mr. Burke within 60 days of September 22, 2006. |
| |
| (10) |
|
Includes 417,174 shares held directly, 279,635 shares held indirectly and 531,834
shares subject to options either currently exercisable or exercisable within 60 days of
September 22, 2006. |
| |
| (11) |
|
Includes 154,672 shares held, 3,333,334 shares underlying convertible notes dated June
18, 2004 (or warrants that might be issued upon redemption of the notes) and 1,343,854
shares underlying common stock purchase warrants issued in connection with the purchase
agreement governing the notes dated June 18, 2004, as amended. The address of Alexandra
Global Master Fund Ltd., a British Virgin Islands company, is Citco Building, Wickam Cay,
P.O. Box 662, Road Town, Tortola, British Virgin Islands. Alexandra Investment Management,
LLC, a Delaware limited liability company, whose address is 767 Third Avenue,
39th Floor, New York, New York 10017, serves as investment adviser to Alexandra
Global Master Fund Ltd. By reason of such relationship, Alexandra Investment Management
LLC may be deemed to share voting and dispositive power over the shares of common stock
stated as beneficially owned by Alexandra Global Master Fund Ltd. Alexandra Investment
Management LLC disclaims beneficial ownership of such shares of common stock. Messrs.
Mikhail A. Filimonov and Dimitri Sogoloff are managing members of Alexandra Investment
Management LLC. By reason of such relationships, Messrs. Filimonov and Sogoloff may be
deemed to share voting and dispositive power over the shares of common stock stated as
beneficially owned by Alexandra Global Master Fund Ltd. Messrs. Filimonov and Sogoloff
disclaim beneficial ownership of such shares of common stock. Based in part on a Schedule
13G/A filed with the SEC on February 14, 2006. |
EQUITY COMPENSATION PLAN INFORMATION
The following table reflects certain information about our common stock that may be issued
upon the exercise of options, warrants and rights under our existing equity compensation plans as
of June 30, 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(a) |
|
|
|
|
|
|
| |
|
Number of |
|
|
|
|
|
(c) |
| |
|
securities to be |
|
(b) |
|
Number of securities |
| |
|
issued upon |
|
Weighted-average |
|
remaining available |
| |
|
exercise of |
|
exercise price of |
|
for future issuance |
| |
|
outstanding |
|
outstanding |
|
under equity compensation |
| |
|
options, warrants, |
|
options, warrants, |
|
plans (excluding securities |
| Plan category |
|
and rights |
|
and rights |
|
reflected in column(a)) |
Equity compensation
plans approved by
security holders
(1) |
|
|
296,783 |
|
|
$ |
4.46 |
|
|
|
158,676 |
|
Equity compensation
plans not approved
by security holders
(2) |
|
|
850,500 |
|
|
|
0.91 |
|
|
|
3,157,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,147,283 |
|
|
$ |
1.83 |
|
|
|
3,315,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Consists of our 1995 and 1997 Stock Option Plans. |
| |
| (2) |
|
Includes our 2006 Equity Compensation Plan. No shares issuable upon exercise of the options
can be issued until the 2006 Equity Compensation Plan is approved by our stockholders. We intend
to seek stockholder approval of our 2006 Equity Compensation Plan at our next annual stockholders’
meeting. Also includes (a) 2,500 warrants issued to a strategic partner exercisable at $110 per
share, which expired in August 2006 and (b) 5,000 warrants issued to a consultant, exercisable at
$5.00 per share (as to 2,500 warrants) and $1.10 per share (as to 2,500 warrants), expiring on
various dates from August 2007 through February 2009. |
78
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Principal Accounting Fees and Services
The following table presents fees for professional services rendered by Ernst & Young LLP for
the fiscal years ended June 30, 2006 and 2005.
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
Audit fees |
|
$ |
447,000 |
|
|
$ |
596,000 |
|
Audit-related fees |
|
|
— |
|
|
|
— |
|
Tax fees |
|
|
56,000 |
|
|
|
82,000 |
|
All other fees |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
503,000 |
|
|
$ |
678,000 |
|
|
|
|
|
|
|
|
|
|
Audit fees includes the audit of our annual financial statements included in our annual report
on Form 10-K, including Sarbanes-Oxley Section 404 attest services for our fiscal year ended June
30, 2005, review of interim financial statements included in our quarterly reports on Form 10-Q and
services that are normally provided by our independent registered public accounting firm in
connection with statutory and regulatory filings and consents and other services related to SEC
matters. This category also includes advice on audit and accounting matters that arose during, or
as a result of, the audit of the annual financial statements or the review of interim financial
statements.
Audit-related fees consist of services provided by Ernst & Young LLP that are reasonably
related to the performance of the audit or review of our financial statements and not included
under audit fees.
Tax fees consist of the aggregate fees billed for professional services rendered by Ernst &
Young LLP for tax compliance, tax advice, and tax planning.
Pre-Approval Policy
In April 2004, we implemented our Audit and Non-Audit Services Pre-Approval Policy. This
policy conforms to guidelines established under the Sarbanes-Oxley Act of 2002 and is administered
by the audit and finance committee. The policy provides that the audit and finance committee is
required to pre-approve the audit and non-audit services performed by our independent registered
public accounting firm in order to assure that they do not impair their independence. Our policy
provides for both general pre-approval and specific pre-approval guidelines. The policy states that
unless a type of service has received general pre-approval, it will require specific pre-approval
by the audit and finance committee if it is to be provided by our independent registered public
accounting firm. For our fiscal years ended June 30, 2006 and 2005, all of the services under the
category “Tax fees” described above were pre-approved by the audit and finance committee.
79
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
See Item 8. “Financial Statements and Supplementary Data” for Financial Statements included
with this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules have been omitted because the required information is not applicable or the
information is included in the consolidated financial statements or the notes thereto.
(a)(3) Exhibits
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
3.1 |
|
|
Articles of Incorporation (incorporated by reference to Viragen’s
registration statement on Form S-1 dated June 8, 1981, File No.
2-72691). |
| |
3.2 |
|
|
Certificate of Amendment of Certificate of Incorporation dated
September 11, 1986 (incorporated by reference to Viragen’s
registration statement on Form S-2 dated October 24, 1986, File
No. 33-9714). |
| |
3.3 |
|
|
Certificate of Amendment of Certificate of Incorporation dated
April 8, 1987 (incorporated by reference to Viragen’s Form 8-K
dated April 17, 2000, filed on April 13, 2000). |
| |
3.4 |
|
|
Certificate of Amendment of Certificate of Incorporation dated May
11, 1993 (incorporated by reference to Viragen’s Form 8-K dated
April 17, 2000, filed on April 13, 2000). |
| |
3.5 |
|
|
Certificate of Amendment of Certificate of Incorporation dated
February 28, 1997 (incorporated by reference to Viragen’s Form 8-K
dated April 17, 2000, filed on April 13, 2000). |
| |
3.6 |
|
|
Certificate of Amendment of Certificate of Incorporation dated
July 2, 1997 (incorporated by reference to Viragen’s Fort 8-K
dated April 17, 2000, filed on April 13, 2000). |
| |
3.7 |
|
|
Certificate of Amendment of Certificate of Incorporation dated
October 4, 1999 (incorporated by reference to Viragen’s Form 8-K
dated April 17, 2000, filed on April 13, 2000). |
| |
3.8 |
|
|
Certificate of Amendment of Certificate of Incorporation dated
August 28, 2001, filed on August 28, 2001 (incorporated by
reference to Viragen’s Form 10-K filed with the Securities and
Exchange Commission on September 28, 2001). |
| |
3.9 |
|
|
Certificate of Amendment to Certificate of Incorporation dated
February 3, 2003 (incorporated by reference to Viragen’s Form 10-Q
filed with the Securities and Exchange Commission on February 14,
2003). |
| |
3.10 |
|
|
Certificate of Amendment to Certificate of Incorporation dated
June 25, 2003 (incorporated by reference to Viragen’s registration
statement on Form S-3 dated June 26, 2003, File No. 333-106536). |
| |
3.11 |
|
|
Certificate of Amendment to Certificate of Incorporation dated
June 15, 2004 (incorporated by reference to Viragen’s Form 10-Q
filed with the Securities and Exchange Commission on February 9,
2006). |
| |
3.12 |
|
|
Certificate of Amendment to Certificate of Incorporation dated
December 15, 2005 (incorporated by reference to Viragen’s Form
10-Q filed with the Securities and Exchange Commission on February
9, 2006). |
| |
3.13 |
|
|
Amended and Restated Bylaws of Viragen, Inc. (incorporated by
reference to Exhibit 3.1 of Viragen’s Form 8-K filed with the
Securities and Exchange Commission on March 3, 2005) |
| |
4.1 |
|
|
Form of common Stock Certificate (incorporated by reference to
Viragen’s registration statement on Form S-1 dated June 8, 1981,
File No. 2-72691). |
| |
4.2 |
|
|
Certificate of Designation for Series A Preferred Stock, as
amended (incorporated by reference to 1986 Form S-2, Part II, Item
16, 4.4). |
| |
4.3 |
|
|
Specimen Certificate for Unit (Series A Preferred Stock and Class
A Warrant) (incorporated by reference to 1986 Form S-2, Part II,
Item 15. |
80
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
4.4 |
|
|
1995 Stock Option Plan (incorporated by reference to Viragen’s
Registration Statement on Form S-8 filed June 9, 1995). |
| |
4.5 |
|
|
1997 Stock Option Plan (incorporated by reference to Viragen’s
Registration Statement of Form S-8 filed April 17, 1998). |
| |
4.6 |
|
|
Certificate to set forth Designations, Preferences, and Rights of
Series J 24% Cumulative Convertible Preferred Stock, $1.00 par
value per share (incorporated by reference to Exhibit 4.1 of
Viragen, Inc.’s Form 8-K filed with the Securities and Exchange
Commission on March 13, 2006). |
| |
4.7 |
|
|
Viragen, Inc. 2006 Equity Compensation Plan (incorporated by
reference to Exhibit 4.1 of Viragen, Inc.’s Form 8-K filed with
the Securities and Exchange Commission on April 11, 2006). |
| |
10.1 |
|
|
Royalty Agreement between Viragen, Inc. and Medicore, Inc. dated
November 7, 1986 (incorporated by reference to Viragen’s November
1986 Form 8-K, Item 7(c)(i)). |
| |
10.2 |
|
|
Amendment to Royalty Agreement between Viragen, Inc. and Medicore,
Inc. dated November 21, 1989 (incorporated by reference to
Viragen’s Form 8-K dated December 6, 1989, Item 7(c)(i)). |
| |
10.3 |
|
|
Amendment No. 2 to the Royalty Agreement between Viragen, Inc. and
Medicore, Inc. dated May 11, 1993 (incorporated by reference to
Viragen’s June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xix)). |
| |
10.4 |
|
|
Development, License and Collaborative Agreement between Roslin
Institute (Edinburgh) and Viragen, Inc. dated November 15, 2000
(incorporated by reference to Viragen’s Form S-3 registration
statement filed December 29, 2000, File No. 333-52996). |
81
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
10.5 |
|
|
Employment Agreement, Stock Option Agreement between Viragen and
Dennis W. Healey dated March 1, 2001 (incorporated by reference to
Viragen’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2001). |
| |
10.6 |
|
|
Agreement for the Acquisition of BioNative AB between Hakan Borg
and others, Viragen (Europe) Limited and Viragen, Inc. dated
September 28, 2001 (incorporated by reference to Viragen (Europe)
Limited’s Annual Report on Form 10-K filed September 28, 2001). |
| |
10.7 |
|
|
Securities Purchase Agreement, Convertible Debentures, Common
Stock Purchase Warrants and Registration Rights Agreement dated
January 11, 2002 (incorporated by reference to Viragen’s Form 8-K
dated January 15, 2002). |
| |
10.8 |
|
|
Supply and Distribution agreement between Viranative AB and
Laboratorios Pisa, S.A. dated January 9, 2003 (incorporated by
reference to Viragen International’s Form 10-Q filed February 14,
2003) |
| |
10.9 |
|
|
Securities Purchase Agreement dated November 8, 2002, between
Viragen, Inc., Palisades Equity Fund L.P., Bristol Investment Ltd.
and Alpha Capital AG (incorporated by reference to Viragen, Inc.’s
Form S-3 filed on November 26, 2002, File No. 333-101480) |
| |
10.10 |
|
|
Form of Convertible Debenture (incorporated by reference to
Viragen, Inc.’s Form S-3 filed on November 26, 2002, File No.
333-101480) |
| |
10.11 |
|
|
Form of Common Stock Purchase Warrant (incorporated by reference
to Viragen, Inc.’s Form S-3 filed on November 26, 2002, File No.
333-101480) |
| |
10.12 |
|
|
Registration Rights Agreement dated November 8, 2002, between
Viragen, Inc., Palisades Equity Fund, L.P., Bristol Investment
Ltd. and Alpha Capital AG (incorporated by reference to Viragen,
Inc.’s Form S-3 filed on November 26, 2002, File No. 333-101480) |
| |
10.13 |
|
|
Securities Purchase Agreement dated January 31, 2003, between
Viragen, Inc., Palisades Equity Fund L.P., Crescent International
Ltd., Alpha Capital AG, Brivis Investment, Ltd. and Castlerigg
Master Investments Ltd. (incorporated by reference to Viragen,
Inc.’s Form 10-Q filed with the Securities and Exchange Commission
on February 14, 2003) |
| |
10.14 |
|
|
Form of Secured Convertible Debenture for Securities Purchase
Agreement dated January 31, 2003 (incorporated by reference to
Viragen, Inc.’s Form 10-Q filed with the Securities and Exchange
Commission on February 14, 2003) |
| |
10.15 |
|
|
Form of Stock Purchase Warrant for Securities Purchase Agreement
dated January 31, 2003 (incorporated by reference to
Viragen, Inc.’s Form 10-Q filed with the Securities and Exchange
Commission on February 14, 2003) |
| |
10.16 |
|
|
Registration Rights Agreement dated January 31, 2003, between
Viragen, Inc., Palisades Equity Fund, L.P., Crescent International
Ltd., Alpha Capital AG, Brivis Investment, Ltd. and Castlerigg
Master Investments Ltd. (incorporated by reference to Viragen,
Inc.’s Form 10-Q filed with the Securities and Exchange Commission
on February 14, 2003) |
| |
10.17 |
|
|
First Amendment dated February 27, 2003 to the Securities Purchase
Agreement dated January 31, 2003, between Viragen, Inc., Palisades
Equity Fund L.P., Crescent International Ltd., Alpha Capital AG,
Brivis Investment, Ltd. and Castlerigg Master Investments Ltd.
(incorporated by reference to Viragen, Inc.’s Form S-3 filed with
the Securities and Exchange Commission on March 4, 2003, File No.
333-103593) |
82
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
10.18 |
|
|
Secured Convertible Debenture between Viragen, Inc. and Palisades
Equity Fund L.P. dated February 28, 2003
(incorporated by reference to Viragen, Inc.’s Form S-3 filed with
the Securities and Exchange Commission on March 4, 2003, File No.
333-103593) |
| |
10.19 |
|
|
Secured Convertible Debenture between Viragen, Inc. and Alpha
Capital AG dated February 28, 2003 (incorporated by reference to
Viragen, Inc.’s Form S-3 filed with the Securities and Exchange
Commission on March 4, 2003, File No. 333-103593) |
| |
10.20 |
|
|
Stock Purchase Warrant between Viragen, Inc. and Palisades Equity
Fund L.P. dated February 28, 2003 (incorporated by reference to
Viragen, Inc.’s Form S-3 filed with the Securities and Exchange
Commission on March 4, 2003, File No. 333-103593) |
| |
10.21 |
|
|
Stock Purchase Warrant between Viragen, Inc. and Alpha Capital AG
dated February 28, 2003 (incorporated by reference to Viragen,
Inc.’s Form S-3 filed with the Securities and Exchange Commission
on March 4, 2003, File No. 333-103593) |
| |
10.22 |
|
|
Consulting Agreement between Viragen, Inc. and Gerald Smith dated
January 31, 2003 (incorporated by reference to Viragen, Inc.’s
Form 10-Q filed with the Securities and Exchange Commission on May
14, 2003) |
| |
10.23 |
|
|
Common Stock Purchase Agreement dated March 31, 2003, between
Viragen, Inc., and Talisman Management Limited. (incorporated by
reference to Viragen, Inc.’s Form 10-Q filed with the Securities
and Exchange Commission on May 14, 2003) |
| |
10.24 |
|
|
Registration Rights Agreement dated March 31, 2003, between
Viragen, Inc., and Talisman Management Limited.
(incorporated by reference to Viragen, Inc.’s Form 10-Q filed with
the Securities and Exchange Commission on May 14, 2003) |
| |
10.25 |
|
|
Form of Common Stock Purchase Warrant dated March 31, 2003,
between Viragen, Inc., and Talisman Management Limited.
(incorporated by reference to Viragen, Inc.’s Form 10-Q filed with
the Securities and Exchange Commission on May 14, 2003) |
| |
10.26 |
|
|
Securities Purchase Agreement dated April 16, 2003, between
Viragen, Inc., Palisades Equity Fund L.P., Crescent International
Ltd. and Alpha Capital AG (incorporated by reference to Viragen,
Inc.’s Form 10-Q filed with the Securities and Exchange Commission
on May 14, 2003) |
| |
10.27 |
|
|
Form of Secured Convertible Debenture for Securities Purchase
Agreement dated April 16, 2003. (incorporated by reference to
Viragen, Inc.’s Form 10-Q filed with the Securities and Exchange
Commission on May 14, 2003) |
| |
10.28 |
|
|
Form of Stock Purchase Warrant for Securities Purchase Agreement
dated April 16, 2003. (incorporated by reference to
Viragen, Inc.’s Form 10-Q filed with the Securities and Exchange
Commission on May 14, 2003) |
| |
10.29 |
|
|
Registration Rights Agreement dated April 16, 2003, between
Viragen, Inc., Palisades Equity Fund, L.P., Crescent International
Ltd. and Alpha Capital AG. (incorporated by reference to Viragen,
Inc.’s Form 10-Q filed with the Securities and Exchange Commission
on May 14, 2003) |
| |
10.30 |
|
|
Additional Funding Agreement dated May 8, 2003, between Viragen,
Inc., Palisades Equity Fund L.P., Crescent International Ltd. and
Alpha Capital AG. (incorporated by reference to Viragen, Inc.’s
Form 10-Q filed with the Securities and Exchange Commission on May
14, 2003) |
| |
10.31 |
|
|
Additional Funding Agreement dated May 13, 2003 between Viragen,
Inc. and Bristol Investment Fund, Ltd. (incorporated by reference
to Viragen, Inc.’s Form S-3 filed with the Securities and Exchange
Commission on May 30, 2003, File No. 333-105668) |
| |
10.32 |
|
|
Secured Promissory Note dated August 6, 2002 between Viragen, Inc.
