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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:
September 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 October 31, 2002..............................32,001,595
PARADIGM GENETICS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - September 30, 2002(unaudited) and
December 31, 2001...............................................................3
Condensed Statements of Operations - Three and nine months ended
September 30, 2002 and 2001 (unaudited) ........................................4
Condensed Statements of Cash Flows - Nine months ended
September 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..........................................................12
Item 3 Quantitative and Qualitative Disclosures About Market Risk.....................18
Item 4 Controls and Procedures .......................................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................18
Item 2. Changes in Securities and Use of Proceeds......................................18
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...............................................................................26
Exhibit Index...........................................................................29
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
PARADIGM GENETICS, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
2002 2001
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 4,284,292 $ 6,151,521
Short-term investments............................................................ 5,084,990 4,584,000
Accounts receivable............................................................... 6,371,914 5,663,337
Interest receivable............................................................... 249,367 590,042
Prepaid expenses.................................................................. 2,084,795 2,243,905
------------ ------------
Total current assets............................................................ 18,075,358 19,232,805
Restricted cash...................................................................... 1,404,543 1,474,870
Property and equipment, net.......................................................... 24,255,062 27,854,068
Long-term investments................................................................ 14,090,225 32,256,050
Long-term receivable ................................................................ 1,486,554 1,539,313
Goodwill and intangible assets....................................................... 1,647,286 1,834,786
Other assets, net.................................................................... 851,549 895,117
------------ ------------
Total assets.................................................................... $ 61,810,577 $ 85,087,009
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 1,153,503 $ 2,414,125
Accrued liabilities................................................................ 1,782,387 1,333,272
Deferred revenue................................................................... 9,997,187 13,349,810
Long-term debt--current portion.................................................... 4,273,698 6,762,473
Capital lease obligation--current portion.......................................... 222,266 296,259
Other current liabilities.......................................................... 23,380 8,712
------------ ------------
Total current liabilities........................................................ 17,452,421 24,164,651
Long-term debt, less current portion.................................................. 4,117,896 7,299,692
Capital lease obligation,. less current portion....................................... 225,627 378,703
------------ ------------
Total liabilities................................................................ 21,795,944 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; 31,988,677 and
31,936,188 shares issued and outstanding as of September 30, 2002 and December
31, 2001, respectively........................................................... 319,887 319,362
Additional paid-in capital............................................................ 102,996,120 103,387,223
Deferred compensation................................................................. (569,030) (1,584,201)
Accumulated deficit................................................................... (63,092,119) (48,934,177)
Accumulated other comprehensive income................................................ 359,775 55,756
------------ ------------
Total stockholders' equity....................................................... 40,014,633 53,243,963
------------ ------------
Total liabilities and stockholders' equity....................................... $ 61,810,577 $ 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 Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------
2002 2001 2002 2001
-----------------------------------------------------------------
Revenues:
Commercial partnerships............................ $ 5,154,581 $ 6,250,701 $ 16,276,221 $ 17,629,795
Grant revenues..................................... 74,991 -- 74,991 129,729
-----------------------------------------------------------------
Total revenues 5,229,572 6,250,701 16,351,212 17,759,524
-----------------------------------------------------------------
Operating expenses:
Research and development (includes $77,824 and
$100,463 of stock based compensation expense for the
three months ended September 30, 2002 and 2001,
respectively, and includes $272,362 and $461,244 of
stock based compensation expense for the nine months
ended September 30, 2002 and 2001, respectively)... 6,388,020 7,382,283 22,146,454 20,713,714
Selling, general and administrative (includes $50,488
and $118,317 of stock based compensation expense for
the three months ended September 30, 2002 and 2001,
respectively, and includes $271,641 and $392,330 of
stock based compensation expense for the nine months
ended September 30, 2002 and 2001, respectively)... 2,606,069 2,794,433 8,057,482 9,566,756
-----------------------------------------------------------------
Total operating expenses.................. 8,994,089 10,176,716 30,203,936 30,280,470
-----------------------------------------------------------------
Loss from operations........................................ (3,764,517) (3,926,015) (13,852,724) (12,520,946)
-----------------------------------------------------------------
Other income (expense):
Interest income..................................... 233,645 359,787 929,632 1,444,259
Interest expense.................................... (312,354) (490,456) (1,145,109) (1,414,488)
(Loss) gain on sale of assets....................... (89,743) -- (89,743) 126,671
-----------------------------------------------------------------
Other income (expense), net............ (168,452) (130,669) (305,220) 156,442
-----------------------------------------------------------------
Net loss..................................................... $ (3,932,969) $ (4,056,684) $ (14,157,944) $ (12,364,504)
=================================================================
Net loss per share basic and diluted......................... $ (0.12) $ (0.15) $ (0.44) $ (0.47)
=================================================================
Weighted average common shares outstanding - basic and
diluted...................................................... 31,993,748 26,347,387 31,958,180 26,254,351
=================================================================
The accompanying notes are an integral part of these condensed financial
statements.
