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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from: ______________ to ________________
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Commission file number 0 - 26476
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GLYCOGENESYS, INC.
(Exact name of Registrant as specified in its charter.)
NEVADA 33-0231238
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification no.)
Park Square Building
31 St. James Avenue, 8th Floor
Boston, Massachusetts 02116
(Address of principal executive offices, including zip code.)
(617) 422-0674
Registrant's telephone number, including area code.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by the Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [_]
The number of shares outstanding of the Registrant's common stock, $.01 par
value per share, at August 19, 2002 was 37,251,457 shares.
1
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 .................................. 3-4
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2002
and 2001 ............................................... 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2002
and 2001 ............................................... 6
Notes to Unaudited Consolidated Financial Statements ..... 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 12-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ...................................... 15-24
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds ................ 24-25
Item 4. Submission of Matters to a Vote of Securities Holders .... 25
Item 6. Exhibits and Reports on Form 8-K ......................... 25
Signatures ........................................................... 26
On May 20, 2002, the Company filed its quarterly report on Form 10-Q for the
quarter ended March 31, 2002 which contained financial statements that had not
been reviewed by an independent public accountant as required by Rule 10-01(d)
of Regulation S-X because the Company elected not to have Arthur Andersen LLP
review such financial statements in reliance on Securities and Exchange Release
No. 34-45589. Deloitte & Touche LLP has since reviewed those financial
statements and did not recommend any material changes to such financial
statements.
2
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
CONSOLIDATED BALANCE SHEETS
ASSETS
------
(Unaudited)
June 30, December 31,
2002 2001
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 8,097,715 $ 7,977,910
Due from SafeScience Newco, Ltd. 360,715 177,646
Prepaid expenses and other current assets 192,301 271,899
----------- -----------
Total current assets 8,650,731 8,427,455
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Computer, office and laboratory equipment 489,128 469,253
Furniture and fixtures 289,958 284,748
Motor vehicles 25,026 25,026
----------- -----------
804,112 779,027
Less-accumulated depreciation (499,563) (437,844)
----------- -----------
304,549 341,183
----------- -----------
OTHER ASSETS:
Restricted cash 108,128 108,128
Other 81,704 79,831
----------- -----------
Total other assets 189,832 187,959
----------- -----------
Total assets $ 9,145,112 $ 8,956,597
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 823,760 $ 1,094,872
Accrued liabilities 443,688 1,370,364
Net liabilities of discontinued operations 282,323 326,780
------------ ------------
Total current liabilities 1,549,771 2,792,016
------------ ------------
Preferred Stock: -- 15,091,827
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value; Authorized -5,000,000 shares Series A
convertible, exchangeable preferred stock, 7,500 authorized;
4,944.44 shares issued and outstanding as of June 30, 2002 and December 31, 2001
(liquidation value $12,854,115 and $12,419,273, respectively) (Note 5c) 49 --
Series B convertible preferred stock, 10,000 authorized;
1,462.55 and 862.71 shares issued and outstanding as of June 30, 2002 and
December 31, 2001 (liquidation value $2,548,057
and $1,466,601, respectively) 15 --
Series C convertible preferred stock, 1,117 authorized;
1,116.79 shares issued and outstanding as of June
30, 2002 and December 31, 2001 11 --
Common stock, $.01 par value; Authorized -200,000,000 shares Issued and
outstanding - 37,220,449 and 33,568,952
shares at June 30, 2002 and December 31, 2001, respectively 372,204 335,690
Additional paid-in capital 81,802,037 60,100,645
Note receivable from former officer - issuance of common stock (2,675,000) (2,675,000)
Accumulated deficit (71,903,975) (66,688,581)
------------ ------------
Total stockholders' equity (deficit) 7,595,341 (8,927,246)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 9,145,112 $ 8,956,597
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
4
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2002 2001 2002 2001
----------- ------------ ----------- -----------
OPERATING EXPENSES:
Research and development $ 247,326 $ 984,537 $ 1,375,981 $ 2,726,632
General and administrative 1,048,382 1,052,282 1,666,378 2,383,043
Restructuring charge (credit) -- -- -- (182,625)
----------- ----------- ----------- -----------
Operating loss (1,295,708) (2,036,819) (3,042,359) (4,927,050)
----------- ----------- ----------- -----------
OTHER (EXPENSE) INCOME:
Equity in Loss of SafeScience Newco, Ltd.
(Note 3) (1,301,104) -- (2,232,114) --
Other income (expense) 2,082 (19,036) 1,209 (24,780)
Interest income 30,048 2,434 57,871 29,936
----------- ----------- ----------- -----------
Total other (expense) income (1,268,975) (16,602) (2,173,034) 5,156
----------- ----------- ----------- -----------
Loss from continuing operations (2,564,683) (2,053,421) (5,215,394) (4,921,894)
Loss from discontinued operations -- (57,600) -- (244,129)
----------- ----------- ----------- -----------
Net loss (2,564,683) (2,111,021) (5,215,394) (5,166,023)
Accretion of preferred stock dividend (256,885) -- (496,559) --
----------- ----------- ----------- -----------
Net loss applicable to common stock $(2,821,568) $(2,111,021) $(5,711,952) $(5,166,023)
=========== =========== =========== ===========
Basic and diluted loss per common stock
from continuing operations $ (0.08) $ (0.08) $ (0.15) $ (0.19)
Basic and diluted loss per common stock
from discontinued operations -- -- -- (0.01)
----------- ----------- ----------- -----------
Basic and diluted net loss
per common stock $ (0.08) $ (0.08) $ (0.15) $ (0.20)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 37,168,314 25,817,699 37,118,171 25,462,315
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
5
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------
2002 2001
-------------- -------------
Cash flows from operating activities:
Net loss $ (5,215,394) $ (5,166,123)
Adjustments to reconcile net loss to net cash
used in operating and discontinued activities:
Operating expenses paid in common
stock, options and warrants 42,833 521,120
Amortization of value of warrants issued for license 433,734 456,024
Equity adjustment in SafeScience Newco, Ltd. 2,232,114 --
Depreciation and amortization 61,719 69,119
Changes in assets and liabilities:
Due from SafeScience Newco, Ltd. (1,395,443) --
Prepaid expenses and other current assets 79,598 70,568
Accounts payable (271,112) 23,497
Accrued liabilities (926,676) (144,627)
Net liabilities of discontinued operations (44,457) (804,595)
------------ ------------
Net cash operating and discontinued activities (5,003,084) (4,975,017)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (25,085) (11,173)
Deposits (1,873) 188,280
------------ ------------
Net cash (used in) provided by investing activities (26,958) 177,107
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs 5,148,275 2,839,988
Proceeds from exercise of warrants 1,572 --
------------ ------------
Net cash provided by financing activities 5,149,847 2,839,988
------------ ------------
Net increase (decrease) in cash and cash equivalents 119,805 (1,957,922)
Cash and cash equivalents, beginning balance 7,977,910 2,547,353
------------ ------------
Cash and cash equivalents, ending balance $ 8,097,715 $ 589,431
============ ============
Supplemental disclosure of non-cash financing activities:
Series B preferred stock issued to fund SafeScience Newco $ 1,019,740 $ -
Dividends accreted on Series A and Series B preferred stock $ 496,559 $ -
Reclassification of Series A, B and C preferred stock from
temporary equity to permanent equity $ 15,091,827 $ -
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ -- $ 20,099
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of GlycoGenesys,
Inc. (formerly SafeScience, Inc.) and its subsidiaries (the "Company") have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America applicable to interim periods, and with
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, such financial statements reflect all adjustments,
consisting of only normal recurring adjustments, which are necessary for a fair
presentation of the results of the interim periods presented. The results of
operations for the interim periods shown in this report are not necessarily
indicative of results expected for the full year. These financial statements do
not include disclosures associated with the annual financial statements and,
accordingly, should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and footnotes for the year ended December 31, 2001, included in the
Company's Annual Report on Form 10-K/A.
