U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
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 000-27353
SELECT THERAPEUTICS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 98-0169105
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
124 Mt. Auburn St., Suite 200 North, Cambridge, MA 02138
(Address of principal executive offices) (Zip Code)
(617) 520-6693
(Issuer's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |_| No [X]
The aggregate number of shares outstanding of the Issuer's Common Stock, its
sole class of common equity, was 6,101,358 as of January 7, 2000.
Transitional Small Business Issuer Disclosure Format: Yes [_] No [X]
Page 1 of 16; Exhibit Index is on Page 14
<PAGE>
Consolidated Financial Statements
(Stated in U.S. dollars)
SELECT THERAPEUTICS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Three months ended September 30, 1999 and 1998
(Unaudited)
2
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SELECT THERAPEUTICS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Balance Sheets
(Stated in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
September 30, June 30,
1999 1999
(audited)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 44,980 $ 120,881
Restricted cash 72,000 72,000
Accounts receivable -- 7,380
Inventory 68,104 32,130
Prepaid expenses and other assets 18,380 21,740
Property, plant and equipment 128,542 104,547
Intangible assets 835,644 900,581
- ----------------------------------------------------------------------------------
$ 1,167,650 $ 1,259,259
==================================================================================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 240,677 $ 43,309
Accrued liabilities 684,285 655,798
- ----------------------------------------------------------------------------------
924,962 699,107
Shareholders' equity:
Capital stock:
Authorized:
1,000,000 preferred shares
10,000,000 common shares,
$0.001 par value
Issued:
6,101,358 common shares
(June 30, 1999 - 5,634,094) 5,720 5,634
Contributed surplus 5,355,034 5,140,120
Deficit accumulated during the development stage (5,118,066) (4,585,602)
- ----------------------------------------------------------------------------------
242,688 560,152
- ----------------------------------------------------------------------------------
$ 1,167,650 $ 1,259,259
==================================================================================
</TABLE>
See accompanying note to consolidated financial statements.
3
<PAGE>
SELECT THERAPEUTICS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Statements of Operations
(Stated in U.S. dollars)
Three months ended September 30, 1999 and 1998
(Unaudited)
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Revenue $ 93,125 $ --
Cost of revenue 13,711 --
- -------------------------------------------------------------------------------
79,414 --
Interest income 506 14,908
Research and development 121,669 228,038
Selling, general and administration 415,820 316,342
Depreciation 9,958 --
Amortization 64,937 --
- -------------------------------------------------------------------------------
612,384 544,380
- -------------------------------------------------------------------------------
Loss for the period $ (532,464) $ (529,472)
===============================================================================
Loss per share $ (0.09) $ (0.13)
Weighted average number of shares 5,819,354 4,164,534
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
(Stated in U.S. dollars)
Three months ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Deficit
accumulated
during the
Common shares Contributed development
Shares Amount surplus stage Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 4,981,313 $ 4,981 $ 3,176,046 $(2,118,274) $ 1,062,753
Issue of common shares 652,781 653 1,964,074 -- 1,964,727
Loss for the period -- -- -- (2,467,328) (2,467,328)
- --------------------------------------------------------------------------------------------------
Balance, June 30, 1999 5,634,094 5,634 5,140,120 (4,585,602) 560,152
Issue of common shares 467,264 86 214,914 -- 215,000
Loss for the period -- -- -- (532,464) (532,464)
- --------------------------------------------------------------------------------------------------
Balance, September 30, 1999 6,101,358 $ 5,720 $ 5,355,034 $(5,118,066) $ 242,688
==================================================================================================
</TABLE>
See accompanying note to consolidated financial statements.
