UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 2)
[X] QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 16-1399565
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 LANGMUIR LABORATORIES, CORNELL TECHNOLOGY PARK, ITHACA, NEW YORK 14850
- --------------------------------------------------------------------- -----
(address of principal executive offices) Zip Code
Issuer's telephone number: (607) 257-4224
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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 18,715,033 shares of Common Stock outstanding at February 12, 1999.
PARACELSIAN, INC. AND SUBSIDIARY
Index
PAGE
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet as of December 31, 1998 (Unaudited) 3
Consolidated Statements of Operations for the three months ended
December 31, 1998 and 1997 and the cumulative period from
inception to December 31, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
December 31, 1998 and 1997 and the cumulative period from
inception to December 31, 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 11
2
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
December 31, 1998
(Unaudited)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 189,024
Inventory 171,689
Prepaid expenses and other current assets 56,223
------------
Total current assets 416,936
------------
Equipment, net 248,794
------------
Other Assets:
TCM extracts on-hand 272,364
Licensing agreement, net 127,257
Patents and trademarks, net 185,344
Note receivable 148,750
------------
733,715
------------
$ 1,399,445
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 105,703
Accrued expenses 136,063
Current portion of capital lease obligation 10,123
Current portion of notes payable 33,867
------------
Total current liabilities 285,756
LONG-TERM LIABILITIES
Long-term portion of capital lease obligation 14,389
Long-term portion of notes payable 18,497
------------
Total current and long-term liabilities 318,642
------------
Commitments and Contingency
Stockholders' Equity:
Common stock, $.01 par value; 35,000,000 shares authorized;
18,715,033 shares outstanding at December 31, 1998 187,150
Additional paid-in capital 23,368,474
Deficit accumulated during the development stage (21,132,306)
Treasury stock, at cost; 265,478 shares (1,342,515)
------------
Total stockholders' equity 1,080,803
------------
$ 1,399,445
============
See accompanying notes to consolidated financial statements.
3
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of
Operations For the three months ended
December 31, 1998 and 1997,
And the cumulative period from inception to December 31, 1998
(Unaudited)
Cumulative
Three Months Ended Period from
December 31, Inception to
---------------------------- December 31,
1998 1997 1998
------------ ------------ ------------
Revenues:
Marketing rights $ -- $ -- $ 254,995
Products 1,705 -- 178,730
Product testing 10,260 21,920 51,678
Product royalties -- -- 1,246
Subscription revenue -- -- 31,625
------------ ------------ ------------
11,965 21,920 518,274
Operating expenses:
Research and product engineering 173,577 182,482 7,849,792
General and administrative 341,483 258,240 11,813,172
Product launch costs -- -- 300,544
Cost of products sold -- -- 95,023
------------ ------------ ------------
515,060 440,722 20,058,531
------------ ------------ ------------
Loss from operations during
the development stage (503,095) (418,802) (19,540,257)
Interest income, net -- 13,813 497,463
Gain on sale of assets -- 5,268 38,488
------------ ------------ ------------
Net loss during the development stage $ (503,095) $ (399,721) $(19,004,306)
============ ============ ============
Basic and diluted net loss per share
of common stock (0.03) (0.03)
============ ============
Weighted average number of
shares outstanding 18,093,430 12,004,867
============ ============
See accompanying notes to consolidated financial statements.
4
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated
Statements of Cash
Flows For the three
months ended December
31, 1998 and 1997 ,
And the cumulative period from inception to December 31, 1998
(Unaudited)
Cumulative
Three Months Ended Period from
December 31, Inception to
---------------------- December 31,
1998 1997 1998
--------- --------- ------------
Cash flows from operating activities:
Net loss $(503,095) $(399,721) $(19,004,306)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on the sale of assets -- (5,268) (6,968)
Non-cash compensation expense 29,763 -- 1,272,038
Other non-cash expenses -- -- 1,742,754
Depreciation and amortization 107,325 107,325 1,794,170
Changes in assets and liabilities:
(Increase) decrease in inventory -- (15,366) (171,689)
(Increase) decrease in prepaid expenses
and other current assets 27,954 6,000 (26,803)
(Decrease) increase in accounts payable 36,068 (153,243) 460,225
(Decrease) increase in due to related party -- (11,555) --
(Decrease) increase in accrued expenses 11,226 (21,164) 173,564
--------- --------- ------------
Net cash used in operating activities (290,759) (492,992) (13,767,015)
--------- --------- ------------
Cash flows from investing activities:
Purchase of equipment -- -- (733,401)
Proceeds from sale of equipment -- 5,268 26,968
Acquisition of licensed technology -- -- (53,656)
Acquisition of patents and trademarks (6,141) -- (436,720)
Acquisition of New Century Nutrition newsletter -- -- (350,000)
Acquisition of option for East West Herbs, Ltd.
and related acquisition costs -- -- (92,866)
Loan to East West Herbs, Ltd. -- -- (340,000)
Proceeds from loan to East West Herbs, Ltd. -- 42,500 42,500
--------- --------- ------------
Net cash used in investing activities (6,141) 47,768 (1,937,175)
--------- --------- ------------
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 250,000 -- 11,080,109
Proceeds from the exercise of warrants -- -- 1,186,295
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)
Payment on capital lease obligations (1,545) -- (6,700)
Payment on notes payable (13,073) -- (31,437)
--------- --------- ------------
Net cash (used in) provided by financing activities 235,382 -- 15,893,214
--------- --------- ------------
Net increase (decrease) in cash and cash equivalents (61,518) (445,224) 189,024
Cash and cash equivalents, beginning of period 250,542 886,249 --
--------- --------- ------------
Cash and cash equivalents, end of period $ 189,024 $ 441,025 $ 189,024
========= ========= ============
See accompanying notes to consolidated financial statements.
