<PAGE>
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 June 30, 2000.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: ______________ to ________________
-------------------------------------------------------------
Commission file number 0 - 26476
-------------------------------------------------------------
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, 8/th/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 August 10, 2000 was 18,013,578 shares.
<PAGE>
SAFESCIENCE, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 (Unaudited) .................................................... 2
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2000
and 1999 (Unaudited).................................................................. 3
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000
and 1999 (Unaudited).................................................................. 4
Notes to Unaudited Consolidated Financial Statements (unaudited) ...................... 5-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................... 13-25
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds.............................................. 26
Item 4. Submission of Matters to a Vote of Security Holders.................................... 26
Item 6. Exhibits and Report on Form 8-K........................................................ 26-28
Signatures............................................................................................. 29
</TABLE>
<PAGE>
Page 2
SAFESCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents 7,009,945 3,377,067
Accounts receivable, net of allowances of approximately
$119,000 and $43,000 at June 30, 2000 and December 31, 1999, respectively. 287,251 95,222
Inventory 747,670 356,211
Prepaid expenses, trade credits and other current assets 706,834 538,823
-------------- --------------
Total current assets 8,751,700 4,367,323
-------------- --------------
Property and equipment, at cost
Computer,office and laboratory equipment 502,027 470,614
Furniture, fixtures and leasehold improvements 286,625 210,274
Motor vehicles 48,100 46,100
--------------- -------------
836,752 726,988
Less-accumulated depreciation (301,450) (207,267)
--------------- -------------
535,302 519,721
--------------- -------------
Other assets:
Notes receivable - related parties (Note 6) 210,271 661,005
Restricted cash 108,128 108,128
Deposits 14,068 14,068
--------------- -------------
Total other assets 332,467 783,201
--------------- -------------
Total assets $ 9,619,469 $ 5,670,245
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable 1,047,334 484,208
Accrued liabilities 1,722,411 644,945
Deferred revenue 19,975 19,975
--------------- -------------
Total current liabilities 2,789,720 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 - 17,715,662 and 16,835,923 shares at June 30, 2000
and December 31, 1999, respectively 177,157 168,359
Additional paid-in capital 45,023,043 34,388,615
Note receivable from former officer -Issuance of common stock (3,343,750) (3,343,750)
Accumulated deficit (35,026,701) (26,692,107)
--------------- --------------
Total stockholders' equity 6,829,749 4,521,117
--------------- --------------
Total liabilities and stockholders' equity $ 9,619,469 $ 5,670,245
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
Page 3
SAFESCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $ 211,418 $ 206,013 $ 783,969 $ 206,013
Cost of goods sold 253,531 364,618 711,905 364,618
------------- ------------- ------------- ------------
Gross profit (42,113) (158,605) 72,064 (158,605)
------------- ------------- ------------- ------------
Operating expenses:
General and administrative 1,211,522 1,647,539 2,126,568 3,039,129
Sales and marketing 1,392,266 667,670 2,613,346 1,082,207
Research and development 1,180,335 515,006 1,843,276 914,467
Restructuring charge (Note 3) 1,730,927 - 1,730,927 -
------------- ------------- ------------- -------------
Total operating expenses 5,515,050 2,830,215 8,314,117 5,035,803
-------------- ------------- ------------- -------------
Operating loss (5,557,163) (2,988,820) (8,242,053) (5,194,408)
------------- ------------- ------------- -------------
Other income (expense):
Other expense (188,295) (107) (221,005) (217)
Interest income 107,402 77,865 128,461 110,218
------------- ------------- ------------- -------------
Total other income (expense) (80,893) 77,758 (92,544) 110,001
------------- ------------- ------------- -------------
Net loss (5,638,056) (2,911,062) $(8,334,597) $(5,084,407)
============== ============= ============= =============
Basic and diluted net loss per common share $ (0.32) $ (0.18) $ (0.47) $ (0.34)
============== ============= ============= =============
Weighted average number of common
shares outstanding 17,629,370 15,942,743 17,550,872 14,855,787
============== ============= ============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Page 4
SAFESCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
2000 1999
---------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (8,334,597) (5,084,407)
Adjustments to reconcile net loss to net cash
used in operating activities:
Operating expenses paid in common
stock and options 28,080 1,601,523
Non-cash compensation 272,000 --
(Increase) in accounts receivable allowances (76,000) (3,500)
Depreciation and amortization 94,183 47,750
Changes in assets and liabilities:
Accounts receivable (116,029) (34,231)
Inventory (391,459) (205,979)
Prepaid expenses, trade credits and other current assets (168,011) (9,711)
Accounts payable 563,126 164,821
Accrued liabilities 1,077,466 (45,686)
------------- -------------
Net cash used in operating activities (7,051,241) (3,569,420)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (109,764) (149,416)
Repayment of loans to related parties, net 178,734 647
Other assets - (153,847)
Deposits paid, net - (12,370)
-------------- --------------
Net cash provided by (used in) investing activities 68,970 (314,986)
-------------- --------------
Cash flows from financing activities:
Payments on obligations under capital lease - (2,292)
Proceeds from sale of common stock, net of issuance costs 10,615,149 5,860,367
Proceeds from exercise of common stock options 1,536,207
-------------- --------------
Net cash provided by financing activities 10,615,149 7,394,282
-------------- --------------
Net increase in cash and cash equivalents 3,632,878 3,509,876
Cash and cash equivalents, beginning balance 3,377,067 3,439,408
-------------- -------------
Cash and cash equivalents, ending balance $ 7,009,945 $ 6,949,284
============== ==============
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 $ - $ 217
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PAGE 5
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 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 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. 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, U.S. Environmental Protection Agency 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.