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<PAGE>
SELECT THERAPEUTICS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Statements of Cash Flows
(Stated in U.S. dollars)
Three months ended September 30, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss for the period $ (532,464) $ (529,472)
Items not involving cash:
Depreciation 9,958 --
Amortization 64,937 --
Issue of common shares for services 90,000 --
Changes in non-cash operating working capital:
Accounts receivable 7,380 --
Inventory (35,974) --
Prepaid expenses and other assets 3,360 --
Accounts payable 197,368 (16,720)
Accrued liabilities 28,487 (33,180)
- -------------------------------------------------------------------------------
(166,948) (579,372)
Financing activities:
Increase in loans to Sierra Diagnostics, Inc. -- (105,000)
Proceeds from issuance of common shares 125,000 --
- -------------------------------------------------------------------------------
125,000 (105,000)
Investing activities:
Additions to property, plant and equipment (33,953) --
- -------------------------------------------------------------------------------
Decrease in cash (75,901) (684,372)
Cash and cash equivalents, beginning of period 120,881 2,070,705
- -------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 44,980 $ 1,386,333
===============================================================================
Supplementary disclosure:
Non-cash financing and investing activities:
Issue of common shares for services $ 90,000 $ --
- -------------------------------------------------------------------------------
See accompanying note to consolidated financial statements.
5
<PAGE>
SELECT THERAPEUTICS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Note to Consolidated Financial Statements
(Stated in U.S. dollars)
Three months ended September 30, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
Basis of presentation:
In the opinion of management, the unaudited consolidated financial statements of
Select Therapeutics Inc. (the "Company") included herein have been prepared on a
consistent basis with the June 30, 1999 audited consolidated financial
statements and include all material adjustments, consisting of normal recurring
adjustments, necessary to fairly present the information set forth therein.
These interim financial statements should be read in conjunction with the June
30, 1999 audited consolidated financial statements and notes thereto. The
Company's results of operations for the first fiscal quarter of 1999 are not
necessarily indicative of future operating results.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ materially from those estimates.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which involve risks
and uncertainties. Select Therapeutics Inc.'s actual results may differ
materially from the results discussed in the forward-looking statements.
SUMMARY
Going forward, Select Therapeutics Inc. ("Select" or the "Company") has
become a reporting company under federal securities laws and has recently
succeeded in obtaining the bridge funds it required to position the Company for
a significant financing and development partnerships with other companies. It
has a strong portfolio of product opportunities in therapeutics for cancer, two
of which have been advanced to the stage at which clinical investigations may
begin (subject to adequate funding resources). Product sales at Sierra
Diagnostics have begun and although growth of sales have been slower than
expected and do not currently cover operating costs, interest in both products
is high and significant sales growth is anticipated in 2000. We are adding new
products and technology to Sierra as part of an overall plan to develop a
diagnostics business with both sales and earnings.
Research results from key collaborations continue to be encouraging. Most
notably the program at the Institut Curie, with respect to presentation of
antigens to dendritic cells, has progressed well and moved significantly towards
clinical experiments aimed at validating the potential of this approach for
development of therapeutic vaccines for cancers.
As noted below, subsequent share placements have improved the financial
position of Select. We look forward to continuing to develop the potential of
the Company's technology and bringing realizable value to our shareholders.
OVERVIEW
The Company is a development stage biopharmaceutical company formed to
acquire and develop rights to selected early-stage compounds which have
potential use as therapeutics or diagnostics. Since its inception (December 6,
1996), substantially all of the Company's resources have been dedicated to
research and development and technology acquisition and management. To date, the
Company has not generated significant product revenue from the sale of Gonostat,
launched in January 1999, and it does not expect to generate significant
revenues for at least three years while its
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other products are under development. The continuation of the Company as a going
concern is dependent on additional equity financing and on the development of
economically viable products. The Company has incurred losses of $2,467,328,
$1,919,240 and $199,034 in fiscal 1999, 1998 and 1997, respectively, and
negative cash flow is expected to continue for the Company for at least the next
three years. There can be no assurance that funding will be available to the
Company or that the Company will be able to develop an economically viable
product.