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 operating expenses during the period. Actual results
could differ from those estimates.
(2) Organization and Operations
GlycoGenesys, Inc. 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. International Gene Group, Inc. focuses on the development of
carbohydrate-based pharmaceutical products and related technologies in
connection with oncology and other life threatening and/or debilitating
diseases. SafeScience Products, Inc. develops agricultural products, some of
which are also based upon carbohydrate chemistries. The therapeutic products
will be either licensed from or jointly developed with third parties.
In July 2001, the Company and Elan International Services, Ltd. ("EIS") formed a
joint venture in Bermuda, SafeScience Newco, Ltd. ("SafeScience Newco"), for the
purpose of furthering the development of the Company's drug candidate, GCS-100,
in the field of oncology (see Note 3).
7
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
As of June 30, 2002, the Company has an accumulated deficit of $71,903,975.
Despite this accumulated deficit, the Company had a net working capital position
(current assets less current liabilities) of approximately $7.1 million at June
30, 2002. The Company believes that its existing funds will be sufficient to
fund its operating expenses and capital requirements into the first quarter of
2003. The Company intends to raise additional capital through equity financings
to support its continued operations. Since inception, the Company has funded its
operations primarily through the proceeds from the sale of equity securities.
Through June 30, 2002, the Company had been successful in raising approximately
$58,551,000 from the sales of equity securities.
Pursuant to an agreement with EIS, as of June 30, 2002, EIS may acquire up to
$7.1 million of additional Series B preferred stock from the Company and may
directly contribute up to approximately $1.8 million of additional funds
directly to SafeScience Newco, in both cases to fund additional expenses which
may be incurred by SafeScience Newco in the development of GCS-100. However, the
Company will not receive additional reimbursement of R&D expenses from
SafeScience Newco, and EIS will not contribute additional capital to SafeScience
Newco nor acquire additional shares of Series B preferred stock, unless the
Company agrees with EIS on a quarterly basis on the business plan for
SafeScience Newco. On June 10, 2002, Elan Corporation, plc ("Elan") issued a
press release announcing a plan to streamline its operations into three core
areas: neurology, pain management and autoimmune disease. The release stated
that its joint ventures that focus on products outside of these three core
therapeutic areas will be evaluated on an ongoing basis for further investment
and eventual outlicensing to marketing partners. As a result, we believe EIS
will provide a portion but not all of the funds available to SafeScience Newco
under the agreement. Any reduction in funding will not affect the amount of
funding committed through June 30, 2002 (19.9% of the joint venture's losses)
for payment of amounts due from SafeScience Newco. On August 15, 2002, EIS
acquired 832.1245 additional shares, or $1.4 million, of Series B preferred
stock and contributed approximately $0.35 million directly to SafeScience Newco
from which the Company was reimbursed $1.7 million for R&D and other expenses
incurred on behalf of SafeScience Newco.
The Company's future is dependent upon its ability to obtain financing to fund
its operations. As of August 19, 2002, the Company has not obtained commitments
from any existing or potential investors to provide additional financing. The
Company expects to incur substantial additional operating costs, including costs
related to ongoing research and development activities, preclinical studies and
clinical trials. To the extent that the Company is unable to raise additional
capital on a timely basis, management may prioritize research activities to
conserve cash. In the event additional financing is not obtained, the Company
may be required to significantly reduce or curtail operations.
In its Annual Report on Form 10-K/A for the year ended December 31, 2001, the
Company reported that there is substantial doubt that the Company will have the
ability to continue as a going concern and, therefore, may be unable to realize
its assets and discharge its liabilities in the normal course of business. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary should the Company be unable
to continue as a going concern.
Principal risks to the Company include the need to obtain adequate financing to
fund future operations, the successful development and marketing of
pharmaceutical products, dependence on collaborative partners, United States
Food and Drug Administration approval, dependence on key individuals and
competition from substitute products and larger companies.
8
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(3) Joint Venture with Elan International Services, Ltd. ("EIS")
SafeScience Newco was formed by issuing voting common shares of SafeScience
Newco ("Newco common shares") and non-voting non-redeemable convertible
preferred shares of SafeScience Newco ("Newco preferred shares") valued at
$15,000,000 to the Company and EIS. The Company owns 100% of the outstanding
Newco common shares, which represents 100% of the outstanding voting shares of
SafeScience Newco. The Newco preferred shares are non-voting and are
convertible, at the option of the holder thereof, into voting Newco common
shares at any time after July 10, 2003. While EIS currently does not own any
Newco common shares and is unable to convert any of its Newco preferred shares
into Newco common shares until July 10, 2003, it has retained significant
minority investor rights that the Company considers to be "participating rights"
as defined in EITF Issue 96-16 "Investors' Accounting for an Investee When the
Investor Has a Majority of the Voting Interest but the Minority Shareholder or
Shareholders Have Certain Approval or Veto Rights". EIS's participating rights
prevent the Company from exercising sole control over SafeScience Newco.
Accordingly, the Company has not consolidated the financial statements of
SafeScience Newco but instead accounts for its investment in SafeScience Newco
using the equity method.
Subject to the approval by the Company and EIS on a quarterly basis to the
business plan of SafeScience Newco, the Company has agreed to provide additional
funding to SafeScience Newco as needed in relation to its 80.1% ownership
interest in SafeScience Newco and EIS has agreed to provide the remaining 19.9%.
To the extent such funding is provided, EIS has agreed to acquire up to
$9,612,000 of the Company's Series B preferred stock, at the option of the
Company, to provide the Company with funds for its pro rata share of development
funding for SafeScience Newco, of which approximately $2.5 million has been
funded through June 30, 2002. Elan's current business direction is likely to
significantly limit its future funding of SafeScience Newco.
The Company performed research for SafeScience Newco and incurred research
expenses of approximately $2,537,000 on behalf of SafeScience Newco during the
period January 1, 2002 through June 30, 2002. In addition, management fees and
other direct expenses billed to SafeScience Newco totaled approximately $120,000
during this period. The Company's 80.1% share of SafeScience Newco's ongoing
operating expenses for the three and six months ended June 30, 2002 was
approximately $1,301,104 and $2,232,114, respectively, and is included in Equity
in Loss of SafeScience Newco, Ltd. in the Company's consolidated statements of
operations. As of June 30, 2002, the Company has a receivable from SafeScience
Newco of $360,715. This receivable represents EIS' share of research and
development expenses paid for by the Company on behalf of SafeScience Newco.
Elan has committed to fund this amount through June 30, 2002.
As part of a normal review of the Company's recently filed registration
statement on Form S-3, the Securities and Exchange Commission has questioned the
Company's recording of 80.1% of the expenses incurred by SafeScience Newco Ltd.,
when, in fact, the Company holds 100% of the outstanding common stock of
SafeScience Newco Ltd. The Company and EIS have agreed to fund SafeScience
Newco's on-going research and development costs as approved expenses are
incurred on an 80.1%/19.9% basis, and, as such, the Company will not be
responsible for more than 80.1% of SafeScience Newco's losses as long as both
parties continue to agree to fund SafeScience Newco's expenditures. If EIS did
not agree to fund such expenditures, and SafeScience Newco were to incur losses,
the Company would recognize 100% of its losses. If the Company were required as
a result of this review to record the additional 19.9% of SafeScience Newco's
total loss, "Equity in loss of SafeScience Newco" would increase from
$1,301,104 and $2,232,114 to $1,624,350 and $2,786,660 for the three and six
months ended June 30, 2002, respectively.
9
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
SafeScience Newco incurred a net loss of $1,624,350 and $2,786,660 for the three
and six-month period ended June 30, 2002, respectively.
