SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------------------------------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: ______________ to ________________
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Commission file number 0 - 26476
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SAFESCIENCE, INC.
(Exact name of Registrant as specified in its charter.)
NEVADA 33-0231238
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification no.)
Park Square Building
31 St. James Avenue, 8th Floor
Boston, Massachusetts 02116 (Address of principal
executive offices, including zip code.)
(617) 422-0674
Registrant's telephone number, including area code.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by the Section 13 or 15(d) of the Securities 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 [ ]
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value per share, at April 30, 2000 was 17,593,102 shares.
<PAGE>
SAFESCIENCE, INC.
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 (Unaudited) .................. 2
Consolidated Statements of Operations
for the Three Months Ended March 31, 2000
and 1999 (Unaudited)................................ 3
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2000
and 1999 (Unaudited)................................ 4
Notes to Unaudited Consolidated Financial Statements.. 5-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 12-23
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds............ 24
Item 6. Exhibits and Report on Form 8-K....................... 24
Signatures.............................................................. 26
1
<PAGE>
<TABLE>
SAFESCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<CAPTION>
ASSETS
March 31, December 31,
2000 1999
------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents 9,690,940 3,377,067
Accounts receivable, net of allowances of approximately
$ 68,000 at March 31, 2000 and $43,000 at December 31, 1999 310,598 95,222
Inventory 478,639 356,211
Prepaid expenses, trade credits and other current assets 605,654 538,823
------------------------------------------
Total current assets 11,085,831 4,367,323
------------------------------------------
Property and equipment, at cost
Computer,office and laboratory equipment 486,673 470,614
Furniture, fixtures and leasehold improvements 217,970 210,274
Motor vehicles 46,100 46,100
------------------------------------------
750,743 726,988
Less-accumulated depreciation (242,097) (207,267)
------------------------------------------
508,646 519,721
------------------------------------------
Other assets:
Notes receivable - related parties (Note 6) 439,008 661,005
Restricted cash 108,128 108,128
Deposits 14,068 14,068
------------------------------------------
Total other assets 561,204 783,201
------------------------------------------
Total assets $ 12,155,681 $ 5,670,245
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable 726,472 484,208
Accrued liabilities 673,619 644,945
Deferred revenue 19,975 19,975
------------------------------------------
Total current liabilities 1,420,066 1,149,128
------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value
Authorized -5,000,000 shares
issued and outstanding - None
- -
Common stock, $.01 par value
Authorized -100,000,000 shares
Issued and outstanding - 17,595,777 and 16,835,923
shares at March 31, 2000 and December 31, 1999, respectively 175,958 168,359
Additional paid-in capital 43,292,056 34,388,615
Note receivable from officer -Issuance of common stock (3,343,750) (3,343,750)
Accumulated deficit (29,388,649) (26,692,107)
------------------------------------------
Total stockholders' equity 10,735,615 4,521,117
------------------------------------------
Total liabilities and stockholders' equity $ 12,155,681 $ 5,670,245
==========================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
SAFESCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
2000 1999
------------------ -------------------
<S> <C> <C>
Sales $ 572,551 $ -
Cost of goods sold
458,374 -
----------------------------------------
Gross profit
114,177 -
----------------------------------------
Operating expenses:
General and administrative 1,275,215 1,390,283
Sales and marketing 860,912 414,537
Research and development 662,941 399,461
----------------------------------------
Total operating expenses 2,799,068 2,204,281
----------------------------------------
Operating loss (2,684,891) (2,204,281)
----------------------------------------
Other income (expense):
Other expense (32,710) (1,417)
Interest income 21,059 32,353
----------------------------------------
Total other income (expense) (11,651) 30,936
----------------------------------------
Net loss (2,696,542) (2,173,345)
========================================
Basic and diluted net loss per common share $(0.16) $(0.15)
========================================
Weighted average number of common
shares outstanding 17,143,728 14,762,172
========================================
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
3
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<TABLE>
SAFESCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------------------
2000 1999
------------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (2,696,542) (2,173,345)
Adjustments to reconcile net loss to net cash
used in operating activities:
Operating expenses paid in common
stock and options
405,611 655,206
Depreciation and amortization
34,830 22,288
Changes in assets and liabilities:
Accounts receivable (215,376) -
Inventory (122,428) (270,920)
Prepaid expenses and other current assets (66,831) (20,490)
Accounts payable 242,264 159,776
Accrued liabilities
28,674 381,452
----------------------------------------
Net cash used in operating activities (2,389,798) (1,246,033)
----------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (23,755) (104,773)
Repayment of loans to related parties, net
21,997 321
Deposits paid, net
- (11,370)
----------------------------------------
Net cash provided by (used in) investing activities (115,822)
198,242
----------------------------------------
Cash flows from financing activities:
Payments on obligations under capital lease
- (1,144)
Proceeds from sale of common stock, net of issuance costs 8,505,000 5,834,795
Proceeds from exercise of common stock options
429 -
----------------------------------------
Net cash provided by financing activities 8,505,429 5,833,651
----------------------------------------
Net increase in cash and cash equivalents 6,313,873 4,471,796
Cash and cash equivalents, beginning balance 3,377,067 3,439,408
----------------------------------------
Cash and cash equivalents, ending balance $ 9,690,940 $ 7,911,204
========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ - $ 110
========================================
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
4
<PAGE>
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(1) Summary of Significant Accounting Policies
(a) Organization
SafeScience, Inc. (the Company) was formed in 1992 for the research and
development of pharmaceutical products based on carbohydrate chemistry. Today,
the Company has two wholly owned subsidiaries: International Gene Group, Inc.
and SafeScience Products, Inc. The Company has expanded its focus to include
other pharmaceuticals, agricultural, consumer and home and garden products.
International Gene Group, Inc. focuses on the development of carbohydrate-based
pharmaceutical products related to two major areas of disease: cancer and fungal
infections. SafeScience Products, Inc. focuses on developing consumer and home
and garden, industrial and agricultural applications for products some of which
are also based upon carbohydrate chemistries. These products are either licensed
from or jointly developed with third parties (Note 3). SafeScience, Inc.,
International Gene Group, Inc. and SafeScience Products, Inc. maintain an office
in Boston, Massachusetts.
The Company was a development stage enterprise from inception until the third
quarter of 1999.
