SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
- -----
Quarterly Report pursuant to Section 13 or 15(d) of the Securities
X
- ----- Exchange Act of 1934 for the Quarterly period ended SEPTEMBER 30,1998
or
- -----
Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from _______ to ______
- -----
Commission file number 0-14691
SENETEK PLC
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(Exact name of registrant as specified in its charter)
England 77-0039728
- ----------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
23 Palace Street, London SW1E 5HW
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no. including area code 011-44-171-828-4800
-------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(former name, former address and former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
Indicate number of shares outstanding of each of the issuer's classes of common
stock, as of the latest date practicable.
SEPTEMBER 30, 1998 (ALL ONE CLASS): 54,793,472 ORDINARY SHARES 5P PAR VALUE
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THIS DOCUMENT CONTAINS 26 PAGES
<PAGE>
SENETEK PLC AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
PART I. FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements
Unaudited Consolidated Statement of Operations 3
Three Months Ended September 30, 1998 and September 30, 1997
Nine Months Ended September 30, 1998 and September 30, 1997
Consolidated Balance Sheet 4
September 30, 1998 (unaudited) and December 31, 1997
Unaudited Consolidated Statement of Cash Flows 5&6
Nine Months Ended September 30, 1998 and September 30, 1997
Consolidated Statement of Stockholders' Equity 7
Nine Months Ended September 30, 1998
Notes to the Unaudited Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II. OTHER INFORMATION 23
SIGNATURES 24
2
<PAGE>
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 1,074 1,374 $ 3,846 4,477
Cost of sales (534) (845) (2,204) (2,885)
-------- -------- -------- --------
Gross Profit 540 529 1,642 1,592
Operating Expenses:
Research & development (2,287) (1,152) (5,536) (3,173)
General & administration (2,736) (899) (6,472) (2,746)
Marketing & promotion (536) (1,278) (983) (2,788)
Selling expenses (147) (315) (381) (597)
-------- -------- -------- --------
Total Operating Expenses (5,706) (3,644) (13,372) (9,304)
Loss from operations (5,166) (3,115) (11,730) (7,712)
Interest Expense (28) (22) (59) (80)
Amortization of Deferred Interest Cost (627) -- (627)
Interest income 62 132 157 196
Other income 11 -- 108 1
-------- -------- -------- --------
Loss before taxation (5,748) (3,005) (12,151) (7,595)
Taxation -- -- -- --
-------- -------- -------- --------
Net Loss $ (5,748) (3,005) $(12,151) (7,595)
======== ======== ======== ========
Net loss per ordinary
share outstanding $ (0.11) (0.06) $ (0.23) (0.16)
Weighted average
Ordinary shares
outstanding 54,742 51,222 53,803 48,282
-------- -------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
3
<PAGE>
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
----------- ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 2,931 $ 6,216
Inventory 999 890
Trade Receivables 1,216 1,123
Non-Trade Receivables 45 113
Receivable from Employee 11 311
Prepaids and Deposits 1,592 939
Deferred Financing Cost 1,881 --
-------- --------
Total Current Assets 8,675 9,592
Deferred Financing Cost - Long Term 2,089 --
Property and Equipment - net of depreciation 3,254 1,909
Goodwill and Other Intangible Assets - net of amortization 1,800 1,900
-------- --------
Total Assets $ 15,818 $ 13,401
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Bank Overdraft -- --
Line of Credit 6,100 900
Accounts Payable 1,118 1,754
Accrued Liabilities 451 1,353
Accrued Compensation on Stock Options
-- Employees 4,374 3,048
-- Non Employee 1,540 840
Capital Leases 193 --
-------- --------
13,776 7,895
======== ========
Long Term Liabilities
Capital Leases 190 --
Stockholders' Equity:
Ordinary shares $0.08 (5p) par value:
Authorized shares: 100,000,000
Issued and outstanding shares:
September 30, 1998- 54,793,472
December 31, 1997 - 52,186,821 4,432 4,215
Share Premium 59,059 50,711
Accumulated deficit (61,627) (49,476)
Equity adjustment from foreign currency translation (12) 56
Total Stockholders' Equity $ 1,852 $ 5,506
-------- --------
Total Liabilities and Stockholders' Equity $ 15,818 $ 13,401
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
4
<PAGE>
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------ ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,151) $ (7,595)
ADJUSTMENTS TO RECONCILE
NET LOSS TO NET CASH:
Depreciation and amortization 1,040 447
Gain on disposal of fixed assets (9) --