(4) Net Loss Per Common Stock
The Company applies Statement of Financial Accounting Standards Statement
("SFAS") No. 128, Earnings per Share. Basic loss per share is computed using the
weighted-average number of common shares outstanding. The dilutive effect of the
potential common shares consisting of outstanding stock options and warrants is
determined using the treasury stock method in accordance with SFAS No. 128.
Diluted weighted average shares outstanding for the three and six month periods
ended June 30, 2002 and 2001 excluded the potential common shares from
convertible preferred stock, warrants and stock options because to do so would
be anti-dilutive. At June 30, 2002 and 2001, there are 11,165,328 and 4,851,360
warrants outstanding, respectively, with a weighted average exercise price of
$2.27 and $2.90, respectively, and 1,400,427 and 986,251 stock options
outstanding, respectively, with a weighted average exercise price of $2.90 and
$6.34, respectively, which were omitted from the net loss per common stock
calculations, and 7,523,780 and no shares, respectively, issuable upon
conversion of outstanding shares of preferred stock.
(5) EQUITY
(a) Private Placement Offerings
During the first quarter of 2002, the Company raised $5,650,666 in a private
placement offering of common stock in which 3,008,608 shares of common stock
were sold at a weighted average price of $1.88 per share, and warrants to
purchase 2,256,457 shares of common stock each at a weighted average price of
$2.25 per share, and warrants to purchase 903,243 shares of common stock at a
price of $0.01 per share each exercisable for five years. Net proceeds of this
offering were $5,237,039. Included in this private placement and pursuant to
their pre-emptive rights, EIS purchased 597,205 shares of common stock at $1.79,
and warrants to purchase 447,904 shares of common stock at a price of $2.15 and
149,301 shares of common stock at a price of $0.01, each exercisable for five
years.
(b) Stock, Stock Option, and Warrants
The Company has entered into agreements with various employees and consultants
for the grant of stock options and shares of common stock at prices determined
by the Compensation Committee of the Company's Board of Directors. During the
six months ended June 30, 2002 and 2001, the Company issued 122,038 and 427,162
shares of common stock, respectively, to various employees, a former employee
and consultants as compensation for services rendered or for licensing fees and
recorded charges to operations of $42,833 and $521,120 relating to those
issuances of common stock.
10
GLYCOGENESYS, INC.
(formerly known as SafeScience, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
During the six months ended June 30, 2002, the Company granted options to
purchase 551,700 shares of common stock at a weighted average exercise price of
$1.98 per share to employees. Options to purchase 16,100 shares were exercised
generating proceeds of $2,497.
Including the warrants referred to in Note 5(a), during the six months ended
June 30, 2002, the Company issued warrants to purchase 3,352,869 shares of
common stock to investors and advisors at a weighted average price of $1.65.
Total non-cash compensation expense related to stock, stock option and warrant
grants recorded in the accompanying consolidated statements of operations for
the six months ended June 30, 2002 and 2001 amounted to $476,567 and $977,144,
respectively.
(c) Classification of Preferred Stock
Prior to April 16, 2002, the Company's Series A, B and C preferred stock
contained provisions for redemption in cash in the event that a change in
control of the Company were to occur without prior approval by the Board of
Directors. In July 2001, the Securities and Exchange Commission issued an SEC
Staff announcement which was codified as EITF Topic No. D-98, "Classification
and Measurement of Redeemable Securities", which required that certain equity
instruments that have liquidation features similar to redemption features be
reclassified to temporary equity. This announcement was applied retroactively in
the Company's fourth quarter of 2001, by reclassifying the outstanding shares of
preferred stock to temporary equity.
On April 16, 2002, the Company and EIS, the holder of the outstanding shares of
Series A, B and C preferred stock, amended the original terms of the preferred
stock. As a result of this amendment, the Company has reclassified the Series A,
B and C preferred stock to permanent equity as of April 16, 2002.
As part of a normal review of the Company's recently filed registration
statement on Form S-3, the Securities and Exchange Commission has questioned the
Company's classification of the Series A preferred stock as stockholders' equity
due to the existence of an exchange feature whereby EIS may exchange the Series
A preferred stock for the preferred shares of SafeScience Newco held by the
Company. Although the Company believes that the Series A preferred stock is
appropriately reported as permanent equity, it is possible that preferred stock
in the amount of approximately $12.9 million at June 30, 2002 will be
reclassified back to temporary equity upon the completion of the SEC's review.
(6) SUBSEQUENT EVENTS
On August 15, 2002, the Company issued 832.1245 additional shares of Series B
preferred stock to EIS for net proceeds of approximately $1.3 million.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto.
The following contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. All forward-looking statements involve risks
and uncertainty. Although the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this report will prove to be
accurate. The Company's actual results may differ materially from the results
anticipated in the forward-looking statements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Factors that
May Affect Future Results" included herein for a discussion of factors that
could contribute to such material differences. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved. The Company disclaims any obligation to update or revise the
information provided in this report to reflect future events.
Overview
GlycoGenesys, Inc. is a biotechnology company that develops novel pharmaceutical
products based on carbohydrate compounds and related technologies. Our lead drug
candidate GCS-100 (formerly known as GBC-590), a potential treatment for
multiple forms of cancer, completed Phase II(a) clinical trials for pancreatic
cancer in April 2002 and completed Phase II(a) clinical trials for colorectal
cancer in March 2001. We began a Phase I dose escalation trial to include
colorectal and other types of cancer patients in February 2002. In July 2001, we
formed a joint venture, SafeScience Newco, Ltd., with Elan International
Services, Ltd. ("EIS") to advance GCS-100 in the field of oncology.
While we are also developing two agricultural products (Elexa, a registered
trademark of ours and Bb447), we continue to seek strategic alternatives,
including the sale, of our agricultural products business area. Our near term
objective is to continue to proceed through the various phases of United States
Food and Drug Administration ("FDA") clinical trials for GCS-100.
Our business was founded in 1992 as IGG International, Inc. to pursue
carbohydrate based pharmaceutical research for cancer therapeutics. In 1995, we
merged with Alvarada Inc., a publicly-traded corporation having no active
operations. In 1998 we changed our name to SafeScience, Inc. and more recently
in October 2001 we changed our name to GlycoGenesys, Inc.
We conduct our business through two wholly-owned subsidiaries, International
Gene Group, Inc. and SafeScience Products, Inc.
International Gene Group, Inc. ("IGGI") develops human therapeutics. IGGI has
been focused on developing GCS-100, 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.
Historically, SafeScience Products, Inc. developed agriculture products and
developed, marketed, and distributed chemically safe consumer and commercial
products.
Critical Accounting Policies
Our significant accounting policies are described in the Notes to the
Consolidated Financial Statements included in our Annual Report on Form 10-K/A
for the year ended December 31, 2001. The accounting policies used in preparing
our interim consolidated financial statements for
12
the six months ended June 30, 2002 are the same as those described in our Annual
Report on Form 10-K/A.
Our critical accounting policies are those having the most impact to the
reporting of our financial condition and results and those requiring significant
judgments and estimates. Our critical accounting policies include those related
to (1) accounting for our investment in SafeScience Newco, Ltd., (2) accounting
for our Series A, B, and C Preferred Stock and (3) research and development. Our
critical accounting policies for our investment in SafeScience Newco Ltd. and
for our Series A, B, and C Preferred Stock are discussed in Notes 3 and 5,
respectively, in the notes to the accompanying financial statements in this
report. Our critical accounting policy for research and development is as
follows: research and development costs, which consist primarily of expenses for
clinical trials, preclinical research, drug manufacturing for clinical trials,
sponsored research, consultants, supplies and testing, are charged to operations
as incurred.
With respect to these critical accounting policies, management believes that the
application of judgments and assessments is consistently applied and produces
financial information, which fairly depicts the results of operations for all
periods presented.