The Company is producing and marketing its consumer and industrial products
while continuing its efforts toward product research and development and raising
capital. Management anticipates that additional revenues may be derived from
products under development or those developed in the future. Principal risks to
the Company include the successful development and marketing of products to
attain profitable operations, dependence on collaborative partners, the need to
obtain adequate financing to fund future operations, United States Food and Drug
Administration approval and other regulatory agencies, clearance and regulation,
dependence on key individuals and competition from substitute products and
larger companies.
(b) Principles of Consolidation
The Company's consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, International Gene Group, Inc., and
SafeScience Products, Inc. All material intercompany transactions and accounts
have been eliminated in the consolidated financial statements.
(c) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments, consisting of only normal
recurring adjustments, which, in the opinion of management, are necessary for a
fair statement of the results of the interim periods presented. These financial
statements do not include disclosures associated with the annual financial
statements and, accordingly, should be read in conjunction with the attached
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and footnotes for the year ended
December 31, 1999 included in the Company's Form 10-K.
(d) Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentation.
(e) Use of Estimates
5
<PAGE>
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
The preparation of financial statements in conformity with generally accepted
accounting principles 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 operational expenses during the reporting period. Actual
results could differ from those estimates.
(f) Revenue Recognition
The Company recognizes revenue related to product sales upon shipment of the
product. The Company provides for anticipated product returns at the time of
product shipment. Approximately $136,000 or 23.8% of the Company's revenues for
the three months ended March 31, 2000 were derived from a barter transaction.
(See Note 5)
(g) Cash and Cash Equivalents
Cash and cash equivalents at March 31, 2000 were $9,960,940 including $9,678,264
held by a single bank. Of that amount $ 8,722,079 was in an overnight investment
account, which reinvests daily in government securities funds and money market
funds. Restricted cash represents funds held under an irrevocable standby letter
of credit. The letter of credit serves as a security for the Company's facility
lease. The funds are being held in an investment account.
(h) Depreciation and Amortization
The Company provides for depreciation and amortization using straight-line and
accelerated declining balance methods to allocate the cost of property and
equipment over their estimated useful lives as follows:
Asset Classification Estimated Useful Life
-------------------- ---------------------
Computer, office and laboratory equipment 3 - 5 years
Furniture and fixtures 7 years
Motor vehicles 4 years
(i) Research and Development
Research and development costs, which consist primarily of wages, expenses for
consultants, supplies and testing, are charged to operations as incurred.
6
<PAGE>
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(j) Net Loss Per Share
The Company applies Statement of Financial Accounting Standards Statement (SFAS)
No. 128, Earnings per Share. Basic loss per share is computed using the
weighted-average number of common shares outstanding. The dilutive effect of the
potential common shares consisting of outstanding stock options and warrants is
determined using the treasury stock method in accordance with SFAS No. 128.
Diluted weighted average shares outstanding at March 31, 2000 and 1999 excluded
the potential common shares from warrants and stock options because to do so
would be antidulitive for the periods presented. At March 31, 2000 and 1999
there are 259,754 and 650,385 warrants outstanding, respectively, with a
weighted average exercise price of $14.37 and $4.83, respectively, and 541,294
and 153,175 stock options outstanding, respectively, with a weighted average
exercise price of $11.24 and $4.81 respectively.
(k) Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. The comprehensive net loss is the same as net loss for all
periods presented.
(l) Disclosures about Segments of an Enterprise and Significant Customers
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, in the fiscal year ended December 31, 1998. SFAS No.
131 establishes standards for reporting information regarding operating segments
in annual financial statements and requires selected information for those
segments to be presented in interim financial reports issued to stockholders.
SFAS No. 131 also establishes standards for related disclosures about products
and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision-maker, or
decision-making group, in making decisions how to allocate resources and assess
performance. The Company's sales are primarily confined to only one geographic
area. During the three months ended March 31, 2000 84.2% of all sales were in
the United States. The Company's chief decision-maker, as defined under SFAS No.
131, is the chief executive officer. To date, the Company has viewed its
operations and manages its business as two principal operating segments,
cleaning products and pharmaceuticals. Revenues and cost of revenues to date
relates to cleaning products. Expenditures are not currently tracked by segment.
As a result, the financial information disclosed herein represents all of the
material financial information related to the Company's principal operating
segment.
(m) Concentration of Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company has not experienced significant losses
related to receivables from any individual customers or groups of customers in
any specific industry or by geographic area. Due to these factors, no additional
risk beyond amounts provided for returns is believed by management to be
inherent in the Company's accounts receivable. For the three months ended March
31, 2000, twelve customers represented 95% of revenues and 97% of accounts
receivable.
(2) STOCKHOLDER'S EQUITY
(a) Private Placement Offerings
In March 2000, the Company raised $5,000,000 in a private placement offering of
common stock in which 346,021 shares were sold at $14.45 per share. The
purchasers also received a warrant to purchase 108,996 additional shares of
common stock at $15.98 per share exercisable for five years, and a warrant to
purchase shares at $0.01 per share, the number of shares of common stock to be
determined in the future according to a formula based on the then market price
per share compared to the $14.45 per share sales price paid by the purchasers in
the offering. The purchasers have certain rights, including but not limited to,
registration rights, rights-of-first-refusal, and adjustments for certain
events. Net proceeds
7
<PAGE>
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
from the offering were $4,625,000. The purchasers have a
commitment to purchase up to $2,000,000 of additional common stock at $14.45 per
share upon the date at which the registration statement for the initial shares
becomes effective, provided the date is no later than June 29, 2000. In
addition, the purchasers have a commitment to purchase $7,000,000 of additional
common stock at the price equal to the lesser of (i) 110% of the average of the
closing bid prices of the Company's common stock for the four trading days
preceding the closing date of the tranche and (ii) $16.00, with additional
warrants within 190 - 210 days from the closing of the initial transaction
subject to conditions, including but not limited to, market capitalization,
trading volume, and share price conditions.
Also during March 2000, the Company raised an additional $4,000,000 in a private
placement offering of common stock in which 333,334 shares were sold at $12.00
per share. The purchasers also received warrants to purchase 75,758 additional
shares of common stock at $15.98 per share exercisable for five years. Net
proceeds from the offering were $3,880,000. The purchasers have "piggyback"
registration rights in any registered public offering of common shares by the
Company subject to standard underwriter consent and other customary provisions.
