UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _________
Commission File No. 0-19844
PARACELSIAN, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 16-1399565
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 LANGMUIR LABORATORIES, CORNELL TECHNOLOGY PARK, ITHACA, NEW YORK 14850
- -------------------------------------------------------------------- -----
(Address of principal executive offices) Zip Code
Issuer's telephone number: (607) 257-4224
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
There were 11,739,389 shares of Common Stock and 2,111,870 Redeemable Common
Stock Purchase Warrants outstanding at August 4, 1997.
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
Index
PAGE
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited) and
September 30, 1996 (Audited). ............................................ 3
Consolidated Statements of Operations for the three months and nine
months ended June 30, 1997 and 1996 and the period from inception
(April 15, 1991) to June 30, 1997 (Unaudited). ........................... 4
Consolidated Statements of Stockholders' Equity for the period from
inception (April 15, 1991) to June 30, 1997 (Unaudited) .................. 5
Consolidated Statements of Cash Flows for the nine months ended June
30, 1997 and 1996 and the period from inception (April 15, 1991) to
June 30, 1997 (Unaudited). ............................................... 7
Notes to Consolidated Financial Statements (Unaudited). .................. 8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations. ...................................... 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ............................................... 13
Item 6 - Exhibits and Reports on Form 8-K ................................ 13
Signatures ............................................................... 14
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
------------ ------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,332,149 $ 4,171,402
Prepaid expenses and other current assets 328,236 278,367
------------ ------------
Total current assets 1,660,385 4,449,769
------------ ------------
Equipment, net 337,912 384,790
Other Assets:
Traditional Chinese Medicine extracts,net 505,734 622,419
Licensing agreements, net 415,257 555,602
Patents and trademarks, net 303,025 258,206
Option to acquire EastWest Herbs, Ltd. and
related acquition costs -- 92,866
Loan to EastWest Herbs, Ltd. 340,000 340,000
------------ ------------
1,564,016 1,869,093
------------ ------------
$ 3,562,313 $ 6,703,652
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 192,465 $ 312,817
Accrued expenses 88,182 192,790
Deferred revenues 47,441 46,858
Due to related party 25,598 77,597
------------ ------------
Total current liabilities 353,686 630,062
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
Common stock, $.01 par value; 20,000,000 shares authorized;
11,942,367 issued at June, 1997 and 11,935,082 at
September, 1996 119,420 119,348
Additional paid-in capital 20,320,840 20,348,005
Deficit accumulated during the development stage (15,889,118) (13,051,248)
Treasury stock, at cost; 265,478 shares (1,342,515) (1,342,515)
------------ ------------
Total stockholders' equity 3,208,627 6,073,590
------------ ------------
$ 3,562,313 $ 6,703,652
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
For the three months and nine months ended June 30,
1997 and 1996, And the period from inception to
June 30, 1997
(Unaudited)
Cumulative
Period from
Three Months Ended Nine Months Ended Inception to
June 30, June 30, June 30,
1997 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales:
Marketing rights $ -- $ $ -- $ -- $ 254,995
Product royalties -- -- 1,070 -- 1,070
Products 475 -- 3,525 20,306 161,338
Subscription revenues -- 9,563 -- 13,199 31,625
----------- ----------- ----------- ------------ -------------
Total Sales 475 9,563 4,595 33,505 449,028
Operating expenses:
Research and product engineering 400,232 409,437 1,257,598 976,302 6,515,532
Product launch 220,060 -- 297,507 -- 297,507
Research concerning Indian herbs -- -- -- -- 375,000
Newsletter expenses and costs -- 213,805 -- 411,531 955,586
Cost of products sold -- -- -- 10,538 95,023
General and administrative 526,489 422,863 1,400,956 1,327,441 6,791,920
Officer stock compensation -- -- -- -- 1,228,275
----------- ----------- ----------- ------------ -------------
Total Operating Expenses 1,146,781 1,046,105 2,956,061 2,725,812 16,258,843
----------- ----------- ----------- ------------ -------------
Loss from operations during