Stock option compensation 2,026 --
Interest on Convertible Debentures
effected by issue of shares -- 49
CHANGES IN ASSETS AND LIABILITIES:
Trade receivables decrease/
(increase) (93) (95)
Non-trade receivables decrease/
(increase) 368 (317)
Inventory (increase)/decrease (109) 398
Prepaids and deposits
(increase)/decrease (653) (47)
Accounts payable and accrued
liabilities(decrease) (1,155) (190)
Deferred Financing Cost increase (660) --
-------- --------
Net cash (used) by operating activities $(11,396) $ (7,350)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & Equipment (1,655) (550)
Proceeds for the sale of tangible fixed assets -- 8
-------- --------
Net cash (used)/provided by investing
activities $ (1,655) $ (542)
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
5
<PAGE>
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of
Ordinary shares from Private placements, 4,628 12,715
Exercise of warrants, options
and Convertible Debentures
(Decrease)/ increase in bank overdraft -- 670
Net increase/ (decrease) in Line of Credit 5,200 --
------- -------
Net cash provided by financing activities $ 9,828 13,385
======= =======
NET(DECREASE)/ INCREASE IN CASH
AND CASH EQUIVALENTS (3,223) 5,493
Cash and cash equivalents at the beginning
of the year 6,216 2,975
Effect of exchange rate changes on cash (62) --
------- -------
Cash & cash equivalents at the end of the period $ 2,931 8,468
======= =======
Supplemental disclosures of cash flow information are as follows:
Amounts Paid
(in $ thousands)
----------------
1998 1997
---- ----
Interest 59 31
The accompanying notes to consolidated financial statements are an integral part
of this statement.
6
(PAGE)
SENETEK PLC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN $ THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM FOREIGN NET
$ SHARE ACCUMULATED CURRENCY STOCKHOLDERS'
SHARES AMOUNT PREMIUM $ DEFICIT $ TRANSLATION $ EQUITY $
------ ------ --------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997: 52,186,821 4,215 50,711 (49,476) 56 5,506
Issuance of Ordinary shares in 1,100,500 92 2,880 2,972
Private Placements
Warrants exercised 458,706 38 534 572
Options exercised 1,047,445 87 997 1,084
Net Loss (12,151) (12,151)
Deferred Financing Cost 3,937 3,937
Translation adjustment: (68) (68)
---------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1998: 54,793,472 $ 4,432 $ 59,059 $ (61,627) $ (12) $ 1,852
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
7
(PAGE)
SENETEK PLC AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim consolidated financial statements incorporate the accounts
of Senetek PLC ("Senetek") or ("the Company") and its wholly owned
subsidiaries, Senetek Drug Delivery Technologies Inc. ("SDDT")
(formerly MEIS Corporation) and Carme Cosmeceutical Sciences
Inc.("CCSI") (formerly Carme International, Inc.), (both Delaware
corporations) for the nine months ended September 30, 1998. CCSI was
incorporated on September 21, 1995 and commenced business on September
26, 1995 when it acquired certain assets of Carme Inc. (a Nevada
corporation) in an arms-length transaction. All significant
intercompany balances and transactions have been eliminated in
consolidation.
2. The interim consolidated financial statements reflect all adjustments
(which include only normal, recurring adjustments) which, in the
opinion of management, are necessary for the fair presentation of the
results of the Company at the dates of the balance sheets. The interim
consolidated financial statements have been prepared by the Company
without audit and are subject to year-end adjustment. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
These interim statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1997
Annual Report on Form 10-K.
Results of operations for the nine months ended September 30, 1998 are
not necessarily indicative of results to be achieved for the full
fiscal year.
The accounts have been prepared in accordance with U.S. generally
accepted accounting principles (U.S.GAAP).
3. The Company follows currency principles established by Statement of
Financial Accounting Standards No. 52. All assets and liabilities in
the balance sheets of the UK parent Company, foreign branches and
subsidiaries where the functional currency is other than U.S. dollars
are translated at period-end exchange rates. All income and expenditure
items in the profit and loss account of foreign branches and
subsidiaries whose functional currency is other than US dollars are
translated at average monthly exchange rates Gains and losses arising
from such translation are not included in determining net income but
are accumulated in a separate component of stockholders' equity.