<PAGE>
PAGE 6
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(d) Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentation.
(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. Approximately $43,000 or 20.3% of the Company's revenues for
the three months ended June 30, 2000, and $179,000 or 22.8% of the Company's
revenues for the six-months ended June 30, 2000 were derived from barter
transactions. (See Note 5)
(g) Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2000 were $7,009,945 including $6,996,377
held by a single bank. Of that amount $6,056,130 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:
<TABLE>
<CAPTION>
Asset Classification Estimated Useful Life
-------------------- ---------------------
<S> <C>
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
</TABLE>
(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
June 30, 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 June 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 June 30, 2000 and 1999 there
were 302,754 and 181,089 warrants outstanding, respectively, with a weighted
average exercise price of $14.60 and $4.75, respectively, and 541,294 and
604,381 stock options outstanding, respectively, with a weighted average
exercise price of $11.24 and $9.89 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 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 six months ended June 30, 2000, and 1999, respectively, 92.8%
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 June 30, 2000
--------------------------------
SafeScience
Products Pharmaceuticals Corporate Combined
<S> <C> <C> <C> <C>
Sales $ 211,418 $ - $ - $ 211,418
Cost of Goods Sold 253,531 - - 253,531
Gross Profit (Loss) (42,113) - - (42,113)
Sales and Marketing 1,265,308 126,958 - 1,392,266
Research & Development 367,068 813,267 - 1,180,335
General & Admin. Expense - - 1,211,522 1,211,522
</TABLE>
<PAGE>
Page 8
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
------------------------------
SafeScience
Products Pharmaceuticals Corporate Combined
<S> <C> <C> <C> <C>
Sales $ 783,969 $ - $ - $ 783,969
Cost of Goods Sold 711,905 - - 711,905
Gross Profit 72,064 - - 72,064
Sales and Marketing 2,380,152 233,194 - 2,613,346
Research & Development 503,015 1,340,261 - 1,843,276
General & Admin. Expense - - 2,126,568 2,126,568
</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 six months ended
June 30, 2000, three customers represented 79% of revenues and five customers
represented 81% of accounts receivable. For the six months ended June 30, 1999,
two customers represented 95% of revenues and one customer represented 78% of
accounts receivable.
(2) STOCKHOLDER'S EQUITY
(a) Private Placement Offerings
In June 2000, the Company raised $2,000,000 in a private placement offering of
common stock wherein 138,408 shares were sold at $14.45 per share. Net proceeds
were $1,860,000. 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 purchase and (ii)
$16.00, with warrants within 190 - 210 days from March 30, 2000, the closing of
the initial transaction with the purchasers, subject to conditions including,
but not limited to, market capitalization, trading volume, and share price
conditions.
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. Shares issued pursuant to the exercise of a portion
of these adjustable warrants total 256,465 shares through August 14, 2000.
<PAGE>
Page 9
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 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 months ended June 30,
2000, the Company issued no shares of common stock or stock options. During the
three months ended June 30, 1999, the Company granted options and shares
totaling 772,338 shares of common stock and recorded changes to operations of
$946,317 relating to these issuances.
