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 September 30, 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 November 10, 2000 was 18,838,075 shares.
<PAGE>
SAFESCIENCE, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 (Unaudited) ........................ 2
Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2000
and 1999 (Unaudited)...................................... 3
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000
and 1999 (Unaudited)...................................... 4
Notes to Unaudited Consolidated Financial Statements
(Unaudited) .............................................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............13
Part II - Other Information
Item 6. Exhibits and Report on Form 8-K.............................28
Signatures....................................................................30
<PAGE>
Page 2
<TABLE>
SAFESCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<CAPTION>
ASSETS
------
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents 3,678,473 3,377,067
Accounts receivable, net of allowances of approximately
$80,000 at September 30, 2000 and $43,000 December 31, 1999 190,810 95,222
Inventory 661,924 356,211
Prepaid expenses, trade credits and other current assets 826,033 538,823
------------ ------------
Total current assets 5,357,240 4,367,323
------------ ------------
Property and equipment, at cost
Computer, office and laboratory equipment 535,461 470,614
Furniture and fixtures 268,121 208,383
Leasehold improvements 13,153 1,891
Motor vehicles 48,100 46,100
------------ ------------
864,835 726,988
Less-accumulated depreciation and amortization (351,280) (207,267)
------------ ------------
513,555 519,721
------------ ------------
Other assets:
Notes receivable - related parties (Note 6) 132,126 661,005
Restricted cash 108,128 108,128
Deposits 14,068 14,068
------------ ------------
Total other assets 254,322 783,201
------------ ------------
Total assets $ 6,125,117 $ 5,670,245
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable 2,064,425 484,208
Accrued liabilities 1,137,284 644,945
Deferred revenue 19,975 19,975
------------ ------------
Total current liabilities 3,221,684 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 - 18,025,031 and 16,835,923
shares at September 30, 2000 and December 31, 1999, respectively 180,250 168,359
Additional paid-in capital 45,168,296 34,388,615
Note receivable from officer -Issuance of common stock (3,343,750) (3,343,750)
Accumulated deficit (39,101,363) (26,692,107)
------------ ------------
Total stockholders' equity 2,903,433 4,521,117
------------ ------------
Total liabilities and stockholders' equity $ 6,125,117 $ 5,670,245
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
Page 3
<TABLE>
SAFESCIENCE, INC.
(Unaudited)
<CAPTION>
Three-Months Ended Nine-Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 390,943 $ 557,788 1,174,912 $ 763,801
Cost of goods sold 313,764 485,501 1,025,669 $ 850,119
------------- ------------- ------------- -------------
Gross profit ( loss ) 77,179 72,287 149,243 (86,318)
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 1,544,451 1,261,778 4,157,797 2,396,764
Research and development 1,973,539 1,407,307 3,816,815 2,233,834
General and administrative 942,390 1,646,743 3,068,958 4,721,033
Restructuring charge (Note 3) (251,970) - 1,478,957 -
------------- ------------- ------------- -------------
Total operating expenses 4,208,410 4,315,828 12,522,527 9,351,631
------------- ------------- ------------- -------------
Operating loss (4,131,231) (4,243,541) (12,373,284) (9,437,949)
------------- ------------- ------------- -------------
Other income (expense):
Other income (expense) 3,418 (17,222) (217,587) (17,439)
Interest income 53,154 89,095 181,615 199,313
------------- ------------- ------------- -------------
Total other income (expense) 56,572 71,873 (35,972) 181,874
------------- ------------- ------------- -------------
Net loss (4,074,659) (4,171,668) $(12,409,256) $ (9,256,075)
============= ============= ============= =============
Basic and diluted net loss per common share $ (0.23) $ (0.25) $ (0.71) $ (0.59)
============= ============= ============= =============
Weighted average number of common
shares outstanding 17,928,889 16,756,271 17,567,018 15,808,539
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
Page 4
<TABLE>
SAFESCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (12,409,256) (9,256,075)
Adjustments to reconcile net loss to net cash
used in operating activities:
Operating expenses paid in common
stock and options 327,383 2,238,272
Compensation charges related to loan forgiveness 155,343 --
Provision for loss on loans to related parties 325,000 --
Depreciation and amortization 144,013 86,656
Changes in assets and liabilities:
Accounts receivable (95,588) (308,425)
Inventory (305,713) (326,324)
Prepaid expenses and other current assets (287,210) (56,982)
Accounts payable 1,580,217 349,302
Accrued liabilities 492,339 49,946
------------- -------------
Net cash used in operating activities (10,073,472) (7,223,630)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (137,848) (322,653)
Loans to related parties 16,681 (441,331)
Repayment of loans to related parties, net -- 978
Deposits paid, net -- (12,370)
------------- -------------
Net cash provided by (used in) investing activities (121,167) (775,376)
------------- -------------
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs 10,496,045 9,161,291
Proceeds from exercise of warrants -- 1,601,919
Proceeds from exercise of common stock options -- --
Payments on obligations under capital lease -- (3,448)
------------- -------------
Net cash provided by financing activities 10,496,045 10,759,762
------------- -------------
Net increase in cash and cash equivalents 301,406 2,760,756
Cash and cash equivalents, beginning balance 3,377,067 3,439,408
------------- -------------
Cash and cash equivalents, ending balance 3,678,473 $ 6,200,164
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Note receivable from issuance of common stock -- $ 3,343,750
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest -- $ 347
Exchange of common stock for notes receivable - related parties $ 272,000 --
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 5
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 from
pharmaceuticals to include consumer, agricultural and commercial 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,
agricultural and commercial 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 8). 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 commercial products
while continuing its research and development and raising capital. Management
anticipates that additional revenues may be derived from products under
development or those developed in the future. Risks to the Company include, but
are not limited to, 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 approval and regulation,
dependence on key individuals and competition from substitute products and
larger companies. See " Certain Factors That May Affect Future Results".
