See accompanying notes to consolidated financial statements Paracelsian, Inc. and Subsidiary (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 (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 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, 2000. 2. ORGANIZATION, BUSINESS, AND RISK FACTORS: Organization and Business Paracelsian is a development stage company, which develops and applies bioassays to monitor environmental toxins, to determine the quality of herbal products, and to identify therapeutic compounds from herbal sources (www.paracelsian.com). The Company has developed a highly sensitive, user friendly, cost effective testing system for the detection and quantification of highly toxic environmental chemicals generally known as dioxin and dioxin-like compounds. It is called the Ah-IMMUNOASSAY® Kit (AH-1 Method). Since the discovery of the dioxin compounds, during the late 1950’s, extensive research has been undertaken into their chemical and biological properties. And as more information becomes available, it is now clear that the original and narrowly defined group of ‘dioxins’ is becoming more expansive to include many other highly toxic, chemically similar compounds. Dioxin, although singular in name, is actually comprised of at least 17 chemical variants or congeners of a larger dioxin family. These chemicals are highly toxic, with the most active congener (TCDD) being the most toxic chemical ever discovered. The number of chemicals with dioxin-like activity is even much larger still than the 17 original polychlorodibenzo-p-dioxin (PCDD) families, such as the polychlorodibenzofurans (PCDF), the polychlorinated biphenyls (PCBs), the polybrominated biphenyls (PBBs), the polycyclic aromatic hydrocarbons (PAHs), the heterocyclic amines (HAs), among others. Probably no other group of chemicals has invoked more public health concern and received more media attention than these dioxin and dioxin-like substances, both because of their widespread distribution and their capability for serious toxicity (e.g., cancer, birth defects, diabetes, hormone disruption, immunologic dysfunction, etc.). The Environmental Protection Agency (EPA) of the United States has concluded, for example, that more than 100 of these dioxins and dioxin-like chemicals are likely human carcinogens. Waste incineration is a major source of these chemicals. Paper mill bleaching and varied industrial syntheses also add significant amounts to the environment. Following release into the air, perhaps also into waste water or sludge, these chemicals then settle on plant material, soil, and water where they are likely to persist for very long periods of time. As a consequence, they tend to accumulate either onto particulate matter (such as found at the bottom of bodies of water), or into body fat reservoirs of animals and fishes which feed on the plants. And because of their stability and persistence, these chemicals accumulate to relatively high levels in animal based foods. Investigating the distribution and toxicities of these chemicals has been challenging, both because of the ever-growing number of chemicals with dioxin-like activity and the difficulty of predicting toxicities. Because of these complexities, analysis of these chemicals has been very expensive, with the results being difficult to interpret. More recently, simpler analytical methods have been developed, such as the AH-1 Method, based on the use of biologically based concepts. Dioxins and dioxin-like chemicals (also called ligands), enter the cell and bind to a protein in the cytoplasm called Ah receptor (AhR), thus giving a ligand-AhR complex. This complex, by dropping and adding some smaller proteins (e.g., AhR translocator or ARNT, hsp-90 protein) is said to be ‘transformed’, thus enabling it to enter the nucleus to bind to a specific ‘dioxin receptor element’ (or enhancer) (DRE) of DNA. This interaction with DNA occurs ‘upstream’ of genes which then are activated to produce certain enzymes, some of which are highly correlated with the subsequent toxicity. The AH-I Method takes advantage of these facts. It is generally acknowledged, for example, that AhR binding appears to be essential for the development of toxicity by these chemicals. It is as if ligand binding of AhR is the main traffic intersection through which these chemicals pass on their way to produce their respective toxicities. In the AH-I Method, where an excess of AhR protein is provided, the amount of AhR-ligand complex that transforms is dependent on the amount of dioxin ligand present in the sample being assayed. The amount of the transformed complex is detected by using an antibody specific for the Ah-I protein component of the complex, thus giving the ‘Immunoassay’ name to the method. (For the scientifically minded reader, there really are two antibodies: the first interacts with the ARNT protein in the complex while the second, containing an enzyme that catalyzes the formation of the color reaction, binds to the first antibody. The color being produced in the reaction shows how much of the complex is present.). Dioxin is a toxic chemical group of widespread public health concern, and more information is needed, especially on the distribution of this material in the environment. More survey data are needed not only to identify potential ‘hot spots’ but also to allay unwarranted concerns. Until now, such survey work has been prohibitively expensive, but with the introduction of simpler and much more cost effective bioassay methods, such as the AH-1 Method, it is now possible to gather far more information in order