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: March 31, 2004.
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
108 T.W. 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act). Yes ¨ No x
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 May 1, 2004 |
36,214,497 |
PARADIGM GENETICS, INC.
2
CONDENSED BALANCE SHEETS
| March 31, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 9,110,803 | $ | 7,157,308 | ||||
| Short-term investments |
6,082,679 | 9,127,200 | ||||||
| Accounts receivable |
1,726,325 | 2,975,800 | ||||||
| Interest receivable |
168,191 | 116,493 | ||||||
| Prepaid expenses |
634,873 | 784,350 | ||||||
| Inventory |
151,275 | 128,621 | ||||||
| Total current assets |
17,874,146 | 20,289,772 | ||||||
| Restricted cash |
1,404,543 | 1,404,543 | ||||||
| Property and equipment, net |
17,446,888 | 17,337,042 | ||||||
| Other assets, net |
4,965,722 | 422,357 | ||||||
| Total assets |
$ | 41,691,299 | $ | 39,453,714 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 1,390,589 | $ | 1,131,946 | ||||
| Accrued liabilities |
2,388,590 | 2,141,000 | ||||||
| Deferred revenue |
7,763,611 | 8,200,970 | ||||||
| Long-term debt—current portion |
2,078,556 | 2,152,663 | ||||||
| Capital lease obligation—current portion |
125,139 | 109,991 | ||||||
| Revolving line of credit |
1,500,000 | 2,331,514 | ||||||
| Other current liabilities |
— | 25,724 | ||||||
| Total current liabilities |
15,246,485 | 16,093,808 | ||||||
| Long-term debt, less current portion |
3,319,523 | 3,807,173 | ||||||
| Capital lease obligation, less current portion |
9,642 | 39,055 | ||||||
| Contingent purchase consideration |
2,578,109 | — | ||||||
| Total liabilities |
21,153,759 | 19,940,036 | ||||||
| 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; 36,212,839 and 32,605,493 shares issued and outstanding as of March 31, 2004, and December 31, 2003, respectively |
362,128 | 326,055 | ||||||
| Additional paid-in capital |
108,262,874 | 103,647,048 | ||||||
| Deferred compensation |
— | (1,806 | ) | |||||
| Accumulated deficit |
(88,230,822 | ) | (84,559,208 | ) | ||||
| Accumulated other comprehensive income |
143,360 | 101,589 | ||||||
| Total stockholders’ equity |
20,537,540 | 19,513,678 | ||||||
| Total liabilities and stockholders’ equity |
$ | 41,691,299 | $ | 39,453,714 | ||||
The accompanying notes are an integral part of these condensed financial statements.
3
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenues: |
||||||||
| Commercial partnerships and government contracts |
$ | 4,364,619 | $ | 3,838,844 | ||||
| Grant revenues |
523,439 | 228,339 | ||||||
| Total revenues |
4,888,058 | 4,067,183 | ||||||
| Operating expenses: |
||||||||
| Research and development (includes $1,119 and $135,603 of stock-based compensation expense for the three months ended March 31, 2004 and 2003, respectively) |
6,633,777 | 5,849,932 | ||||||
| Selling, general and administrative (includes $687 and $149,493 of stock-based compensation expense for the three months ended March 31, 2004 and 2003, respectively) |
1,886,187 | 2,234,114 | ||||||
| Total operating expenses |
8,519,964 | 8,084,046 | ||||||
| Loss from operations |
(3,631,906 | ) | (4,016,863 | ) | ||||
| Other income (expense): |
||||||||
| Interest income |
60,239 | 108,665 | ||||||
| Interest expense |
(122,671 | ) | (233,266 | ) | ||||
| Other income (expense), net |
(62,432 | ) | (124,601 | ) | ||||
| Loss from continuing operations |
(3,694,338 | ) | (4,141,464 | ) | ||||
| Discontinued operations: Gain (loss) from discontinued operations |
22,725 | 24,669 | ||||||
| Net loss |
$ | (3,671,613 | ) | $ | (4,116,795 | ) | ||
| Net loss per common share-basic and diluted: |
||||||||
| Loss per share from continuing operations |
$ | (0.11 | ) | $ | (0.13 | ) | ||
| Loss per share from discontinued operations |
— | — | ||||||
| Net loss per common share |
$ | (0.11 | ) | $ | (0.13 | ) | ||
| Weighted average common shares outstanding – basic and diluted |
33,425,044 | 32,040,876 | ||||||
The accompanying notes are an integral part of these condensed financial statements.
