Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended: June 30, 2002.
OR
[_] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission File Number:
0-30365
Paradigm Genetics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 56-2047837
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
108 Alexander Drive, Research Triangle Park, North Carolina 27709
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (919) 425-3000
Former name, former address, and former year, if changed since last report:
Not applicable
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [_]
Indicate the number of shares outstanding of each of the Issuer's classes of
Common Stock, as of the latest practicable date.
Title of each class
Common stock $.01 par value
Shares outstanding on July 31, 2002..............................32,001,595
PARADIGM GENETICS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - June 30, 2002(unaudited) and
December 31, 2001 ..................................................... 3
Condensed Statements of Operations - Three and six months ended
June 30, 2002 and 2001 (unaudited) .................................... 4
Condensed Statements of Cash Flows - Six months ended
June 30, 2002 and 2001 (unaudited) .................................... 5
Notes to Condensed Financial Statements (unaudited) ................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk ............ 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................... 19
Item 2. Changes in Securities and Use of Proceeds ............................. 19
Item 3. Defaults Upon Senior Securities ....................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ................... 19
Item 5 Other Information - Risk Factors ...................................... 20
Item 6. Exhibits and Reports on Form 8-K ...................................... 24
Signature ...................................................................... 25
Exhibit Index .................................................................. 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
PARADIGM GENETICS, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
2002 2001
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 4,431,791 $ 6,151,521
Short-term investments ............................................................ 5,141,590 4,584,000
Accounts receivable ............................................................... 7,240,355 5,663,337
Interest receivable ............................................................... 355,031 590,042
Prepaid expenses .................................................................. 2,330,621 2,243,905
------------- -------------
Total current assets ............................................................ 19,499,388 19,232,805
Restricted cash ..................................................................... 1,404,543 1,474,870
Property and equipment, net ......................................................... 25,659,537 27,854,068
Long-term investments ............................................................... 18,429,505 32,256,050
Long-term receivable ................................................................ 1,494,140 1,539,313
Goodwill and intangible assets ...................................................... 1,709,786 1,834,786
Other assets, net ................................................................... 866,151 895,117
------------- -------------
Total assets .................................................................... $ 69,063,050 $ 85,087,009
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 2,325,856 $ 2,414,125
Accrued liabilities ............................................................... 1,857,341 1,333,272
Deferred revenue .................................................................. 10,981,911 13,349,810
Long-term debt--current portion ................................................... 4,483,812 6,762,473
Capital lease obligation--current portion ......................................... 247,632 296,259
Other current liabilities ......................................................... 9,631 8,712
------------- -------------
Total current liabilities ....................................................... 19,906,183 24,164,651
Long-term debt, less current portion ................................................ 5,229,692 7,299,692
Capital lease obligation, less current portion ...................................... 278,093 378,703
------------- -------------
Total liabilities ............................................................... 25,413,968 31,843,046
------------- -------------
Commitments
Stockholders' equity:
Convertible preferred stock, $0.01 par value; 5,000,000 shares authorized, none
issued or outstanding ........................................................... -- --
Common stock, $0.01 par value; 50,000,000 shares authorized; 32,001,595 and
31,936,188 shares issued and outstanding as of June 30, 2002 and December 31,
2001, respectively .............................................................. 320,016 319,362
Additional paid-in capital .......................................................... 103,088,308 103,387,223
Deferred compensation ............................................................... (785,113) (1,584,201)
Accumulated deficit ................................................................. (59,159,152) (48,934,177)
Accumulated other comprehensive income .............................................. 185,023 55,756
------------- -------------
Total stockholders' equity ...................................................... 43,649,082 53,243,963
------------- -------------
Total liabilities and stockholders' equity ...................................... $ 69,063,050 $ 85,087,009
============= =============
The accompanying notes are an integral part of these condensed financial
statements.
3
PARADIGM GENETICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------
Revenues:
Commercial partnerships ..................................... $ 5,252,054 $ 5,993,289 $ 11,121,640 $ 11,379,094
Grant revenues .............................................. -- 64,866 -- 129,729
------------------------------------------------------------
Total revenues ...................................... 5,252,054 6,058,155 11,121,640 11,508,823
------------------------------------------------------------
Operating expenses:
Research and development (includes $89,610 and
$172,531 of stock based compensation expense for the
three months ended June 30, 2002 and 2001,
respectively, and includes $194,538 and $360,782 of
stock based compensation expense for the six months
ended June 30, 2002 and 2001, respectively) ................. 7,673,271 6,936,073 15,758,434 13,331,431
Selling, general and administrative (includes $62,261
and $125,541 of stock based compensation expense for
the three months ended June 30, 2002 and 2001,
respectively, and includes $221,154 and $274,012 of
stock based compensation expense for the six months
ended June 30, 2002 and 2001, respectively) ................. 2,506,111 3,552,718 5,451,413 6,772,323
------------------------------------------------------------
Total operating expenses ............................ 10,179,382 10,488,791 21,209,847 20,103,754
------------------------------------------------------------
Loss from operations ............................................... (4,927,328) (4,430,636) (10,088,207) (8,594,931)
------------------------------------------------------------
Other income (expense):
Interest income ............................................. 274,468 452,621 695,987 1,084,472
Interest expense ............................................ (354,972) (446,673) (832,755) (924,032)
Gain on sale of assets ...................................... -- 126,671 -- 126,671
------------------------------------------------------------
Other income (expense), net ......................... (80,504) 132,619 (136,768) 287,111
------------------------------------------------------------
Net loss ........................................................... (5,007,832) (4,298,017) (10,224,975) (8,307,820)
============================================================
Net loss per share basic and diluted ............................... $ (0.16) $ (0.16) $ (0.32) $ (0.32)
============================================================
Weighted average common shares outstanding - basic and
diluted ............................................................ 31,942,101 26,315,406 31,940,102 26,207,062
============================================================
The accompanying notes are an integral part of these condensed financial
statements.
4
PARADIGM GENETICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2002 2001
-------------------------------------
Cash flows from operating activities:
Net loss ............................................................... $(10,224,975) $ (8,307,820)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization ....................................... 3,093,700 2,376,138
Stock-based compensation ............................................ 415,692 634,794
Gain on sale of assets .............................................. -- (126,671)
Write-off of acquisition costs ...................................... -- 887,279
Changes in operating assets and liabilities:
Accounts receivable ............................................. (1,531,845) (1,211,611)
Interest receivable ............................................. 235,011 (32,164)
Prepaid expenses ................................................ 401,829 193,576
Accounts payable ................................................ (88,269) (120,517)
Restricted cash ................................................. 70,327 (670,327)
Accrued and other current liabilities ........................... 524,988 (751,773)
Deferred revenue ................................................ (2,367,899) (1,088,571)
-------------------------------------
Net cash used in operating activities ..................... (9,471,441) (8,217,667)
-------------------------------------
Cash flows from investing activities:
Purchase of property and equipment ..................................... (774,169) (5,649,831)
Purchase of investments ................................................ (22,254,730) (40,926,461)
Maturities of investments .............................................. 35,652,951 68,736,359
-------------------------------------
Net cash provided by investing activities ................. 12,624,052 22,160,067
-------------------------------------
Cash flows from financing activities:
Repayments of notes payable ............................................ (4,782,533) (1,932,186)
Borrowings under note payable .......................................... -- 3,903,021
Repayments of capital lease obligations ................................ (174,944) (63,194)
Common stock issuance costs ............................................ (28,000) --
Proceeds from exercise of stock options ................................ 144,387 178,554
Proceeds from issuance of common stock, net ............................ 18,071 152,833
Purchase of restricted stock ........................................... (49,322) (44,091)
-------------------------------------
Net cash (used in) provided by financing activities ....... (4,872,341) 2,194,937
-------------------------------------
Net (decrease) increase in cash and cash equivalents ........................... (1,719,730) 16,137,337
Cash and cash equivalents, beginning of period ................................. 6,151,521 2,146,904
-------------------------------------
Cash and cash equivalents, end of period ....................................... 4,431,791 $ 18,284,241
=====================================
The accompanying notes are an integral part of these condensed financial
statements.