The Company expects its sources of revenue, for the next several years, to
consist principally of sales of diagnostic products and of payments under future
corporate partnerships. The process of developing the Company's therapeutic
products will require significant additional research and development,
preclinical testing and clinical trials, as well as regulatory approvals. These
activities, together with the Company's general and administrative expenses, are
expected to result in operating losses for at least three more years. The
Company will not receive product revenue from therapeutic products unless it
completes clinical trials and successfully commercializes or arranges for the
commercialization of one or more of its products, as to the success of which no
assurance can be given.
The Company is subject to risks common to biopharmaceutical companies,
including risks inherent in its research and development efforts and clinical
trials, reliance on collaborative partners, enforcement of patent and
proprietary rights, the need for future capital, potential competition and
uncertainty of regulatory approval. In order for a product to be commercialized,
it will be necessary for the Company and its collaborators to conduct
preclinical tests and clinical trials, demonstrate efficacy and safety of the
Company's product candidates, obtain regulatory clearances and enter into
manufacturing, distribution and marketing arrangements either directly or
through sublicensees. There can be no assurance that the company will generate
revenues or achieve and sustain profitability in the future.
During the quarter which ended Sept 30th, Select was able to accomplish a
number of key tasks under severely constrained financial circumstances. Most
important was the Company's filing to become a reporting issuer -a step which
had been delayed by a number of circumstances and which is essential to
obtaining financing for continuing operations. The Company entered this period
with a depleted treasury and expectations of a financing which were not
realized. Management efforts were directed to completion of the required 10-SB
registration statement (filed on September 16th) and obtaining bridge funds.
8
<PAGE>
During the quarter, restricted shares were sold to an unrelated party in a
negotiated transaction for $250,000 of which $125,000 was received during the
quarter. This provided needed working capital. Subsequently, two bridge
placements (one completed and one still ongoing) secured additional working
capital. Management and key consultants deferred their compensation and
significant accounts payable are outstanding to professional service providers
and collaborating academic institutions as a result of cash constraints.
The funding required for the Company to enter clinical trials significantly
exceeds the magnitude of funds raised by the Company to date and there can be no
assurance that such funding is available on acceptable terms if at all. In
December, the Company signed a placement agent agreement for a significant
private placement which is planned for the first quarter of calendar 2000. If
successful, this placement will provide an adequate operating base for Select to
move forward in its clinical programs which have been put on 'hold' pending
availability of funds for their support.
Program Review.
During the quarter ended September 30th, the Company was able to maintain
and expand its research collaborations and strengthen its portfolio of
intellectual property. Academic research on applications of Verotoxin (VT)
continued in collaborating institutions; however, due to the significant funding
requirements, production of clinically qualified materials was not initiated and
all clinically oriented programs were halted for both purging and direct
applications of the toxin. Both of these programs continue to be viewed as
promising and management believes that with appropriate funding, both can move
forward rapidly since institutional collaborations are in place with clinical
investigators.
The application of VT to present antigens to dendritic cells continues to
be a promising approach to development of therapeutic vaccines for cancer and
other diseases which circumvent the immune system's surveillance. Research
carried out under the Company's option agreement with the Institut Curie has
resulted in promising findings and a plan for clinical investigation of the
technology is being developed in collaboration with Dr. Evan Hersh at the
Arizona Cancer Center. As with chemotherapeutic applications of VT,
significantly increased levels of expenditure will be required as investigations
move from the research laboratory setting to the clinical setting. These
expenses include but are not limited to development of materials and
formulations which are compliant with regulatory requirements and the costs of
patient recruitment and monitoring in trial settings.
9
<PAGE>
Both the purging program and the dendritic cell program involve ex-vivo
therapies (i.e. treatments are carried out on patient tissues which have been
removed from the patient). A common characteristic of ex-vivo therapies is that,
relative to systemic administration, they are less costly to investigate.
Select's focus is on identification of opportunities which combine low cost of
development with a strong proprietary position and potentially short time to
market. While there can be no assurance that viable products will result from
the Company's programs, they have the potential to yield therapeutic products
within time and financial constraints which offer attractive risk-return
opportunities for development.
