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 MARCH 31, 1998.
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.)
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 14,871,296 shares of Common Stock outstanding at May 11, 1998.
PARACELSIAN, INC. AND SUBSIDIARY
Index
Page
----
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (Unaudited) and September 30,
1997 (Audited).
3
Consolidated Statements of Operations for the three and six months ended March
31, 1998 and 1997 and the period from inception (April 15, 1991) to March 31,
1998 (Unaudited). 4
Consolidated Statements of Stockholders' Equity for the period from inception
(April 15, 1991) to March 31, 1998 (Unaudited). 5
Consolidated Statements of Cash Flows for the six months ended March 31, 1998
and 1997 and the period from inception (April 15, 1991) to March 31, 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 15
Item 6 - Exhibits and Reports on 8-K 16
Signatures 16
2
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
March 31, September 30,
1998 1997
------------ ------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 557,238 $ 886,249
Inventory 171,689 156,323
Prepaid expenses and other current assets 40,387 61,437
Loan to East West Herbs, Ltd., - current portion 170,000 170,000
------------ ------------
Total current assets 939,314 1,274,009
------------ ------------
Equipment, net 304,431 305,079
Other Assets:
TCM extracts on-hand 389,049 466,839
Licensing agreement, net 271,258 367,258
Patents and trademarks, net 116,586 125,586
Loan to East West Herbs, Ltd., - noncurrent portion 127,500 170,000
------------ ------------
904,393 1,129,683
------------ ------------
$ 2,148,138 $ 2,708,771
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 126,476 $ 268,702
Accrued expenses 137,055 180,664
Due to related party 7,002 18,557
------------ ------------
Total current liabilities 270,533 467,923
------------ ------------
Commitments and Contingency
Stockholders' Equity:
Commonstock, $.01 par value; 20,000,000 shares authorized;
14,871,296 shares outstanding March 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 (19,484,240) (18,620,997)
Treasury stock, at cost; 265,478 shares (1,342,515) (1,342,515)
------------ ------------
Total stockholders' equity 1,877,605 2,240,848
------------ ------------
$ 2,148,138 $ 2,708,771
============ ============
See accompanying notes to consolidated financial statements.
3
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
For the three months and six months ended March 31, 1998 and 1997,
And the period from inception to March 31, 1998
(Unaudited)
Cumulative
Three Months Ended Six Months Ended Period from
March 31, March 31, Inception to
-------------------------- -------------------------- March 31,
Revenues: 1998 1997 1998 1997 1998
---------- ----------- ---------- ----------- -------------
Marketing rights $ -- $ -- $ -- $ -- $ 254,995
Products 1,675 3,525 1,675 3,525 164,388
Product testing 12,050 -- 33,970 -- 33,970
Product royalties -- 140 1,070 1,246
Subscription revenue -- -- -- -- 31,625
---------- ----------- ---------- ----------- -------------
13,725 3,665 35,645 4,595 486,224
Operating expenses:
Research and product engineering 194,675 448,297 377,157 836,032 7,044,777
Newsletter expenses -- -- -- -- 955,586
General and administrative 297,161 595,508 555,401 973,723 8,758,304
Product launch costs -- -- -- -- 300,544
Cost of products sold -- -- -- -- 95,023
Officer stock compensation -- -- -- -- 1,228,275
---------- ----------- ---------- ----------- -------------
491,836 1,043,805 932,558 1,809,755 18,382,509
---------- ----------- ---------- ----------- -------------
Loss from operations during
the development stage (478,111) (1,040,140) (896,913) (1,805,160) (17,896,285)
Interest income, net 12,889 18,161 26,702 61,427 501,557
Gain on sale of assets 1,700 -- 6,968 -- 38,488
---------- ----------- ---------- ----------- -------------
Net loss during the development stage $ (463,522) $(1,021,979) $ (863,243) $(1,743,733) $ (17,356,240)
========== =========== ========== =========== =============
Basic net loss per share $ (0.03) $ (0.06) $ (0.06) $ (0.16)
========== =========== ========== ===========
Weighted average number of
common stock outstanding 15,576,296 10,599,041 15,576,296 10,595,768
========== =========== ========== ===========
See accompanying notes to consolidated financial statements.
4
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from inception to March 31, 1998
(Unaudited)
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ --------- ------
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 purchased by Officer -
January 1995 705,000 7,050
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from inception to March 31, 1998
(Unaudited)
Deficit
Accumulated
Additional During the
Paid-in Development Treasury
Capital Stage Stock Total
--------- ------------ -------- ----------
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) -- 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 purchased by Officer -
January 1995 1,311,075 1,318,125
See accompanying notes to consolidated financial statements.