to make wiser decisions. The herbal supplement market presents the opportunity to commercialize a quality assurance program that identifies the bioactivity present in herbal products, which are complex mixtures of substances. This product is a significant advance versus current practices for verifying the quality and the bioactivity of herbal products. This is the Company’s BioFIT™ Quality Assurance Certification Program. Typically, the Company will investigate the effect of a compound or mixture of compounds on a disease (such as cancer) or a symptom (such as depression). The Company scientists conduct in depth research of the scientific literature and review the results of successful clinical trials to establish the best scientific explanation for the positive results seen in such trials. Based on their review, they identify the biological mechanism which, if activated, would best explain the positive clinical results. By defining such mechanisms of action associated with a wide variety of biological effects the Company scientists can then test a wide variety of natural materials in "in vitro" models which demonstrate these effects for the purpose of either discovering or confirming these biological activities. Such discovery or confirmation provides the Company with the basis for its BioFIT™ Program. The Company is continuing to work with its Chinese colleagues, during the appropriate market conditions, to expand the scope of the BioFIT™ program to the rest of the world. The Company is engaged in an internet-based health exchange between the US and China and currently maintains the website www.newcenturynutrition.com. The Company has excellent relations with recognized health authorities and organizations within the People’s Republic of China. This website serves to provide a forum for the exchange of nutrition, health and related information. At its core is the New Century Nutrition website where renowned researchers, teachers and physicians from both countries can discuss their philosophies, research findings and health advice. Other components of the site include an herbal resource center featuring herbal databases from China, a nutrition resource center featuring healthy recipes and a technology center featuring the Ah-IMMUNOASSAY® Kit and the BioFIT™ Program. Our goal is to combine the best of Chinese medical practice with the best of Western practice creating new opportunities for information on health and disease prevention. 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 $960,000 for the nine months ended June 30, 2001 and had a working capital deficit of approximately $1,638,000 at June 30, 2001. Operating expenses decreased by $431,000 (27%) as a result of decreases in a variety of expense categories including salaries, office expenses, materials and supplies, director fees and amortization, as part of the company's program to control costs. Management believes that revenues from the sale of Ah-IMMUNOASSAY® Kits, additional license fees and funding for kit upgrades will accelerate throughout the coming year, and coupled with a continual program to control costs, the Company will achieve positive cash flow from operations during 2002. Until such revenues are realized on a sustained basis, the Company will require additional capital to meet its obligations and continue operations. - COMMITMENTS:
On January 19, 1995 Paracelsian, Inc. granted to DOW Chemical Company a worldwide non-exclusive license to evaluate and practice all aspects of proprietary information related to environmental bioassay apparatus and testing. The proprietary information referred to is Paracelsian’s Ah-IMMUNOASSAY® Kit. DOW paid the Company $250,000 for the non-exclusive license. On November 2, 1998 officials of the DOW Chemical Company and Paracelsian Inc. signed a License Revocation Agreement. Paragraph 3.3 of the agreement states that Paracelsian agrees to pay DOW 10% of all sublicensing fees and 10% of any net sales derived from the proprietary information which were the subject of the License Agreement between DOW and Paracelsian. The maximum total value for any and all such payments shall not exceed $250,000. To date, the Company has received $407,995 in sublicensing fees and sales derived from the proprietary information, and the Company has accrued $40,799.50 to account for its liability to DOW. On July 1, 1991 the Cornell Research Foundation (CRF) granted to Paracelsian, Inc., under a royalty agreement, an exclusive license to make, have made, use or sell Licensed Products referred to as Paracelsian’s Ah-IMMUNOASSAY® Kit. Paracelsian agreed to pay to CRF a royalty of three percent on the net sales price of Licensed Products, and the Company has accrued $7,739.85 to account for the royalty. Paracelsian also agreed to pay CRF for all expenses incurred in the preparation, filing, prosecution, renewal and continuation of License Patents and Applications, as well as a 15% administrative fee. The Company has accrued the charges invoiced of $137,399 to account for these expenses, and is contesting the amount. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101), which provides guidance in applying revenue recognition and financial statements under accounting principals generally accepted in the United States of America. SAB 101, as amended, will require implementation by the Company in the fourth quarter of fiscal 2001. The Company is presently reviewing the SAB to determine the impact the Bulletin will have on the Company's financial statements. (Page 7) ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Nine months ended June 30, 2001 as compared to the Nine months ended June 30, 2000 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 signed a final Licensing Agreement on January 21, 2000 with Kubota Corporation for the sale of Paracelsian’s Ah-IMMUNOASSAY® in the Japanese market and began manufacturing and selling kits to Kubota. This 'bioassay' based kit is rugged, user-friendly, portable, analytically sensitive, and low cost when compared with existing methodology. The agreement with Kubota will provide revenues from the sale of kits and royalties. On June 15, 2000 the Company announced that in accordance with the License Agreement, Kubota agreed to pay the initial $150,000 License Fee. The License Agreement also calls for a second payment of $150,000 within (30) days of the third anniversary of the Agreement. Kubota after using and evaluating the Ah-IMMUNOASSAY® concluded that the methodology is effective for their purposes, and Kubota paid the $150,000 on August 8, 2001, seventeen months sooner. Also, on June 17, 2001 Kubota announced that they will be paying the Company $350,000, earmarked for upgrading the Ah-IMMUNOASSAY® Kits. The first payment of $175,000 will be made in September 2001. The remaining 50% will be paid in three installments beginning December 2001. The Ah-IMMUNOASSAY® Kits are continuing to be sold to the Kubota Corporation for the sale and distribution of the Ah-IMMUNOASSAY® in Japan. Kubota has been ordering kits on a regular basis, placing orders for approximately 30-50 kits per month since the Fall of 2000, and in June 2001 the Company filled orders for a 100 kits, the first time this level has been reached within a 30 day period. The breakeven point for the Company is 200 kits per month, and manufacturing procedures are in place to process orders of that magnitude. In July 2001, representatives of a large customer of Kubota visited the Company and shared the results of 135 samples for fly ash, an incinerator by-product. Working with the representatives, the Company was able to support the further use of the Kit for their future screening needs. Kits have also been sold to Cypress Diagnostics in Belgium for the testing of animal feed. The University of Liege in Belgium has purchased kits for animal serum and tissue screening, and on July 14, 2001 a leading worldwide dioxin researcher from the University visited the Company to review the results of his work on cleanup procedures for various sample types. The Danish and Veterinary and Food Administration have purchased kits for the testing of fish, milk and fat. MCS Diagnostics is testing our kit for use in the German milk program. Dynex Technologies is using the kit for animal feed, food and environmental samples in the Czech and Slovak Republics. KNJ Engineering is using the kit with one of their customers, LG Chemical of Korea. KNJ sells dioxin-sampling equipment to incinerators and other applications in Korea. The Company has also begun discussions with Marubeni for exclusive distribution in Korea. Solutia has purchased the kit for testing organic material, and Scientific Supply Company purchased the kit for soil, milk powder and feed samples. Sales have also been made to Bristol Myers Squibb, Lockheed Martin and a firm in Portugal. We are in continual contact with representatives at Lockheed Martin on the use of our Kit, reviewing with them test results and working toward performing test of samples in our laboratory. Additionally, the Company has a note receivable outstanding, including accrued interest, with a balance outstanding of $370,000. The Company is continuing its efforts to collect the entire amount of this receivable, and has submitted a proposal to the holder of the note for cash, plus the assignment of the note holder’s interest in his USA subsidiary. The Company also has an inventory of Andrographis paniculata that it is attempting to sell through its Internet sites (www.newcenturynutrition.com and www.paracelsian.com/). Andrographis is an annual plant that grows in much of Asia. Modern research has examined the effect of Andrographis on various viral infections and general immunological functions, and the research has indicated very promising results. Because this inventory has been slow moving, the Company has written it off completely. However, the Company will continue with its efforts to sell this inventory. If it is successful in its efforts, the retail value could approximate $400,000. The Company’s plan is to continue to advance the Ah-IMMUNOASSAY® technology so as to be the premier screening and monitoring methodology within the worldwide marketplace. To fund certain of its continual development expenses the Company, in July 2001, received word that a grant from the New York State Energy Research and Development Authority, which could result in funding up to $180,000, is in the final stages for approval. On July 16, 2001 the Company signed an agreement with the Institute of Nutrition and Food Hygiene, the leading laboratory of the national government located in Beijing, People’s Republic of China. The Institute agreed to provide research services to Paracelsian, related to acceleration of advancements to the Ah-IMMUNOASSAY ® Kit, and assistance in achieving a leadership position in the worldwide marketplace. Management is also aggressively seeking an investment of at least $1,000,000 to strengthen its working capital position, and active discussions with a number of interested parties are continuing. Current monthly cash requirements in order to sustain meaningful operations are approximately $65,000 and management fully expects to meet its financial