the development stage (1,146,306) (1,036,542) (2,951,466) (2,692,307) (15,809,815)
Interest income, net 52,169 24,244 113,596 63,528 420,697
----------- ----------- ----------- ------------ -------------
Net loss during the development stage $(1,094,137) $(1,012,298) $(2,837,870) $(2,628,779) $(15,389,118)
=========== =========== =========== ============ =============
Net loss per weighted average
shares of common share $ (0.09) $ (0.10) (0.24) (0.34)
=========== =========== =========== ===========
Weighted average number of
common stock outstanding 11,937,510 10,148,511 11,935,891 7,802,257
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from Inception to June 30, 1997
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Issuance of Common Stock April - July 1991 -- $ -- 806,250 $ 8,063
Issuance of Common Stock for licensing,
technology and consulting services - July 1991 333,850 3,338
Private placement of Common Stock -
August - September 1991, net of costs 267,288 2,673
Net loss (April 15, 1991 to September 30, 1991)
----------- ----------- ------------ ---------
BALANCE, September 30, 1991 -- -- 1,407,388 14,074
Redemption of Common Stock - November 1991 (245,000) (2,450)
Initial Public Offering of Common Stock -
February 1992, net of costs 1,150,000 11,500
Issuance of Warrants - February 1992
Net loss (for the year ended September 30, 1992)
----------- ----------- ------------ ---------
BALANCE, September 30, 1992 -- -- 2,312,388 23,124
Warrant dividend - September 1993
Net loss (for the year ended September 30, 1993)
----------- ----------- ------------ ---------
BALANCE, September 30, 1993 2,312,388 23,124
Net loss (for the year ended September 30, 1994)
----------- ----------- ------------ ---------
BALANCE, September 30, 1994 2,312,388 23,124
Issuance of Common Stock for acquisition of
Pacific Liaisons - October 1994 1,116,666 11,167
Exercise of Warrants 221,200 2,212
Common Stock purchase by Officer -
January 1995 705,000 7,050
Issuance of Common Stock for services rendered -
January 1995 33,330 333
April 1995 200,000 2,000
Issuance of Common Stock
for conversion of short-term liabilities - June 1995 13,000 130
Issuance of Common Stock - August 1995 300,000 3,000
Issuance of Preferred Stock - September 1995
Series A, net of costs 10,700 107
Series B, net of costs 10,000 100
Series C, net of costs 5,000 50
Net loss (for the year ended September 30, 1995)
----------- ----------- ------------ ---------
BALANCE, September 30, 1995 25,700 257 4,901,584 49,016
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT TREASURY
CAPITAL STAGE STOCK TOTAL
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Issuance of Common Stock April - July 1991 $ $ - $ - $ 8,063
Issuance of Common Stock for licensing,
technology and consulting services - July 1991 3,338
Private placement of Common Stock -
August - September 1991, net of costs 369,017 371,690
Net loss (April 15, 1991 to September 30, 1991) (133,469) (133,469)
------------ ------------ ----------- -----------
BALANCE, September 30, 1991 369,017 (133,469) 0 249,622
Redemption of Common Stock - November 1991 (2,450)
Initial Public Offering of Common Stock -
February 1992, net of costs 5,103,451 5,114,951
Issuance of Warrants - February 1992 1,000 1,000
Net loss (for the year ended September 30, 1992) (1,221,943) (1,221,943)
------------ ------------ ----------- -----------
BALANCE, September 30, 1992 5,473,468 (1,355,412) - 4,141,180
Warrant dividend - September 1993 436,898 (500,000) (63,102)
Net loss (for the year ended September 30, 1993) (2,022,614) (2,022,614)
------------ ------------ ----------- -----------
BALANCE, September 30, 1993 5,910,366 (3,878,026) - 2,055,464
Net loss (for the year ended September 30, 1994) (1,940,262) (1,940,262)
------------ ------------ ----------- -----------
BALANCE, September 30, 1994 5,910,366 (5,818,288) - 115,202
Issuance of Common Stock for acquisition of
Pacific Liaisons - October 1994 1,632,833 1,644,000
Exercise of Warrants 716,644 718,856
Common Stock purchase by Officer -
January 1995 1,311,075 1,318,125
Issuance of Common Stock for services rendered -
January 1995 21,167 21,500
April 1995 373,000 375,000
Issuance of Common Stock
for conversion of short-term liabilities
- June 48,849 48,979
Issuance of Common Stock - August 1995 749,625 752,625
Issuance of Preferred Stock - September 1995
Series A, net of costs 361,018 361,125
Series B, net of costs 399,900 400,000
Series C, net of costs 218,422 218,472
Net loss (for the year ended September 30, 1995) (3,031,196) (3,031,196)
------------ ------------ ----------- ----------