(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.
<PAGE>
Page 6
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(e) Use of Estimates
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. During the three months ended September 30, 1999, $131,000, or
23.6% of the Company's revenues were derived from barter transactions compared
with $0 for the three months ended September 30, 2000. During the nine months
ended September 30, 1999 and 2000, approximately $298,000, or 39.1% and 179,000,
or 15.2%, respectively, of the Company's revenues were derived from barter
transactions. (See Note 5)
(g) Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2000 were $3,678,473 including
$3,663,956 held by a single bank. Of that amount $2,279,261 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
Leasehold improvements Lesser of useful life or
life of lease
Motor vehicles 4 years
(i) Research and Development
Research and development costs, which consist primarily of wages, expenses for
consultants and supplies and testing, are charged to operations as incurred.
<PAGE>
Page 7
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(j) Net Loss Per Share
The Company applies Statement of Financial Accounting Standards (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 September 30, 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 September 30, 2000 and 1999 there
were 302,754 and 75,000 warrants outstanding, respectively, with a weighted
average exercise price of $14.60 and $10.40 respectively, and 921,685 and
604,924 stock options outstanding, respectively, with a weighted average
exercise price of $7.96 and $9.95 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 (loss) and its components in the financial
statements. Comprehensive income (loss) 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
reported 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 nine months ended September 30, 2000, and 1999, respectively,
94.5% and 100% 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: SafeScience products and pharmaceuticals. Revenues
and cost of revenues to date relates to SafeScience products.
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
-------------------------------------
SafeScience
Products Pharmaceuticals Corporate Combined
-------- --------------- --------- --------
<S> <C> <C> <C> <C>
Sales $ 390,943 $ $ - $ 390,943
Cost of Goods Sold 313,764 - - 313,764
Gross Profit (Loss) 77,179 - - 77,179
Sales and Marketing 1,473,926 70,525 - 1,544,451
Research & Development 118,105 1,855,434 - 1,973,539
General & Admin. Expense - - 942,390 942,390
</TABLE>
<PAGE>
Page 8
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
SafeScience
Products Pharmaceuticals Corporate Combined
-------- --------------- --------- --------
<S> <C> <C> <C> <C>
Sales $ 557,788 $ - $ - $ 557,778
Cost of Goods Sold 485,501 - - 485,501
Gross Profit (Loss) 72,287 - - 72,287
Sales and Marketing 1,245,982 15,796 - 1,261,778
Research & Development 339,972 1,067,335 - 1,407,307
General & Admin. Expense - - 1,646,743 1,646,743
Nine Months Ended September 30, 2000
------------------------------------
SafeScience
Products Pharmaceuticals Corporate Combined
-------- --------------- --------- --------
Sales $ 1,174,912 $ - $ - $1,174,912
Cost of Goods Sold 1,025,669 - - 1,025,669
Gross Profit 149,243 - - 149,243
Sales and Marketing 3,854,079 303,718 - 4,157,797
Research & Development 621,120 3,195,695 - 3,816,815
General & Admin. Expense - - 3,068,958 3,068,958
Nine Months Ended September 30, 1999
------------------------------------
SafeScience
Products Pharmaceuticals Corporate Combined
-------- --------------- --------- --------
Sales $ 763,801 $ - $ - $ 763,801
Cost of Goods Sold 850,119 - - 850,119
Gross Profit (86,318) - - (86,318)
Sales and Marketing 2,359,534 37,230 - 2,396,764
Research & Development 581,979 1,651,855 - 2,233,834
General & Admin. Expense - - 4,721,033 4,721,033
</TABLE>
(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 and bad debts is believed by management
to be inherent in the Company's accounts receivable. For the nine months ended
September 30, 2000 and 1999, the table below shows the Company's concentration
exposures.
<TABLE>
<CAPTION>
---------------------------------------- -------------------------------------- --------------------------------------
Nine Months Ended Nine Months Ended
September 30,2000 September 30,1999
---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Number of Customers 6 4
---------------------------------------- -------------------------------------- --------------------------------------
% of Total Revenue 70% 97%
---------------------------------------- -------------------------------------- --------------------------------------
Number of Customers 5 1
---------------------------------------- -------------------------------------- --------------------------------------
% of Accounts receivable 80% 97%
---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
<PAGE>
Page 9
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(2) STOCKHOLDER'S EQUITY
(a) Private Placement Offerings
In June 2000, the Company raised an additional $2,000,000 in connection with the
private placement offering closed on March 30, 2000 wherein 138,408 shares of
common stock were sold at $14.45 per share. Net proceeds were $1,860,000. The
purchasers also hold warrants to purchase 108,996 additional shares of common
stock at $15.98 per share exercisable for five years, and adjustable warrants 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. A total of 256,465 shares have been issued pursuant to the
exercise of a portion of these adjustable warrants through September 30, 2000.