During the past year, Select purchased Sierra Diagnostics Inc., a developer
and manufacturer of diagnostic products for consideration comprising stock and
assumption of debts and operating costs. The purchase and subsequent development
of Sierra was motivated by three factors; a need for in-house capability to
develop diagnostic tests required for therapeutic programs such as ex-vivo
purging, a requirement for a facility to develop and manufacture the Company's
patented HIV diagnostic, and the desire to develop earnings from operations in
order to offset development costs. Sierra has a base of proprietary technology
relating to assays for sexually transmitted diseases and handling of clinical
samples. It has launched two products in 1999 both of which have significant
revenue potential. The first product, Gonostat, is a clinical laboratory test
for gonorrhea which offers unique advantages in cost and performance relative to
other technologies available in the market. Although the market is highly
competitive, Gonostat is expected to capture a significant niche and become a
profitable product. The second product brought to market by Sierra is a sample
preservation and handling product which eliminates the need for refrigeration of
clinical samples intended for molecular (DNA/RNA based) assays. This product
fits into the general practice of clinical testing and is expected to find wide
application due to elimination of sample degradation and thus the need for
repeat testing or sampling with attendant costs and inconvenience. The
technology is proprietary and believed to be patentable. Sales and licensing of
the technology to third parties are beginning. There can, however, be no
assurance of performance in the market of either of these products.
Sierra Diagnostics has operated within its expense projections but sales of
Gonostat and DNA-RNA Protect, while contributing on a gross margin basis, have
lagged expectations. This resulted in a higher than anticipated cash requirement
for Sierra. We have engaged a sales and marketing group on a consulting basis to
assist in developing the market for both products. However to date, the
operations of Sierra have generated losses and there can be no
10
<PAGE>
assurance that profitable operations will be achieved or that, if achieved, they
can be maintained.
RESULTS OF OPERATIONS
The Company has been unprofitable from its formation and has an accumulated
deficit of $5,118,066 through September 30, 1999. For the quarter ended
September 30, 1999, Select incurred a net loss of $532,464 compared with a loss
of $529,472 for the three months ended September 30, 1998. The decrease in loss
per share form $0.13 to $0.09 reflects the increase in the number of common
shares. The net loss is a result of the routine operations of the Company in its
development stage. We expect losses to continue and increase for the next
several years as the Company pursues development and commercialization of its
intellectual property resources.
During the quarter the Company's cash position decreased from $120,881 to
$44,980, and there was an increase in accounts payable and accrued liabilities
from $699,107 to $924,962. Cash and cash equivalents for the period ended
September 30, 1999 were $44,980 versus $1,386,333 for the period ended September
30, 1998. Payments to certain members of management and consultants were
suspended or reduced during this period. Cash raised from the private placement
of securities subsequent to the period has considerably improved the prospects
for the Company and management is optimistic that adequate funding for
continuation of operations and development of the Company's technology assets
can be obtained.
Revenues.
Revenues of $93,631 during the quarter ended September 30, 1999 were
principally from the sale of Gonostat; interest income for the quarter was $506.
During the corresponding quarter in 1998, there were no revenues from sales and
interest income was $14,908. Select's sole operating revenues to date arise from
sales of diagnostic products through its wholly owned subsidiary, Sierra
Diagnostics. The Company has no other product or license revenues. Management
anticipates that future revenues may consist primarily of product sales either
directly by the Company or, more likely, through collaborative development and
marketing agreements with other companies in the pharmaceutical industry.
Although Sierra's operations are expected to achieve breakeven during fiscal
2000 and thereafter be profitable, there can be no assurance that such
performance will be realized or maintained.
11
<PAGE>
Costs and Expenses.
Operating expenses for the quarter ended September 30, 1999 were
significantly reduced compared to the same period in 1998; however, the
reduction was required by the Company's severely limited cash resources. The
Company has to defer expenditures required to advance its development projects.
All research and development activities of the Company and its patent
costs, are expensed as incurred. Personnel costs including retained consultants
and external contractors are the largest ongoing cost of operations. Locating
and retaining appropriate personnel resources is a priority and the Company
anticipates that personnel costs will increase if adequate funding is obtained.