4
PARADIGM GENETICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2002 2001
----------------------------------
Cash flows from operating activities:
Net loss...................................................................... $ (14,157,944) $ (12,364,504)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 3,814,471 3,756,515
Stock-based compensation................................................... 544,003 853,574
Loss (gain) on sale of assets.............................................. 89,743 (126,671)
Write-off of acquisition costs............................................. -- 887,279
Changes in operating assets and liabilities:
Accounts receivable..................................................... (655,818) (2,500,604)
Interest receivable..................................................... 340,675 100,549
Prepaid expenses........................................................ 580,801 (9,954)
Accounts payable........................................................ (1,260,621) (1,409,294)
Restricted cash......................................................... 70,327 (670,327)
Accrued and other current liabilities................................... 463,783 (344,667)
Deferred revenue........................................................ (3,352,623) (1,744,243)
----------------------------------
Net cash used in operating activities................................ (13,523,203) (13,572,347)
----------------------------------
Cash flows from investing activities:
Purchase of property and equipment............................................ (117,707) (7,292,887)
Purchase of investments....................................................... (22,052,329) (61,246,279)
Maturities of investments..................................................... 40,021,182 82,831,937
----------------------------------
Net cash provided by investing activities............................ 17,851,146 14,292,771
----------------------------------
Cash flows from financing activities:
Repayments of notes payable................................................... (6,022,270) (2,949,664)
Borrowings under note payable................................................. -- 3,903,021
Borrowings under capital leases............................................... -- 591,647
Repayments of capital lease obligations....................................... (253,492) (91,463)
Common stock issuance costs................................................... (28,000) --
Proceeds from exercise of stock options....................................... 150,295 180,856
Proceeds from issuance of common stock, net................................... 18,071 152,833
Purchase of restricted stock.................................................. (59,776) (44,945)
----------------------------------
Net cash (used in) provided by financing activities.................. (6,195,172) 1,742,285
----------------------------------
Net (decrease) increase in cash and cash equivalents............................. (1,867,229) 2,462,709
Cash and cash equivalents, beginning of period................................... 6,151,521 2,146,904
----------------------------------
Cash and cash equivalents, end of period......................................... $ 4,284,292 $ 4,609,613
----------------------------------
The accompanying notes are an integral part of these condensed financial
statements.
5
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Paradigm Genetics, Inc. (the "Company" or "Paradigm") was founded on September
9, 1997, and is a biotechnology company driving research and development
productivity by focusing its integrated suite of technologies on the product
development cycle, from target discovery to the enhancement of safety and
efficacy profiles. The Company chooses a systems biology approach to understand
gene function in the context of biological pathways and to develop assays and
biomarkers for molecular diagnostic solutions for life sciences companies.
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 and nine month period ended September 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.