(b) Stock Option Plan
The Company has entered into agreements with various employees and consultants
for the grant of stock options and shares of common stock at prices determined
by the Company's Compensation Committee. During the three months ended March 31,
2000, the Company issued 2,061 shares of common stock and recorded charges to
operations of $28,080 relating to those issuances of common stock. During the
three months ended March 31, 1999, the Company granted options to purchase 7,419
shares of common stock and granted 144,615 shares of common stock, and recorded
charges to operations of $54,812 and $600,394 relating to these issuances,
respectively.
8
<PAGE>
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
The following table summarizes all stock option activity to employees and
consultants for services for the three months ended March 31, 2000.
Stock Options
Weighted -
Average
Number Exercise Price
Of Shares Per Share
Balance December 31, 1999 585,424 $ 10.42
Granted - -
Exercised (42,876) .01
Cancelled (1,254) 12.03
-------- -------
Balance March 31, 2000 541,294 $ 11.24
======= =======
As of March 31, 2000, the Company had committed to grant 40,000 shares of common
stock upon the attainment of future milestones.
(c) Warrants
The following table summarizes all warrant activity for the three months ended
March 31, 2000.
Weighted -
Average
Number Exercise Price
Of Shares Per Share
Balance December 31, 1999 75,000 $ 10.40
Issued 184,754 15.98
Exercised - -
-------- -------
Balance March 31, 2000 259,754 $ 14.37
======= =======
(3) LICENSING AGREEMENTS
The Company and Volcani Institute have agreed not to continue their research
program, however, the Company has retained the right to sell licensed products
under a royalty arrangement. During the three months ended March 31, 2000 and
1999, no payments were paid under this agreement.
9
<PAGE>
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(4) INVENTORY
Inventory is stated at lower of cost (first-in, first-out) or market and consist
of the following:
March 31, 2000 March 31, 1999
-------------- --------------
Raw Materials $391,257 $270,920
Finished Goods 87,382 0
---------- --------------
Total Inventory $478,639 $270,920
======== ========
(5) TRADE CREDITS
The Company has entered into a trade agreement with a barter company for the
exchange of goods and services. This barter company purchased approximately
$136,000 of product from the Company during the three months ended March 31,
2000 and paid for these products by issuing $136,000 of advertising credits. The
barter company acquires media time on behalf of the Company; 55% of the net cost
of all media time utilized by the Company is payable in cash and the remaining
45% is charged against the trade credit. As of March 31, 2000 $523,921 of trade
credits were outstanding. The Company expects to utilize these credits by the
end of the year 2000.
(6) NOTES RECEIVABLE - RELATED PARTIES
The Company has the following notes due from:
Principal Amount as of
<TABLE>
Interest
Date of Note Relationship Rate Maturity Date Mar 31, 2000 Dec. 31, 1999
------------ ------------ ---- ------------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Mar 11, 1997 Officer 5.66 % Mar 11, 2002 $ 61,291 $ 85,514
May 14, 1999 Supplier 8.25 May 14, 2001 150,000 150,000
Dec. 30, 1999 Supplier - Dec. 30, 2000 - 50,000
June 14, 1999 Officer 4.92 July 31, 2000 72,000 (1), (2) 72,000
Sept. 3, 1999 Officer 5.50 May 1, 2000 76,000 (1), (2) 200,000
Dec. 31, 1999 Officer 6.75 Sept. 30, 2000 27,347 16,491
Various Dates Others 52,370 87,000
-------------------- --------------
$ 439,008 $ 661,005
==================== ==============
(1) Non-recourse
(2) Secured by pledge of common stock of SafeScience, Inc.
</TABLE>
(7) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Pursuant to SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 , SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
believes that the adoption of SFAS No. 133 will not have a material impact on
its financial results or financial position.
10
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SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") as
amended by SAB 101A, which is effective no later than the quarter ending June
30, 2000. SAB 101 clarifies the Securities and Exchange Commission's views
regarding recognition of revenue. The Company will adopt SAB 101 in the second
quarter of 2000 and is currently evaluating the effects it will have. The
Company anticipates that the adoption of SAB 101 will not have a material
adverse effect on the Company's 2000 financial position and results of
operations.
11
<PAGE>
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto.
OVERVIEW
SafeScience is a "responsible science" company. We have chosen a business
model which spans multiple products, markets, industries and technologies, all
united through a common goal exemplified in our mission "making chemical safety
a lifestyle choice." We are focused on three distinct business segments:
biotechnology, consumer products, and agricultural products, tied together with
a branding and marketing strategy. We have unified these seemingly disparate
businesses by seeking to fill an important need which exists in many areas of
modern life: to provide safe alternatives to products which include hazardous
chemicals. This concept is embodied in the word "SafeScience", which is an idea
and a lifestyle as well as a brand. Our mission is to build a comprehensive
world brand that introduces chemical safety and product performance to human
therapeutics and to many aspects of consumer, institutional and agricultural
life.
We began as a carbohydrate chemical company, and continue to build on
carbohydrate technology. Yet we have expanded our efforts to research, develop
and market products beyond carbohydrate chemistry and into many other safe and
innovative technologies, and are seeking to build a world brand based on our own
products as well as technology we have licensed from or developed with strategic
partners. All our products seek to achieve competitive standards of performance,
as well as a strong environmental, health and safety profile. The SafeScience
brand currently encompasses agricultural products, as well as, products for the
consumer and institutional markets.
We believe that the SafeScience trademark is an important asset. The
mark has been registered in the United States and is in the process of
registration in major markets throughout the world. It communicates our mission
and identity, creating the foundation for a world brand which identifies not
only products but the core principle behind them. The message of the SafeScience
brand has attracted retailers, distributors, consumers, scientists and
development partners to us, allowing us to grow through activities such as
licensing, partnering and joint ventures in research and development. It has
also allowed us to pursue a strategy which is novel in "corporate" or store
branding: a "better-than brand" positioning. Historically, corporate or store
brands have been marketed based purely on price since they are cheaper than
leading brands. Co-branding with SafeScience allows a corporate brand to offer a
qualitative difference, where "SafeScience" is used descriptively, not just as
an identifier of origin.
We conduct our business through two wholly-owned subsidiaries. One
subsidiary, SafeScience Products, Inc. ("SafeScience Products"), operates our
consumer and institutional, agricultural, and horticultural products business.
This subsidiary is also responsible for the marketing and brand management of
all our products. SafeScience Products' consumer and institutional products
currently for sale include an innovative line of safe, industrial-strength
cleaning products, chemically safe consumer household cleaning products, and a
home and garden care line.