(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 and nine months ended
September 30, 2000, the Company granted options to purchase 560,391 and 560,391
shares of common stock, respectively, and recorded no charges to operations
relating to such issuances. During the three and nine months ended September 30,
1999, the Company granted options and shares totaling 48,312 and 233,877 shares
of common stock, respectively, and recorded charges to operations of $597,522
and $1,712,843, respectively, relating to these issuances.
The following table summarizes all stock option activity to employees and
consultants for services for the nine months ended September 30, 2000.
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price Per Share
------ ------------------------
<S> <C> <C>
Balance Dec. 31, 1999 585,424 $ 10.42
Granted 560,391 5.38
Exercised (42,876) .01
Cancelled ( 181,254) 9.65
---------- ----
Balance Sept. 30, 2000 921,685 $ 7.96
========= ====
</TABLE>
(c) Warrants
The following table summarizes all warrant activity for the nine months ended
September 30, 2000.
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price Per Share
------ ------------------------
<S> <C> <C>
Balance December 31, 1999 75,000 $ 10.40
Issued 484,219 7.52
Exercised (256,465) -
--------- --------
Balance Sept. 30, 2000 302,754 $ 14.60
========= ========
</TABLE>
Warrants to purchase 43,000 shares of common stock were issued to two investment
advisors in connection with the private placements during the nine months ending
September 30, 2000 which raised $11,000,000.
<PAGE>
Page 10
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
On August 3, 2000 we issued 256,465 shares in connection with the adjustable
warrants received by the purchasers of common stock on March 30, 2000. On
October 3, and also October 5, 2000 we issued 345,467 and 460,324 shares,
respectively, in connection with adjustable warrants received by the purchasers
of common stock on March 30, 2000. In addition, pursuant to the remaining
outstanding adjustable warrants, 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 average of the four lowest closing bid prices for the
prior 40 trading days, or adjustment price, compared to the $14.45 per share
purchase price paid by such purchaser. Assuming the adjustable warrants were
exercisable in full on November 10, 2000, the adjustment price would be $1.4375
and the holders of the adjustable warrants could exercise those warrants for an
aggregate of 2,192,653 shares of common stock. If our stock price decreases and
results in a lower adjustment price, the holders of the adjustable warrants
could acquire an increased number of shares upon exercise of the adjustable
warrants, and the greater the decline in the market price, the greater the
number of shares the holders of the adjustable warrants could acquire upon
exercise of the adjustable warrants.
(3) RESTRUCTURING CHARGE
During the second quarter of 2000, the Company implemented a restructuring plan
to reduce the size and realign its organization to conform with strategic
changes. The major components of the restructuring relate to the elimination of
approximately 8 employees across the following functions: sales and marketing
(6), general and administrative (1), and research and development (1).
Components of the charge include severance and other related expenses. At
September 30, 2000 approximately $773,700 of accrued restructuring charges
remained which are comprised of approximately $673,700 of severance costs and
$100,000 of other costs. Approximately $299,000 of the expense has been paid by
the issuance of common stock and recorded as a non-cash expenditure. The total
cash impact of the restructuring amounted to approximately $1,300,000. The total
cash paid as of September 30, 2000 was approximately $406,000 and the remaining
amounts will be paid through June 2002. An adjustment of approximately $252,000
was recorded during the three months ended September 30, 2000 to reflect a
reduction in estimated severance costs.
(4) INVENTORY
Inventory is stated at lower of cost (first-in, first-out) or market and consist
of the following:
September 30, 2000 December 31, 1999
------------------ -----------------
Raw Materials $269,872 $309,729
Finished Goods 392,052 46,482
-------- -------
Total Inventory $661,924 $356,211
======== ========
<PAGE>
Page 11
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(5) TRADE CREDITS
The Company has entered into trade agreements with two barter companies for the
exchange of goods and services. These were no barter transactions during the
three months ended September 30, 2000. The barter companies acquire media time
on behalf of the Company: 55% and 15%, respectively, of the net cost of all
media time utilized by the Company is payable in cash and the remaining 45% and
85%, respectively, is charged against the trade credit. As of September 30,
2000, $299,215 of trade credits were outstanding. The Company expects to fully
utilize these credits by the end of the year 2000.
(6) NOTES RECEIVABLE - RELATED PARTIES
Notes receivable from related parties consist primarily of a note from one
officer of the Company and amounts due from two former officers of the Company.
The officer's note is payable in monthly installments of $356 including interest
at 5.66% with a final payment of $60,601 due on March 11, 2002. This note is
collateralized by shares of the Company's common stock.
(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 September 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
December 31, 2000. SAB 101 clarifies the Securities and Exchange Commission's
views regarding recognition of revenue. The Company will adopt SAB 101 in the
fourth 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.
(8) LICENSES
On September 18, 2000, the Company was granted a limited exclusive license to
market a patented lice cleansing shampoo product of BioSafe Technologies, Inc.
of Denison Texas within the United State, Canada and Mexico. The license
requires advance payment of $150,000 towards future purchases of product of
which $100,000 has been paid through November 10, 2000.
<PAGE>
Page 13
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
We are a publicly traded biotechnology company engaged in developing
pharmaceutical products primarily for cancer treatment, as well as introducing a
line of high-performance, non-toxic consumer products either under the
SafeScience(R) brand name or private label, and agricultural products. We sell
an extended line of cleaning products in supermarkets, drug chains, mass
merchandise and commercial channels, and expect to introduce additional product
categories in the future. We also expect to launch environmentally friendly
agricultural products, beginning with an EPA conditionally approved "non-toxic
fungicide" (principally for grapes and other high-value per acre crops) subject
to approval by or registration with state regulatory authorities. We believe
that our business model is unique among biotechnology companies because we are
jointly pursuing longer-term development of human therapeutics, while
simultaneously selling and/or developing a line of SafeScience(R) consumer and
agricultural products.