5
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from inception to March 31, 1998
(Unaudited)
Preferred Stock Common Stock
Shares Amount Shares Amount
-------- ------ -------- ------
Continued from the previous page
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
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
Preferred dividends and beneficial
conversion feature
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
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from inception to March 31, 1998
(Unaudited)
Deficit
Accumulated
Additional During the
Paid-in Development Treasury
Capital Stage Stock Total
---------- ----------- ---------- -----
Continued from the previous page
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 1995 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
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)
Preferred dividends and beneficial
conversion feature 1,628,000 (1,628,000)
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
See accompanying notes to consolidated financial statements.
6
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from inception to March 31, 1998
(Unaudited)
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ---------- ---------
Continued from the previous page
Sale of Warrants - June 1996
Issuance of Common Stock - July 1996 91,667 917
Issuance of Common Stock for services rendered -
July 1996 5,000 50
Exercise of Options - September 1996 15,000 150
Issuance of Common Stock - September 1996 683,333 68,833
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
Repayment of officer stock subscription receivable
Issuance of Common Stock for services rendered -
July 1997 62,500 625
Net loss (for the year ended September 30, 1997)
------ ------ ---------- ---------
BALANCE, September 30, 1997 -- -- 12,004,867 120,045
------ ------ ---------- ---------
Issuance of Common - January 1998 3,571,429 35,715
Surrender of shares - January 1998 (705,000) (7,050)
Net loss (for the six months ended March 31, 1998) -- -- -- --
------ ------ ---------- ---------
BALANCE, March 31, 1998 -- $ -- 14,871,296 $ 148,710
====== ====== ========== =========
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from inception to March 31, 1998
(Unaudited)
Deficit
Accumulated
Additional During the
Paid-in Development Treasury
Capital Stage Stock Total
---------- ------------ ----------- -----------
Continued from the previous page
Sale of Warrants - June 1996 35,000 35,000
Issuance of Common Stock - July 1996 250,075 250,992
Issuance of Common Stock 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 21,976,005 (14,679,248) (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)
Repayment of officer stock subscription receivable 89,850 89,850
Issuance of Common Stock for services rendered -
July 1997 30,625 31,250
Net loss (for the year ended September 30, 1997) (3,941,749) (3,941,749)
----------- ------------ ----------- -----------
BALANCE, September 30, 1997 22,084,315 (18,620,997) (1,342,515) 2,240,848
----------- ------------ ----------- -----------
Issuance of Common - January 1998 464,285 500,000
Surrender of shares - January 1998 7,050 --
Net loss (for the six months ended March 31, 1998) -- (863,243) -- (863,243)
----------- ------------ ----------- -----------
BALANCE, March 31, 1998 $22,555,650 $(19,484,240) $(1,342,515) $ 1,877,605
=========== ============ =========== ===========
See accompanying notes to consolidated financial statements.
7
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the six months ended March 31, 1998 and 1997
And the period from inception to March 31, 1998
(Unaudited)
Cumulative
Six Months Ended Period from
March 31, Inception to
--------------------------- March 31,
1998 1997 1998
--------- --------- -------------
Cash flows from operating activities:
Net loss $(863,243) $(1,743,733) $(17,356,240)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on the sale of assets (1,700) (33,220)
Non-cash compensation expense -- -- 1,228,275
Other non-cash expenses -- 170,656 1,510,203
Depreciation and amortization 214,650 147,510 1,461,622
Changes in assets and liabilities:
(Increase) decrease in inventory (15,366) -- (171,689)
(Increase) decrease in prepaid expenses and
other current assets 21,050 (254,783) (10,967)
(Decrease) increase in accounts payable (142,226) (143,112) 480,999
(Decrease) increase in due to related party (11,555) (34,667) 7,002
(Decrease) increase in deferred revenue -- 1,900 --
(Decrease) increase in accrued expenses (43,609) (143,486) 137,055
--------- ----------- ------------
Net cash used in operating activities (841,999) (1,999,715) (12,746,960)
--------- ----------- ------------
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 1,700 -- 53,220
Acquisition of licensed technology -- -- (53,656)
Acquisition of patents and trademarks -- (42,951) (352,953)
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 provided by (used in) investing activities 12,988 (59,838) (1,857,153)
--------- ----------- ------------
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 -- 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 (35,000) 15,161,351
--------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (329,011) (2,094,553) 557,238
Cash and cash equivalents, beginning of period 886,249 4,171,402 --
--------- ----------- ------------
Cash and cash equivalents, end of period $ 557,238 $ 2,076,849 $ 557,238
========= =========== ============
See accompanying notes to consolidated financial statements.