The following table summarizes all stock option activity to employees and
consultants for services for the three months ended June 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 - -
Exercised (42,876) .01
Cancelled ( 1,254) 12.03
--------- -----
Balance March 31, 2000 541,294 $ 11.24
Granted - -
Exercised - -
Cancelled - -
------- ------------------
Balance June 30, 2000 541,294 $ 11.24
======= ==================
</TABLE>
As of June 30, 2000, the Company had committed to grant 40,000 shares of common
stock upon the attainment of future milestones.
In July 2000 the Company granted 557,709 stock options to employees at a
weighted average exercise price of $5.3617 per share. In addition, the Company
issued 65,947 shares to former employees and consultants for prior services and
recorded a charge of $430,900 which had been accrued as part of the
restructuring charge as of June 30, 2000.
<PAGE>
Page 10
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(c) Warrants
The following table summarizes all warrant activity for the three months ended
June 30, 2000.
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price Per Share
------ ------------------------
<S> <C> <C>
Balance March 31, 2000 259,754 $ 14.37
Issued 43,000 15.98
------- --------------------
Balance June 30, 2000 302,754 $ 14.60
======= ====================
</TABLE>
The warrants to purchase 43,000 shares of common stock were issued to two
investment advisors in connection with the private placements during the six
months ending June 30, 2000 of $11,000,000.
(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
(5), general and administrative (2), and research and development (1).
Components of the charge include severance and other related expenses. At June
30, 2000 approximately $1,450,000 of accrued restructuring charges remained,
which are comprised of approximately $1,350,000 of severance costs and $100,000
of other costs. Approximately $430,000 of the expense will be paid by the
issuance of common stock. The total cash impact of the restructuring amounted to
approximately $1,300,000. The total cash paid as of June 30, 2000 was
approximately $231,000 and the remaining amounts will be paid through June 2002.
(4) INVENTORY
Inventory is stated at lower of cost (first-in, first-out) or market and consist
of the following:
June 30, 2000 December 31, 1999
------------- -----------------
Raw Materials $431,764 $309,729
Finished Goods 315,906 46,482
-------- --------
Total Inventory $747,670 $356,211
======== ========
(5) TRADE CREDITS
The Company has entered into trade agreements with two barter companies for the
exchange of goods and services. These barter companies purchased approximately
$42,000 and $1,000, respectively, of product from the Company during the three
months ended June 30, 2000 and paid for these products by issuing $42,000 and
$1,000 of advertising credits, respectively. These barter
<PAGE>
Page 11
SAFESCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
companies purchased approximately $172,000 and $7,000, respectively, of product
from the Company during the six months ended June 30, 2000 by issuing
advertising credits. The barter companies acquire media time on behalf of the
Company and 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 June 30, 2000, $447,635
of trade credits were outstanding. The Company expects to utilize these credits
by the end of the year 2000.
(6) NOTES RECEIVABLE - RELATED PARTIES
Notes receivable from related parties at June 30, 2000 consist primarily of a
note from one officer stockholder of the Company and amounts due from two former
employees 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 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
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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a biotechnology company engaged in developing pharmaceutical
products primarily for cancer treatment, as well as introducing a line of
high-performance, non-toxic agricultural and consumer products under the
SafeScience(R) brand name. We have begun selling a line of cleaning products in
supermarkets, drug chains and industrial channels, and expect to introduce
additional product categories in the future. We also expect to introduce
environmentally friendly agricultural products, beginning with a biofungicide
(principally for grapes and other high-value per acre crops) subject to approval
by or registration with state regulatory and federal environmental protection
authorities. We believe that our business model is unique among biotechnology
companies because we are jointly pursuing longer-term development of cancer
remedies, 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, GBC-590, is designed to reduce primary tumors, the growth of cancerous
tumors, and the spread of cancer cells with indications in prostate, pancreatic,
colorectal, and liver cancer patients.
GBC-590, a rationally designed 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. In Phase I human testing that enrolled
patients with terminal cancer refractory to all standard treatment, GBC-590 was
found to be well tolerated at all administered dose levels. We commenced Phase
IIA clinical trials of GBC-590 for pancreatic and colorectal cancers. We
anticipate beginning Phase IIA clinical trials for prostate cancer in 2001, but
will defer commencing liver cancer trials at this time. We have received
institutional review board approval at the following sites to conduct Phase IIA
clinical trials for pancreatic and/or colorectal cancers:
. Beth Israel/Deaconess Hospital in Boston, Massachusetts;
. University of Chicago Pritzker School of Medicine;
. the University of Rochester Cancer Center;
. Christiana Healthcare in Wilmington, Delaware; and
. Ocala Oncology Center in Ocala, Florida.