5
Paradigm Genetics, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Paradigm Genetics, Inc. (the "Company" or "Paradigm") was organized on September
9, 1997, and is an integrated life sciences company developing novel
technologies to speed the discovery of new products for the advancement of human
health and agriculture. The Company has developed an industrialized,
high-throughput platform, known as the GeneFunction Factory(TM), capable of
rapidly determining the function of genes in plants and fungi. The Company
determines gene function through an assembly-line process that generates
information that it believes will enable it to develop novel products with
commercial partners or on its own. As part of its integrated discovery approach,
the Company has developed a proprietary biochemical profiling platform designed
to allow it to characterize essentially all of the small molecules or
metabolites in cells, tissues and fluids of any organism. The technology
surrounding this process is known as metabolomics. Although this technology has
been a part of the Company's GeneFunction Factory(TM) since 1999, in 2001, the
Company began adapting this technology for use with human cells, tissues and
fluids. Paradigm plans to use this platform, called MetaVantage(TM), to improve
drug discovery and development by significantly improving the validation process
of new targets and the selection of new lead compounds. Human metabolomics is
the global analysis of all classes of biochemicals, also known as the
metabolome, in a human being. MetaVantage(TM) elucidates the biochemical profile
of a cell, tissue, or fluid, and integrates this information with data from
other genomics analyses using a proprietary comprehensive informatics system.
The Company stores and integrates data from its GeneFunction Factory(TM) and
MetaVantage(TM) systems in a sophisticated data integration and analysis system
called FunctionFinder(TM). Additionally, the Company is in the process of
creating a data integration and visualization system for its MetaVantage(TM)
platform called MetaTrace(TM). The Company uses FunctionFinder(TM) to infer the
function of genes in its plant and fungal model systems and it uses
MetaVantage(TM) to understand the relationship between biochemical profiles,
biochemical pathways and target genes in human beings. Based on the information
generated through its proprietary systems, the Company established major
commercial partnerships in the areas of agriculture and nutrition in 1998 and
1999. Additionally, in 2001, the Company announced plans to build a
pharmaceutical drug discovery and development platform, based around its
expertise in metabolomics.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002, or for any future period. These financial statements and notes should be
read in conjunction with the financial statements and notes thereto for the year
ended December 31, 2001 included in the Company's Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
6
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Restricted Cash
Restricted cash comprises security deposits relating to the Company's
facilities.
Investments
The Company considers all investments in debt and equity securities purchased
with a maturity of between three months and one year from the balance sheet date
to be short-term investments. All investments are considered as available for
sale and are carried at fair value. Unrealized gains and losses, net, on
investments are recognized as a component of other comprehensive income. At June
30, 2002, the Company had recorded $185,023 in unrealized gains on investments.
At December 31, 2001, the Company had recorded $55,756 in unrealized gains on
investments. Realized gains on sales of investments are determined using the
specific identification method.
Property and Equipment
Property and equipment is primarily comprised of buildings, laboratory
equipment, computer equipment, furniture, and leasehold improvements which are
recorded at cost and depreciated using the straight-line method over their
estimated useful lives which range from one to ten years. Expenditures for
maintenance and repairs are charged to operations as incurred; major
expenditures for renewals and betterments are capitalized and depreciated.
Property and equipment acquired under capital leases are being depreciated over
their estimated useful lives or the respective lease term, if shorter.
Intangible Assets
Intangible assets consist of goodwill and other identifiable assets acquired in
a business combination accounted for by the purchase method. Costs allocated to
identifiable intangible assets are amortized over the remaining estimated useful
lives of the assets. The excess of the purchase price over the fair value of the
tangible and identifiable intangible assets acquired has been recorded as
goodwill. The Company evaluates goodwill for impairment at the reporting unit
level on at least an annual basis in accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and other Intangible Assets."
Other Assets
Other assets include deposits for building leases and other deferred costs.
Capitalized Software Costs
The Company accounts for the costs of development of software applications to be
sold to or used by third parties in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased or Otherwise Marketed." Software development costs are required
to be capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release. To date,
the establishment of technological feasibility has substantially coincided with
the release.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, short-term investments and accounts
payable at June 30, 2002 and December 31, 2001, approximated their fair value
due to the short term nature of these items. Capital lease obligation and
long-term debt at June 30, 2002 and December 31, 2001 approximated their fair
value based on the Company's effective borrowing rate.
7
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment and other
long-lived assets when circumstances indicate that an event of impairment may
have occurred in accordance with the provisions of SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets " ("SFAS No. 144"). SFAS No. 144
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets or the business to which such assets relate.
Impairment is measured based on the difference between the carrying value of the
related assets or businesses and the fair value calculated based upon estimates
of future discounted cash flows of such assets or businesses. No impairment loss
was required to be recognized during the six months ended June 30, 2002 or 2001.
Income Taxes
The Company accounts for income taxes using the liability method which requires
the recognition of deferred tax assets or liabilities for the temporary
differences between financial reporting and tax bases of the Company's assets
and liabilities and for tax carryforwards at enacted statutory rates in effect
for the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established where necessary to reduce deferred tax assets to the amounts
expected to be realized.
Revenue Recognition
Revenues are derived from commercial partnerships and from government grants.
Revenues related to nonrefundable and milestone payments are recognized under
commercial partnerships based on progress to completion. Refundable fees
received under commercial partnerships are initially deferred and recognized as
revenues based on progress to completion over the term of the commercial
partnership beginning at the date that the refund right expires, which is the
date on which the related performance requirements have been met. Upfront fees
received at the initiation of a commercial partnership are deferred and
recognized as revenues on a progress to completion basis over the term of the
commercial partnership with all other fixed nonrefundable payments received
under the commercial partnerships. This is required as the Company has a future
performance obligation under these partnerships which is met as the Company
delivers the results of its gene analysis to its commercial partners. Progress
to completion under commercial partnerships is measured based on a comparison of
the number of genes analyzed to the total number of genes to be analyzed, on a
contract by contract basis. The Company does not segment its commercial
partnerships for purposes of the calculation of revenues to be recognized as the
Company does not meet the criteria to allow segmentation specified in the
relevant authoritative accounting guidance. Revenue related to assays are
recognized when delivered and acknowledged by the other party. Revenues from
government grants are recognized as expenses are incurred over the period of
each grant. Cash received in excess of revenues recognized under commercial
partnerships and government grants is recorded as deferred revenue. Payments
received under the Company's commercial partnerships and government grants are
generally non-refundable regardless of the outcome of the future research and
development activities to be performed by the Company under these arrangements.
The Company is currently recognizing revenue under Staff Accounting Bulletin 101
("SAB 101") issued by the Securities and Exchange Commission.
Research and Development
Research and development costs include personnel costs, costs of supplies,
facility costs, license fees, consulting fees, the recognition of deferred
compensation and depreciation of laboratory equipment. These costs were incurred
by the Company to develop its proprietary GeneFunction Factory(TM) and
MetaVantage(TM) platforms, perform required services under commercial
partnerships and government grants and perform research and development on
internal projects. Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company accounts for stock-based compensation based on the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") which states that no compensation expense is
recorded
8
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
for stock options or other stock-based awards to employees that are granted with
an exercise price equal to or above the estimated fair value of the Company's
common stock on the grant date. In the event that stock options are granted with
an exercise price below the estimated fair value of the Company's common stock
at the grant date, the difference between the fair value of the Company's common
stock and the exercise price is recorded as deferred compensation. The Company
reversed $193,373 and $286,796 of deferred compensation related to the
forfeiture of unvested options during the three months ended June 30, 2002 and
2001, respectively. The Company reversed $449,696 and $490,204 of deferred
compensation related to the forfeiture of unvested options during the six months
ended June 30, 2002 and 2001, respectively. The Company did not recognize any
additional deferred compensation for the, three and six, month periods ended
June 30, 2002 and 2001. Deferred compensation is amortized to compensation
expense over the vesting period of the related stock option. The Company
recognized $151,871 and $298,072 in non-cash compensation expense related to
amortization of deferred compensation during the three months ended June 30,
2002 and 2001, respectively. The Company recognized $349,394 and $565,952 in
non-cash compensation expense related to amortization of deferred compensation
during the six months ended June 30, 2002 and 2001, respectively. The Company
has adopted the disclosure requirements Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
as it relates to stock options granted to employees, which requires compensation
expense to be disclosed based on the fair value of the options granted at the
date of grant. Stock options or warrants granted to non-employees for services
are accounted for in accordance with SFAS No. 123, which requires that these
options and warrants be valued using the Black-Scholes model and the resulting
charge is recognized as the related services are performed. The Company did not
recognized any compensation expense related to stock options issued to
consultants and the acceleration of certain options for the three months ended
June 30, 2002 and 2001. The Company recognized $66,298 and $68,842 of
compensation expense related to stock options issued to consultants and the
acceleration of certain options for the six months ended June 30, 2002 and 2001,
respectively.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to a concentration
of credit risk, consist principally of cash, investments, and accounts
receivables. The Company primarily places its cash, short-term and long-term
investments with high-credit quality financial institutions which invest
primarily in U.S. Government securities, commercial paper of prime quality and
certificates of deposit guaranteed by banks which are members of the FDIC. Cash
deposits are all in financial institutions in the United States. The Company
performs ongoing credit evaluations to reduce credit risk and requires no
collateral from its customers. Management estimates the allowance for
uncollectible accounts based on their historical experience and credit
evaluation.
Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income" established standards for
reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income, as defined, includes all changes in
equity during a period from non-owner sources. The Company's total comprehensive
loss for the three-month periods ended June 30, 2002 and June 30, 2001 was
$4,558,611 and $4,327,752 respectively. The Company's other comprehensive loss
consisted of unrealized gains on investments of $449,221 and unrealized losses
of $29,735 for the three-month period ended June 30, 2002 and 2001,
respectively. The Company had no other items of other comprehensive gains or
losses during the three months ended June 30, 2002 and 2001.
The Company's total comprehensive loss for the six-month periods ended June 30,
2002 and June 30, 2001 was $10,039,952 and $8,225,176, respectively. The
Company's other comprehensive loss consisted of unrealized gains on investments
of $185,023 and $82,644 for the six-month period ended June 30, 2002 and 2001,
respectively. The Company had no other items of other comprehensive gains or
losses during the six months ended June 30, 2002 and 2001.
Net Income (Loss) Per Common Share
The Company computes net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under the
9
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
provisions of SFAS 128 and SAB No. 98, basic net income (loss) per common share
("Basic EPS") is computed by dividing net income (loss) by the weighted average
number of common shares outstanding. Diluted net income (loss) per common share
("Diluted EPS") is computed by dividing net income (loss) by the weighted
average number of common shares and dilutive potential common share equivalents
then outstanding. Potential common shares consist of shares issuable upon the
exercise of stock options and warrants and shares issuable.
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share because to do so would be
antidilutive for the periods indicated:
Six Months Ended
June 30,
2002 2001
--------------------------
Options to purchase common stock ........ 2,982,512 2,197,574
Warrants ................................ 303,779 303,779
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information," ("SFAS No. 131") requires companies
to report information about operating segments in interim and annual financial
statements. It also requires segment disclosures about products and services,
geographic areas and major customers. The Company has determined that it
operates in only one segment as of June 30, 2002 and 2001.
Internal Use Software
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," ("SOP No. 98-1") provides guidance
regarding when software developed or obtained for internal use should be
capitalized. The Company adopted SOP No. 98-1 effective January 1, 1999. The
adoption of SOP No. 98-1 did not have a material impact on the Company's
financial position or results of operations as the predominant portion of the
software applications used by the Company were purchased from third parties. The
Company expenses the cost of accumulating and preparing data for use in its
database applications as such costs are incurred.
Goodwill and Other Intangible Assets
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and other Intangible Assets," ("SFAS No. 142") effective January 1,
2002. This statement addresses accounting and reporting for acquired goodwill
and intangible assets. In accordance with the transitional provisions of SFAS
No. 142, the Company determined that the carrying value of goodwill and related
assets did not exceeded their fair value.
The Company evaluates the recoverability of its intangible assets subject to
amortization in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 144 requires long-lived assets to be reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amount
may not be recoverable. An impairment is recognized in the event that the net
book value of an asset exceeds the sum of the future undiscounted cash flows
attributable to such asset or the business to which such asset relates and the
net book value exceeds fair value. The impairment amount is measured as the
amount by which the carrying amount of a long-lived asset exceeds its fair
value.
In December 2001, the Company acquired all of the assets of Celera's AgGen plant
genomics and genotyping business. After the closing, the AgGen genomics and
genotyping business became a new business unit of the Company called ParaGen.
The results of the business unit have been included in the financial statements
since that date. ParaGen is a provider of services to the plant based
agriculture industry. The services include gene sequencing, assembly, annotation
and single nucleotide polymorphism (SNP) discovery.
10
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
The aggregate purchase price was $2,100,000 of the Company's common stock. The
value of the 422,459 common shares issued was determined based on the average
market price of the Company's common shares over a five day period before and
after the terms of the acquisition were publicly announced.
The following table summarizes the estimated fair values of the assets acquired
at December 31, 2001.
Equipment $ 265,214
Intangible Assets $ 350,000
Goodwill $1,484,786
----------
Total Assets Acquired $2,100,000
==========
Of the $350,000 of acquired intangible assets, $150,000 was assigned to the
revenue backlog and $200,000 was assigned to the customer base. The revenue
backlog has a weighted-average useful life of one year and the customer base has
a weighted-average useful life of approximately two years.
The $1,484,786 of goodwill was assigned to the ParaGen unit.
Intangible assets at June 30, 2002 are comprised of the following:
June 30, 2002 December 31, 2001
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------------------------------------
Revenue Backlog ......... $150,000 $ (75,000) $150,000 --
Customer Base ........... $200,000 $ (50,000) $200,000 --
------------------------------------------------------------
Total ................... $350,000 $(125,000) $350,000 --
------------------------------------------------------------
Aggregate Expenses for the
Six Months Ended
June 30, 2002 June 30 ,2001
------------------------------
Revenue Backlog .................. $ 75,000 --
Customer Base .................... $ 50,000 --
------------------------------
Total ............................ $ 125,000 --
------------------------------
Estimated Amortization Expense:
For the year ended 12/31/02 ...... $ 250,000
---------------
For the year ended 12/31/03 ...... $ 100,000
---------------
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations", or SFAS No. 141, and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets", or SFAS
No. 142. The Company adopted SFAS No. 141 as of July 1, 2001, which requires
that all business combinations be accounted for under the purchase method and
that certain acquired intangible assets in a business combination be recognized
as assets apart from goodwill. The Company adopted SFAS No. 142 as of January 1,
2002, as required. In addition, the Company also adopted the required provisions
of SFAS No. 142 for goodwill and intangible assets acquired after June 30, 2001.
As required by SFAS No. 142, and effective January 1, 2002, the Company no
longer records the amortization of goodwill in the financial statements. Rather,
the Company will analyze goodwill for impairment on an annual basis. The Company
has completed a transitional impairment test on June 30, 2002 and has determined
that there is no impairment of the Company's goodwill.
11
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", or SFAS
No. 144, which supersedes SFAS No. 121 and portions of APB Opinion No. 30. SFAS
No. 144 provides guidance on the recognition and impairment of long-lived assets
to be held and used and for long-lived assets to be disposed. The Company
adopted SFAS No. 144 as of January 1, 2002, as required. The adoption did not
have a material impact on the Company's financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
("Statement No. 146") which addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." Statement No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost as defined
in Issue 94-3 was recognized at the date of an entity's commitment to an exit
plan. The Statement also establishes that the initial liability be measured and
recorded at its fair value. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The adoption of Statement 146 will not have a
material impact on the Company's financial statements.
12
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that are based upon
current expectations. Our actual results and the timing of events could differ
materially from those anticipated in our forward-looking statements as a result
of many factors, including those set forth under "Risk Factors",
"Forward-Looking Statements" and elsewhere in this report.