BALANCE, September 30, 1995 11,742,899 (8,849,484) - 2,942,688
Continued on the following page
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from Inception to June 30, 1997
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ----------------- --------------
Continued from the previous page
<S> <C> <C> <C> <C>
BALANCE, September 30, 1995 25,700 $ 257 4,901,584 $ 49,016
Issuance of Series B Preferred Stock, net of costs 76,651 767
Exercise of Warrants 73,318 733
Issuance of Common Stock
for services rendered - October 1995 33,336 331
Purchase of Treasury Stock - November 1995
Conversion of Preferred Stock (102,351) (1,024) 5,371,010 53,710
Issuance of Common Stock
for conversion of short-term liabilities - January 1996 2,500 25
Issuance of Common Stock
for services rendered - February 1996 25,000 250
Issuance of Warrants and Options
for services rendered - February 1996
Issuance of Common Stock June 1996 733,334 7,333
Sale of Warrants June 1996
Issuance of Common Stock July 1996 91,667 917
Issuance of Warrants and Options
for services rendered - July 1996 5,000 50
Exercise of Options September 1996 15,000 150
Issuance of Common Stock September 1996 683,333 6,833
Net loss (for the year ended September 30, 1996)
------------ ------------ ----------------- -----------
BALANCE, September 30,1996 - - 11,935,082 119,348
Issuance of Common Stock
for services rendered - January 1997 7,285 $ 72
Termination of warrants - February 1997
Costs related to stock issue
Net loss (for nine months ended June 30, 1997)
------------ ------------ ----------------- ------------
BALANCE, June 30, 1997 - $ - 11,942,367 $ 119,420
============ ============ ================= ============
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT TREASURY
CAPITAL STAGE STOCK TOTAL
------------------- ---------------- ---------------- ------------
Continued from the previous page
<S> <C> <C> <C> <C>
BALANCE, September 30, 1995 $ 11,742,899 $ (8,849,484) $ $ 2,942,688
Issuance of Series B Preferred Stock, net of costs 3,999,233 4,000,000
Exercise of Warrants 154,676 155,409
Issuance of Common Stock
for services rendered - October 1995 42,669 43,000
Purchase of Treasury Stock - November 1995 (1,342,515) (1,342,515)
Conversion of Preferred Stock (52,686) --
Issuance of Common Stock
for conversion of short-term liabilities - January 1996 9,975 10,000
Issuance of Common Stock
for services rendered - February 1996 27,875 28,125
Issuance of Warrants and Options
for services rendered - February 1996 132,500 132,500
Issuance of Common Stock June 1996 1,965,663 1,972,996
Sale of Warrants June 1996 35,000 35,000
Issuance of Common Stock July 1996 250,075 250,992
Issuance of Warrants and Options
for services rendered - July 1996 4,950 5,000
Exercise of Options September 1996 37,350 37,500
Issuance of Common Stock September 1996 1,997,826 2,004,659
Net loss (for the year ended September 30, 1996) (4,201,764) (4,201,764)
------------------- ---------------- ---------------- --------------
BALANCE, September 30,1996 20,348,005 (13,051,248) (1,342,515) 6,073,590
Issuance of Common Stock
for services rendered - January 1997 22,835 22,907
Termination of warrants - February 1997 (35,000) (35,000)
Costs related to stock issue (15,000) (15,000)
Net loss (for nine months ended June 30, 1997) (2,837,870) (2,837,870)
------------------- ---------------- ---------------- --------------
BALANCE, June 30, 1997 $ 20,320,840 $ (15,889,118) $ (1,342,515) $ 3,208,627
=================== ================ ================ ==============
6
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the nine months ended June 30, 1997 and 1996
And the Period From Inception to June 30, 1997
(Unaudited)
CUMULATIVE
PERIOD FROM
NINE MONTHS ENDED INCEPTION TO
JUNE 30, JUNE 30,
1997 1996 1997
----------- ----------- ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ($2,837,870) $(2,628,779) $(15,389,118)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Non-cash compensation expense -- -- 1,228,275
Other non-cash expenses 209,551 116,700 1,350,209
Depreciation and amortization 218,265 183,549 995,869
Changes in assets and liabilities
(Increase) in prepaid expenses and other current assets (49,869) (105,071) (298,816)
(Decrease) Increase in accounts payable (97,448) (339,062) 546,984
(Decrease) Increase in due to related party (52,000) (17,332) 25,597
Increase(Decrease) in deferred revenues 583 -- 47,441
(Decrease)Increase in accrued expenses (104,604) 97,256 88,186
----------- ----------- ------------
Net cash (used in) operating activities (2,713,392) (2,692,739) (11,405,373)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of investments -- -- (6,719,089)
