See accompanying notes to consolidated financial statements Paracelsian, Inc. and Subsidiary
(A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Unaudited) 1. BASIS OF PRESENTATION: The consolidated financial statements included herein have been prepared in accordance with
generally accepted accounting principles 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 position and results of operations 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 of 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 Companys Annual Report on Form 10-KSB for the fiscal year ended September 30, 1999. - ORGANIZATION, BUSINESS, AND RISK FACTORS:
Organization and Business Paracelsian, Inc. (the "Company") is a bio-science and technology company that
utilizes its proprietary screening technology to identify novel therapeutic compounds from herbal and other botanical sources and to define and/or confirm the biological mechanisms through which traditional herbs and other
botanicals provide the therapeutic or functional benefits suggested by their traditional use. This technology has been developed by the Company to identify potential products that inhibit the biological signals generated by
targeted cells that result in controlled or uncontrolled growth and division. The Companys 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 for normal growth of tissues to support life. The Companys technology enables researchers to observe signal transduction and measure the effects
of chemicals contained in synthetic or natural compounds, and chemicals 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 chemicals on targeted cells, thereby screening compounds to identify those with promising favorable 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 (Pacific), 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 Companys screening technology to identify 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. 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. 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 $359,000 for the three months ended December 31, 1999 and had a working capital
deficit of approximately $414,000 at December 31, 1999. Management believes that revenues from its BioFIT program, its Ah-Immunoassay, its Internet project and the sales of its inventory will be sufficient throughout the year to
enable the Company to achieve positive cash flow during 2000. BioSignia, Inc., the Companys largest shareholder, has advanced interim funds into 2000. Management is currently seeking a capital infusion of at least $1 million
to strengthen its working capital position and bridge its needs until the revenue stream is sustained. Management believes that the combination of additional capital combined with increased revenues will enable the Company
to continue its operations. 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 equivalents consist of highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents as of December 31, 1999.
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 Basic loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. The Companys
basic and diluted per share amounts are the same since the assumed exercise of stock options and warrants are anti-dilutive. 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. Equipment and Depreciation Equipment is stated at cost and is depreciated over the estimated useful lives of the assets using the straight-line method. 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 disclosures 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. ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Three months Ended December 31, 1999
as compared to the Three months Ended December 31, 1998 As a development stage enterprise, the Company, since inception, has been primarily engaged in research, product
engineering, and capital formation. As such, the Company has not generated significant revenues to date on a recurring basis. The Company has now completed development of its BioFIT (Bio Functional Integrity Tested) "functional" Quality assurance program for herbal and
other complex natural products. This unique quality assurance 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 and complex natural products, including nutraceuticals, based on their demonstrated biological activity, rather than relying, as in the past, on a chemical analysis of their
principal constituents. Chemicals analysis has not been demonstrated to be a consistent measure of functionality for herbal products, and often presumed actives or marker compounds used for standardization do not predict biological
activity. The BioFIT certification ensures that products exhibit a high enough level of biological activity in mechanisms relevant to the claimed product benefit, when compared to products used in successful clinical trials,
to suggest that the product will deliver on its benefit claims. The Company filed a broad patent application covering its unique approach to quality assurance in July of 1998. The patent application is being prosecuted by
Kenyon & Kenyon of New York, one of the nations most respected law firms specializing in intellectual property. In July 1998, the Company entered into an agreement with R.P. Scherer North America that establishes them as the exclusive marketing and distribution agent for
the BioFIT certification program in the dietary supplement and OTC market segments in North America. The agreement provided for payments to the Company for development of assay systems, for product certifications, for batch to
batch testing and for royalties on the sale of BioFIT products. This agreement has now been modified to limit R.P. Scherer exclusivity only to the softgel delivery system. The Company will continue to receive royalties on the
sale of all BioFIT certified products by R.P. Scherer and will continue to be paid for batch to batch testing. However, the Company is now free to pursue arrangements with all manufacturers selling other types of delivery
forms including tablets, two part hard shells, foods and beverages, as well as with raw material manufacturers. This dramatically increases the Companys potential revenue and, in the case of finished goods manufacturers,
allows the Company to receive royalties based on a higher selling price than that at which its royalties from R.P. Scherer would have been based. The Company has initiated testing for several raw material suppliers and finished goods manufacturers. Revenues derived from testing are increasing and the
Company expects that requests for testing will continue to increase in the coming months. The Company is also in active discussions with several sellers of finished dietary supplements and sellers of raw materials and expects
BioFIT certified products on store shelves later this year. On July 20,1999 the Company signed a Development Agreement with Kubota Corporation to further develop The Companys patented Ah-IMMUNOASSAY for use in
the monitoring of municipal waste incinerators in Japan. The Company signed a final Licensing Agreement with the Kubota Corporation on January 18, 2000 for the sale of the Companys Ah-IMMUNOASSAY in the Japanese market.