Results of Operations: Three months ended June 30, 2002 versus June 30, 2001
We had a net loss of approximately $2.6 million for the three months ended June
30, 2002 versus a net loss of approximately $2.1 million for the three months
ended June 30, 2001. The net loss for the three months ended June 30, 2002
included a charge in the amount of approximately $1.3 million to recognize our
80.1% equity share in the loss of SafeScience Newco, Ltd. ("SafeScience Newco"),
our joint venture with Elan.
In July 2001, we transferred our rights to GCS-100 in the field of oncology to
SafeScience Newco. Accordingly, our total research and development expenses for
the three months ended June 30, 2002 are included in two lines in the
Consolidated Statements of Operations: (1) Research and Development ("R&D"), and
(2) Equity in Loss of SafeScience Newco, Ltd. On this basis, total research and
development expenses increased to approximately $1,423,000 for the three months
ended June 30, 2002 from approximately $985,000 for the three months ended June
30, 2001, an increase of approximately $494,000, or 50%.
Our expenses related specifically to the development of GCS-100 during the three
months ended June 30, 2002 were approximately $1,337,000, a portion of which is
included in our equity in loss of SafeScience Newco of approximately $1,301,000,
as compared to approximately $894,000 during the three months ended June 30,
2001, resulting in an increase of approximately $443,000 or 50%. This increase
is attributable to increases in the cost of managing our clinical trials of
approximately $135,000, clinical, professional and consulting services of
$261,000, sponsored research expenses of $65,000, drug production costs of
$30,000, payroll related expenses of $90,000 and other net miscellaneous
expenses of $21,000, partially offset by reductions in non-cash compensation of
$159,000 related to warrants granted to Wayne State University as compensation
for a license.
Research and development expenses for Elexa-4 and Bb-447, our agricultural
compounds, decreased to approximately $86,000 for the three months ended June
30, 2002 from approximately $91,000 for the three months ended June 30, 2001
reflecting our decreased emphasis of agricultural products. We expect future
expenditures related to our agricultural compounds to be commensurate with
current levels.
We are actively seeking to expand our product pipeline under development. These
new product candidates will either be developed jointly or licensed by us. The
cost related to the development of new product candidates is projected to be in
the range of $250,000-$500,000 during the next twelve months, but could vary
significantly based on the actual product candidates.
General and administrative expenses decreased to approximately $1,048,000 for
the three months ended June 30, 2002 from approximately $1,052,000 for the three
months ended June 30, 2001, a
13
decrease of only $4,000. This decrease is primarily attributable to reductions
in non-cash compensation related to stock options granted to employees of
$83,000 and expenses of $121,000 billed to SafeScience Newco, 80.1% of which is
included in the Equity in Loss of SafeScience Newco, Ltd. offset by increased
legal and other professional fees of approximately $115,000, office expenses of
$57,000, and annual report costs of $28,000.
Interest income increased to approximately $30,000 for the three months ended
June 30, 2002 from approximately $2,400 for the three months ended June 30,
2001, an increase of approximately $28,000. This increase is attributable to an
increase in cash available for temporary investment.
Equity in the loss of SafeScience Newco, Ltd. is attributable to the recognition
of 80.1% of the losses of SafeScience Newco, Ltd. for the quarter ended June 30,
2002. Substantially all of SafeScience Newco's expenses related to research and
development.
Results of Operations: Six months ended June 30, 2002 versus June 30, 2001
We had a net loss of approximately $5.2 million for the six months ended June
30, 2002 versus a net loss of approximately $5.2 million as well for the six
months ended June 30, 2001. The net loss for the six months ended June 30, 2002
included a charge in the amount of approximately $2.2 million to recognize our
80.1% equity share in the loss of SafeScience Newco.
Total research and development expenses, including our 80.1% equity share in the
loss of SafeScience Newco, increased to approximately $3,408,000 for the six
months ended June 30, 2002 from $2,727,000 for the six months ended June 30,
2001, an increase of $681,000, or 25%. Expenses associated with the development
of GCS-100 increased approximately $720,000, partially offset by the reduction
of approximately $39,000 in agriculture related expenses.
Our expenses related specifically to the development of GCS-100 during the six
months ended June 30, 2002 were approximately $3,260,000, a portion of which is
included in our equity in loss of SafeScience Newco of approximately $2,232,000,
as compared to $2,540,000 during the six months ended June 30, 2001, resulting
in an increase of approximately $720,000, or 28%. This increase is attributable
to increases in license fees paid to Wayne State University of approximately
$452,000, clinical, professional and consulting services of $291,000, sponsored
research of $92,000, payroll expenses of $174,000 and other net miscellaneous
expenses of $54,000; partially offset by reductions in clinical trial management
of $185,000, production costs of GCS-100 of $93,000 and non-cash compensation of
$22,000 related to warrants granted to Wayne State University as compensation
for a license and options granted to employees of $43,000.
Research and development expenses for Elexa-4 and Bb-447, our agricultural
compounds, decreased to approximately $147,000 for the six months ended June 30,
2002 from approximately $186,000 for the six months ended June 30, 2001
reflecting our decreased emphasis of agricultural products. We expect future
expenditures to be commensurate with current levels.
General and administrative expenses decreased to approximately $1,666,000 for
the six months ended June 30, 2002 from approximately $2,383,000 for the six
months ended June 30, 2001, a decrease of approximately $717,000, or 30%. This
decrease is primarily attributable to reductions of non-cash compensation costs
of approximately $208,000 related to issuance of stock options to employees,
expenses billed to SafeScience Newco, Ltd. in the amount of $306,000 under the
terms of the joint venture agreement, 80.1% of which is included in the "Equity
in Loss of SafeScience Newco Ltd.", employee related costs of $126,000 and
travel costs of $43,000, partially offset by increases in annual report costs of
$27,000 and other office expenses of $25,000.
Interest income increased to approximately $58,000 for the six months ended June
30, 2002 from approximately $30,000 for the six months ended June 30, 2001, an
increase of approximately $28,000, or 93.3%. This increase is attributable to an
increase in cash available for temporary investment.
14
The Equity in Loss of SafeScience Newco, Ltd. is attributable to the recognition
of 80.1% of the losses of SafeScience Newco, Ltd. for the six months ended June
30, 2002. Substantially all of SafeScience Newco's expenses related to research
and development.
Liquidity and Capital Resources
For the six months ended June 30, 2002, our operations utilized cash of
approximately $5,003,000 primarily to fund our operating loss and the reduction
of accounts payable and accrued liabilities. We also invested approximately
$25,000 in purchases of property and equipment. The uses of cash were offset by
equity financings, which resulted in net proceeds of approximately $5,150,000 to
us during the six months ended June 30, 2002. We intend to pursue additional
funds through sales of our securities and possibly through partnering
arrangements with pharmaceutical or mature biotechnology companies.
As of June 30, 2002, our accumulated deficit was approximately $71,904,000 and
as of August 19, 2002, our cash balances were approximately $8.1 million.
In July 2001, we and EIS formed a joint venture in Bermuda (SafeScience Newco,
Ltd.) for the purpose of furthering development of our drug candidate, GCS-100,
in the field of oncology. As of August 19, 2002, we could be reimbursed by
SafeScience Newco, Ltd. of up to approximately $7.1 million of additional funds
of which approximately $5.7 million could be funded by our issuance to EIS of
Series B preferred stock and approximately $1.4 million of which could be funded
directly by EIS to SafeScience Newco, Ltd. for expenses incurred in the
development of GCS-100 pursuant to our agreement with EIS. Based on Elan's June
10, 2002 press release stating its intention to focus on neurology, pain
management and auto-immune disease, and our discussions with Elan, we believe
EIS will fund a portion but not all of the $7.1 million of additional funds. In
any event, we will not receive additional capital from EIS unless we agree with
Elan on a quarterly basis on the business plan for SafeScience Newco.