PHARMACEUTICAL PRODUCTS. The leading product in our drug development pipeline,
now in Phase II clinical trials, GBC-590, is intended to reduce (i) primary
tumors, (ii) the growth of cancerous tumors and (iii) the spread of cancer cells
with indications in prostate, colorectal, pancreatic and liver cancer patients.
GBC-590, a carbohydrate molecule, acts by binding to Galectin 3 receptors on
cancer cells and has been shown to shrink primary tumors and inhibit metastasis
in animal models. Galectin 3 is a carbohydrate-binding protein that has been
implicated in cell growth, differentiation, adhesion, malignant transformation,
angiogenesis and metastasis. In Phase I human testing that enrolled patients
with cancer refractory to all standard treatment, GBC-590 was found to be well
tolerated at all administered dose levels. In 2000, we commenced Phase II
clinical trials of GBC-590 for pancreatic and colorectal cancers. In September
2000, we completed enrollment of a Phase II colorectal clinical trial. We
anticipate beginning Phase II clinical trials for prostate cancer in 2001 but
will defer commencing liver cancer trials at this time. Institutional Review
Board (IRB) approval was received at the following sites prior to conducting the
current Phase II clinical trials for pancreatic and/or colorectal cancers:
. Beth Israel/Deaconess Hospital in Boston, Massachusetts;
. University of Chicago Pritzker School of Medicine;
. University of Rochester Cancer Center;
. Christiana Healthcare in Wilmington, Delaware;
. Ocala Oncology Center in Ocala, Florida;
. Hematology and Oncology Associates in Kansas City, Missouri; and
. Medical Oncology Associates in San Diego, California.
Upon full patient enrollment, we expect Phase II trials to be completed within
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approximately six to twelve months. The clinical trials for each indication will
have approximately 20 patients or more. Subject to the results of our Phase II
trials, we plan to conduct expanded Phase II/Phase III clinical trials for all
indications subsequent to review and analysis of the Phase II data. We have
retained Covance (NYSE:CVD), a leading clinical trial research organization in
the U.S., to assist in conducting these studies.
CONSUMER, AGRICULTURAL AND COMMERCIAL PRODUCTS. We are pursuing
commercialization of the SafeScience(R) line of household and commercial
cleaning products, which are designed to promote a chemically safe environment
within the home and commercial settings. Our first major retailer, Sainsbury
plc's New England-based subsidiary, Shaw's Supermarkets, with approximately 167
locations including the recently acquired Star Supermarkets, commenced stocking
the SafeScience consumer line in the third quarter of 1999. Total revenues
received from Shaw's were approximately $591,000 for the fifteen months ended
September 30, 2000. At Shaw's, SafeScience(R) products are positioned as a
co-brand displaying both the SafeScience brand and the retailer's own name. At
present, nine products are included in the Shaw's program: liquid laundry
detergent, kitchen cleaner, shower mist, dish detergent, all-purpose cleaner,
glass/window cleaner, bathroom cleaner (tub/tile), floor cleaner and fabric
refresher.
Two additional supermarket chains have recently begun selling cleaning products
based on SafeScience technology: Wegmans, a 60-store chain headquartered in
Rochester, New York, and Giant Eagle of Pittsburgh, Pennsylvania with 202 stores
in three states. The Wegmans line of seven products are being sold as Wegmans
brand cleaners using SafeScience technology with the SafeScience icon displayed
on the front and back labels. Giant Eagle stocks nine products under the Smart
Science(R) brand also with the SafeScience icon displayed on both panels.
We intend to continue to pursue relationships whereby in most retail channels
our products will be positioned as a SafeScience branded line, and in
supermarket retailers as either the SafeScience branded line or a private label
brand using SafeScience technology. Private label branding has two advantages
for us: we benefit from existing store brand loyalty; and the retail partner
shares in the promotion of the product.
We recently refocused our sales and marketing efforts and have positioned
ourselves to achieve wider acceptance of the SafeScience(R) branded line of
consumer products with selective effort on private label business. Our sales and
marketing team has been restructured to add extensive consumer product
experience. In September 2000, we announced that three cleaning products are now
distributed through CVS/Pharmacy (CVS: NYSE), and seven cleaning products
through Brooks Pharmacy, all under the SafeScience(R) brand. CVS/Pharmacy is
headquartered in Rhode Island with 4,100 stores in twenty-nine states and the
District of Columbia; and Brooks Pharmacy is also Rhode Island-based with 250
stores throughout New England.
We have an agreement with Daymon Associates, Inc., a leading private label and
retail sales company to serve as a broker to market our products to supermarket,
mass merchandise and drug store chains. Additionally, we have commissioned
approximately 14 account-specific sales representatives to supplement Daymon's
sales efforts. In addition to the consumer cleaning product line, we have
introduced a line of insect repellents in the consumer channel, and are seeking
to commercialize our commercial cleaning products by opportunistically pursuing
sales in various industries.
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The manufacture of SafeScience's formulations, labeling, filling, warehousing
and shipping are handled by Kleen Brite Laboratories, a substantial contract
manufacturer, and Delta-Omega Technologies, Inc. Additional manufacturers are
being qualified at this time.