and Isosceles Fund Limited (incorporated by reference to Viragen,
Inc.’s Form S-3 filed with the Securities and Exchange Commission
on June 26, 2003, File No. 333-106536) |
| |
10.33 |
|
|
Amendment to 8% Secured Promissory Note dated November 22, 2002
between Viragen, Inc. and Isosceles Fund Limited (incorporated by
reference to Viragen, Inc.’s Form S-3 filed with the Securities
and Exchange Commission on June 26, 2003, File No. 333-106536) |
83
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
10.34 |
|
|
Form of Stock Purchase Warrant for Amendment to 8% Secured
Promissory Note dated November 22, 2002 between
Viragen, Inc. and Isosceles Fund Limited (incorporated by
reference to Viragen, Inc.’s Form S-3 filed with the Securities
and Exchange Commission on June 26, 2003, File No. 333-106536) |
| |
10.35 |
|
|
Securities Purchase Agreement dated June 27, 2003 between Viragen,
Inc., Palisades Equity Fund LP, Alpha Capital AG, Crescent
International Ltd., Bristol Investment Fund, Ltd. and Gryphon
Master Fund, LP (incorporated by reference to Viragen, Inc.’s Form
S-3 filed with the Securities and Exchange Commission on July 18,
2003, File No. 333-107176) |
| |
10.36 |
|
|
Form of Secured Convertible Debenture for Securities Purchase
Agreement dated June 27, 2003 (incorporated by reference to
Viragen, Inc.’s Form S-3 filed with the Securities and Exchange
Commission on July 18, 2003, File No. 333-107176) |
| |
10.37 |
|
|
Form of Stock Purchase Warrant for Securities Purchase Agreement
dated June 27, 2003 (incorporated by reference to
Viragen, Inc.’s Form S-3 filed with the Securities and Exchange
Commission on July 18, 2003, File No. 333-107176) |
| |
10.38 |
|
|
Registration Rights Agreement dated June 27, 2003 between Viragen,
Inc., Palisades Equity Fund LP, Alpha Capital AG, Crescent
International Ltd., Bristol Investment Fund, Ltd. and Gryphon
Master Fund, LP (incorporated by reference to Viragen, Inc.’s Form
S-3 filed with the Securities and Exchange Commission on July 18,
2003, File No. 333-107176) |
| |
10.39 |
|
|
Letter dated June 1, 2003 between Viragen, Inc., Palisades Equity
Fund LP, Alpha Capital AG, Crescent International Ltd., Bristol
Investment Fund, Ltd. and Gryphon Master Fund, LP (incorporated by
reference to Viragen, Inc.’s Form S-3 filed with the Securities
and Exchange Commission on July 18, 2003, File No. 333-107176) |
| |
10.40 |
|
|
Addendum to employment agreement with Dennis W. Healey dated
February 14, 2003 (incorporated by reference to Viragen, Inc.’s
Form S-8 filed with the Securities and Exchange Commission on
August 11, 2003, File No. 333-107852) |
| |
10.41 |
|
|
Addendum #2 to employment agreement with Dennis W. Healey dated
March 1, 2003 (incorporated by reference to Viragen, Inc.’s Form
S-8 filed with the Securities and Exchange Commission on August
11, 2003, File No. 333-107852) |
| |
10.42 |
|
|
Addendum to employment agreement with Douglas D. Lind, M.D. dated
February 14, 2003(incorporated by reference to Viragen, Inc.’s
Form S-8 filed with the Securities and Exchange Commission on
August 11, 2003, File No. 333-107852) |
| |
10.43 |
|
|
Addendum to employment agreement with Melvin Rothberg dated
February 14, 2003 (incorporated by reference to Viragen, Inc.’s
Form S-8 filed with the Securities and Exchange Commission on
August 11, 2003, File No. 333-107852) |
| |
10.44 |
|
|
Officers and Directors Alternative Stock Compensation Plan
(incorporated by reference to Viragen, Inc.’s Form S-8 filed with
the Securities and Exchange Commission on August 11, 2003, File
No. 333-107852) |
| |
10.45 |
|
|
Douglas D. Lind, M.D. Common Stock Purchase Warrant agreement
dated June 16, 2003 (incorporated by reference to Viragen, Inc.’s
Form S-8 filed with the Securities and Exchange Commission on
August 11, 2003, File No. 333-107852) |
| |
10.46 |
|
|
Toni Vallen Common Stock Purchase Warrant agreement dated August
1, 2003 (incorporated by reference to Viragen, Inc.’s Form S-8
filed with the Securities and Exchange Commission on August 11,
2003, File No. 333-107852) |
| |
10.47 |
|
|
Securities Purchase Agreement dated as of September 29, 2003,
between Viragen, Inc., and Palisades Equity Fund LP, Alpha Capital
AG, Crescent International, Ltd., Bristol Investment Fund Ltd.,
Gryphon Master Fund, LP, Crestview Capital Fund II, LP, PEF
Advisors LLC and PEF Advisors LLP (incorporated by reference to
Exhibit 99.1 of Viragen, Inc.’s Form 8-K filed with the Securities
and Exchange Commission on October 2, 2003) |
84
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
10.48 |
|
|
Registration Rights Agreement entered into as of September 29,
2003, between Viragen, Inc., and Palisades Equity Fund LP, Alpha
Capital AG, Crescent International, Ltd., Bristol Investment Fund
Ltd., Gryphon Master Fund, LP, Crestview Capital Fund II, LP, PEF
Advisors LLC and PEF Advisors LLP (incorporated by reference to
Exhibit 99.2 of Viragen, Inc.’s Form 8-K filed with the Securities
and Exchange Commission on October 2, 2003) |
| |
10.49 |
|
|
Form of Common Stock Purchase Warrant for Securities Purchase
Agreement dated September 29, 2003 (incorporated by reference to
Exhibit 99.3 of Viragen, Inc.’s Form 8-K filed with the Securities
and Exchange Commission on October 2, 2003) |
| |
10.50 |
|
|
Securities Purchase Agreement dated as of December 23, 2003,
between Viragen, Inc., and Palisades Master Fund LP, Alpha Capital
AG, Crescent International, Ltd., Bristol Investment Fund Ltd.,
Gryphon Master Fund, LP and Gamma Opportunity Capital Partners, LP
(incorporated by reference to Exhibit 99.2 of Viragen, Inc.’s Form
8-K filed with the Securities and Exchange Commission on December
31, 2003) |
| |
10.51 |
|
|
Registration Rights Agreement entered into as of December 23,
2003, between Viragen, Inc., and Palisades Master Fund LP, Alpha
Capital AG, Crescent International, Ltd., Bristol Investment Fund
Ltd., Gryphon Master Fund, LP and Gamma Opportunity Capital
Partners, LP (incorporated by reference to Exhibit 99.3 of
Viragen, Inc.’s Form 8-K filed with the Securities and Exchange
Commission on December 31, 2003) |
| |
10.52 |
|
|
Form of Common Stock Purchase Warrant for Securities Purchase
Agreement dated December 23, 2003 (incorporated by reference to
Exhibit 99.4 of Viragen, Inc.’s Form 8-K filed with the Securities
and Exchange Commission on December 31, 2003) |
| |
10.53 |
|
|
Development, License and Collaboration Agreement between Roslin
Institute (Edinburgh), ViraGenics, Inc. and Viragen, Inc. executed
March 4, 2004, effective December 1, 2003. (incorporated by
reference to Viragen, Inc.’s Form 10-Q filed with the Securities
and Exchange Commission on May 10, 2004) |
| |
10.54 |
|
|
Employment Agreement, Stock Option Agreements between Viragen,
Inc. and Charles A. Rice dated March 29, 2004. (incorporated by
reference to Viragen, Inc.’s Form 10-Q filed with the Securities
and Exchange Commission on May 10, 2004) |
| |
10.55 |
|
|
Form of Securities Purchase Agreement dated as of April 1, 2004
between Viragen, Inc. and each of eight institutional investors
(incorporated by reference to Exhibit 99.2 of Viragen, Inc.’s Form
8-K filed with the Securities and Exchange Commission on April 5,
2004) |
| |
10.56 |
|
|
Form of convertible promissory note issuable at closing of
Securities Purchase Agreement dated as of April 1, 2004
(incorporated by reference to Exhibit 99.4 of Viragen, Inc.’s Form
8-K filed with the Securities and Exchange Commission on April 5,
2004) |
| |
10.57 |
|
|
Form of common stock purchase warrant accompanying notes issuable
at closing of Securities Purchase Agreement dated as of April 1,
2004 (incorporated by reference to Exhibit 99.5 of Viragen, Inc.’s
Form 8-K filed with the Securities and Exchange Commission on
April 5, 2004) |
| |
10.58 |
|
|
Form of common stock purchase warrant issuable upon prepayment of
notes issuable at closing of Securities Purchase Agreement dated
as of April 1, 2004 (incorporated by reference to Exhibit 99.6 of
Viragen, Inc.’s Form 8-K filed with the Securities and Exchange
Commission on April 5, 2004) |
| |
10.59 |
|
|
Form of convertible promissory note issued on June 18, 2004 at
closing of a Securities Purchase Agreement dated as of April 1,
2004 (incorporated by reference to Viragen, Inc.’s Form S-3 filed
with the Securities and Exchange Commission on July 13, 2004, File
No. 333-117338) |
| |
10.60 |
|
|
Form of common stock purchase warrant issued on June 18, 2004 at
closing of a Securities Purchase Agreement dated as of April 1,
2004 (incorporated by reference to Viragen, Inc.’s Form S-3 filed
with the Securities and Exchange Commission on July 13, 2004, File
No. 333-117338) |
| |
10.61 |
|
|
Form of registration rights agreement executed on June 18, 2004 at
closing of a Securities Purchase Agreement dated as of April 1,
2004 (incorporated by reference to Viragen, Inc.’s Form S-3 filed
with the Securities and Exchange Commission on July 13, 2004, File
No. 333-117338) |
85
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
10.62 |
|
|
Agreement between Viragen, Inc. and Melvin Rothberg dated April
22, 2005 (incorporated by reference to Viragen’s Form 8-K filed
April 22, 2005) |
| |
10.63 |
|
|
General Release by Viragen, Inc. in favor of Melvin Rothberg dated
April 22, 2005 (incorporated by reference to the Viragen’s Form
8-K filed April 22, 2005) |
| |
10.64 |
|
|
General Release by Melvin Rothberg in favor of Viragen, Inc. dated
April 22, 2005 (incorporated by reference to Viragen’s on Form 8-K
filed April 22, 2005) |
| |
10.65 |
|
|
Form of Securities Purchase Agreement dated September 15, 2005
relating to the sale of Amortizing, Convertible Debentures in the
aggregate principal amount of $2,000,000 (incorporated by
reference to Exhibit 10.1 of Viragen, Inc.’s Form 8-K filed with
the Securities and Exchange Commission on September 15, 2005) |
| |
10.66 |
|
|
Form of Amortizing, Convertible Debentures in the aggregate
principal amount of $2,000,000 (incorporated by reference to
Exhibit 10.2 of Viragen, Inc.’s Form 8-K filed with the Securities
and Exchange Commission on September 15, 2005) |
| |
10.67 |
|
|
Form of Common Stock Purchase Warrant issuable to purchasers of
Amortizing, Convertible Debentures in the aggregate principal
amount of $2,000,000 (incorporated by reference to Exhibit 10.3 of
Viragen, Inc.’s Form 8-K filed with the Securities and Exchange
Commission on September 15, 2005) |
| |
10.68 |
|
|
Form of Registration Rights Agreement to be entered into with
purchasers of Amortizing, Convertible Debentures in the aggregate
principal amount of $2,000,000 (incorporated by reference to
Exhibit 10.4 of Viragen, Inc.’s Form 8-K filed with the Securities
and Exchange Commission on September 15, 2005) |
| |
10.69 |
|
|
Form of Amendment Agreement with holders of the Viragen’s
Convertible Promissory Notes due 2006 in the aggregate principal
amount of $20,000,000 (incorporated by reference to Exhibit 10.5
of Viragen, Inc.’s Form 8-K filed with the Securities and Exchange
Commission on September 15, 2005) |
| |
10.70 |
|
|
Form of Subscription Agreement relating to the sale of Series J
24% Cumulative Convertible Preferred Stock (incorporated by
reference to Exhibit 10.1 of Viragen, Inc.’s Form 8-K filed with
the Securities and Exchange Commission on March 13, 2006) |
| |
10.71 |
|
|
Form of Class A Common Stock Purchase Warrant issuable to
purchasers of Series J 24% Cumulative Convertible Preferred Stock,
$1.00 par value per share (incorporated by reference to Exhibit
10.2 of Viragen, Inc.’s Form 8-K filed with the Securities and
Exchange Commission on March 13, 2006) |
| |
10.72 |
|
|
2006 Incentive Bonus Calculation for Charles A. Rice (Exhibit A to
Employment Agreement dated March 29, 2004) (incorporated by
reference to Exhibit 10.1 of Viragen, Inc.’s Form 8-K filed with
the Securities and Exchange Commission on April 11, 2006) |
| |
21.1 |
|
|
Subsidiaries of the registrant* |
| |
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm* |
| |
31.1 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| |
31.2 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| |
32.1 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| |
32.2 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
86
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
99.1 |
|
|
Collaborative Research Agreement between Viragen, Inc. and
Sloan-Kettering Institute for Cancer Research, dated February 1,
2002 (incorporated by reference to Exhibit 99.1 of Viragen’s Form
S-1 filed with the Securities and Exchange Commission on July 31,
2006, File No. 333-136144)** |
| |
99.2 |
|
|
Supply and Distribution Agreement between Viragen International,
Inc., Viragen (Scotland) Ltd. and Arriani Pharmaceuticals S.A.,
dated May 27, 2003 (incorporated by reference to Exhibit 99.2 of
Viragen’s Form S-1 filed with the Securities and Exchange
Commission on July 31, 2006, File No. 333-136144)** |
| |
99.3 |
|
|
Supply and Distribution Agreement between Viragen International,
Inc., Viragen (Scotland) Ltd. and Pentafarma, S.A., dated November
17, 2003 (incorporated by reference to Exhibit 99.3 of Viragen’s
Form S-1 filed with the Securities and Exchange Commission on July
31, 2006, File No. 333-136144)** |
| |
99.4 |
|
|
License between Oxford BioMedica (UK) Limited and Viragen, Inc.
effective June 30, 2004 (incorporated by reference to Exhibit 99.4
of Viragen’s Form S-1 filed with the Securities and Exchange
Commission on July 31, 2006, File No. 333-136144)** |
| |
99.5 |
|
|
Agreement between Viragen, Inc. and Cancer Research Technology
Limited, dated April 27, 2005 (incorporated by reference to
Exhibit 99.5 of Viragen’s Form S-1 filed with the Securities and
Exchange Commission on July 31, 2006, File No. 333-136144)** |
| |
99.6 |
|
|
Extension of Development, License and Collaboration Agreement
between Roslin Institute (Edinburgh), ViraGenics, Inc. and
Viragen, Inc., effective December 1, 2005) (incorporated by
reference to Exhibit 99.6 of Viragen’s Form S-1 filed with the
Securities and Exchange Commission on July 31, 2006, File No.
333-136144)** |
| |
99.7 |
|
|
License, Development and Supply Agreement between Viragen, Inc.
and Kuhnil Pharm. Co., Ltd., dated November 16, 2005 (incorporated
by reference to Exhibit 99.7 of Viragen’s Form S-1 filed with the
Securities and Exchange Commission on July 31, 2006, File No.
333-136144)** |
| |
99.8 |
|
|
Extension of Development, License and Collaboration Agreement
between Roslin Institute (Edinburgh), ViraGenics, Inc. and
Viragen, Inc., effective December 1, 2006) (incorporated by
reference to Exhibit 99.8 of Viragen’s Form S-1 filed with the
Securities and Exchange Commission on July 31, 2006, File No.
333-136144)** |
|
|
|
| * |
|
Filed herewith |
| |
| ** |
|
Confidential treatment requested for certain portions of this
exhibit pursuant to Rule 406 under the Securities Act of 1933, as
amended, which portions are omitted and filed separately with the
Securities and Exchange Commission |
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| |
|
|
|
|
| |
VIRAGEN, INC.
|
|
| |
By: |
/s/ Charles A. Rice
|
|
| |
|
Charles A. Rice |
|
| |
|
President and Chief Executive Officer |
|
| |
Dated: September 25, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
| SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
| /s/ Charles A. Rice
Charles A. Rice |
|
President and Chief Executive Officer
|
|
September 25, 2006 |
| |
|
|
|
|
| /s/ Carl N. Singer
Carl N. Singer |
|
Director and Chairman of the Board
Executive Vice President, Treasurer,
Principal Financial Officer and
|
|
September 12, 2006 |
| |
|
|
|
|
| /s/ Dennis W. Healey
Dennis W. Healey |
|
Secretary
|
|
September 25, 2006 |
| |
|
|
|
|
| /s/ Randolph A. Pohlman
Randolph A. Pohlman |
|
Director
|
|
September 10, 2006 |
| |
|
|
|
|
| /s/ Robert C. Salisbury
Robert C. Salisbury |
|
Director
|
|
September 9, 2006 |
| |
|
|
|
|
| /s/ Charles J. Simons
Charles J. Simons |
|
Director
|
|
September 10, 2006 |
| |
|
|
|
|
Nancy A. Speck |
|
Director |
|
|
| |
|
|
|
|
| /s/ C. Richard Stafford
C. Richard Stafford |
|
Director
|
|
September 11, 2006 |
| /s/ Nicholas M. Burke
Nicholas M. Burke |
|
Vice President, Controller and
Principal Accounting Officer
|
|
September 25, 2006 |
88
FORM 10-K — ITEM 8
VIRAGEN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
F-2 |
|
|
|
|
|
|
Consolidated Balance Sheets — June 30, 2006 and 2005 |
|
|
F-3 |
|
|
|
|
|
|
Consolidated Statements of Operations — Years ended June 30, 2006, 2005 and 2004 |
|
|
F-4 |
|
|
|
|
|
|
Consolidated Statements of Stockholders’ (Deficit) Equity — Years ended June 30, 2006, 2005 and 2004 |
|
|
F-5 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows — Years ended June 30, 2006, 2005 and 2004 |
|
|
F-7 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
F-9 |
|
All schedules for which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Viragen, Inc.
We have audited the accompanying consolidated balance sheets of Viragen, Inc. and subsidiaries
as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders’
(deficit) equity and cash flows for each of the three years in the period ended June 30, 2006.
These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal control over
financial reporting as of June 30, 2006. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Viragen, Inc. and subsidiaries at June 30, 2006
and 2005, and the consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2006, in conformity with U.S. generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that Viragen, Inc. will
continue as a going concern. As more fully described in Note A, the Company has incurred recurring
operating losses and has an accumulated deficit and stockholders’ deficit as of June 30, 2006. The
Company’s ability to continue as a going concern is dependent on its ability to raise adequate
capital to fund necessary product commercialization and development activities. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note A. The financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Certified Public Accountants
Fort Lauderdale, Florida
August 31, 2006
F-2
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
443,115 |
|
|
$ |
6,885,537 |
|
Accounts receivable |
|
|
71,107 |
|
|
|
39,350 |
|
Inventories |
|
|
1,821,676 |
|
|
|
2,349,513 |
|
Prepaid expenses |
|
|
589,131 |
|
|
|
820,922 |
|
Other current assets |
|
|
597,981 |
|
|
|
832,610 |
|
Total current assets |
|
|
3,523,010 |
|
|
|
10,927,932 |
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Land, building and improvements |
|
|
4,797,337 |
|
|
|
5,327,018 |
|
Equipment and furniture |
|
|
4,013,694 |
|
|
|
5,670,671 |
|
Construction in progress |
|
|
— |
|
|
|
19,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
8,811,031 |
|
|
|
11,017,319 |
|
Less accumulated depreciation |
|
|
(3,999,958 |
) |
|
|
(5,262,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
4,811,073 |
|
|
|
5,754,550 |
|
Goodwill |
|
|
3,890,415 |
|
|
|
3,653,159 |
|
Developed technology, net |
|
|
1,548,601 |
|
|
|
1,608,585 |
|
Deposits and other assets |
|
|
200,867 |
|
|
|
40,566 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,973,966 |
|
|
$ |
21,984,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
916,001 |
|
|
$ |
749,561 |
|
Accrued expenses and other liabilities |
|
|
1,640,903 |
|
|
|
1,116,637 |
|
Current portion of convertible notes and debenture |
|
|
s 453,918 |
|
|
|
16,104,994 |
|
Short term borrowings |
|
|
217,321 |
|
|
|
224,245 |
|
Current portion of long-term debt |
|
|
65,811 |
|
|
|
33,228 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,293,954 |
|
|
|
18,228,665 |
|
Convertible notes and debentures, less current portion |
|
|
11,145,816 |
|
|
|
— |
|
Long-term debt, less current portion |
|
|
627,265 |
|
|
|
598,104 |
|
Deferred income tax liability |
|
|
412,712 |
|
|
|
456,540 |
|
Royalties payable |
|
|
107,866 |
|
|
|
107,866 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ (deficit) equity |
|
|
|
|
|
|
|
|
Convertible 10% Series A cumulative preferred
stock, $1.00 par value. Authorized 375,000 shares;
2,150 issued and outstanding at June 30, 2006 and
2005. Liquidation preference value: $10 per share,
aggregating $21,500 at June 30, 2006 and 2005 |
|
|
2,150 |
|
|
|
2,150 |
|
Convertible Series J 24% cumulative preferred
stock, $1.00 par value. Authorized 60,000 shares;
52,150 shares issued and outstanding at June 30,
2006. Liquidation preference value: $100 per
share, aggregating $5,215,000 at June 30, 2006 |
|
|
5,215,000 |
|
|
|
— |
|
Common stock, $.01 par value. Authorized
250,000,000 shares at June 30, 2006 and
100,000,000 shares at June 30, 2005; 45,765,687
issued and outstanding at June 30, 2006;
37,087,677 issued and outstanding at June 30, 2005 |
|
|
457,657 |
|
|
|
370,877 |
|
Capital in excess of par value |
|
|
155,989,343 |
|
|
|
146,580,467 |
|
Accumulated deficit |
|
|
(166,176,603 |
) |
|
|
(146,680,119 |
) |
Accumulated other comprehensive income |
|
|
2,898,806 |
|
|
|
2,320,242 |
|
|
|
|
|
|
|
|
|
|
Total stockholders’ (deficit) equity |
|
|
(1,613,647 |
) |
|
|
2,593,617 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,973,966 |
|
|
$ |
21,984,792 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements which are an integral part of these statements.
