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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended - December 31, 2000
OR
[ ] 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 Company as specified in its charter)
Nevada 33-0231238
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Park Square Building
31 St. James Avenue, 8th Floor
Boston, Massachusetts 02116 (Address
of principal executive offices, including postal code.)
(617) 422-0674
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Common Stock
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ x ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value at February 5, 2001 of the voting stock of the
registration filed by non-affiliates was approximately $26,085,935.
The number of shares outstanding each of the Registrant's classes of common
stock, as of March 28, 2001 was 24,659,333.
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Documents Incorporated By Reference
Certain portions of the Registrant's definitive proxy statement to be filed by
April 30, 2001 pursuant to Regulation 14A are incorporated by reference in Items
10 through 13 of Part III of this Annual Report on Form 10-K.
PART I
Forward-looking statements are made throughout this document.
Typically, the use of the words "believe", "anticipate", "plan", "expect",
"seek", "estimate" and similar expressions identify forward-looking statements.
Unless a passage describes a historical event, the statement should be
considered a forward-looking statement. In keeping with the "Safe Harbor"
provision of the Private Securities Litigation Reform Act of 1995, it should be
noted that forward-looking statements regarding the Company's future
expectations and projections are not guarantees of future performance. They
involve risks, uncertainties and assumptions, and many of the factors that will
determine the Company's future results are beyond the Company's ability to
control or predict. Therefore, actual results may differ significantly from
those suggested by forward-looking statements. These risks include those
detailed under the heading "Certain Factors That May Affect Future Results"
immediately following the "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
ITEM 1. BUSINESS
General
SafeScience, Inc. is a biotechnology company developing novel
pharmaceutical products based on carbohydrate compounds. The Company's lead drug
candidate GBC-590, a potential treatment for multiple forms of cancer, is in
Phase II clinical trials for pancreatic and colorectal cancers. The Company also
develops agricultural products. The Company's near term objective is to continue
to proceed through the various phases of United States Food and Drug
Administration (FDA) clinical trials for GBC-590 and to continue to pursue
federal and state registration of its agriculture products while seeking
alternatives, including sale, for its agricultural products business area.
SafeScience, Inc.
SafeScience conducts its business through two wholly-owned subsidiaries.
International Gene Group, Inc. and SafeScience Products, Inc.
International Gene Group, Inc.
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International Gene Group, Inc. ("IGG") develops human therapeutics. IGG has
been focused on developing GBC-590, a complex carbohydrate intended to fight
cancerous tumors and metastasis, which it exclusively licenses from Dr. David
Platt and Wayne State University and the Barbara Ann Karmanos Cancer Institute.
Phase I FDA clinical trials for GBC-590 have been completed. Phase II clinical
trials for GBC-590 designed to evaluate safety and efficacy for pancreatic and
colorectal cancers began in the second quarter of 2000. The Company plans to
conduct an expanded Phase IIb 75 patient dose escalation trial beginning in
mid-2001 for colorectal cancer patients. We may, in addition, begin Phase II
trials for prostate cancer in 2002.
IGG has also developed a complex carbohydrate antifungal agent which is
being tested in animals to inhibit Candida infections.
Theoretical Background of GBC-590. Cells recognize one another through
pairs of complementary structures on their surface. A structure on one cell
carries encoded biological information that a structure on another cell can
decipher. While nucleic acids and proteins were previously recognized as the
major classes of biological materials involved in cell recognition, it has
recently been scientifically established that carbohydrates play a role as well.
The majority of a cell's surface components contain carbohydrate structures on
the cell, which change characteristics as the cell develops, differentiates and
sickens.
It is contended that cell adhesion plays a role in cancer and cancer
metastasis. Metastasis is the process by which cancer cells spread throughout
the body, beginning at the primary tumor. The spread of the cancer cells
throughout the body is the main cause of death for cancer patients. These cells,
once circulating in the bloodstream after their detachment from the primary
tumor, must adhere to new cells in other parts of the body in order to
proliferate to form new tumor colonies. Malignant cells may thus recruit the
very adhesion molecules that are part of the body's natural defense mechanism to
promote their own metastasis. We thus believe that drugs, which inhibit this
process of adhesion, may therefore inhibit metastasis although this theory has
not been scientifically established.
Complex Carbohydrate Substance (GBC-590). GBC-590 may offer a novel
approach to controlling the progression of cancer, by disrupting the cellular
recognition process of roaming cancer cells and preventing them from reattaching
to each other and to normal tissue. The GBC-590 compound acts as a "molecular
decoy" by recognizing Galectin 3,a "lectin", on cancer cells, attaching itself
to the Galectin 3 and preventing those cells from aggregating. GBC-590 may thus
prevent metastasis.
We believe that GBC-590 has the potential for therapeutic effect on
multiple cancer types (i.e. colorectal, prostate, pancreatic, breast and liver)
because the target for GBC-590 on the cancer cells is Galectin 3 which is
over-expressed on all these cancer types. In addition, independent research has
shown that Galectin 3 plays a role in angiogenesis. Angiogenesis, identified in
the 1980's, is the biological process by which cancer cells form new blood
vessels allowing them to obtain the nutrients necessary for tumor growth. By
binding to Galectin
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3, GBC-590 may inhibit angiogenesis.
Phase I clinical trials of GBC-590, at the MD Anderson Cancer Center in
Houston, Texas and at Pennsylvania Oncology and Hematology Associates, an
affiliate of the University of Pennsylvania - School of Medicine in
Philadelphia, Pennsylvania, were completed in 1999. Phase I is intended to
assess toxicity; GBC-590 showed no dose limiting toxicity in patients.
Institutional Review Board (IRB) approval was received at the following
sites prior to conducting the recently completed Phase II clinical trial for
colorectal cancer and/or the ongoing Phase II clinical trial for pancreatic
cancer:
. 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.
On March 23, 2001, the Company announced that GBC-590 demonstrated
positive clinical activity in colorectal cancer patients in the recently
completed Phase IIa clinical trial. Specifically, five of 23 patients showed
tumor stabilization for periods of two to six months before disease state
progression was observed, with one of the five patients showing a period of
tumor shrinkage. Based on this promising, early data, the Company plans to
conduct an expanded Phase IIb dose escalation trial. Higher doses of GBC-590
than administered in the Phase IIa study have already been tested in animals
with no dose limiting toxicity observed. This clinical trial is planned to
enroll 75 colorectal cancer patients separated into three groups of 25 patients
that would receive three different dose levels of GBC-590. There can be no
assurances at present that IV infusion of GBC-590 will prove effective in
reducing or eliminating the spread of cancer in humans or be safe at higher
doses.
CAN-296. CAN-296 is an anti-fungal agent derived from a naturally
occurring complex carbohydrate, designed for treatment of Candida and
Apsergillus infections. Candida, a common fungal disease, can take on two forms:
deep-seated infections which can be fatal and superficial infections such as
athlete's foot, skin infections and vaginitis.
CAN-296 has been tested in vitro and in animals against many Candida
pathogenic isolates including resistant strains and demonstrated positive
activity. There are no assurances that application of CAN-296 will prove
effective in reducing or eliminating Candida infection in humans, and there have
been no clinical studies or tests conducted to prove such an effect. Additional
studies in animals will be conducted, and based on
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those results, the Company will decide whether to proceed to file an
Investigational New Drug ("IND") application.
SafeScience Products, Inc.
Historically, SafeScience Products developed agriculture products and
developed, marketed and distributed chemically safe consumer and commercial
products.
In the agricultural area, SafeScience Products has developed and/or
licensed an array of products that include a Federal EPA-approved plant defense
booster to treat fungal pathogens. An additional insecticide product (Bb447) is
being tested and developed.
On February 15, 2001, the Company received notice of unconditional
registration from the United States Environmental Protection Agency's Office of
Pesticide Programs, Biopesticides and Pollution Prevention Division for its
Elexa-4 Plant Defense Booster. Elexa-4 is an effective non-toxic treatment
against fungal pathogens such as powdery mildew and boytrytis on grapes, and
powdery mildew and gray mold on strawberries, as well as, a variety of
additional crops. Elexa-4 works by stimulating the plants own natural defense
system to defend against attack by diseases. A large number of research trials
show Elexa-4 to be as effective at powdery mildew disease protection and control
as leading traditional synthetic chemical fungicides on our initially targeted
crops of grapes, strawberries and cherries. We have filed for state registration
to distribute and sell Elexa-4 in California and other states.
On November 15, 2000, the Company engaged a merchant bank to explore
alternatives including sale or other disposition of the Company's consumer,
commercial and agriculture business areas. The Company terminated operations of
the consumer and commercial product business areas on February 23, 2001 and
began the process of liquidating all assets and liabilities pertaining to those
operations. Accordingly, the Company has treated its consumer and commercial
products operations as a discontinued operation in accordance with Accounting
Principles Board Opinion No. 30 and has reclassified the 1999 financial
statements to reflect this treatment. For the year ended December 31, 2000, the
Company has recorded a reserve in the amount of $1,750,000 which includes
approximately $983,000 to reduce the carrying value of assets to their estimated
liquidation value and a liability of approximately $767,000 to accrue for the
cost of closing the operations.
The net losses of the discontinued operations are included in the
statements of operations under discontinued operations. The loss from
discontinued operations consists of the following:
Year Ended December 31,
2000 1999
Revenues $ 1,354,898 $ 1,368,514
Cost of revenues 1,229,508 1,410,732
----------- ------------
Gross margin (loss) 125,390 (42,218)
Marketing expense 3,566,900 2,818,050
Research and development expense 297,657 19,120
----------- ------------
Operating loss (3,739,167) (2,879,388)
Provision for loss on
discontinued operations (1,750,000) --
----------- ------------
Loss on discontinued operations $(5,489,167) $(2,879,388)
=========== ===========
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Manufacturing
We have established manufacturing and distribution relationships with
firms, that we believe will provide the capability to meet our anticipated
requirements for the development of our therapeutic and agricultural products
for the foreseeable future. We audit our contract-manufacturing firms for
process capability, management control and for the capacity to scale-up
production in the event that larger volumes of product are needed.
Materials and components are selectively sourced from suppliers
nationally. We have good working relationships with all our manufacturing
associates and suppliers.
