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Report on Audit for Year Ending December 31, 2005
 

DELTAGEN, INC.

REPORT ON AUDIT OF CONSOLIDATED BALANCE SHEET

YEAR ENDED DECEMBER 31, 2005

 

Patel & Associates

Certified Public Accountant

266 17th Street, Suite 200

Oakland, California 94612-4124

Telephone: (510) 452-5051

Facsimile: (510) 452-3432

E-mail: ramesh@patelcpa.com

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders of
Deltagen, Inc.
San Carlos, California

We have audited the accompanying consolidated balance sheet of Deltagen, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 2005. This consolidated balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated balance sheet presentation. We believe that our audit of the consolidated balance sheet provides a reasonable basis for our opinion.

In our opinion, the accompanying consolidated balance sheet presents fairly, in all material respects, the financial position of Deltagen, Inc. and subsidiaries as of December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Oakland, California
June 19, 2006


DELTAGEN, INC.

 

CONSOLIDATED BALANCE SHEET

 

AS OF DECEMBER 31, 2005

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

11,557

 

Accounts receivable, net

 

2,487

 

Prepaids, deposits and tax assets

 

1,503

 

 

 

Total current assets

 

15,547

 

 

 

 

 

 

 

 

 

Property and equipment - net (Note 4)

 

139

 

 

 

 

 

Non-current portion of deferred tax assets (Note 6)

 

1,000

 

 

 

 

 

Total assets

$

16,686

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER'S EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

4,296

 

Accrued expenses

 

876

 

 

 

 

 

Total liabilities

 

5,172

 

 

 

 

 

Stockholder's equity

 

 

 

Common stock

 

39

 

Treasury stock

 

(867)

 

Additional paid-in-capital

 

238,648

 

Retained earnings

 

(226,306)

 

 

 

 

 

Total stockholder's equity

 

11,514

 

 

 

 

 

Total liabilities and stockholder's equity

$

16,686

 

 

 

 

 

The accompanying notes are an integral part of this financial statement

 


DELTAGEN, INC.

NOTES TO CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2005

NOTE 1. NATURE OF BUSINESS

Deltagen, Inc. ("Deltagen" or the "Company") was founded in 1997 in San Carlos, California. Deltagen is a leading provider of drug discovery tools to the biopharmaceutical industry. Deltagen offers a suite of programs designed to enhance the efficiency of drug discovery including access to biological models and small-molecule drug targets.

NOTE 2. Reorganization and Petition for Relief under Chapter 11

On June 27, 2003, the Company filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code ("Bankruptcy Code"). After filing for bankruptcy, the Company continued to operate its business and manage its properties as a debtor-in-possession under sections 1107(a) and 1108 of the Bankruptcy Code. On May 19, 2004, the Company caused its wholly-owned subsidiary, Deltagen Proteomics, Inc. ("DPI"), to commence a case under Chapter 11 of the Bankruptcy Code. DPI's bankruptcy case was jointly administered, for procedural purposes, with the Company's case.

On September 30, 2005, the Company and DPI filed with the bankruptcy court a Joint Plan of Reorganization of Deltagen, Inc., and Deltagen Proteomics, Inc. (the "Reorganization Plan"), along with a Disclosure Statement (the "Disclosure Statement"). The purpose of the Disclosure Statement was to provide creditors of Deltagen and DPI with adequate information to make an informed judgment about the Reorganization Plan before voting on the Reorganization Plan.

On November 15, 2005, the Bankruptcy Court entered its order approving the Disclosure Statement, and confirming the Reorganization Plan. The effective date of the Reorganization Plan was November 29, 2005.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The Company maintains its records and prepares its financial statements on an accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

DELTAGEN, INC.

NOTES TO CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2005

Basis of Consolidation

The consolidated balance sheet includes the accounts of Deltagen and its wholly-owned subsidiaries. The consolidated balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Inter-company balances and transactions have been eliminated.

 

Foreign Currency Translation

The Company uses the U.S. dollar as the functional currency for all of its foreign subsidiaries. Accordingly, gains and losses from the translation of foreign currency amounts reflected on the balance sheet into U.S. dollars are included in the results of operations. The effect of foreign currency exchange rate fluctuations was not material for the period presented.

Cash and Cash Equivalents

Cash and cash equivalents include cash in Banks and Money Market Mutual Funds with a maturity of three months or less when purchased.