F-3
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
| |
|
2006 |
|
2005 |
|
2004 |
Product sales |
|
$ |
391,213 |
|
|
$ |
278,784 |
|
|
$ |
266,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
2,428,088 |
|
|
|
2,611,406 |
|
|
|
2,046,799 |
|
Inventory write-down, net |
|
|
194,284 |
|
|
|
720,450 |
|
|
|
— |
|
Research and development |
|
|
4,596,638 |
|
|
|
4,958,105 |
|
|
|
3,592,173 |
|
Selling, general and administrative |
|
|
6,417,983 |
|
|
|
8,638,529 |
|
|
|
7,367,950 |
|
Impairment of goodwill |
|
|
— |
|
|
|
6,936,215 |
|
|
|
— |
|
Amortization of intangible assets |
|
|
157,074 |
|
|
|
168,944 |
|
|
|
158,270 |
|
Other expense (income), net |
|
|
145,873 |
|
|
|
(1,538,067 |
) |
|
|
(632,378 |
) |
Interest expense |
|
|
4,709,998 |
|
|
|
5,654,975 |
|
|
|
7,393,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and minority interest |
|
|
(18,258,725 |
) |
|
|
(27,871,773 |
) |
|
|
(19,659,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
43,828 |
|
|
|
43,828 |
|
|
|
43,828 |
|
Minority interest in net loss of subsidiary |
|
|
— |
|
|
|
1,620,239 |
|
|
|
1,438,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
|
(18,214,897 |
) |
|
|
(26,207,706 |
) |
|
|
(18,177,164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct required dividends on convertible
preferred stock, Series A |
|
|
2,150 |
|
|
|
2,150 |
|
|
|
2,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct required dividends on convertible
preferred stock, Series J |
|
|
349,762 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct discount relating to value of warrants
issued with convertible preferred stock,
Series J |
|
|
929,675 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO COMMON STOCK |
|
$ |
(19,496,484 |
) |
|
$ |
(26,209,856 |
) |
|
$ |
(18,179,714 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED NET LOSS PER SHARE OF
COMMON STOCK, after deduction for required
dividends and discount on convertible
preferred stock |
|
$ |
(0.46 |
) |
|
$ |
(0.71 |
) |
|
$ |
(0.55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES — BASIC AND
DILUTED |
|
|
42,018,617 |
|
|
|
36,697,852 |
|
|
|
33,183,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements which are an integral part of these statements.
F-4
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
Preferred |
|
|
Common Stock |
|
|
Capital |
|
|
|
|
|
|
Other |
|
|
|
|
| |
|
Stock, |
|
|
|
|
|
|
|
|
|
|
in Excess |
|
|
Accumulated |
|
|
Comprehensive |
|
|
|
|
| |
|
Series A |
|
|
Shares |
|
|
Amount |
|
|
of Par Value |
|
|
Deficit |
|
|
Income |
|
|
Total |
|
Balance at June 30, 2003 |
|
$ |
2,650 |
|
|
|
25,858,666 |
|
|
$ |
258,587 |
|
|
$ |
115,249,900 |
|
|
$ |
(102,290,549 |
) |
|
$ |
2,499,620 |
|
|
$ |
15,720,208 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(18,177,164 |
) |
|
|
— |
|
|
|
(18,177,164 |
) |
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,208,506 |
|
|
|
1,208,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,968,658 |
) |
Repurchase of Preferred Stock, Series A |
|
|
(400 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,100 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,500 |
) |
Private placement of common stock, net |
|
|
— |
|
|
|
4,546,696 |
|
|
|
45,467 |
|
|
|
8,869,683 |
|
|
|
— |
|
|
|
— |
|
|
|
8,915,150 |
|
Beneficial conversion on convertible
notes and debentures |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,362,420 |
|
|
|
— |
|
|
|
— |
|
|
|
6,362,420 |
|
Value of detachable warrants issued
with convertible notes and debentures |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,246,916 |
|
|
|
— |
|
|
|
— |
|
|
|
4,246,916 |
|
Conversion of convertible debentures
into common stock |
|
|
— |
|
|
|
3,667,055 |
|
|
|
36,671 |
|
|
|
7,227,365 |
|
|
|
— |
|
|
|
— |
|
|
|
7,264,036 |
|
Exercise of debt and equity offering
warrants |
|
|
— |
|
|
|
2,439,308 |
|
|
|
24,393 |
|
|
|
3,758,639 |
|
|
|
— |
|
|
|
— |
|
|
|
3,783,032 |
|
Exercise of compensatory common stock
options and warrants |
|
|
— |
|
|
|
18,000 |
|
|
|
180 |
|
|
|
19,620 |
|
|
|
— |
|
|
|
— |
|
|
|
19,800 |
|
Compensation expense on stock options
and warrants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,338 |
|
|
|
— |
|
|
|
— |
|
|
|
13,338 |
|
Consulting fees paid with common stock |
|
|
— |
|
|
|
49,670 |
|
|
|
497 |
|
|
|
126,043 |
|
|
|
— |
|
|
|
— |
|
|
|
126,540 |
|
Change in minority interest ownership in
Viragen International |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
508,301 |
|
|
|
— |
|
|
|
(754,052 |
) |
|
|
(245,751 |
) |
Shares of common stock issued to
certain officers and directors in lieu
of salaries and fees |
|
|
— |
|
|
|
18,429 |
|
|
|
184 |
|
|
|
38,016 |
|
|
|
— |
|
|
|
— |
|
|
|
38,200 |
|
Cancellation of shares in partial
settlement of notes receivable |
|
|
— |
|
|
|
(31,000 |
) |
|
|
(310 |
) |
|
|
(80,290 |
) |
|
|
— |
|
|
|
— |
|
|
|
(80,600 |
) |
Shares issued for fractional interests
in connection with reverse stock split |
|
|
— |
|
|
|
1,561 |
|
|
|
16 |
|
|
|
(16 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Dividend on Preferred Stock, Series A |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,550 |
) |
|
|
— |
|
|
|
(2,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2004 |
|
$ |
2,250 |
|
|
|
36,568,385 |
|
|
$ |
365,685 |
|
|
$ |
146,337,835 |
|
|
$ |
(120,470,263 |
) |
|
$ |
2,954,074 |
|
|
$ |
29,189,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements which are an integral part of these statements.
F-5
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
| |
|
Preferred |
|
Preferred |
|
Common Stock |
|
Capital |
|
|
|
|
|
Other |
|
|
| |
|
Stock, |
|
Stock, |
|
|
|
|
|
|
|
|
|
in Excess |
|
Accumulated |
|
Comprehensive |
|
|
| |
|
Series A |
|
Series J |
|
Shares |
|
Amount |
|
of Par Value |
|
Deficit |
|
Income |
|
Total |
Balance at June 30, 2004 |
|
$ |
2,250 |
|
|
$ |
— |
|
|
|
36,568,385 |
|
|
$ |
365,685 |
|
|
$ |
146,337,835 |
|
|
$ |
(120,470,263 |
) |
|
$ |
2,954,074 |
|
|
$ |
29,189,581 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(26,207,706 |
) |
|
|
— |
|
|
|
(26,207,706 |
) |
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(518,364 |
) |
|
|
(518,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,726,070 |
) |
Repurchase of Preferred Stock, Series A |
|
|
(100 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(500 |
) |
|
|
— |
|
|
|
— |
|
|
|
(600 |
) |
Shares issued as payment of interest on
convertible notes |
|
|
— |
|
|
|
— |
|
|
|
519,292 |
|
|
|
5,192 |
|
|
|
344,808 |
|
|
|
— |
|
|
|
— |
|
|
|
350,000 |
|
Change in minority interest ownership in
Viragen International |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(101,676 |
) |
|
|
— |
|
|
|
(115,468 |
) |
|
|
(217,144 |
) |
Dividend on Preferred Stock, Series A |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,150 |
) |
|
|
— |
|
|
|
(2,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005 |
|
$ |
2,150 |
|
|
$ |
— |
|
|
|
37,087,677 |
|
|
$ |
370,877 |
|
|
$ |
146,580,467 |
|
|
$ |
(146,680,119 |
) |
|
$ |
2,320,242 |
|
|
$ |
2,593,617 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(18,214,897 |
) |
|
|
— |
|
|
|
(18,214,897 |
) |
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
578,564 |
|
|
|
578,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,636,333 |
) |
Issuance of Preferred Stock, Series J, |
|
|
— |
|
|
|
5,215,000 |
|
|
|
— |
|
|
|
— |
|
|
|
(597,805 |
) |
|
|
— |
|
|
|
— |
|
|
|
4,617,195 |
|
Conversion of convertible notes into
common stock |
|
|
— |
|
|
|
— |
|
|
|
7,571,428 |
|
|
|
75,714 |
|
|
|
7,874,286 |
|
|
|
— |
|
|
|
— |
|
|
|
7,950,000 |
|
Shares issued as payment of interest on
convertible notes |
|
|
— |
|
|
|
— |
|
|
|
1,106,582 |
|
|
|
11,066 |
|
|
|
591,657 |
|
|
|
— |
|
|
|
— |
|
|
|
602,723 |
|
Value of detachable warrants issued
with convertible debentures |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
166,321 |
|
|
|
— |
|
|
|
— |
|
|
|
166,321 |
|
Additional discount on outstanding
warrants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
427,273 |
|
|
|
— |
|
|
|
— |
|
|
|
427,273 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,469 |
|
|
|
— |
|
|
|
— |
|
|
|
17,469 |
|
Dividend on Preferred Stock, Series A |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,150 |
) |
|
|
— |
|
|
|
(2,150 |
) |
Dividend on Preferred Stock, Series J |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(349,762 |
) |
|
|
— |
|
|
|
(349,762 |
) |
Discount relating to value of warrants
issued with Preferred Stock, Series J |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
929,675 |
|
|
|
(929,675 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
$ |
2,150 |
|
|
$ |
5,215,000 |
|
|
|
45,765,687 |
|
|
$ |
457,657 |
|
|
$ |
155,989,343 |
|
|
$ |
(166,176,603 |
) |
|
$ |
2,898,806 |
|
|
$ |
(1,613,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements which are an integral part of these statements.
F-6
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
| |
|
2006 |
|
2005 |
|
2004 |
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(18,214,897 |
) |
|
$ |
(26,207,706 |
) |
|
$ |
(18,177,164 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
859,146 |
|
|
|
970,492 |
|
|
|
867,824 |
|
Amortization of intangible assets |
|
|
157,074 |
|
|
|
168,944 |
|
|
|
158,270 |
|
Inventory write-down, net |
|
|
194,284 |
|
|
|
720,450 |
|
|
|
— |
|
Impairment of goodwill |
|
|
— |
|
|
|
6,936,215 |
|
|
|
— |
|
Loss on disposition of property, plant and equipment |
|
|
943,721 |
|
|
|
— |
|
|
|
126,165 |
|
Net unrealized loss (gain) on foreign exchange remeasurement |
|
|
41,743 |
|
|
|
(9,177 |
) |
|
|
— |
|
Gain on remeasurement of subsidiary intercompany liability |
|
|
— |
|
|
|
(595,776 |
) |
|
|
— |
|
Fees paid with shares of common stock |
|
|
— |
|
|
|
60,000 |
|
|
|
98,200 |
|
Compensation expense on common stock options and warrants |
|
|
17,469 |
|
|
|
— |
|
|
|
13,338 |
|
Minority interest in loss of subsidiary |
|
|
— |
|
|
|
(1,620,239 |
) |
|
|
(1,438,924 |
) |
Amortization of discounts on convertible notes and debentures |
|
|
3,045,834 |
|
|
|
3,614,075 |
|
|
|
6,268,192 |
|
Amortization of deferred financing costs |
|
|
498,974 |
|
|
|
549,604 |
|
|
|
474,033 |
|
Interest paid with shares of common stock |
|
|
|
|
|
|
350,000 |
|
|
|
— |
|
Deferred income tax benefit |
|
|
(43,828 |
) |
|
|
(43,828 |
) |
|
|
(43,828 |
) |
Provision for uncollectible notes receivable |
|
|
8,441 |
|
|
|
— |
|
|
|
57,923 |
|
Increase (decrease) relating to operating activities from: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(25,839 |
) |
|
|
(7,562 |
) |
|
|
73,546 |
|
Inventories |
|
|
(22,292 |
) |
|
|
407,251 |
|
|
|
(165,631 |
) |
Prepaid expenses |
|
|
503,601 |
|
|
|
946,673 |
|
|
|
(474,716 |
) |
Other current assets |
|
|
567,702 |
|
|
|
(42,592 |
) |
|
|
(139,375 |
) |
Accounts payable |
|
|
(107,879 |
) |
|
|
(62,935 |
) |
|
|
(852,516 |
) |
Accrued expenses and other liabilities |
|
|
651,252 |
|
|
|
(296,571 |
) |
|
|
172,369 |
|
Other |
|
|
10,714 |
|
|
|
(953 |
) |
|
|
70,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(10,914,780 |
) |
|
|
(14,163,635 |
) |
|
|
(12,911,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short-term investments |
|
|
— |
|
|
|
(5,519,700 |
) |
|
|
— |
|
Maturities of short-term investments |
|
|
— |
|
|
|
5,593,350 |
|
|
|
— |
|
Additions to property, plant and equipment |
|
|
(533,638 |
) |
|
|
(234,677 |
) |
|
|
(1,453,366 |
) |
Proceeds from sale of property, plant and equipment |
|
|
— |
|
|
|
24,738 |
|
|
|
35,783 |
|
Contribution received for capital investment in Sweden |
|
|
— |
|
|
|
278,005 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(533,638 |
) |
|
|
141,716 |
|
|
|
(1,417,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of preferred stock, Series J and warrants, net |
|
|
4,673,345 |
|
|
|
— |
|
|
|
— |
|
Proceeds from sale of convertible notes and debentures and warrants, net |
|
|
1,194,895 |
|
|
|
— |
|
|
|
18,956,611 |
|
Proceeds from private placements of common stock, net |
|
|
— |
|
|
|
— |
|
|
|
8,915,150 |
|
Proceeds from exercise of debt and equity offering warrants |
|
|
— |
|
|
|
— |
|
|
|
3,783,032 |
|
Net payments on lines of credit and short term borrowings |
|
|
(272,752 |
) |
|
|
(1,048,689 |
) |
|
|
(554,572 |
) |
Payments on convertible debentures |
|
|
(437,500 |
) |
|
|
— |
|
|
|
(65,316 |
) |
Payments on long-term debt |
|
|
(75,085 |
) |
|
|
(587,791 |
) |
|
|
(35,032 |
) |
Repurchase of preferred stock shares, Series A |
|
|
— |
|
|
|
(1,000 |
) |
|
|
(4,000 |
) |
Repurchase of shares by subsidiary |
|
|
— |
|
|
|
— |
|
|
|
(48,400 |
) |
Proceeds from exercise of compensatory common stock options and warrants |
|
|
— |
|
|
|
— |
|
|
|
19,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
5,082,903 |
|
|
|
(1,637,480 |
) |
|
|
30,967,273 |
|
Effect of exchange rate fluctuations on cash |
|
|
(76,907 |
) |
|
|
(208,335 |
) |
|
|
172,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(6,442,422 |
) |
|
|
(15,867,734 |
) |
|
|
16,810,770 |
|
Cash and cash equivalents at beginning of year |
|
|
6,885,537 |
|
|
|
22,753,271 |
|
|
|
5,942,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
443,115 |
|
|
$ |
6,885,537 |
|
|
$ |
22,753,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements which are an integral part of these statements.
F-7
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
Supplemental Cash Flow Information:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
| |
|
2006 |
|
2005 |
|
2004 |
Interest paid |
|
$ |
352,216 |
|
|
$ |
1,141,296 |
|
|
$ |
643,995 |
|
During the years ended June 30, 2006, 2005 and 2004, Viragen had the following non-cash
investing and financing activities:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
| |
|
2006 |
|
2005 |
|
2004 |
Conversion of convertible notes and debentures and accrued interest into
common stock |
|
$ |
8,552,723 |
|
|
$ |
350,000 |
|
|
$ |
7,264,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of insurance with notes payable |
|
|
268,875 |
|
|
|
224,245 |
|
|
|
571,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of intercompany balances as capital to Viragen International |
|
|
— |
|
|
|
(101,676 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense paid with common stock |
|
|
— |
|
|
|
— |
|
|
|
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment with notes payable |
|
|
94,053 |
|
|
|
— |
|
|
|
— |
|
See notes to consolidated financial statements which are an integral part of these statements.
F-8
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization: With international operations in the U.S., Scotland and Sweden, we
are a bio-pharmaceutical company engaged in the research, development, manufacture and
commercialization of therapeutic proteins for the treatment of cancers and viral diseases. Our
product and product candidate portfolio includes: Multiferon® (multi-subtype, human alpha
interferon) uniquely positioned in valuable niche indications, such as high-risk malignant
melanoma, other niche cancer indications and selected infectious diseases; VG101 (anti-GD3
antibody), a humanized monoclonal antibody that binds selectively to an antigen over-expressed on
Stage IV malignant melanoma tumors; and VG102 (anti-CD55 antibody), a highly novel humanized
monoclonal antibody that binds selectively to an antigen that is over-expressed on nearly all solid
tumors. We are also pioneering the development of the OVA™ System (Avian Transgenics), with the
renowned Roslin Institute, the creators of “Dolly the Sheep”, as a revolutionary manufacturing
platform for the large-scale, efficient and economical production of human therapeutic proteins and
antibodies, by expressing these products in the egg whites of transgenic hens.
As of June 30, 2006, we owned approximately 81.2% of Viragen International, Inc. Subsequent
to June 30, 2006, our ownership interest of Viragen International, Inc. was reduced to
approximately 77.0%. Viragen International owns 100% of ViraNative AB, our Swedish subsidiary, and
100% of Viragen (Scotland) Ltd., our Scottish research center.
On June 15, 2004, Viragen effected a one for ten reverse split of our common stock. All share
and per share information herein has been restated to retroactively reflect this reverse stock
split.
Consolidation and Basis of Presentation: The consolidated financial statements include
Viragen, Inc., Viragen International, Inc. and all subsidiaries, including those operating outside
the United States of America. All significant intercompany balances and transactions have been
eliminated. The consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, which contemplate continuation of
the Company as a going concern.
Minority interest in net loss of subsidiary, which is shown in our consolidated statements of
operations, represents the minority stockholders’ share of the net loss of Viragen International.
During our fiscal year ended June 30, 2005, stockholders’ equity of Viragen International decreased
to a deficit position. Because the minority stockholders are not required to fund the deficit, we
ceased attributing a portion of Viragen International’s losses to the minority stockholders at that
time. Since then, Viragen has absorbed 100% of Viragen International’s losses and will continue to
do so until Viragen International has positive stockholders’ equity.
During our fiscal years ended June 30, 2006, 2005 and 2004, we incurred significant operating
losses of approximately $18.2 million, $26.2 million and $18.2 million, respectively, and had an
accumulated deficit of approximately $166.2 million and a stockholders’ deficit of approximately
$1.6 million as of June 30, 2006. Additionally, we had a cash balance of approximately $443,000 and
working capital of approximately $229,000 at June 30, 2006. We anticipate additional future losses
as we commercialize our human alpha interferon product and conduct additional research activities
and clinical trials to obtain additional regulatory approvals.