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
September 30, 2002, the Company had recorded $359,775 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
6
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
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 will evaluate goodwill for impairment at December 31, 2002
at the reporting unit level and on an annual basis going forward 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, cash
equivalents, accounts receivable, short-term and long-term investments and
accounts payable at September 30, 2002 and December 31, 2001, approximated their
fair value. Capital lease obligation and long-term debt at September 30, 2002
and December 31, 2001 approximated their fair value based on the Company's
effective borrowing rate.
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 nine months ended September 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.
7
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
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 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 $87,771 and $9,594 of deferred compensation
related to the forfeiture of unvested options during the three months ended
September 30, 2002 and 2001, respectively. The Company reversed $537,467 and
$449,799 of deferred compensation related to the forfeiture of unvested options
during the nine months ended September 30, 2002 and 2001, respectively. The
Company did not recognize any additional deferred compensation for the three and
nine month periods ended September 30, 2002 and 2001. Deferred compensation is
amortized to compensation expense over the vesting period of the related stock
option. The Company recognized $128,312 and $218,780 in non-cash compensation
expense related to amortization of deferred compensation during the three months
ended September 30, 2002 and 2001, respectively. The Company recognized $477,704
and $784,732 in non-cash compensation expense related to amortization of
deferred compensation during the nine months ended September 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 recognize any compensation expense
related to stock options issued to consultants and the
8
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
acceleration of vesting of certain options for the three months ended September
30, 2002 and 2001. The Company recognized $66,299 and $68,842 of compensation
expense related to stock options issued to consultants and the acceleration of
vesting of certain options for the nine months ended September 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 September 30, 2002 and 2001 was
$3,758,217 and $3,880,159, respectively. The Company's other comprehensive loss
consisted of unrealized gains on investments of $174,752 and $176,525 for the
three-month periods ended September 30, 2002 and 2001, respectively. The Company
had no other items of other comprehensive gains or losses during the three
months ended September 30, 2002 and 2001.
The Company's total comprehensive loss for the nine-month periods ended
September 30, 2002 and 2001 was $13,798,169 and $12,105,335, respectively. The
Company's other comprehensive loss consisted of unrealized gains on investments
of $359,775 and $259,169 for the nine-month periods ended September 30, 2002 and
2001, respectively. The Company had no other items of other comprehensive gains
or losses during the nine months ended September 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
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:
At
September 30,
2002 2001
------------------------
Options to purchase common stock........... 2,940,765 2,142,541
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.
9
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
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.
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 exceed 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.
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.
As a result of the planned ParaGen divestiture the Company will write off the
goodwill and intangible assets associated with the genotyping business by
December 31, 2002.
Intangible assets at September 30, 2002 are comprised of the following:
10
Paradigm Genetics, Inc.
Notes to Condensed Financial Statements
(Unaudited)
September 30, 2002 December 31, 2001
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------------------------------------------------------------
Revenue Backlog............. $ 150,000 $ (112,500) $ 150,000 --
Customer Base............... $ 200,000 $ (75,000) $ 200,000 --
-------------------------------------------------------------------
Total.................... $ 350,000 $ (187,500) $ 350,000 --
-------------------------------------------------------------------
Aggregate Expenses for the
Nine Months Ended
September 30, 2002 September 30 ,2001
-------------------------------------------
Revenue Backlog................... $ 112,500 --
Customer Base..................... $ 75,000 --
-------------------------------------------
Total........................ $ 187,500 --
-------------------------------------------
Estimated Amortization Expense:
For the year ended 12/31/02......... $ 250,000
-----------------------
For the year ended 12/31/03......... $ 0
-----------------------
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 completed a transitional impairment test on June 30,
2002 and determined that there is no impairment of the Company's goodwill.
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.
11
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
Paradigm Genetics, Inc. (the "Company" or "Paradigm") was founded on September
9, 1997, and is a biotechnology company driving research and development
productivity by focusing its integrated suite of technologies on the product
development cycle, from target discovery to the enhancement of safety and
efficacy profiles. The Company chooses a systems biology approach to understand
gene function in the context of biological pathways and to develop assays and
biomarkers for molecular diagnostic solutions for life sciences companies.