Translation gains and losses arising from the translation of the
financial statements of foreign branches and subsidiaries whose
functional currency is other than the US dollar are not included in
determining net income but are accumulated in a separate component of
stockholder' equity. Foreign currency transaction gains and losses are
included in the determination of net income in the period in which they
occur. The functional currency of the Company's UK operation is the
Pound Sterling.
4. Revenues are recognized at the time of shipment (or time of rendering
in the case of services) and are stated at the net invoiced value of
goods and services supplied to customers after deduction of value added
tax where applicable.
5. During the nine months ended September 30, 1998, the Company issued
2,606,651 new Ordinary shares, through the sale of Ordinary shares
under Regulation S and the exercise of warrant entitlements and the
exercise of Options under the Company's approved plans at an average
price of $1.78 per share.
6. The Company issued 252,780 new Ordinary shares in the third quarter
of 1998, through the exercise of Options under the Company's approved
plans at an average price of $1.87 per share.
7. The loss per share is calculated on the basis of the weighted average
of the number of shares outstanding during the three month period as
follows:
8
<PAGE>
<TABLE>
<CAPTION>
Third Quarter 1998 First nine months 1998
Actual Weighted Average Actual Weighted Average
Equivalent Equivalent
----------------------------- --------------------------
<S> <C> <C> <C> <C>
Shares outstanding at
beginning of the period 54,540,692 54,540,692 52,186,821 52,186,821
Private Placements -- -- 1,100,500 705,399
Exercise of warrants -- -- 458,706 402,669
Exercise of Share Options 252,780 201,792 1,047,445 508,128
---------- ---------- ---------- ----------
Shares outstanding at the
end of the period 54,793,472 54,742484 54,793,472 53,803,017
---------- ---------- ---------- ----------
Shares issued 252,780 -- 2,606,651 --
Average price per share $ 1.87 -- $ 1.78 --
</TABLE>
8. Inventory at cost comprises:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(in $ thousands)
------------------------------
<S> <C> <C>
Finished Goods $583 $462
Raw Materials 416 427
Work in Progress -- 1
---- ----
$999 $890
---- ----
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
HISTORICAL DISCLOSURE
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto and with the Company's
audited financial statements, notes to the consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations relating thereto included or incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
Except for the historical information contained herein, the statements contained
in this 10-Q may be deemed forward looking statements that involve risks and
uncertainties. There are certain important factors and risks, including, without
limitation, the Company's need for additional financing, its history of losses
and its dependence on key personnel and the other risks detailed from time to
time in the Company's Securities and Exchange Commission filings on Form 10-K
and 10-Q, including those discussed under "Factors Affecting the Company" below,
that could cause results or prospects to differ materially from those
anticipated by the statements made herein.
9
<PAGE>
BUSINESS
Senetek PLC ("Senetek" or "the Company") is a public limited company registered
in England in October, 1983 with the number 1759068 with the objective of
undertaking research and development in the life sciences and biotechnology
fields, with particular emphasis on research relating to the diagnosis and
treatment of diseases related to senescence or aging, applying for marketing
authorisations and commercialising its underlying technologies and products
resulting from those technologies.
The main areas in which the Company is involved are the treatment of male sexual
dysfunction ("MSD"), which includes the development, manufacture and sale of a
patented self-administered automatic injector syringe as a delivery system. The
patented auto injector system is referred to as Reliaject(TM) and the
combination therapy of vasoactive intestinal polypeptide ("VIP") ( British
Approved Name BAN: aviptadil ) and phentolamine mesylate for the treatment of
MSD administered with Reliaject(TM) is referred to as the Invicorp(TM) product.
Phase III Clinical Trials on Invicorp(TM) are now complete and a Marketing
Authorisation was granted by the Danish Medicines Agency on 13th July 1998.
Marketing Authorisation Applications have been made and are currently under
review by the relevant authorities in the United Kigdom ("UK"), the Republic of
Ireland, Switzerland, New Zealand and South Africa. The Company plans to file a
New Drug Application ("NDA") with the Federal Food & Drug Administration ("FDA")
in the United States ("US") at the earliest practicable opportunity.
In December, 1993, the Company formed a wholly owned subsidiary, Senetek Drug
Delivery Technologies Inc.("SDDT"), (formerly named MEIS Corporation) - a
Delaware Corporation formerly based in St. Louis and now based in Napa,
California, for the purposes of designing, manufacturing and exploiting the
syringe, initially as a delivery system for its MSD product. Subsequently,
possible other applications for the syringe have been and are being
investigated, notably in the case of Epinephrine, as an antidote against
anaphylactic shock.