12
<PAGE>
We recognized our first revenues in the second quarter of 1999 through
sales of consumer cleaning and home and garden products through various retail
channels. Additional products and product lines are in various stages of
development. In the agricultural, and home and garden markets, SafeScience
Products has developed and/or licensed an array of products that include a
federal EPA-approved safe fungicide and a line of nutrient fertilizers.
Additional fungicide, herbicide and insecticide products are in various stages
of testing and development.
Our second subsidiary, International Gene Group, Inc. ("IGG"), develops
human therapeutics. IGG has been focused on developing GBC-590, a complex
carbohydrate designed to combat cancer tumors and metastasis. Phase I studies
have been completed. Phase IIA United States Food and Drug Administration
("FDA") clinical trials designed to determine the efficacy of GBC-590 for
prostrate, pancreatic, colorectal, and liver cancer are expected to begin in
2000. Phase IIA trials for pancreatic cancer began in the second quarter of
2000. IGG has also developed CAN-296, a complex carbohydrate antifungal agent,
which is being tested in animals to inhibit Candida infections.
Our current strategy is focused on gaining a strong foothold in markets
for our cleaning products, and to commence marketing efforts of our home and
garden products and obtain EPA approval and commence sales for Elexa Plant
Defense Booster ("PDB") for the 2000 season.
In connection with this strategy, we have retained Daymon Associates, a
leading corporate branding and retail sales company, to represent our consumer
cleaning products to its retailing clients internationally. Daymon Associates
has a large customer base of supermarkets, drug stores and mass merchandisers
and works with numerous chains internationally. Our alliance with Daymon
Associates provides our products access to major supermarkets, mass
merchandisers, drug chains, wholesale clubs and food services stores, on both a
national and international level, thus allowing the SafeScience brand a broader
range of exposure than would have been possible had we attempted to approach
retailers on our own. Sales for the three months ended March 31, 2000
attributable to this relationship represented 32% of all revenues.
Our near-term objectives are as follows: to build sales and revenues
for our consumer, industrial and agricultural products; to continue to expand
our product lines by internal research and development, partnering and
licensing; and to proceed through the various phases of FDA trials for our
therapeutic products.
RESULTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 2000 VERSUS MARCH 31, 1999
Sales increased from $0 for the three months ended March 31, 1999 to
$572,551 for the three months ended March 31, 2000. This increase was
attributable to shipments of various household and commercial cleaning products
to individuals, retail and wholesale establishments, institutions, and
municipalities. Approximately $136,000 or 24% of sales in the first quarter of
2000 were in exchange for $136,000 of advertising credits in a barter
transaction.
Cost of goods sold increased from $0 for the three months ended March
31, 1999 to $458,374 for the three months ended March 31, 2000. This increase
was attributable to the shipments referred to in the preceding paragraph. The
Company earned a gross profit on sales of $114,177 or 19.9 % for the three
months ended March 31, 2000.
General and administrative expenses decreased from $1,390,283 for the
three months ended March 31, 1999 to $1,275,215 for the three months ended March
31, 2000, a decrease of $115,068 or 8.3%. This decrease was primarily
attributable to a reduction of expenditures for
13
<PAGE>
professional services provided by outside consultants. Approximately $636,000
and $28,080 of 1999 and 2000 expenses, respectively, were non-cash expenses
resulting from the issuance of options and warrants to purchase common stock and
the grant of common stock for services.
Marketing expenses increased from $414,537 for the three months ended
March 31, 1999 to $860,912 for the three months ended March 31, 2000, an
increase of $446,375 or 107.7%. This increase was due to increases in payroll,
travel and consulting expenses pertaining to the Company's agricultural and
institutional product lines and the continuing support efforts for the Company's
consumer products in the marketplace.
Research and development costs increased from $399,461 for the three
months ended March 31, 1999 to $662,941 for the three months ended March 31,
2000, an increase of $263,480 or 66.0%. This increase was primarily attributable
to additional costs for consultants, salaries and testing for new technologies,
mostly costs of commencement of Phase II clinical trials for GBC-590.
Approximately $19,206 and $0 of such 1999 and 2000 expenses, respectively, were
non-cash expenses resulting from the issuance of options and warrants to
purchase common stock and the grant of common stock for services.
During the first quarter of 2000, the Company agreed to retain Covance
Inc. for the purpose of conducting studies to evaluate the effect of GBC-590 in
clinical trials. The pancreatic cancer study may require approximately 25 months
and may cost approximately $900,000. The colorectal cancer study may require 25
months and may cost approximately $1,650,000. A separate services agreement in
support of the Company's CAN-296 product in an amount up to $360,000 was
executed on January 31, 2000.
Interest income decreased from $32,353 for the three months ended March
31, 1999 to $21,059 for the three months ended March 31, 2000, a decrease of
$11,294 or 34.9%. This decrease was attributable to a reduction in cash
available for temporary investment.
YEAR 2000
The Company relies upon a diverse assortment of computer hardware and
software, the integrated operation of which is essential to the successful
implementation of the Company's operations. In 1999, the Company began a
comprehensive review of its information technology systems and other systems and
equipment and developed a Year 2000 implementation program. Full compliance and
testing was completed before the end of 1999.
Subsequent to the end of 1999, the Company's operations are fully
functioning and have not experienced any significant issues relating to the Year
2000. While the Company is encouraged by the result of its Year 2000 efforts,
monitoring for any potential problems will continue throughout 2000.
Although the Company does not believe that any continued exposure
exists, the Company has a contingency plan for possible Year 2000 issues and
will continue to update that plan based on assessments of any subsequent Year
2000 issues as additional information becomes available.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2000, the Company's operations
utilized cash of approximately $2,389,800 primarily to fund the operating loss.
The Company also invested $23,755 in fixed asset purchases. The uses of cash
were offset by equity financings which resulted in net proceeds of approximately
$8,505,000 to the Company during the three months ended March 31, 2000.
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As of March 31, 2000, the Company's accumulated deficit was
approximately $29,389,000 and cash balances were $9,690,940.
The Company's future is dependent upon its ability to obtain financing
to fund its operations. The Company expects to incur substantial additional
operating costs, including costs related to ongoing research and development
activities, sales and marketing activities, preclinical studies and clinical
trials. The Company believes that its existing funds will be sufficient to fund
its operating expenses and capital requirements as currently planned through the
end of 2000.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Pursuant to SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 , SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
believes that the adoption of SFAS No. 133 will not have a material impact on
its financial results or financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") as
amended by SAB 101A, which is effective no later than the quarter ending June
30, 2000. SAB 101 clarifies the Securities and Exchange Commission's views
regarding recognition of revenue. The Company will adopt SAB 101 in the second
quarter of 2000 and is currently evaluating the effects it will have. The
Company anticipates that the adoption of SAB 101 will not have a material
adverse effect on the Company's 2000 financial position and results of
operations.