We have recently received conditional registration approval by the United States
Environmental Protection Agency (EPA) for Elexa PBD 4%, our lead agricultural
product, which is designed to improve a plant's natural ability to resist
disease. Elexa will initially be marketed for the control of fungal diseases,
and specifically powdery mildew disease, on grapes and strawberries. We are
seeking approval by the California Department of Pesticide Regulation and, now
that EPA conditional registration has been granted, will seek other state
regulatory approvals too. We expect to receive California and other state
registrations of Elexa in time for the 2001 growing season.
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RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS
SEPTEMBER 30, 1999
Sales decreased from $557,788 for the three months ended September 30,
1999 to $390,943 for the three months ended September 30, 2000, a decrease of
$166,845, or 29.9%. This decrease is primarily attributable to elimination of
barter transactions in the third quarter of 2000. The Company does not expect to
enter into barter transactions in the fourth quarter of 2000; accordingly, there
will likely be a substantial decline in sales revenue in the fourth quarter of
2000 as compared to last year.
Cost of goods sold decreased from $485,501 for the three months ended
September 30, 1999 to $313,764 for the three months ended September 30, 2000, a
decrease of $171,737, or 35.4% This decrease is attributable to lower sales
volume during the period. Gross profit increased from $72,287 to $77,179 during
the same period. This represents an increase in gross margin from 13.0% to
19.7%. Higher sales prices account for the gross margin improvement.
General and administrative expenses decreased from $1,646,743 for the
three months ended September 30, 1999 to $942,390 for the three months ended
September 30, 2000, a decrease of $704,353, or 42.8%. This decrease is primarily
attributable to a reduction of expenditures for professional services provided
by outside consultants, officer's compensation and travel. Approximately
$316,451 of the 1999 expenses 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 $1,261,778 for the three months ended
September 30, 1999 to $1,544,451 for the three months ended September 30, 2000,
an increase of $282,673, or 22.4%. This increase is primarily due to increases
in consulting and freight expenses partially offset by reductions in advertising
and commissions.
Research and development costs increased from $1,407,307 for the three
months ended September 30, 1999 to $1,973,539 for the three months ended
September 30, 2000, an increase of $566,232, or 40.2%. This increase is
primarily attributable to consulting services of Covance Inc. in connection with
the clinical trials of GBC-590 and production costs for GBC-590 used in clinical
trials, partially offset by a reduction in license fees. Approximately $320,295
of 1999 expenses were non-cash expenses resulting from the issuance of options
and warrants to purchase common stock and the grant of common stock for
services.
Since the first quarter of 2000, Covance Inc. has managed the studies
to evaluate the effect of GBC-590 in clinical trials. We estimate that Phase II
pancreatic cancer studies may require approximately 18 months and $900,000 to
complete and that Phase II colorectal cancer studies may require approximately
18 months and $1,650,000 to complete. The Company has incurred expenses of
approximately $1,238,000 through September 30, 2000 in connection with these
clinical trials.
Interest income decreased from $89,095 for the three months ended
September 30, 1999 to $53,154 for the three months ended September 30, 2000, a
decrease of $35,941, or 40.3%. This decrease is attributable to a decrease in
cash available for temporary investment.
During the second quarter we began a restructuring of operations
including the replacement of our Chief Executive Officer. In connection with
this severance and other employee reductions, we recorded a charge in the amount
of $1,731,000 to cover the estimated costs of terminating an existing employment
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Page 17
agreement and other severance costs. Certain expenses were reduced by $251,970
from the estimated amount recorded and have been reflected in the results for
this quarter. (See Note 3)
RESULTS OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS
SEPTEMBER 30, 1999
Sales increased from $763,801 for the nine months ended September 30,
1999 to $1,174,912 for the nine months ended September 30, 2000 an increase of
$411,111, or 53.8%. This increase is primarily attributable to the comparison of
nine months of revenues in 2000 with the commencement of sales of our household
and commercial cleaning products in June 1999. Due to the decision to place more
emphasis on branded consumer products and to pursue commercial sales on a more
opportunistic basis, the year-over-year comparisons in the fourth quarter of
2000 may show substantial declines. Also, we have reduced the use of barter
transactions as a percentage of sales. For the nine months ended September 30,
1999 approximately $297,800, or 39.1%, of sales were in exchange for barter
credits compared with $179,000, or 15.2%, of sales for the nine months ended
September 30, 2000.
Cost of goods sold increased from $850,119 for the nine months ended
September 30, 1999 to $1,025,668 for the nine months ended September 30, 2000.
This increase is attributable to the increase in sales of our products in the
nine months ended September 30, 2000 from the nine months ended September 30,
1999. We earned a gross profit on sales of $149,243, or 12.7%, for the nine
months ended September 30, 2000 compared with a gross loss of $86,318 during the
nine months ended September 30, 1999.
General and administrative expenses decreased from $4,721,033 for the
nine months ended September 30, 1999 to $3,068,958 for the nine months ended
September 30, 2000, a decrease of $1,652,075, or 35.0%. This decrease is
primarily attributable to a reduction of expenditures for professional services
provided by outside consultants and officers compensation, primarily non-cash
expenses, and travel. Approximately $1,812,552 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 $2,396,764 for the nine months
ended September 30, 1999 to $4,157,797 for the nine months ended September 30,
2000, an increase of $1,761,033, or 73.5%. This increase is primarily due to
increases in payroll, consulting expenses, freight and rent partially offset by
a reduction in advertising expenses. In addition to the direct expenses
associated with the marketing and support of our consumer and agricultural
products, $758,000 of our operating expense is allocated to marketing in 2000.