In July 2006, Viragen International completed a private placement of 18,000 units with each
unit consisting of one share of Viragen International Series C 24% cumulative preferred stock and
200 shares of Viragen International common stock. Accordingly, 18,000 shares of its Series C
cumulative preferred stock and 3,600,000 shares of its common stock were issued. Viragen
International received net proceeds of approximately $1.6 million in connection with this
transaction.
F-9
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
In August 2006, Viragen International completed a private placement of 3,154 shares of Viragen
International Series D 24% cumulative preferred stock. Viragen International received net proceeds
of approximately $284,000 in connection with this transaction.
While, subsequent to June 30, 2006, Viragen International received net proceeds of
approximately $1.9 million from the sale of its preferred stock and common stock, we continue to
experience operating losses and cash flow difficulties. We believe that this additional funding
will provide sufficient cash to support our operations through at least September 2006. However, we
will require substantial additional funding to support our operations subsequent to September 2006.
In July 2006, we filed a registration statement to register 67 million units (not including 10.05
million units to cover underwriters’ over-allotment option if exercised), with each unit consisting
of one share of our common stock and one warrant to purchase one share of our common stock. If our
proposed offering is completed and depending upon the proceeds available from the offering, we
intends to provide Viragen International with funding to allow them, if permitted under applicable
law, to redeem their Series C cumulative preferred stock and Series D cumulative preferred stock,
including payment of dividends accrued thereon. We believe that the net proceeds from this
proposed secondary offering, if completed as currently contemplated and we raise the level of
proceeds anticipated, will be sufficient to fund our operations through our fiscal year ending June
30, 2007. However, our proposed secondary offering may not be completed as contemplated or we may
raise fewer net proceeds than anticipated. Our inability to complete this proposed secondary
offering as contemplated raising the anticipated level of proceeds or generate substantial revenue
or obtain additional capital through equity or debt financings would have a material adverse effect
on our financial condition and our ability to continue operations. Accordingly, we could be forced
to significantly curtail or suspend our operations, including laying-off employees, recording asset
impairment write-downs and other measures.
These factors, among others, raise substantial doubt about the Company’s ability to continue
as a going concern. The accompanying consolidated 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.
We received a deficiency letter from the American Stock Exchange, or AMEX, dated March 1,
2006, advising that, based upon its review of our financial statements included in our Quarterly
Report on Form 10-Q for the quarter ended December 31, 2005, we do not meet the AMEX’s combined
minimum stockholders’ equity and operating losses requirements. Specifically, we are not in
compliance with Section 1003(a)(i) of the AMEX Company Guide, because our stockholders’ equity is
less than $2 million and we have sustained losses from continuing operations and/or net losses in
two of our three most recent fiscal years. Previously, we received a deficiency letter from the
AMEX dated September 20, 2005, advising that, based upon its review of our financial statements
included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005, we are not in
compliance with AMEX’s continued listing standards. Specifically, we are not in compliance with
Section 1003(a)(ii) of the AMEX Company Guide, because our stockholders’ equity is less than $4
million and we have sustained losses from continuing operations and/or net losses in three out of
our four most recent fiscal years, and Section 1003(a)(iii) of the AMEX Company Guide, because our
stockholders’ equity is less than $6 million and we have sustained losses from continuing
operations and/or net losses in our five most recent fiscal years. We submitted a plan to AMEX
which outlines our plans to regain compliance with AMEX’s continued listing standards. On October
25, 2005, AMEX notified us that it accepted our plan of compliance and granted us an extension of
time until March 20, 2007 to regain compliance with AMEX’s continued listing standards. We will be
subject to periodic review by AMEX during the extension period granted by AMEX. Failure to make
progress consistent with the plan we submitted to AMEX or to regain compliance with the continued
listing standards by the end of the extension period could result in our shares being delisted from
AMEX. We have provided quarterly updates to AMEX regarding our progress with the plan.
F-10
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
In the event our common stock is delisted from AMEX, we would apply to have our common stock
listed on the over-the-counter bulletin board; however, certain institutional investors have
policies against investments in bulletin board companies and other investors may refrain from
purchasing our common stock if it is not listed on a national securities exchange. Also, we would
lose some of our existing analyst coverage and our efforts to obtain new analyst coverage would be
significantly impaired. Further, our ability to sell our equity securities and debt would be
significantly limited in numerous states because the exemption we utilize to sell these securities
without registration under applicable state securities laws requires that our common stock be
listed on AMEX. If we were required to register our equity securities or debt offerings under the
securities laws of various states, no assurance will be given as to whether we would be able to
obtain the necessary approvals from states’ securities administrators. To the extent our common
stock were to be delisted from trading on AMEX, the value of our equity securities and our ability
to sell equity securities and debt would be negatively impacted. The occurrence of these events
could have a material adverse effect on our ability to repay our outstanding debt and other
obligations.
In addition, our outstanding convertible debt contains a provision that in the event our
common stock is no longer traded on the AMEX, New York Stock Exchange or NASDAQ, the debt holders
have the right to request repayment of their outstanding principal balance with related accrued
interest. Given our current financial position, if our common stock was delisted from AMEX, and if
the convertible debt holders were to request repayment, we would be unable to repay these amounts
and would be in default under these agreements, which would significantly hamper our ability to
raise additional capital to fund our ongoing operations.
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 periods. The
accounting estimates that require management’s most difficult and subjective judgments include: the
assessment of recoverability of goodwill and long-lived assets; and the valuation of inventories.
Actual results could differ from those estimates.
Concentrations of Credit Risk: We are subject to a concentration of credit risk with respect
to our accounts receivable. We sell our human alpha interferon product to manufacturers and
distributors located outside the United States. Credit terms to our customers generally range from
30 to 180 days. We evaluate and monitor the credit worthiness of each customer on a case-by-case
basis. Allowances are maintained, if necessary, for potential credit losses.
Foreign Currency Translation and Transactions: For our operations in Scotland and Sweden,
local currencies are considered their functional currencies. For financial reporting purposes, we
translate the assets and liabilities of these operations to their U.S. dollar equivalents at rates
in effect at the balance sheet date. Intercompany accounts that are considered long-term in nature
are translated to U.S. dollars at historical rates. We translate statement of operations accounts
at monthly average rates. The resulting unrealized foreign currency translation gains and losses
are included in accumulated other comprehensive income in the stockholders’ (deficit) equity
section of our consolidated balance sheet. Intercompany trading accounts, which are short-term in
nature, are remeasured at current exchange rates as of the balance sheet date and any gains or
losses are recorded in other expense (income), net. During the fiscal year ended June 30, 2006, we
incurred a net loss of approximately $42,000 due to the remeasurement of certain balance sheet
accounts. During the fiscal year ended June 30, 2005, we incurred a net loss of approximately
$33,000 due to the remeasurement of certain balance sheet accounts. During the fiscal year ended
June 30, 2005, we also recorded a $596,000 gain on the remeasurement of a liability to Viragen,
Inc. by Viragen (Scotland), which was denominated in U.S. dollars. See Note I for further
discussion. This liability, which is now denominated in UK Pound Sterling is considered short-term
in nature.
While most of the transactions of our U.S. and foreign operations are denominated in the
respective local currency, some transactions are denominated in other currencies. Transactions
denominated in other currencies are accounted for in the respective local currency at the time of
the transaction. Upon settlement of this type of transaction, any foreign currency gains or losses
are recorded in other expense (income), net. For fiscal years 2006, 2005 and 2004, foreign
currency transaction gains and losses were immaterial to our results of operations.
F-11
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
Fair Value of Financial Instruments: Fair value estimates, assumptions and methods used to
estimate the fair value of our financial instruments are made in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair
Value of Financial Instruments. We have used available information to derive our estimates.
However, because these estimates are made as of a specific point in time, they are not necessarily
indicative of amounts we could realize currently. The use of different assumptions or estimating
methods may have a material effect on the estimated fair value amounts. The carrying value of cash
and cash equivalents, accounts receivable, accounts payable and short-term financing approximated
fair value as of June 30, 2006 and 2005, due to their short-term nature. The carrying value of
long-term debt consisting of a mortgage and equipment financing approximated fair value as of June
30, 2006 and 2005, due to the variable interest rates on a significant portion of those instruments
and because the debt is fully secured by certain fixed assets. As of June 30, 2006, the fair value
of our outstanding convertible notes and debentures with an aggregate principal amount of
approximately $13.61 million was estimated to be approximately
$8.70 million. In determining this
estimate, we considered several factors including our current financial position, maturity dates of
the instruments and the unsecured status of the convertible notes and debentures. As of June 30,
2005, the fair value of our outstanding convertible notes with an outstanding principal amount of
$20.00 million approximated fair value as of June 30, 2005, due to their short-term nature.
Cash and Cash Equivalents: Cash equivalents include demand deposits, money market funds,
certificates of deposit and time deposits with maturity periods of three months or less when
purchased.
Short-Term Investments: We invest excess cash in highly liquid instruments with maturities of
less than twelve months as of the date of purchase. During fiscal 2005, we invested a portion of
our cash in UK Pound Sterling denominated certificates of deposit, which matured prior to June 30,
2005. For the fiscal year ended June 30, 2005, we recognized a net foreign currency remeasurement
gain of approximately $74,000 related to our short-term investments.
Accounts Receivable: Accounts receivable primarily consists of amounts due from the sale of
our human alpha interferon product by our Swedish subsidiary. As of June 30, 2006 and 2005, there
was no allowance for doubtful accounts and no allowance for returns.
Inventories: Inventories consist of raw materials and supplies, work in process, and finished
product. Finished product consists of purified human alpha interferon that is available for sale.
Costs of raw materials and supplies are determined on a first-in, first-out basis. Costs of work in
process and finished product, consisting of raw materials, labor and overhead are recorded at a
standard cost (which approximates actual cost). Excess/idle capacity costs represent fixed
production costs incurred at our Swedish manufacturing facilities, which were not absorbed as a
result of the production of inventory at less than normal operating levels. Excess/idle capacity
costs are expensed in the period in which they are incurred and are included in cost of sales.
Our inventories are stated at the lower of cost or market (estimated net realizable value). If
the cost of the inventories exceeds their expected market value, provisions are recorded currently
for the difference between the cost and the market value. These provisions are determined based on
estimates. The valuation of our inventories also requires us to estimate excess inventories and
inventories that are not saleable. The determination of excess or non-saleable inventories
requires us to estimate the future demand for our product and consider the shelf life of the
inventory. If actual demand is less than our estimated demand, we could be required to record
inventory write-downs, which would have an adverse impact on our results of operations. During the
fiscal year ended June 30, 2006 we recorded net write-downs of our finished product inventory
totaling approximately $194,000. During the fiscal year ended June 30, 2005 we recorded write-downs
of our finished product inventory totaling approximately $720,000.
F-12
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
Inventories consisted of the following at June 30, 2006 and 2005:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
Finished product |
|
$ |
558,995 |
|
|
$ |
19,234 |
|
Work in process |
|
|
899,945 |
|
|
|
2,031,981 |
|
Raw materials and supplies |
|
|
362,736 |
|
|
|
298,298 |
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
1,821,676 |
|
|
$ |
2,349,513 |
|
|
|
|
|
|
|
|
|
|
Certain raw materials used in the manufacture of our human alpha interferon product, including
human white blood cells, are only available from a limited number of suppliers. We are dependent on
our suppliers to allocate a sufficient portion of their capacity to meet our needs.
Other Current Assets: Other current assets consisted of the following at June 30, 2006 and
2005:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
Deferred financing costs |
|
$ |
203,994 |
|
|
$ |
591,780 |
|
VAT tax refund receivable |
|
|
143,087 |
|
|
|
114,506 |
|
Grant receivable |
|
|
— |
|
|
|
121,824 |
|
Licensing fee |
|
|
250,000 |
|
|
|
— |
|
Other current assets |
|
|
900 |
|
|
|
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
597,981 |
|
|
$ |
832,610 |
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment: Property, plant and equipment is stated at the lower of cost
or net realizable value. Depreciation and amortization is computed using the straight-line method
over the estimated useful life of the assets for financial reporting purposes and using accelerated
methods for income tax purposes. Maintenance and repair costs are charged to operations as
incurred. The estimated useful lives used for financial reporting purposes are:
| |
|
|
Building and leasehold improvement
|
|
Shorter of lease term or 25 years |
Equipment and furniture
|
|
3-10 years |
Goodwill: In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is
not amortized but is reviewed for impairment on an annual basis or sooner if indicators of
impairment arise. Management has selected April 1st as the date of our annual
impairment review. All of our goodwill arose from Viragen International’s acquisition of
ViraNative on September 28, 2001 and the subsequent achievement of certain milestones defined in
the acquisition agreement. We periodically evaluate that acquired business for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are based on legal
factors, market conditions, and the operational performance of the acquired business. See Note B
for the goodwill impairment charge that was recorded in our fiscal year ended June 30, 2005.
Changes in the estimates used to conduct the impairment review, including revenue projections or
market values, could cause our analysis to indicate that our goodwill is further impaired in
subsequent periods and result in a write-off of a portion or all of our goodwill.
Intangible Assets: Intangible assets consist of separately identified intangible assets
recognized in connection with the acquisition of ViraNative on September 28, 2001. In accordance
with SFAS No. 142, intangible assets with definite useful lives are amortized over their useful
lives. Amortization of intangible assets is computed using the straight-line method over the
estimated useful life of the asset.
F-13
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
Impairment of Long-Lived Assets: In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we review our long-lived assets, including intangible
assets, for impairment whenever events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. The assessment of possible impairment is based
on our ability to recover the carrying value of our asset based on our estimate of its undiscounted
future cash flows. If these estimated future cash flows are less than the carrying value of the
asset, an impairment charge is recognized for the difference between the asset’s estimated fair
value and its carrying value. As of the date of these financial statements, we are not aware of
any items or events that would cause us to adjust the recorded value of our long-lived assets,
including intangible assets, for impairment.
During our fiscal year ended June 30, 2006, and as a result of our efforts to reduce our
operating expenses by decreasing the amount of lease space utilized by our operations, we recorded
a write-off of approximately $930,000 related to certain leasehold improvements and equipment
located at our facility in Scotland. These assets were deemed to have no fair value as they will
be disposed of and we do not expect to receive any salvage value. This write-off has been recorded
in the other expense (income), net line item of our consolidated statement of operations.
Accrued Expenses and Other Liabilities: Accrued expenses and other liabilities consisted of
the following at June 30, 2006 and 2005:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
Accrued payroll and related expenses |
|
$ |
291,449 |
|
|
$ |
459,786 |
|
Accrued professional services fees |
|
|
450,449 |
|
|
|
364,750 |
|
Accrued dividends on preferred stock, Series J |
|
|
349,762 |
|
|
|
— |
|
Accrued interest on convertible notes |
|
|
210,875 |
|
|
|
— |
|
Other accrued expenses |
|
|
338,366 |
|
|
|
292,101 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,640,903 |
|
|
$ |
1,116,637 |
|
|
|
|
|
|
|
|
|
|
Convertible Debt and Equity Issued with Stock Purchase Warrants: We account for the issuance
of and modifications to our convertible debt issued with stock purchase warrants in accordance with
APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, EITF No.
98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, and EITF No. 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments and SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings.
Sale of Stock by Subsidiaries: We account for sales of stock by our subsidiaries as capital
transactions for financial reporting purposes.
Revenue: We recognize revenue from sales of our human alpha interferon product when title and
risk of loss has been transferred, which is generally upon shipment. Moreover, recognition requires
persuasive evidence that an arrangement exists, the price is fixed and determinable, and
collectibility is reasonably assured.
Advertising: Advertising costs are charged to expense as incurred. Advertising expenses for
fiscal years 2006, 2005 and 2004 were immaterial to our results of operations.
Research and Development Costs: We account for research and development costs in accordance
with SFAS No. 2, Accounting for Research and Development Costs. Accordingly, all research and
development costs are expensed as incurred.
F-14
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
Stock-Based Compensation: Effective July 1, 2005, we adopted the fair value recognition
provisions of SFAS No. 123(R), Share-Based Payment, using the modified-prospective-transition
method. Under that transition method, stock-based compensation cost recognized subsequent to July
1, 2005 includes: (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of July 1, 2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, and (b) compensation cost for all stock-based compensation
granted subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with
the provisions of SFAS No. 123(R). The amount of stock-based compensation costs included in our
consolidated statement of operations for our fiscal year ended June 30, 2006 for stock options
granted to employees and directors prior to July 1, 2005, which were not fully vested as of July 1,
2005, was approximately $17,000. As of June 30, 2006 there are 50,000 outstanding stock options
that have not vested and the amount of unrecognized stock-based compensation for these stock
options is approximately $47,000, which will be recognized on a straight-line basis over the next
three years.
As previously permitted under SFAS No. 148, Accounting for Stock-Based
Compensation—Transition and Disclosure, which amended SFAS No. 123, Accounting for Stock-Based
Compensation, we accounted for our employee and director stock-based compensation arrangements
under the provisions of Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for
Stock Issued to Employees, and related interpretations. Under APB No. 25, compensation expense for
stock option grants was recognized if the exercise price was less than the fair value of our common
stock on the grant date. No stock-based compensation costs were recognized in our consolidated
statements of operations for our fiscal years ended June 30, 2005 and 2004, since the exercise
prices of stock options granted to our employees and directors during our fiscal years ended June
30, 2005 and 2004 were equal to the market price of our common stock on the date of grant.
The following table illustrates the effect on net loss and loss per common share if we had
applied the fair value recognition provisions of SFAS No. 123 to measure stock-based compensation
for our fiscal years ended June 30, 2005 and 2004.
| |
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended June 30, |
| |
|
2005 |
|
2004 |
Net loss as reported |
|
$ |
(26,207,706 |
) |
|
$ |
(18,177,164 |
) |
Stock-based compensation determined under the
fair value method |
|
|
(88,654 |
) |
|
|
(151,225 |
) |
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
|
(26,296,360 |
) |
|
|
(18,328,389 |
) |
|
|
|
|
|
|
|
|
|
Preferred dividends, Series A |
|
|
(2,150 |
) |
|
|
(2,550 |
) |
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to common stock |
|
$ |
(26,298,510 |
) |
|
$ |
(18,330,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share after deduction of
required dividends on convertible preferred
stock: |
|
|
|
|
|
|
|
|
Basic and diluted — as reported |
|
$ |
(0.71 |
) |
|
$ |
(0.55 |
) |
Basic and diluted — pro forma |
|
$ |
(0.72 |
) |
|
$ |
(0.55 |
) |
Pro forma information regarding net loss and loss per share has been determined as if we
had accounted for our employee and director stock-based compensation under the fair value method.
The fair value for employee and director stock-based compensation, which consists of stock options,
was estimated at the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: dividend yield of zero percent for all periods; expected life of the
stock option within a range of 3 to 10 years; risk-free interest rates within a range of 2.04% to
3.50%; and a volatility factor of the expected market price of Viragen’s common stock of 1.15 and
1.07 for our fiscal years ended June 30, 2005 and 2004, respectively. The weighted average grant
date fair value of stock options granted during our fiscal years ended June 30, 2005 and 2004 was
$0.59 and $1.38, respectively. For stock options subject to vesting, pro forma expense is
recognized on a straight-line basis over the vesting period.
F-15
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
Our 1995 Stock Option Plan, which was adopted in May 1995 and amended in September 1995,
authorized the grant of stock options to officers, directors, employees and consultants for up to
400,000 shares of Viragen common stock. Stock options granted under the 1995 Stock Option Plan have
various vest dates and all stock options granted have five-year terms from the vest dates. The
1995 Stock Option Plan expired in May 2005. This expiration did not affect the validity of
outstanding stock options previously granted under the plan.
Our 1997 Stock Option Plan, adopted in February 1997 with a 10-year life, authorized the grant
of stock options to officers, directors, employees and consultants for up to 300,000 shares of
common stock. In April 1998, the 1997 Stock Option Plan was amended increasing the number of shares
of common stock authorized to 400,000 shares. Stock options granted under the plan have various
vest dates and all stock options granted have five-year terms from the vest dates. The maximum
term of any option granted under the plan is ten years. At June 30, 2006, approximately 159,000
shares were available for issuance under the 1997 Stock Option Plan.
In April 2006, our Board of Directors adopted, subject to approval by our stockholders, the
Viragen 2006 Equity Compensation Plan, reserving an aggregate of 4 million shares of our common
stock. The Board of Directors also issued 843,000 stock options to directors, officers and certain
employees. The exercise price of each option is $0.57 per share, and each option vests half upon
the date of issuance and the remaining half upon the first anniversary of the date of issuance.