We believe that our existing funds will be sufficient to fund our operating
expenses and capital requirements into the first quarter of 2003 consistent with
prioritizing R&D expenditures. Since inception, we have funded our operations
primarily through the proceeds from the sale of equity securities; however,
there can be no assurance that additional equity financing will be available.
Our future is dependent upon our ability to obtain financing to fund our
operations. As of August 19, 2002, we have not obtained commitments from any
existing or potential investors to provide additional financing. We expect to
incur substantial additional operating costs, including costs related to ongoing
research and development activities, preclinical studies and clinical trials. To
the extent that we are unable to raise additional capital on a timely basis,
management plans to prioritize research activity to conserve cash. In the event
additional financing is not obtained, we may be required to significantly reduce
or curtail operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are not exposed to significant market risk related to changes in currency
exchange rates as measured against the U.S. dollar. As of June 30, 2002, we have
evaluated our risk and determined that any exposure to currency exchange is not
significant to our overall consolidated financial results. There can be no
assurance that our exposure will remain at these levels, especially in the event
of significant and sudden fluctuations in the value of local currencies. We do
not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity
15
We are exposed to market risk related to changes in interest rates which could
positively or negatively affect results of operations. We maintain short-term
investments in an overnight money market account comprised of U.S. treasury
bills. If market interest rates were to increase immediately and uniformly by
10% from levels that existed at June 30, 2002, the fair value of the portfolio
would decline by an immaterial amount.
Certain Factors That May Affect Future Results
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
WE HAVE EXPERIENCED SIGNIFICANT LOSSES THROUGHOUT OUR HISTORY, WE EXPECT THESE
LOSSES TO CONTINUE AND WE MAY NOT ACHIEVE PROFITABILITY IN THE FUTURE.
We began operations more than nine years ago and began to generate revenue
only in the second quarter of 1999. Through December 31, 2000, we generated only
$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 will not generate funds unless
we are able to sell our consumer and commercial and/or agricultural business
areas, or generate revenues through the receipt of payments in connection with
any potential licensing, marketing or other partnering arrangement with other
pharmaceutical or biotechnology companies, or bringing to market pharmaceutical
or agricultural products. Excluding dividends accreted to preferred stock, we
have incurred approximately $71.9 million of losses since our inception,
including $22.7 million in the year ended December 31, 2001 and approximately
$5.2 million for the six months ended June 30, 2002. Extensive losses can be
expected to continue for the foreseeable future.
OUR PRODUCTS ARE STILL IN DEVELOPMENT, THERE ARE UNCERTAINTIES ASSOCIATED WITH
RESEARCH AND DEVELOPMENT ACTIVITIES AND WE MAY BE UNABLE TO BRING THESE PRODUCTS
TO MARKET.
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. The products
are in the development stage and are subject to the risks inherent in the
development of new products. 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. 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 BE ABLE TO OBTAIN ADDITIONAL FUNDING, WHICH COULD REDUCE OUR ABILITY
TO FUND, EXPAND OR CONTINUE OPERATIONS.
We believe that our existing funds will be sufficient to fund our operating
expenses and capital requirements into the first quarter of 2003 consistent with
prioritizing R&D expenditures. We intend to raise additional capital through the
sale of equity securities. SafeScience Newco may receive, and in turn we could
be reimbursed for work done on GCS-100, a portion of up to approximately $7.1
million of additional funds of which up to $5.7 million could be funded by us
through the issuance to EIS of Series B preferred stock and up to
16
approximately $1.4 million of which would be funded directly by EIS for the
development of GCS-100 pursuant to our agreement with EIS. We and Elan must
agree on a quarterly basis on the business plan for SafeScience Newco in order
to receive additional capital from EIS. Elan has stated that it intends to focus
on three core therapeutic areas: neurology, pain management and auto-immune
disease and that it will evaluate joint ventures outside those areas for further
investment on an ongoing basis. Based on our conversations with Elan, we expect
that SafeScience Newco will receive a portion but not all of the approximately
$7.1 million of additional funds.
Our future is dependent on our ability to obtain additional financing to fund
our operations. We expect to incur substantial additional operating costs,
including costs related to ongoing research and development activities,
preclinical studies and clinical trials. We may also seek funds in conjunction
with the in-licensing of additional bio-pharmaceutical products where we acquire
in-licenses and development funds for our securities. Additional equity
financing may result in dilution to our shareholders. 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 necessary to fund our operations, we
may have to sell or liquidate GlycoGenesys or significantly reduce or curtail
our operations. There is substantial doubt that we have the ability to continue
as a going concern.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY OR OUR INFRINGEMENT ON THE
PROPERTY RIGHTS OF OTHERS MAY IMPEDE OUR ABILITY TO OPERATE FREELY.
We rely significantly upon proprietary technology and protect our
intellectual property through patents, copyrights, trademarks and contractual
agreements as appropriate. We own, or exclusively license ten issued U.S.
patents having expiration dates ranging from 2013 to 2018. Four of these ten
issued patents relate directly to GCS-100. We own or exclusively license five
foreign patents having expiration dates ranging from 2016 to 2017. Four of these
five foreign patents relate directly to GCS-100. We own or exclusively license
eight pending U.S. patent applications of which four directly relate to GCS-100
and 26 pending foreign patent applications, of which 16 relate to GCS-100. We
continually evaluate our technology to determine whether to make further patent
filings.
To the extent aspects of our technology may be unpatentable or we determine
to maintain such technology as trade secrets, we protect such unpatented
technology by contractual agreements. Our unpatented technology or similar
technology could be independently developed by others. In addition, the
contractual agreements by which we protect our unpatented technology and trade
secrets may be breached. If our technology is independently developed or our
contractual agreements are breached, our technology will be less valuable and
our business will be harmed.
There is always a risk that issued patents may be subsequently invalidated,
either in whole or in part, and this could diminish or extinguish our patent
protection for key elements of our technology. We are not involved in any such
litigation or proceedings, nor are we aware of any basis for such litigation or
proceedings. We cannot be certain as to the scope of patent protection, if any,
which may be granted on our patent applications.
Our potential products or business activities could be determined to
infringe intellectual rights of third parties despite our issued patents. Any
claims against us or any purchaser or user of our potential products, including
GCS-100, asserting that such product or process infringes intellectual property
rights of third parties, if determined adversely to us could have a material
effect on our business, financial condition or future operations. Any asserted
claims of infringement, 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 materially adversely affect 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 is successful against us and we cannot
obtain a license to the relevant technology on acceptable terms, license a
substitute
17
technology or redesign our products to avoid infringement, our business,
financial condition and operating results 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 OUR FUTURE PROSPECTS MAY BE MATERIALLY
ADVERSELY AFFECTED.
We license our technology, including GCS-100, from third parties. We
anticipate that we will continue to license technology from third parties in the
future. To maintain our license with Wayne State University and the Karmanos
Cancer Institute we must, among other things, pay Wayne State University and the
Karmanos Cancer Institute 2% royalties on product sales and up to $3 million in
milestone payments and receive FDA or equivalent agency approval to sell GCS-100
by January 1, 2006. To maintain our license with Dr. Platt we must pay an annual
license fee equal to the greater of $50,000 or 2% of product sales starting this
year. To maintain our joint venture's license with Elan for its oral drug
delivery technology we do not have material obligations other than royalty
payments, if any, which shall be determined by SafeScience Newco, Ltd. prior to
commercialization of GCS-100.
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 and could materially adversely affect our
future prospects. 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.
WE EXPECT TO REMAIN DEPENDENT ON THIRD PARTIES FOR RESEARCH AND DEVELOPMENT
ACTIVITIES NECESSARY TO COMMERCIALIZE OUR PRODUCTS.