Research and development costs increased from $2,233,834 for the nine
months ended September 30, 1999 to $3,816,815 for the nine months ended
September 30, 2000, an increase of $1,582,981, or 70.9%. This increase is
primarily attributable to consulting services of Covance Inc. in connection with
the clinical trials of GBC-590 and production costs for GBC-590 used in clinical
trials partially offset by license fees and consulting expense. Total expenses
incurred from Covance Inc. during the nine month ended September 30, 2000 were
$1,238,000 of the $2,550,000 estimated cost to complete the clinical trials.
Approximately $425,720 of 1999 expenses were non-cash expenses resulting from
the issuance of options and warrants to purchase common stock and the grant of
common stock for services.
Interest income decreased from $199,313 for the nine months ended
September 30, 1999 to $181,615 for the nine months ended September 30, 2000, a
decrease of $17,698, or 8.9%. This decrease is attributable to a decrease in
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cash available for temporary investment.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, our operations utilized
cash of approximately $10,073,000 primarily to fund our operating loss. We also
invested $137,848 in fixed asset purchases. The uses of cash were offset by
equity financings that resulted in net proceeds of approximately $10,496,000 to
us during the nine months ended September 30, 2000.
As of September 30, 2000, our accumulated deficit was approximately
$39,101,000 and cash balances were $3,678,473.
Our future is dependent upon our ability to obtain financing to fund
operations. We expect to incur substantial additional operating costs, including
costs related to ongoing research and development activities, sales and
marketing activities, preclinical studies and clinical trials. We believe that
our existing funds will be sufficient to fund our operating expenses and capital
requirements as currently planned until the first quarter of 2001. We intend to
raise funds by year-end 2000 which if through the sale of our securities would
result in dilution for existing shareholders. See "Certain Factors That May
Affect Future Results".
RECENTLY ISSUED ACCOUNTING STANDARDS
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
December 31, 2000. SAB 101 clarifies the Securities and Exchange Commission's
views regarding recognition of revenue. We will adopt SAB 101 in the fourth
quarter of 2000 and are currently evaluating the effects it will have. We
anticipate that the adoption of SAB 101 will not have a material adverse effect
on our 2000 financial position and results of operations.
MARKET RISK
We are 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 September 30, 2000, we have evaluated our risk and
determined that any exposure to currency exchange is not significant to our
overall consolidated financial results. There can be no assurance that this
exposure will remain at these levels, especially in the event of significant and
sudden fluctuations in the value of local currencies. We do not use derivative
financial instruments for speculative or trading purposes.
INTEREST RATE SENSITIVITY
We maintain 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 September 30, 2000,
the fair value of the portfolio would decline by an immaterial amount.
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Page 19
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS WE FACE.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION
OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN THOSE CASES,
THE TRADING PRICE OF OUR 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 September 30, 2000, we have
only generated an aggregate of $2,543,400 from product sales. We have incurred
approximately $39.1 million of operating losses since our inception, including
$12.3 million in the year ended December 31, 1999 and $12.4 million for the nine
months ended September 30, 2000. Extensive operating losses can be expected to
continue for the foreseeable future.
MANY OF OUR PRODUCTS ARE STILL IN DEVELOPMENT AND 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, development, testing and/or regulatory
approval process for our proposed products will be completed. Accordingly, no
assurance can be given that our product development efforts will be successful,
that required regulatory approvals from U.S. or foreign authorities will be
obtained, or that any products, if introduced, will be capable of being produced
in commercial quantities at reasonable costs or will 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.
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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 nine months ended
September 30, 2000, 96% and 70% of our revenues came from four and six
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 ANY PATENTS 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. Although we have patents
on certain technology, we have patents pending, but no patents issued, relating
to GBC-590 other than patent number 714164 in Australia. 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,
there can be no assurance that others may not independently develop similar
technology and know-how or that confidentiality will not be breached.
We have applied for a patent on GBC-590 with the U.S. Patent and Trademark
office. A patent has been granted to Dr. A. Raz of the Michigan Cancer Institute
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. As a result of the
GBC-590 patent not being issued and the subsequent issuance of Dr. Raz's patent,
the degree of patent protection, if any, we will obtain for GBC-590 is unclear.
There can be no assurance that the patent will in fact be granted or that, if
granted, it will not 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 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
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Page 21
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, MEDICAL AND
CONSUMER COMMUNITIES OUR BUSINESS WILL SUFFER.
Two of our three principal areas 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. In
addition, some of our consumer products, such as the lice shampoo, may require
educating consumers regarding the benefits and efficacy of our products to
achieve significant acceptance. There can be no assurance that our proposed
products will 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 Company 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 there is no
assurance that such arrangements can 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 product quality and 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.
WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGES IN THE
MARKETS IN WHICH WE COMPETE, AND OUR FAILURE TO SUCCESSFULLY COMPETE OR ADAPT 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 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
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Page 22
introduce new and enhanced products on a timely basis will be significant
factors in our ability to grow and remain competitive. There is no assurance
that any products, which we do develop, will not 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. 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. Except for
any potential licensing arrangements with other pharmaceutical companies, 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 are
subject to regulation by the EPA, including the need for approval before
marketing, and by comparable foreign and state agencies. Our agricultural
products will only be able to be commercially marketed for use either in the
United States or other countries by first obtaining the necessary approvals.