Redemption of investments -- -- 6,719,089
Purchase of equipment (16,887) (47,497) (732,186)
Proceeds from sale of equipment -- -- 20,000
Acquisition of licensed technology (3,656) (50,000) (53,656)
Acquisition of patents and trademarks (55,318) (37,125) (360,121)
Acquisition of New Century Nutrition newsletter -- (350,000) (350,000)
Acquisition of option for EastWest Herbs Ltd. and related costs -- (82,016) (92,866)
Loan to EastWest Herbs Ltd -- (340,000) (340,000)
----------- ----------- ------------
Net cash (used in) investing activities (75,861) (906,638) (1,908,829)
----------- ----------- ------------
Cash flows from financing activities:
Sale of common stock, initial public offering, net of costs -- -- 5,124,014
Sale of common and preferred stock, net of costs (15,000) 5,972,996 10,315,109
Proceeds from the exercise of warrants -- 155,409 666,295
Proceeds from the exercise of options -- -- 37,500
Proceeds from the sale of warrants(Redemption) (35,000) 35,000 --
Purchase of treasury stock -- (1,342,515) (1,342,515)
Cost of warrant dividend -- -- (63,102)
Payments on equipment contract -- -- (90,950)
----------- ----------- ------------
Net cash (used in)provided by financing activities (50,000) 4,820,890 14,646,351
----------- ----------- ------------
Net (decrease) increase in cash and cash equivalents (2,839,253) 1,221,513 1,332,149
Cash and cash equivalents, beginning of period 4,171,402 1,416,022 --
----------- ----------- ------------
Cash and cash equivalents, end of period $ 1,332,149 $ 2,637,535 1,332,149
=========== =========== ============
Supplemental disclosure:
Cash paid during the period for interest $ 3,694 $ 7,019 $ 18,494
=========== =========== ============
Supplemental disclosure of non-cash investing and financing activities:
Fair value of assets acquired, net of cash acquired $ -- $ -- $ 1,702,000
Less - liabilities assumed -- -- (52,000)
Less - issuance of common stock -- -- (1,644,000)
----------- ----------- ------------
Net cash paid $ -- $ -- $ 6,000
=========== =========== ============
Warrant dividend $ -- $ -- $ 500,000
Issuance of common stock to reduce short-term liabilities $ 22,907 $ 38,125 $ 519,981
Purchase of equipment $ -- $ -- $ 90,950
Issuance of common stock for licensing and technology rights $ -- $ -- $ 3,338
=========== =========== ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
7
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
--------------------------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1997 AND 1996
----------------------
1. MANAGEMENT REPRESENTATION
The consolidated financial statements included herein have been prepared by
Paracelsian, Inc. and subsidiary (the "Company") without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission applicable to
quarterly reporting on Form 10-QSB and reflect, in the opinion of the Company,
all adjustments necessary to present fairly the financial information for
Paracelsian, Inc. and its consolidated subsidiary. All such adjustments are of a
normal and recurring nature. Certain information and footnote disclosures
normally included in financial statements, prepared in accordance with generally
accepted accounting principles, have been condensed or omitted as permitted by
such regulations. These consolidated financial statements and related notes
should be read in conjunction with the consolidated financial statements and
related notes included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1996.
2. ORGANIZATION, BUSINESS, AND RISK FACTORS:
Organization and Business
The Company is a biotechnology company that markets and develops products from
technology related to the detection of signals from the exterior of a cell to
its nucleus (signal transduction). These signals result in the activation or
suppression of specific genes and culminate in cell division or death.
Cell division is one of the basic steps in biology necessary for normal growth
of tissues to support life. The Company's technology enables researchers to
observe signal transduction pathways and measure the effects of chemicals
contained in synthetic and natural compounds, such as herbal extracts, on cell
division. In the course of these observations, the Company can distinguish the
effects of such chemicals on targeted cells, thereby screening compounds to
identify those with promising therapeutic effects. (This proprietary technology,
including the components, methods, procedures and know-how employed in this
screening process, is referred to herein as the "Screening Technology".)