We do not maintain our own laboratories and employ five scientific
personnel. We contract out research and development operations, utilizing third
party contract manufacturers, such as Elan Drug Delivery, Ltd., Formatech, Inc.
and Sigma-Aldrich, to supply clinical grade material, Chromaceutical Advanced
Technologies, Inc. for assay development and contract research organizations,
such as ITR Laboratories Canada, Inc. and Beardsworth Consulting Group, Inc. to
perform pre-clinical and/or clinical studies in accordance with our designed
protocols, as well as sponsoring research at medical and academic centers, such
as MIT. In addition, we employ several consultants to oversee various aspects of
our protocol design, clinical trial oversight, manufacturing and other research
and development functions.
Because we rely on third parties for much of our research and development
work, we have less direct control over our research and development. We face
risks that these third parties may not be appropriately responsive to our
timeframes and development needs.
OUR FUTURE PROSPECTS ARE HEAVILY DEPENDENT ON THE RESULTS OF GCS-100.
While we seek to increase our portfolio of potential products, currently we
are not developing a wide array of products. Most of our attention and resources
are directed to the development of GCS-100. If GCS-100 is ultimately ineffective
in treating cancer, does not receive the necessary regulatory approvals or does
not obtain commercial acceptance, GlycoGenesys will be materially adversely
affected.
THE DEVELOPMENT OF GCS-100 IS NOT IN OUR EXCLUSIVE CONTROL AND IS JOINTLY
DETERMINED WITH ELAN AND EIS.
We are developing GCS-100 through collaboration with Elan and EIS.
SafeScience Newco is a company that we formed and jointly own with EIS to
develop GCS-100 in the field of oncology. We own 80.1% and EIS owns 19.9% of
SafeScience Newco. Despite our majority ownership of SafeScience Newco, we do
not fully control the development activities regarding GCS-100, because we need
consent of EIS for material development decisions regarding GCS-100. As a
result, development of GCS-100 will depend on our ability to negotiate
development issues with EIS.
18
OUR ECONOMIC INTEREST IN GCS-100 WILL BE REDUCED IF EIS EXERCISES ITS RIGHTS TO
ACQUIRE A 50% INTEREST IN SAFESCIENCE NEWCO, LTD.
EIS has the right to exchange our Series A convertible exchangeable
preferred stock it owns for all of the convertible preferred securities we own
of SafeScience Newco at any time until July 10, 2007, which would give EIS a 50%
ownership interest in SafeScience Newco, Ltd. If EIS exercises this right, our
ownership in SafeScience Newco will be reduced to 50% from its current 80.1%,
which would reduce our economic interest in GCS-100.
IF ELAN DECIDES TO STOP FURTHER INVESTMENT IN SAFESCIENCE NEWCO, LTD. WE INTEND
TO SEEK A NEW JOINT VENTURE PARTNER.
On June 10, 2002, Elan issued a press release announcing a plan to
streamline its operations into three core therapeutic areas: neurology, pain
management and autoimmune disease. Elan stated that its joint ventures that
focus on products outside of Elan's three core therapeutic areas (such as
oncology) will be evaluated on an ongoing basis for further investment and
eventual outlicensing to marketing partners. As a result of our subsequent
conversations with Elan, we expect that SafeScience Newco will receive a
portion, but not all of the approximately $7.1 million of additional research
funds currently contemplated under the agreements with EIS. If EIS stops funding
SafeScience Newco, we intend to replace EIS with a new development partner. If
we are unable to find a partner to replace EIS, our ability to develop and
commercialize GCS-100, and the Company as a whole, would be materially harmed.
IF OUR AGRICULTURE PRODUCTS ARE NOT ACCEPTED BY THE AGRICULTURAL COMMUNITY OUR
BUSINESS WILL SUFFER.
Our focus is primarily pharmaceuticals and to a lesser extent agricultural
products. Although we currently do not market any products, commercial sales of
our proposed agricultural products will substantially depend upon the products'
efficacy and on their acceptance by the agricultural community. For example,
Elexa works by a different mode of action than current fungicides because it
increases a plant's natural resistance to disease instead of killing the fungus
directly. Widespread acceptance of Elexa in the agricultural field will require
educating the agricultural community as to the benefits and reliability of
Elexa. Our proposed products may not be accepted, and even if accepted, we are
unable to estimate the length of time it would take to gain such acceptance.
IF THE THIRD PARTIES WE RELY ON FOR MANUFACTURING OUR PRODUCTS ARE UNABLE TO
PRODUCE THE NECESSARY AMOUNTS OF OUR PRODUCTS, DO NOT MEET OUR QUALITY NEEDS OR
TERMINATE THEIR RELATIONSHIPS WITH US, OUR BUSINESS WILL SUFFER.
We do not presently have our own manufacturing operations, nor do we intend
to establish any unless and until in the opinion of our management, the size and
scope of our business so warrants. While we have established manufacturing
relationships with Formatech, Inc., Sigma-Aldrich and Elan Drug Delivery, Ltd.
to provide us with GCS-100 and AgFormulators to provide us with Elexa 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.
19
MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES THAN WE DO AND MAY
BE ABLE TO DEVELOP AND COMMERCIALIZE PRODUCTS THAT MAKE OUR POTENTIAL PRODUCTS
AND TECHNOLOGIES OBSOLETE OR NON-COMPETITIVE.
A biotechnology company such as ours must keep pace with rapid
technological change and faces intense competition. We compete with
biotechnology and pharmaceutical companies for funding, access to new
technology, research personnel and in product research and development. Many of
these companies have greater financial resources and more experience than we do
in developing drugs, obtaining regulatory approvals, manufacturing and
marketing. We also face competition from academic and research institutions and
government agencies pursuing alternatives to our products and technologies. We
expect that our products under development, including GCS-100, will face intense
competition from existing or future drugs. In addition, our product candidates
may face increasing competition from generic formulations or existing drugs
whose active components are no longer covered by patents.
According to industry surveys there are approximately 402 new drug
candidates in development to treat various types of cancer. This research is
being conducted by 170 pharmaceutical and biotechnology companies and the
National Cancer Institute. We have conducted two Phase I clinical trials, the
first enrolled late stage patients with differing types of cancer and the second
enrolled patients with late stage prostate cancer. We also conducted two Phase
II(a) clinical trials, one in patients with refractory or relapsing pancreatic
cancer and the other in refractory or relapsing colorectal cancer. Published
surveys indicate that, including GCS-100, approximately twenty-six drugs are in
various stages of clinical trial development for pancreatic cancer and
fifty-five drugs in various stages of clinical trial development for colorectal
cancer. Our current clinical trial plan is to pursue pancreatic cancer as a lead
indication and we are planning to conduct a Phase II/III pivotal trial in
2003/2004.
There are approximately ten drugs currently having completed or in Phase
III clinical trial development, ten drugs in Phase II and six drugs in Phase I
for pancreatic cancer. Competitors may receive approval before us for competing
pancreatic cancer drugs, including without limitation the following drugs which
have completed Phase III trials: Imclone and Bristol Meyer's Erbitux;
Pharmacia's Camptosar; Snaofi-Synthelabo's tirapazamine; Aphton and Aventis
Pasteur's anti-gastrin therapeutic vaccine; Genentech's Herceptin (already
approved for breast cancer); MGI Pharma's Irofulven; Supergens' Mitoextra and
rubitecan; Janssen Pharmaceuticals' R115777 and Lorus Therapeutics' Virulizin.
In addition, GCS-100, if it receives FDA approval, will face competition from
existing cancer drugs approved for pancreatic cancer. These drugs are
fluorouracil (5-FU) and Eli Lilly's gemcitabine (Gemzar). Combination studies
utilizing new drug candidates and Gemzar are ongoing and combination therapies
of new drug candidates and Gemzar may present future competition.