Overview
We are an integrated life sciences company developing novel technologies
designed to speed the discovery of new products for the advancement of
agriculture and human health. In agriculture, we have developed an
industrialized platform for determining the definitive function of plant and
microbial genes that we believe will enable us and our commercial partners to
develop novel products in the areas of crop production and nutrition. This
industrialized, high-throughput platform is known as the GeneFunction
Factory(TM) and is capable of determining the function of over a hundred plant
and microbial genes per week. In human health, we are developing a proprietary
human metabolomics platform called MetaVantage(TM) which we believe will
significantly enhance the development of drug targets, lead compounds and
predictive medicines. Human metabolomics is the global analysis of all classes
of biochemicals, also known as the metabolome, in a human being. We are
currently in the process of developing a reference library of stable metabolites
identified in human cells, tissues and fluids. We plan to use this database in
conjunction with our MetaVantage(TM) discovery platform to assist pharmaceutical
and biotechnology companies to prioritize drug targets and to identify drug
candidates with improved efficacy and safety profiles.
Our GeneFunction Factory(TM) and MetaVantage(TM) systems generate many terabytes
of data. In order to analyze these data we have developed a sophisticated data
integration and analysis system called FunctionFinder(TM), and we are developing
a data integration and visualization system called MetaTrace(TM). We use
FunctionFinder(TM) to infer the function of plant and microbial genes and we
intend to use MetaTrace(TM), when it is completed, to understand the
relationship between biochemical profiles, biochemical pathways and target genes
in human beings.
We currently have commercial partnerships with Bayer AG ("Bayer") in the area of
crop production, with The Monsanto Company ("Monsanto") in the areas of crop
production and nutrition and with VDDI Pharmaceuticals in the area of infectious
diseases. Our commercial partnership with Bayer was signed in September 1998 and
was extended in June 2001. Under the terms of the agreement, the companies will
collaborate on herbicide discovery for an additional five years through
September 2006. This includes three years of committed funding through September
2004, plus a two-year option through September 2006. The commercial partnership
with Monsanto was signed in November 1999 and began contributing revenues in the
second quarter of fiscal year 2000. During September 2001, we announced that
Monsanto had amended the commercial partnership agreement by eliminating its
option to terminate the agreement without cause in exchange for broader
commercialization rights. This amendment commits Monsanto to a total partnership
term of six years with committed funding through January 2005, plus options to
extend the scope of work in time and volume. Our commercial partnership with
VDDI Pharmaceuticals was signed in February 2002, for the development of
antibiotics for the treatment of gram-positive bacterial infections. Under the
agreement, we will use our proprietary MetaVantage(TM) metabolomics technology
platform to prioritize lead compounds targeting the essential bacterial enzyme
nicotinamide adenine dinucleotide synthetase for further preclinical
development. We expect that the commercial partnership with VDDI Pharmaceuticals
will begin contributing to our revenues in the third quarter of 2002. During
June 2002, we announced that we have been awarded a five-year, $11.7 million
Advanced Technology Program (ATP) grant from the National Institute of Standards
and Technology. The grant will be shared equally between Paradigm and LION
bioscience AG. The federal funding will support the development of a Target
Assessment Technologies Suite (TATS). This suite of technologies is intended to
increase the number and success rate of validated targets for product
development by the pharmaceutical and other life sciences industries. We will
participate equally in the grant and anticipate significant commercial
applications for the new technologies. We expect that the ATP grant will begin
contributing to our revenues in the third quarter of 2002. We also generated
revenues for the six months ended June 30, 2001 from a grant from the U.S.
Department of Energy. This grant ended in June 2001.
13
We have invested heavily in developing our GeneFunction Factory(TM),
MetaVantage(TM), MetaTrace(TM) and FunctionFinder(TM) systems. We occupy office
and laboratory space totaling approximately 125,000 square feet. Our total
number of full time employees decreased to 218 employees at June 30, 2002 from
241 employees at June 30, 2001. In April, 2002 we announced an internal
restructuring to better focus our resources in order to grow the human
healthcare and agricultural businesses. All costs associated with the internal
restructuring were incurred and expensed within the second quarter. Of our total
number of employees on June 30, 2002, 85% were engaged in research and
development activities. Our research and development efforts consisted of work
performed under our commercial partnerships and work advancing our own core
technologies and programs.
We have incurred significant losses since our inception. As of June 30, 2002,
our accumulated deficit was approximately $59.2 million and total stockholders'
equity was approximately $43.6 million. Our net loss increased to approximately
$5.0 million during the three months ended June 31, 2002 compared to
approximately $4.3 million during the three months ended June 31, 2001. The
primary reason for the increase in our net loss was due to lower revenues from
our commercial partnership with Bayer. Operating expenses including non-cash
compensation charges decreased to approximately $10.2 million during the three
months ended June 31, 2002, from approximately $10.5 million during the three
months ended June 31, 2001. We expect to incur additional operating losses for
the foreseeable future as we continue to develop our MetaVantage(TM) platform,
advance our internal research and development programs, establish the
infrastructure necessary to support our business and increase our marketing
activities.
Results of Operations
Three Months Ended June 30, 2002 and 2001.
Revenues. Revenues are comprised of amounts recognized under our commercial
partnerships and a grant from the U.S. Department of Energy. Total revenues
decreased 13% to approximately $5.3 million for the three months ended June 30,
2002 compared to approximately $6.1 million for the three months ended June 30,
2001. The decrease was primarily due to lower throughput in our GeneFunction
Factory(TM) related to work on our commercial partnership with Bayer partially
offset by an increase in revenues from our commercial partnership with Monsanto
and revenues from our Paragen genotyping business, which we acquired in December
2001.
Revenues relating to our commercial partnership with Monsanto increased to
approximately $3.1 million for the three months ended June 30, 2002, from
approximately $2.1 million for the three months ended June 30, 2001. This
increase was primarily the result of an increase in throughput in our
GeneFunction Factory(TM). We expect that revenues related to this commercial
partnership will continue at second quarter levels through the end of 2002.
Revenues relating to our commercial partnership with Bayer decreased to
approximately $1.3 million for the three months ended June 30, 2002 compared to
approximately $3.9 million for the three months ended June 30, 2001. We have
completed the majority of the work under this commercial partnership and are as
of June 30, 2002 ahead of schedule. As a result we have an accounts receivable
balance of approximately $5.2 million relating to Bayer, of which approximately
$3.7 million is classified as current and $1.5 million is classified as long
term. During the three months ended June 30, 2001, our commercial partnership
with Bayer was expanded and extended for an additional three years, through
September 2004, with a further two year option period through September 2006. We
expect that revenues related to this commercial partnership will continue at
second quarter levels through the third quarter of 2002 and then begin to fall
in the fourth quarter of 2002. Revenues relating to our Paragen genotyping
business, which we acquired in December 2001, increased to approximately
$837,000 for the three months ended June 30, 2002 compared to $0 for the three
months ended June 30, 2001. Due to the cyclical nature of the genotyping
industry we expect to recognize less revenue in the last two quarters of 2002
compared to the second quarter of 2002 in connection with this component of our
business.
Grant revenue decreased to $0 for the three months ended June 30, 2002 compared
to approximately $65,000 for the three months ended June 31, 2001. In June 2001,
our grant from the U.S. Department of Energy ended and no longer contributes to
our revenue.
Research and Development Expenses. Research and development expenses consist
primarily of personnel costs, including the recognition of deferred
compensation, costs of supplies, facility costs, license fees and depreciation
of laboratory equipment. Research and development expenses increased 11% to
approximately $7.7 million for the three months ended June 30, 2002 compared to
approximately $6.9 million for the three months ended June 30, 2001. This
increase was primarily due to the addition of our Paragen genotyping business,
continued investment in building our MetaVantage(TM) platform, increased
personnel costs, increased laboratory supply usage, additional license fees and
depreciation of additional laboratory equipment. In April 2002, we
14
announced an internal restructuring to better focus our resources on our core
business opportunities. All costs associated with the internal restructuring
were incurred and expensed within the quarter. As a result of this
restructuring, we expect that our research and development expenses will be
lower in the second half of 2002 than they were in the first half of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of personnel costs, including the
recognition of deferred compensation expense, professional expenses, such as
legal and accounting fees, facilities costs, business development costs, taxes
and insurance costs and depreciation. Selling, general and administrative
expenses decreased 29% to approximately $2.5 million for the three months ended
June 30, 2002 compared to approximately $3.6 million for the three months ended
June 30, 2001. During the second quarter 2001 we incurred a one-time charge of
$0.9 million related to an acquisition we ceased to pursue. As a result of the
restructuring that we announced in April 2002, we expect that our general and
administrative expenses will be lower in the second half of 2002 than they were
in the first half of 2002.