Government Regulation
Certain of our activities are subject to extensive federal and local
laws and regulations controlling the development, testing, manufacture and
distribution of pesticide and pharmaceutical products. The pharmaceutical
products of our IGG subsidiary are subject to regulation as therapeutics by the
FDA, while our agricultural products are regulated as fungicides and/or
insecticides by the EPA and other federal and state regulatory agencies. In
addition, our products may also be subject to varying degrees of regulation by a
number of foreign governmental agencies. Compliance with FDA and EPA regulations
often results in substantial costs relating to laboratory and clinical testing
of new products, for the preparation and filing of documents in required formats
and for other testing. Moreover, there are no assurances that we will receive
the approvals necessary to commercially market our products.
Food and Drug Administration Regulation
The FDA approval process consists of three steps that all new drugs,
antibiotics and biologicals must follow. These steps are:
1. investigational new drug application
2. clinical trials
3. new drug application (review and approval)
In addition, the FDA may impose post-approval requirements (Phase 4) on the
applicant to further study some aspect of the product. The applicant is also
required to conduct post-market surveillance on its drug products.
In 1993 the FDA approved new procedures to accelerate the approval of
certain new drugs and biological products directed at serious or
life-threatening illnesses. These new procedures are intended to expedite the
approval process for patients suffering from terminal illness, if the drugs
subject to approval provide a therapeutic advantage over existing treatment. We
believe that GBC-590 may fall under the FDA guidelines for accelerated approval,
since they are targeted as potential treatments for cancer metastasis and
primary tumors, although there can be no assurance that they will be subject to
such accelerated approval standards.
Human clinical trials are generally conducted in three phases, normally
involving progressively larger numbers of patients. Phase I clinical trials are
concerned primarily with learning more about the safety of a drug, by
determining the drug's toxicity. Typically oncology related Phase I trials
involve 20-40 patients, taking one to two years to
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complete. Phase I has been completed for GBC-590.
Assuming the results of Phase I testing present no toxicity or
unacceptable safety problems, Phase II trials may begin. The primary objective
of this stage of clinical testing is to determine whether the drug is effective
in treating the disease or condition for which it is intended and it is designed
to continue to evaluate the toxicity of a drug. Phase II studies may take a year
or longer and could involve 200 or more patients for each type of disease or
illness tested. These studies are randomized controlled trials that also attempt
to identify short-term side effects and risks in people whose health is
impaired. The cost per patient is estimated at $50,000 to $70,000. Phase II
trials of GBC-590 being investigated for the treatment of pancreatic and
colorectal cancers began in the second quarter of 2000. We plan to commence an
expanded Phase IIb colorectal trial in 2001 and may commence an initial trial
for prostate cancer in 2002.
The objective of Phase III is to develop information that will allow the
drug to be marketed and used safely. Phase III trials generally involve hundreds
of patients with the objective of expanding on the research carried out in Phase
II. Among the objectives of Phase III trials are to demonstrate that the product
is effective and safe for treatment of a disease and to discover less common or
even rare side effects and adverse reactions. This information will be
incorporated into the drug's labeling.
The third step that is necessary prior to marketing a new drug is the New
Drug Application (NDA) submission and approval. In this step, all the
information generated in the clinical trials along with preclinical, chemistry,
manufacturing and controls, pharmacokinetic data and labeling will be submitted
for review and, if acceptable to demonstrate safety and effectiveness, the drug
will be approved for marketing.
Subsequent to, or as a condition of FDA approval, the FDA may impose
post-approval requirements (Phase 4) on the applicant to further study some
aspect of the product. The applicant is also required to conduct post-market
surveillance on its drug product. The time required to complete all steps
averages seven years, but can take significantly longer. There is no assurance
that the Company will ever receive FDA approval of any of its products.
Environmental Agency Approvals
EPA and state regulatory approvals must be obtained for all
agricultural products constituting fungicides, insecticides or herbicides before
these products can be sold in a particular state.
EPA approval requires submitting a comprehensive data package
describing the product and its active ingredients. The package includes
information on product identity, product chemistry, mammalian toxicology,
non-target animal and plant studies and a clear and well-defined manufacturing
process. Although there is no set registration time schedule, due in part to
EPA's backlog of registration filings and need to be satisfied that all data
requirements have been met, most low risk, exempt from tolerance, pesticides
(like those from SafeScience) typically take from 12 to 18 months for approval.
The EPA regulatory process for the first generation (1%) Elexa PDB was completed
and the product was
8
approved for sale in October 1997. Unconditional registration approval from the
Federal EPA for a new more concentrated (4%) formulation of Elexa PDB was also
received on February 15, 2001. The California State Pesticide regulatory
approval is pending and the Company will also seek to register Elexa-4 with
other state regulatory agencies. There can be no assurance that the Company will
receive approval for all, or any, of Elexa PDB's labeling claims from the State
of California, or other state regulatory agencies.
The Company has initiated the registration process for another pesticide.
Our microbial agent, referred to as Bb447, for use in bait stations in homes and
commercial settings for control of cockroaches and ants has also been submitted
to the EPA and is pending registration.
The Company may pursue registration of its agricultural products in foreign
countries through its international distribution network.
The Internet
The Internet provides us with an international online audience that is
self-selected for its interest in ideas concerning human therapeutics, as well
as, chemical and environmental safety. It allows potential partners throughout
the world with ideas, information and products to contact us. We can be found at
http://www.safescience.com.
Competition
Our products will encounter significant competition from firms
currently engaged in the pharmaceutical, biotechnology, and agrochemical
products industries.
In the pharmaceutical area, both GBC-590, our lead drug candidate for
the treatment of multiple forms of cancer, and CAN-296 for the treatment of
various fungal disorders, address large markets which are already populated with
several biotechnology and large pharmaceutical companies. These companies
utilize different drug discovery methodologies, including small molecule,
protein chemistry, liposome technology, and genomics. The drug development
industry is intensely competitive, and many of our actual or potential
competitors have significantly greater financial resources and/or drug
development experience than we do. There is no assurance that other
carbohydrate-based or non-carbohydrate-based drugs with similar clinical effects
to GBC-590 may not already be in development by other companies or that other
companies may not successfully develop such drugs in the future.
Our agricultural products compete in several different markets. Elexa
PDB competes in the "high value" agricultural market. Many competitors have
established brand recognition and customer loyalty and are significantly larger,
with much greater financial resources and well-established chains of
distribution, than the Company. It is our goal, however, to not necessarily
replace competitors' products in certain instances, but to offer an alternative
mode of action which can be used in conjunction with many conventional
pesticides in integrated pest management programs.
9
Our failure to compete successfully against current or future
competitors could seriously harm our business, financial condition and results
of operation.
Product Liability
Because the Company's products are intended to be used in a wide
variety of applications including human therapeutic and agricultural
commodities, the Company may be exposed to significant product liability claims.
The Company has purchased product liability insurance for all its products,
which it believes is adequate; however, there can be no assurance that available
amounts of coverage will be sufficient to protect the Company in the event of a
successful product liability claim.
Patent Status and Protection of Proprietary Technology
On January 26, 2001, SafeScience executed an agreement with Wayne State
University and the Barbara Ann Karmanos Cancer Institute granting an exclusive
world-wide license to SafeScience to patents related to "GBC-590 Material"
issued to or applied for by Wayne State University and the Barbara Ann Karmanos
Cancer Institute. This agreement adds the rights to these patents and patent
applications to the Company's existing portfolio of licensed patents and patent
applications, consolidating the rights to all of the parties' existing GBC-590
intellectual property within SafeScience. SafeScience made an initial payment of
$300,000 upon signing the agreement and will pay an additional $1,635,000 in
license payments over twelve months. Additional payments of up to $3,000,000 are
contingent upon reaching future commercialization milestones. The Company also
granted Wayne State University and the Barbara Ann Karmanos Cancer Institute
warrants to purchase jointly 1,375,000 shares of common stock at $1.15 that will
vest in equal quarterly installments over two years beginning March 31, 2001.
All payments made under this agreement will be recorded as research and
development expense until such time as revenue is generated. In addition, the
Company will pay a 2% royalty jointly to Wayne State University and the Barbara
Ann Karmanos Cancer Institute on net sales of GBC-590.
In addition, Dr. David Platt, our Former Chairman, CEO and Director,
has granted our IGG subsidiary an exclusive, world-wide license, including the
right to sublicense, for all products covered by certain patents, (if and when
granted) or patent applications that he has developed (including GBC-590). The
license was entered into on January 7, 1994 and was amended on April 14, 1999.
IGG is responsible for payment of all costs connected with obtaining and
maintaining the patents. In the case of GBC-590, Dr. Platt is entitled to a
royalty of 2% of all net sales.
The Company believes it has patent rights necessary to protect its core
business activities. Specifically, the Company has acquired the exclusive rights
to two granted United States patents, one pending United States patent and
corresponding foreign patent filings covering its GBC 590 therapies. The Company
has the exclusive rights to two granted United States patents, one pending
United States patent, and corresponding foreign patent filings covering its
Elexa (R) materials. The Company's BB-447 insect control technology is protected
by granted and pending patents in the United States and abroad.
To the extent that the Company currently relies 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 believe
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our intellectual property rights are significant and that the loss of all or a
substantial portion of such rights could have a material adverse effect on our
business, financial condition and results of operation. There is no assurance
that any patents will ever be granted on our unpatented intellectual property.
Uncertainties Associated with Research and Development Activities
The Company intends to continue its research and development activities
on its human therapeutic products, principally GBC-590, and its agricultural
products none of which are presently ready for market and are in various stages
of development. Research and development activities, by their nature, preclude
definitive statements as to the time required and costs involved in reaching
certain objectives although the costs of these activities will be significant.
If research and development requires more funding than anticipated, the Company
will have to reduce product development efforts or seek additional financing.
There can be no assurance that the Company would be able to secure any necessary
additional financing or that such financing would be available on favorable
terms.
Dependence Upon Key Persons
The Company relies greatly in its efforts on the services of Bradley J.
Carver, CEO, President, Treasurer and a member of the Board of Directors; John
W. Burns, Senior Vice President, Chief Financial Officer and Secretary; Brian
G.R. Hughes, Chairman of the Board; and Clark F. Springgate, M.D., Ph,D. Chief
Medical Officer. The operation and future success of the Company could be
adversely affected in the event the Company were to lose their services.