The Ah-IMMUNOASSAY is used to detect dioxin contamination in the environment. The Licensing Agreement provides the Company with licensing fees and a royalty on sales in the Japanese market. In return, the Company provides
Kubota with an exclusive license to manufacture and distribute the Ah-IMMUNOASSAY in Japan. The Company is also actively involved in discussions with private businesses in Belgium, Korea and with the Ministry of Health and other government agencies in the Peoples
Republic of China regarding development and implementation of the Ah-IMMUNOASSAY to monitor food, water and soil, in addition to municipal waste incinerators. The Company expects these discussions to be fruitful and result in
further applications for its technology with associated revenues some time in the year 2000. In 2000 the Company will complete discussions with two leading health care agencies of the government of the Peoples Republic of China. These discussions,
it is expected, will lead to a unique alliance leading to the worlds most complete and unique Internet site for information, services and products combining the wisdom of Traditional Chinese Medicine with the latest cutting
edge Western nutritional science. Results of Operation The Companys net loss for the first quarter
of fiscal 2000 was approximately $359,000 compared to $503,000 in the first quarter of fiscal 1999. Revenues for the three month period were $77,000 in 1999 as compared to $12,000 in 1998. The increase in revenues is primarily due
to $50,000 from the Kubota Corporation related to the Ah-IMMUNOASSAY technology. These revenues are not representative of the Companys future plans and expectations. Operating expenses for the three month period were
approximately $453,000 compared to $515,000 for the first fiscal quarter of the prior year. The decrease of $63,000 is due to managements commitment to utilize its resources in the most efficient manner. The management team
is continuing to operate with modest staff levels and has been focusing on continuing to conserve resources, and generating revenues. Liquidity & Capital Resources As of December 31, 1999, the Company had cash of $7,800 and a net working capital deficit of $414,000. Management believes that it can continue to raise additional
capital through private placements, to support its operations until such time as the revenue stream is sufficient to realize positive cash flow in 2000. The Company is actively pursuing additional capital of $1 million to $1.5
million to provide resources to strengthen its working capital position until sufficient revenues are achieved. Management believes that the additional financings coupled with its expected revenues from the BioFIT™ program,
the Ah-Immunoassay, the Internet Program and the sale of its inventory of Andrographolide will enable the Company, (1) to further increase its operating efficiency; and (2) to continue its operations into the future. Management and The Board On January 31, 2000 the Company announced that Dr. T. Colin Campbell was named Chairman, CEO & President. Dr. Campbell replaces Bernard M. Landes, who served as
Chairman, CEO and President the previous two years. Dr. Campbell served on the Board of Directors of the Company for several years prior to taking this new position. On February 8, 2000 the Company announced that Dr. Max Shaibe has
accepted an invitation to serve on the Companys Board. Dr. Shaibes appointment to the Board lasts until the annual shareholders meeting on June 12, 2000, when he will stand for election. Dr. Shaibes
background includes significant positions in academia, government and the private sector. Perhaps most noteworthy, Dr. Shaibe is a co-inventor of the Internet. In addition Gary G. Chabot has joined the Company as the Chief
Financial Officer. The management of the Company will be focusing their efforts on producing ongoing revenues and controlling expenses. PART II OTHER INFORMATION Item 1. Legal Proceedings
Hadyk, et al. V. John G. Babish, et al. In addition to routine litigation that is incidental to its business, the Company is a party to the following litigation: Hadyk, et al.
V. John G. Babish, et al.: This case was commenced in New York State Supreme Court (Onondaga County) in June 1993 by certain persons, individually and doing business as In Vitro Bioanalytic Systems, against the Company, Dr. John G. Babish, a former
officer and director of the Company, and Edward Heslop, a founding shareholder of the Company, primarily as an action for money damages and injunctive relief against the Company for alleged misappropriation of proprietary
information and unfair competition. The plaintiffs allege, among other things, that in 1990, prior to the Companys incorporation, a partnership has been formed with Messrs. Babish and Heslop to commercialize products that the
Company was developing. Damages, an accounting and an injunction are being sought against the Company. By decision dated September 14, 1994, the Court dismissed certain of the plaintiffs claims against the Company while
permitting a claim alleging unfair competition to proceed. Discovery has been temporarily stayed pending resolution of a motion for summary judgment brought by certain of the Companys co-defendants. That motion, if
successful, will fully resolve the case in favor of the Company. The Company believes that the suit against it is without merit and intends to defend the case vigorously. 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 March 3, 2000 PARACELSIAN, INC.
By:/s/ T. COLIN CAMPBELL
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T. Colin Campbell
President,
Chief Executive Officer
By/s/ GARY G. CHABOT
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Gary G. Chabot
Principal Accounting Officer |