In October 1994, Pacific Liaisons, a partnership engaged in identifying and
acquiring biologically active drugs, natural products and foods from Eastern
Asia, merged with a wholly-owned subsidiary of the Company and the Company now
maintains a large library of natural medicinal extracts. These extracts are
being processed with the p34 screening assay. The Company also has access to the
informational database related to the medicinal extracts, which contains, among
other things, a history of the usage of each extract.
In November 1995, the Company purchased substantially all the assets related to
NEW CENTURY NUTRITION, a newsletter promoting disease prevention through
nutrition. In December 1996, the Company decided to cease publication of the
newsletter and seek potential buyers for the newsletter and/or its subscriber
list. All costs associated with the cessation of publication have been included
in the financial statements of September 30, 1996.
Development Stage Company and Risk Factors
The Company is a development stage company as defined in Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises." Since inception, the Company has been primarily engaged in
research, product engineering and raising capital.
8
<PAGE>
The Company, as a development stage enterprise, has yet to generate significant
revenues and has no assurance of substantial future revenues. Even if marketing
efforts are successful, it may take several years before significant revenues
are realized. The Company is subject to a number of risks that may affect its
ability to become an operating enterprise or impact its ability to remain in
existence, including risks related to successful development and marketing of
its products, patent protection of proprietary technology, competition from
substitute products (including technologies that may not yet have been
developed), dependence on key employees and the need to obtain additional funds
that may not be available to it.
As shown in the accompanying financial statements, the Company incurred a net
loss of approximately $2,838,000 for the nine months ended June 30, 1997 and has
working capital of approximately $1,306,000 at that date. The Company continues
to expend funds on product research and development and general and
administrative expenses and has not generated significant revenues.
3. SIGNIFICANT ACCOUNTING POLICIES:
Consolidation
The consolidated financial statements of the Company include the accounts of
Paracelsian, Inc. and its wholly owned subsidiary ParaComm, Inc. formerly known
as Para Acquisition Corp. All intercompany balances and transactions have been
eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an original
maturity of three months or less. Cash equivalents as of June 30, 1997 and
September 30, 1996 approximated $1,332,000 and $4,171,000 respectively.
Research and Product Engineering
Company-sponsored research and product engineering expenditures have been
charged to expense as incurred. These costs consist primarily of employee
salaries and direct laboratory costs. The cost of extracts used in research and
development activities is expensed as consumed.
Net Loss Per Share
Net loss per share was computed by dividing net loss for the period by the
weighted average number of shares of common stock outstanding during the period.
Common stock equivalents are not included in the computation of average shares
outstanding because the effect of such inclusion would be to decrease the loss
per share.
Patents and Trademarks
The Company has acquired or applied for certain patent and trademark rights.
Costs associated with the acquisition and application for these rights have been
capitalized and are being amortized on the straight-line method over the
estimated legal life of the assets which range from 15 to 17 years. Accumulated
amortization of the patents and trademarks totaled $69,247 and $58,747 at June
30, 1997 and September 30, 1996, respectively.
9
<PAGE>
Equipment and Depreciation
Equipment is stated at cost and is depreciated over the estimated useful lives
of the assets using the straight-line method. Equipment consists of the
following as of:
<TABLE>
<CAPTION>
USEFUL JUNE 30, SEPTEMBER 30,
LIVES 1997 1996
----- ---- ----
<S> <C> <C> <C>
Laboratory equipment 10 Years $ 511,69l $ 500,623
Office furniture and equipment 10 Years 86,345 88,095
Computer equipment and software 5 Years 133,852 133,033
------- ----------
731,888 721,751
393,976 336,961
---------- -------
$ 337,912 $ 384,790
---------- ----------
</TABLE>
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Three Months and Nine Months Ended June 30, 1997 as compared to the Three Months
and Nine Months Ended June 30, 1996
For the three month period ending June 30, 1997 the Company generated revenues
of $ 475 from the sale of the Company's ELISATM kits. This represents a 95%
decrease from the three month period ending June 30, 1996 when revenue was
$9,500 of subscription revenue from NEW CENTURY NUTRITION newsletter. In the
nine months ended June 30, 1997 the Company had revenues of $4,600 as compared
to $33,500 in the nine months ended June 30, 1996. The decrease is due to the
licensing of the products utilizing the cdk 1 Assay technology to
Calbiochem-Novabiochem International in April 1996 which shifts the revenue from
product sales in fiscal year 1996 to royalty income in fiscal year 1997. Also,
in fiscal 1996 subscription revenue from the publication of the NEW CENTURY
NUTRITION was $13,200. The newsletter ceased publication in December 1996.