Our competitors may:
.. successfully identify drug candidates or develop products earlier than we
do;
.. obtain approvals from the FDA or foreign regulatory bodies more rapidly
than we do;
.. develop products that are more effective, have fewer side effects or cost
less than our products; or
.. successfully market products that may compete with our product candidates.
The success of our competitors in any of these efforts would adversely
affect our ability to develop, commercialize and market our product candidates.
OUR BUSINESSES ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION AND FAILURE TO
ACHIEVE REGULATORY APPROVAL OF OUR PRODUCTS WOULD SEVERELY HARM OUR BUSINESS.
The FDA regulates the manufacture, distribution and promotion of
pharmaceutical products in the United States pursuant to the Federal Food, Drug,
and Cosmetic Act and related regulations. We must receive premarket approval by
the FDA for any commercial sale of our pharmaceutical products. Before receiving
such approval we must provide proof in human clinical trials of the nontoxicity,
safety and efficacy of our pharmaceutical products, which
20
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
or marketing arrangements with other pharmaceutical or biotechnology companies,
we will not generate any revenues in connection with our pharmaceutical products
unless and until we obtain FDA approval to sell our products in commercial
quantities for human application.
The investigation, manufacture and sale of agricultural products are
subject to regulation by the EPA, including the need for approval before
marketing, and by comparable foreign and state agencies. Our agricultural
products will 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. We have received approval
from the EPA, California and other states for Elexa 4%.
REIMBURSEMENT PROCEDURES AND FUTURE HEALTHCARE REFORM MEASURES ARE UNCERTAIN AND
MAY ADVERSELY IMPACT OUR ABILITY TO SUCCESSFULLY SELL ANY PHARMACEUTICAL
PRODUCT.
Our ability to successfully sell any pharmaceutical product 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 future 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.
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. We may hire additional clinical operations personnel
in the future. Competition for such personnel is intense and we may not be able
to retain existing personnel or attract qualified employees in the future. Our
limited drug pipeline and small size make it more difficult to compete for such
personnel against larger, more diversified companies. At present, we employ
approximately 14 full-time employees and one part-time worker. We depend upon
the personal efforts and abilities of our officers and directors, including
Bradley J. Carver, our President, CEO and a director, John W. Burns, our Senior
Vice President and Chief Financial Officer and a director, and Brian G.R.
Hughes, Chairman of the Board 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 SUIT AGAINST US, OUR BUSINESS COULD BE SEVERELY HARMED.
The testing, marketing and sale of pharmaceutical and agricultural products
entails a risk of product liability claims by patients and customers. While we
currently maintain product liability insurance, such insurance may not be
available at reasonable cost and in the event of a significant adverse event
with a patient or customer, such insurance would likely be insufficient to cover
the full amount of the liability incurred. In the event of a successful suit
against us, payments and damage to our reputation could have a material adverse
effect on our business and financial condition. Even if such suit is
unsuccessful, our
21
reputation could be damaged and litigation costs and expenditure of management
time on such matters could adversely affect our business and financial
condition.
WE ARE CONTRACTUALLY OBLIGATED TO ISSUE SHARES IN THE FUTURE, INCLUDING SHARES
TO BE ISSUED UPON THE CONVERSION OF OUTSTANDING PREFERRED STOCK AND WARRANTS
HELD BY EIS, WHICH WILL CAUSE DILUTION OF YOUR INTEREST IN US.
As of June 30, 2002, there are outstanding options to purchase 1,400,427
shares of common stock, at a weighted average exercise price of $2.90 per share
and warrants to purchase 11,165,328 shares of common stock at a weighted average
exercise price of $2.27 per share. Moreover, we may in the future issue
additional shares to raise capital, acquire other companies or technologies, to
pay for services, or for other corporate purposes. Any such issuances will have
the effect of further diluting the interest of the purchasers of the current
shareholders.
In July 2001, in connection with a business venture and financing
transaction, we issued to EIS 1,116.79 shares of our Series C convertible
non-voting preferred stock, 4,944.44 shares of our Series A convertible
exchangeable non-voting preferred stock and a warrant to purchase 381,679 shares
of our common stock. In December 2001, May 2002 and August 2002, we sold
862.70647, 599.84706 and 832.1245 shares, respectively, of our Series B
convertible non-voting preferred stock to EIS. Each share of our Series A
preferred stock and Series C preferred stock is presently convertible after July
10, 2003 into 1,000 shares of our common stock. Each share of our Series B
preferred stock is presently convertible after December 31, 2003 into 1,000
shares of our common stock. The Series A preferred stock and the Series B
preferred stock each bear a 7% dividend payable in Series A preferred stock and
Series B preferred stock, respectively, which compounds annually. In January
2002, we sold to EIS warrants to purchase a total of 597,205 shares of common
stock in connection with a private placement. Accordingly, a total of 9,334,793
shares of our common stock could be issued to EIS, assuming the exercise of the
warrants and the conversion into common stock of all shares of Series A, Series
B and Series C preferred stock currently outstanding, but not including any
dividends to be issued on the Series A and Series B preferred stock. This amount
of shares represents 25.0% of our currently outstanding common stock. Pursuant
to provisions in our agreement with EIS, if the exercise or conversion of any of
our securities held by EIS would result in EIS owning more than 9.9% of our
common stock at any time EIS may opt to receive non-voting securities instead of
common stock. In addition, we may elect to sell to EIS, subject to its
agreement, up to an additional 3,359.440 shares of our Series B convertible
non-voting preferred stock in the future at a price per share of $1,700. Upon
conversion, a total of an additional 3,359,440 shares of common stock would be
issued to EIS assuming the purchase of all the remaining Series B preferred
stock, but not including any dividends to be issued on the Series B preferred
stock. Thus, we could potentially issue a total of 12,694,233 shares of our
common stock to EIS, assuming the exercise of all warrants and conversion of all
Series A, Series B and Series C preferred stock outstanding or that may be sold
to EIS in the future, but excluding any dividends to be issued on the Series A
and Series B preferred stock. This amount of shares represents 34.1% of our
currently outstanding common stock.
WE MUST COMPLY WITH THE LISTING REQUIREMENTS OF THE NASDAQ SMALLCAP MARKET OR
OUR COMMON STOCK MAY DECLINE AND THE LIQUIDITY OF AN INVESTMENT IN OUR
SECURITIES WOULD DECREASE.
Our common stock could be delisted from The Nasdaq Stock Market for the
following reasons:
. if the bid price of our common stock falls below $1.00 per share
for thirty (30) consecutive business days; or
. if our market capitalization falls below $35 million and we have
less than (A) $2,000,000 in net tangible assets (total assets less
total liabilities and goodwill) or (B) $2,500,000 in equity; or
. if the value of our common stock held by our stockholders (other
than our directors, executive officers and 10% stockholders) is
less than $1,000,000.
22
On November 1, 2002, the $2,000,000 net tangible assets test will no longer
be a listing requirement and will be replaced by the requirement to have no less
than $2,500,000 in equity. There are other quantitative and qualitative criteria
of the Nasdaq SmallCap Market which if violated could lead to delisting of our
common stock.
We may not be able to maintain our compliance with Nasdaq continued listing
requirements in the future. The closing bid price of our common stock has been
below $1.00 for a thirty day period. On July 23, 2002, we received a letter from
Nasdaq that the bid price of our common stock had been below $1.00 for 30
consecutive business days and that we have until January 21, 2003 to achieve a
bid price of at least $1.00 for a period of 10 consecutive business days or face
delisting. Further, in light of the recent declines in our stock price, our
market capitalization has been below $35 million since July 1, 2002. Our net
tangible assets and equity are approximately $7.6 million as of June 30, 2002.
