UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
OR
[ ] QUARTERLY REPORTS 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.)
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 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 14,871,296 shares of Common Stock outstanding at August 10, 1998
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
Index
Page
----
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and
September 30, 1997 (Audited). 3
Consolidated Statements of Operations for the three
and nine months ended June 30, 1998 and 1997 and the period from
inception (April 15, 1991) to June 30, 1998 (Unaudited). 4
Consolidated Statements of Stockholders' Equity for the
period from inception (April 15, 1991) to June 30, 1998 (Unaudited). 5
Consolidated Statements of Cash Flows for the nine months
ended June 30, 1998 and 1997 and the period from inception
(April 15, 1991) to June 30, 1998 (Unaudited). 8
Notes to Consolidated Financial Statements (Unaudited) 10
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations. 14
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings 16
Item 6. - Exhibits and Reports on 8-K 16
Signatures 16
2
<PAGE>
<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
June 30, September 30,
1998 1997
------------ ------------
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 137,857 $ 886,249
Accounts receivable 15,240 --
Inventory 171,689 156,323
Prepaid expenses and other current assets 97,502 61,437
Loan to East West Herbs, Ltd., - current portion 170,000 170,000
------------ ------------
Total current assets 592,288 1,274,009
------------ ------------
Equipment, net 288,501 305,079
Other Assets:
TCM extracts on-hand 350,154 466,839
Licensing agreement, net 223,258 367,258
Patents and trademarks, net 130,747 125,586
Loan to East West Herbs, Ltd., - noncurrent portion 127,500 170,000
------------ ------------
Total other assets 831,659 1,129,683
------------ ------------
$ 1,712,448 $ 2,708,771
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 173,138 $ 268,702
Accrued expenses 165,254 180,664
Due to related party 7,002 18,557
------------ ------------
Total current liabilities 345,394 467,923
------------ ------------
Commitments and Contingency
Stockholders' Equity:
Commonstock, $.01 par value; 35,000,000 shares authorized;
14,871,296 shares outstanding June 1998
and 12,004,867 September 1997 148,710 120,045
Additional paid-in capital 22,555,650 22,084,315
Deficit accumulated during the development stage (19,994,791) (18,620,997)
Treasury stock, at cost; 265,478 shares (1,342,515) (1,342,515)
------------ ------------
Total stockholders' equity 1,367,054 2,240,848
------------ ------------
$ 1,712,448 $ 2,708,771
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
For the three months and nine months ended June 30, 1998 and 1997,
And the period from inception to June 30, 1998
(Unaudited)
Cumulative
Three Months Ended Nine Months Ended Period from
June 30, June 30, Inception to
---------------------------- ---------------------------- June 30,
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Marketing rights $ -- $ -- $ -- $ -- $ 254,995
Products 1,425 475 3,100 3,525 165,813
Product testing 15,240 -- 49,210 -- 49,210
Product royalties -- -- -- 1,070 1,246
Subscription revenue -- -- -- -- 31,625
------------ ------------ ------------ ------------ ------------
16,665 475 52,310 4,595 502,889
Operating expenses:
Research and product engineering 165,107 400,232 542,264 1,257,598 7,209,884
Newsletter expenses -- -- -- -- 955,586
General and administrative 371,205 526,489 926,606 1,400,956 9,129,509
Product launch costs -- 220,060 -- 297,507 300,544
Cost of products sold -- -- -- -- 95,023
Officer stock compensation -- -- -- -- 1,228,275
------------ ------------ ------------ ------------ ------------
536,312 1,146,781 1,468,870 2,956,061 18,918,821
------------ ------------ ------------ ------------ ------------
Loss from operations during
the development stage (519,647) (1,146,306) (1,416,560) (2,951,466) (18,415,932)
Interest income, net 9,096 52,169 35,798 113,596 510,653