We currently have a contract with the National Institute of Environmental Health
Sciences (NIEHS) in the area of toxicology. We also have commercial partnerships
with Bayer Crop Sciences ("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. We also have three
grants, our Advanced Technology Program (ATP) grant from the National Institute
of Standards and Technology in the area of target validation using our suite of
informatics technologies and two grants with the National Science Foundation in
the areas of modification of terpenoid production in mint, and the development
of a high throughput gene discovery system in arabidopsis using geminivirus.
The $23.8 million five year contract with NIEHS was signed in September 2002 and
will begin contributing to our revenue in the fourth quarter of 2002. Under the
terms of the contract we will use our technologies to determine how toxicants
work and cause damage at the cellular level. 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. During November 2002 we announced that the research plan under the
commercial partnership with Monsanto had been revised. The revision to the
research plan will slow the timing of our revenue recognition during the fourth
quarter 2002, but will not alter the amount of revenue we will recognize from
the commercial partnership. 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. VDDI
Pharmaceuticals began contributing to our revenues in the third quarter of 2002.
Unless extended, this commercial partnership ends in December 2002, and as such
will no longer contribute to our revenue. During June 2002, we announced that we
have been awarded a five-year, $11.7 million 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 anticipate significant commercial applications for the new
technologies. We expect that the ATP grant will begin contributing to our
revenues in the fourth quarter of 2002. We also generated additional revenues
for the nine months ended September 30, 2002 from two grants award by the
National Science Foundation. The first grant awarded in June 2002 is for the
modification of terpenoid production in mint, and in July 2002 we were awarded a
second grant for a high throughput gene discovery system in arabidopsis using
geminivirus. During the nine-month period ended September 30, 2001 we generated
revenues from a grant from the U.S. Department of Energy which ended in June
2001.
We have invested heavily in developing our GeneFunction Factory(TM),
MetaVantage(TM), MetaTrace(TM) and FunctionFinder(TM)
12
systems. We occupy office and laboratory space totaling approximately 74,800
square feet. In April, 2002 we announced an internal reorganization to better
focus our resources in order to grow the human healthcare and agricultural
businesses. All costs associated with the internal reorganization were incurred
and expensed within the second quarter. As part of that reorganization we were
able to consolidated our facilities during the third quarter 2002. Our total
number of full time employees decreased to 213 employees at September 30, 2002
from 259 employees at September 30, 2001. Of our total number of employees on
September 30, 2002, 85% were engaged in research and development activities. Our
research and development efforts consisted of work performed under our
commercial partnerships, grants and work advancing our own core technologies and
programs.
We have incurred significant losses since our inception. As of September 30,
2002, our accumulated deficit was approximately $63.1 million and total
stockholders' equity was approximately $40.0 million. Our net loss decreased to
approximately $3.9 million during the three months ended September 30, 2002
compared to approximately $4.1 million during the three months ended September
30, 2001. The primary reason for the decrease in our net loss was due to a
decrease in our total operating expenses offset by lower revenues from our
commercial partnership with Bayer. Operating expenses including non-cash
compensation charges decreased to approximately $9.0 million during the three
months ended September 30, 2002, from approximately $10.2 million during the
three months ended September 30, 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 September 30, 2002 and 2001.
Revenues. Revenues are comprised of amounts recognized under our commercial
partnerships, ParaGen genotyping business and two grants from the National
Science Foundation. Total revenues decreased 16% to approximately $5.2 million
for the three months ended September 30, 2002 compared to approximately $6.3
million for the three months ended September 30, 2001. The decrease was
primarily due to lower throughput in our GeneFunction Factory(TM) related to
work on our commercial partnership with Bayer, offset by an increase in revenues
from our commercial partnership with Monsanto, revenues from our ParaGen
genotyping business, revenues from our commercial partnership with VDDI
Pharmaceuticals and our two grants with the National Science Foundation.