The Company has a corporate research laboratory in St. Louis which investigates
the therapeutic viability of potential new products prior to further development
and supports the analytical measurement process in Phase II and III trials,
through the development of chemical assay methodology. The Company operates a
development center in Kettering, UK, whose staff are involved in the monitoring
of Phase III clinical trials in the UK and Europe, product licensing
applications and regulatory work with the relevant medicines evaluation agencies
in Europe.
In September 1995, the Company extended its interests by forming another wholly
owned subsidiary, Carme Cosmeceutical Sciences Inc. ("CCSI") (formerly named
Carme International Inc.) - a Delaware Corporation formerly based in Novato,
California but now located at Napa, California, for the acquisition of the
majority of the assets of Carme Inc., a corporation based in Novato, that
manufactured and distributed a wide range of health and beauty products. The
acquisition was designed to promote the Company's interest in the area of skin
care, with particular reference to potential anti-aging aspects, and
specifically to provide a vehicle for the manufacture and distribution of a
product featuring the patented Kinetin compound (formerly referred to as Factor
X or Vivakin) in cosmeceutical format.
CCSI revised its supply chain strategy during 1997 with the result that total
manufacturing requirements were outsourced from the fourth quarter of 1997.
Additional resources have been focused on the commercialization of Kinetin and
the revitalization of CCSI's Mill Creek core brands. During the fourth quarter
of 1997 Senetek re-located its SDDT, CCSI and US Corporate activities to a
single site in Napa, California. The move was completed in January 1998 with the
closure and relocation of the CCSI Novato facility, the SDDT St Louis syringe
manufacturing facility and the New York Corporate office. Senetek's Scientific
Research Center continues to operate out of the Tesson Grove Medical Center in
St Louis.
Sales of monoclonal antibodies purchased from outside suppliers and derived from
Company sponsored research into diagnostic procedures for Alzheimer's disease
and other cell lines are effected on a continuing basis to the scientific
community for research purposes.
Aspects of the business are discussed under "Product Research and Development",
"Manufacturing and Marketing", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", below.
10
<PAGE>
PRODUCT RESEARCH AND DEVELOPMENT
GENERAL
- -------
A significant proportion of the Company's historic and current operating
expenses have related to the discovery and development of biomedical products,
for which purpose the Company has established clinical research agreements with
consultants and research scientists. Under these agreements, the Company funds
agreed programs of the consultants', clinicians' or research scientists' work
and retains exclusive rights to manufacture and market worldwide any products
arising from such research. Currently no products, except for CCSI's sales of
its Mill Creek range of products incorporating the Company's Kinetin compound,
and the sale of monoclonal antibodies, have reached the marketing stage. If
products arise from such research, certain of the researchers will become
entitled to a royalty under the terms of their individual agreements.
Typically, the research agreements referred to above oblige the Company to fund
research in amounts to be determined between the parties. The researchers are
responsible for filing progress reports with the Company. Currently, Senetek's
research and development efforts consist of the work being done under these
agreements, and through liaison with the research teams involved, and with
specialised consultants on matters such as formulation, stability, clinical
trials and regulatory matters covering the products involved in such research.
MALE SEXUAL DYSFUNCTION ("MSD") INVICORP(TM)
- --------------------------------------------
The Company has continued to liaise with research groups, clinicians and
consultants to conduct controlled clinical trials in the United Kingdom,
following the completion of the earlier stage trials in Denmark. Further liaison
is conducted with consultants and clinicians in the USA. The Company proposes to
expedite the development and subsequent commercialisation of its Invicorp(TM)
product either through its own resources where appropriate or commercially
advantageous, or in co-operation with potential pharmaceutical partners,
distributors or licensees.
In the second quarter of 1998, one of the active constituents of Invicorp(TM),
Vasoactive Intestinal Polypeptide; was granted a British Approved Name ("BAN") -
AVIPTADIL.
Marketing Authorisation Applications ("MAA's") were filed for Invicorp(TM) in
1997 with the relevant regulatory bodies in the United Kingdom, Ireland,
Denmark, Switzerland, South Africa and New Zealand. A marketing permit for
Denmark was granted in the third quarter of fiscal year 1998 and the Company
seeks to obtain other marketing authorisations by the end of 1998. An
application under the European Mutual Recognition Procedure ("MRP") is pending
dependent on the choice of Reference Member State ("RMS") in Europe. In the USA,
Invicorp(TM) received Investigational New Drug ("IND") approval from the Federal
Food & Drug Administration ("FDA") enabling the Company to conduct clinical
trials in the USA.