Gain on sale of assets -- -- 6,968 -- 38,488
------------ ------------ ------------ ------------ ------------
Net loss during the development stage $ (510,551) $ (1,094,137) $ (1,373,794) $ (2,837,870) $(17,866,791)
============ ============ ============ ============ ============
Basic net loss per share $ (0.03) $ (0.09) $ (0.09) $ (0.24)
============ ============ ============ ============
Weighted average number of
common stock outstanding 14,871,296 11,937,510 14,871,296 11,935,891
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
</TABLE>
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<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from inception to June 30, 1998
(Unaudited)
Deficit
Accumulated
Additional During the
Preferred Stock Common Stock Paid-in Development Treasury
Shares Amount Shares Amount Capital Stage Stock Total
------- ------- ---------- ---------- ------------ ------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock April - July 1991 -- $ -- 806,250 $ 8,063 $ -- $ -- $ -- 8,063
Issuance of Common Stock for licensing,
technology and consulting
services - July 1991 333,850 3,338 3,338
Private placement of Common Stock -
August - September 1991, net of costs 267,288 2,673 369,017 371,690
Net loss (April 15, 1991 to
September 30, 1991) -- -- (133,469) (133,469)
------- ------- ---------- ---------- ------------ ------------- ------- ----------
BALANCE, September 30, 1991 -- -- 1,407,388 14,074 369,017 (133,469) -- 249,622
Redemption of Common Stock - November 1991 (245,000) (2,450) (2,450)
Initial Public Offering of Common Stock -
February 1992, net of costs 1,150,000 11,500 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 -- -- 2,312,388 23,124 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 -- -- 2,312,388 23,124 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 -- -- 2,312,388 23,124 5,910,366 (5,818,288) -- 115,202
Issuance of Common Stock for
acquisition of Pacific
Liaisons - October 1994 1,116,666 11,167 1,632,833 1,644,000
Exercise of Warrants 221,200 2,212 716,644 718,856
Common Stock purchased by Officer -
January 1995 705,000 7,050 1,311,075 1,318,125
See accompanying notes to consolidated financial statements.
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, 1998
(Unaudited)
Continued from the previous page
Deficit
Accumulated
Additional During the
Preferred Stock Common Stock Paid-in Development Treasury
Shares Amount Shares Amount Capital Stage Stock Total
------- ------- ---------- ---------- ------------ ------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock for
services rendered -
January 1995 33,330 333 21,167 21,500
April 1995 200,000 2,000 373,000 375,000
Issuance of Common Stock for
conversion of short-term
liabilities - June 1995 13,000 130 48,849 48,979
Issuance of Common Stock
- August 1995 300,000 3,000 749,625 752,625
Issuance of Preferred Stock
- September 1995
Series A, net of costs 10,700 107 361,018 361,125
Series B, net of costs 10,000 100 399,900 400,000
Series C, net of costs 5,000 50 218,422 218,472
Net loss (for the year ended
September 30, 1995) (3,031,196) (3,031,196)
------- ------- ---------- ---------- ------------ ------------- ------- ----------
BALANCE, September 30, 1995 25,700 257 4,901,584 49,016 11,742,899 (8,849,484) -- 2,942,688
Issuance of Series B Preferred
Stock, net of costs 76,651 767 3,999,233 4,000,000
Exercise of Warrants 73,318 733 154,676 155,409
Issuance of Common Stock for
services rendered -
October 1995 33,336 331 42,669 43,000
Purchase of Treasury Stock -
November 1995 (1,342,515) (1,342,515)
Conversion of Preferred Stock (102,351) (1,024) 5,371,010 53,710 (52,686)
Preferred dividends and beneficial
conversion feature 1,628,000 (1,628,000)
Issuance of Common Stock for
conversion of short-term
liabilities - January 1996 2,500 25 9,975 10,000
Issuance of Common Stock for
services rendered - February 1996 25,000 250 27,875 28,125
Issuance of Warrants and
Options for services rendered
- February 1996 132,500 132,500
Issuance of Common Stock - June 1996 733,334 7,333 1,965,663 1,972,996
See accompanying notes to consolidated financial statements.