Other Income (Expense), Net. Other income (expense), net represents interest
earned on our cash and cash equivalents and short-term and long-term
investments, offset by interest expense on long-term debt and capital leases.
Other income (expense), net decreased 161% to an expense of approximately
$81,000 for the three months ended June 30, 2002 compared to an income of
approximately $133,000 for the three months ended June 30, 2001. This decrease
was attributable to a reduction in interest earned on our cash balances. Other
income (expense), net for the three months ended June 30, 2001 included
approximately $127,000 related to the gain on the sale of assets. We expect that
other income (expense), net will continue to decrease as we use our cash
balances to fund our operations and service our debt.
Net Loss. Net Loss increased 17% to approximately $5.0 million for the three
months ended June 30, 2002, compared to approximately $4.3 million for the three
months ended June 30, 2001. The increase in net loss was primarily due to the
decrease in revenues between the two periods and the decrease in other income,
net.
Six Months Ended June 30, 2002 and 2001.
Revenues. Revenues are comprised of amounts recognized under two commercial
partnerships and a grant from the U.S. Department of Energy. Total revenues
decreased 3% to approximately $11.1 million for the six months ended June 30,
2002, compared to approximately $11.5 million for the six months ended June 30,
2001. The decrease was primarily due to lower throughput in our GeneFunction
Factory(TM) related to work on our commercial partnership with Bayer, a decrease
in revenue recognized from our U.S. Department of Energy grant which ended in
June 2001, offset by an increase in revenues from our commercial partnership
with Monsanto and revenues from our Paragen genotyping business, which we
acquired in December 2001.
Revenues relating to our commercial partnership with Monsanto increased to
approximately $6.8 million for the six months ended June 30, 2002, from
approximately $4.7 million for the six months ended June 30, 2001. This increase
was primarily the result of an increase in throughput in our GeneFunction
Factory(TM). We expect that revenues related to this commercial partnership will
continue at second quarter levels through the end of 2002. Revenues relating to
our commercial partnership with Bayer decreased to approximately $3.3 million
for the six months ended June 30, 2002 compared to approximately $6.7 million
for the six months ended June 30, 2001. We have completed the majority of the
work under this commercial partnership and are as of June 30, 2002 ahead of
schedule. As a result we have an accounts receivable balance of approximately
$5.2 million relating to Bayer, of which approximately $3.7 million is
classified as current and $1.5 million is classified as long term. During the
six months ended June 30, 2001, our commercial partnership with Bayer was
expanded and extended for an additional six years, through September 2004, with
a further two year option period through September 2006. We expect that revenues
related to this commercial partnership will continue at second quarter levels
through the third quarter of 2002 and then begin to fall in the fourth quarter
of 2002. Revenues relating to our Paragen genotyping business, which we acquired
in December 2001, increased to approximately $1.1 million for the six months
ended June 30, 2002 compared to $0 for the six months ended June 30, 2001. Due
to the cyclical nature of the genotyping business unit we expect to recognize
less revenue in the last six months of 2002 when compared to the first six
months of 2002 in connection with this component of our business.
Grant revenues decreased to $0 for the six months ended June 30, 2002 compared
to approximately $130,000 for the six months ended June 31, 2001. In June 2001,
our grant from the U.S. Department of Energy ended and no longer contributes to
our revenue.
15
Research and Development Expenses. Research and development expenses consist
primarily of personnel costs, including the recognition of deferred
compensation, costs of supplies, facility costs, license fees and depreciation
of laboratory equipment. Research and development expenses increased 18% to
approximately $15.8 million for the six months ended June 30, 2002 compared to
approximately $13.3 million for the six months ended June 30, 2001. This
increase was primarily due to the addition of our Paragen genotyping business,
continued investment in building our MetaVantage(TM) platform, increased
personnel costs, increased laboratory supply usage, additional license fees and
depreciation of additional laboratory equipment. In April 2002, we announced an
internal restructuring to better focus our resources on our core business
opportunities. As a result of this restructuring, we expect that our research
and development expenses will be lower in the second half of 2002 than they were
in the first half of 2002.
Selling, General and Administrative Expense . Selling, general and
administrative expenses consist primarily of personnel costs, including the
recognition of deferred compensation expense, professional expenses, such as
legal and accounting fees, facilities costs, business development costs, taxes
and insurance costs and depreciation. Selling, general and administrative
expenses decreased 20% to approximately $5.5 million for the six months ended
June 30, 2002 compared to approximately $6.8 million for the six months ended
June 30, 2001. During the second quarter of 2001 we incurred a one-time charge
of $0.9 million related to an acquisition we are no longer pursuing. As a result
of the restructuring that we announced in April 2002, we expect that our general
and administrative expenses will be lower in the second half of 2002 than they
were in the first half of 2002.
Other Income (Expense), Net. Other income (expense), net represents interest
earned on our cash and cash equivalents and short-term and long-term
investments, offset by interest expense on long-term debt and capital leases.
Other income (expense), net decreased 148% to an expense of approximately
$137,000 for the six months ended June 30, 2002 compared to an income of
approximately $287,000 for the six months ended June 30, 2001. This decrease was
attributable to a reduction in interest earned on our cash balances. Other
income (expense), net for the six months ended June 30, 2001 included
approximately $127,000 related to the gain on the sale of assets. We expect that
other income (expense), net will continue to decrease as we use our cash
balances to fund our operations and service our debt.
Net Loss. Net loss increased 23% to approximately $10.2 million for the six
months ended June 30, 2002, compared to approximately $8.3 million for the six
months ended June 30, 2001. The increase in net loss was primarily due to a
decrease in revenues between the two periods, an increase in operating expenses
and a decrease in other income, net.
Liquidity and Capital Resources
We have historically financed our operations through the sale of common and
preferred stock, debt and capital lease financing, payments received from
commercial partnerships and a government grant. From our inception through June
30, 2002, we have raised approximately $26.9 million in net cash proceeds from
the sale of preferred stock. On May 10, 2000, we completed an initial public
offering in which we sold 6,000,000 shares of common stock at $7.00 per share
for net proceeds of approximately $37.6 million, net of underwriting discounts,
commissions and other offering costs. On May 31, 2000, the underwriters
exercised an over-allotment option to purchase an additional 750,000 shares
resulting in additional net proceeds of approximately $4.9 million. On October
23, 2001, we closed a direct offering in which we sold 5,097,727 shares of
common stock at $5.50 per share for proceeds of approximately $26.1 million, net
of underwriting discounts, commissions and other offering costs.
Annual maturities of long-term debt subsequent to June 30, 2002 are
approximately $2.4 million in 2002, approximately $4.1 million in 2003,
approximately $2.8 million in 2004 and approximately $404,000 in 2005. In
addition, we have several noncancellable operating leases pertaining to office
lease space and other equipment. Our minimum lease payments, under these leases,
subsequent to June 30, 2002, are approximately $0.9 million in 2002,
approximately $1.8 million in 2003, approximately $1.9 million in 2004,
approximately $1.9 million in 2005, approximately $1.9 million in 2006, and
approximately $7.9 million thereafter.
We had cash, cash equivalents and short-term investments of approximately $9.6
million at June 30, 2002 compared to approximately $10.7 million at December 31,
2001. Our cash, cash equivalents, short-term investments and long-term
investments totaled approximately $28.0 million at June 30, 2002 compared to
approximately $43.0 million at December 31, 2001. During the six months ended
June 30, 2002, we repaid principal of $4.8 million that matured under our
long-term debt agreements. We expect that for the remainder of 2002 our
quarterly cash burn will decrease from that of the second quarter of 2002 as a
result of our lower debt and our internal restructuring. We believe that our
cash and investments balance coupled with cash from our
16
commercial partners will be sufficient to cover our working capital needs at
least through 2003. We are exposed to interest rate fluctuations on cash
equivalents and short-term and long-term investments. Our cash and cash
equivalents, short-term, and long-term investments are invested in financial
instruments with interest rates based on financial market conditions.