However, no shares issuable upon exercise of the options can be issued until the 2006 Equity
Compensation Plan is approved by our stockholders. Therefore, no measurement date can be
established under SFAS No. 123(R). Accordingly, no stock-based compensation expense has been
recognized in our consolidated statement of operations for our fiscal year ended June 30, 2006 in
connection with this issuance of options. The tables below regarding option activity exclude these
843,000 options exercisable at $0.57 per share. We intend to seek stockholder approval of our 2006
Equity Compensation Plan at our next annual stockholders’ meeting. Following, and subject to,
stockholder approval of the Viragen 2006 Equity Compensation Plan, we will recognize the fair value
of the options granted under the provisions of SFAS No. 123(R).
A summary of Viragen’s stock option activity and related information is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
| |
|
Options |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
Outstanding at June 30, 2005 |
|
|
334,467 |
|
|
$ |
5.50 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Canceled/Expired |
|
|
(37,684 |
) |
|
|
13.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
296,783 |
|
|
$ |
4.46 |
|
|
3.37 years |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
246,783 |
|
|
$ |
4.94 |
|
|
2.48 years |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During our fiscal years ended June 30, 2006 and 2005 no stock options were exercised. During
our fiscal year ended June 30, 2004, the aggregate intrinsic value of stock options exercised was
approximately $27,000.
F-16
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
We account for our stock-based compensation arrangements with non-employees in accordance with
SFAS No. 123 and related guidance, including EITF No. 96-18, Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.
Accordingly, we recognize as expense the estimated fair value of such instruments as calculated
using the Black-Scholes valuation model. The estimated fair value is re-determined each quarter
using the methodologies allowable by SFAS No. 123 and EITF No. 96-18 and the expense is amortized
over the vesting period of each instrument or the recipient’s contractual arrangement, if shorter.
We did not issue stock-based compensation to non-employees during our fiscal years ended June 30,
2006 and 2005 and no expense was recognized during our fiscal years ended June 30, 2006 and 2005
for stock-based compensation issued prior to our fiscal year ended June 30, 2005. During our
fiscal year ended June 30, 2004, we recognized net stock-based compensation expense of
approximately $13,000 due to the variable accounting treatment of certain unvested warrants that
were issued to non-employees during our fiscal years ended June 30, 1999 through 2004. The
weighted-average fair value of the warrants issued during our fiscal year ended June 30, 2004 was
$1.60.
A summary of Viragen’s warrant activity, excluding warrants issued in conjunction with debt
and equity offerings, and related information is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
| |
|
Warrants |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
Outstanding at June 30, 2005 |
|
|
117,500 |
|
|
$ |
23.24 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Canceled/Expired |
|
|
(110,000 |
) |
|
|
22.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
7,500 |
|
|
$ |
38.70 |
|
|
1.96 years |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
7,500 |
|
|
$ |
38.70 |
|
|
1.96 years |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective July 1, 2005, our majority-owned subsidiary, Viragen International, also adopted the
fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the
modified-prospective-transition method. Under that transition method, stock-based compensation cost
recognized subsequent to July 1, 2005 includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of July 1, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for
all stock-based compensation granted subsequent to July 1, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123(R). For our fiscal year ended June 30,
2006, we did not recognize any stock-based compensation costs in our consolidated statement of
operations as all of Viragen International’s stock options granted to employees and directors prior
to July 1, 2005 were fully vested as of July 1, 2005 and no stock-based compensation was granted by
Viragen International during our fiscal year ended June 30, 2006. As of June 30, 2006, all of
Viragen International’s outstanding stock options have vested and there is no unrecognized
stock-based compensation for Viragen International’s outstanding stock options.
As previously permitted under SFAS No. 148, Accounting for Stock-Based
Compensation—Transition and Disclosure, which amended SFAS No. 123, Accounting for Stock-Based
Compensation, Viragen International also accounted for their employee and director stock-based
compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25 (APB
No. 25), Accounting for Stock Issued to Employees, and related interpretations. Under APB No. 25,
compensation expense for stock option grants was recognized if the exercise price was less than the
fair value of Viragen International’s common stock on the grant date. No stock-based compensation
costs were recognized in our consolidated statements of operations for our fiscal years ended June
30, 2005 and 2004 as Viragen International did not issue any stock-based compensation during our
fiscal year ended June 30, 2005 and since the exercise price of Viragen International’s employee
and director stock options granted during our fiscal year ended June 30, 2004 were
equal to the market price of Viragen International’s common stock on the date of grant.
F-17
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
Prior to July 1, 2006, Viragen International accounted for their stock-based compensation in
the same manner in which we did. Our pro forma information regarding net loss and loss per share
includes Viragen International’s stock-based compensation and has been determined as if Viragen
International had accounted for its employee and director stock-based compensation, which consists
of stock options, under the fair value method. Viragen International did not grant stock options
during our fiscal year ended June 30, 2005 but did grant stock options to its employees and
directors during our fiscal year ended June 30, 2004. The fair value of Viragen International’s
stock options granted during our fiscal year ended June 30, 2004 was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average assumptions:
dividend yield of zero percent; risk-free interest rate of 2.00%; volatility factor of the expected
market price of Viragen International’s common stock of 1.02; and an expected life of the stock
option of three years. The weighted average grant date fair value of Viragen International’s stock
options granted during our fiscal year ended June 30, 2004 was $0.22. For stock options subject to
vesting, pro forma expense was recognized on a straight-line basis over the vesting period.
Viragen International’s 1997 Incentive Stock Option Plan authorized the grant of options to
employees, directors, or consultants for up to 600,000 shares of our common stock, of which 364,300
remained available for issuance at June 30, 2006. Options granted under the plan generally vest
half upon the date of grant and half upon the first anniversary of the date of grant. All options
granted have five year terms from the respective vest dates. The maximum term of any option
granted under the plan is ten years.
A summary of stock option activity under Viragen International’s 1997 Incentive Stock Option
Plan and related information is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
| |
|
Options |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
Outstanding at June 30, 2005 |
|
|
325,500 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Canceled/Expired |
|
|
(92,000 |
) |
|
|
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
233,500 |
|
|
$ |
0.58 |
|
|
1.31 years |
|
$ |
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
233,500 |
|
|
$ |
0.58 |
|
|
1.31 years |
|
$ |
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
Income Taxes: Deferred income taxes at the end of each period are determined by applying
enacted tax rates applicable to future periods in which the taxes are expected to be paid or
recovered to differences between financial accounting and tax bases of assets and liabilities.
Based on our accumulated losses, a full valuation allowance is provided to reduce deferred income
tax assets to the amount that will more likely than not be realized.
Loss Per Common Share: Loss per common share has been computed based on the weighted average
number of shares outstanding during each period, in accordance with SFAS No. 128, Earnings per
Share. The effect of outstanding stock options, stock purchase warrants and convertible debt and
equity securities, which could result in the issuance of 34,709,366, 21,883,804, and 22,048,523
shares of common stock at June 30, 2006, 2005 and 2004, respectively, is antidilutive. As a result,
diluted loss per share data does not include the assumed exercise of outstanding stock options,
stock purchase warrants or conversion of convertible debt and equity securities and has been
presented jointly with basic loss per share. Loss attributable to common stock reflects adjustments
for dividends on preferred stock and the discount related to the value of warrants issued with the
Series J cumulative convertible preferred stock.
Comprehensive Loss: SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income or loss and its components in financial statements.
As reflected in our consolidated statements of stockholders’ (deficit) equity, our comprehensive
loss is a measure of net loss and all other changes in equity that result from transactions other
than with stockholders. Our comprehensive loss consists of net loss and foreign currency
translation adjustments.
F-19
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE B — GOODWILL AND OTHER INTANGIBLE ASSETS
On September 28, 2001, Viragen International, Inc., our majority owned subsidiary, acquired
all of the outstanding shares of BioNative AB (“BioNative”), a privately held biotechnology company
located in Umeå, Sweden. Subsequent to the acquisition, BioNative was renamed ViraNative. The
initial purchase consideration consisted of 2,933,190 shares of Viragen International common stock.
In January 2002, ViraNative achieved two milestones defined in the acquisition agreement. As a
result, the former shareholders of ViraNative were issued an additional 8,799,570 shares of Viragen
International common stock.
The goodwill reported in our consolidated balance sheets as of June 30, 2006 and 2005 arose
from Viragen International’s acquisition of ViraNative and the subsequent achievement of the
milestones. Subsequent to the initial recording of goodwill, the carrying amount has increased as a
result of foreign currency fluctuations between the U.S. dollar and the Swedish Krona. The
following table reflects the changes in the carrying amount of goodwill for our fiscal years ended
June 30, 2006 and 2005:
| |
|
|
|
|
Balance as of June 30, 2004 |
|
$ |
10,295,140 |
|
Foreign exchange adjustment |
|
|
294,234 |
|
Impairment charge |
|
|
(6,936,215 |
) |
|
|
|
|
|
Balance as of June 30, 2005 |
|
|
3,653,159 |
|
Foreign exchange adjustment |
|
|
237,256 |
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
3,890,415 |
|
|
|
|
|
|
Due to a lack of significant revenues from our human alpha interferon product and a longer
than anticipated timeframe to receive regulatory approvals in certain markets, revenue, operating
profits and cash flows for the ViraNative reporting unit were lower than expected during our fiscal
year ended June 30, 2005. Primarily based on this trend, the revenue projections for the next
several years were revised downward. As a result of these revised projections, the present value of
the future estimated cash flows from the reporting unit were significantly less than those
estimated in prior periods. The fair value of the ViraNative reporting unit was estimated using a
combination of the present value of estimated future cash flows, quoted market prices and market
multiples from comparable businesses. After evaluating the results of these valuation methods, a
goodwill impairment charge of approximately $6.9 million was recognized in our fiscal year ended
June 30, 2005 on the ViraNative reporting unit.
The developed technology intangible asset reported in our consolidated balance sheets as of
June 30, 2006 and 2005 arose from Viragen International’s acquisition of ViraNative on September
28, 2001. A detail of our developed technology intangible asset as of June 30, 2006 and 2005 is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
Developed technology |
|
$ |
2,329,754 |
|
|
$ |
2,187,675 |
|
Accumulated amortization |
|
|
(781,153 |
) |
|
|
(579,090 |
) |
|
|
|
|
|
|
|
|
|
Developed technology, net |
|
$ |
1,548,601 |
|
|
$ |
1,608,585 |
|
|
|
|
|
|
|
|
|
|
Our developed technology consists of the production and purification methods developed by
ViraNative prior to the acquisition by Viragen International. This technology was complete and
ViraNative had been selling the resultant human alpha interferon product prior to the acquisition
by Viragen International. Developed technology was recorded at its estimated fair value at the date
of acquisition. Subsequent to the initial recording of this intangible asset, the gross carrying
amount has increased by approximately $680,000 as a result of foreign currency fluctuations between
the U.S. dollar and the Swedish Krona.
F-20
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE B — GOODWILL AND OTHER INTANGIBLE ASSETS — (Continued)
Developed technology is being amortized over its estimated useful life of approximately 14
years. The 14-year life assigned to this asset was determined using a weighted average of the
remaining lives of the patents on the various components of the production and purification
processes.
Amortization expense recognized for our fiscal year ended June 30, 2006 was approximately
$157,000. Estimated amortization expense for the five succeeding fiscal years is as follows:
| |
|
|
|
|
2007 |
|
$ |
164,000 |
|
2008 |
|
|
164,000 |
|
2009 |
|
|
164,000 |
|
2010 |
|
|
164,000 |
|
2011 |
|
|
164,000 |
|
NOTE C — CONVERTIBLE NOTES AND DEBENTURES
Details of our convertible notes and debentures outstanding at June 30, 2006 and 2005 are as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
Outstanding principal |
|
$ |
13,612,500 |
|
|
$ |
20,000,000 |
|
Less discounts |
|
|
(2,012,766 |
) |
|
|
(3,895,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
11,599,734 |
|
|
|
16,104,994 |
|
Less current portion, net of discounts |
|
|
(453,918 |
) |
|
|
(16,104,994 |
) |
|
|
|
|
|
|
|
|
|
Long term portion |
|
$ |
11,145,816 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, the convertible notes and debentures balance was comprised of convertible
notes issued on June 18, 2004, with an outstanding principal amount of $12.05 million, and
convertible debentures issued September 15, 2005 with an outstanding principal amount of $1.56
million. At June 30, 2005, the convertible notes and debentures balance was comprised solely of
convertible notes issued on June 18, 2004, with an outstanding principal amount of $20.00 million.
In September 2005, the terms of the convertible notes issued on June 18, 2004 were modified
resulting in a reclassification of the principal due from current to long term. See further
discussion below.
September 15, 2005 Convertible Debentures
On September 15, 2005, we entered into a securities purchase agreement under which we issued
our convertible, amortizing debentures in the aggregate principal amount of $2.0 million to four
returning institutional investors. Under the terms of the agreement, we received approximately
$1.2 million, net of original issue discounts of $570,000, a $200,000 finder’s fee and legal
expenses. This agreement also provided for the issuance to the purchasers of an aggregate of
952,381 three-year common stock purchase warrants exercisable at a price of $1.25 per share.
The debentures are convertible at a conversion price of $1.05 per share, subject to
adjustment, including in the event that we subsequently issue securities at less than the
conversion price then in effect (other than an “exempt issuance” as defined in the debentures).
The debentures provide for amortization in 32 equal monthly installments of principal, commencing
on January 1, 2006. Monthly amortization payments may be made, at our option, in cash, accompanied
by a 10% premium, or in shares of our common stock at a 5% discount to market price (computed by
reference to the volume weighted average price of our common stock during the five trading day
period immediately preceding the amortization due date). We have the right to require the debenture
holders to convert their debentures in the event that the volume weighted average price of our
common stock exceeds $2.00 per share for 30 consecutive trading days, the resale of the shares
issuable upon conversion of the debentures is covered by an effective registration statement, and
certain other conditions are met.
F-21
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE C — CONVERTIBLE NOTES AND DEBENTURES — (Continued)
In lieu of stated interest, the debentures provided for an original issue discount equal to
$570,000, the equivalent of 9.5% interest over the three year life of the debentures. For the
fiscal year ended June 30, 2006, we recognized approximately $226,000 as interest expense from the
amortization of the original issue discount.
The warrants issued in connection with these debentures are exercisable during the three year
period ending September 15, 2008. Subject to certain conditions, we have the right to call the
warrants if the volume weighted average price for our common stock exceeds 250% of the prevailing
exercise price of the warrants for 20 consecutive trading days. The relative fair value of these
warrants was calculated to be approximately $166,000 using a Black-Scholes valuation model. The
relative fair value of these warrants was recorded as a discount on the principal amount of the
debentures and are being amortized to interest expense using the effective interest rate method
over the life of the debentures. For the fiscal year ended June 30, 2006, we recognized
approximately $66,000 as non-cash interest expense from the amortization of the discount that arose
from the issuance of the warrants.
We incurred costs of approximately $290,000 in connection with the debentures issued under the
September 15, 2005 securities purchase agreement, which primarily consisted of the finder’s fees,
registration fees and legal and accounting expenses. These costs are being amortized to interest
expense over the life of the debentures using the effective interest rate method. For the fiscal
year ended June 30, 2006, we recognized approximately $115,000 as interest expense from the
amortization of these debt issuance costs.
Resale of the shares issuable upon conversion or payment of the debentures and upon exercise
of the related warrants is registered under our Form S-3 registration statement (File No.
333-129319) filed with the Securities and Exchange Commission, which was declared effective on
November 9, 2005. If, following the effective date of the registration statement, the registration
statement ceases to remain effective for ten consecutive calendar days, but no more than an
aggregate of fifteen days during any twelve month period, or if we fail to deliver unlegended
shares to the investors as and when required, we are subject to the payment of liquidated damages,
payable in cash, based on a percentage of the aggregate purchase price of the then outstanding
balance of the convertible debentures.
During the fiscal year ended June 30, 2006, we made cash payments aggregating $481,000 to the
holders of these convertible debentures, which represented seven monthly installments, including
the additional 10% premium for principal payments made in cash. As of June 30, 2006, $1.56 million
of the principal amount of these convertible debentures remained outstanding.
June 2004 Convertible Notes, as amended
On April 1, 2004, we entered into purchase agreements for the issuance and sale of 7%
convertible promissory notes due March 31, 2006, and common stock purchase warrants in the
aggregate amount of $20 million. The notes were placed with a group of new and returning
institutional investors. The $20 million purchase price for the notes and warrants was placed in
escrow pending satisfaction of all conditions precedent to closing, including receipt of
stockholder approval for the sale of the notes and warrants, as well as a one for ten reverse split
of our common stock. On June 11, 2004 our stockholders voted to approve the sale of the notes and a
one for ten reverse split of our common stock. On June 18, 2004, we completed the sale of the
notes and warrants. Under the terms of these agreements, we received approximately $18.96 million,
net of finder’s fees and legal expenses. These agreements also provided for the issuance to the
purchasers of an aggregate of 5,357,051 three-year common stock purchase warrants initially
exercisable at $1.819 per share. In connection with the April 1, 2004 purchase agreements, we paid
a finder’s fee of 5% or $1 million and issued the finder 80,000 three-year common stock purchase
warrants initially exercisable at a price of $1.516 per share.
The purchase agreements provided that we pay interest on the escrowed purchase price at the
rate of 10% per annum until the closing date. From April 1, 2004 through June 18, 2004, the total
amount of interest paid on the escrowed purchase price totaled approximately $428,000.
F-22
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE C — CONVERTIBLE NOTES AND DEBENTURES — (Continued)
On September 15, 2005, we entered into agreements with each of the eight note holders to:
| |
• |
|
extend the maturity date of the notes from March 31, 2006 to August 31, 2008; |
| |
| |
• |
|
reduce the conversion price from $1.516 to $1.05 per share. This conversion
price, with certain exceptions, is subject to reductions if we enter into
additional financing transactions for the sale of our common stock below the
public trading price and below the conversion price; |
| |
| |
• |
|
provide for mandatory conversion of the notes if the volume weighted average
price for our common stock exceeds $2.00 per share for 30 consecutive trading days; |
| |
| |
• |
|
amend the adjustment provisions of the notes and the warrants to provide for
“full ratchet” rather than “weighted average” adjustments in the event that we
issues securities in the future (other than an “exempt issuance” as defined in the
notes) for a price of less than the then current conversion price of the notes or
119% of the then current exercise price of the warrants, as the case may be. Full
ratchet adjustments reduce the conversion and exercise prices to the lowest price
at which we may issue securities in the future. Weighted average adjustments reduce
the conversion and exercise prices to a lower price, weighted based upon the
average price at which our shares have been sold; and |
| |
| |
• |
|
expand the definition of “exempt issuance” under the notes and related warrants
to exclude from the adjustment provisions of the notes and related warrants, our
issuance of shares (a) in a firm commitment public offering by a reputable
underwriter, (b) under equity compensation plans approved by a majority of our
independent directors or a majority of the non-employee members of a committee of
the board, (c) in connection with any future acquisition of the minority interest
in Viragen International, Inc. and (d) in connection with strategic transactions
not undertaken with the primary purpose of raising capital. |
| |
| |
• |
|
reduce the exercise price of the related warrants to $1.25 per share. As a
result of the reduction in the exercise price of the warrants, the holders were
entitled to an additional 2.4 million warrants with an exercise price of $1.25 per
share. |
Interest on the notes remains payable quarterly at an annual rate of 7%. Quarterly interest
payments are payable in cash or, at our option, in shares of our common stock based upon the
average market price of our common stock during the 20 consecutive trading days prior to and
including the interest payment date, subject to certain conditions. The amount of interest on the
notes following the closing of this transaction through June 30, 2004 totaled approximately $51,000
and was paid in cash. Interest on these notes for the fiscal year ended June 30, 2005 totaled
approximately $1.40 million of which $1.05 million was paid in cash and $350,000 was settled
through the issuance of 519,292 shares of our common stock valued at $0.67 per share. Interest on
these notes for the fiscal year ended June 30, 2006 totaled approximately $1.07 million. The
quarterly interest due July 1, 2006 of approximately $211,000 was satisfied through the issuance of
532,515 shares of our common stock valued at $0.40 per share. The quarterly interest due April 1,
2006 of approximately $232,000 was satisfied through the issuance of 387,403 shares of our common
stock valued at $0.60 per share. The quarterly interest due January 1, 2006 of approximately
$284,000 was satisfied through the issuance of 576,857 shares of our common stock valued at $0.49
per share. The quarterly interest due October 1, 2005 of approximately $345,000 was satisfied
through the payment of approximately $258,000 in cash and the issuance of 142,322 shares of our
common stock valued at $0.61 per share.