A portion of the Company's strategy is to develop certain of its products to a
point where its value can be clearly established and then license marketing and
other rights to third parties. To this end, the Company completes sufficient
product development so that prospective licensees can more readily recognize the
value of completing the product's development and its ultimate
commercialization.
In addition, the Company's strategy is to directly market those products which
it believes can be marketed without significant marketing expenditures and
without the time-consuming process of having such products approved by
regulatory agencies such as the Food and Drug Administration.
It is the Company's experience that a product's value to a prospective licensee
varies significantly depending on the remaining product development risk
perceived by the prospect. The Company, therefore, tailors its development plans
for each product based on the interest of prospective licensees and the critical
risk factors perceived. The Company also adjusts its plans as conditions change
during the course of development. As novel technologies become better understood
by the Company, perceived risks are frequently reduced. Similarly, as the
Company introduces novel technologies and approaches, significant effort is
expended to verify the scientific basis and document the findings.
Since the Company's inception (April 15, 1991) through June 30, 1997, it has
invested $ 6,515,500 in product research, development and engineering. The
amount expended in the third quarter of fiscal 1997, $400,200, as compared to
$409,000 in the third quarter of fiscal 1996 representing a decrease of 2.2%.
This decrease is attributable to a refocusing of the science of assay
development and the application of these assays to the identification of novel
pharmaceutical compounds. There has been a corresponding reduction in the
science staff. Research and product engineering costs during the nine months
ended June 30, 1997 total $1,258,000 as compared to $976,000 in the nine months
ended June 30, 1996. The increase is due to the expanded study of andrographide
based products with its resulting increase in supplies, equipment and personnel
in prior periods of fiscal 1997 and the initial payment under the agreement with
the National Cancer Institute. After the cancellation of the proposed product
launch, the Company reduced its science staff and therefore personnel expenses
will be lower in future quarters.
During the quarter ending June 30, 1997 the Company incurred $220,000 in
expenses in preparation of the launch of the product AndroVir-DS. In April 1997,
the Company was advised by the Food and Drug Administration that the dietary
supplement marketing of AndroVirTM for HIV+ individuals and of AndroCarTM to
persons with cancer would constitute claims that the products are intended to
treat persons with serious diseases and thus intended for drug use and not
dietary supplement use. After careful consideration the Company decided to
cancel the launch.
The Company intends to incur continuing product research and development
expenses. The expenses during the remainder of fiscal 1997 will include payments
to the National Cancer Institute as part of the CRADA (Cooperative Research and
Development Agreement). The terms of the CRADA are included in an agreement
signed by the parties in December 1996.
11
<PAGE>
Under the terms of the CRADA, the parties have agreed to share certain,
extensive proprietary data, methods and models for use in evaluating the
efficacy of certain of the Company's compounds against HIV and certain cancers.
During the nine month period ended June 30, 1996 the Company incurred $411,500
of expenses associated with the development, marketing and launch of the
newsletter, NEW CENTURY NUTRITION. Publication ceased December 31, 1996.
General and administrative expenses totaled $ 6,792,000 during the period from
inception to June 30, 1997. Of this amount $ 526,000 was incurred in the third
quarter of fiscal 1997 and $423,000 in the third quarter of fiscal 1996, an
increase of 24%. These expenses relate to the administration of the research,
development and product engineering activities and support services including
raising capital, arranging for facilities, hiring employees, market analysis and
the development and administration of the Company's business and marketing
plans. The increase from the prior year period is attributable to additional
consultant and other professional fees incurred in the current quarter. In
April, 1997 the Company's option to acquire East West Herbs, Ltd. of Kingham,
England expired. The option fee and related legal and professional fees of
$92,800 are included in general and administrative expenses. General and
administrative expenses for the nine months ended June 30, 1997 are $1,400,000
as compared to $1,327,000 in the nine months ended June 30, 1996, an increase of
5.5%. Expenses have remained constant in the areas of personnel, facility and
other aspects of administration.