Employees
At December 31, 2000 we had approximately 29 employees on a full-time
basis and also employed a part-time worker, a decrease of 24 employees from
December 31, 1999 as we reduced the emphasis of our consumer and commercial
cleaning products. As of March 28, 2001, we had 17 full time employees and one
part-time worker.
ITEM 2. PROPERTIES.
Our offices are located at the Park Square Building, 8th Floor, 31 St.
James Avenue, Boston, Massachusetts 02116. We lease a total of 11,300 square
feet of office space, which we seek to reduce to approximately 5,000 square feet
due to the reduced number of employees.
In addition to our leased space in Boston, we are conducting research at various
facilities on a contract or license basis.
ITEM 3. LEGAL PROCEEDINGS.
There is no outstanding material litigation against the Company. The
Company is aware of potential litigation threatened by Agrogene Ltd. but does
not believe this threatened litigation represents a material
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threat to the Company's operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
MATTERS.
(a) Market Information
In May 1998, the Company's securities became traded on the NASDAQ
(Small Cap) market under the symbol SAFS. Prior thereto, the Company's
securities were traded over-the-counter by the National Association of
Securities Dealers, Inc. under the symbol IGGI. The table shows the high and low
closes of Company's common stock during 1999 and 2000:
QUARTER ENDED CLOSE
High Low
1999
March 31 9 5/8 4 3/4
June 30 23 3/4 9 1/2
September 30 29 14 7/16
December 31 20 7/8 11 5/8
2000
March 31 18 7/8 11 5/8
June 30 12 1/2 4 11/16
September 30 5 1/4 1 3/4
December 31 2 3/4 1 3/16
(b) Holders
As of March 28, 2001, the Company had 474 holders of record of its
common stock. This number does not include those beneficial owners whose
securities are held in street name. The total number of stockholders is
estimated to be approximately 7,900.
(c) Dividends
The Company has never paid a cash dividend on its common stock and has
no present intention to declare or pay cash dividends on the common stock in the
foreseeable future. The Company intends to retain any earnings which it may
realize in the foreseeable future to finance its operations. Future dividends,
if any, will depend on earnings, financing requirements and other factors.
(d) Sales of Unregistered Securities
Set forth in chronological order below is information regarding the
number of shares of capital stock issued by the Company during the year ended
December 31, 2000. Further included is the consideration, if any, received by
the Company for such shares, and information relating to the section of the
Securities Act or rule of the Securities and Exchange Commission under which
exemption from registration was claimed.
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1. On March 30, 2000, the Company issued an aggregate of 346,020 shares of
Common Stock to two accredited investors for $14.45 per share, warrants
to purchase 108,996 additional shares at $15.98 per share exercisable for
five years, and adjustable warrants to purchase shares at $0.01 per
share, the number of shares to be determined in the future according to a
formula based on the then price per share compared to the $14.45 common
stock offering price (see 4, 5, 6, 7, and 8 below). Net proceeds from the
offering were $4,462,061.
2. On March 30, 2000, the Company issued an aggregate of 333,334 shares of
Common Stock to four accredited investors for $12.00 per share, warrants
to purchase 75,758 additional shares at $15.98 per share exercisable for
five years. Net proceeds from the offering were $3,845,000
3. On June 30, 2000, the Company issued an aggregate of 138,408 shares of
Common Stock to two accredited investors for $14.45 per share. Net
proceeds from the offering were $1,841,182.
4. On August 2, 2000, the Company issued an aggregate of 256,456 shares of
Common Stock pursuant to the exercise of an adjustable warrant (see 1
above). Since the exercise was on a "cashless" basis there were no
proceeds from the exercise.
5. On October 3, 2000, the Company issued an aggregate of 345,467 shares of
Common Stock pursuant to the exercise of an adjustable warrant (see 1
above). Since the exercise was on a "cashless" basis there were no
proceeds from the exercise.
6. On October 5, 2000, the Company issued an aggregate of 460,324 shares of
Common Stock pursuant to the exercise of an adjustable warrant (see 1
above). Since the exercise was on a "cashless" basis there were no
proceeds from the exercise.
7. On November 27, 2000, the Company issued an aggregate of 600,000 shares
of Common Stock and a warrant to purchase 200,000 shares at $2.63 per
share, exercised for five years, pursuant to the exercise of an
adjustable warrant (see 1 above). Since the exercise was on a "cashless"
basis there were no proceeds from the exercise.
8. On December 5, 2000, the Company issued an aggregate of 600,000 shares of
Common Stock and a warrant to purchase 200,000 shares at $2.63 per share,
exercised for five years, pursuant to the exercise of an adjustable
warrant (see 1 above). Since the exercise was on a "cashless" basis there
were no proceeds from the exercise.
9. In 2000, the Company issued 5,518 shares of Common Stock to its employees
in consideration for services.
10. In 2000, the Company issued 30,500 shares of Common Stock to a consultant
in consideration for services.
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11. During the fourth quarter of 2000, the Company raised $4,703,000 in a
private placement offering of common stock to 15 accredited investors
whereby 3,960,421 shares were sold at $1.1875 per share, as well as,
warrants to purchase 396,042 shares each at prices of $2.20, $2.50, $3.00
and $5.00 per share exercisable for five years, and warrants to purchase
380,000 shares at $0.01 per share for a total of 1,964,168 shares
issuable upon the exercise of warrants. Net proceeds from the offering
were $4,703,000.
No underwriters were used in connection with these sales and issuances. The
sales and issuance of these securities were exempt from registration under the
Securities Act pursuant to Section 4(2) of the
Securities Act and the rules and regulations thereunder on the basis that the
transactions did not involve a public offering. All of the foregoing securities
are deemed restricted securities for the purposes of the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
The selected financial data presented below has been derived from the
financial statements of the Company. The following table summarizes certain
financial information and should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the Financial Statements and related notes included elsewhere in this Report.
The consolidated statement of operations data set forth below for the fiscal
years ended December 31, 1998, 1999 and 2000, and the consolidated balance sheet
data as of December 31, 1999 and 2000, are derived from the Company's financial
statements which have been audited by Arthur Andersen LLP, independent public
accountant, and which are included elsewhere in this Annual Report on Form 10-K.
The consolidated statement of operations data for the years ended December 31,
1996 and 1997 as well as the consolidated balance sheet data as of December 31,
1998, 1997 and 1996 are derived from the audited consolidated financial
statements not included in this Annual Report on Form 10-K. The information
shown below may not be indicative of the Company's future results of operations.
As of December 31,
------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,547,353 $3,377,067 $ 3,439,408 $ 2,594,312 $ 444,661
Working capital 1,768,337 2,554,744 3,095,242 2,180,775 272,315
Total assets 5,779,117 5,513,500 3,968,588 2,906,737 488,839
Stockholders' equity 1,845,751 4,521,117 3,500,449 2,443,120 298,091
Year Ended December 31,
------------------------------------------------------------------------------------------
TATEMENT OF OPERATIONS DATA:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Research and development 4,494,135 2,887,904 2,174,400 2,390,021 1,095,027
General and administrative 4,093,507 5,837,861 4,420,886 2,428,072 1,118,125
Marketing 1,688,015 1,041,994 - - -
Restructuring charge 1,478,957 - - - -
------------ ----------- ----------- ----------- -----------
perating loss (11,754,614) (9,767,759) (6,595,286) (4,818,093) (2,213,152)
------------ ----------- ----------- ----------- -----------
Other income (expense)
Interest and other expense (243,373) (8,063) (392) - (105,284)
Interest income 216,842 353,492 122,173 83,618 18,289
Loss on disposal of assets - - - - (1,767)
------------ ----------- ----------- ----------- -----------
Total other income (expense) (26,531) 345,429 121,781 83,618 (86,995)
------------ ----------- ----------- ----------- -----------
Loss from continuing operations (11,781,144) (9,422,330) (6,473,505) (4,734,475) (2,300,147)
------------ ----------- ----------- ----------- -----------
Loss from discontinued operations
(5,489,167) (2,879,388) - - -
Net loss $(17,270,311) $(12,301,718) $(6,473,505) $(4,734,475) $(2,300,147)
============= ============= ============ ============ ============
Basic and diluted net loss per
common share from continuing
operations $ (0.64) $ (0.59) $ (0.50) $ (0.43) $ (0.26)
Basic and diluted net loss per
common share from
discontinued operations (0.30) (0.18) - - -
------------ ----------- ----------- ----------- -----------
Basic and diluted net loss per $ (0.94) $ (0.77) $ (0.50) $ (0.43) $ (0.26)
========= ========= ======== ======== ========
common share
Number of weighted average 18,314,819 16,060,783 13,000,259 11,022,577 8,700,146
shares outstanding ============= ========== ========== ========== ==========
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
report.
Results of Operations: December 31, 2000 versus December 31, 1999
Continuing Operations
- ---------------------
Research and development expenses increased to $4,494,135 for the year
ended December 31, 2000 from $2,887,904 for the year ended December 31, 1999, an
increase of $1,606,231, or 55.6%. This increase was principally attributable to
the Company's ongoing clinical trials of GBC-590, its lead drug candidate,
partially offset by reduced spending on agricultural products.
General and administrative expenses decreased to $4,093,507 for the
year ended December 31, 2000 from $5,837,861 for the year ended December 31,
1999, a decrease of $1,744,804, or 29.9%. This decrease was principally
attributable to a reduction in consulting expense and officers' compensation
partially offset by increases in other salaries and rent.
Marketing expenses increased to $1,688,015 for the year ended December
31, 2000 from $1,041,994 for the year ended December 31, 1999, an increase of
$646,021, or 62.0%. This increase was principally attributable to salaries and
consulting expense for agriculture and human therapeutics not directly related
to research and development.
During the second quarter, Bradley J. Carver became the Company's new
Chief Executive Officer to replace Dr. David Platt and the Company began a
restructuring of operations. In connection with Dr. Platt's departure and other
employee reductions, the Company recorded a charge in the amount of $1,478,956
to cover associated costs. (See Note 3)
Interest income decreased to $216,842 for the year ended December 31,
2000 from $353,492 for the year ended December 31, 1999, a decrease of $136,650,
or 38.7%. This decrease was attributable to a reduction in cash available for
investment.