The Company expects to file a New Drug Application ("NDA") at the earliest
practicable opportunity.
On November 3, 1998 Senetek entered into two agreements relative to its Invicorp
product which has a marketing permit for sale in Denmark. The first agreement is
with KV Tjellsen , a major logistics and distibution company which is the second
largest pharmaceutical wholesaler in Denmark. KV Tjellsen will warehouse,
process orders and distribute to hospitals, clinics, wholesalers and pharmacies
throughout Denmark. The second agreement is with Innovative Pharmacuetical
Concepts ("IPC"), a local pharmaceutical product marketing and sales company
that will promote Invicorp to urologists, clinics and pharmacies throughout
Denmark. No income will be received from this arrangement in 1998.
On September 10, 1998 Senetek announced the signing of an agreement with Al
Jabeira International Group which included a $10 million license fee based on
milestones in return for exclusive marketing rights for Invicorp in the Middle
East. The agreement will also provides that Al Jabeira will pay Senetek a 25
percent royalty calculated on net sales of Invicorp in the Middle East. No
amounts have been included in income in 1998.
11
<PAGE>
SELF-ADMINISTERED AUTO-INJECTOR SYRINGE (RELIAJECT(TM))
- -------------------------------------------------------
The Company's patented auto-injection device ("ReliaJect(TM)") has now been
fully developed by SDDT, and is currently being used as the delivery device for
Invicorp(TM) in both clinical trials and for supplies, in Europe, on a named
patient basis. The potential for parenteral delivery of other drugs using the
ReliaJect(TM) device, in additional to Invicorp(TM) and epinephrine (adrenaline)
referred to herein is under active review and investigations into other
potential applications.
EPINEPHRINE IN THE RELIAJECT(TM) AUTO-INJECTION DEVICE
- ------------------------------------------------------
The Company has filed an Abbreviated New Drug Application ("ANDA") with the US
FDA during 1998 for the proposed administration of epinephrine by sub-cutaneous
injection delivered via the ReliaJect(TM) auto-injection device, under the
proposed brand name "AdrenaJect". Epinephrine (adrenaline in Europe) is a well
recognised and documented compound that is used as an emergency antidote in
anaphylactic shock--a life threatening condition triggered by a severe allergic
reaction to insect stings, insect bits and to certain foodstuffs. It is hoped
that marketing approval in the USA may be gained in the first half of 1999.
On October 26 1998 entered into an agreement with ICN Pharmaceuticals Inc
("ICN") for Adrenaject which includes a license fee of $3 million based on
milestones and an initial purchase order valued at $1.5 million in return for
exclusive worldwide rights. No amounts have been included in income in 1998.
SKIN AGING
- ----------
Research activity relating to the Company's anti-aging compound continues to be
carried out through research groups in the US including the University of
California, Irvine.
The Company also holds a patent for the use of Kinetin in the treatment of
psoriasis.This pharmaceutical application of Kinetin would require further
extensive pivotal clinical studies and toxicology testing prior to the filing of
product licensing applications. This additional activity is not subject to the
Company's presently planned activities. Evidence to date, suggests that the
patented Kinetin product could represent a major breakthrough in the prevention
or delay of aging characteristics in human fibroblasts. Specifically, Kinelin
preparations have revealed in trials at the University of Califirnia the
reduction of fine lines and wrinkles, mottled hyperpigmentation, telangiectasia
and tactile skin roughness.
On July 7, 1998 Senetek entered into an agreement with Osmotics Corporation for
the exclusive licensing for supply to the prestige market of Kinetin based
products. The agreement provides performance based minimum guaranteed payments
over a ten year period.
12
<PAGE>
General
Research and Development expenditure amounted to $5,026,000, $2,187,000 and
$1,925,000 for fiscal 1997, 1996 and 1995 respectively.
MANUFACTURING AND MARKETING
The Company's subsidiary, SDDT, anticipates completing the installation of
required machinery for the manufacture and assembly of the components for
Reliaject(TM) during the fourth quarter of 1998.
Senetek entered into two agreements in October 1998 with contract manufacturers
each of whom will supply an important component of the Reliaject drug delivery
device. One will supply the needle case component and the other will supply the
"power pack".