We had a working capital deficit of approximately $407,000 at June 30, 2002
compared to a working capital deficit of approximately $4.9 million at December
31, 2001. The decrease in our working capital deficit between June 30, 2002 and
December 31, 2001 was primarily due to the repayment of principal under a
long-term debt agreement and a reduction in our deferred revenue balance. We
consider our long-term investments to be highly liquid. If we include long-term
investments in our working capital, we would have had working capital of
approximately $18.0 million at June 30, 2002 compared to approximately $27.3
million at December 31, 2001.
Our operating activities used cash of approximately $9.5 million for the six
months ended June 30, 2002 compared to approximately $8.2 million used for the
six months ended June 30, 2001. Cash used in operating activities for the six
months ended June 30, 2002 was primarily related to the funding of our net
operating loss, a decrease in deferred revenue and an increase in accounts
receivable.
Cash provided by investing activities totaled approximately $12.6 million for
the six months ended June 30, 2002 compared to approximately $22.2 million
provided for the six months ended June 30, 2001. Investing activities consist
primarily of net maturities of investments offset by additions to property and
equipment. Cash provided by investing activities decreased for the six months
ended June 30, 2002 compared to the six months ended June 30, 2001 primarily as
a result of a decrease in the net maturities of investments. Capital
expenditures totaled approximately $774,000 for the six months ended June 30,
2002 compared to approximately $5.6 million for the six months ended June 30,
2001. Capital expenditures for the six months ended June 30, 2002 consisted
primarily of investments in our GeneFunction Factory(TM) and our MetaVantage(TM)
platforms, which includes laboratory and leasehold improvements. We expect to
continue to make investments in the purchase of property and equipment to
support our operations. A portion of our cash may be used to acquire or invest
in complementary businesses, products or technologies, or to obtain the right to
use such complementary technologies.
Cash used in financing activities totaled approximately $4.9 million for the six
months ended June 30, 2002 compared to cash provided of approximately $2.2
million for the six months ended June 30, 2001. Cash used in financing
activities for the six months ended June 30, 2002 of $4.9 million was comprised
of repayments of principal that matured under our long-term debt agreements.
Cash provided by financing activities for the six months ended June 30, 2001 was
primarily comprised of borrowings under secured debt agreements of approximately
$3.9 million.
We expect to continue expanding our operations through internal growth and,
possibly, through strategic acquisitions. We expect these activities will be
funded from existing cash, cash flow from operations, issuances of our stock,
and borrowings under credit facilities. We believe that these sources of
liquidity will be sufficient to fund our operations through 2003. From time to
time, we evaluate potential acquisitions and other growth opportunities, which
might require additional external financing, and we might seek funds from public
or private issuances of equity or debt securities.
Potential Volatility of Quarterly Operating Results and Stock Price
Our quarterly and annual operating results have fluctuated, and we expect that
they will continue to fluctuate in the future. Factors that could cause these
fluctuations include:
.. the timing of the initiation, progress or cancellation of commercial
partnerships
.. the mix of work performed for our commercial partners in a particular
period
.. the timing of internal expansion costs, and
.. the timing and amount of costs associated with evaluating and integrating
acquisitions, if any.
Fluctuations in quarterly results or other factors beyond our control could
affect the market price of our common stock. Such factors include changes in
earnings estimates by analysts, market conditions in our industry, changes in
pharmaceutical, agri-chemical, and biotechnology industries, and general
economic conditions. Any effect on our common stock could be unrelated to our
longer-term operating performance.
17
FORWARD-LOOKING STATEMENTS
Our forecast of the period of time through which our financial resources will be
adequate to support our operations and other statements contained in this report
are forward-looking and involve risks and uncertainties. Actual results could
vary as a result of a number of factors. We believe that our existing cash and
investments and anticipated cash flow from existing commercial partnerships will
be sufficient to support our current operating plan through 2003. We have based
this estimate on assumptions that may prove to be wrong. It is possible that we
may seek additional funding within this time frame. We may raise additional
funds through public or private financing, collaborative relationships or other
arrangements. We cannot assure you that additional funding, if sought, will be
available or, even if available, will be available on terms favorable to us.
Further, any additional equity financing may be dilutive to stockholders, and
debt financing, if available, may involve restrictive covenants. Our failure to
raise capital when needed may harm our business and operating results. Our
future capital requirements will depend on many factors, including:
.. the number, breadth and progress of our research programs
.. the achievement of the milestones under certain of our existing commercial
partnerships
.. our ability to establish additional and maintain current and additional
commercial partnerships
.. our commercial partners' success in commercializing products developed
under our commercial partnership agreements
.. our success in commercializing products to which we have retained the
rights under our commercial partnerships
.. the costs incurred in enforcing and defending our patent claims and other
intellectual property rights, and
.. the costs and timing of obtaining regulatory approvals for any of our
products.
This report contains other forward-looking statements, including statements
regarding: our ability to successfully develop and improve our GeneFunction
Factory(TM); FunctionFinder(TM) system, MetaVantage(TM) platform, MetaTrace(TM)
system, databases and other technologies; the future prospects of our
metabolomic platform, our ability to improve drug discovery and development
efforts; our ability to build an integrated drug discovery platform; anticipated
activity under our commercial partnerships; our ability to establish
intellectual property protection for our gene function information, databases,
processes and other technologies; product development and commercialization
efforts; our strategy and market opportunities, anticipated increases in our
revenues and losses and the reasons therefore; expected reductions in our
expenses and cash burn as a result of our April 2002 restructuring and lower
debt; the timing of revenues under our commercial partnerships; our ability to
meet or exceed our milestone targets and earn royalties under our commercial
partnerships; our ability to maintain and to enter into new partnerships and
alliances; our intended use of our cash and investments and other financial
resources; our research and development and other expenses; and our operational
and legal risks.
Such statements are based on management's current expectations and are subject
to a number of risks, factors and uncertainties that may cause actual results,
events and performance to differ materially from those referred to in the
forward-looking statements. These risks include, but are not limited to, our
early stage of development, history of net losses, technological and product
development uncertainties, reliance on research collaborations, uncertainty of
additional funding and ability to protect our patents and proprietary rights.
These and other risks are discussed below in Part II, Item 5 of this report,
titled "Other information - Risk Factors."
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes since the disclosure in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on May 17, 2002, and the
following matters were voted upon:
The election of Michael Summers, Leroy E. Hood, M.D., Ph. D., and Henri Zinsli,
Ph.D. as Class II Directors for a term of three years to serve until the 2005
annual meeting of stockholders, and until their respective successors are
elected and qualified. The votes cast were as follows:
FOR WITHHELD
--- --------
Michael Summers 26,196,945 771,748
Leroy E. Hood, M.D., Ph. D. 26,831,126 137,567
Henri Zinsli, Ph.D. 26,139,279 829,414
G. Steven Burrill and Robert M. Goodman, Ph.D. continue to serve as Directors
for terms which expire in 2003. Mark B. Skaletsky and Susan K. Harlander, Ph.D
continue to serve as Directors for terms which expire in 2004.
(b) Increase by 1,500,000 to 3,300,00 the aggregate number of shares for which
stock options may be granted under the Company's 2000 Employee, Director and
Consultant Stock Option Plan. The votes cast were as follows:
FOR AGAINST ABSTAIN BROKER NONVOTES
--- ------- ------- ---------------
14,435,628 4,492,093 11,348 8,029,624
(c) Ratification of the appointment of PricewaterhouseCoopers LLP as
independent auditors for the fiscal year ending December 31, 2002. The votes
cast were as follows:
FOR AGAINST ABSTAIN BROKER NONVOTES
--- ------- ------- ---------------
25,685,638 1,261,680 21,375 0
19
Item 5. Other Information
(a) Risk Factors
We are an early stage company using unproven technologies and, as a result, we
may never achieve, or be able to maintain, profitability.
You should evaluate us in light of the uncertainties affecting an early stage
biotechnology company. Our GeneFunction Factory(TM), our FunctionFinder(TM)
system, our MetaVantage(TM) platform, our MetaTrace(TM) system, and our
databases are still in development stage. We have not yet proven that
determining the function of a gene in commercially significant target organisms
or elucidating the biochemical profiles of cells, tissues, or fluids will enable
us to develop commercial products. Furthermore, while we are continuing with our
work in the agriculture sector, we are shifting some of our efforts to address
the human health market with our MetaVantage(TM) platform. To date, we have no
significant commercial partnerships in this area.