Upon full patient enrollment, we expect Phase IIA trials to be completed
within 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 IIA trials, we plan to conduct Phase IIB/Phase III clinical trials
for all indications subsequent to review and analysis of the Phase IIA data. We
have retained Covance (NYSE:CVD), a leading clinical trial research organization
in the U.S., to assist in conducting these studies.
<PAGE>
Page 14
Consumer, Commercial and Agricultural Products. We are pursuing
commercialization of our SafeScience(R) line of household and commercial
cleaning products, which are designed to promote a chemically-safe environment
within the home, office, school, hospital and other commercial settings. The
first major retailer to stock the SafeScience(R) consumer line was Sainsbury
plc's New England based subsidiary, Shaw's Supermarkets, which currently has
approximately 162 locations, including acquisitions, which commenced in the
third quarter of 1999. Total revenues received from Shaw's were approximately
$485,000 from October 1, 1999 through the quarter ended June 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.
We intend to pursue relationships in which our products will be positioned
as a stand alone brand in most channels or as a premium corporate brand in
supermarket retailers. Corporate branding has two advantages for us:
. we benefit from existing store brand loyalty; and
. the retail partner shares in the promotion of the product, relieving us of
certain expenses and most slotting fees.
In October 1999, we initiated a rollout of our cleaning products by selling
through a major drug chain with approximately 4,200 locations in 25 states. We
have entered into agreements with two other regional retailers and expect to
begin shipments of our consumer cleaning products in the third quarter of 2000.
We have an agreement with Daymon Associates, Inc., a leading corporate branding
and retail sales company to market our products to supermarket, mass merchandise
and drug store chains. We have introduced a line of insect repellents and garden
products. We are seeking to commercialize our commercial cleaning products by
opportunistically pursuing sales in various industries.
We are awaiting approval by both the United States Environmental Protection
Agency and the California Department of Pesticide Regulation for the Elexa PBD
4% formulation. We are focusing our approval efforts for Elexa on its use to
control powdery mildew on grapes. If we obtain such approvals, we expect that
sales of Elexa PDB may begin in 2001.
Our business was founded in 1992 to pursue carbohydrate-based
pharmaceutical research for cancer therapeutics. In 1995, we merged with,
Alvarada, Inc., a publicly traded corporation having no active operations. In
1995, our management elected to pursue the dual strategy of emphasizing faster-
to-market consumer and agricultural products while we pursued the longer
approval cycle for the pharmaceuticals we were developing. We changed our name
to SafeScience, Inc. in 1998. Our principal executive offices are located at 31
St. James Avenue, 8th Floor, Boston, MA 02116 and our telephone number is (617)
422-0674.
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto.
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Results of Operations: Three months Ended June 30, 2000 versus June 30, 1999
Sales increased from $206,013 for the three months ended June 30, 1999 to
$211,418 for the three months ended June 30, 2000. Although revenue was greater
than the previous year, it was significantly lower than levels attained during
the first quarter of 2000. This decrease is attributable to reductions in
commercial sales and barter transactions, seasonal impact on garden products,
and sales discounts. Approximately $43,000 or 20.3% of sales in the second
quarter of 2000 were in exchange for $43,000 of advertising credits in barter
transactions.
The Company has determined that its efforts in the commercial cleaning
products market may not succeed in developing revenue opportunities of
sufficient scale. Future sales will be pursued on an opportunistic basis. The
sales and marketing personnel dedicated to this line are no longer with the
Company. In addition, the Vice President responsible for all sales and marketing
including consumer cleaning products is no longer with the Company.
Cost of goods sold decreased from $364,618 for the three months ended
June 30, 1999 to $253,531 for the three months ended June 30, 2000. This
decrease is attributable to start up expenses during the three months ended June
30, 1999 which did not relate to revenues for that period.
The gross loss for the three months ended June 30, 2000 was $42,114.
This loss was primarily due to allowances for returns, warehouse charges not
directly related to sales volume and sales discounts.