SDDT has responsibility for the supply chain activities of providing
Reliaject(TM) components to specialized contract manufacturers in Europe and
North America who will perform the assembly of Reliaject(TM) and fill the
syringe with compounds such as the Invicorp(TM) and Epinephrine formulations,
perform final assembly and complete pack preparation prior to distribution.
On July 1, 1998 Senetek entered into a Contract Filling agreement with CP
Pharmaceuticals Limited in the UK for the high volume manufacture of Invicorp.
On September 2, 1998 Senetek entered into a Contract Filling agreement
with Novocol Inc in Canada for the high volume manufacture of Invicorp and
Adrenaject
The active materials, vasoactive intestinal polypeptide and phentolamine
mesylate which are formulated in the Invicorp(TM) preparation are currently
available in commercial quantities from two suppliers. These suppliers have
developed synthetic methods which are included in the product licensing
applications. There is therefore a degree of reliance on these specialized
suppliers for continued supply of materials.
In the case of CCSI, manufacture, filling and labelling of its products are now
outsourced. In South Africa and the United Kingdom licenses to manufacture have
been granted for the Mill Creek line of skincare products. The majority of the
CCSI products are sold within the North American Free Trade Area ("NAFTA")
through its marketing organization covering two main sectors, natural products,
and speciality mass markets. Distribution agreements have been signed within the
US and abroad. There is no significant reliance on main or specialised
suppliers, and it is not anticipated that problems will arise over the question
of access to raw materials that are generally available and that will be
required for CCSI's contract manufacturing processes.
In accordance with an agreement entered into with the Research Foundation for
Mental Hygiene Inc. ("the Foundation"), the Company, which has been granted the
exclusive right to certain of the Foundation's cell lines capable of producing
certain monoclonal antibodies, including those applicable to the early diagnosis
of Alzheimer's disease, and continues to effect sales of such antibodies, which
are sourced from outside suppliers to the scientific community for research
purposes in consideration for a royalty entitlement in favor of the Foundation.
The Company is reliant on the sourcing of the monoclonal antibodies from a
specific biotech organization at the present time.
In the case of any emerging products, the Company anticipates that any
manufacturing and marketing activities may be arranged through co-development
and marketing agreements with companies which have already established a
majority presence in specialised fields.
In this event, any revenues to be generated will arise primarily through third
party distribution or licensing arrangements or co-ventures whereby the Company
will seek to receive a percentage of sales, licence fees and/or milestone
payments in consideration for its grant of specified marketing rights to its
products, or by profit participation through a third party equity investment or
joint venture.
13
<PAGE>
COMPETITION
The biomedical, drug delivery, biopharmaceutical and pharmaceutical industries
are highly competitive and the Company's business and research efforts compete
with drug discovery and development programs at biomedical, drug delivery and
biopharmaceutical companies as well as with the internal drug discovery
development programs of pharmaceutical companies, acting independently or in
collaboration with other companies. In addition, academic institutions,
government agencies throughout the world and their public and private
organisations may seek intellectual property protection; discover what could be
considered as competing products, or establish collaborative arrangements in the
Company's areas of research and development.
The vast majority of the Company's existing or potential competitors have
substantially greater financial, technical and human resources and name
recognition than the Company and are better equipped to research, develop,
patent, conduct pre-clinical testing and human clinical trials, manufacture, and
market products. These Companies may develop or in license, or acquire products
and/or technologies and introduce products competitive with or superior to those
of the Company. The timing of the market introduction of competitors' products
will be important competitive factors. Accordingly, the relative speed with
which the Company can develop products and technologies; complete pre-clinical
testing; conduct human clinical trials; initiate the necessary regulatory
approval processes, and supply commercial quantities of the products to the
market will be critical to the Company's success.
Once products have been approved for sale, the Company believes that competition
will be based, inter alia, on product efficacy, product safety, product
reliability, price and patent position. The Company's competitive position also
depends upon its ability to attract and retain suitably qualified and
experienced personnel to develop proprietary products or processes or
technologies and to commercialize them and the degree of intellectual property
protection obtainable. The Company expects competition to intensify in all
fields in which it is involved as new products in these areas are developed and
become more widely known. Moreover, the patent position in this field is
complex, and the protection afforded by patents in any particular jurisdiction
can be limited.
The Company cannot predict the extent to which any of the products currently in
the course of development or registration may become commercially viable.
