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Financial Statements and Notes - Second Quarter 2006
 

FINANCIAL STATEMENTS

DELTAGEN, INC.

CONSOLIDATED BALANCE SHEETS

Consolidated Balance Sheet

 

 

 

For Fiscal Year Ending 12/31/2005

 

 

 

and Quarters ending 3/31/06 & 6/30/06

Audited

Unaudited

Unaudited

 

 

(In Thousands)

12/31/05

03/31/06

06/30/06

 

 

 

Consolidated

Consolidated

Consolidated

Assets

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

            11,557

            10,434

            10,789

 

Accounts receivable, net

              2,487

              1,561

              3,380

 

Prepaids, Deposits and Tax Assets

              1,503

                 490

                 640

 

 

Total current assets

            15,547

            12,485

            14,809

 

 

 

 

 

 

Property and equipment, net

                 139

                   84

                   73

 

 

 

 

 

 

Non-current portion of deferred tax assets

              1,000

                 848

                 400

 

 

 

 

 

 

 

 

Total assets

            16,686

            13,417

            15,282

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

              4,296

              1,539

              1,591

 

Accrued expenses

                 876

                 80

                 143

 

 

Total liabilities

              5,172

              1,619

              1,734

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

Common stock

                   39

                   39

                   39

 

Treasury Stock

               (867)

               (867)

               (867)

 

Additional paid-in capital

          238,648

          238,648

          217,223

 

Additional paid-in capital - Stock-based compensation

                  -

                  -

21,548

 

Retained Earnings

        (226,306)

        (226,089)

        (224,606)

 

Foreign currency translation adjustment

 -

                   67

                 211

 

 

Total stockholders' equity

            11,514

            11,798

            13,548

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

            16,686

            13,417

            15,282

 

The accompanying notes are an integral part of these consolidated financial statements.

 

DELTAGEN, INC.

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

Consolidated Income Statement and

Statement of Retained Earnings

For Quarters ending 3/31/06 & 6/30/06

 

 

 

 

 

Unaudited

Unaudited

(In Thousands)

03/31/06

06/30/06

 

Consolidated

Consolidated

 

 

 

Revenue

              1,882

              3,749

Royalty and Commission Costs

                 493

              1,125

Stock-Based Compensation Expense

-

123

Other Operating Costs

              1,062

                 767

 

 

 

Income From Operations

                 327

              1,734

 

 

 

Interest Income

                 97

                   87

Loss on disposal of assets

                 (44)

                    -  

 

 

 

Total Other Income

                   53

                   87

 

 

 

Income before provision for income taxes

                 380

              1,821

 

 

 

Provision for income taxes

 

 

   Current income tax expense

                   11

                   39

   Deferred income tax expense

                 152

                 817

   Adjustment for valuation allowance

                    -  

               (518)

 

 

 

Total income tax expense

                 163

                 338

 

 

 

Net Income (Loss)

                 217

              1,483

 

 

 

Retained earnings at beginning of period

        (226,306)

        (226,089)

 

 

 

Retained earnings at end of period

        (226,089)

        (224,606)

The accompanying notes are an integral part of these consolidated financial statements.


DELTAGEN, INC.

CONSOLIDATED CASH FLOW

(UNAUDITED)

Consolidated Cash Flow

 

 

For Quarters ending 3/31/06 & 6/30/06

 

 

 

 

 

Unaudited

Unaudited

(In Thousands)

03/31/06

06/30/06

 

Consolidated

Consolidated

 

 

 

Cash flows from operating activities:

 

 

 

 

 

   Net Income

                 217

              1,483

 

 

 

Adjustments to reconcile net income to net cash

 

used by operating activities

 

 

     Depreciation

                   11

                   11

     Loss on disposal of fixed assets

                   44

                    -  

     Stock-based compensation expense

-

123

 

 

 

(Increase) / Decrease in operating assets

 

 

     Accounts receivable

                 926

            (1,819)

     Prepaids, deposits and tax assets

              1,165

               298

 

 

 

Increase / (Decrease) in operating liabilities

 

 

     Accounts payable

            (2,757)

52

     Accrued Expenses

               (796)

                 63

 

 

 

Net Increase (Decrease) in cash

            (1,190)

                 211

 

 

 

Effect of foreign exchange rate change on cash

                   67

                 144

 

 

 

Cash at beginning of period

            11,557

            10,434

 

 

 

Cash at end of period

            10,434

            10,789

The accompanying notes are an integral part of these consolidated financial statements.


DELTAGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR SECOND QUARTER 2006

June 30, 2006

1.  Basis of Presentation

The accompanying consolidated financial statements of Deltagen, Inc. ("Deltagen" or the "Company") for the three months ended June 30, 2006 are unaudited, but have been prepared on an accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. 