As part of a normal review of our recently filed registration statement on Form
S-3, the Securities and Exchange Commission has questioned our classification of
the Series A preferred stock as stockholders' equity due to the existence of an
exchange feature whereby EIS may exchange the Series A preferred stock for the
preferred shares of SafeScience Newco held by us. Although we believe that the
Series A preferred stock is appropriately reported as permanent equity, it is
possible that preferred stock in the amount of approximately $12.9 million at
June 30, 2002 will be reclassified back to temporary equity upon the completion
of the SEC's review. This would reduce our net tangible assets and change
shareholders equity to a deficit of approximately negative $5.3 million as of
June 30, 2002.
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 were
unable to obtain listing or quotation on such market or exchange, trading of our
common stock would occur in the over-the-counter market on an electronic
bulletin board for unlisted securities or in what are commonly known as the
"pink sheets." 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, such as disclosing offer and bid prices and compensation
received from a trade to a purchaser and sending monthly account statements to
purchasers. Consequently, broker-dealers may be less willing or able to sell
and/or make a market in our common stock. These rules also require that
purchasers be accredited investors which would reduce the number of investors
that could purchase our shares. Additionally, an investor would find it more
difficult to dispose of, or to obtain accurate quotations for the price of, our
common stock. As a result of delisting, it may become more difficult for us to
raise funds through the sale of our securities.
OUR STOCK PRICE COULD DECLINE IF A SIGNIFICANT NUMBER OF SHARES BECOME AVAILABLE
FOR SALE.
Approximately 24,280,160 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, 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 of restricted securities 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.
Restricted securities can be sold, under certain circumstances, without any
quantity limitation, by persons who are not affiliates of GlycoGenesys and who
have beneficially owned the shares for a minimum period of two years. The
Company has filed a registration statement on Form S-3, which is not yet
effective, with respect to 7,233,266 outstanding shares of the approximately
24,280,160 restricted securities, as well as with respect to shares issuable
upon the exercise of warrants. In addition, the Company has seven S-3
Registration Statements which are currently effective.
The sale of these restricted shares as well as our additional seven
effective registration statements, will increase the number of free-trading
shares and may reduce the price of our common stock. Moreover, such sales, if
substantial, might also adversely affect our ability to raise additional capital
through the sale of equity securities.
23
BECAUSE OUR MANAGEMENT COULD CONTROL A SIGNIFICANT PERCENTAGE OF OUR COMMON
STOCK, THEY COULD EXERCISE SUBSTANTIAL CONTROL OVER US.
The holders of the common stock do not have cumulative voting rights. Our
directors, two of whom are executive officers of GlycoGenesys, own approximately
9.7% collectively of the currently outstanding shares of common stock. One of
the conditions of the transactions between us, Elan and EIS required that we
expand our board of directors to six members at our 2002 annual stockholders'
meeting at which time EIS could appoint one director. EIS decided not to appoint
a director at our 2002 annual stockholders' meeting, but may choose to do so in
the future. If EIS appoints a director, members of the board of directors and
their affiliates will own approximately 18.6% of the currently outstanding
common stock, assuming EIS has not converted or exercised any of our securities
held by it, and the same number of shares are outstanding at such time as are
currently outstanding. If EIS and our directors were to have converted or
exercised all of our securities held by them, the members of our board of
directors and their affiliates would own approximately 39.7% of the currently
outstanding common stock, assuming the number of shares outstanding at such time
equals the number of shares currently outstanding plus the number of shares
issued on exercise or conversion of securities held by EIS and our directors.
This percentage would increase if we were to sell additional shares of our
Series B preferred stock to EIS. This concentration of ownership would allow
these stockholders to substantially influence all matters requiring stockholder
approval and could have the effect of delaying or preventing a change in control
or otherwise discouraging a potential acquirer from attempting to obtain control
of us, which in turn could materially adversely affect our stock price.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES BY YOU.
The market price of our common stock, which is traded on the National
Association of Securities Dealers Automated Quotation (NASDAQ--Small Cap) has
been, and may continue to be, highly volatile. During the twelve months ending
June 30, 2002, our common stock has traded at prices ranging from $0.63 to $2.43
per share. Factors such as announcements of clinical trial results, financings,
technological innovations or new products, either by us or by our competitors or
third parties, as well as market conditions within the biotech and
pharmaceutical industries, may have a significant impact on the market price of
our common stock.
In addition, the stock market has from time to time and especially in the
last few years, experienced extreme price and volume fluctuations, particularly
in the biotechnology sector, which have often been unrelated to the operating
performance of particular companies. Current market conditions are particularly
unstable and there is a large degree of uncertainty at this time. In general,
biotechnology stocks tend to be volatile even during periods of relative market
stability because of the high rates of failure and substantial funding
requirements associated with biotechnology companies. Market conditions and
conditions of the biotechnology sector could negatively impact the price of our
common stock.
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds
(c) Set forth below is information regarding the sale of unregistered shares of
equity securities sold by the Company during the three months ended June 30,
2002.
On May 7, 2002, the Company issued 599.84706 shares of Series B preferred
stock to EIS for $1,019,740. Net proceeds of the sale were $930,976. The Series
B preferred stock is convertible into common stock after December 31, 2003 at a
conversion price of $1.70, subject to anti-dilution adjustment. These securities
were sold in reliance upon the exemption from registration pursuant to Section
4(2) under the Securities Act of 1933, as amended.
24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 13, 2002, the Company held its Annual Meeting of Stockholders.
Three items were voted upon: (1) an amendment of the Articles of Incorporation;
(2) the election of directors; and (3) the ratification of the appointment of
auditors.
The proposed amendment to the Articles of Incorporation providing for the
increase in the number of shares of common stock authorized from 100,000,000 to
200,000,000 was approved by a vote of 26,150,898 in favor, 4,010,170 against
with 82,241 abstentions out of a total of 30,243,309 votes cast.
The nominees for director approved by the shareholders were Theodore J.
Host and John W. Burns. The following table indicates the term expiration dates
and the number of votes cast with respect to each candidate, the number of votes
in favor and the number of votes withheld:
Term Total Total Votes Total Votes
Nominee Expiration Votes Cast in Favor Withheld
------- ---------- ---------- -------- --------
Theodore J. Host 2005 30,243,309 27,022,316 3,220,993
John W. Burns 2005 30,243,309 26,778,392 3,464,917
The appointment of Deloitte & Touche LLP as auditors for the Company for the
year ended December 31, 2002 was approved by a vote of 27,164,449 in favor,
3,009,618 against with 69,242 abstentions out of a total of 30,243,309 votes
cast.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
3.1 Certificate of Amendment to the Articles of Incorporation of the
Company filed on June 18, 2002.
4.1 Certificate of Amendment to the Certificate of Designations,
Preferences and Rights of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock of the Company filed on April 19,
2002.
10.1 Consulting Agreement between the Company and Beardsworth Consulting
Group, Inc. dated as of April 16, 2002 (portions of this Exhibit are
omitted and are being filed separately with the Securities and
Exchange Commission pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 promulgated under
the Securities Exchange Act of 1934, as amended).
(b) Reports on Form 8-K.
On April 19, 2002, the Company filed a Current Report on Form 8-K to report the
dismissal of its independent public accountant, Arthur Andersen LLP and the
engagement of Deloitte & Touche LLP to serve as the Company's independent public
accountants.
On June 6, 2002, the Company filed a Current Report on Form 8-K to report
developments concerning GCS-100 discussed in the Company's conference call
regarding the first quarter results.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated this 19th day of August 2002.
GLYCOGENESYS, INC.
(the "Registrant")
BY: /s/ Bradley J. Carver
-----------------------------------------------------
Bradley J. Carver, CEO, President, Treasurer, and a member of the Board
of Directors
BY: /s/ John W. Burns
-----------------------------------------------------
John W. Burns, Senior Vice President, CFO & Secretary and a member of
the Board of Directors
BY: /s/ Patrick J. Joyce
-----------------------------------------------------
Patrick J. Joyce, Controller, Principal Accounting Officer
26