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MARKET RISK
The Company is exposed to market risk related to changes in interest
rates as well as changes in currency exchange rates as measured against the U.S.
dollar and each other which could positively or negatively affect results of
operations and retained earnings. As of March 31, 2000, the Company has
evaluated its risk and determined that any exposure to currency exchange is not
significant to the Company's overall consolidated financial results. There can
be no assurance that the Company's exposure will remain at these levels,
especially in the event of significant and sudden fluctuations in the value of
local currencies. The Company does not use derivative financial instruments for
speculative or trading purposes.
INTEREST RATE SENSITIVITY
The Company maintains short-term investments in an overnight money
market account comprised of U.S. treasury bills. If market interest rates were
to increase immediately and uniformly by 10% from levels that existed at March
31, 2000, the fair value of the portfolio would decline by an immaterial amount.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING
SAFESCIENCE, INC. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO THE
COMPANY OR THAT IT CURRENTLY DEEMS IMMATERIAL MAY ALSO IMPAIR ITS BUSINESS
OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE COMPANY'S BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
THOSE CASES, THE TRADING PRICE OF THE COMMON STOCK COULD DECLINE.
WE HAVE EXPERIENCED SIGNIFICANT OPERATING LOSSES THROUGHOUT OUR
HISTORY, WE EXPECT THESE LOSSES TO CONTINUE AND WE MAY NOT ACHIEVE PROFITABILITY
IN THE FUTURE
We began operations more than seven years ago and began to generate
revenue only in the second quarter of 1999. Through March 31, 2000, we have only
generated an aggregate of $1,941,000 from product sales. We have incurred
approximately $29.4 million of operating losses since our inception, including
$12.3 million in the year ended December 31, 1999 and $2.7 million for the three
months ended March 31, 2000. Our operating losses can be expected to continue
for the foreseeable future.
MANY OF OUR PRODUCTS ARE STILL IN DEVELOPMENT, THERE ARE UNCERTAINTIES
ASSOCIATED WITH RESEARCH AND DEVELOPMENT ACTIVITIES AND WE MAY BE UNABLE TO
BRING NEW PRODUCTS TO MARKET
Many of our proposed products require further research, development,
laboratory testing, regulatory approval and/or demonstration of commercial scale
manufacturing before they can be proven to be commercially viable. Many of these
proposed products are in the development stage and are subject to the risks
inherent in the development of new products, particularly those products based
upon biotechnology. Potential products that appear to be promising at early
stages of development may not reach the market for a number of reasons. Such
reasons include the possibilities that potential products are found during
testing to be ineffective, that they fail to receive necessary regulatory
approvals, are difficult or uneconomical to manufacture on a large scale, fail
to achieve market acceptance or are precluded from commercialization by
proprietary rights of third parties. We cannot predict with any degree of
certainty when, or if, the research,
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development, testing and/or regulatory approval process for our proposed
products will be completed. Our product development efforts may be unsuccessful,
required regulatory approvals from U.S. or foreign authorities may not be
obtained, and products, if introduced, may not be capable of being produced in
commercial quantities at reasonable costs or be successfully marketed. The
failure of our research and development activities to result in any commercially
viable products or technologies would materially adversely affect our future
prospects.
WE DERIVE ALMOST ALL OF OUR REVENUES FROM A SMALL NUMBER OF CUSTOMERS
AND OUR REVENUES MAY DECLINE SIGNIFICANTLY IF ANY CUSTOMER CANCELS OR DELAYS A
PURCHASE OF OUR PRODUCTS
We derive the majority of our revenues from a small number of
customers. Our business would be seriously harmed if we do not generate as much
revenue as expected from these customers or if any of these customers cease
purchasing our products. For the year ended December 31, 1999 and the three
months ended March 31,2000, 96% and 95% of our revenues came from four and
twelve customers, respectively. Present and future customers may terminate their
purchasing arrangements with us or significantly reduce or delay their orders.
The loss of any one of our major customers or the delay of significant orders
from such customers, even if only temporary, could reduce or delay our
recognition of revenues, harm our reputation in the industry and reduce our
ability to accurately predict cash flow, and, as a consequence, could seriously
harm our business, financial condition and results of operations.
IF WE ARE UNABLE TO SECURE A PATENT ON OUR CANCER DRUG GBC-590 OR IF
EXISTING PATENTS IMPAIR OUR RIGHTS TO OUR CANCER DRUG, OUR ABILITY TO GENERATE
REVENUES FROM GBC-590 WOULD BE SEVERELY HARMED
We rely significantly upon proprietary technology. To the extent that
we currently rely upon unpatented, proprietary technology, processes and
know-how and the protection of such intellectual property by confidentiality
agreements, others may independently develop similar technology and know-how or
confidentiality may be breached.
We have applied for a patent on GBC-590 but no patent has been issued.
Our GBC-590 technology may not be granted patent protection, and may infringe on
patents owned by others. A patent has been granted on a compound which is
similar to GBC-590, the claims of which conflict with certain of the claims in
the GBC-590 patent application. The degree of patent protection, if any, we will
obtain for GBC-590 is unclear. The patent on GBC-590 may in fact not be granted
or, if granted, it may be limited in such a way as to materially affect our
ability to produce, market and sell GBC-590.
Any claims against us or any purchaser or user of our products or
patents, including GBC-590, asserting that our products or patents infringe or
may infringe proprietary rights of third parties, if determined adversely to us,
could have a material adverse effect on our business, financial condition or
results of operations. Any claims, with or without merit, could be
time-consuming, result in costly litigation, divert the efforts of our technical
and management personnel, cause product shipment delays, disrupt our
relationships with our customers or require us to enter into royalty or
licensing agreements, any of which could have a material adverse effect upon our
operating results. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. In the event a claim against us
is successful and we
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cannot obtain a license to the relevant technology on acceptable terms, license
a substitute technology or redesign our products to avoid infringement, our
business, financial condition and results of operations would be materially
adversely affected.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES AND IF WE ARE
UNABLE TO CONTINUE LICENSING THIS TECHNOLOGY WE MAY BE UNABLE TO SUSTAIN OR
INCREASE OUR REVENUES
We license technology from third parties for use with our products. We
anticipate that we will continue to license technology from third parties in the
future. This technology may not continue to be available on commercially
reasonable terms, if at all. Some of the technology we license from third
parties would be difficult to replace. The loss of any of these technology
licenses would result in delays in the availability of our products until
equivalent technology, if available, is identified, licensed and integrated. The
use of replacement technology from other third parties would require us to enter
into license agreements with these third parties, which could result in higher
royalty payments and a loss of product differentiation.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE AGRICULTURAL AND MEDICAL
COMMUNITIES OUR BUSINESS WILL SUFFER
Two of our three principal divisions are agricultural products and
pharmaceuticals. Commercial sales of our proposed products in these areas, for
use as fungicides or therapeutics, will substantially depend upon the products'
efficacy and on their acceptance by the agricultural and medical communities.