6
</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, 1998
(Unaudited)
Continued from the previous page
Deficit
Accumulated
Additional During the
Preferred Stock Common Stock Paid-in Development Treasury
Shares Amount Shares Amount Capital Stage Stock Total
------- ------- ---------- ---------- ------------ ------------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of Warrants - June 1996 35,000 35,000
Issuance of Common Stock - July 1996 91,667 917 250,075 250,992
Issuance of Common Stock for
services rendered - July 1996 5,000 50 4,950 5,000
Exercise of Options - September 1996 15,000 150 37,350 37,500
Issuance of Common Stock - September 1996 683,333 6,833 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 -- -- 11,935,082 119,348 21,976,005 (14,679,248)(1,342,515) 6,073,590
Issuance of Common Stock for
services rendered -
January 1997 7,285 72 22,835 22,907
Termination of warrants - February 1997 (35,000) (35,000)
Repayment of officer stock
subscription receivable 89,850 89,850
Issuance of Common Stock for
services rendered -
July 1997 62,500 625 30,625 31,250
Net loss (for the year ended
September 30, 1997) (3,941,749) (3,941,749)
------- ------- ---------- ---------- ------------ ----------- ---------- ----------
BALANCE, September 30, 1997 -- -- 12,004,867 120,045 22,084,315 (18,620,997)(1,342,515) 2,240,848
------- ------- ---------- ---------- ------------ ----------- ---------- ----------
Issuance of Common - January 1998 3,571,429 35,715 464,285 500,000
Surrender of shares - January 1998 (705,000) (7,050) 7,050 --
Net loss (for the nine
months ended June 30, 1998) -- -- -- -- -- (1,373,794) -- (1,373,794)
------- ------- ---------- ---------- ------------ ----------- ---------- ----------
BALANCE, June 30, 1998 -- -- 14,871,296 148,710 22,555,650 (19,994,791)(1,342,515) 1,367,054
======= ======= ========== ========== ============ =========== ========== ==========
See accompanying notes to consolidated financial statements.
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash
Flows For the nine months ended June 30, 1998 and 1997
And the period from inception to June 30, 1998
(Unaudited)
Cumulative
Nine Months Ended Period from
June 30, Inception to
---------------------------- June 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,373,794) $ (2,837,870) $(17,866,791)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on the sale of assets (6,968) -- (38,488)
Non-cash compensation expense -- -- 1,228,275
Other non-cash expenses -- 209,551 1,510,203
Depreciation and amortization 321,975 218,265 1,568,947
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (15,240) -- (15,240)
(Increase) decrease in inventory (15,366) -- (171,689)
(Increase) decrease in prepaid expenses and
other current assets (36,065) (49,869) (68,082)
(Decrease) increase in accounts payable (95,564) (97,448) 527,661
(Decrease) increase in due to related party (11,555) (52,000) 7,002
(Decrease) increase in deferred revenue -- 583 --
(Decrease) increase in accrued expenses (15,410) (104,604) 165,254
------------ ------------ ------------
Net cash used in operating activities (1,247,987) (2,713,392) (13,152,948)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of investments -- -- (6,719,089)
Redemption of investments -- -- 6,719,089
Purchase of equipment (31,212) (16,887) (763,398)
Proceeds from sale of equipment 6,968 -- 58,488
Acquisition of licensed technology -- (3,656) (53,656)
Acquisition of patents and trademarks (18,661) (55,318) (371,614)
Acquisition of New Century Nutrition newsletter -- -- (350,000)
Acquisition of option for East West Herbs, Ltd.
and related acquisition costs -- -- (92,866)
(Loan) proceeds (to) from East West Herbs, Ltd. 42,500 -- (297,500)
------------ ------------ ------------
Net cash used in investing activities (405) (75,861) (1,870,546)
------------ ------------ ------------
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 500,000 (15,000) 10,830,109
Proceeds from the exercise (redemption) of warrants -- (35,000) 666,295
Proceeds from the exercise of options -- -- 37,500
Purchase of treasury stock -- -- (1,342,515)
Cost of warrant dividend -- -- (63,102)
Payment on equipment contract -- -- (90,950)
------------ ------------ ------------
Net cash (used in) provided by financing activities 500,000 (50,000) 15,161,351
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (748,392) (2,839,253) 137,857
Cash and cash equivalents, beginning of period 886,249 4,171,402 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 137,857 $ 1,332,149 $ 137,857
============ ============ ============
See accompanying notes to consolidated financial statements.
8
</TABLE>
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<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash
Flows For the nine months ended June 30, 1998 and 1997
And the period from inception to June 30, 1998
(Unaudited)
Cumulative
Nine Months Ended Period from
June 30, Inception to
----------------------------- June 30,
1998 1997 1998
------------- ------------- ----------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid during the period for interest $ 3,433 $ 3,694 $ 22,717
============= ============= ==========
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/warrants for services
and to reduce short-term liabilities -- 22,907 550,456
Purchase of equipment -- -- 90,950
Repayment of officer stock subscription receivable -- -- 89,850
Issuance of common stock for licensing and technology rights -- -- 3,338
============= ============= ==========
See accompanying notes to consolidated financial statements.
9
</TABLE>
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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, 1997.