These consolidated financial statements have been prepared so that they present fairly, in the opinion of management, the Company's financial position and its results of operations and its cash flows for the period presented.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. 

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

Operating results for the three-month period ended June 30, 2006 or any other quarter are not necessarily indicative of the results that may be expected or achieved for the year ended December 31, 2006.

Under our revenue recognition policy, revenues are recognized when a definitive agreement with a determinable price exists, product delivery and/or invoicing (in each case where there is reasonable assurance of meeting customer-specified criteria) have occurred, and collectibility is reasonably assured.

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 are recorded at cost less accumulated depreciation and amortization.  Depreciation and amortization are computed using the straight-line method over the estimated useful lives 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 are removed from the accounts and any resulting gain or loss on disposition is recognized in the current year.

                Property and equipment is summarized by major classification as follows:

 

(Dollars in Thousands)

 

 

 

 

 

Computers

$

1,370

 

Other furniture and equipment

 

340

 

 

 

 

 

 

 

1,710

 

Less: Accumulated depreciation

 

(1,637)

 

 

 

 

Net

$

73

 

The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The provision for income taxes is as follows:

 

(Dollars in Thousands)

Current:

$

 

 

 

Federal

 

         39

 

Deferred:

 

 

 

 

Federal

 

623

 

 

State

 

194

 

 

 

 

 

           Total

$

       856

 

The components of the net deferred tax assets as of June 30, 2006 are as follows:

 

(Dollars in Thousands)

Deferred tax assets:

 

 

 

Net operating loss carryforward

$

68,224

 

Research and experimental credits

 

      7,308

 

Cumulative temporary differences

 

6

 

 

 

   Total

 

75,538

 

 

 

Deferred tax liabilities:

 

 

 

Capitalized research and development

 

      3,992

 

 

 

 

Net deferred tax assets

 

71,546

 

 

 

 

 

Valuation allowance

 

70,548

 

 

 

 

 

Total

 

998

 

 

 

 

 

Less: Current portion of deferred tax assets

 

598

 

 

 

 

 

Non-current portion of deferred tax assets

$

400

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, in the Company's opinion, 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.

For further information, refer to the financial statements and related notes posted on the Company's website (www.deltagen.com).

2.   Treatment of Subsidiaries

                The consolidated financial statements include the accounts and activities of the Company's subsidiaries, Deltagen Research Laboratories, L.L.C., Deltagen Europe, S.A. and Xenopharm, Inc.  Intercompany transactions and balances are eliminated in consolidation.  The Company uses the U.S. dollar as the functional currency for its foreign subsidiary.  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 translation adjustments reflect an increase in the U.S. dollar value of cash and accounts receivable held at Deltagen Europe, S.A. due to the change in the Euro-U.S. dollar exchange rate since the end of 2005.

3.   Stock-Based Compensation

The Company's stock awards are governed by its 2000 Stock Incentive Plan (a qualified stock option plan under Internal Revenue Code), as amended (the "Plan"). The exercise price of stock options under the Plan is determined by the Compensation Committee of the Board of Directors of the Company (the "Committee"). No incentive stock option is exercisable after 10 years from the date of grant.

Prior to January 1, 2006, the Company accounted for the Plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation, which did not require that compensation cost be recognized for the Company's stock options provided the option exercise price was established at the common stock fair market value on the date of grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), by which the compensation cost for all stock-based payments granted subsequent to January 1, 2006 are based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R).  The Company adopted this statement using the modified prospective transition method, which applies to the compensation expenses recognition provision to new awards and to any awards modified, repurchased or cancelled after the January 1, 2006 adoption date. Additionally, for any unvested awards outstanding at the option date, the company will recognize the compensation expenses over the remaining vesting period. Stock-based compensation is recognized on the straight-line basis.

On March 30, 2006, the Company issued options to purchase in the aggregate 5,430,000 shares of common stock to certain directors and officers of the Company.  For more information on these stock option grants, please refer to Management's Discussion & Analysis for the first quarter of 2006, which is posted on the Company's website.

As a result of adopting Statement 123(R) on January 1, 2006, the Company's net income for the three-month period ended June 30, 2006 is approximately $123,000 lower than it would have been had the Company continued to account for stock-based compensation under APB Opinion No. 25. The total stock-based compensation cost relating to Statement 123(R) for the three-month period ended June 30, 2006 has been included in the consolidated statement of operations under Operating Cost ($2,015,000) in accordance with Staff Accounting Bulletin ("SAB") No. 107.

The following table summarizes all stock option transactions for the Company under the Plan for the period from January 1, 2006 through June 30, 2006.