 

Property and Equipment

 

Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful life of assets ranging from three to seven years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred.

When an asset is sold or retired, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss on disposition is recognized in the current year.

Use of Estimates

The preparation of consolidated balance sheet in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the consolidated balance sheet and accompanying disclosures. Although these estimates are based on management's best knowledge of current events and actions that the company may undertake in the future, actual results may differ from those estimates.

DELTAGEN, INC.

NOTES TO CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2005

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment is summarized by major classification as follows:

 

(Dollars in Thousands)

 

 

 

 

 

Computers

$

1,371

 

Other furniture and equipment

 

463

 

 

 

 

 

 

 

1,834

 

Less: Accumulated depreciation

 

(1,695)

 

 

 

 

Net

$

139

 

NOTE 5: CONCENTRATION OF CREDIT RISK

         The Company and its subsidiaries maintain cash balances in banks, which are insured by the Federal Deposit Insurance Corporation up to $100,000. As of December 31, 2005, the Company's uninsured cash balance totaled $9,342,000 and subsidiaries' uninsured cash balances totaled $1,786,000.

         Approximately 66% of gross accounts receivable as of December 31, 2005 relate to revenues under the Company's contract with the National Institutes of Health.

NOTE 6: INCOME TAX

The components of the net deferred tax assets as of December 31, 2005 are as follows:

(Dollars in Thousands)

Deferred tax assets:

 

 

Net operating loss carryforward

$

69,195

Research and experimental credits

 

7,308

Cumulative temporary differences

 

6

 

 

 

Total

 

76,509

 

 

 

Deferred tax liabilities:

 

 

Capitalized research and development

 

3,992

 

 

 

Net deferred tax assets

 

72,517

 

 

 

Valuation allowance

 

71,066

 

 

 

Total

 

1,451

 

 

 

Less: Current portion of deferred tax assets

 

451

 

 

 

Non-current portion of deferred tax assets

$

1,000


 

DELTAGEN, INC.

NOTES TO CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2005

In its calculation of the deferred tax assets, the Company established a 98% valuation allowance due to uncertainties relating to future income and the realization of such deferred tax assets. Management currently intends to evaluate and adjust on an ongoing basis, based on expected income, the recoverability of the deferred tax assets and the level of the valuation allowance.

As of December 31, 2005, the Company had federal and California net operating loss carryforwards of approximately $172,514,000 and $119,303,000 available to reduce future federal and California taxable income, respectively. These federal and California loss carryforwards begin to expire in 2006 and 2015, respectively, if not utilized. The extent to which these loss carryforwards can be used to offset future taxable income may be limited under Section 382 of the Internal Revenue Code and applicable state law.

As of December 31, 2005, the Company had California tax credit carryforwards of approximately $7,308,000 and federal tax credit carryforwards of approximately $58,648,000. The federal tax credit carryforwards begin to expire in 2018, if not utilized. The California tax credit carryforwards begin to expire in 2008, if not utilized. The extent to which these tax credit carryforwards can be used to offset future taxes may be limited under Section 383 of the Internal Revenue Code and applicable state law.

NOTE 7: IMPAIRMENT OF LOANS


The Company evaluates the collectibility of notes receivable in accordance with SFAS No. 114, "Accounting by Creditors For Impairment of a Loan." SFAS No. 114 states that a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. The Company reviews outstanding notes receivable on a periodic basis to ensure that each is fully collectible by reviewing the financial condition of its debtors. If the Company concludes that it will be unable to collect all amounts due, the Company will record an impairment charge based on the present value of expected future cash flows, discounted at the loan's effective interest rate. During the year ended December 31, 2005, the Company incurred $288,000 of impairment losses related to two notes receivable.

NOTE 8: PATENT-RELATED EXPENSES

The Company has incurred expenditures relating to the pursuit of patent rights covering certain of its products and technologies. These expenditures have not been capitalized because, as per management, the probability of future benefits from such patent rights cannot at present be reasonably assessed and/or the useful life of such assets cannot be reasonably estimated.

NOTE 9: CONTINGENCIES

There is a possibility that any patents issued to Deltagen could be challenged, invalidated or circumvented in the future. Also, litigation may be necessary to enforce any patents issued to Deltagen, to protect trade secrets or know-how owned by Deltagen or to determine the enforceability, scope and validity of the proprietary rights of others.


©2006 Deltagen, Inc. All rights reserved.