2. ORGANIZATION, BUSINESS, AND RISK FACTORS:
Organization and Business
- -------------------------
Paracelsian, Inc., (the "Company") is a unique biotechnology based company that
utilizes both proprietary and non-proprietary screening technology to identify
novel compounds of unique therapeutic benefit from herbal and other botanical
sources. These assays also provide a vehicle through which the Company
identifies and/or confirms the mechanisms through which traditional herbs and
other botanicals provide the therapeutic or functional benefits suggested by
their traditional use. The Company has developed technologies to identify
potential products that inhibit the biological signals generated by targeted
cells that result in controlled or uncontrolled growth and division. The
Company's screening technology evaluates the effects of herbal and other
botanical products on intracellular signals referred to as "Signal Transduction
Technology."
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 and measure the effects of chemicals contained in
synthetic or natural compounds, and substances occurring in nature such as herbs
and combinations of herbal extracts on cell division. In the course of these
observations, the Company can distinguish the effects of such substances on
targeted cells, thereby screening compounds to identify those with promising
favorable therapeutic effects or favorable effects on the body's structure and
function. (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 (Pacific), a partnership engaged in
identifying and acquiring biologically active pharmaceutical compounds, natural
products and foods from Eastern Asia, merged with a wholly-owned subsidiary of
the Company and the Company now maintains a library of over 2,700 natural
medicinal extracts. The Company, also has, by agreement, access to over 5,000
additional Tradition Chinese Extracts. The initial group of extracts has been
processed with the Company's screening technology, with many of the extracts
showing significant potential for development as either pharmaceutical compounds
or dietary supplements. As the Company develops new screening technologies or
screening protocols focused on conditions other than those applicable to the
current screens, the library will be screened again to further determine
potential candidates for drug or dietary supplement development. 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 (see
Note 3).
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.
10
<PAGE>
Development Stage Company and Risk Factors
- ------------------------------------------
The Company is considered to be 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.
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, government
regulation, 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 $1,374,000 for the nine months ended June 30, 1998 and has
working capital of approximately $247,000 at June 30, 1998. The Company
continues to expend funds on product research and development and general and
administrative expenses and has not generated significant revenues subsequent to
year-end. However, in July 1998, the Company executed an agreement with R.P.
Scherer that is expected to generate significant revenues on a recurring basis.
See related discussion in Management, Discussion and Analysis section.
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, 1998 and
September 30, 1997 approximated $138,000 and $887,000, 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
- ------------------
Effective December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic loss per share is computed by dividing the net
loss by the weighted-average number of common shares outstanding during the
period. Diluted loss per share is not presented as the inclusion of potential
common shares (stock options and warrants) would be antidilutive.
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 $90,247 and $76,747,
respectively, at June 30, 1998 and September 30, 1997. As of September 30, 1997,
management has determined a portion of these assets to be impaired according to
FASB 121, and as a result $162,770 has been expensed during the year ended
September 30, 1997.
11
<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:
June 30, September 30,
Useful Lives 1998 1997
------------ ------------ ------------
Laboratory equipment 10 Years $ 542,903 $ 480,171
Office furniture and equipment 10 Years 86,345 86,345
Computer equipment and software 5 Years 133,852 133,852
------------ ------------
763,100 700,368
Less - accumulated depreciation 474,598 395,299
------------ ------------
$ 288,501 $ 305,079
============ ============
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.
4. STOCKHOLDERS' EQUITY:
In January, 1998 the Company signed an agreement with Biomar International,
Inc.("Biomar") in which Biomar agreed to purchase 3,571,429 shares of common
stock for $500,000. In addition, Biomar received warrants to purchase an
additional 2,971,429 shares of common stock at a price of $.175 per share or a
total of $520,000, subject to an increase in the Company's authorized shares.
These warrants expire 90 days after the shares and warrants are registered with
the Securities and Exchange Commission ("SEC"). Biomar became the major
shareholder and obtained the right to name a new Board of Directors. Biomar is
controlled by T. Colin Campbell a former director of the Company and his son, T.
Nelson Campbell a former Vice President of the Company.
The Purchase Agreement also provided for the resignation of the Board of
Directors serving on January 14, 1998 and the appointment of Biomar's nominees
to the Board of Directors of the Corporation (the "Board"). Effective January
14, 1998, all of the Board members other than the Chairman, Mr. Theodore P.