Discontinued Operations
- -----------------------
On November 15, 2000, the Company engaged a merchant bank to explore
alternatives including sale or other disposition of the Company's consumer,
commercial and agriculture business areas. The Company terminated operations of
the consumer and commercial product business areas on February 23, 2001 and
began the process of liquidating all assets and liabilities pertaining to those
operations. Accordingly, the Company has treated its consumer and commercial
products operations as a discontinued operation in accordance with Accounting
Principles Board Opinion No. 30 and has reclassified the 1999 financial
statements to reflect this treatment. For the year ended December 31, 2000, the
Company has recorded a reserve in the amount of $1,750,000 which includes
approximately $983,000 to reduce the carrying value of assets to their estimated
liquidation value and a liability of approximately $767,000 to accrue for the
cost of closing the operations.
17
The net losses of the discontinued operations are included in the
statements of operations under discontinued operations. The loss from
discontinued operations consists of the following:
Year Ended December 31,
2000 1999
Revenues $ 1,354,898 $ 1,368,514
Cost of revenues 1,229,508 1,410,732
--------- ------------
Gross margin (loss) 125,390 (42,218)
Marketing expense 3,566,900 2,818,050
Research and development expense 297,657 19,120
----------- ------------
Operating loss (3,739,167) (2,879,388)
Provision for loss on discontinued
operations (1,750,000) -
----------- ------------
Loss on discontinued operations $(5,489,167) $ (2,879,388)
============ =============
Results of Operations: December 31, 1999 versus December 31, 1998
Research and development expenses increased to $2,887,904 for the year
ended December 31, 1999 from $2,174,400 for the year ended December 31, 1998, an
increase of $713,504, or 32.8%. This increase was principally attributable to
the Company's ongoing research activities on GBC-590, its lead drug candidate.
General and administrative expenses increased to $5,837,861 for the
year ended December 31, 1999 from $4,420,886 for the year ended December 31,
1998, an increase of $1,416,975, or 32.1%. This increase was principally
attributable to a combination of additional administrative compensation costs
and related employee benefits expenses.
Marketing expenses were $1,041,994 for the year ended December 31,
1999. Due to the reclassifications for discontinued operations, no comparison
with 1998 would be meaningful. Marketing expenses were principally attributable
to salaries, consultants and travel for agriculture and human therapeutics not
directly related to research and development.
Interest income increased to $353,492 for the year ended December 31,
1999 from $122,173 for the year ended December 31, 1998, an increase of
$231,319, or 189.3%. This increase was attributable to an increase in cash
available for investment due to cash proceeds received from six private
placements of the Company's securities during 1999 and 1998 and interest charged
on notes receivable from related parties.
18
Liquidity and Capital Resources
Since inception, the Company has funded its operations primarily with
the proceeds from debt and equity securities totaling approximately $40,500,000.
For the year ended December 31, 2000, the Company's operations utilized cash of
$13,287,000 primarily to fund the operating loss, including $4,581,000 for
discontinued operations. This use of cash was offset by equity financings that
resulted in net proceeds of $12,851,000 to the Company. In 1999, the Company's
operations utilized cash of $10,050,000 which was offset by equity financings
that resulted in net proceeds of $10,939,000.
Capital expenditures for the year ended December 31, 2000 were as follows:
Computer, office and
laboratory equipment $35,162
Furniture, fixtures and
leasehold improvements 71,000
---------
$ 106,162
=========
The Company has no significant commitments for the purchase of
equipment, product manufacturing or marketing efforts at present. The Company
leases office facilities under an operating lease that ends in February 2005.
Rent expense for this space will be approximately $398,000 in 2001. The Company
is seeking to reduce its space from the current 11,300 square feet to
approximately 5,000 square feet due to the reduced number of employees.
On January 26, 2001, SafeScience executed an agreement with Wayne State
University and the Barbara Ann Karmanos Cancer Institute granting an exclusive
world-wide license to SafeScience to patents related to "GBC-590 Material"
issued to or applied for by Wayne State University and the Barbara Ann Karmanos
Cancer Institute. This agreement adds the rights to these issued patents and
patent applications to the Company's existing portfolio of licensed patents and
patent applications, consolidating the rights to all of the parties' existing
GBC-590 intellectual property within SafeScience. SafeScience made an initial
payment of $300,000 upon signing the agreement and will pay an additional
$1,635,000 in license payments over twelve months. Additional payments of up to
$3,000,000 are contingent upon reaching future commercialization milestones. The
Company also granted Wayne State University and the Barbara Ann Karmanos Cancer
Institute warrants to purchase jointly 1,375,000 shares of common stock at $1.15
that will vest in equal quarterly installments over two years beginning March
31, 2001. All payments made under this agreement will be recorded as research
and development expense until such time as revenue is generated. In addition,
the Company will pay a 2% royalty jointly to Wayne State University and the
Barbara Ann Karmanos Cancer Institute on net sales of GBC-590.
19
As of December 31, 2000, the Company's cash balances were approximately
$2,547,000, as compared to $3,377,000 as of December 31, 1999. The Company has
no bank lines of credit or other commercial financing sources at present but may
seek such sources in the future. It is not known whether additional funds could
be borrowed from stockholders or other sources.
During the fourth quarter of 2000, the Company raised $4,703,000 in a
private placement offering of common stock whereby 3,960,421 shares were sold at
$1.1875 per share, as well as warrants to purchase 396,042 shares each at prices
of $2.20, $2.50, $3.00 and $5.00 per share exercisable for five years, and
warrants to purchase 380,000 shares at $0.01 per share for a total of 1,964,168
shares issuable upon exercise of warrants. The purchasers have certain rights
including, but not limited to, registration rights, and adjustments for certain
events. Net proceeds from the offering were $4,703,000. The payment by one
purchaser was not received by the Company until January 3, 2001, and therefore
was recorded as a stock subscription receivable at December 31, 2000 in the
amount of $2,000,000.
During the first quarter of 2001, the Company has raised $800,000 in a
private placement offering of common stock whereby 700,000 shares were sold at a
weighted average of $1.1429 per share. The purchasers also received warrants to
purchase 280,000 shares at prices ranging from $2.20 to $5.00 per share
exercisable for five years, and warrants to purchase 90,000 shares at $0.01 per
share.
As of March 30, 2001, the Company's cash and cash equivalents was
approximately $1,946,793.
The Company believes that its existing funds will be sufficient to fund
its operating expenses and capital requirements as currently planned into June
2001. The Company's future is dependent upon its ability to obtain financing to
fund its operations. The Company is seeking to raise additional debt and/or
equity financing. In the event the Company is unable to obtain additional
financing it will be required to substantially reduce or cease operations. The
Company expects to incur substantial additional operating costs, including costs
related to ongoing research and development activities, preclinical studies and
clinical trials.
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 December 31, 2000, the Company has
evaluated its risk and determined that any exposure to currency exchange is not
significant to the Company's overall consolidated financial results. There can
be no assurance that the
20
Company's exposure will remain at these levels, especially in the event of
significant and sudden fluctuations in the value of local currencies. The
Company does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Sensitivity
The Company maintains short-term investments in an overnight money
market account comprised of U.S. treasury bills. If market interest rates were
to increase immediately and uniformly by 10% from levels that existed at
December 31, 2000, the fair value of the portfolio would decline by an
immaterial amount.
Certain Factors That May Affect Future Results
The risks and uncertainties described below are not the only ones facing
SafeScience, Inc. Additional risks and uncertainties not presently known to the
Company or that it currently deems immaterial may also impair its business
operations.
If any of the following risks actually occur, the Company's business, financial
condition or results of operations could be materially adversely affected. In
those cases, the trading price of the common stock could decline.
WE HAVE EXPERIENCED SIGNIFICANT OPERATING LOSSES THROUGHOUT OUR HISTORY, WE
EXPECT THESE LOSSES TO CONTINUE AND WE MAY NOT ACHIEVE PROFITABILITY IN THE
FUTURE
We began operations more than eight years ago and began to generate revenue only
in the second quarter of 1999. Through December 31, 2000, we have only generated
$2,723,000 from product sales. On February 23, 2001 we announced the
discontinuation of our consumer and commercial product business from which all
of our revenues to date have been generated. We do not expect to generate
product revenue for several years; if at all. We have incurred approximately
$44.0 million of operating losses since our inception, including $17.3 million
in the year ended December 31, 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
21
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, or unsafe, 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. If research and
development requires more funding than anticipated, we will have to reduce our
product development efforts or seek additional financing. Our product
development efforts may be unsuccessful, required regulatory approvals from U.S.
or foreign authorities may not be obtained, and products, if introduced, may not
be capable of being produced in commercial quantities at reasonable costs or be
successfully marketed. The failure of our research and development activities to
result in any commercially viable products or technologies would materially
adversely affect our future prospects.
WE MAY NOT GENERATE REVENUES IN THE FUTURE BECAUSE WE HAVE CEASED OPERATION OF
OUR CONSUMER AND COMMERCIAL PRODUCT AREAS
We have generated substantially all our revenues from our consumer and
commercial products. We have discontinued operations for our consumer and
commercial product business and are exploring alternatives for our agricultural
product business. We will not generate revenues or other funds on an ongoing
basis unless we receive current payments with respect to the sale of these areas
or we are able to successfully bring to market pharmaceutical or agricultural
products.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FUNDING WHEN NEEDED, WHICH COULD REDUCE
OUR ABILITY TO FUND OR EXPAND OPERATIONS
We believe that our existing funds are sufficient to fund our operating expenses
and capital requirements into June 2001. We are pursuing additional funds
through sales of our securities. Additional equity financing may result in
dilution to our shareholders. The resale of the common stock offered by selling
stockholders may negatively affect our ability to obtain financing. If the
market price of our common stock declines, some potential investors may either
refuse to offer us any financing or will offer financing at unacceptable rates
or unfavorable terms. If we are unable to obtain financing on favorable terms,
we may be unable to fund or expand our operations or we may only be able to fund
or expand our operations on terms that adversely affect our financial condition.
If we are unable to obtain financing necessary to fund our operations, we may
have to sell or liquidate SafeScience.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY OR OUR INFRINGEMENT ON THE
PROPERTY RIGHTS OF OTHERS MAY IMPEDE OUR ABILITY TO OPERATE FREELY
22
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. 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, 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 GENERATE REVENUES
We license our technology, including GBC-590, from third parties. 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. 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 AGRICULTURAL AND MEDICAL COMMUNITIES OUR
BUSINESS WILL SUFFER
Our principal product areas are agricultural products and pharmaceuticals.