We have a history of net losses. We will continue to incur net losses that may
depress our stock price.
We have incurred net losses in each year since our inception and expect these
losses to continue. We experienced a net loss of approximately $5.0 million for
the three months ended June 30, 2002. As of June 30, 2002, we had an accumulated
deficit of approximately $59.2 million. To date, we have derived all of our
revenues from two commercial partnerships, our Paragen genotyping unit, and a
government grant. We expect to derive revenue in the foreseeable future
principally from commercial partnerships. However, we expect our revenues from
our commercial partnership with Bayer will decrease in 2002. We expect to spend
a significant amount of capital to fund research and development and enhance our
core technologies, particularly our MetaVantage(TM) platform and MetaTrace(TM)
system. As a result, we will need to generate significant additional revenues to
become profitable. We cannot predict when, if ever, we will become profitable.
We may never become profitable if we and our commercial partners are unable to
develop or commercialize our technologies into products.
We have no experience in manufacturing and marketing products, and we currently
do not have the resources or capability to manufacture products on a commercial
scale. In order for us to commercialize our products on our own, we would need
to develop, or obtain through outsourcing arrangements or through acquisitions,
the capability to manufacture, market and sell products. Since we do not
currently possess the resources necessary to develop and commercialize potential
products ourselves, we must enter into commercial partnerships to develop and
commercialize products.
We have entered into only three commercial partnerships, with Bayer, Monsanto
and VDDI Pharmaceuticals to fund the development of certain new products,
including herbicides, plants with improved nutritional and growth
characteristics and antibiotics for the treatment of gram-positive bacterial
infections. If we are unable to successfully achieve milestones or our
commercial partners fail to develop successful products, we will not earn the
revenues contemplated under such partnerships. In addition, we may not be able
to enter into additional commercial partnerships. We do not control the
resources that our commercial partners devote to our projects and our commercial
partners may not perform their obligations. Our commercial partnerships are
subject to termination rights by the commercial partners. If any of our
commercial partners were to terminate its relationship with us, or fail to meet
its contractual obligations, it could have a material adverse effect on our
revenues and it could have a material adverse effect on our ability to undertake
research, to fund related and other programs and to develop, manufacture and
market any products that may have resulted from the commercial partnership.
Also, we may pursue opportunities in fields that conflict with our commercial
partners or in which our commercial partners could become active competitors. In
either case, we may not be able to commercialize our products.
If we lose our key personnel or are unable to attract and retain additional
personnel, our operations could be disrupted, and our revenues could decrease.
Our success depends on the continued services and on the performance of our
senior management and scientific staff. The loss of the services of any of our
senior management or scientific staff could seriously impair our ability to
operate and achieve our objectives, which could reduce our revenues. Recruiting
and retaining qualified scientific personnel to perform future research and
development work will be critical to our success.
20
In order to achieve our business objectives, we must identify, attract, train
and motivate additional personnel with expertise in specific industries and
areas applicable to the products developed through our technologies. We compete
intensely for these personnel and we may be unable to achieve our personnel
goals. Our failure to achieve any of these goals could seriously limit our
ability to improve our operations and financial results.
If we were successfully sued for product liability, we could face substantial
liabilities that exceed our resources.
We may be held liable if any product we develop, or any product which is made
using our technologies, causes injury or is found unsuitable during product
testing, manufacturing, marketing, sale or use. For example, a genetically
modified food could, after it is sold, be found to cause illness in individuals
who eat the food. Also, like other pharmaceutical products, those produced
through genetically modified plants could be found to cause illness. These risks
are inherent in the development of chemical, agricultural and pharmaceutical
products. We currently do not have product liability insurance. If we choose to
obtain product liability insurance but cannot obtain sufficient insurance
coverage at an acceptable cost or otherwise protect against potential product
liability claims, the commercialization of products that we or our commercial
partners develop may be prevented or inhibited. If we are sued for any injury
caused by our products, our liability could exceed our total assets.
If we do not compete effectively, our losses could increase.
Our technology platform for the industrialization of gene function determination
faces competition from functional genomics technologies, which are computer
hardware and software technologies that researchers use to help them identify
the role that specific genes play within organisms, created by others, including
Exelixis, Inc., Ceres, Inc., Mendel Biotechnology Inc., and Large Scale Biology
Corporation. Our MetaVantage(TM) platform also faces competition from other
companies attempting to analyze biochemicals in human beings. We expect
competition to intensify in functional genomics and metabolomics research.
Genomic technologies have undergone and are expected to continue to undergo
rapid and significant change. Our future success will depend in large part on
maintaining a competitive position in these fields. Metabolomics is a rapidly
growing new technology. We or others may make rapid technological developments,
which may result in products or technologies becoming obsolete before we recover
the expenses we incur in connection with our development. We or our commercial
partners may offer products, which could be made obsolete by less expensive or
more effective technologies. We may not be able to enhance our technology in
ways necessary to compete successfully with newly emerging technologies.
Any products that we may develop alone or in collaboration with others will
compete in highly competitive markets. In the specific markets in which we apply
or intend to apply our technology platform, we face competition from
pharmaceutical, biotechnology plant genomics, and agri-chemical companies. Many
of our existing and potential competitors have substantially greater financial
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than we do. Many
of these competitors have achieved substantial market penetration in the human
health, agriculture and nutrition markets.
If we are not able to adequately acquire and protect patents and licenses, we
may not be able to operate our business and remain competitive.
Our business and competitive position will depend in part on our ability to
obtain patents and maintain adequate protection of our other intellectual
property for our technologies and products in the United States and other
countries. As of July 31, 2002, we had 96 U.S. patent applications and 30
international patent applications pending covering our technology. We currently
hold eight issued U. S. patents and no issued patents in other countries. The
laws of some foreign countries do not protect proprietary rights to the same
extent as the laws of the United States, and many companies have encountered
significant problems in protecting their proprietary rights in these foreign
countries.
Third parties have filed, and in the future are likely to file, patent
applications covering genes and gene function that we have developed or may
develop or technology upon which our technology platform depends. If patent
offices issue patents on these patent applications and we wish to use the
claimed genes, gene functions or technology, we would need to obtain a license
from the third party. However, we might not be able to obtain any such license
on commercially favorable terms, if at all, and if we do not obtain these
licenses, we might be prevented from using certain technologies or taking
certain products to market.
21
The patent positions of biopharmaceutical and biotechnology companies, including
our patent position, are generally uncertain and involve complex legal and
factual questions. Patent law relating to the scope of claiming the technology
field in which we operate is still evolving. We will be able to protect our
proprietary rights from unauthorized use by third parties only to the extent
that our proprietary technologies are covered by valid and enforceable patents
or are effectively maintained as trade secrets. We will apply for patents
covering both our technologies and products, as we deem appropriate. However,
other companies may challenge these applications and governments may not issue
patents we request. Any future patents we obtain may not be sufficiently broad
to prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, our
patents may be challenged, invalidated or fail to provide us with any
competitive advantages.
We rely upon trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information. These measures may not provide adequate protection for our trade
secrets or other proprietary information. Even though we seek to protect our
proprietary information by entering into confidentiality agreements with
employees, commercial partners and consultants, people may still disclose our
proprietary information, and we might not be able to meaningfully protect our
trade secrets.
If third parties make or file claims of intellectual property infringement
against us or otherwise seek to establish their intellectual property rights, we
may have to spend time and money in response and shut down some of our
operations.
Third parties may claim that we are employing their proprietary technology
without authorization or that we are infringing their patents. We could incur
substantial costs and diversion of management and technical personnel in
defending ourselves against any of these claims. Furthermore, parties making
claims against us may be able to obtain injunctive or other equitable relief
which could effectively block our ability to further develop, commercialize and
sell products. In the event of a successful claim of infringement, courts may
order us to pay damages and obtain one or more licenses from third parties. We
may not be able to obtain these licenses at a reasonable cost, if at all.
Defense of any lawsuit or failure to obtain any of these licenses could prevent
us from commercializing available products.