The Company has no long term employment contracts or liabilities for severances.
At June 30, 1999 the Company employed seven people, mainly at Sierra Diagnostics
and retained services of three key consultants who are an integral part of the
Company management.
Capital Expenditures.
There were no significant capital expenditures during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private placements of its Common Stock. As of September 30, 1999 the Company had
received approximately $3,417,297 in net proceeds from the sale of equity
securities.
Cash at June 30, 1999 totaled $120,881. In the quarter ended September 30,
1999 the Company received $125,000 from the private sale of 50,000 shares of
restricted common stock. Subsequently, it also received $857,700 from additional
securities sales.
The Company's limited financial resources have forced it to curtail some of
its planned operations through 1999, and the Company will require substantial
additional funding in order to complete its research and development activities
and sublicense any potential products. The Company's future capital requirements
will depend on many factors, including scientific progress in its research and
development programs, the size and complexity of such programs, the scope and
results of preclinical studies and clinical trials, the ability of the Company
to establish and maintain corporate partnerships, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
cost of manufacturing preclinical and clinical
12
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material and other factors not within the Company's control. There can be no
assurance that the additional financing necessary to meet the Company's short
and long-term capital requirements will be available on acceptable terms or at
all.
Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its research or development programs, to lose rights
under existing licenses or to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than
the Company would otherwise choose or may cause the Company to cease operations.
If additional funds are raised by issuing equity securities, substantial
dilution to existing stockholders likely will result.
Sales of Sierra's products to date are not sufficient to cover operating
costs. The Company currently has funds sufficient to continue operations for
less than three months and does not have funds required to move current projects
into clinical investigations. In December, the Company signed a placement agent
agreement for a significant private placement which is planned for the first
quarter of calendar 2000. If successful, this placement will provide an adequate
operating base for Select to move forward in its clinical programs which have
been put on 'hold' pending availability of funds for their support. Management
has been in discussions with a number of parties regarding additional financing
required to maintain and develop the Company's position and while it is
optimistic that such funds may be available there is no assurance that this will
be the case.
Year 2000.
Year 2000 (Y2K) issues arise because many computer systems use two rather
than four digits to identify the year thus creating ambiguities which may
produce errors before, on or after January 1, 2000. If not addressed, errors
could impact all aspects of operations including financial reporting, clinical
and production records or controls and communications. Errors may range from
minor to significant systems failures and could be imported from suppliers'
systems.
We have assessed, taken corrective actions in light of, and continue to
monitor our vulnerability to Y2K issues in all aspects of our business including
information and computer systems and critical suppliers and service providers.
To the best of our knowledge, systems and equipment critical to our operations
are Y2K compliant; however, it is not possible to be certain that the systems of
our suppliers, service providers or other third parties upon which we rely are
compliant or that they will unaffected by problems in their own supply chain.
Based on the nature of our
13
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operations and ongoing assessments we believe that Select has little direct
exposure to Y2K issues.
We estimate that our direct costs of addressing the Y2K issue are less than
$5,000, which are being expensed in the normal course of our business
operations.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed with this report: Page
27. Financial Data Schedule 16
14
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: January 11, 2000 SELECT THERAPEUTICS, INC.
By: /s/ Robert Bender
-----------------------------
Name: Robert Bender
Title: Chairman of the Board
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the three months ended September 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 44,980
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 68,104
<CURRENT-ASSETS> 203,464
<PP&E> 170,598
<DEPRECIATION> 42,056
<TOTAL-ASSETS> 1,167,650
<CURRENT-LIABILITIES> 924,962
<BONDS> 0
0
0
<COMMON> 5,720
<OTHER-SE> 5,355,034
<TOTAL-LIABILITY-AND-EQUITY> 1,167,650
<SALES> 93,125
<TOTAL-REVENUES> 93,631
<CGS> 13,711
<TOTAL-COSTS> 13,711
<OTHER-EXPENSES> 612,384
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (532,464)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (532,464)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