Revenues relating to our commercial partnership with Bayer decreased to
approximately $1.2 million for the three months ended September 30, 2002
compared to approximately $3.1 million for the three months ended September 30,
2001. During the three months ended September 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 have completed the majority of the work under this commercial
partnership and are as of September 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. We expect that revenues related to this
commercial partnership will decline in the fourth quarter of 2002 when compared
to the third quarter 2002.
Revenues relating to our commercial partnership with Monsanto increased to
approximately $3.3 million for the three months ended September 30, 2002, from
approximately $3.2 million for the three months ended September 30, 2001. This
increase was primarily the result of an increase in throughput in our
GeneFunction Factory(TM). As a result of the revision to the research plan we
expect that revenues related to this commercial partnership will decrease in the
fourth quarter as we alter our processes resulting in a temporary decrease in
throughput in our GeneFunction Factory(TM).
Revenues relating to our commercial partnership with VDDI Pharmaceuticals, which
was announced in February 2002, increased to approximately $645,000 for the
three months ended September 30, 2002 compared to $0 for the three months ended
September 30, 2001. Unless extended, this commercial partnership ends in
December 2002 and as such will no longer contribute to our revenue. We expect
that revenues related to this commercial partnership will decrease in the fourth
quarter of 2002 as the total value of this commercial partnership is
approximately $1.0 million.
Revenues relating to our ParaGen genotyping business, which we acquired in
December 2001, increased to approximately $20,000 for the three months ended
September 30, 2002 compared to $0 for the three months ended September 30, 2001.
In November we announced that we will be seeking to divest the ParaGen
genotyping business in the fourth quarter of 2002. We are
13
expecting to recognize all of the expenses associated with the planned
divestiture in the fourth quarter 2002. Our decision to divest the genotyping
business was due to strategic reasons, as we believe that ParaGen does not fit
into our future scientific programs.
Grant revenues increased to approximately $75,000 for the three months ended
September 30, 2002 compared to $0 for the three months ended September 30, 2001.
We are expecting that our grant revenues will remain flat through December 31,
2002 and then begin to decline as one of the grants with the National Science
Foundation ends in December 2002 and the other ends in June 2003.
Research and Development Expenses. Research and development expenses consist
primarily of personnel costs, costs of supplies, facility costs, license fees
and depreciation of laboratory equipment. Research and development expenses
decreased 13% to approximately $6.4 million for the three months ended September
30, 2002 compared to approximately $7.4 million for the three months ended
September 30, 2001. This decrease was primarily due to a decrease in personnel
costs, laboratory supply usage and consultant fees. In April 2002, we announced
an internal reorganization to better focus our resources on our core business
opportunities which has contributed to the reduction in our research and
development expenses. All costs associated with the internal reorganization were
incurred and expensed within the second quarter of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of personnel costs, professional
expenses, such as legal and accounting fees, facilities costs and taxes and
insurance costs. Selling, general and administrative expenses decreased 7% to
approximately $2.6 million for the three months ended September 30, 2002
compared to approximately $2.8 million for the three months ended September 30,
2001. This decrease was primarily due to lower administrative costs,
particularly in the areas of human resources, legal and operations. We are
expecting that the selling, general and administrative expenses will remain flat
for the fourth quarter when compared to the third quarter 2002.
Divestiture. As a result of the planned ParaGen divestiture we are expecting
that our expenses will be higher in the fourth quarter 2002 when compared to the
third quarter 2002 as we accrue severance packages, write off the goodwill and
the assets associated with the ParaGen genotyping business.
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, capital leases and
the recognition of gains and losses on the sale of assets. Other income
(expense), net increased 29% to an expense of approximately $168,000 for the
three months ended September 30, 2002 compared to an expense of approximately
$131,000 for the three months ended September 30, 2001. This increase was
attributable to a reduction in interest earned on our cash balances offset by a
decrease in our interest expense and approximately $90,000 related to the
loss on the sale of assets. We expect that 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 decreased 3% to approximately $3.9 million for the three
months ended September 30, 2002, compared to approximately $4.1 million for the
three months ended September 30, 2001. The decrease in the net loss was
primarily due to the decrease in total operating expenses.