Nikolis, resigned immediately and T. Nelson Campbell, the Chairman of the board
of directors of Biomar, was appointed to the Board. Upon satisfaction of the
notification requirements of the SEC on February 9, 1998, Mr. Nikolis resigned
as a director of the Corporation and appointments of the new directors became
effective. All newly appointed directors stood for election at the annual
meeting of the shareholders on May 13, 1998, and were duly elected for staggered
terms ranging from one to three years.
On January 23, 1995, the Company approved a stock purchase by the Company's
President and then Chief Executive Officer to purchase an aggregate of 705,000
shares of the Company's common stock at a price of $.05 and $.56 per common
share for 245,000 and 460,000 shares of common stock, respectively. In
connection with this transaction, the Company recognized a one-time, non-cash
compensation expense of approximately $1,228,000 in the year ended September 30,
1995. In conjunction with the purchase of these shares, the Company extended a
note to the officer for $230,000, due December 31, 1995. Subsequently, this note
was extended until December 31, 1997. In January 1998, the shares of stock were
returned to the Company and the note was forgiven. The shares of stock had a
fair market value that approximated the outstanding note balance of 180,000 at
September 30, 1997 which has been reflected as an offset to additional
paid-in-capital.
12
<PAGE>
The Company entered into an employment agreement with Bernard M. Landes to be
President and Chief Executive Officer of the Corporation as of January 15, 1998.
The initial employment term is for one year and automatically extended for an
additional one year period unless prior written notice is received from the
Corporation or the Officer. Under the Agreement, the Officer receives an annual
cash salary of $175,000, with annual adjustments and discretionary bonuses of
$50,000 as determined by the Board. The Officer was also granted 100,000 shares
of the Common Stock and granted options to acquire an additional 500,000 shares
provided certain performance criteria are satisfied.
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended June 30, 1998 as compared to the
Three Months Ended June 30, 1997
RESULTS OF OPERATIONS
During the third quarter of the fiscal year ending September 30, 1998 the
Company generated revenue of $16,665 from product testing and the sale of
products as compared to $475 of royalty and product sale revenue in the same
quarter of the prior year. This represents an increase of $16,190 in revenue
from last year.
A significant portion of the Company's strategy is to expand its testing of
natural products. The Company believes that it has an opportunity to develop a
new area of quality assurance that will add value to the products it tests. As a
result, the Company has developed BioFit (TM) (Bio Functional Integrity Testing)
testing program. This unique testing program is able to certify consistent
bio-functionality of herbal and other dietary supplements. This new "functional"
approach to quality assurance will assist consumers in selecting herbs and other
botanical products based on their demonstrated biological activity, rather than
relying solely on analytical techniques which measure only the presence or
absence of certain marker compounds. This new approach to quality assurance
bridges the gap between purely analytical methods of validation and the use of
clinical trials to validate the effectiveness of natural products relative to
the structure and function claims being made for them under the Dietary
Supplement Health and Education Act of 1994.
Since the Company's inception (April 15, 1991) through June 30, 1998, it has
invested $7,210,000 in product testing research, development and engineering.
The Company expended $165,000 in the third quarter of fiscal 1998, as compared
to $400,000 in the third quarter in fiscal 1997, this represents a decrease of
$235,000. This decrease is attributable to lower personnel costs and the
cancellation of the research agreement with the National Cancer Institute.
General and administrative expenses were $371,000 for the third quarter of
fiscal 1998 as compared to $526,000 in the third quarter of fiscal 1997. These
expenses relate to the administration and management of the Company, including
personnel costs, legal, accounting, consulting, investor relations and the
administration of the research, development and product engineering activities.
This decrease of $155,000 is attributable to lower personnel costs, lower legal
and other professional and consulting costs and other general cost reductions.
The Company anticipates its general and administrative expenses will be lower in
the final quarter of fiscal 1998 than in the final quarter of fiscal 1997.
The Company has incurred net losses of $17,867,000 as a development stage
company from inception (April 15, 1991) to June 30, 1998, of which $511,000 was
incurred in the third quarter of fiscal 1998 and $ 1,094,000 was incurred in
third quarter of fiscal 1997. The basic net loss per share of common stock
amounted to $.03 for the three months ended June 30, 1998 and $.09 for the three
months ended June 30, 1997. The Company anticipates that losses will continue
throughout fiscal 1998, but at a significantly lower level than prior years.
Paracelsian, Inc. has entered into an agreement with R.P. Scherer North America,
a division of R.P. Scherer Corporation, that establishes R.P. Scherer North
America as the exclusive marketing and distribution agent for Paracelsian's
BioFIT (Bio Functional Integrity Testing) Certification program in the Dietary
Supplement and OTC market segments in North America. The agreement also provides
for collaboration between the two companies on the development of new dietary
supplements and OTC products.