As a result of the amendments to the notes and our financial condition at that time, the
modifications to the notes (which included a reduction of the conversion price and extension on the
maturity date) were accounted for as a troubled debt restructuring under SFAS No. 15, Accounting by
Debtors and Creditors for Troubled Debt Restructurings and EITF 02-04, Determining Whether a
Debtor’s Modification or Exchange of Debt Instruments is within the Scope of FASB Statement No. 15.
A modification in a troubled debt restructuring is accounted for prospectively. As a result of the
reduced exercise price of the warrants and the issuance of additional warrants on September 15,
2005, we recorded an additional discount of approximately $427,000 on the principal amount of the
notes with a corresponding increase to capital in excess of par value. This additional discount,
together with the unamortized original discount as of the modification date, is being amortized
over the new term of the notes using the effective interest rate method.
F-23
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE C — CONVERTIBLE NOTES AND DEBENTURES — (Continued)
The relative fair value of the warrants initially issued was calculated to be approximately
$3,264,000 using a Black-Scholes valuation model. The relative fair value of these warrants was
recorded as a discount on the principal amount of the notes. As discussed above, we recorded an
additional discount of approximately $427,000 on the principal amount of the notes due to the
reduction of the exercise price of the warrants and the issuance of additional warrants. The
aggregate discount is being amortized to interest expense using the effective interest rate method
over the life of the notes. For our fiscal years ended June 30, 2006, 2005 and 2004, we recognized
non-cash interest expense from the amortization of this discount of approximately $1,308,000,
$1,545,000 and $54,000, respectively.
As a result of the calculated effective conversion price of the notes, a beneficial conversion
amount of approximately $4,372,000 was calculated and recorded as a discount on the principal
amount of the notes at the date of issuance. This discount is being amortized to interest expense
using the effective interest rate method over the life of the notes. For our fiscal years ended
June 30, 2006, 2005 and 2004, we recognized non-cash interest expense from the amortization of this
discount of approximately $1,447,000, $2,069,000 and $73,000, respectively.
In connection with the April 1, 2004 purchase agreements, we incurred costs of approximately
$1,161,000. These costs primarily consisted of the finder’s fee of 5%, or $1 million, the fair
value of 80,000 three-year common stock purchase warrants exercisable at a price of $1.516 per
share issued to the finder, and legal and accounting expenses. These costs are being amortized to
interest expense over the life of the notes using the effective interest rate method. For our
fiscal years ended June 30, 2006, 2005 and 2004, we recognized interest expense from the
amortization of these debt issuance costs of approximately $384,000, $550,000 and $19,000,
respectively.
During our fiscal year ended June 30, 2006, several of the note holders converted an aggregate
of $7,950,000 of principal at the $1.05 conversion price resulting in the issuance of 7,571,428
shares of our common stock.
The notes may be prepaid at 110% of their face amount, plus the issuance to note holders of
additional warrants to purchase the number of shares of our common stock into which the notes would
otherwise have been convertible, at an exercise price equal to the prevailing conversion price of
the notes. If issued on prepayment, the warrants may be exercised for the period that would have
been the remaining life of the notes had they not been prepaid. We also have the right to require
note holders to convert their notes, subject to certain limitations; if the volume weighted average
price of our common stock exceeds $2.00 per share for 30 consecutive trading days.
The notes are subject to acceleration in the event of our default under the notes, which
events of default include, among others:
| |
• |
|
our failure to pay the principal on the notes when due or any installment of
interest on the notes when due, and such failure continues for a period of five
business days after the due date; or |
| |
| |
• |
|
our failure to issue shares of our common stock to a note holder upon exercise
of the holder’s conversion or purchase rights within two trading days after the due
date therefore. |
If any event of default occurs under the notes, at the option of the note holder, we are
required to pay to the holder an amount equal to 110% of the sum of the outstanding principal
amount of the notes, plus accrued and unpaid interest on the principal amount to the date of
payment, plus accrued and unpaid default interest, if any.
Resale of the shares issuable upon conversion or payment of the notes and related interest and
upon exercise of the warrants is registered under our Form S-3 registration statement (File No.
333-117338) filed with the Securities and Exchange Commission, which was declared effective on July
28, 2004. If, following the effective date of the registration statement, the registration
statement ceases to remain effective or if Viragen fails to deliver unlegended shares to the
investors as and when required, Viragen is subject to the payment of liquidated damages, payable in
cash, based on a percentage of the aggregate purchase price of the then outstanding balance of the
convertible notes.
F-24
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE C — CONVERTIBLE NOTES AND DEBENTURES — (Continued)
June 2003 Convertible Debentures
On June 27, 2003, we entered into a securities purchase agreement with five unrelated
institutional investors. The securities purchase agreement provided for the purchase and sale of
our convertible debentures in the aggregate amount of approximately $5.55 million. Under the terms
of the agreement, Viragen received approximately $4.55 million, net of original issue discounts of
approximately $661,000, and a 6.5% finder’s fee and legal expenses. This agreement also provided
for the issuance to the purchasers of an aggregate of 1,354,664 five-year common stock purchase
warrants exercisable at a price of $1.722 per share. In connection with the June 2003 securities
purchase agreement, we also issued the finder 19,571 five-year common stock purchase warrants
exercisable at a price of $1.722 per share.
These convertible debentures were to mature on September 1, 2005, and were payable, without
interest, in 24 equal payments of principal commencing September 1, 2003. In lieu of interest, the
debentures provided for an original issue discount of approximately $661,000, the equivalent of 10%
interest over the two year life of the debenture. For the fiscal year ended June 30, 2004, we
recognized approximately $659,000 as interest expense from the amortization of the original issue
discount. As of December 31, 2003, this original issue discount had been fully amortized to
interest expense.
The warrants issued in connection with the June 2003 debentures are exercisable during the
five year period ending June 1, 2008 and can be exercised on a cashless basis whereby the holder
may surrender a number of warrants with value equal to the exercise price of the warrants being
exercised. The relative fair value of these warrants was initially calculated to be approximately
$1,381,000 using a Black-Scholes valuation model. The relative fair value of these warrants was
recorded as a discount on the principal amount of the debentures and was amortized to interest
expense using the effective interest rate method over the life of the debentures. As a result of
the revaluation of these warrants (see Warrant Revaluation below), we recorded an additional
discount on the principal amount of the debentures totaling approximately $405,000. For the fiscal
year ended June 30, 2004, we recognized approximately $1,780,000 as non-cash interest expense from
the amortization of the discount that arose from the issuance of the warrants. As of December 31,
2003, the entire discount resulting from the issuance of the warrants had been fully amortized to
interest expense.
As a result of the common stock purchase warrants issued in connection with these debentures
and the calculated effective conversion price of the debentures, a beneficial conversion amount of
approximately $689,000 was initially calculated and recorded as a discount on the principal amount
of the debentures at the date of issuance. As a result of a subsequent financing transaction
entered into in September 2003, the conversion price of these debentures was reduced from $3.17 to
$2.24. Due to this reduction in the conversion price of these debentures, an additional beneficial
conversion amount of approximately $1,382,000 was calculated and recorded as a discount on the
principal amount of the debentures. As a result of a subsequent financing transaction entered into
in December 2003, the conversion price of the outstanding debentures was reduced from $2.24 to
$2.00. Due to this reduction in the conversion price of the outstanding debentures, an additional
beneficial conversion amount of approximately $96,000 was calculated and recorded as a discount on
the principal amount of the debentures. As a result of the revaluation of the warrants issued in
connection with these debentures (see Warrant Revaluation below), an additional beneficial
conversion amount of $405,000 was calculated and recorded as a discount on the principal amount of
the debentures. For the fiscal year ended June 30, 2004, we recognized approximately $2,569,000 as
non-cash interest expense from the amortization of the discount that arose from the beneficial
conversion feature amount associated with these debentures. As of December 31, 2003, the entire
discount resulting from the beneficial conversion feature had been fully amortized to interest
expense.
We incurred costs of approximately $369,000 in connection with the sale and issuance of these
debentures and warrants, which primarily consisted of the finder’s fees, the fair value of warrants
issued to the finder, and legal and accounting expenses. These costs were amortized to interest
expense over the life of the debentures using the effective interest rate method. For the fiscal
year ended June 30, 2004, we recognized approximately $367,000 as interest expense from the
amortization of these debt issuance costs. As of December 31, 2003, these debt issuance costs had
been fully amortized to interest expense.
F-25
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE C — CONVERTIBLE NOTES AND DEBENTURES — (Continued)
As of December 31, 2003, these convertible debentures had been satisfied and no further
amounts were due as the purchasers had converted approximately $5.5 million of principal resulting
in the issuance of approximately 2.34 million shares of our common stock and we repaid
approximately $65,000 of principal in cash.
Resale of the shares issuable upon conversion or payment of the debentures and upon exercise
of the related warrants are registered under our Form S-3 registration statement (File No.
333-107176) filed with the Securities and Exchange Commission, which was declared effective on
August 1, 2003.
April 2003 Convertible Debentures, as Amended
On April 16, 2003, we entered into a securities purchase agreement with three unrelated
institutional investors. This agreement was amended on May 8, 2003 and May 16, 2003, to among other
things, include an additional unrelated institutional investor. The securities purchase agreement,
as amended, provided for the purchase and sale of our convertible debentures in the aggregate
amount of approximately $3.8 million. Under the terms of the agreement, we received approximately
$3.1 million, net of original issue discounts of $453,395, a 6.5% finder’s fee, and legal expenses.
This agreement also provided for the issuance to the purchasers of an aggregate of 3,171,200
three-year common stock purchase warrants exercisable at a price of $0.625 per share. In
connection with the April 2003 securities purchase agreement, we also issued the finder 13,408
three-year common stock purchase warrants exercisable at a price of $0.625 per share.
These convertible debentures were to mature on July 1, 2005, and were payable, without
interest, in 24 equal payments of principal commencing August 1, 2003. The debentures were
convertible immediately, in whole or in part, by the purchasers into shares of our common stock at
a conversion price equal to $2.00 per share. In lieu of interest, the debentures provided for an
original issue discount equal to $453,395, the equivalent of 10% interest over the two year life of
the debentures. For the fiscal year ended June 30, 2004, we recognized approximately $135,000 as
interest expense from the amortization of the original issue discount. As of September 30, 2003,
the entire original issue discount had been fully amortized to interest expense.
The warrants issued in connection with the April 16, 2003 securities purchase agreement and
the amendments dated May 8, 2003 and May 16, 2003, were exercisable during the three year period
ending April 2006. The relative fair value of these warrants was calculated to be approximately
$800,000 using a Black-Scholes valuation model. The relative fair value of the warrants was
recorded as a discount on the principal amount of the debentures and was amortized to interest
expense using the effective interest rate method over the life of the debentures. For the fiscal
year ended June 30, 2004, we recognized approximately $268,000 as non-cash interest expense from
the amortization of the discount that arose from the issuance of these warrants. As of September
30, 2003, the entire initial discount resulting from the issuance of the warrants had been fully
amortized to interest expense. As a result of the revaluation of these warrants (see Warrant
Revaluation below), we recorded additional non-cash interest expense of approximately $505,000
during the fiscal year ended June 30, 2004.
F-26
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE C — CONVERTIBLE NOTES AND DEBENTURES — (Continued)
As a result of the common stock purchase warrants issued along with the April 2003 debentures
and the calculated effective conversion price of the debentures, a beneficial conversion amount of
approximately $335,000 was initially calculated and recorded as a discount on the principal amount
of the debentures at the date of issuance. This discount was amortized to interest expense using
the effective interest rate method over the life of the debentures. For the fiscal year ended June
30, 2004, we recognized approximately $120,000 as non-cash interest expense from the amortization
of the discount that arose from the beneficial conversion. As of September 30, 2003, the entire
initial discount resulting from the beneficial conversion feature had been fully amortized to
interest expense. As a result of the revaluation of these warrants (see Warrant Revaluation below),
we recorded additional non-cash interest expense of approximately $108,000 during the fiscal year
ended June 30, 2004.
We incurred costs of approximately $301,000 in connection with the sale and issuance of these
debentures and warrants, which primarily consisted of the finder’s fees, the fair value of warrants
issued to the finder, and legal and accounting expenses. These costs were amortized to interest
expense over the life of the debentures using the effective interest rate method. For the fiscal
year ended June 30, 2004, we amortized approximately $88,000 to interest expense. As of September
30, 2003, these debt issuance costs have been fully amortized to interest expense.
As of September 30, 2003, the purchasers had converted the entire principal balance on the
April 2003 debentures resulting in the issuance of approximately 1.9 million shares of our common
stock.
Resale of the shares issued upon conversion or payment of the debentures and upon exercise of
warrants are registered under our Form S-3 registration statement (File No. 333-105668) filed with
the Securities and Exchange Commission, which was declared effective on June 9, 2003.
Warrant Revaluation
We issued common stock purchase warrants in connection with the sale of convertible debentures
under our April and June 2003 securities purchase agreements. At the time of issuance the warrants
were valued using their expected lives, which was less than their contractual lives. Ernst & Young
LLP, our independent registered public accounting firm, concurred with this approach. In January
2004, we were informed by Ernst & Young LLP that they had reevaluated their interpretation of the
accounting literature as it relates to the accounting for common stock purchase warrants issued in
connection with financing transactions. As a result of this subsequent interpretation, we and
Ernst & Young LLP determined that valuing the warrants issued in connection with our April and June
2003 securities purchase agreements using their expected lives was not correct. By using the
expected lives of the warrants, less value was attributed to them than if we had used the
contractual lives. Thus, an additional discount aggregating approximately $1,423,000 would have
been recorded on the convertible debentures issued under the April and June 2003 securities
purchase agreements by using the contractual lives on the warrants.
As a result of the initial valuation of these warrants, the carrying value of the convertible
debentures was overstated and stockholders’ equity was correspondingly understated by approximately
$986,000 as of June 30, 2003. After consideration of all of the facts and circumstances, we
recognized the additional discounts resulting from the revaluation of these warrants as well as the
related amortization of prior period non-cash interest expense in the quarter ended December 31,
2003, as management believes it is not material to any period affected. Since the amortization of
the additional discount resulted in non-cash interest expense, there was no impact on the cash
flows of the Company for the fiscal years ended June 30, 2004.
F-27
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE C — CONVERTIBLE NOTES AND DEBENTURES — (Continued)
August 2002 Note, as Amended
During August 2002, we executed a $500,000, 90 day Note with Isosceles Fund Limited. The Note
bore interest at 8% and was secured by 250,000 shares of our common stock. In connection with this
transaction, we issued 5,387 common stock purchase warrants exercisable at $5.30 per share for a
period of three years. In November 2002, the Note was amended to eliminate the fixed maturity date
and make the Note payable within three business days following demand. The Note was also amended
to provide for conversion of outstanding principal and interest into shares of our common stock at
a price of $1.75 per share in lieu of cash at Isosceles’ option. As a result of our subsequent
financing transactions, this conversion price was reduced to $0.56. Since Isosceles did not elect
to convert the Note within 90 days of the amendment, we issued Isosceles 11,650 warrants at $2.50
per share, 11,650 warrants at $3.00 per share, 11,650 warrants at $3.50 per share, 40,625 warrants
at $5.00 per share and 37,500 warrants at $6.00 per share. The warrants were exercisable for a
three-year period. The fair value of the warrants, which was calculated to be approximately
$68,000, was charged to interest expense at the time of issuance. As a result of subsequent
financing transactions, the exercise price of these warrants was reduced to $0.56. As a result of
the stock purchase warrants issued and the calculated effective conversion price of the Note, a
beneficial conversion amount of approximately $485,000 was calculated and charged to interest
expense. All of these items charged to interest expense were non-cash items.
During the three months ended September 30, 2003, we issued 960,000 shares upon conversion of
the principal of the August 2002 Note and accrued interest totaling approximately $536,000. No
further amounts are due on this Note. In addition, Isosceles converted all 118,462 warrants issued
in connection with this Note resulting in net proceeds to us of approximately $66,300. Resale of
the shares issued upon conversion of the Isosceles Note and exercise of warrants issued in
connection with this Note as amended are registered under our Form S-3 registration statement (File
No. 333-106536) filed with the Securities and Exchange Commission, which was declared effective on
July 11, 2003.
Convertible notes and debentures outstanding at June 30, 2006 with an aggregate principal
balance of $13,612,500 mature in the succeeding fiscal years as follows:
| |
|
|
|
|
2007 |
|
$ |
687,500 |
|
2008 |
|
|
750,000 |
|
2009 |
|
|
12,175,000 |
|
|
|
|
|
|
Total |
|
$ |
13,612,500 |
|
|
|
|
|
|
F-28
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE D — DEBT
Line of Credit and Short Term Borrowings
Our Swedish subsidiary maintained an overdraft facility, denominated in Swedish Krona, with a
bank in Sweden. In July 2004, the terms on this overdraft facility were renegotiated to provide
for a reduced interest rate and a reduction in the maximum borrowing capacity. The maximum
borrowing capacity on this overdraft facility was approximately $767,000 as of June 30, 2005.
Borrowings outstanding under this facility were at a floating rate of interest, which was
approximately 5.25% at June 30, 2005. This overdraft facility expired at the end of February 2006
and there was no outstanding balance at June 30, 2006. There was no outstanding balance under this
overdraft facility as of June 30, 2005. This overdraft facility was secured by certain assets of
ViraNative including inventories and accounts receivable.
During June 2006, we obtained short term financing of approximately $217,000 for the purchase
of certain corporate insurance policies. Outstanding borrowings under this arrangement bear
interest at an effective rate of 8.79%. Principal and interest payments of approximately $25,000
are payable in nine equal monthly installments. The outstanding balance on this short term
borrowing was approximately $217,000 as of June 30, 2006.
During August 2005, we obtained short term financing of approximately $52,000 for the purchase
of certain corporate insurance policies. Outstanding borrowings under this arrangement bore
interest at an effective rate of 7.45%. Principal and interest payments of approximately $5,000
were payable in ten equal monthly installments. This short term was paid in full in May 2006.
During June 2005, we obtained short term financing of approximately $224,000 for the purchase
of certain corporate insurance policies. Outstanding borrowings under this arrangement bear
interest at an effective rate of 6.86%. Principal and interest payments of approximately $26,000
are payable in nine equal monthly installments. This short term financing was paid in full in
March 2006. The outstanding balance on this short term borrowing was approximately $224,000 as of
June 30, 2005.
Long-Term Debt
Long-term debt is comprised of the following:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
Mortgage loan secured by land and building in
Sweden. Quarterly payments of principal and
interest as described below. |
|
$ |
636,948 |
|
|
$ |
631,332 |
|
Financing agreement for certain laboratory
equipment in Scotland. Monthly payments of
principal and interest as described below. |
|
|
47,332 |
|
|
|
— |
|
Other financing agreement |
|
|
8,796 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
693,076 |
|
|
|
631,332 |
|
Less current portion |
|
|
(65,811 |
) |
|
|
(33,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
627,265 |
|
|
$ |
598,104 |
|
|
|
|
|
|
|
|
|
|
Our Swedish subsidiary has a 25-year mortgage with a Swedish bank obtained to purchase one of
our facilities in Sweden. The outstanding principal balance on this loan, which is payable in
Swedish Krona, was approximately $637,000 and $631,000 at June 30, 2006 and 2005, respectively.
This loan carries a floating rate of interest, which was approximately 5.75% at June 30, 2006 and
5.25% at June 30, 2005. We are required to make quarterly payments of principal and interest of
approximately $17,000 under this agreement. This loan matures in September 2024 and is secured by
the related land and building, including improvements, with a carrying value of approximately $2.6
million and $2.3 million as of June 30, 2006 and 2005, respectively.
F-29
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE D — DEBT — (Continued)
During November 2005, we obtained financing denominated in British Pounds of approximately
$84,000 for the purchase of certain laboratory equipment. Outstanding borrowings under this
arrangement bear interest at an effective rate of 7.92%. Following an initial payment of principal
and interest of approximately $15,000, principal and interest payments are payable in 33 monthly
installments on a stepped reducing balance basis; nine payments of approximately $3,900, twelve
payments of approximately $2,300 and twelve payments of approximately $1,600. The outstanding
balance on this borrowing was approximately $47,000 as of June 30, 2006.