8
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the six months ended March 31, 1998 and 1997
And the period from inception to March 31, 1998
(Unaudited)
Cumulative
Six Months Ended Period from
March 31, Inception to
-------------------------- March 31,
1998 1997 1998
----------- ------------ ------------
Supplemental disclosures:
Cash paid during the period for interest $ 2,485 $ 7,019 $ 21,769
=========== ============ ===========
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 $ -- $ 38,125 $ 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
PARACELSIAN, INC. AND SUBSIDIARY
--------------------------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
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 $863,000 for the six months ended March 31, 1998 and has
working capital of approximately $666,000 at March 31, 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.
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 March 31, 1998 and
September 30, 1997 approximated $557,000 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 $85,747 and $76,747,
respectively, at March 31, 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
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:
March 31, September 30,
1998 1997
----------- ----------
Useful
Lives
-----
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 458,669 395,299
----------- ----------
$ 304,431 $ 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. Under the rules of the SEC,
Biomar is required to give notice to the shareholders of the Corporation not
less than 10 days prior to the date that it appoints the persons who will
constitute a majority of the Board. Upon satisfaction of the requirements of the
SEC rules on February 9, 1998, Mr. Nikolis resigned as a director of the
Corporation and appointments of the new directors became effective. All
directors will stand for election at the annual meeting of the shareholders
scheduled for May 13, 1998.
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
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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended March 31, 1998 as compared to the
Three Months Ended March 31, 1997
RESULTS OF OPERATIONS
During the second quarter of the fiscal year ending September 30, 1998 the
Company generated revenue of $13,725 from product testing and the sale of
products as compared to $3,665 of royalty and product sale revenue in the same
quarter of the prior year. This represents an increase of $10,060 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. 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 December 31, 1997, it has
invested $7,045,000 in product testing research, development and engineering.
The Company expended $194,675 in the second quarter of fiscal 1998, as compared
to $377,157 in the second quarter in fiscal 1997, this represents a decrease of
$182,482. 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 $297,161 for the second quarter of
fiscal 1998 as compared to $595,508 in the second 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 $298,347 is attributable to lower personal 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
futures quarters of fiscal 1998 than comparable quarters in fiscal 1997.
The Company has incurred net losses of $17,356,000 as a development stage
company from inception (April 15, 1991) to March 31, 1998, of which $464,000 was
incurred in the second quarter of fiscal 1998 and $ 1,022,000 was incurred in
second quarter of fiscal 1997. The basic net loss per share of common stock
amounted to $.03 for the three months ended March 31, 1998 and $.06 for the
three months ended March 31, 1997. The Company anticipates that losses will
continue throughout fiscal 1998, but at a significantly lower level than prior
years.
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
14
Year 2000 problem on its accounting systems and other aspects of its business
and as of March 31, 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 March 31, 1998, the Company maintained working capital of $666,000, which
included cash and cash equivalents of $557,000.
The Company expects to continue its research and development efforts but focus
them in different areas than prior years. During fiscal 1998, the Company
intends to do more product testing for outside companies. The Company is in
discussions with a number of companies to do quality testing on their products
and anticipates securing new sources of revenue as a results of such
discussions.
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. 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.
This additional financing will enable the Company's available cash and existing
sources of funding to satisfy its capital requirements through September 1998.
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, the magnitude of such programs and the
settlement of various law suits. The Company intends to seek additional funding
sources; however there can be no assurance that additional financing will be
available on acceptable terms or at all.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Paracelsian, Inc. v. John Babish
- --------------------------------
During 1993, an action was commenced against the Company, a Company Vice
President and a shareholder and former employee of the Company. The complaint
seeks money damages and alleges that in 1990, prior to the Company's
incorporation, certain individuals became partners with the individual
defendants in a venture formed to commercialize products which the Company had
originally intended to develop. Management believes that the action is without
merit and is vigorously opposing the allegations and that the ultimate
resolution of this litigation will not have a material adverse effect on the
Company's financial position or results of operations.
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
15
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 and $1,829,587" 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 negotiated a mutual release and settlement. Under the terms of
the settlement dated April 30, 1998, the Company agreed to pay John Babish
$12,500 upon signing and $26,000 payable over 60 months at an interest rate of
8.5%.
Dr. T. Colin Cambell 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 appointed to 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.
Pursuant to the stock purchase agreement executed on January 14, 1998, Dr. T.
Colin Campbell has agreed not to pursue his claims and has given the Company a
full and final release of all claims, including any claims which he may have or
contended that he may have had.
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 May 11, 1998
PARACELSIAN, INC.
By: /s/ BERNARD M. LANDES
-------------------------
Bernard M. Landes
President and
Chief Executive Officer
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