Management is presently discussing the possibility of entering into licensing
agreements with potential major pharmaceutical companies, assuming that
marketing authorisation approval is granted for Invicorp(TM) by the MCA during
the second quarter of 1999. In the case of Invicorp(TM) in particular, certain
competing products have been or are being developed for the indication being
pursued by the Company and in particular, three other US companies--Pharmacia &
Upjohn, (Caverject); Pfizer Inc. (Viagra) and VIVUS Inc. (MUSE)--have developed
and/or are marketing in certain territories, products that compete in the same
market place as Invicorp(TM). It is believed that there should be a
substantial potential demand for a product in this field but there can be no
assurance that the Company will be successful in penetrating this potential
market.
With regard to Reliaject(TM), there are already a number of auto-injection
devices and other syringes on the market and there are two direct competitors
whose products are being used extensively, mainly in the US. For regulatory
approval purposes, auto-injection devices have to be identified with the
medicinal compound that they are designated to deliver.
In the opinion of the Company and based upon the extensive clinical trials
conducted in the UK where the Reliaject(TM) device was used for the delivery of
Invicorp(TM); Reliaject(TM), which utilizes a standard glass dental cartridge to
hold a drug in a 29 gauge needle to reduce pain on injection; is of an extremely
high standard and capable of competing successfully with products currently on
the market and one which can, after instruction, be utilized by the patient
without medical supervision.
In the case of CCSI, bearing in mind that the vast health and beauty care market
is dominated by large multi-national organizations, who have far greater
resources and market exposure than the Company and CCSI, CCSI's products are
designed to meet specific niche segments of the market. CCSI's products include
the Mill Creek line, which features the kinetin compound, Sleepy Hollow
Botanticals and Biotene H-24. The speciality mass market lines are Silver Fox -
a product for gray hair, and the Allercreme, hypoallergenic range for sensitive
skins, that was developed in conjunction with dermatologists. The DuBarry range,
a long established cosmetic line acquired from Carme Inc., was sold during 1997.
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The Mill Creek range, including kinetin, has been launched as a next generation
skin care product, and is designed to replace alpha hydroxy acid lines, marketed
by other organizations, as a product of choice. However, major companies may
introduce competitive lines of similar or superior quality and may be able to
effect a greater marketing impact than the Company can achieve.
GOVERNMENT REGULATION
The Company's research and development activities and future product
manufacturing and marketing activities are subject to extensive regulation for
safety and efficacy by numerous governmental authorities in the United States
and Europe. In the US, drugs are subject to rigorous regulation by the FDA.
The Federal Food, Drug and Cosmetic Act and the Public Health Service Act
governs the testing, manufacture, safety, efficacy, labelling, storage, record
keeping, approval, advertising, and promotion of the Company's products in the
US. Product development and approval within this regulatory framework takes a
number of years and involves the expenditure of substantial resources. Many
products ultimately do not reach the market because of toxicity or lack of
effectiveness as demonstrated by required testing. In addition, there can be no
assurance that this regulatory framework will not change or that additional
regulations will not arise at any stage of the Company's product development
that may affect approval, delay an application, or require additional
expenditures by the Company. After approval is obtained, failure to comply with
present or future regulatory requirements, or new information regarding the
safety or effectiveness of an approved drug, can lead to FDA withdrawal of
approval to market the product.
The steps required before a pharmaceutical product may be marketed in the United
States include (i) preclinical laboratory testing, (ii) submission to the FDA of
an IND application which must become effective before human clinical trials may
be commenced, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug, (iv) submission of an NDA to the
FDA and (v) FDA approval of the NDA prior to any commercial sale or shipment of
the drug. To date, the Company has submitted and received IND status for its
Invicorp(TM) product.
Clinical testing of new compounds in humans is designed to establish both safety
and efficacy in treating a particular disease or condition. These studies are
usually conducted in three phases of testing. In Phase I, a small number of
volunteers are given the new compound in order to identify toxicities and
characterize the compound's behaviour in humans. In Phase II, small numbers of
patients with the targeted disease are given the compound to test its efficacy
in treating the targeted disease and to establish effective dose levels. Phase
III studies, which have been concluded by the Company for Invicorp(TM), are
large-scale studies designed to confirm a compound's efficacy for the targeted
disease and identify toxicities that might not have been seen in smaller
studies. Once adequate data has been obtained in clinical testing to demonstrate
that the compound is both safe and effective for the intended use, all available
data will need to be submitted to the FDA as part of the NDA. Review of this
application by the FDA can cover an extended period.