Under the terms of the North American agreement, Paracelsian will initially
complete development of 10 BioFIT assay systems. R.P. Scherer North America will
pay Paracelsian initial fees, concurrent with the completion of the BioFIT assay
systems, certification of products, and completion of agreements with R.P.
Scherer customers. The companies will market the program jointly. The terms of
the agreement further call for Paracelsian to receive royalties on the sale of
all BioFIT certified products and the establishment of minimum royalty payments.
In addition to the initial fees, Paracelsian Inc. will receive a minimum of
$400,000 in royalty payments in the initial period of the agreement. Paracelsian
must receive minimum royalties of $700,000 in the subsequent 12-month period.
The agreement will continue to renew automatically upon the receipt of minimum
prescribed royalty payments, with Paracelsian receiving royalties adjusted
upward annually. The agreement also calls for negotiation of a worldwide
agreement within 90 days, on terms and conditions essentially equivalent to
those in the North American agreement.
14
<PAGE>
The Company has also signed a collaborative research agreement with the Southern
Research Institute. Under this agreement, the Southern Research Institute will
invest in testing a series of the Company's Traditional Chinese Medicine (TCM)
herbal extracts for "in vivo" (live) anti-tumor activity against human breast
cancer and prostate cancer.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", SFAS
No. 131, "Disclosures about Segments of an Enterprises and Related Information",
and SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
SFAS No. 132 revises current disclosure requirements for employers' pension and
other retiree benefits. These standards are effective for years beginning after
December 15, 1997. These standards expand or modify current disclosures and,
accordingly, will have no impact on the Company's reported financial position,
results of operations and cash flows.
YEAR 2000 COMPLIANCE
The Company is currently analyzing the potential of the Year 2000 on the
processing of date sensitive information by the Company's computerized
information systems. The Year 2000 problem is the result of computer programs
being written using two digits (rather then four) to define an application year.
The Company is studying the impact of the Year 2000 problem on its accounting
systems and other aspects of its business and as of June 30, 1998 does not
believe that there will be any significant impact on the future financial
position, operating results, and cash flows of the Company.
LIQUIDITY & CAPITAL RESOURCES
As of June 30, 1998, the Company maintained working capital of $247,000, which
included cash and cash equivalents of $138,000.
The Company expects to continue its research and development efforts but focus
them in different areas than prior years. The Company is in discussions with a
number of companies and anticipates securing new sources of revenue as a results
of such discussions. As a result of the R.P. Scherer agreement and other
potential sources of revenue, the Company anticipates emerging from the
development stage during fiscal 1999.
The Company has significantly reduced its personnel and other costs since June
1997 and will continue to operate in a cost effective manner in order to
maximize the productivity of its cash reserves.
In January, 1998 the Company signed an agreement with Biomar International,
Inc.("Biomar") in which Biomar agreed to purchase 3,571,429 shares of common
stock for $500,000. In addition, Biomar received warrants to purchase an
additional 2,971,429 shares of common stock at a price of $.175 per share or a
total of $520,000. The warrants, in the aggregate amount of $520,000 were
exercised on August 12, 1998.
This additional financing will enable the Company's available cash and existing
sources of funding to satisfy its capital requirements for several months.
Furthermore, on August 12, 1998 the Board of Directors approved a plan to
restructure the terms of certain warrant agreements currently outstanding for
the purpose of raising additional capital on a near to intermediate term basis.
Management believes that it will be able to raise sufficient capital from these
sources to sustain its liquidity needs until such time as revenues are adequate
to provide internally generated funds. The Company's future capital requirements
will depend on many factors, including its ability to generate significant
revenues, and continued scientific progress in its research and development
programs, and the magnitude of such programs. The Company intends to seek
additional funding sources as necessary; however there can be no assurance that
additional financing will be available on acceptable terms or at all.
15
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Discussion in Form 10-QSB for the quarter ended March 31, 1998.
Item 6(a) Exhibits
--------
None
Item 6(b) Reports on Form 8-K.
--------------------
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date August 14, 1998
PARACELSIAN, INC.
By: /s/ Bernard M. Landes
--------------------------------------
Bernard M. Landes
President and
Chief Executive Officer
16
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This schedule contains summary financial information extracted from this
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