Long-term debt outstanding at June 30, 2006 matures as follows:
| |
|
|
|
|
2007 |
|
$ |
66,000 |
|
2008 |
|
|
58,000 |
|
2009 |
|
|
39,000 |
|
2010 |
|
|
35,000 |
|
2011 |
|
|
35,000 |
|
Thereafter |
|
|
460,000 |
|
NOTE E — ROYALTY AGREEMENT
In November 1986, we entered into a royalty agreement with Dialysis Corporation of America
(DCA, formerly Medicore, Inc.) with respect to interferon, transfer factor and products using
interferon and transfer factor. The agreement was subsequently amended in November 1989 and May
1993. The amended agreement provides for a maximum cap on royalties to be paid to DCA of
$2,400,000. It includes a schedule of royalty payments of:
| |
• |
|
5% of the first $7,000,000 of sales, |
| |
| |
• |
|
4% of the next $10,000,000, and |
| |
| |
• |
|
3% of the next $55,000,000 |
These royalties are to be paid until the total of $2,400,000 is achieved. The amended
agreement also states that royalties of approximately $108,000 previously accrued prior to May 1993
under the agreement are payable to DCA as the final payment. From May 1993 through September 2001,
we paid royalties under the amended agreement totaling approximately $70,000.
Royalties owed to DCA of approximately $90,000, based on our human alpha interferon sales from
October 1, 2001 through June 30, 2003, were payable in three installments: $30,000 was payable by
August 1, 2003; $30,000 was payable by August 1, 2004; and $30,000 was payable by August 1, 2005.
These three installments, plus approximately $4,500 in interest, have been paid. Subsequent to June
30, 2003, in accordance with the terms of the amended agreement, royalties are paid to DCA based on
sales of human alpha interferon on a quarterly basis. For our fiscal years ended June 30, 2006,
2005 and 2004, royalties due under the amended agreement totaled approximately $20,000, $14,000 and
$13,000, respectively.
F-30
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE F — PREFERRED STOCK
We are authorized to issue a total of 1,000,000 shares of preferred stock, par value $1.00 per
share. Our board of directors may issue preferred stock by resolutions, without any action of our
stockholders. These resolutions may authorize issuance of preferred stock in one or more series.
In addition, the board of directors may fix and determine all privileges and rights of the
authorized preferred stock series including:
| |
• |
|
dividend and liquidation preferences, |
| |
| |
• |
|
voting rights, |
| |
| |
• |
|
conversion privileges, and |
| |
| |
• |
|
redemption terms. |
Series A Cumulative Convertible Preferred Stock
We established the 10% Series A cumulative convertible preferred stock in November 1986. We
are authorized to issue 375,000 shares of Series A cumulative convertible preferred stock. As of
June 30, 2006, there were 2,150 shares of Series A cumulative convertible preferred stock
outstanding. Each share of Series A cumulative convertible preferred stock is immediately
convertible, at the option of the holder, into .426 shares of our common stock. Dividends on the
Series A cumulative convertible preferred stock are cumulative and have priority over dividends, if
any, paid on our common stock. These dividends are payable in either cash or shares of our common
stock, at our option.
The Series A cumulative convertible preferred stock has voting rights only if dividends are in
arrears for five annual dividends. In such event, owners of Series A cumulative convertible
preferred stock have the right to elect two directors. Voting rights terminate upon payment of the
cumulative dividends. We may redeem the Series A cumulative convertible preferred stock at any
time after expiration of ten consecutive business days during which the bid or last sale price for
our common stock is $60.00 per share or higher. There is no mandatory redemption or sinking fund
obligation for the Series A cumulative convertible preferred stock.
Owners of the Series A cumulative convertible preferred stock are entitled to receive $10.00
per share, plus accrued and unpaid dividends, upon our liquidation, dissolution or winding up. As
of June 30, 2006, the aggregate amount of dividends in arrears on the Series A cumulative
convertible preferred stock is approximately $13,000 or approximately $6.05 per share of Series A
cumulative convertible preferred stock. This obligation must be satisfied before any distribution
or payment is made to holders of our common stock or our other stock junior to the Series A
cumulative convertible preferred stock.
Series J Cumulative Convertible Preferred Stock
We established the Series J 24% cumulative convertible preferred stock in March 2006. We are
authorized to issue 60,000 shares of Series J cumulative convertible preferred stock. On March 21,
2006, we completed a private placement of Series J cumulative convertible preferred stock and
warrants to purchase shares of our common stock. Gross proceeds from the placement were
approximately $5.2 million. We incurred costs of approximately $598,000 in connection with the
placement, which primarily consisted of the finder’s fees, registration fees and legal and
accounting expenses. These costs were recorded as a reduction in capital in excess of par value.
As of June 30, 2006, there were 52,150 shares of Series J cumulative convertible preferred
stock outstanding. Each share of Series J cumulative convertible preferred stock is immediately
convertible, at the option of the holder, into 80 shares of our common stock. Each share of Series
J cumulative convertible preferred stock has a stated value equal to $100 and $1.00 par value. The
owners of outstanding shares of Series J cumulative convertible preferred stock shall be entitled
to receive preferential dividends in cash out of any funds before any dividend or other
distribution will be paid or declared and set apart for payment on any shares of any common stock,
or other class of stock presently authorized or to be authorized, except for our Series A
cumulative convertible preferred stock, at the rate of 24% per annum on the stated value, payable
in cash on the earlier of (a) annually in arrears commencing February 28, 2007 and annually
thereafter in cash or (b) upon redemption, as discussed below, following the closing of any
subsequent financing (whether done in one
or more financings of debt or equity) by us with gross proceeds equal to or greater than $5
million.
F-31
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE F — PREFERRED STOCK — (Continued)
At such time as we complete a subsequent financing, of either debt or equity, resulting in the
receipt of gross proceeds to us of $5 million or more, (a) owners of the Series J cumulative
convertible preferred stock may require us to redeem, at the owners’ sole option, all or a portion
of their Series J cumulative convertible preferred stock outstanding at such time at the stated
value, including any accrued but unpaid dividends, rounded up to February 28, 2007 and to each
February 28 thereafter (i.e., if such redemption occurs, dividends will be accrued and payable
through the next February 28 despite redemption prior to that date) and (b) we may redeem, at our
sole option, the Series J cumulative convertible preferred stock outstanding at such time, in their
entirety, at the stated value, including any accrued but unpaid dividend, rounded up to February
28, 2007 and to each February 28 thereafter (i.e., if such redemption occurs, dividends will be
accrued and payable through the next February 28 despite redemption prior to that date).
We also have the right, at our sole option, (a) to require the owners of the Series J
cumulative convertible preferred stock to convert their Series J cumulative convertible preferred
stock outstanding at such time, in their entirety, into our common stock at the $1.25 per share
conversion price, or (b) to redeem the Series J cumulative convertible preferred stock outstanding
at such time, in their entirety, at the stated value, including any accrued but unpaid dividend,
rounded up to February 28, 2007 and to each February 28 thereafter (i.e., if such redemption
occurs, dividends will be accrued and payable through the next February 28 despite redemption prior
to that date), but in each such option, only in the event the closing price of our common stock
trades at $2.50 per share or higher for at least 10 consecutive trading days.
The Series J cumulative convertible preferred stock has been recorded as equity rather than a
liability, as the right of redemption of the Series J cumulative convertible preferred stock by
either the investors or Viragen is contingent upon a subsequent financing for gross proceeds of $5
million or more, which has not occurred and is within Viragen’s control. In addition, it is
expected that subsequent financings will be for equity securities as opposed to debt securities.
For each share of Series J cumulative convertible preferred stock purchased, investors
received warrants to purchase 80 shares of common stock at an exercise price of $1.25 per share,
subject to adjustment, for a term of five years from the date of issuance. The warrants include a
cashless exercise provision. No redemption rights for the warrants are provided to either Viragen
or the investors.
The relative fair value of the warrants issued in connection with the Series J cumulative
convertible preferred stock was calculated to be approximately $930,000 using a Black-Scholes
valuation model resulting in a discount to the Series J cumulative convertible preferred stock.
This relative fair value was presented as an increase in our net loss attributable to our common
stock. The full amount of the discount was recognized at the date of issuance because the Series J
cumulative convertible preferred stock is immediately convertible and is not subject to mandatory
redemption.
The Series J cumulative convertible preferred stock has no voting rights, except if we should
amend our certificate of incorporation and such amendment would: (a) change the relative seniority
rights of the owners of the Series J cumulative convertible preferred stock as to the payment of
dividends in relation to the holders of any other of our capital stock, or create any other class
or series of capital stock entitled to seniority as to the payment of dividends in relation to the
owners of the Series J cumulative convertible preferred stock; (b) reduce the amount payable to the
owners of the Series J cumulative convertible preferred stock upon our voluntary or involuntary
liquidation, dissolution or winding up, or change the relative seniority of the liquidation
preferences of the owners of the Series J cumulative convertible preferred stock to the rights upon
liquidation of the holders of our other capital stock, or change the dividend rights of the owners
of the Series J cumulative convertible preferred stock; (c) cancel or modify the conversion rights
of the owners of the Series J cumulative convertible preferred stock; or (d) cancel or modify the
rights of the owners of the Series J cumulative convertible preferred stock.
Owners of the Series J cumulative convertible preferred stock are entitled to receive $100.00
per share, plus accrued and unpaid dividends, upon our liquidation, dissolution or winding up. As
of June 30, 2006, the aggregate amount of dividends in arrears on the Series J cumulative
convertible preferred stock is approximately $350,000 or approximately $6.71 per share of Series J
cumulative convertible preferred stock. This obligation must be satisfied before
any distribution or payment is made to holders of our common stock or our other stock junior
to the Series J cumulative convertible preferred stock.
F-32
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE F — PREFERRED STOCK — (Continued)
Owners of the Series J cumulative convertible preferred stock have additional conversion
rights that trigger upon our merging into another company. If, as a result of the merger, we are
not the surviving entity and the merger does not terminate the conversion rights of the Series J
cumulative convertible preferred stock, then after the merger the owners of the Series J cumulative
convertible preferred stock have the right to convert their shares in the common stock of the
surviving corporation.
Owners of the Series J cumulative convertible preferred stock have similar rights if we sell
all or substantially all of our assets. If, in addition to selling substantially all of our
assets, the transaction also involves selling our common stock or receiving common stock from the
buyer and the agreement does not terminate the conversion rights of the owners of the Series J
cumulative convertible preferred stock, then after the sale the owners of the Series J cumulative
convertible preferred stock have the right to convert their shares into the common stock sold or
received under the transaction.
Dawson James Securities, Inc. served as placement agent for the transaction, and received a
placement agent cash fee of 8% of monies raised and a non-accountable expense fee of an additional
2% of monies raised. The placement agent also received warrants to purchase 667,520 shares of our
common stock (8% of the shares issuable upon conversion of the Series J cumulative convertible
preferred stock and exercise of the related warrants). The placement agent warrants are
exercisable at $1.25 per warrant share for a 60-month period.
Resale of the shares issuable upon conversion of the Series J cumulative convertible preferred
stock and exercise of the related warrants is registered under our Form S-3 registration statement
(File No. 333-133397) filed with the Securities and Exchange Commission, which was declared
effective on May 23, 2006. If we are unable to maintain the effectiveness of the registration
statement related to the Series J cumulative convertible preferred stock, we are obligated to pay
investors liquidated damages in cash equal to 1.5% of the stated value of the Series J cumulative
convertible preferred stock per month. Liquidated damages will not accrue nor be payable for times
during which the shares covered by the related prospectus are transferable by the holder pursuant
to Rule 144(k) under the Securities Act of 1933, as amended.
NOTE G — CAPITAL STOCK
Common Stock
As of June 30, 2006, there were 45,765,687 shares of our common stock outstanding and
34,709,366 shares of our common stock issuable upon exercise or conversion of the following
securities:
| |
|
|
|
|
Convertible notes or related warrants issuable upon redemption of the notes
(convertible/exercisable at $1.05 per share through August 2008) |
|
|
11,476,194 |
|
|
|
|
|
|
Convertible debentures (convertible at $1.05 per share through September 2008) |
|
|
1,488,096 |
|
|
|
|
|
|
Debt and equity offering warrants (exercisable at a weighed average price of
$1.13 per share through March 2011) |
|
|
16,424,877 |
|
|
|
|
|
|
Officers, employees, and directors options (exercisable at a weighted average
price of $1.58 per share through March 2014) |
|
|
1,139,783 |
|
|
|
|
|
|
Consultant warrants (exercisable at a weighted average price of $38.70 per
share through February 2009) |
|
|
7,500 |
|
|
|
|
|
|
Convertible preferred stock, Series A |
|
|
916 |
|
|
|
|
|
|
Convertible preferred stock, Series J (convertible at $1.25 per share) |
|
|
4,172,000 |
|
|
|
|
|
|
|
|
|
34,709,366 |
|
|
|
|
|
|
F-33
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE G — CAPITAL STOCK — (Continued)
On December 15, 2005, our stockholders approved an amendment to our Articles of Incorporation
to increase the number of shares of common stock that Viragen is authorized to issue to 250
million.
On June 11, 2004, our stockholders approved an amendment to our Articles of Incorporation to
effect a 1-for-10 reverse split of our outstanding common stock and change the number of shares of
common stock that Viragen is authorized to issue to 100 million from 70 million. The split became
effective on June 15, 2004.
During our fiscal year ended June 30, 2006, we issued approximately 7.57 million shares of our
common stock upon conversion of our outstanding convertible notes at $1.05 per share. We also
issued an aggregate of approximately 1.11 million shares of our common stock at prices ranging from
$0.49 to $0.61 per share as payment of quarterly interest totaling approximately $592,000 on our
outstanding convertible notes.
During our fiscal year ended June 30, 2005, we issued approximately 519,000 shares of our
common stock valued at $0.67 per share as payment of quarterly interest totaling $350,000 on our
outstanding convertible notes.
During our fiscal year ended June 30, 2004, we sold approximately 4.55 million shares of our
common stock to institutional investors at prices ranging from $2.00 to $2.24 per share for an
aggregate amount of approximately $8.92 million, net of finders fees and related expenses. In
connection with these transactions, we also issued approximately 1.15 million common stock purchase
warrants with exercise prices ranging from $2.00 to $2.80 per share. The exercise price of these
warrants was subsequently reduced to $0.49 per share as a result of the issuance of shares or our
common stock below those exercise prices.
During our fiscal year ended June 30, 2004, we issued approximately 3.67 million shares of our
common stock upon conversion of outstanding convertible debentures. These shares were issued at
prices ranging from $2.00 to $3.17 per share.
During our fiscal year ended June 30, 2004, we issued approximately 2.44 million shares of our
common stock upon the exercise of common stock purchase warrants at prices ranging from $0.56 to
$2.24 per share resulting in net proceeds to us of approximately $3.78 million.
Subsequent to June 30, 2006, we issued an aggregate of approximately 1.43 million shares of
our common stock upon conversion of $1.50 million of our outstanding convertible notes at $1.05 per
share. We also issued an aggregate of approximately 533,000 shares of our common stock valued at
$0.40 per share as payment of quarterly interest totaling approximately $211,000 on our outstanding
convertible notes.
F-34
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE H — INCOME TAXES
Viragen, Inc. and its majority-owned subsidiaries, as defined by the Internal Revenue Code,
file consolidated federal and state income tax returns, except for Viragen International, Inc.,
which files its own separate US income tax return.
For financial reporting purposes, loss before income taxes and minority interest includes the
following components:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
| |
|
2006 |
|
2005 |
|
2004 |
U.S. |
|
$ |
(11,513,307 |
) |
|
$ |
(21,262,050 |
) |
|
$ |
(14,048,621 |
) |
Foreign |
|
|
(6,745,418 |
) |
|
|
(6,609,723 |
) |
|
|
(5,611,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(18,258,725 |
) |
|
$ |
(27,871,773 |
) |
|
$ |
(19,659,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of Viragen’s income tax benefit are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
|
2004 |
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
U.S. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
U.S. |
|
|
43,828 |
|
|
|
43,828 |
|
|
|
43,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,828 |
|
|
|
43,828 |
|
|
|
43,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit |
|
$ |
43,828 |
|
|
$ |
43,828 |
|
|
$ |
43,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE H — INCOME TAXES — (Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of Viragen’s deferred income tax liabilities and
assets as of June 30, 2006 and 2005 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2006 |
|
2005 |
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carry-forwards |
|
$ |
47,883,000 |
|
|
$ |
43,633,000 |
|
Research and development credits |
|
|
953,000 |
|
|
|
947,000 |
|
Deferred compensation |
|
|
11,000 |
|
|
|
209,000 |
|
Accrued liabilities |
|
|
207,000 |
|
|
|
132,000 |
|
Other |
|
|
89,000 |
|
|
|
86,000 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
49,143,000 |
|
|
|
45,007,000 |
|
Valuation allowance for deferred tax assets |
|
|
(49,080,000 |
) |
|
|
(44,576,000 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
63,000 |
|
|
|
431,000 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Fixed assets |
|
|
(63,000 |
) |
|
|
(431,000 |
) |
Identifiable intangibles |
|
|
(413,000 |
) |
|
|
(457,000 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(476,000 |
) |
|
|
(888,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(413,000 |
) |
|
$ |
(457,000 |
) |
|
|
|
|
|
|
|
|
|
The change in the valuation allowance was a net increase of approximately $4,504,000,
$7,886,000 and $5,477,000 for the years ended June 30, 2006, 2005 and 2004, respectively.
Viragen has undergone two ownership changes, as defined by Internal Revenue Code Section 382,
which may cause the utilization of the net operating losses and tax credits to be limited. The
effects of these limitations have not been calculated at this time.
Viragen has net operating loss and tax credit carry-forwards for U.S. income tax purposes,
with expiration dates, as follows:
| |
|
|
|
|
|
|
| Net Operating |
|
|
|
|
| Losses |
|
Tax Credits |
|
Expiration |
$2,867,000
|
|
$ |
— |
|
|
2007—2009 |
12,606,000
|
|
|
— |
|
|
2010—2012 |
75,768,000
|
|
|
953,000 |
|
|
2013—2026 |
|
|
|
|
|
|
|
$91,241,000
|
|
$ |
953,000 |
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, Viragen International has U.S. net operating loss carry-forwards totaling
approximately $8.7 million expiring between 2007 and 2026, which are included in the table above.
At June 30, 2006, Viragen (Scotland) had approximately $27.3 million in net operating loss
carry-forwards that do not expire, which are available to offset future taxable income in Scotland.
At June 30, 2006, ViraNative had approximately $19.2 million in net operating loss carry-forwards
that do not expire, which are available to offset future taxable income in Sweden.
For financial reporting purposes, a valuation allowance has been recognized to offset the
deferred income tax assets related to these carry-forwards.
F-36
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE H — INCOME TAXES — (Continued)
The reconciliation of income tax benefit computed at the U.S. federal statutory rate applied
to our consolidated net loss before income taxes and minority interest is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
| |
|
2006 |
|
2005 |
|
2004 |
Tax at U.S. statutory rate |
|
|
(34.00 |
)% |
|
|
(34.00 |
)% |
|
|
(34.00 |
)% |
State taxes, net of federal benefit |
|
|
(1.63 |
) |
|
|
(1.85 |
) |
|
|
(3.63 |
) |
Benefit of lower foreign tax rates |
|
|
1.99 |
|
|
|
1.38 |
|
|
|
1.54 |
|
Goodwill impairment |
|
|
— |
|
|
|
8.46 |
|
|
|
— |
|
Non-deductible items |
|
|
6.17 |
|
|
|
0.13 |
|
|
|
0.20 |
|
Change in valuation allowance |
|
|
24.67 |
|
|
|
28.29 |
|
|
|
27.86 |
|
Tax return true-up |
|
|
(1.12 |
) |
|
|
(3.83 |
) |
|
|
— |
|
Other |
|
|
3.68 |
|
|
|
1.26 |
|
|
|
7.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.24 |
)% |
|
|
(0.16 |
)% |
|
|
(0.22 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Viragen International files separate U.S. income tax returns. ViraNative, a wholly-owned
subsidiary of Viragen International, files separate income tax returns in Sweden. Viragen
(Scotland) Ltd., a wholly-owned subsidiary of Viragen International, files separate income tax
returns in the United Kingdom.