While we hope to obtain regulatory approvals for our proposed products, there
can be no assurance that we will obtain these approvals on a timely basis, if at
all.
FUTURE HEALTHCARE REFORM MEASURES AND REIMBURSEMENT PROCEDURES ARE
UNCERTAIN AND MAY ADVERSELY IMPACT THE SALE OF OUR PHARMACEUTICAL PRODUCTS.
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
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Page 23
and cost containment and cost reduction efforts can be more pronounced than in
the United States.
WE HAVE LIMITED MARKETING ARRANGEMENTS IN PLACE AND OUR SALES FORCE IS
LIMITED AND THUS MAY BE UNABLE TO INCREASE OR SUSTAIN OUR REVENUES.
While we may enter into arrangements with one or more agricultural,
chemical and/or pharmaceutical companies to market certain of our products, we
may be unable to enter into such arrangements 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. There can be no assurance that we will be able to
enter into distribution arrangements with terms which are satisfactory to us.
While we have begun to develop our own sales force, 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.
IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS
NECESSARY, OUR GROWTH MAY BE LIMITED AND WE MAY NOT BE ABLE TO SUCCESSFULLY
ACHIEVE OUR OBJECTIVES.
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 there
can be no assurance that we will be able to retain existing personnel or attract
qualified employees in the future. During the last year we have hired a Chief
Financial Officer and recently replaced the Vice President of Marketing and
Sales of Consumer Products and appointed the President to the additional
position of Chief Executive Officer. At present, we employ approximately 33 full
time employees and several part-time consultants. We depend upon the personal
efforts and abilities of our officers and 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,
there is no assurance that such insurance will continue to be available at a
reasonable cost or will 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 WILL NEED ADDITIONAL FINANCING, WHICH IF NOT AVAILABLE, COULD
PREVENT OUR ABILITY TO FUND OR EXPAND OPERATIONS.
We anticipate that we have sufficient cash to meet our cash requirements
until the first quarter of next year. We intend to raise additional funds by
year-end 2000 through sales of our securities to the public and through private
placements, debt financing or short-term loans. Additional equity financing may
result in dilution to our shareholders and debt financing is likely to include
significant restrictive covenants that would limit our operational flexibility
and would make us more leveraged, thereby increasing the possibility of default.
Any of such additional financings may not be available when needed on terms
satisfactory to us, if at all. If adequate financing is not available, we may be
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required to delay, scale back or eliminate certain of our research and
development programs, to relinquish rights to certain technologies or products,
or to license third parties to commercialize technologies or products that we
would otherwise seek to develop ourselves. Any inability to obtain additional
financing, if required, would have a material adverse effect on our business and
prospects.
WE ARE OBLIGATED TO ISSUE ADDITIONAL SHARES IN THE FUTURE, DILUTING THE
INTEREST OF OUR SHAREHOLDERS.
As of September 30, 2000 there are outstanding and exercisable options
to purchase 921,685 shares of common stock, at a weighted average exercise price
of $7.96 per share, and warrants to purchase 302,754 shares of common stock at a
weighted average price of $14.60 per share. Moreover, we may in the future issue
additional shares to acquire other companies or technologies, to pay for
services, or for other corporate purposes.
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 average of the four lowest closing bid
prices for the prior 40 trading days, or adjustment price, compared to the
$14.45 per share purchase price paid by such entities. Assuming the adjustable
warrants were exercisable in full on November 10, 2000, the adjustment price
would be $1.4375 and the holders of the adjustable warrants could exercise those
warrants for an aggregate of 2,192,563 shares of common stock. If our stock
price decreases and results in a lower adjustment price, the holders of the
adjustable warrants could acquire an increased number of shares upon exercise of
the adjustable warrants, and the greater the decline in the market price, the
greater the number of shares the holders of the adjustable warrants could
acquire upon exercise of the adjustable warrants.
IF STRONG RIVER INVESTMENTS, INC. AND MONTROSE INVESTMENTS LTD. 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.
Strong River Investments, Inc. and Montrose Investments Ltd. each owns an
adjustable warrant that will vest on three dates. Two vesting dates have
occurred for the Strong River adjustable warrant for which we have issued
601,932 shares of common stock to Strong River and one vesting date has occurred
for the Montrose adjustable warrant for which we have issued 460,324 shares of
common stock to Montrose. The remaining vesting date for Strong River
Investments, Inc. will be on November 24, 2000 and the remaining two vesting
dates for Montrose Investment Ltd. will be on December 4, 2000 and January 31,
2001. The number of shares that will be issuable at each future 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, Strong River
Investments, Inc. and Montrose Investments Ltd. 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 a greater number of shares to vest under the
adjustable warrants. Strong River Investments, Inc. and Montrose Investments
Ltd. could then exercise their adjustable warrants and use the shares of common
stock received upon exercise to cover their short positions. Strong River
Investments, Inc. and Montrose Investments Ltd. could thereby profit by the
decline in the market price of the common stock caused by their short selling.
The perception that Strong River Investments, Inc. and Montrose Investments Ltd.
may sell short our common stock may cause others to sell their shares as well.
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An increase in the volume of sales of our common stock, whether short sales or
not and whether the sales are by others, could cause the market price of our
common stock to decline further.