Nine Months Ended September 30, 2002 and 2001.
Revenues. Revenues are comprised of amounts recognized under our commercial
partnerships, ParaGen genotyping business, two grants from the National Science
Foundation and a grant from the U.S. Department of Energy which ended in June
2001. Total revenues decreased 8% to approximately $16.4 million for the nine
months ended September 30, 2002, compared to approximately $17.8 million for the
nine months ended September 30, 2001. The decrease was primarily due to lower
throughput in our GeneFunction Factory(TM) related to work on our commercial
partnership with Bayer, and a decrease in revenue recognized from our U.S.
Department of Energy grant which ended in June 2001. This decrease was offset by
an increase in revenues from our commercial partnerships with Monsanto and VDDI
Pharmaceuticals, revenues from our ParaGen genotyping business and our two
grants with the National Science Foundation.
Revenues relating to our commercial partnership with Bayer decreased to
approximately $4.5 million for the nine months ended September 30, 2002 compared
to approximately $9.8 million for the nine months ended September 30, 2001.
During the nine months ended September 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 have
completed the majority of the work under this commercial partnership and are as
of September 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
14
classified as current and $1.5 million is classified as long term. We expect
that revenues related to this commercial partnership will decline in the fourth
quarter of 2002 when compared to the third quarter 2002.
Revenues relating to our commercial partnership with Monsanto increased to
approximately $10.1 million for the nine months ended September 30, 2002, from
approximately $7.9 million for the nine months ended September 30, 2001. This
increase was primarily the result of an increase in throughput in our
GeneFunction Factory(TM). As a result of the revision to the research plan we
expect that revenues related to this commercial partnership will decrease in the
fourth quarter as we alter our processes resulting in a temporary decrease in
throughput in our GeneFunction Factory(TM).
Revenues relating to our commercial partnership with VDDI Pharmaceuticals, which
was announced in February 2002, increased to approximately $645,000 for the nine
months ended September 30, 2002 compared to $0 for the nine months ended
September 30, 2001. Unless extended, this commercial partnership ends in
December 2002 and as such will no longer contribute to our revenue. We expect
that revenues related to this commercial partnership will decrease in the fourth
quarter of 2002 as the total value of this commercial partnership is
approximately $1.0 million.
Revenues relating to our ParaGen genotyping business, which we acquired in
December 2001, increased to approximately $1.1 million for the nine months ended
September 30, 2002 compared to $0 for the nine months ended September 30, 2001.
In November we announced that we will be seeking to divest the ParaGen
genotyping business in the fourth quarter of 2002. We are expecting to recognize
all of the expenses associated with the planned divestiture in the fourth
quarter 2002. Our decision to divest the genotyping business was due to
strategic reasons, as we believe that ParaGen does not fit into our future
scientific programs.
Grant revenues decreased to approximately $75,000 for the nine months ended
September 30, 2002 compared to approximately $130,000 for the nine months ended
September 30, 2001. For the nine months ended September 2002, grant revenue from
our two new grants with the National Science Foundation was lower than the
revenue from the grant with the U.S. Department of Energy which ended in June
2001. We are expecting that our grant revenues will remain flat through December
31, 2002 and then begin to decline as one of the grants with the National
Science Foundation ends in December 2002 and the other ends in June 2003.
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 7% to
approximately $22.1 million for the nine months ended September 30, 2002
compared to approximately $20.7 million for the nine months ended September 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.
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 16% to approximately $8.1 million for the nine months ended September
30, 2002 compared to approximately $9.6 million for the nine months ended
September 30, 2001. This decrease was primarily due to lower administrative
costs, particularly in the areas of company administrative costs, operations and
human resources. Included in the expenses for the nine months ended September
30, 2001 is a one-time charge of $0.9 million related to an acquisition we are
no longer pursuing.