NOTE I — TRANSACTIONS WITH RELATED PARTIES
As of June 30, 2006, we have a receivable of approximately $26.7 million from our
majority-owned subsidiary, Viragen International. This amount does not show in our consolidated
balance sheet because Viragen International is consolidated with Viragen for financial reporting
purposes. Historically, this balance has been settled by the issuance of shares of Viragen
International common stock to Viragen at the then prevailing market price.
On August 31, 2004, we contributed to capital $1,000,000 in inter-company balances with
Viragen International. On that date, the closing price of Viragen International’s common stock was
$0.18 per share as quoted on the over-the-counter bulletin board. We received 5,555,556 shares of
Viragen International common stock for the capital contribution, which increased our ownership in
Viragen International to approximately 81.2% from 79.7% at that time.
On April 22, 2005, we entered into an agreement with Melvin Rothberg, pursuant to which the
parties agreed to an early termination of the employment agreement dated July 1, 2004 between
Viragen, Inc. and Mr. Rothberg. Upon execution of the agreement by the parties, Mr. Rothberg
resigned as Executive Vice President — Operations of Viragen, Inc. and in all other capacities in
which he served Viragen, Inc. and its subsidiaries and affiliates. Mr. Rothberg received the
balance of his salary due to him over the remaining term of the employment agreement, which was due
to expire on June 30, 2006, as well as certain employee benefits. Mr. Rothberg’s responsibilities
have been assumed by Charles A. Rice.
F-37
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE I — TRANSACTIONS WITH RELATED PARTIES — (Continued)
During our fiscal year ended June 30, 2005 we recorded a $596,000 gain on the remeasurement of
a liability to us by Viragen (Scotland), which was denominated in U.S. dollars. This amount has
been recorded in the other expense (income), net line item of our consolidated statement of
operations. In prior periods, this liability had been translated at historical exchange rates since
this liability was determined to be long-term in nature. This determination was based on the fact
that Viragen (Scotland) did not have the ability or intent to repay the liability to us. Beginning
in our fiscal year ended June 30, 2002, Viragen (Scotland) began gradually settling the liability
by charging us for services performed on our behalf. Management anticipates the liability will be
settled through these charges in the near term. Therefore, it was determined that the account
should no longer be considered long-term and thus translation at current exchange rates is
appropriate. Since the liability was denominated in U.S. dollars and the Pound Sterling had been
strengthening against the U.S. dollar over the last few years, the remeasurement of the liability
resulted in a gain. Had the determination been made when Viragen (Scotland) began settling the
liability with charges to us in prior periods and the liability been remeasured at then current
exchange rates, the impact on our consolidated statements of operations would not have been
material and there would have been no effect on total stockholders’ (deficit) equity as such
currency gains are reclassifications from accumulated other comprehensive income.
In May 2004, Viragen USA, Inc., our majority-owned subsidiary, repurchased the shares of its
outstanding common stock not held by Viragen. The shares were held by an officer, two former
officers and a former director. These shares were independently valued at $0.22 per share,
resulting in a total cost of $70,400. Viragen USA, Inc. is now wholly-owned by Viragen.
In January 2003, Mr. Gerald Smith resigned his positions as chairman, president and chief
executive officer of Viragen, Inc. and Viragen International. Upon his resignation, Mr. Smith
received a one time payment of $170,000. Mr. Smith also entered into a one-year consulting
agreement related to our avian transgenics program. This agreement, which expired on January 31,
2004, provided for annual compensation of $155,000, health insurance and automobile related
expenses. In October 2003, Mr. Smith resigned as a director of Viragen, Inc. and Viragen
International, Inc.
Mr. Carl Singer receives $100,000 per year for his services as chairman of the board of
Viragen and chairman of Viragen’s executive committee. Mr. Singer serves as chairman of the board
of Fundamental Management Corporation, a Florida-based institutional investment company, which
manages two investment funds that own less than 1.0% of our outstanding common stock. Mr. Robert
Salisbury, a director of Viragen, serves as a director of Fundamental Management Corporation. Mr.
Salisbury and Mr. Charles Simons, a director of Viragen, are investors in the funds managed by
Fundamental Management Corporation.
F-38
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE I — TRANSACTIONS WITH RELATED PARTIES — (Continued)
Peter Fischbein, a former director, exercised options to purchase 20,000 shares of Viragen
common stock at $5.00 per share during October 1998. These options were exercised through the
payment of $2,000 cash and the issuance of a promissory note payable to Viragen totaling $98,000,
and related pledge and escrow agreements. This promissory note accrued interest at 5.06%, payable
semi-annually, and was secured by the underlying shares of common stock purchased. During February
2000, Mr. Fischbein exercised options to purchase an additional 2,500 shares of Viragen common
stock at $5.00 per share through the issuance of another promissory note payable to Viragen
totaling $12,500 and related pledge and escrow agreements. This promissory note accrued interest at
6.46% payable semi-annually. The shares of common stock purchased are being held in escrow, pending
payment of the related notes pursuant to the provisions of the pledge and escrow agreements. In
January 2004, Mr. Fischbein consolidated his October 1998 and February 2000 notes by issuing a two
year promissory note payable to Viragen totaling approximately $114,000. This promissory note
accrued interest at 3.5%, payable semi-annually, and was secured by the underlying common stock
purchased. Effective January 1, 2006, Mr. Fischbein executed a new promissory note providing for
the immediate payment of accrued interest and $10,000 in principal. Thereafter, principal of
$10,000 and accrued interest on the outstanding balance shall be paid on each six-month anniversary
of the effective date of the promissory note for five consecutive semi-annual payments.
Thereafter, principal of $15,000 and accrued interest on the outstanding balance shall be paid on
each six-month anniversary of the effective date of the promissory note with the remaining
principal amount and accrued interest payable on the fourth annual anniversary of the effective
date of the promissory note. This promissory note accrues interest at 3.5% and is secured by the
underlying common stock purchased. As of June 30, 2006, the uncollateralized portion of the
promissory note has been reserved.
During May 1999, Charles F. Fistel, a former officer, exercised options totaling 41,000
shares. These options were all exercised through the issuance of promissory notes payable to
Viragen totaling $145,000, and related pledge and escrow agreements. The promissory notes bear
interest at 5.15%, payable semi-annually, and were secured by the underlying shares of common stock
purchased. The shares of common stock purchased were held in escrow, pending payment of the related
notes pursuant to the provisions of the pledge and escrow agreements. Mr. Fistel paid $30,000 of
the principal on his promissory notes, plus related interest, during March 2000. A pro-rated number
of escrowed shares of common stock were released to Mr. Fistel upon receipt of his payment. On
June 30, 2003, we reserved the uncollaterized portion of these notes totaling approximately
$47,000, based on the closing price of our stock on that date. In February 2004, following default
on these promissory notes, we reclaimed the 31,000 shares of common stock held in escrow. These
shares of common stock were valued at $2.60 per share, the then market price. This resulted in an
$80,600 reduction of the outstanding principal on the notes. In May 2004, Mr. Fistel’s outstanding
principal was further reduced by $22,000 as a result of his surrendering to Viragen 100,000 shares
of Viragen USA valued at $0.22 per share. The outstanding balance on this note is fully reserved as
of June 30, 2006.
NOTE J — COMMITMENTS
Lease agreements
In November 1996, we entered into a ten year lease commencing April 1997 for a 14,800 square
foot facility in Plantation, Florida. This facility contains our domestic administrative and
executive offices. Current monthly rental on the property, including common area maintenance
charges and applicable taxes, is approximately $31,000. The lease contains an option for up to two
additional five-year terms.
In November 1996, Viragen (Scotland) executed a five year lease, subsequently modified for
additional space, for a newly constructed laboratory and manufacturing facility located in
Pentlands Science Park near Edinburgh, Scotland. The facility consists of approximately 17,000
square feet with base monthly rental payments of approximately $35,000 plus common area and
maintenance charges. The lease further provides for up to four five year extensions at our option.
In October 2001, we exercised our first option to extend the lease through October 2006 and we
intend to extend the lease for an additional five years. In March 2002 and September 2003, we
entered into sub-lease agreements, sub-leasing a portion of our space to third parties, with
initial terms of one year, thereafter renewable on a monthly basis. The area covered in these
sub-lease agreements totals approximately 4,000 square feet generating monthly sub-lease rent of
approximately $9,000. This sublease income is included in the other expense (income), net line
item of our consolidated statement of operations.
F-39
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE J — COMMITMENTS — (Continued)
Through ViraNative, we lease approximately 25,500 square feet of laboratory, production and
office facilities in Umeå, Sweden under two separate leases. One of the leases representing
approximately 21,000 square feet was recently renewed through March 2009 at a total lease cost of
approximately $28,000 per month. The initial stages of the manufacture of Multiferon® are conducted
in this facility. The other lease representing approximately 4,500 square feet of office space at a
total lease cost of approximately $6,000 per month will expire in December 2006 and not be renewed.
During the years ended June 30, 2006, 2005, and 2004, Viragen recognized rent expense and
related charges on facilities of approximately $1,136,000, $1,169,000, and $1,121,000,
respectively.
We have entered into various lease agreements for miscellaneous office equipment. The
duration of these agreements ranges from twelve to sixty months from origination. The aggregate
base quarterly rental payment on these leases is approximately $15,000.
The approximate minimum rental payments required under our facility and equipment lease
agreements with remaining terms of at least one year as of June 30, 2006 are as follows:
| |
|
|
|
|
| Year ended June 30, |
|
Amount |
2007 |
|
$ |
1,115,000 |
|
2008 |
|
|
775,000 |
|
2009 |
|
|
680,000 |
|
2010 |
|
|
431,000 |
|
2011 |
|
|
427,000 |
|
After 2011 |
|
|
109,000 |
|
Employment Contracts
Viragen has entered into employment agreements with certain officers and employees. As of June
30, 2006, the future commitment under these agreements, which run through March 2007, is
approximately $413,000
Viragen International
In connection with the acquisition of ViraNative by Viragen International discussed in Note B,
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 a Mutual Recognition Procedures application is
filed and receives approval from the requisite national and European Union regulatory
authorities for the use, sale and marketing of Multiferon® in European Union member
countries, one of which must be Germany; and |
| |
| |
• |
|
2,933,190 additional shares when and if Multiferon® has been approved by the requisite
regulatory bodies in the European Union for the treatment of Melanoma or when Multiferon®
has been approved by the requisite regulatory bodies for sale in the United State of
America. |
If and as each of these milestones is met, additional shares of Viragen International will be
issued.
F-40
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE K — CONTRIBUTION
During our fiscal year ended June 30, 2005, we received a contribution in the amount of
$278,000 from a business development agency in Sweden. This contribution was awarded in connection
with our capital investment in our renovated facility in Umeå, Sweden, which was completed during
our fiscal year ended June 30, 2004. This contribution was recorded as a reduction of the cost of
the building improvements. We could be required to repay a portion of this contribution if we do
not meet certain conditions under the award, including, but not limited to, keeping the facility in
operation. In July 2005, the amount we would have been required to repay decreased to 70% of the
contribution. In July 2006, 2007 and 2008, the amount we could be required to repay will decrease
to 45%, 25% and 10%, respectively, of the contribution. At this time, we have no reason to believe
we will be required to repay any portion of the contribution.
NOTE L — LEGAL SETTLEMENT
In March 2006, we received a $300,000 settlement relating to (a) legal fees awarded to us in
connection with a 1997 lawsuit filed against us that was resolved by the court in our favor in 2002
and (b) a malicious prosecution and conspiracy action that we filed against the plaintiff and
plaintiff’s counsel in the 1997 lawsuit. This amount was record in other expense (income), net in
our consolidated statement of operations. We are not currently a party to any legal proceedings.
F-41
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE M — RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — a
replacement for APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on
accounting for and reporting of accounting changes and error corrections. It requires prior period
financial statements to be restated for voluntary changes in accounting principles. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We have no plans to adopt a voluntary change in accounting principle and believe
that the adoption of SFAS No. 154 will not have an effect on the Company’s consolidated financial
statements.
In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF)
on EITF Issue No. 05-02 The Meaning of “Conventional Convertible Debt Instrument” in Issue No.
00-19 (EITF No. 05-02). The abstract clarified the meaning of “conventional convertible debt
instruments” and confirmed that instruments which meet its definition should continue to receive an
exception to certain provisions of EITF Issue No. 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (EITF No. 00-19). The
guidance should be applied to new instruments entered into and instruments modified in periods
beginning after June 29, 2005. The adoption of EITF No. 05-02 has not had a material impact on our
consolidated financial statements.
In September 2005, the FASB reported that the EITF postponed further deliberations on Issue
No. 05-04 The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject
to Issue No. 00-19 (EITF No. 05-04) pending the FASB reaching a conclusion as to whether a
registration rights agreement meets the definition of a derivative instrument. The legal agreements
related to our convertible notes and debentures include a freestanding registration rights
agreement. Once the FASB ratifies the then-completed consensus of the EITF on EITF No. 05-04, we
will assess the impact on our consolidated financial statements of adopting the standard and, if an
impact exists, follow the transition guidance for implementation.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments—an amendment of FASB Statements No. 133 and 140, which resolves issues addressed in
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, Implementation Issue
No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS
No. 155, among other things, permits the fair value remeasurement of any hybrid financial
instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies
which interest-only strips and principal-only strips are not subject to the requirements of SFAS
No. 133; and establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. SFAS No. 155 is effective for all financial
instruments acquired or issued in a fiscal year beginning after September 15, 2006. We will be
required to adopt SFAS No. 155 for our fiscal year beginning July 1, 2007. The impact the adoption
of SFAS No. 155 will have on our consolidated financial statements is not known at this time.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48), Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, which clarifies the
accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting
for Income Taxes. FIN No. 48 clarifies the application of SFAS No. 109 by defining criteria that an
individual tax position must meet for any part of the benefit of that position to be recognized in
the financial statements. Additionally, FIN No. 48 provides guidance on the measurement,
derecognition, classification and disclosure of tax positions, along with accounting for the
related interest and penalties. The provisions of FIN No. 48 are effective for fiscal years
beginning after December 15, 2006, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We will be required to adopt FIN No. 48 for
our fiscal year beginning July 1, 2007. We believe the adoption of FIN No. 48 will not have a
material effect on our consolidated financial statements.
F-42
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE N — GEOGRAPHIC AND SEGMENT INFORMATION
We define geographical regions as countries in which we operate. We operate extensively
through our majority owned subsidiary, Viragen International, Inc., and its wholly owned
subsidiaries, ViraNative AB, a Swedish company located in Umeå, Sweden and Viragen (Scotland) Ltd.,
a Scottish company located near Edinburgh, Scotland. ViraNative and Viragen (Scotland) house our
manufacturing and research laboratory facilities. In our corporate headquarters located in
Plantation, Florida, we conduct only administrative activities.
The following table reconciles long-lived assets by geographic region to the consolidated
total:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| Region |
|
2006 |
|
2005 |
United Kingdom |
|
$ |
1,562,258 |
|
|
$ |
2,753,551 |
|
Sweden |
|
|
8,607,753 |
|
|
|
8,100,801 |
|
United States |
|
|
280,945 |
|
|
|
202,508 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,450,956 |
|
|
$ |
11,056,860 |
|
|
|
|
|
|
|
|
|
|
Our product sales are currently derived from the sale of human alpha interferon. All of our
product sales for 2006, 2005 and 2004 have been to external customers located outside of the United
States. Product sales are attributed to external customers in individual countries based on the
location of the customer.
The following table illustrates product sales by country:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended June 30, |
| Country |
|
2006 |
|
% |
|
2005 |
|
% |
|
2004 |
|
% |
Sweden |
|
$ |
220,950 |
|
|
|
56.5 |
|
|
$ |
156,489 |
|
|
|
56.1 |
|
|
$ |
140,320 |
|
|
|
52.7 |
|
Germany |
|
|
48,373 |
|
|
|
12.4 |
|
|
|
43,946 |
|
|
|
15.8 |
|
|
|
44,906 |
|
|
|
16.9 |
|
Indonesia |
|
|
27,125 |
|
|
|
6.9 |
|
|
|
32,094 |
|
|
|
11.5 |
|
|
|
45,188 |
|
|
|
17.0 |
|
Mexico |
|
|
33,020 |
|
|
|
8.4 |
|
|
|
24,661 |
|
|
|
8.9 |
|
|
|
35,723 |
|
|
|
13.4 |
|
South Africa |
|
|
41,483 |
|
|
|
10.6 |
|
|
|
14,048 |
|
|
|
5.0 |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
20,262 |
|
|
|
5.2 |
|
|
|
7,546 |
|
|
|
2.7 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
391,213 |
|
|
|
|
|
|
$ |
278,784 |
|
|
|
|
|
|
$ |
266,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE O — UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following table presents selected quarterly financial information for the periods
indicated. This information has been derived from the Company’s unaudited quarterly consolidated
financial statements, which in the opinion of management includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of such information. The
quarterly per share data presented below was calculated separately and may not sum to the annual
figures presented in the consolidated financial statements. These operating results are also not
necessarily indicative of results for any future period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
September 30 |
|
December 31 |
|
March 31 |
|
June 30 |
Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
85,186 |
|
|
$ |
116,973 |
|
|
$ |
98,643 |
|
|
$ |
90,411 |
|
Cost of sales |
|
|
456,829 |
|
|
|
570,062 |
|
|
|
681,394 |
|
|
|
719,803 |
|
Net loss |
|
|
(5,048,450 |
) |
|
|
(4,620,863 |
) |
|
|
(3,655,085 |
) |
|
|
(4,890,499 |
) |
Net loss
attributable to
common stock |
|
|
(5,048,987 |
) |
|
|
(4,621,401 |
) |
|
|
(4,623,016 |
) |
|
|
(5,203,080 |
) |
Basic and diluted
net loss per share
of common stock |
|
$ |
(0.14 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.11 |
) |
Weighted average
common shares —
basic and diluted |
|
|
37,359,416 |
|
|
|
40,817,497 |
|
|
|
44,237,680 |
|
|
|
45,748,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
30,417 |
|
|
$ |
52,548 |
|
|
$ |
80,078 |
|
|
$ |
115,741 |
|
Cost of sales |
|
|
476,260 |
|
|
|
754,352 |
|
|
|
604,944 |
|
|
|
775,850 |
|
Net loss |
|
|
(4,320,890 |
) |
|
|
(3,587,432 |
) |
|
|
(4,844,756 |
) |
|
|
(13,454,628 |
) |
Net loss
attributable to
common stock |
|
|
(4,321,427 |
) |
|
|
(3,587,970 |
) |
|
|
(4,845,293 |
) |
|
|
(13,455,166 |
) |
Basic and diluted
net loss per share
of common stock |
|
$ |
(0.12 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.36 |
) |
Weighted average
common shares —
basic and diluted |
|
|
36,568,385 |
|
|
|
36,568,385 |
|
|
|
36,568,385 |
|
|
|
37,087,677 |
|
During the quarter ended September 30, 2005, we recorded a net write-down of our finished
goods inventory of approximately $91,000. During the quarter ended December 31, 2005, we recorded
an additional write-down of our finished goods inventory of approximately $104,000. During the
quarter ended March 31, 2006, we received $300,000 in recovery of legal fees and settlement of
litigation. During the quarter ended June 30, 2006, we recorded a write-off of approximately
$930,000 related to certain leasehold improvements and equipment located at our facility in
Scotland.
During the quarter ended December 31, 2004, we recorded a write-down of our finished goods
inventory of approximately $540,000. During the quarter ended June 30, 2005, we recorded an
additional write-down of our finished goods inventory of approximately $181,000 as well as an
impairment of our goodwill of approximately $6.9 million.
F-44
INDEX OF EXHIBITS
As required under Item 15. Exhibits, Financial Statement Schedules, the exhibits filed as part
of this report are provided in this separate section. The exhibits included in this section are as
follows:
| |
|
|
|
|
| Exhibit No. |
|
Description |
| |
|
|
|
|
| |
21.1 |
|
|
Subsidiaries of the Registrant |
| |
|
|
|
|
| |
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm |
| |
|
|
|
|
| |
31.1 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
31.2 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
32.1 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
32.2 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
F-45