If adverse public reaction limits the acceptance of genetically modified
products, demand for any products that we or our collaborators may develop in
agriculture and nutrition may decrease.
The commercial success of our product candidates in agriculture and nutrition
will depend in part on public acceptance of the use of genetically modified
products, including drugs, food, plants and plant products. Claims that
genetically modified products are unsafe for consumption or pose a danger to the
environment may influence public attitudes. Any genetically modified product
that our collaborators or we may develop may not gain public acceptance. Due to
public reaction in both the United States and Europe, some food processors and
restaurants have already decided not to sell food that has been genetically
altered or that contains genetically altered ingredients. If this policy
continues or becomes more common, there could be a decrease in demand for
products that we or our commercial partners may develop.
Any product that we or our commercial partners develop using the gene function
information we provide may be subject to a lengthy and uncertain government
regulatory process that may not result in the necessary approvals, may delay the
commercialization of these products or may be costly, any of which could reduce
our revenues.
Any new product that we or our commercial partners develop will likely undergo
an extensive regulatory review process in the United States by the FDA and the
USDA and by regulators in other countries before it can be marketed or sold. For
example, in the United States, the FDA must approve any drug or biologic product
before it can be marketed in the U.S. This review process can take many years
and require substantial expense. In the future, we and our commercial partners
may also be required to submit pre-market information to the FDA about food
developed through biotechnology. Adverse publicity could lead to greater
regulation and trade restrictions on imports and exports of genetically modified
products. Changes in the policies of U.S. and foreign regulatory bodies could
increase the time required to obtain regulatory approval for each new product.
Our efforts to date have been primarily limited to identifying targets. If
regulators approve any products that we or our commercial partners develop, the
approval may impose limitations on the uses for which a product may be marketed.
Regulators may require the submission of post-market launch information about a
product after approving it, and may impose restrictions, including banning the
continued sale of the product, if they discover problems with the product or its
manufacturer.
22
Our stock price may be extremely volatile.
The stock market has experienced significant price and volume fluctuations, and
the market prices of technology companies, particularly life science companies,
have been highly volatile. Our common stock began public trading in May 2000.
The trading price of our common stock has been extremely volatile, and we
believe it will remain highly volatile and may fluctuate substantially.
If our results of operations fluctuate and quarterly results are lower than the
expectations of securities analysts, then the price of our common stock could
fall.
Our operating results historically have fluctuated on a quarterly basis and are
likely to continue to do so in the future. These fluctuations could cause our
stock price to fluctuate significantly or decline. Some of the factors, which
could cause our operating results to fluctuate, include:
.. expiration of research contracts with commercial partners, which may not be
renewed or replaced;
.. the success rate of our discovery efforts leading to milestones and
royalties;
.. the timing and willingness of commercial partners to commercialize our
products which would result in royalties; and
.. general and industry specific economic conditions, which may affect our
commercial partners' research and development expenditures.
A large portion of our expenses, including expenses for facilities, equipment
and personnel are relatively fixed. Accordingly, if revenues decline or do not
grow as anticipated due to expiration of commercial partnerships or government
research grants, failure to obtain new contracts or other factors, we may not be
able to correspondingly reduce our operating expenses. Failure to achieve
anticipated levels of revenues could therefore significantly harm our operating
results for a particular fiscal period.
Our operating results in some quarters may not meet the expectations of stock
market analysts and investors. In that case, our stock price would likely
decline.
If our stockholders sell substantial amounts of our common stock, the market
price of our common stock may fall.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the perception
that these sales could occur. In addition, these factors could make it more
difficult for us to raise funds through future offerings of common stock. As of
July 31, 2002, there were 32,001,595 shares of common stock outstanding. All of
the (i) 11,847,727 shares sold in our initial public offering and our October
2001 direct offering, (ii) 422,459 shares registered on Form S-3, (iii)
outstanding shares that were registered on one of our registration statements on
Form S-8, and (iv) shares that have been sold pursuant to Rule 144 or Rule 701
are freely transferable without restriction or further registration under the
Securities Act, except for shares purchased by our "affiliates," as defined in
Rule 144 of the Securities Act. The remaining shares of common stock outstanding
are "restricted securities" as defined in Rule 144. Holders of these shares may
sell them in the future without registration under the Securities Act to the
extent permitted by Rule 144 or other exemptions under the Securities Act.
Anti-takeover provisions of Delaware law and our charter could make a
third-party acquisition of us difficult.
The anti-takeover provisions of Delaware law could make it more difficult for a
third party to acquire control of us, even if the change in control would be
beneficial to stockholders. We will be subject to the provisions of Section 203
of the General Corporation Law of Delaware. Section 203 will prohibit us from
engaging in certain business combinations, unless the business combination is
approved in a prescribed manner. Accordingly, Section 203 may discourage, delay
or prevent someone from acquiring or merging with us. In addition, our restated
certificate of incorporation and amended and restated by-laws contain certain
provisions that may make a third party acquisition of us difficult, including:
.. a classified board of directors, with three classes of directors each
serving a staggered three-year term;
.. the ability of the board of directors to issue preferred stock; and
.. the inability of our stockholders to call a special meeting or act by
written consent.
23
Some of our existing stockholders can exert control over us and may not make
decisions that are in the best interests of all stockholders.
Due to their combined stock holdings, our officers, directors and stockholders
who beneficially own more than five percent of our common stock, if they act
together, will be able to exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. In addition, this concentration of ownership may delay or prevent
a change in control of us and might affect the market price of our common stock,
even when a change may be in the best interests of all stockholders. In
addition, the interests of this concentration of ownership may not always
coincide with our interests or the interests of other stockholders and
accordingly, they could cause us to enter into transactions or agreements, which
we would not otherwise consider.
Future issuances of preferred stock may dilute the rights of our common
stockholders.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, privileges and other terms
of these shares. The board of directors may exercise this authority without the
approval of the stockholders. The rights of the holders of any preferred stock
that we may issue in the future may adversely affect the rights of holders of
our common stock.
(b) Recent Events
On July 18, 2002, the Company announced the appointment of Heinrich Gugger,
Ph.D., as President and Chief Executive Officer. On August 09, 2002 Dr. Gugger
was appointed as a Director.
On August 12, 2002, the Company announced the appointment of Thomas Colatsky,
Ph.D., as Vice President, Healthcare Research and the resignation of Ian A.W.
Howes as Chief Financial Officer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 Restated Certificate of Incorporation (Filed as Exhibit 3.2 to
Registration Statement on Form S-1, Registration No. 333-
30758, and incorporated herein by reference).
Exhibit 3.2 Amended and Restated Bylaws (Filed as Exhibit 3.4 to
Registration Statement on Form S-1, Registration No. 333-
30758, and incorporated herein by reference).
Exhibit 4.1 Form of Common Stock Certificate (Filed as Exhibit 4.1 to
Registration Statement on Form S-1, Registration No. 333-
30758, and incorporated herein by reference).
Exhibit 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
(b) Reports on Form 8-K
On April 22, 2002, the Company filed a Report on Form 8-K in conjunction with
its internal restructuring.
On May 7, 2002, the Company filed a Report on Form 8-K in conjunction with the
release of its financial results for the first quarter ended March 31, 2002.
On May 20, 2002, the Company filed a Report on Form 8-K in conjunction with the
resignation of John A. Ryals, Ph.D. from the company's board of directors.
24
PARADIGM GENETICS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARADIGM GENETICS, INC.
DATE: August 14, 2002 SIGNATURE: /s/ Heinrich Gugger
President and Chief Executive Officer
DATE: August 14, 2002 SIGNATURE: /s/ Andrew L. Graham
Chief Accounting Officer
25
EXHIBIT INDEX
Exhibit 3.1 Restated Certificate of Incorporation (Filed as Exhibit 3.2 to
Registration Statement on Form S-1, Registration No. 333-
30758, and incorporated herein by reference).
Exhibit 3.2 Amended and Restated Bylaws (Filed as Exhibit 3.4 to
Registration Statement on Form S-1, Registration No. 333-
30758, and incorporated herein by reference).
Exhibit 4.1 Form of Common Stock Certificate (Filed as Exhibit 4.1 to
Registration Statement on Form S-1, Registration No. 333-
30758, and incorporated herein by reference).
Exhibit 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
26