General and administrative expenses decreased from $1,647,539 for the
three months ended June 30, 1999 to $1,211,760 for the three months ended June
30, 2000, a decrease of $435,779 or 26.5%. This decrease was primarily
attributable to a reduction of expenditures for professional services provided
by outside consultants and officers compensation partially offset by an increase
in payroll and rent. Approximately $859,700 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 $667,670 for the three months ended
June 30, 1999 to $1,392,266 for the three months ended June 30, 2000, an
increase of $724,596 or 108.5%. This increase was primarily due to increases in
payroll, supplies, travel and consulting expenses in the Company's consumer and
agricultural product lines.
Research and development costs increased from $515,006 for the three
months ended June 30, 1999 to $1,180,335 for the three months ended June 30,
2000, an increase of $665,329 or 129.2%. This increase was primarily
attributable to increases in license fees, production costs for GBC-590 used in
clinical trials, field testing of Elexa PDB, and consulting services of Covance
(NYSE:CVD) in connection with the clinical trials of GBC-590. Approximately
$86,600 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 has managed the studies to
evaluate the effect of GBC-590 in clinical trials. The pancreatic cancer studies
may cost approximately $900,000. The colorectal cancer studies may cost
approximately $1,650,000.
Interest income increased from $77,865 for the three months ended June
30, 1999 to $107,402 for the three months ended June 30, 2000, an increase of
$29,537 or 37.9%. This increase was attributable to an increase in cash
available for temporary investment.
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Other expense increased from $107 for the three months ended June 30,
1999 to $188,295 for the three months ended June 30, 2000, an increase of
$188,188. This increase is primarily due to an increase in reserves for bad
debts and a valuation reserve for amounts due from related parties.
Other expense increased from $217 for the six months ended June 30, 1999
to $221,005 for the six months ended June 30, 2000, an increase of $220,788.
This increase is primarily due to an increase in reserves for bad debts and a
valuation in reserve for amounts due from related parties.
During the second quarter the Company began a restructuring of operations
including the replacement of its Chief Executive Officer. In connection with
this severance and other employee reductions, the Company recorded a charge in
the amount of $1,731,000. (See Note 3)
Results of Operations: Six months Ended June 30, 2000 versus June 30, 1999
Sales increased from $206,013 for the six months ended June 30, 1999 to
$783,969 for the six months ended June 30, 2000. There were no sales recorded
during the period ending March 31, 1999. This increase was attributable to
shipments of various household and commercial cleaning products to individuals,
retail and wholesale establishments and institutions. Due to the Company's
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 third and fourth quarter of 2000 may show substantial declines. Also, the
Company has reduced its use of barter transactions as a percentage of sales.
Approximately $179,000 or 22.8% of sales in the six months ended June 30, 2000
were in exchange for $179,000 of advertising credits in barter transactions. For
the six months ended June 30, 1999 approximately $167,000 or 81% of sales were
in exchange for barter credits.
Cost of goods sold increased from $364,618 for the six months ended June
30, 1999 to $711,905 for the six months ended June 30, 2000. This increase was
attributable to the increase in sales of our products in the six months ended
June 30, 2000 from the six months ended June 30, 1999. The Company earned a
gross profit on sales of $72,064 or 9.2% for the six months ended June 30, 2000.
General and administrative expenses decreased from $3,039,129 for the six
months ended June 30, 1999 to $2,126,568 for the six months ended June 30, 2000,
a decrease of $912,561 or 30.0%. This decrease was primarily attributable to a
reduction of expenditures for professional services provided by outside
consultants and officers compensation, primarily non-cash expenses, and travel
partially offset by an increase in payroll, rent and insurance. Approximately
$1,496,000 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 $1,082,207 for the six months ended
June 30, 1999 to $2,613,346 for the six months ended June 30, 2000, an increase
of $1,531,139 or 141.5%. This increase was primarily due to increases in
payroll, supplies, travel and consulting expenses pertaining to the Company's
agricultural, consumer and commercial product lines.
Research and development costs increased from $914,467 for the six months
ended June 30, 1999 to $1,843,276 for the six months ended June 30, 2000, an
increase of $928,809 or 101.6%. This increase was primarily due to increases in
production costs of GBC-590 for use in clinical trials, the costs of those
trials, testing for several products and consulting related to GBC-590.
Approximately $105,400 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 increased from $110,218 for the six months ended June 30,
1999 to $128,461 for the six months ended June 30, 2000, an increase of $18,243
or 16.6%. This increase was attributable to an increase in cash available for
temporary investment.
Other expense increased from $217 for the six months ended June 30, 1999
to $221,005 for the six months ended June 30, 2000, an increase of $220,788.