Commercial sales of our proposed products in these areas 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
23
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 management, the size and scope
of our business so warrants. While we have established manufacturing
relationships with 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 manufacturer 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 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 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
24
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. 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 is subject to
regulation by the EPA, including the need for approval before marketing, and by
comparable foreign and state agencies. Our agricultural products will be able to
be commercially marketed for use either in the United States or other countries
only by 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 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
25
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.
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. At present, we employ approximately 17 full time employees and one part
time worker. 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.
WE ARE CONTRACTUALLY OBLIGATED TO ISSUE SHARES IN THE FUTURE
As of December 31, 2000 there were outstanding options to purchase 1,163,417
shares of common stock, at a weighted average exercise price of $6.39 per share
and warrants to purchase 2,665,104 shares of common stock at a weighted average
price of $4.01 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 current shareholders.
WE MUST COMPLY WITH THE LISTING REQUIREMENTS OF THE NASDAQ SMALLCAP MARKET OR
OUR COMMON STOCK AND LIQUIDITY WOULD DECLINE
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 for thirty (30)consecutive
business days, 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
26
common stock held by our stockholders (other than our directors and executive
officers) is less than $1,000,000. On certain days in March 2001 our common
stock traded at prices below $1.00 per share.
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." 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.
IF A SIGNIFICANT NUMBER OF SHARES BECOME AVAILABLE FOR SALE OUR STOCK PRICE
COULD DECLINE
Many shares of common stock presently issued and outstanding are "Restricted
Securities" as that term is defined in Rule 144 promulgated under the Act. In
general, under Rule 144, a person (or persons whose shares are aggregated) who
has satisfied a one year holding period may sell, within any three month period,
an amount which does not exceed the greater of 1% of the then outstanding shares
of common stock or the average weekly trading volume during the four calendar
weeks prior to such sale. Rule 144 also permits the sale of shares, under
certain circumstances, without any quantity limitation, by persons who are not
affiliates of SafeScience and who have beneficially owned the shares for a
minimum period of two years. The possible sale of these restricted shares may,
in the future, increase the number of free-trading shares and may have a
depressive effect on the price of our securities. Moreover, such sales, if
substantial, might also adversely effect our ability to raise additional equity
capital.
BECAUSE OUR CURRENT MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR COMMON
STOCK, THEY HAVE SUBSTANTIAL CONTROL OVER US
The holders of the common stock do not have cumulative voting rights. Two of our
directors, one of whom is an executive officer of SafeScience, own approximately
15% collectively of the outstanding shares of common stock. These stockholders
can substantially influence all matters requiring stockholder approval,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in control or otherwise discouraging a potential acquirer
from attempting to obtain control of us, which in turn could materially
adversely affect our
27
stock price.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES BY YOU
The market price of the common stock, which is traded on the National
Association of Securities Dealers Automated Quotation (NASDAQ - Small Cap) has
been, and may continue to be, highly volatile. The stock market has from time to
time experienced extreme price and volume fluctuations, particularly in the
biotechnology sector, which have often been unrelated to the operating
performance of particular companies. In addition, factors such as announcements
of technological innovations or new products, either by us or by our competitors
or third parties, as well as market conditions within the various industries in
which we compete, may have a significant impact on the market price of our
common stock.
AN INVESTMENT IN OUR STOCK IS SPECULATIVE AND ENTAILS A HIGH DEGREE OF RISK
There is nothing at this time upon which to base an assumption that our plans
for our business will prove successful. If our plans prove unsuccessful, the
purchasers of our shares may lose all or a substantial part of their investment.
Our operations are subject to numerous risks associated with the development of
agricultural 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.
ITEM 7A. QUANTITATIVE AND QUALATATIVE DISCLOSURE ABOUT MARKET RISK.
The Company has no material market risk exposure.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants
To the Stockholders and Board of Directors of SafeScience, Inc.:
We have audited the accompanying consolidated balance sheets of SafeScience,
Inc. and subsidiaries (the Company) as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and had an accumulated deficit of $44.0 million as of December 31, 2000. In
addition, the Company's business plan for 2001 is predicated on obtaining
additional financing for which the Company has not received any commitments as
of March 20, 2001. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Managements' plan in regard to these
matters is described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 20, 2001
F-1
SAFESCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------
2000 1999
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 2,547,353 $ 3,377,067
Stock subscription receivable 2,000,000 --
Prepaid expenses and
other current assets 288,134 170,060
----------- -----------
Total current assets 4,835,487 3,547,127
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Computer, office and
laboratory equipment 455,994 399,758
Furniture, fixtures and
leasehold improvements 281,274 210,274
Motor vehicles 25,026 46,100
----------- -----------
762,294 656,132
Less-Accumulated depreciation (324,932) (197,020)
----------- -----------
437,362 459,112
----------- -----------
OTHER ASSETS:
Note receivable-related parties 128,659 661,005
Restricted cash 108,128 108,128
Net assets of discontinued operation -- 724,060
Deposits 269,481 14,068
----------- -----------
Total other assets 506,268 1,507,261
----------- -----------
Total assets $ 5,779,117 $ 5,513,500
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-2a
SAFESCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
------------
2000 1999
---- ----
CURRENT LIABILITIES:
Accounts payable 1,360,615 327,463
Accrued liabilities 797,964 664,920
Net liabilities of discontinued
operations 908,571 --
------------ ------------
Total current liabilities 3,067,150 992,383
------------ ------------
Commitments and Contingencies (Note 6)
OTHER EQUITY (Note 8) 866,216 --
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value
Authorized - 5,000,000 shares
Issued and outstanding - None -- --
Common stock, $.01 par value
Authorized - 100,000,000 shares
Issued and outstanding -
23,998,504 and 16,835,923
shares at December 31, 2000
and 1999, respectively 239,985 168,359
Additional paid-in capital 48,243,184 33,719,865
Note receivable from officer -
Issuance of common stock (2,675,000) (2,675,000)
Accumulated deficit (43,962,418) (26,692,107)
------------ ------------
Total stockholders' equity 1,845,751 4,521,117
------------ ------------
Total liabilities and
stockholders' equity $ 5,779,117 $ 5,513,500
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-2b
SAFESCIENCE, INC.
Consolidated Statements of Operations
Years Ended December 31,
---------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Operating Expenses:
Research and development $4,494,135 $ 2,887,904 $ 2,174,400
General and administrative 4,093,507 5,837,861 4,420,886
Marketing 1,688,015 1,041,994 -
Restructuring charge 1,478,956 - -
----------- ----------- -----------
Operating loss (11,754,613) (9,767,759) (6,595,286)
----------- ----------- -----------
INTEREST(EXPENSE) INCOME:
Interest expense (243,373) (8,063) (392)
Interest income 216,842 353,492 122,173
----------- ----------- -----------
Total other (expense) income
(26,531) 345,429 121,781
----------- ----------- -----------
Loss from continuing
operations (11,781,144) (9,422,330) (6,473,505)
Loss from discontinued
operations (5,489,167) (2,879,388) -
----------- ----------- -----------
Net loss $ (17,270,311) $ (12,301,718) $ (6,473,505)
============ ============ ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE
FROM CONTINUING OPERATIONS
$ (0.64) $ (0.59) $ (0.50)
BASIC AND DILUTED NET LOSS PER COMMON SHARE
FROM DISCONTINUED OPERATIONS
(0.30) (0.18) -
----------- ----------- -----------
BASIC AND DILUTED NET LOSS PER COMMON SHARE
$ (0.94) $ (0.77) $ (0.50)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 18,314,819 16,060,783 13,000,259
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
SAFESCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Additional Note Receivable Stockholder's
Number Paid-in From Accumulated Equity
of Shares Amount Capital Officer Deficit (Deficit)
BALANCE, DECEMBER 31, 1997 12,098,576 $ 120,986 $ 10,239,018 -- (7,916,884) $ 2,443,120
Private placements 1,897,426 18,974 6,824,197 -- -- 6,843,171
Stock options issued for
consulting and professional
services valued at $3.63
to $7.66 per option -- -- 687,463 -- -- 687,463
Stock options exercised 111,214 1,112 (912) -- -- 200
Net loss -- -- -- -- (6,473,505) (6,473,505)
---------- ---------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998 14,107,216 $ 141,072 $ 17,749,766 -- (14,390,389) $ 3,500,449
Options exercised 78,877 789 116,731 -- -- 117,520
Expense associated with
options granted to nonemployees -- -- 528,233 -- -- 528,233
Private placements, net of
finders fee of $445,259
(includes 1,112 shares for payment) 1,615,706 16,157 9,119,944 -- -- 9,136,101
Stock issued for services 218,276 2,183 1,413,727 -- -- 1,415,910
Warrants exercised 545,396 5,454 1,812,374 -- -- 1,817,828
Notes receivable from
issuance of common stock 250,000 2,500 2,672,500 (2,675,000) -- --
Common stock issued as legal settlement 20,453 204 306,590 -- -- 306,794
Net loss -- -- -- -- (12,301,718) (12,301,718)
------------ ---------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1999 16,835,924 $ 168,359 $ 33,719,865 $(2,675,000) (26,692,107) $ 4,521,117
------------ ------------
Private placements 4,778,184 68,142 14,783,101 -- -- 14,851,243
Cashless exercise of warrants 2,262,256 2,262 (2,262)
Reclassification to other equity -- -- (866,216) -- -- (866,216)
Exercise of common stock options 44,376 444 (444) -- -- --
Common stock issued for services and wages 93,287 933 804,562 -- -- 805,495
Common stock redeemed in payment
of notes receivable (15,523) (155) (195,422) -- -- (195,577)
Net loss -- -- -- -- (17,270,311) (17,270,311)
------------ ---------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 2000 23,998,504 $ 239,985 $ 48,243,184 $(2,675,000) $(43,962,418) $ 1,845,751
========== ========== ============ =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements
F-4
SAFESCIENCE, INC.