obligations as described above. The actions described above represent the Company’s plans to generate cash flow, thereby enabling the Company to continue to operate as a going concern. There is no assurance that these efforts will be successful. Results of Operations The Company’s net loss for the third quarter of fiscal 2001 was approximately $387,000 compared to $545,000 in the third quarter of fiscal 2000. Revenues for the three-month period were $88,000 in 2001 as compared to $196,000 in 2000. The decrease in revenues of $108,000 is due to the receipt of the initial $150,000 license fee from Kubota Corporation in June 2000, offset by additional sales of the Ah-IMMUNOASSAY® Kit. Operating expenses for the three-month period were approximately $468,000 compared to $741,000 for the third fiscal quarter of the prior year. The decrease of $273,000 (37%) is due to a decrease in a number of expense categories including salaries, office expenses, materials and supplies, director fees and amortization. The management team is continuing to operate with modest staff levels and has been focusing on continuing to optimize the use of its resources, increasing its customer base and generating revenues. Liquidity & Capital Resources As of June 30, 2001, the Company had cash of $13,700 and a net working capital deficit of $1,638,000. Management believes that it can continue to raise additional capital, to support its operations until such time as the revenue stream is sufficient to realize positive cash flow in 2002. Management believes that the additional financing coupled with its expected revenues from the Ah-IMMUNOASSAY®, additional license fees, funding of kit upgrades, the collection of the outstanding note receivable and the sale of its inventory of Andrographolide will enable the Company to further improve its operating efficiency and to continue its operations into the future. Management and The Board On July 27, 2001 the Board of Directors announced the appointment of NoriYoshi Inoue to the position of President & CEO. Mr. Inoue is a Senior Executive with over twenty-five years of international management, manufacturing, corporate strategy, marketing and sales experience. He has been Deputy General Manager and International Marketing Manager for Kubota Corporation. Mr. Inoue will retain his seat on the Board of Paracelsian, and Dr. T. Colin Campbell will retain the title of Chairman of the Board. The Board also approved of Gary G. Chabot, the Chief Financial Officer of Paracelsian, also assuming the position of Chief Operating Officer. The management of the Company will be focusing their efforts on bringing the Company products and services to market in a timely manner, producing ongoing revenues and controlling expenses. Short Term Advances BioSignia, Inc., the Company’s largest shareholder, has advanced interim funds to the Company for working capital purposes. The Company agreed to repay the funds, together with interest at an annual rate of 10%, at the earlier of 30 days from the date of the advance or the receipt by the Company of proceeds from the sale of stock. On June 19, 2000, the Board of Directors agreed to accept BioSignia's offer to convert $500,000 of debt into common stock of Paracelsian at $.40 per share. Through June 30, 2001, the principal portion of advances from BioSignia aggregated $310,677. Patents The Japanese Patent Office in March 2001 issued to the Company Patent # 3144689 for the detection of dioxin-like compounds through the use of the Paracelsian’s Ah-IMMUNOASSAY® Kit. This patent, which is equivalent to US patent # 6,127,136 is Paracelsian’s sixth patent related to the Ah-IMMUNOASSAY® Kit Forward Looking Statements Certain statements in this Form 10-Q "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, among others, the following: success of operating initiative, advertising and promotional efforts, acceptance of new product offerings, availability, changes in business strategy or development plan, availability and terms of capital, labor and employee benefit costs, and other factors specifically referred to in this 10-Q. (Page 10) PART II OTHER INFORMATION Item 1. Legal Proceedings Hadyk, et al. V. John G. Babish, et al. On February 14, 2001 the Hadyk, et al. V. John G. Babish, et al. case that was commenced in the New York State Supreme Court (Onondaga County) in June 1993 by certain persons against the Company was dismissed. This case was commenced by certain person, 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 alleged, among other things, that in 1990, prior to the Company’s incorporation, a partnership had been formed with Messrs. Babish and Heslop to commercialize products that the Company was developing. Damages, an accounting and an injunction were 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 had been temporarily stayed pending resolution of a motion for summary judgment brought by certain of the Company’s co-defendants. That motion was successfully and fully resolved, and the Court, on February 14, 2001, ruled in favor of the Company. The Court not only exonerated the Company of any wrongdoing, but also rejected the plaintiffs’ fundamental premise that they had a property interest in the technology at issue in this case. (Page 12) 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, 2001 PARACELSIAN, INC. PARACELSIAN, INC. By:/s/ NoriYoshi Inoue
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NoriYoshi Inoue
President,
Chief Executive Officer By/s/ GARY G. CHABOT
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Gary G. Chabot
Principal Accounting Officer (PAGE 13) |