Widespread acceptance of our products will require educating the agricultural
and medical communities as to the benefits and reliability of the products. Our
proposed products may not be accepted, and, even if accepted, we are unable to
estimate the length of time it would take to gain such acceptance.
IF THE THIRD PARTIES WE RELY ON FOR MANUFACTURING OUR PRODUCTS ARE
UNABLE TO PRODUCE THE NECESSARY AMOUNTS OF OUR PRODUCTS, DO NOT MEET OUR QUALITY
NEEDS OR TERMINATE THEIR RELATIONSHIPS WITH US, OUR BUSINESS WILL SUFFER
We do not presently have our own manufacturing operations, nor do we
intend to establish any unless and until in the opinion of our management, the
size and scope of our business so warrants. While we have established
manufacturing relationships with several firms that we believe will provide the
capability to meet our anticipated requirements for the foreseeable future, we
have not entered into any long-term arrangements for manufacturing and such
arrangements may not be obtained on desirable terms. Therefore, for the
foreseeable future, we will be dependent upon third parties to manufacture our
products.
Our reliance on independent manufacturers involves a number of risks,
including the absence of adequate capacity, the unavailability of, or
interruptions in, access to necessary manufacturing processes and reduced
control over delivery schedules. If our manufacturers are unable or unwilling to
continue manufacturing our products in required volumes, we will have to
identify acceptable alternative manufacturers. The use of a new manufacturer may
cause significant interruptions in supply if the new manufacture has difficulty
manufacturing products to our specifications. Further, the introduction of a new
manufacturer may increase the variation in the quality of our products.
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WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGES IN THE
MARKETS IN WHICH WE COMPETE, AND OUR FAILURE TO SUCCESSFULLY COMPETE OR ADOPT TO
CHANGING TECHNOLOGY COULD MAKE IT DIFFICULT TO ACQUIRE AND RETAIN CUSTOMERS
Many companies, including large pharmaceutical, chemical, biotechnology
and agricultural concerns, universities and other research institutions, with
financial resources and research and development staffs and facilities
substantially greater than ours, may develop or attempt to develop products that
compete with our products. These companies may have the ability to devote far
greater resources to researching, developing and marketing their products than
we are able to do. In addition, the biotechnology industry is one in which
technological change is extremely rapid. Our ability to anticipate changes in
technology and industry standards together with regulatory changes and to
successfully develop and introduce new and enhanced products on a timely basis
will be significant factors in our ability to grow and remain competitive. Any
products which we do develop may become technologically obsolete before we have
had the ability to realize significant revenues or profits.
OUR FAILURE TO MEET PRODUCT RELEASE SCHEDULES WOULD MAKE IT DIFFICULT
TO PREDICT OUR QUARTERLY RESULTS AND MAY CAUSE OUR OPERATING RESULTS TO VARY
SIGNIFICANTLY
Delays in the planned release of our products may adversely affect
forecasted revenues and create operational inefficiencies resulting from
staffing levels designed to support the forecasted revenues. Our failure to
introduce new products on a timely basis could delay or hinder market acceptance
and allow competitors to gain greater market share.
CERTAIN OF OUR BUSINESSES ARE SUBJECT TO SIGNIFICANT GOVERNMENT
REGULATION AND FAILURE TO ACHIEVE REGULATORY APPROVAL OF OUR PRODUCTS WOULD
SEVERELY HARM OUR BUSINESS
The FDA regulates the manufacture, distribution and promotion of
pharmaceutical products in the United States pursuant to the Federal Food Drug
and Cosmetic Act and related regulations. We must receive premarket approval by
the FDA for any commercial sale of our pharmaceutical products. Before receiving
such approval we must provide proof in human clinical trials of the nontoxicity,
safety and efficacy of our pharmaceutical products, which trials can take
several years. Premarket approval is a lengthy and expensive process. We may not
be able to obtain FDA approval for any commercial sale of our product. By
regulation, the FDA has 180 days to review an application for approval to market
a pharmaceutical product; however, the FDA frequently exceeds the 180-day time
period. In addition, based on its review, the FDA may determine that additional
clinical trials are required. We will not generate any revenues in connection
with our pharmaceutical products unless and until we obtain FDA approval to sell
our products in commercial quantities for human application.
The investigation, manufacture and sale of agricultural products is
subject to regulation by the EPA, including the need for approval before
marketing, and by comparable foreign and state agencies. Few of our agricultural
products, will be able to be commercially marketed for use either in the United
States or other countries without first obtaining the necessary approvals. While
we hope to obtain regulatory approvals for our proposed products, we may not
obtain these approvals on a timely basis, if at all.
REIMBURSEMENT PROCEDURES AND FUTURE HEALTHCARE REFORM MEASURES ARE
UNCERTAIN AND MAY ADVERSELY IMPACT THE SALE OF OUR PHARMACEUTICAL PRODUCTS
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Our ability to sell our pharmaceutical products successfully will
depend in part on the extent to which government health administration
authorities, private health insurers and other organizations will reimburse
patients for the costs of our pharmaceutical products and related treatments. In
the United States, government and other third-party payers have sought to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new pharmaceutical products approved for marketing by the FDA.
In some cases, these payers may refuse to provide any coverage for uses of
approved products to treat medical conditions even though the FDA has granted
marketing approval. Healthcare reform may increase these cost containment
efforts. We believe that managed care organizations may seek to restrict the use
of new products, delay authorization to use new products or limit coverage and
the level of reimbursement for new products. Internationally, where national
healthcare systems are prevalent, little if any funding may be available for new
products, and cost containment and cost reduction efforts can be more pronounced
than in the United States.