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
Cash Flows from Operating Activities:
Net loss $(17,270,311) $(12,301,718) $ (6,473,505)
Loss from discontinued operations (5,489,167) (2,879,388) --
Loss from continuing operations (11,781,144) (9,422,330) (6,473,505)
Adjustments to reconcile net loss to net cash
used in operating activities
Operating expenses paid in common stock and options
805,495 2,367,871 1,999,212
Provision for losses on loans to related
Parties 336,768 -- --
Depreciation and amortization 160,662 125,563 53,684
Changes in assets and liabilities
Prepaid expenses and other current assets (118,075) (57,386) (61,354)
Accounts payable 1,033,153 80,649 97,959
Accrued liabilities 133,044 459,502 (109,345)
Net cash used in continuing operating
activities
(9,430,097) (6,446,130) (4,493,349)
------------ ------------ ------------
Net assets of discontinued operations 724,060 (724,060) --
Net liabilities of discontinued operations 908,571 -- --
Net cash used in discontinued operations (3,856,536) (3,603,448) --
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (138,913) (364,450) (205,188)
Loans to related parties -- (574,178) --
Repayment of stockholders' loans -- -- 1,167
(Increase) decrease in deposits, net (255,411) (12,741) 5,000
Decrease in restricted cash -- -- 11,010
------------ ------------ ------------
Net cash used in investing activities (394,324) (951,369) (188,011)
------------ ------------ ------------
Cash Flows from Financing Activities:
Payments on notes payable -- (15,908) --
Stock subscription receivable (2,000,000) -- --
Payments for obligations under capital lease -- -- (5,166)
Proceeds from issuance of common stock 14,851,243 9,019,166 5,531,422
Proceeds from exercise of warrants -- 1,817,828 --
Proceeds from exercise of common stock options -- 117,250 200
------------ ------------ ------------
Net cash provided by financing activities 12,851,243 10,938,606 5,526,456
------------ ------------ ------------
Net (Decrease) Increase in Cash (829,714) (62,341) 845,096
Cash and Cash Equivalents, beginning of period 3,377,067 3,439,408 2,594,312
------------ ------------ ------------
Cash and Cash Equivalents, end of period 2,547,353 3,377,067 3,439,408
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations
$ -- $ -- 21,074
============ ============ ============
Note receivable from issuance of common stock $ -- $ 3,343,750 $ --
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,451 $ 319 $ 392
============ ============ ============
Exchange of common stock for notes receivable $ 195,577 -- --
============ ============ ============
F-5
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(1) SUMMARY of OPERATIONS AND 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 also focuses on other pharmaceuticals
and agricultural 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 agricultural products some of which are also based upon
carbohydrate chemistries. These products will be either licensed from or jointly
developed with third parties (Note 7). SafeScience, Inc., International Gene
Group, Inc. and SafeScience Products, Inc. maintain an office in Boston,
Massachusetts.
As of December 31, 2000, the Company has an accumulated deficit of $43,962,418.
Additionally, the Company's operating plan indicates that the Company's existing
cash balance will only be sufficient to sustain operations into June 2001 unless
additional financing is obtained. The Company has not obtained commitments from
any existing or potential investors to provide such financing as of March 20,
2001. In the event that additional financing is not obtained, the Company may be
required to significantly reduce or curtail operations. There is substantial
doubt that the Company will have the ability to continue as a going concern. The
financial statements do not contain any adjustments that may be required as a
result of this uncertainty.
During the fourth quarter of 2000, the Company raised $4,703,000 in a private
placement offering of common stock whereby 3,960,421 shares were sold at $1.1875
per share, as well as warrants to purchase 396,042 shares each at prices of
$2.20, $2.50, $3.00 and $5.00 per share exercisable for five years, and warrants
to purchase 380,000 shares at $0.01 per share for a total of 1,964,168 shares
issuable upon exercise of warrants. The purchasers have certain rights
including, but not limited to, registration rights, and adjustments for certain
events. Net proceeds from the offering were $4,703,000. The payment by one
purchaser was not received by the Company until January 3, 2001, and therefore
was recorded as a stock subscription receivable at December 31, 2000 in the
amount of $2,000,000.
F-6
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
During the first quarter of 2001, the Company has raised $800,000 in a private
placement offering of common stock whereby 700,000 shares were sold at a
weighted average of $1.1429 per share. The purchasers also received warrants to
purchase 280,000 shares at prices ranging from $2.20 to $5.00 per share
exercisable for five years, and warrants to purchase 90,000 shares at $0.01 per
share.
Principal risks to the Company include the successful development and marketing
of products to obtain profitable operations, dependence on collaborative
partners, the need to obtain adequate financing to fund future operations,
United States Food and Drug Administration approval and other regulatory
agencies, clearance and regulation, dependence on key individuals and
competition from substitute products and larger companies (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) 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.
(d) Discontinued Operations
On November 15, 2000, the Company engaged a merchant bank to explore
alternatives including the sale or other disposition of the Company's consumer,
commercial and agricultural business areas. The Company terminated operations of
the consumer and commercial product business areas on February 23, 2001 and
began the process of liquidating all assets and liabilities pertaining to those
operations. Accordingly, the Company has treated its consumer and commercial
products operations as a discontinued operation in accordance with Accounting
Principles Board Opinion No. 30 and has reclassified the 1999 financial
statements to reflect this treatment. For the year ended December 31, 2000, the
Company has recorded a reserve in the amount of $1,750,000 which includes
approximately $983,000 to reduce the carrying value of assets to their
F-7
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
estimated liquidation value and a liability of approximately $767,000 to accrue
for the cost of closing the operations.
The net losses of the discontinued operations are included in the
statements of operations under discontinued operations. The loss from
discontinued operations consists of the following:
Year Ended December 31,
2000 1999
Revenues $ 1,354,898 $ 1,368,514
Cost of revenues 1,229,508 1,410,732
----------- ------------
Gross margin (loss) 125,390 (42,218)
Marketing expense 3,566,900 2,818,050
Research and development expense 297,657 19,120
----------- ------------
Operating loss (3,739,167) (2,879,388)
Provision for loss on
discontinued operations (1,750,000) --
----------- ------------
Loss on discontinued operations $(5,489,167) $(2,879,388)
=========== ===========
(e) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash and cash
equivalents at December 31, 2000 and 1999 include approximately $653,478 and
$1,042,000 in cash and approximately $1,893,875 and $2,335,000 in cash
equivalents, respectively, held in an overnight investment account, which is
reinvested 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.
(f) 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 Estimated
Classification Useful Life
- -------------- -----------
Computer, office and laboratory equipment 3 - 5 years
Furniture and fixtures 7 years
Motor vehicles 4 years
(g) Research and Development
Research and development costs, which consist primarily of expenses for clinical
trials, consultants, supplies and testing, are charged to operations as
incurred.
F-8
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
(h) Net Loss Per Share
The Company follows 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. Diluted net loss per share
is the same as basic net loss per share as the inclusion of common stock
equivalents would be antidilutive. Antidilutive securities that are not included
in diluted net loss per common share were 3,828,521, 660,424 and 840,532 for
2000, 1999 and 1998, respectively.
(i) Comprehensive Income
The Company follows 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 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 Company's
comprehensive net loss is the same as net loss for all periods presented.
(j) Disclosures About Segments of an Enterprise
The Company followed 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. Due to the discontinuation of the consumer and commercial products
business, the Company operates in one segment.
(k) Concentrations of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
F-9
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
Credit Risk, requires disclosure of any significant off-balance-sheet risk and
credit risk concentrations. The Company has no significant off-balance-sheet
risk or credit risk concentrations. The Company maintains its cash and cash
equivalents with multiple financial institutions and invests in investment-grade
securities.
(l) Financial Instruments
The estimated fair values of the Company's consolidated financial instruments,
which include cash equivalents, notes receivable and accounts payable,
approximate their carrying value due to the short maturity of these instruments.
The estimated fair value of the Company's capital lease obligations approximates
its carrying value based upon the current rates offered to the Company for
similar type arrangements. As of December 31, 2000, there were no capital lease
obligations.
(m) Post Retirement Benefits
The Company has no obligations for post retirement benefits.
(n) Reclassification
Certain items in the prior years consolidated financial statements have been
reclassified to conform to their 2000 presentation.
(o) Derivative Instruments and Hedging Accounting
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. As amended in
June 1999, the statement is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued statement No.
138, which is a significant amendment to SFAS NO. 133. SFAS NO. 133 and its
amendments establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively, the derivatives) and for hedging activities. The
Emerging Issues Task Force (EITF) has also issued a number of derivative-related
tentative and final consensuses. We do not expect the adoption of these
statements to have a material impact on our consolidated financial position or
results of operations.
F-10
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
In September 2000, The EITF issued 00-19 "Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company's Own Stock", which
requires freestanding contracts that are settled in a company's own stock,
including common stock warrants, to be designated as an equity instrument, asset
or a liability. Under the provisions of EITF 00-19, a contract designated as an
asset or a liability must be carried at fair value, with any changes in fair
value recorded in the results of operations. A contract designated as an equity
instrument must be included within equity and no fair value adjustments are
required. In accordance with EITF 00-19, the Company has determined that the
outstanding adjustable warrant, as of December 31, 2000, which required the
issuance of 729,445 shares of the Company's common stock should be designated as
temporary equity. Under the transition rules of EITF 00-19, the Company is
required to record as temporary equity as of December 31, 2000, the intrinsic
value of the warrants outside of stockholders' equity. As of December 31, 2000,
the Company has reclassified the intrinsic value of the warrants of $866,216 to
temporary equity from additional paid-in capital. As of December 31, 2000, these
warrants had a fair value of approximately $866,216. On February 5, 2001, the
Company issued 729,445 shares of common stock in satisfaction of the warrants
and reclassified the temporary equity to additional paid-in capital (see Note
8).
(2) NOTES RECEIVABLE - RELATED PARTIES
Notes receivable from related parties includes $61,548 of promissory notes from
Bradley J. Carver, Chief Executive Officer and President of the Company. The
loan is payable in monthly installments of $375 including interest of 5.66%,
with a final payment of $60,601 due on March 11, 2002. The note is
collateralized by shares of the Company's common stock.
On June 15, 1999, the Company entered into a transaction whereby a senior
executive relinquished an option to purchase 100,000 shares of common stock for
a price of $0.01 per share which would have vested on January 1, 2000 and, in
exchange, the Company issued to the executive a stock option for 250,000 shares
of common stock at an exercise price of $10.70 per share, the estimated fair
market value of the common stock on the date of the transaction. The option was
exercised immediately. The Company loaned the executive an amount representing
the entire exercise price. The note accrues interest at 4.92% per annum,
compounded semi- annually. The executive has pledged the 250,000 shares of
common stock as collateral. The note is nonrecourse but is pre-payable and is
secured only by the pledged shares. All outstanding principal, together with
accrued interest on the unpaid principal balance of this note, will be due on
June 15, 2004. The note is accounted for under variable plan
F-11
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
accounting. The balance outstanding at December 31, 2000 is $2,675,000 and is
shown in the accompanying statement of stockholders' equity.