 

 

 

Weighted Average

Weighted Average Remaining

Weighted Average

Aggregate

 

 

Stock

Exercise

Contractual

Grant Date

Intrinsic

As of 1/1/2006

Options

Price

Life

Fair Value

Value

Outstanding

 

675,712

 

 

 

 

Exercisable

 

671,507

 

 

 

 

Nonvested

 

4,205

 

 

 

 

 

 

 

 

 

 

 

Period activity

 

 

 

 

 

Issued

 

5,430,000

$0.47

 

$0.32

 

Exercised

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

 

As of 6/30/2006

 

 

 

 

 

Outstanding

 

6,105,712

$1.01

$9.27

$0.88

$1,010,350

Exercisable

 

1,729,837

$2.38

$8.03

$2.29

$222,730

Nonvested

 

4,375,875

$0.47

$9.75

$0.32

$787,620

No stock options were granted during the three-month period ended June 30, 2006.

The following table summarizes the information about stock options outstanding at June 30, 2006:

Outstanding:

 

Weighted Average

Weighted Average Remaining

Range of

 

Stock Options

Exercise

Contractual

Exercise Prices

Outstanding

Price

Life

$0.25 -$4.00

$

 5,750,855

$

       0.49

9.53 years

 

$4.01- $8.00

 

      99,285

 

       5.80

4.62 years

 

$8.01-$13.31

 

  255,572

 

    10.93

5.02 years

 

 

$

6,105,712

 

$

    1.01

 

9.26 years

 

                The following table summarizes the information about stock options exercisable at June 30, 2006:

Exercisable:

 

 

Range of

Exercise Prices

Stock Options

Exercisable

Weighted Average Exercise Price

 

 

 

 

$0.25 -$4.00

    $1,374,980

           $0.55

 

$4.01- $8.00

         $99,285

           $5.80

 

$8.01-$13.31

       $255,572

         $10.93

 

 

$1,729,837

$2.38

 

The fair value of each option grant is estimated using the Black-Scholes option pricing method. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period (4 years). Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical price data and on peer group companies as provided by the Company's management. The average expected life was based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.

                The weighted average assumptions used in the Black-Scholes option pricing model are as follows:

 

 

FY2006

 

 

 

Expected stock price volatility

 

71.8- 75.1%

Weighted-Average Volatility

 

74.3%

Risk-free interest rate

 

4.77%

Expected life of options (years)

 

5.75-6.00 years

Expected dividend yield

 

0.00%

Deltagen has not issued dividends and has no current plans to issue dividends in the future.

                For the six-month period ending June 30, 2006, no stocks options were exercised and the total fair value of stock awards vested was $344,023.

                As of June 30, 2006, the total unrecognized compensation cost related to non-vested stock options was approximately $1,626,000. This cost is expected to be recognized over a weighted average period of 2.09 years.

4.   Adjustments to Full-Year 2005 and First Quarter 2006 Financials

                The Company issued and posted on its website (www.deltagen.com) on March 28, 2006 its unaudited financial results for the year ended December 31, 2005.  Subsequently, an audit of the December 31, 2005 balance sheet was commenced and the audited balance sheet for 2005 will be posted on the Company's website.  The Company does not intend to update its Management's Discussion & Analysis and Risk Factors for 2005. 

As a result of the audit, an adjustment to the 2005 consolidated balance sheet was made with respect to the settlement of a claim that had been filed in Deltagen's chapter 11 bankruptcy case relating to a lease.  On November 7, 2003, Woodside Technology Center, LLC ("Woodside") filed a proof of claim in our chapter 11 case, in which it asserted the right to payment of $3,787,600.20 on a general unsecured basis relating to a lease of real property.  On June 14, 2005, Woodside amended its claim, in which it asserted the right to payment of $2,178,429 on a general unsecured basis and $799,633 on a secured basis, for a total claim of $2,978,062.  As of December 31, 2005, we were continuing negotiations with Woodside for settlement of the Woodside claim.  On March 20, 2006, Deltagen and Woodside consensually resolved the Woodside claim, in which Deltagen agreed to make payment to Woodside before March 31, 2006 in the amount of $1,846,248 as a single allowed, general unsecured, prepetition claim.  This settlement amount, which was paid during the first quarter of 2006, was $363,000 less than had been reserved (as of December 31, 2005) within the claims pool for payment of the claim.  The adjustment is also reflected in the beginning retained earnings balance for 2006.

A second adjustment arising from the audit was the establishment of a deferred tax assets item.  The components of the net deferred tax assets as of December 31, 2005 were:

 

($ in Thousands)

Deferred Tax Assets:

 

 

   Net operating loss carry forwards

 

   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

                In the 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.  The Company 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 June 30, 2006, 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 June 30, 2006, 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.

 

©2006 Deltagen, Inc. All rights reserved.