ISSUANCES OF OUR SECURITIES ARE SUBJECT TO FEDERAL AND STATE SECURITIES
LAWS AND CERTAIN PRIOR OFFERINGS OF OUR SECURITIES MAY NOT HAVE COMPLIED WITH
APPLICABLE SECURITIES LAWS
Issuances of securities are subject to federal and state securities
laws. Certain prior private placement offerings of our securities may not have
complied with requirements of applicable state securities laws. In such
situations a number of remedies may be available to regulatory authorities and
stockholders who purchased securities in such offerings, including, without
limitation, rescission rights.
WE HAVE LIMITED MARKETING ARRANGEMENTS IN PLACE AND OUR SALES FORCE IS
SMALL AND THUS MAY BE UNABLE TO INCREASE OR SUSTAIN OUR REVENUES
We may be unable to enter into arrangements with one or more
agricultural, chemical and/or pharmaceutical companies to market certain of our
products on favorable terms, and may therefore seek to market such products
through independent distributors. Any independent distributors through which we
distribute such products may also market competitive products. We may not be
able to enter into distribution arrangements with terms which are satisfactory
to us. We have only recently begun to develop our own sales force and its size
is presently limited and may be inadequate for the sales and marketing
activities that we plan to undertake with respect to our products. Our ability
to market and sell our products may be adversely affected if we are unable to
identify, employ and retain suitably qualified sales and marketing personnel.
OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO RETAIN AND HIRE
ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY
Our success will depend on our ability to retain key employees and our
continuing ability to attract and retain highly qualified scientific, technical
and managerial personnel. Competition for such personnel is intense and we may
not be able to retain existing personnel or attract qualified employees in the
future. We have recently hired a Chief Financial Officer and Chief Operating
Officer. At present, we employ approximately 40 full time employees and several
part-time consultants. We depend upon the personal efforts and abilities of our
officers and
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directors, and would be materially adversely affected if their services ceased
to be available for any reason and comparable replacement personnel were not
employed.
THE BUSINESSES IN WHICH WE ENGAGE HAVE A RISK OF PRODUCT LIABILITY, AND
IN THE EVENT OF A SUCCESSFUL SUIT AGAINST US, OUR BUSINESS COULD BE SEVERELY
HARMED
The testing, marketing and sale of agricultural and pharmaceutical
products entails a risk of product liability claims by consumers and others.
While we currently maintain product liability insurance which we believe to be
adequate, such insurance may not continue to be available at a reasonable cost
or may not be sufficient to fully cover any potential claims. In the event of a
successful suit against us, the lack or insufficiency of insurance coverage
could have a material adverse effect on our business and financial condition.
WE ARE CONTRACTUALLY OBLIGATED TO ISSUE SHARES IN THE FUTURE, DILUTING
THE INTEREST OF OUR STOCKHOLDERS
We have entered into agreements with Strong River Investments, Inc. and
Montrose Investments, Ltd. which obligate us to issue additional shares of
common stock and warrants to purchase shares of common stock subject to certain
conditions, including market capitalization, trading volume and share price
conditions. In addition, pursuant to adjustable warrants we have issued to
Strong River Investments and Montrose Investments we are required to issue
additional shares of our common stock at $.01 per share, the number of such
shares to be determined by a formula based on the then market price per share
compared to the $14.45 per share purchase price paid by such entities. As of
April 30, 2000 there are outstanding and exercisable options to purchase
approximately 541,294 shares of common stock, at a weighted average exercise
price of $11.24 per share. Moreover, we may in the future issue additional
shares to raise capital, acquire other companies or technologies, to pay for
services, or for other corporate purposes. Any such issuances will have the
effect of further diluting the interest of the purchasers of shares of our
capital stock.
IF MONTROSE INVESTMENTS LTD. AND STRONG RIVER INVESTMENTS, INC. ENGAGE
IN SHORT SELLING TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THEIR ADJUSTABLE WARRANTS, THE MARKET PRICE OF OUR COMMON STOCK MAY
DECLINE
Montrose Investments Ltd. and Strong River Investments, Inc. each owns
an adjustable warrant that will vest on three dates determined by them over a
period up to 18 months following the effectiveness of this registration
statement. The number of shares that will be issuable at each vesting date will
be determined according to a formula in which the number of shares issuable will
be greater the lower the price of our common stock. Since the exercise price of
the adjustable warrants is only $.01 per share, Montrose Investments Ltd. and
Strong River Investments, Inc. have an incentive to sell short our common stock
prior to each vesting date in order to cause the market price of our common
stock to decline and greater number of shares to vest under the adjustable
warrants. Montrose Investments Ltd. and Strong River Investments, Inc. could
then exercise their adjustable warrants and use the shares of common stock
received upon exercise to cover their short positions. Montrose Investments Ltd.
and Strong River Investments, Inc. could thereby profit by the decline in the
market price of the common stock caused by their short selling.
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THE TERMS OF OUR ADJUSTABLE WARRANTS MUST COMPLY WITH THE LISTING
REQUIREMENTS OF THE NASDAQ SMALLCAP MARKET OR OUR COMMON STOCK AND LIQUIDITY
WOULD DECLINE
To remain listed for trading on the Nasdaq SmallCap Market, we must
abide by Nasdaq's rules regarding the issuance of "future priced securities."
These rules apply to our adjustable warrants because additional shares of our
common stock are issuable upon exercise based on a future price of our common
stock.
Nasdaq rules regarding future priced securities prohibit an issuer of
listed securities from issuing 20% or more of its outstanding capital stock at
less than the greater of book value or then current market value without
obtaining prior stockholder consent. The number of shares issuable upon exercise
of the adjustable warrants could exceed 20% of the number of our outstanding
shares if the price of our common stock is substantially lower than $14.45 per
share as of the vesting dates of the adjustable warrants. Although we did not
obtain stockholder consent prior to issuing the adjustable warrants, we believe
that Nasdaq will not delist our shares if we obtain shareholder approval before
the adjustable warrants are actually exercised for a number of shares exceeding
20% of our outstanding shares. This is because the adjustable warrants contain
provisions that (1) prohibit us from issuing a number of shares upon exercise
that would exceed 19.999% of our outstanding shares, and (2) prevent the shares
issued from being voted to approve the adjustable warrants. However, if Nasdaq
disagrees with our interpretation of its rules, Nasdaq could delist our common
stock from the Nasdaq SmallCap Market.