(3) RESTRUCTURING CHARGE
During the second quarter of 2000, the Company implemented a restructuring plan
to reduce its size and realign its organization to conform with strategic
changes. The major component of the restructuring relates to the elimination of
approximately eight employees across the following functions: sales and
marketing (six), general and administrative (one), and research and development
(one). Components of the charge include severance and other related expenses. At
December 31, 2000, approximately $526,000 of accrued restructuring charges
remained which are comprised of approximately $426,000 of severance costs and
$100,000 of other costs. Approximately $357,700 of the expense has been paid by
the issuance of common stock. The total cash impact of the restructuring is
expected to amount to approximately $1,142,000. The total cash paid as of
December 31, 2000 was approximately $616,000 and the remaining amounts will be
paid through June 2002.
(4) STOCKHOLDERS'EQUITY
(a) Authorized Shares
The Company has authorized 100,000,000 $0.01 par value common shares and
5,000,000 $.01 par value preferred shares
(b) Sales of Common Stock
In 1998, the Company sold 181,818, 145,999, 406,206, 646,918 and 179,222 shares
of common stock at $2.75, $3.00, $4.25, $3.50 and $4.50 per share respectively.
Warrants to purchase one share for each four shares purchased were included in
the 181,818 and 145,999 share offerings.
In 1999, the Company sold 1,399,101, 307,500, and 216,605 shares of common stock
for $4.50, $3.50 and $ 15.24 (weighted average) per share, respectively. The
Company also issued 545,396 shares of common stock for warrants exercised at an
average weighted price of $3.333 per share.
In 2000, the Company sold 484,429, 333,334 and 3,960,421 shares of common stock
at $ 14.45, $12.00 and $1.1875 per share, respectively. Warrants to purchase
108,996, 83,334 and 1,964,168 shares of common stock were included in each
transaction, respectively. The Company also issued 2,262,256 shares of common
stock for warrants exercised on a cashless basis.
F-12
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
In 2001, the Company sold 700,000 shares of common stock at a weighted average
price of $1.1429 per share. The purchasers also received warrants to purchase
280,000 shares at prices ranging from $2.20 to $5.00 per share exercisable for
five years, and warrants to purchase 90,000 shares at $0.01 per share.
(c) Stock Option Plan
The Company has a Nonqualified Stock Option Plan (the 1996 Plan) and has
registered 500,000 shares of common stock with the Securities and Exchange
Commission for future issuance under option agreements. The exercise price of
each option will be determined by the Board of Directors and must be exercised
within 10 years from May 1, 1996. The Company may issue these options to its
officers, directors, employees and consultants. As of December 31, 2000, options
to purchase 11,659 shares were available for future grant under the 1996 Plan.
Effective December 1, 1998, the Company adopted the 1998 Incentive Stock Option
Plan (the 1998 Plan) under which 600,000 shares of common stock were reserved
for issuance under option agreements. As with the 1996 Plan, the exercise price
of the each option will be determined by the Board of Directors and may be
issued to officers, directors, employees and consultants. Additionally, the
options must be exercised within 10 years from December 1, 1998. As of December
31, 2000, options to purchase 172,077 shares were available for future grant
under the 1998 Plan.
Effective June 7, 2000, the Company adopted the 2000 Incentive Stock Option Plan
(the 2000 Plan) under which 1,000,000 shares of common stock were reserved for
issuance under option agreements. As with the 1998 Plan, the exercise price of
the each option will be determined by the Board of Directors and may be issued
to officers, directors, employees and consultants. Additionally, the options
must be exercised within 10 years from date of issuance. As of December 31,
2000, options to purchase 234,554 shares were available for future grant under
the 2000 Plan.
F-13
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
The following table summarizes all stock option activity to employees and
consultants for services as of December 31, 2000.
Weighted
Average
Number Exercise Price
Of Shares Per Share
Balance, December 31, 1997 108,333 $ 0.01
Granted 193,028 1.72
Exercised (111,214) 0.01
---------- ---------
Balance, December 31, 1998 190,147 $ 1.74
Granted 486,931 12.94
Exercised (78,877) 3.67
Forfeited (12,777) 13.38
---------- ---------
Balance, December 31, 1999 585,424 $ 10.42
Granted 768,357 4.22
Exercised (44,376) 0.01
Forfeited (145,988) 13.00
---------- ---------
Balance, December 31, 2000 1,163,417 $ 6.39
========== =========
Exercisable December 31, 1998 108,597 $ 1.74
========== =========
Exercisable December 31, 1999 561,424 $ 10.42
========== =========
Exercisable December 31, 2000 596,236 $ 8.89
========== =========
The following table presents weighted-average price and life information about
significant option groups outstanding at December 31, 2000:
---------Options Outstanding---------- ---Options Exercisable---
Weighted
Average Weighted Weighted Average
Remaining Average Exercise Price
Range of Exercise Prices Number Contractual Life Exercise Price Number
Outstanding in Years Exercisable
$ 0.010 $ 0.010 23,500 6.65 $ 0.0100 23,500 $ 0.0100
1.780 1.780 160,000 2.83 1.7800 0 0.0000
2.350 3.000 134,267 6.65 2.5825 33,750 3.0000
3.310 3.310 5,434 2.60 3.3100 0 0.0000
3.4375 3.4375 136,961 2.53 3.4375 136,961 3.4375
3.630 4.770 37,207 2.54 4.3398 1,666 4.7700
4.970 4.970 275,000 6.56 4.9700 22,915 4.9700
5.500 12.625 71,326 7.06 6.3932 63,269 5.8410
13.375 13.375 302,036 1.55 13.3750 300,234 13.3750
13.688 27.625 17,686 2.83 16.5058 13,941 16.0646
------- --------- --------- ---------
1,163,417 $ 6.39 596,236 $ 8.89
========= ======= ======== =========
F-14
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
(e) Pro Forma Disclosures of Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options or warrants granted to employees to be included in the statement of
operations or, alternatively, disclosed in the notes to financial statements.
The Company has determined that it will continue to account for stock-based
compensation for employees under APB Opinion No. 25, Accounting for Stock Issued
to Employees, and elect the disclosure-only alternative under SFAS No. 123. The
Company records the fair market value of stock options and warrants granted to
nonemployees in the consolidated statement of operations. The Company has
computed the pro forma disclosures required under SFAS No. 123 for stock options
granted in 2000, 1999 and 1998 using the Black-Scholes option pricing model. The
weighted average assumptions used for 2000, 1999 and 1998 are as follows: 2000
1999 1998 Risk-free interest rate 5.17% 5.8% 4.2%-5.6% Expected dividend yield -
- - - Expected life 5 years 5 years 5 years Expected volatility 150% 60% 60%
Weighted average fair value of options granted $ 2.44 $ 8.84 $ 2.52
Had compensation cost for the Company's stock option plans been determined
consistent with SFAS No. 123, net loss would have been as follows:
2000 1999 1998
As reported
Net loss $ (17,270,311) $ (12,301,718) $ (6,473,505)
Pro forma
Net loss $ (18,550,776) $ (12,792,904) $ (6,516,065)
Basic and diluted net
loss per common share $ (0.94) $ (0.77) $ (0.50)
Pro Forma basic and
diluted net loss per
common share $ (1.01) $ (0.80) $ (0.50)
F-15
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
(f) Warrants
The following table summarizes all warrant activity in connection with equity
financing as of December 31, 2000:
Warrants
Weighted
Average
Number of Exercise Price
Shares Per Share
Balance, December 31, 1997 493,430 $ 4.00
Granted 156,955 7.45
-------- -------
Balance, December 31, 1998 650,385 $ 4.10
Granted 14,750 4.75
Exercised (545,396) 4.75
Cancelled (44,739) 4.75
-------- -------
Balance, December 31, 1999 75,000 $ 10.40
Granted 4,872,360 2.05
Exercised (2,262,256) 0.00
Expired (20,000) 6.00
-------- -------
Balance, December 31, 2000 2,665,104 $ 4.01
======== =======
Exercisable, December 31, 1998 650,385 $ 4.10
======= ====
1999 75,000 $ 10.40
======== =====
2000 2,665,104 $ 4.01
========= ====
On January 26, 2001, the Company granted Wayne State University and the Barbara
Ann Karmanos Cancer Institute warrants to purchase jointly 1,375,000 shares of
common stock at $1.15 that will vest in equal quarterly installments over two
years beginning March 31, 2001.
F-16
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
(5) RELATED PARTY TRANSACTIONS
In January 1994, the Company agreed that one of its founders, Dr. David Platt,
would receive a royalty of 2% of net sales, in exchange for the licensed patent
rights on certain products being developed. The Company has agreed to pay all of
the costs to procure and maintain any patents granted under this agreement. The
agreement includes a requirement that the royalties paid in the sixth year of
this agreement and all subsequent years meet a minimum requirement of $50,000.
If this requirement is not met, Dr. Platt may terminate the agreement and retain
the patent rights. The Company may terminate the agreement on 60 days' notice.
The Company has not made any royalty payments under the agreement. The parties
executed an amendment to the agreement to delay the first year of this minimum
threshold from 1999 to 2002.
On December 6, 1996, Dr. Platt signed a Confidentiality and Invention Agreement
with the Company. The Agreement provides that Dr. Platt assigns all his rights,
title and interest in any invention, data or idea, made or conceived or reduced
to practice either alone or jointly with others to the Company. Further, the
agreement provides all rights thereto shall remain the sole property of the
Company and Dr. Platt agreed not to disclose any information about the Company's
confidential information.
(6) COMMITMENTS AND CONTINGENCIES
(a) Clinical Trials
During the first quarter of 2000, the Company retained Covance Inc. for the
purpose of conducting two studies to evaluate the clinical activity of GBC-590
in clinical trials. The pancreatic cancer patient trial enrollment is nearly
complete and the colorectal cancer patient trial has been completed. Through
December 31, 2000 the Company incurred expenditures of $748,000 and $462,000 on
these trials, respectively. Through March 30, 2001, the cost of these trials
increased to $916,000 and $585,700, respectively. The remaining patient study,
analytical work and reporting costs are estimated to cost $200,000 and $300,000,
respectively.