5
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated
Statements of Cash
Flows For the three
months ended December
31, 1998 and 1997 ,
And the cumulative period from inception to December 31, 1998
(Unaudited)
(Continued from Previous Page)
Cumulative
Three Months Ended Period from
December 31, Inception to
---------------------- December 31,
1998 1997 1998
--------- --------- ------------
Supplemental disclosures:
Cash paid during the period for interest $ 1,580 $ -- $ 20,864
========= ========= ============
Supplemental disclosure of non-cash investing and financing activities:
Fair value of assets acquired, net of cash acquired $ -- $ -- $ 1,733,212
Less - liabilities assumed -- -- 83,212
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 $ 67,263 $ -- $ 632,494
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.
6
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(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, 1998.
2. 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 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 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
7
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Unaudited)
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 Company's 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 $503,000 for the three months ended December 31, 1998 and
has working capital of approximately $131,000 at December 31, 1998. The Company
continues to expend funds on product research and development and general and
administrative expenses, however, under the direction of a new management team
and Board since January, 1998, expenditures have been reduced from prior year
levels, and efforts have been focused on developing a recurring revenue stream.
Management anticipates that revenues from its BioFIT(TM) quality assurance
program will commence in January, 1999, and that revenues associated with its
AhIMMUNOASSAY will also commence during the second quarter of fiscal 1999. The
Company raised $250,000 of capital in December, 1998 through a private placement
of common stock. Management believes that the combination of that additional
capital and its anticipated revenue stream will enable the Company to continue
its operations and emerge from the development stage in 1999.
8
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Unaudited)
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,
1998.
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
Company's 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 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. SUBSEQUENT EVENT:
In January 1999, the Company received $50,000 from R.P. Scherer representing its
initial payment toward development fees under the BioFIT(TM) certification
program. The fees will be recognized as revenue in January 1999.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended December 31, 1998 as compared to the
Three Months Ended December 31, 1997
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.
Since January 1998, a significant portion of the new management team's strategy
has been focused on the development of its BioFIT(TM) (Bio Functional Integrity
Tested) quality assurance 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.
The Company has entered into an agreement with R.P. Scherer North America that
establishes them as the exclusive marketing and distribution agent for the
BioFIT(TM) 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. The agreement, among other things, provides for payments to the
Company for the development of each bioassay, payment for each certification,
and payment of royalties on all sales of BioFIT(TM) certified products.
Although the BioFIT(TM) program will be introduced in the North American market,
the program will be expanded to a worldwide basis on terms that are essentially
equivalent to the North American agreement.
The commencement of revenues from the BioFIT(TM) program began in January 1999,
and management anticipates a gradual ramp-up and expansion of the program
throughout the year. Consequently, the Company is expected to emerge from the
development stage during the first half of 1999.
RESULTS OF OPERATIONS
The Company's first quarter of fiscal 1999 net loss of $503,000 is approximately
$103,000 more than the first quarter of fiscal 1998 loss of $400,000. Although
revenues decreased from $21,920 in fiscal '98 to $11,965 in fiscal '99, those
revenues are incidental and not representative of the Company's future plans and
expectations. By the first quarter of fiscal '98, prior to the Biomar investment
and change in management, the Company had cut its work force and scaled down
discretionary expenses to conserve resources as a result of its abandoned
product launch and lack of strategic focus. The successor management team has
continued to operate throughout 1998 with modest staff levels and has
particularly focused on resolving costly litigation that had been a significant
drain on both human and financial resources. Management views fiscal '98 as a
transitional year, of resolving old problems and redirecting the focus of the
Company toward generating a recurring and growing revenue stream. The first
quarter of fiscal '99 reflects the gradual build up of personnel and related
costs associated with the development of the BioFit(TM) certification program
under the direction of the new management team and Board of Directors.
LIQUIDITY & CAPITAL RESOURCES
As of December 31, 1998, the Company maintained working capital of $131,000,
which included cash of $189,000. In December 1998, the Company raised $250,000
in cash through a private placement of its common stock at 37.5 cents per share.
The average closing price for the five trading days immediately preceding the
transaction was approximately 44 cents per share. In January 1999, the Company
received the initial payment from R.P. Scherer for development fees under its
BioFIT(TM) certification program. Management believes that it can successfully
raise additional capital if necessary to support its continued operations until
such time as revenues are sufficient to provide internally generated funds. The
Company presently intends to pursue additional capital of $1 million to $1.5
million in the near term, if available on reasonable terms, to provide resources
for the hiring of additional personnel, expansion and/or relocation of lab
facilities, and the acceleration of product development efforts. Of course,
there can be no assurance that additional financing will be available on
acceptable terms or at all.
10
YEAR 2000 COMPLIANCE
The Company continues to monitor its exposure to the year 2000 computer problem.
Management believes that all of the Company's date sensitive computer equipment
and software is Y2K compliant, and is not aware of any vendor or customer Y2K
problems that could have a significant impact on the financial position or
results of operations of the Company. To date, the Company has not incurred any
significant expense with respect to this issue and does not anticipate any
significant related expense in the future.
11
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 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 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 Company's
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 May 18, 1999
PARACELSIAN, INC.
By: /s/ BERNARD M. LANDES
--------------------------------------
Bernard M. Landes
President and
Chief Executive Officer