Divestiture. As a result of the planned ParaGen divestiture we are expecting
that our expenses will be higher in the fourth quarter 2002 when compared to the
third 2002 as we accrue severance packages, write off the goodwill and the
assets associated with the ParaGen genotyping business.
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, capital leases and
the recognition of gains and losses on the sale of assets. Other income
(expense), net decreased to an expense of approximately $305,000 for the nine
months ended September 30, 2002 compared to an income of approximately $156,000
for the nine months ended September 30, 2001.
15
This decrease was attributable to a reduction in interest earned on our cash
balances offset by a decrease in our interest expense and approximately $90,000
related to the loss of the sale of assets for the nine months ended September
30, 2002. We recognized approximately $127,000 related to the gain on the sale
of assets for the nine months ended September 30, 2001. 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 15% to approximately $14.2 million for the nine
months ended September 30, 2002, compared to approximately $12.4 million for the
nine months ended September 30, 2001. The increase in the net loss was primarily
due to a decrease in revenues between the two periods and a decrease in other
income (expense), 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 government grants. From our inception through
September 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 September 30, 2002 are
approximately $1.1 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 September 30, 2002, are approximately $0.5 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 $9.4
million at September 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 $23.5 million at September 30, 2002
compared to approximately $43.0 million at December 31, 2001. During the nine
months ended September 30, 2002, we repaid principal of $6.0 million that
matured under our long-term debt agreements. We expect that our quarterly cash
burn will decrease from that of the third quarter of 2002 as a result of our
lower debt and our internal reorganization. We believe that our cash and
investments balance coupled with cash from our commercial partners will be
sufficient to cover our working capital needs through 2003. We are exposed to
interest rate fluctuations on cash equivalents and short-term and long-term
investments. Our cash, cash equivalents, short-term and long-term investments
are invested in financial instruments with interest rates based on financial
market conditions.
We had working capital of approximately $623,000 at September 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 September 30, 2002 and
December 31, 2001 was primarily due to 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 $14.7 million at September 30, 2002 compared to
approximately $27.3 million at December 31, 2001.
Our operating activities used cash of approximately $13.5 million for the nine
months ended September 30, 2002 compared to approximately $13.6 million used for
the nine months ended September 30, 2001. Cash used in operating activities for
the nine months ended September 30, 2002 was primarily related to the funding of
our net operating loss, a decrease in deferred revenue and a decrease in
accounts payable.
Cash provided by investing activities totaled approximately $17.9 million for
the nine months ended September 30, 2002 compared to approximately $14.3 million
provided for the nine months ended September 30, 2001. Investing activities
consist primarily of net maturities of investments offset by additions to
property and equipment. Cash provided by investing activities increased for the
nine months ended September 30, 2002 compared to the nine months ended September
30, 2001 primarily as a result of a decrease in the net maturities of
investments offset by a reduction in capital expenditures. Capital expenditures
totaled approximately $118,000 for the nine months ended September 30, 2002
compared to approximately $7.3 million for the nine months ended September 30,
2001. Capital expenditures for the nine months ended September 30, 2002
consisted primarily of
16
investments in our GeneFunction Factory(TM) and our MetaVantage(TM) platforms.
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 $6.2 million for the
nine months ended September 30, 2002 compared to cash provided of approximately
$1.7 million for the nine months ended September 30, 2001. Cash used in
financing activities for the nine months ended September 30, 2002 was comprised
of repayments of principal that matured under our long-term debt agreements.
Cash provided by financing activities for the nine months ended September 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.
See also "Risk Factors - Common Stock may be delisted from Nasdaq."
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.
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
17
.. 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 reorganization 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.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's
principal executive officer and principal financial officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on November 13, 2002,
have concluded that, based on such evaluation, the Company's disclosure controls
and procedures were adequate and effective to ensure that material information
relating to the Company, including its consolidated subsidiaries, was made known
to them by others within those entities, particularly during the period in which
this Quarterly Report on Form 10-Q was being prepared.