4
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (3,671,613 | ) | $ | (4,116,795 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
1,285,147 | 1,284,132 | ||||||
| Stock-based compensation |
1,806 | 285,096 | ||||||
| Loss (Gain) on disposal of assets |
8,559 | (44,869 | ) | |||||
| Changes in operating assets and liabilities excluding impact of acquisition: |
||||||||
| Accounts and long-term receivables |
1,250,009 | 505,755 | ||||||
| Interest receivable |
(51,698 | ) | 149,807 | |||||
| Prepaid expenses and other assets |
247,878 | (776 | ) | |||||
| Inventory |
(22,654 | ) | — | |||||
| Accounts payable |
201,833 | (415,791 | ) | |||||
| Accrued and other current liabilities |
(578,356 | ) | 78,646 | |||||
| Deferred revenue |
(444,175 | ) | (613,925 | ) | ||||
| Net cash used in operating activities |
(1,773,264 | ) | (2,888,720 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchase of property and equipment |
(230,524 | ) | (157,232 | ) | ||||
| Sale of property and equipment |
— | 150,000 | ||||||
| Acquisition costs |
(224,808 | ) | — | |||||
| Cash from acquisition |
2,518,476 | — | ||||||
| Purchase of investments |
(3,042,176 | ) | (3,013,444 | ) | ||||
| Maturities of investments |
6,128,467 | 9,069,781 | ||||||
| Net cash provided by investing activities |
5,149,435 | 6,049,105 | ||||||
| Cash flows from financing activities: |
||||||||
| Repayments of long-term debt |
(606,143 | ) | (1,055,000 | ) | ||||
| Repayments of capital lease obligations |
(28,744 | ) | (49,534 | ) | ||||
| Repayments under revolving line of credit |
(831,514 | ) | — | |||||
| Proceeds from exercise of stock options |
43,725 | 165 | ||||||
| Net cash used in financing activities |
(1,422,676 | ) | (1,104,369 | ) | ||||
| Net (decrease) increase in cash and cash equivalents |
1,953,495 | 2,056,016 | ||||||
| Cash and cash equivalents, beginning of period |
7,157,308 | 5,883,907 | ||||||
| Cash and cash equivalents, end of period |
$ | 9,110,803 | $ | 7,939,923 | ||||
The accompanying notes are an integral part of these condensed financial statements.
5
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 using proprietary systems biology to discover biomarkers to reduce cost, risk and time in the product development cycle as well as to discover inaccessible targets for small molecule discovery, both for its partners and for the Company. The Company is growing the business by partnering with life sciences companies in both healthcare and agriculture, while building its own portfolio of products. Additionally, the Company is leveraging their existing infrastructure to provide services that generate near-term revenue.
The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company had an accumulated deficit of $88.2 million as of March 31, 2004, incurred a net loss of $3.7 million for the three months then ended and expects to incur substantial additional losses for the remainder of 2004.
The Company has historically financed its operations through the sale of common and preferred stock, debt and capital lease financing, payments received from commercial partnerships and government grants. As of March 31, 2004, the Company had total cash and investments of $15.2 million, which is comprised of cash and cash equivalents of $9.1 million and short-term investments of $6.1 million.
The Company expects to continue expanding its operations through internal growth and, possibly, through strategic acquisitions. The Company expects these activities will be funded from existing cash, cash flow from operations, issuances of stock and borrowings under credit facilities. Management believes that these sources of liquidity will be sufficient to fund its operations into 2005. From time to time, the Company evaluates potential acquisitions and other growth opportunities, which might require additional external financing, and the Company may seek funds from public or private issuances of equity or debt securities.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 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, 2003, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2004.
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.
Reclassifications
Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentations, with no effect on previously reported net loss, stockholders’ equity, or net loss per share.
6
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 cash held in escrow for security deposits on the Company’s facilities.
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. 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.
Other Assets
Other assets include intangible assets, resulting the Company’s acquisition of TissueInformatics.Inc (See Note 2), 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 of any software products developed. Accordingly, no costs have been capitalized.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment and intangible assets 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 the carrying amount of an asset may not be recoverable. An impairment is recognized in the event that the net book value of an asset exceeds 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 (or asset group) exceeds its fair value. No impairment loss was required to be recognized during the three months ended March 31, 2004 or 2003.
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
Revenue Recognition
Revenues are derived from commercial partnerships and services and government contracts and grants. Payments from our commercial contracts are generally related to refundable or nonrefundable fees, milestone achievements or assay deliveries. Payments for refundable and nonrefundable fees and milestone achievements are recognized as revenues on a progress to completion basis over the term of the respective commercial partnership, except with respect to refundable fees for which revenue recognition does not commence until the refund right expires. Payments related to assay deliveries are recognized as revenues when accepted by the other party. Payments received under the Company’s commercial partnerships and government contracts and grants are generally non-refundable regardless of the outcome of the future research and development activities to be performed by the Company. Payments from government contracts and grants are recognized as revenues as related expenses are incurred over the term of each contract or grant.