The Company has incurred net losses of $15,389,000 as a development stage
company from inception to June 30, 1997, of which $1,094,000 was incurred in the
third quarter of fiscal 1997 and $1,012,000 was incurred in the third quarter of
fiscal 1996. The net loss per share of common stock amounted to $.09 for the
quarter ended June 30, 1997 and $.10 for the quarter ended June 30, 1996. Net
loss for the nine months ended June 30, 1997 amounted to $2,838,000 and the nine
months ended June 30, 1996 of $2,629,000. The Company anticipates that losses
will continue throughout fiscal 1997, increasing slightly from the amount in the
third quarter of fiscal 1997 for the reasons described above.
Liquidity and Capital Resources
At June 30, 1997, the Company had cash and cash equivalents of $ 1,332,000 as
compared to $4,171,000 at September 30, 1996.
The Company intends to seek additional funding sources of capital and liquidity
through collaborative agreements. In addition, the Company is continually
evaluating various financing alternatives including public and private sources
of debt and equity. There can be no assurance that such additional financing
will be available on acceptable terms or at all. If additional financing is not
available, even with the staff reductions already made, the Company anticipates
that its available cash and existing sources of funding will be adequate to
satisfy its operating cash and capital requirements only until December 1997.
The Company's future capital requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
magnitude of such programs and its acquisition plans.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
-----------------
PARACELSIAN, INC. V. JOHN G. BABISH
- -----------------------------------
On April 25, 1997 the Company filed a complaint in the U.S. District Court for
the Northern District of New York against John G. Babish, a former officer and
director of the Company. The complaint alleges that Mr. Babish engaged in a
pattern of wrongful conduct by which he sought to unjustly enrich himself and to
seize control of the Company at the expense of the Company and its shareholders.
That conduct included in part the manipulation of the Company's stock price,
trading in the Company's stock on inside information, breach of fiduciary and
contractual duties, theft of Company property, and usurpation of corporate
opportunities.
The Company initially obtained a temporary restraining order prohibiting the
defendant alone or in cooperation with others from transferring any of the stock
or assets of or other interests in the Company, from issuing a press release, or
contacting stock brokers or major shareholders with the intent to affect the
price of plaintiff's stock or from disseminating any trade secrets or other
confidential information of the plaintiffs. The restraining order against the
defendant expired, and the court declined the Company's request to extend that
order in a preliminary injunction.
The defendant denied any wrongdoing in his answer to the complaint, and
counterclaimed for damages "between $375,000.00 and $1,829,587.50" on account of
the Company's alleged failure to register shares of common stock underlying
certain warrants. Defendant moved to dismiss the suit, and that motion was
denied. The parties have commenced mutual disclosure of evidence as required by
law. Trial of the case has not yet been scheduled by the court.
DR. T. COLIN CAMPBELL V. PARACELSIAN, INC.
- ------------------------------------------
On May 20, 1997, Dr. T. Colin Campbell, a former director of the Company, filed
a petition in the Delaware Court of Chancery pursuant to Section 211 of the
Delaware General Corporation Law ("DGCL"). The petition sought an order
compelling the Company to hold an annual meeting of stockholders and sought
other forms of relief relating thereto, including requesting that the Court set
a time and place for the meeting and ordering that certain board seats be put up
for election. On June 11, 1997, the Company announced that the Board of
Directors had scheduled the annual meeting for August 13, 1997 and had set a
record date of July 10, 1997 for stockholders entitled to attend and vote at the
meeting. On the same day, the Company moved to dismiss the petition.
On June 20, 1997, petitioner filed a cross-motion in opposition to the Company's
motion to dismiss, and an application, pursuant to Section 223(c) of the DGCL,
to require the Company to hold an election at the annual meeting to replace
directors recently elected by the Board. Subsequently, petitioner moved to
postpone the scheduled August 13th meeting in order to have more time to conduct
a proxy contest. The Court scheduled a hearing for July 28, 1997 to hear
argument on that motion. Following the hearing, the Court ruled from the bench
and denied petitioner's request to postpone the meeting, but granted the
petitioner leave to amend his petition. To date, petitioner has not filed an
amended petition.
Item 6(a). EXHIBITS
--------
None.
Item 6(b). REPORTS ON FORM 8-K.
--------------------
None.
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: August 8, 1997
PARACELSIAN, INC.
By: /s/ KEITH A. RHODES
----------------------------------------
Keith A. Rhodes
Chairman of the Board and President
14
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
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