F-17
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
(b) Leases
The Company leases office space in Boston, Massachusetts, under an operating
lease expiring in February 2005. The Company also leases certain equipment under
operating leases.
Minimum future payments under the operating leases as of December 31, 2000 for
each of the next four calendar years are approximately as follows:
Years ending December 31,
- ------------------------------
2001 398,084
2002 408,426
2003 428,173
2004 444,744
2005 79,892
-----------
$ 1,759,349
===========
Rent expense in the accompanying consolidated statements of operations was
approximately $395,000, $223,000 and $100,000 in 2000, 1999 and 1998,
respectively.
(7) LICENSING AGREEMENTS
In September 2000, the Company entered into a sales and distribution agreement
with BioSafe Technologies, Inc. of Denison, Texas, under which it has the right
to market the patented BioSafe head lice cleansing product in the consumer
market within the United States, Mexico and Canada. The Company agreed to
purchase $150,000 of product and may extend the term of the agreement by
purchasing product totaling approximately $312,500 before April 15, 2002.
(8) OTHER EQUITY
In February 2001, the Company was required to issue 729,445 shares of common
stock under the terms of an adjustable warrant. The Company recorded the
warrants as temporary equity in an amount equal to the fair market value of
$866,216 as of December 31, 2000.
F-18
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
(9) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes, the objective of which is to recognize the amount of current and deferred
income taxes payable or refundable at the date of the consolidated financial
statements as a result of all events that have been recognized in the
accompanying consolidated financial statements, as measured by enacted tax laws.
At December 31, 2000, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $36,152,024 which expires through
2020. The Company also has certain tax credits available to offset future
federal and state income taxes, if any. Net operating loss carryforwards and
credits are subject to review and possible adjustments by the Internal Revenue
Service and may be limited in the event of certain cumulative changes in excess
of 50% in the ownership interests of significant stockholder over a three-year
period.
The components of the Company's deferred tax asset follow:
2000 1999
Net operating loss carryforwards $ 14,558,000 $10,067,000
Tax credit carryforwards 456,000 465,000
Temporary differences 2,672,000 (42,000)
------------ -----------
Total deferred tax assets 17,686,000 10,490,000
Less valuation allowance (17,686,000) (10,490,000)
------------ -----------
Deferred tax assets $ - $ -
============ ===========
In evaluating realizability of these deferred tax assets, management has
considered the Company's short operating history, the volatility of the market
in which it competes and the operating losses incurred to date, and it believes
that given the significance of this evidence, a full valuation reserve against
its deferred tax assets is required as of December 31, 2000 and 1999. The
increase in the valuation allowance during these periods primarily relates to
the increase in the Company's net operating loss carryforwards.
F-19
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
(10) Employee Benefit Plan
The Company instituted the SafeScience 401(k) Plan (the Plan) in 1998, pursuant
to which employees may defer compensation for income tax purposes under Section
401(k) of the Internal Revenue Code. Substantially all of the Company's
employees are eligible to participate in the Plan. Participants may contribute
up to 20% of their annual compensation to the Plan, subject to certain
limitations. The Company could match a discretionary amount as determined by the
Board of Directors. The Company did not make any contributions to the Plan
during 1999 and 2000.
(11) Subsequent Events
On January 5, 2001, the Company acquired the right to certain product formulas
which it previously licensed from a supplier, Delta-Omega Technologies, Inc. The
purchase price consisted of installments of $50,000 cash payable on January 5,
2001 and April 1, 2001, $200,000 of common stock of the Company and forgiveness
of a note receivable in the amount of $150,000 and accrued interest thereon. The
purchase price has been included in the estimated cost of discontinued
operations.
During the first quarter of 2001, the Company has raised $800,000 in a private
placement offering of common stock whereby 700,000 shares were sold at a
weighted average of $1.1429 per share. The purchasers also received warrants to
purchase 280,000 shares at prices ranging from $2.20 to $5.00 per share
exercisable for five years, and warrants to purchase 90,000 shares at $0.01 per
share.
On January 26, 2001, the Company executed an agreement with Wayne State
University and the Barbara Ann Karmanos Cancer Institute granting an exclusive
world-wide license to SafeScience to patents related to GBC-590 material issued
to or applied for by Wayne State University and the Barbara Ann Karmanos Cancer
Institute. This agreement adds the rights to these issued patents and patent
applications to the Company's existing portfolio of licensed patents and patent
applications, consolidating the rights to all of the parties' existing GBC-590
intellectual property within SafeScience. SafeScience made an initial payment of
$300,000 upon signing the agreement and will pay an additional $1,635,000 in
license payments over twelve months. Additional payments of up to $3,000,000 are
F-20
SAFESCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Continued)
contingent upon reaching future commercialization milestones. The Company also
granted Wayne State University and the Barbara Ann Karmanos Cancer Institute
warrants to purchase jointly 1,375,000 shares of common stock at $1.15 that will
vest in equal quarterly installments over two years beginning March 31, 2001.
All payments made under this agreement will be recorded as research and
development expense until such time as revenue is generated. In addition, the
Company will pay a 2% royalty jointly to Wayne State University and the Barbara
Ann Karmanos Cancer Institute on net sales of GBC-590.
F-21
(12) Quarterly Financial Data (unaudited)
Unaudited quarterly financial data for 2000 and 1999 is summarized below.
Quarters Ended
---------------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
---------------------------------------------------------------------------------------------------
2000 2000 2000 2000 1999 1999 1999 1999
---------------------------------------------------------------------------------------------------
Operating expenses: $ (000)
Research and development 954 1,901 992 647 670 1,374 454 391
General and administrative 1,025 942 1,212 915 1,117 1,647 1,691 1,383
Marketing 333 261 530 564 614 190 169 68
Restructuring charge 0 (252) 1,731 0 0 0 0 0
------------------------------------------------------------------------------------------------------
Total expenses 2,312 2,852 4,465 2,126 2,401 3,211 2,314 1,842
Operating loss (2,312) (2,852) (4,465) (2,126) (2,401) (3,211) (2,314) (1,842)
OTHER INCOME (EXPENSE): 0 0 0 0 0 0 0 0
Interest expense 22 1 188 33 (15) 21 1 1
Interest income 31 57 107 21 150 93 78 32
------------------------------------------------------------------------------------------------------
Total other income (expense) 9 56 (81) (12) 165 72 77 31
Loss from continuing
operations (2,303) (2,796) (4,546) (2,138) (2,236) (3,139) (2,237) (1,811)
Loss from discontinued
operations (2,505) (1,276) (1,147) (560) (825) (1,043) (647) (363)
Net loss (4,808) (4,072) (5,693) (2,698) (3,061) (4,182) (2,884) (2,174)
======================================================================================================
F-22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 30, 2001,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934 (the "Company's Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
Company's Definitive Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) The following Financial Statements are contained in Item 8 of this
Form 10-K:
1) Report of Independent Auditors Consolidated Balance Sheets as of
December 31, 2000 and 1999.
2) Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.
3) Consolidated Statements of Stockholders Equity for the years
ended December 31, 2000, 1999 and 1998.
4) Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
5) Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
1) Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 26, 2000.
(c) 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.
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:
10.3 Incentive Stock Option Plan.
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:
10.4 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:
10.5 Amendment to Consulting Agreement with Keith Greenfield.
10.6 Licensing Agreement with Agrogene Ltd.
10.7 Consulting Agreement with Michelangelo, LLC, dated May 1997.
10.8 Consulting Agreement with Michelangelo, LLC, dated September
1997.
99.1 Office Lease
The following documents are incorporated by reference from the Registrant's Form
8-K filed on April 7, 2000:
10.9 Securities Purchase Agreement by and among SafeScience, Inc.,
Strong River Investments, Inc. and Montrose Investments Ltd.,
dated March 19, 2000.
10.10 Form of Closing Warrants dated March 29, 2000.
10.11 Form of Adjustable Warrants dated March 29, 2000.
10.12 Registration Rights Agreement by and among SafeScience, Inc.,
Strong River Investments, Inc. and Montrose Investments Ltd.
dated March 29, 2000.
10.13 Letter of Agreement by and among SafeScience, Inc., Strong
River Investments, Inc. and Montrose Investment Ltd. dated
March 29, 2000.
The following documents are incorporated herein by reference from the
Registrant's Form 10-Q for the quarter ending September 30, 2000:
10.14 Employment Agreement between SafeScience, Inc. and Bradley J.
Carver dated June 29, 1999.
10.15 1998 Stock Option Plan
10.16 2000 Stock Incentive Plan
The following documents are incorporated herein by reference from the
Registrant's Form 8-K filed on January 31, 2001:
10.17 License Agreement by and among SafeScience,Inc., Wayne State
University and the Barbara Ann Karmanos Cancer Institute dated
January 26, 2001.
The following documents are an exhibit hereto:
10.18 Product Formula Agreement between SafeScience, Inc. and Delta-
Omega Technologies, Inc. dated January 5, 2001.
23.1 Consent of Arthur Andersen LLP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in Boston,
Massachusetts on this 4th day of April 2001.
SAFESCIENCE, INC.
BY:
/s/ Bradley J. Carver
Bradley J. Carver, Chief Executive
Officer, President and Treasurer
/s/ John W. Burns
John W. Burns, Senior Vice President,
Chief Financial Officer and Secretary
/s/ Patrick J. Joyce
Patrick J. Joyce, Controller,
Principal Accounting Officer
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Bradley J. Carver, as true and lawful attorney-in-fact
and agent, with full power of substitution, for his and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying the confirming all that said
attorney-in-fact and agent, or any substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons in the capacities and on
the dates indicated:
Signatures Title Date
/s/ Bradley J. Carver Chief Executive Officer, April 4, 2001
Bradley J. Carver President, Treasurer and
a member of the Board of
Directors
/s/ John W. Burns Senior Vice President April 4, 2001
John W. Burns CFO and Secretary
/s/ Patrick J. Joyce Controller April 4, 2001
Patrick J. Joyce Principal Accounting Officer
/s/ David W. Dube
David W. Dube Director April 4, 2001
/s/ Theodore J. Host
Theodore J. Host Director April 4, 2001
/s/ Brian G. R. Hughes
Brian G.R. Hughes Chairman of the
Board of Directors April 4, 2001