If Nasdaq delisted our common stock, we would likely seek to list our
common stock for quotation on a regional stock exchange. However, if we are
unable to obtain listing or quotation on such market or exchange, trading of our
common stock would occur in the over-the-counter market on an electronic
bulletin board for unlisted securities or in what are commonly known as the
"pink sheet." As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations for the price of, or common stock.
IF A SIGNIFICANT NUMBER OF SHARES BECOME AVAILABLE FOR SALE IN THE
FUTURE, OUR STOCK PRICE COULD DECLINE
Many shares of common stock presently issued and outstanding are
"Restricted Securities" as that term is defined in Rule 144 promulgated under
the Act. In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one year holding period may sell, within any
three month period, an amount which does not exceed the greater of 1% of the
then outstanding shares of common stock or the average weekly trading volume
during the four calendar weeks prior to such sale. Rule 144 also permits the
sale of shares, under certain circumstances, without any quantity limitation, by
persons who are not affiliates of SafeScience and who have beneficially owned
the shares for a minimum period of two years. The possible sale of these
restricted shares may, in the future, increase the number of free-trading shares
and may have a depressive effect on the price of our securities. Moreover, such
sales, if substantial, might also adversely effect our ability to raise
additional equity capital.
BECAUSE OUR CURRENT MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR
COMMON STOCK, THEY HAVE SUBSTANTIAL CONTROL OVER US
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The holders of the common stock do not have cumulative voting rights.
Two of our executive officers, who are also Directors of SafeScience, own
approximately 32% of the outstanding shares of common stock. These stockholders
can substantially influence all matters requiring stockholder approval,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in control or otherwise discouraging a potential acquirer
from attempting to obtain control of us, which in turn could materially
adversely affect our stock price.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES BY YOU
The market price of the common stock, which is traded on the National
Association of Securities Dealers Automated Quotation (NASDAQ - Small Cap) has
been, and may continue to be, highly volatile. The stock market has from time to
time experienced extreme price and volume fluctuations, particularly in the
biotechnology sector, which have often been unrelated to the operating
performance of particular companies. In addition, factors such as announcements
of technological innovations or new products, either by us or by our competitors
or third parties, as well as market conditions within the various industries in
which we compete, may have a significant impact on the market price of our
common stock.
AN INVESTMENT IN OUR STOCK IS SPECULATIVE AND ENTAILS A HIGH DEGREE OF
RISK
There is nothing at this time upon which to base an assumption that our
plans for our business will prove successful. If our plans prove unsuccessful,
the purchasers of our shares of capital may lose all or a substantial part of
their investment. Our operations are subject to numerous risks associated with
the development of agricultural, consumer and pharmaceutical products, including
the competitive and regulatory environment in which we operate. In addition, we
may encounter unanticipated problems, including manufacturing, distributing and
marketing difficulties, some of which may be beyond our financial and technical
abilities to resolve. The failure adequately to address such difficulties could
have a material adverse effect on our prospects and our financial condition.
WE HAVE NOT PAID AND DO NOT INTEND TO PAY ANY DIVIDENDS
To date, we have not paid any cash dividends on our common stock. Our
Board of Directors does not intend to declare any cash dividends in the
foreseeable future, but instead intends to retain all earnings, if any, for use
in our business operations. Furthermore, as we may be required to obtain
additional financing, there may be restrictions on our ability to declare any
cash dividends on common stock in the future.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Set forth below is information regarding the sale of unregistered shares of
capital stock issued by the Company during the three months ended March 31,
2000.
1. The Company issued to two accredited investors 346,020 shares of common
stock at $14.45 per share, warrants to purchase 108,996 shares of common
stock at an exercise price of $15.98 per share and warrants to purchase
shares of common stock at an exercise price of $0.01 per share, the number
of shares to be determined in the future according to a formula based on
the then market price per share compared to the $14.45 per share purchase
price paid by the purchasers in the offering. Net proceeds from the
offering were $4,625,000. These securities were issued in reliance upon the
exemption from registration pursuant to Rule 506 of Regulation D under the
Securities Act.
2. The Company issued to four accredited investors 333,334 shares of common
stock at $12.00 per share and warrants to purchase 75,758 shares of common
stock at an exercise price of $15.98 per share. Net proceeds from the
offering were $3,880,000. These securities were issued in reliance upon the
exemption from registration pursuant to Rule 506 of Regulation D under the
Securities Act.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
(a) Exhibits
The following documents are incorporated herein by
reference from the Registrant's Form 8-K filed on April 7, 2000:
10.17 Securities Purchase Agreement by and among SafeScience,
Inc., Strong River Investments, Inc. and Montrose
Investments Ltd. dated March 29, 2000.
10.18 Form of Closing Warrant dated March 29, 2000.
10.19 Form of Adjustable Warrant dated March 29, 2000.
10.20 Registration Rights Agreement by and among SafeScience,
Inc., Strong River Investments, Inc. and Montrose
Investments, Ltd. dated March 29, 2000.
10.21 Letter Agreement by and among SafeScience, Inc., Strong
River Investments, Inc. and Montrose Investments Ltd.
dated March 29, 2000.
The following document is an exhibit hereto:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K where filed during the quarter covered by
this Form 10-Q.
24
<PAGE>
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.
Dated this 15th day of May 2000 .
---- ----------------------------------------
SAFESCIENCE, INC.
(the "Registrant")
BY: /s/ Bradley J. Carver
------------------------------
Bradley J. Carver, President, Treasurer,
and a member of the Board of Directors
BY: /s/ John W. Burns
------------------------------
John W. Burns, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Financial Condition at March 31, 2000 (Unaudited) and the Statement
of Operations for the three months ended March 31, 2000 (Unaudited) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,690,940
<SECURITIES> 0
<RECEIVABLES> 378,598
<ALLOWANCES> (68,000)
<INVENTORY> 478,639
<CURRENT-ASSETS> 11,085,831
<PP&E> 750,743
<DEPRECIATION> 242,097
<TOTAL-ASSETS> 12,155,681
<CURRENT-LIABILITIES> 1,420,066
<BONDS> 0
0
0
<COMMON> 175,958
<OTHER-SE> 10,559,657
<TOTAL-LIABILITY-AND-EQUITY> 12,155,681
<SALES> 572,551
<TOTAL-REVENUES> 572,551
<CGS> 458,374
<TOTAL-COSTS> 2,799,068
<OTHER-EXPENSES> 11,651
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,696,542)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,696,542)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