WE 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.
In addition, our common stock could be delisted from The NASDAQ Stock
Market if the bid price of our common stock falls below $1.00 per share, if we
have less than $2,000,000 in net tangible assets (total assets less total
liabilities and goodwill) and our market capitalization falls below $35 million,
or if the value of our common stock held by our stockholders (other than our
directors and executive officers) is less than $1,000,000.
If NASDAQ delisted our common stock, we would likely seek to list our
common stock for quotation on a regional or other principal stock exchanges.
However, if we were 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." In addition, delisting from NASDAQ and failure to
obtain listing or quotation on such market or exchange would subject our common
stock to so-called "penny stock" rules. These rules impose additional sales
practice and market making requirements on broker-dealers who sell and/or make a
market in such securities. Consequently, broker-dealers may be less willing or
able to sell and/or make a market in our common stock. Additionally, an investor
would find it more difficult to dispose of, or to obtain accurate quotations for
the price of our common stock. Finally, it may become more difficult for us to
raise funds through the sale of our securities.
THERE MAY BE SIGNIFICANT FUTURE SALES PURSUANT TO RULE 144 UNDER THE
SECURITIES ACT WHICH COULD CAUSE OUR STOCK PRICE TO 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
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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 our affiliates 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 affect 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
The holders of the common stock do not have cumulative voting rights.
One of our executive officers, who is a Director of SafeScience, owns
approximately 15% of the outstanding shares of common stock. This stockholder
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.
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 our 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. There are a
number of remedies available to regulatory authorities and stockholders who
purchased securities in such offerings, including, without limitation,
rescission rights.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES BY OUR STOCKHOLDERS.
The market price of our 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 will prove successful. If our plans prove unsuccessful, purchasers of our
common stock 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
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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 will 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 6. EXHIBITS AND REPORT ON FORM 8-K.
(a) Exhibits
The following documents are incorporated herein by reference from the
Registrant's Form 10, as filed with the Securities and Exchange Commission, SEC
file No. 0-26476:
3.1 Articles of Incorporation of Alvarada, Inc.
3.2 Amendment to the Articles of Incorporation dated March 1, 1995
3.3 Amendment to the Articles of Incorporation dated March 3, 1995
3.4 Amendment to the Articles of Incorporation dated May 23, 1995
3.5 Bylaws of Alvarada, Inc.
3.6 Articles of Incorporation of International Gene Group
3.7 Bylaws of the Company of International Gene Group
3.8 Articles of Incorporation of Agricultural Glycosystems, Inc.
3.9 Bylaws of the Company of Agricultural Glycosystems, Inc.
4.1 Specimen Stock Certificate
10.1 Agreement and Plan of Reorganization
10.2 Licensing Agreement with Dr. Platt
10.3 Office Lease
10.4 Licensing Agreement with The Government of Israel.
The following documents are incorporated herein by reference from the
Registrant's Form S-8 Registration Statement filed with the Commission on May
14, 1996, SEC file No. 333-04764:
10.5 Incentive Stock Option Plan
The following documents are incorporation herein by reference from the
Registrant's Form 10-K for the period ending December 31, 1996:
10.6.1 Employee Confidentiality and Invention Agreement between Dr. David
Platt and the Company.
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The following documents are incorporated herein by reference from the
Registrant's Registration Statement on Form SB-2, filed with the Commission on
November 20, 1996, SEC file no. 333-16087:
10.6.2 Warrant Agreement with Trinity American Corporation.
10.7 Consulting Agreement with Richard Salter and Amendment thereto.
10.8 Consulting Agreement with Keith Greenfield.
10.9 Consulting Agreement with James C. Czirr.
10.10 Warrant Agreement with James C. Czirr.
The following documents are incorporated herein by reference from the
Registrant's Form 10-K for the period ending December 31, 1997:
10.11 Amendment to Consulting Agreement with Keith Greenfield
10.12 Licensing Agreement with Agrogene Ltd.
10.13 Trademark Sales and License Agreement with Elk Mound Feed and Farm
Supply, Inc.
10.14 Consulting Agreement with Michelangelo, LLC, dated May 1997
10.15 Consulting Agreement with Michelangelo LCC, dated September 1997.
10.16 Agreement with Leket-Bar Chemicals, Ltd., dated October 1997
99.1 Office Lease
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.
(b) Reports on Form 8-K.
None.
The following document is an exhibit hereto:
10.22 Employment Agreement between SafeScience, Inc. and Bradley J. Carver
dated June 29, 1999.
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10.23 1998 Stock Option Plan.
10.24 2000 Stock Incentive Plan.
10.25 Supply and Distribution Agreement by and between SafeScience, Inc. and
Delta-Omega Technologies, Inc. dated July 8, 1998.
10.26 Exclusive License Agreement by and between SafeScience, Inc. and
Delta-Omega Technologies, Inc. dated September 15, 1999.
27.1 Financial Data Schedule.
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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 14th day of November 2000.
SAFESCIENCE, INC.
(the "Registrant")
BY: /s/ Bradley J. Carver
----------------------------------------------
Bradley J. Carver, President, Chief Executive
Officer, Treasurer and Director
BY: /s/ John W. Burns
---------------------------------------------
John W. Burns, Chief Financial Officer and
Secretary
BY: /s/ Patrick J. Joyce
---------------------------------------------
Patrick J. Joyce, Principal Accounting Officer