(b) Changes in Internal Controls. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, nor were there
any significant deficiencies or material weaknesses in the Company's internal
controls. Accordingly, no corrective actions were required or undertaken.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
18
(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
Not applicable.
19
Item 5. Other Information
(a) Risk Factors
Our common stock may be delisted from Nasdaq.
On October 25, 2002, we received a notice from the Nasdaq National Market that
our common stock had failed to maintain the required minimum closing bid price
of $1.00 for a period of 30 consecutive trading days. As a result, Nasdaq has
provided us 90 calendar days, or until January 23, 2003, to regain compliance
with this requirement or be delisted from trading. In order to regain
compliance, the closing bid price of our common stock must stay above $1.00 for
10 consecutive trading days. If we are unable to regain compliance with this
requirement during this time period, and any appeal to Nasdaq for relief from
this requirement is unsuccessful, our common stock will be delisted from trading
by the Nasdaq National Market. If this were to happen, trading in our common
stock would decrease substantially, or cease altogether, the market price of our
common stock may decline further, potentially to zero, and stockholders may lose
some or all of their investment. Security analysts' and news media's coverage,
if any, of us will be reduced. Furthermore, delisting of our common stock from
the Nasdaq National Market would inhibit, if not preclude, our ability to raise
additional working capital on acceptable terms, if at all.
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.
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 $3.9 million for
the three months ended September 30, 2002. As of September 30, 2002, we had an
accumulated deficit of approximately $63.1 million. To date, we have derived all
of our revenues from three commercial partnerships, our ParaGen genotyping unit,
and three government grants. 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 three commercial partnerships and one contract. Our
commercial partnerships with Bayer, Monsanto and VDDI Pharmaceuticals 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. Under our contract with NIEHS we will use
our technologies to determine how toxicants work and cause damage at the
cellular level. 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 or contract. 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
20
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.
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.
21
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 October 31, 2002, we had 97 U.S. patent applications and 33
international patent applications pending covering our technology. We currently
hold nine 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.
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.
22
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.
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. See also
"Our Common Stock may be delisted from Nasdaq".
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
September 30, 2002, there were 31,988,677 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
23
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.
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 November 5, 2002, the Company announced the hiring of Phil Alfano, as Chief
Financial Officer and Barry Buzogany, as General Counsel.
On November 7, 2002, the Company also announced the planned divestiture of the
ParaGen genotyping business unit and the revision of its research plan in its
commercial partnership with Monsanto.
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-
24
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 Paradigm Genetics, Inc - 2002 Non-Qualified Stock Option Plan.
(b) Reports on Form 8-K
On August 6, 2002, the Company filed a Report on Form 8-K in conjunction with a
press release announcing the appointment of Heinrich Gugger, Ph.D as President
and Chief Executive Officer.
On August 19, 2002, the Company filed a Report on Form 8-K in conjunction with
the release of its financial results for the first quarter ended June 30, 2002
and the announcement of the appointment of Thomas Colatsky to the position of
Vice President, Healthcare Research and the resignation of Ian A.W. Howes as
Chief Financial Officer.
25
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: November 14, 2002 SIGNATURE: /s/ Heinrich Gugger
President and Chief Executive Officer
DATE: November 14, 2002 SIGNATURE: /s/ Andrew L. Graham
Chief Accounting Officer
26
Certifications:
I, Heinrich Gugger, certify that:
1. I have reviewed this quarterly report on Form 10Q of Paradigm Genetics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: November 14, 2002 SIGNATURE: /s/ Heinrich Gugger
President and Chief Executive Officer
27
Certifications:
I, Andrew L. Graham, certify that:
1. I have reviewed this quarterly report on Form 10Q of Paradigm Genetics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: November 14, 2002 SIGNATURE: /s/ Andrew L. Graham
Chief Accounting Officer
28
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 Paradigm Genetics, Inc - 2002 Non-Qualified Stock Option Plan.
29