This increase is primarily due to an increase in reserves for bad debts and a
valuation reserve for amounts due from related parties.
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Liquidity and Capital Resources
For the six months ended June 30, 2000, the Company's operations
utilized cash of approximately $7,051,200 primarily to fund its operating loss.
The Company also invested $109,800 in fixed asset purchases. The uses of cash
were offset by equity financings that resulted in net proceeds of approximately
$10,615,000 to the Company during the six months ended June 30, 2000.
As of June 30, 2000, the Company's accumulated deficit was
approximately $35,027,000 and cash balances were $7,009,945.
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
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.
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 June 30, 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.
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Page 18
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 June
30, 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 June 30, 2000, we have only
generated an aggregate of $2,152,400 from product sales. We have incurred
approximately $35.0 million of operating losses since our inception, including
$12.3 million in the year ended December 31, 1999 and $5.6 million for the three
months ended June 30, 2000. Extensive 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, 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
<PAGE>
Page 19
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 six months
ended June 30, 2000, 96% and 79% of our revenues came from four and three
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 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
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Page 20
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.
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
<PAGE>
Page 21
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
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
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Page 22
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. During the last nine months, we have hired a Chief Financial Officer and
Chief Operating Officer. At present, we employ approximately 35 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, 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.
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Page 23
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
June 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
Strong River Investments, Inc. and Montrose Investments Ltd. each owns
an adjustable warrant that will vest on three dates determined by the selling
stockholders. The initial vesting date for the Strong River adjustable warrant
occurred on August 2, 2000 upon which 256,465 shares of common stock were issued
and the initial vesting date for the Montrose adjustable warrant will occur
anytime on or prior to August 28, 2001. 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, the selling stockholders 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. The selling stockholders could then exercise their adjustable warrants
and use the shares of common stock received upon exercise to cover their short
positions. The selling stockholders could thereby profit by the decline in the
market price of the common stock caused by their short selling.
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
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Page 24
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 after this
offering, 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. For more information on securities available for
future sale, see "Share Eligible for Future Sale."
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.
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,
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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 shares of our 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 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 registered shares of
capital stock issued by the Company during the three months ended June 30, 2000.
1. The Company issued to two accredited investors 138,408 shares of common
stock at $14.45 per share. Net proceeds from the offering were $1,860,000.
Item 4. Submission of Matters to a Vote of Security Holders
On June 8, 2000 the Company held its Annual Meeting of Stockholders.
Three items were voted upon: the election of directors; the ratification of the
appointment of auditors and Amendment of the Articles of Incorporation.
The nominees for director were Bradley J. Carver, David W. Dube,
Theodore J. Host, and Brian G. R. Hughes. The following table indicates the
number of votes cast with respect to each candidate, the number of votes in
favor, the number of votes against. There were no abstentions.
Total Votes Votes
Nominee Votes Cast In Favor Withheld
Bradley J. Carver 15,697,945 15,607,812 90,133
David W. Dube 15,697,945 15,605,482 92,463
Theodore J. Host 15,697,945 15,605,532 92,413
Brian G. R. Hughes 15,697,945 15,606,964 90,981
The appointment of Arthur Andersen LLP as auditors for the Company for
the fiscal year ended December 31, 2000 was approved by a vote of 15,650,033 in
favor, 12,025 against with 35,887 abstentions out of a total of 15,697,945 votes
cast.
The 2000 Stock Incentive Plan. was approved by a vote of 11,688,865 in
favor, 273,024 against with 98,636 abstentions out of a total of 12,060,525
votes cast.
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
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Page 27
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.
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
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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.
The following documents are incorporated herein by reference from the
Registrant's Form 9-K filed on June 6, 2000:
99.1 Press Release dated May 31, 2000 issued by the Company.
99.2 Press Release dated June 5, 2000 issued by the Company.
The following document is an exhibit hereto:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
On April 7, 2000, the Company filed a Current Report on Form 8-K to report the
sale of $5,000,000 of common stock and warrants to Strong River Investments,
Inc. and Montrose Investments Ltd.
On June 6, 2000, the Company filed a Current Report on Form 8-K to report the
appointment of Brian G. R. Hughes as Chairman of the Board of Directors and
Bradley J. Carver as Chief Executive Officer.
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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 14/th/ day of August 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 and
Secretary
BY: /s/ Patrick J. Joyce
-------------------------------------------
Patrick J. Joyce, Principal