Marketing of products requires regulatory approval from the relevant medicines
evaluation agency in a particular country. No action can be taken to market any
product in a country until an appropriate application has been approved by the
regulatory authorities in that country. The current approval process varies from
country to country, and the time spent in gaining approval varies from that
required for FDA approval. The review of clinical studies by regulatory agencies
in other jurisdictions follows a similar a process to that in the US and the
Company anticipates approvals from the MCA and Ireland in Europe during 1999. An
application under the MRP will then be made dependent on the choice of RMS for
European licensing.
In certain European countries, the sales price of a product must also be
approved. The pricing review period often begins after market approval is
granted. No assurance can be given that, even if a product is approved by a
regulatory authority, satisfactory prices will be approved for such product.
Under current regulations, the market introduction of the majority of
non-medicated cosmetics and skin care products do not require prior formal
registration or approval by the FDA, although this could change in the future.
The Cosmetics Division of the FDA monitors matters of safety and adulteration.
The situation for non-medicated cosmetic and skin care products is the same for
Europe.
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IMPORT RESTRICTIONS AND DUTIES
Because the Company may be importing certain of its products or product
ingredients into the United States, the Company could be subject to quantity
limitations, duties and tariffs imposed by a country within which the products
are to be sold. The United States does not have quantity restrictions for goods
such as the Company's proposed products but does impose tariffs based on the
value of the products imported. Other countries may have different restrictions
and duties.
PATENTS
The Company believes that patents and other proprietary rights are an essential
element of its business and as part of its grant agreements with various
researchers, has received exclusive license rights to any commercially valuable
products developed by the contracted researchers within the scope of the
respective agreements in exchange for royalty entitlements. The Company's policy
is to file patent applications to protect inventions and improvements that are
considered important to the development of its business. Typically, patents in
the US expire 19 years after the grant date.
The Company also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position. The Company has filed patent applications for its products in most
major countries including those that are signatories to the Patent Conference
Treaty ("PCT"). Thus far, Reliaject(TM) is patented in most PCT countries and in
major areas in Asia and South America, and additionally the Company has received
patent approvals covering its technology for the treatment of the effects of
aging on skin in the US, and for the treatment of psoriasis and other
hyper-proliferative skin diseases in the US, Canada and Australia and male
sexual dysfunction in the US, Australia, Czech Republic, Hungary, Israel,
Latvia, Lithuania, Mexico and Taiwan.
Patent positions generally, including those for pharmaceutical and health
service organizations such as the Company, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved. In addition, the coverage claimed in a patent application can be
significantly reduced before a patent is issued. Consequently, the Company
cannot be sure that any patents that are or may be issued to it will provide
significant proprietary protection or will not be circumvented or invalidated.
Because patent applications in the United States are maintained in secrecy until
patents issued, and publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it or any licensor was the first creator or that it or such licensor was
the first to file patent applications for such inventions. Moreover, the Company
might have to participate in interference proceedings declared by the US Patent
and Trademark Office to determine priority of inventions, which could result in
substantial cost to the Company, whether or not the eventual outcome were
favorable to the Company. There can be no assurance that the Company's patents,
if issued, would be held valid by a court or that a competitor's technology or
product would be found to infringe such patents.
A number of pharmaceutical and health services companies and research and
academic institutions have developed technologies, filed patent applications, or
received patents in areas that may be related to the Company's business. Some of
these technologies applications, or patents may conflict with the Company's
development efforts or patent applications.
CCSI has acquired the numerous trademarks formerly owned by Carme Inc. To the
best of CCSI's knowledge, there has been no indication to date that such
trademarks are invalid or are subject to challenge.
Typically, the Company requires its employees, consultants and sponsored
researchers to execute confidentiality agreements as part of their employment,
consulting or research arrangements with the Company. There can be no assurances
however, that these agreements will produce meaningful or adequate protection
for the Company's trade secrets.
MATERIAL CHANGES IN FINANCIAL CONDITION
Changes in the Company's financial condition that are, or may be considered to
be, material are included under "Financial Condition, Liquidity and Capital
Resources" below.
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RESULTS OF OPERATIONS
SALES
World-wide sales for the third quarter of 1998 totalled $1,074,000, a decrease
of 21.8% from sales of $1,374,000 for the third quarter of 1997.
In the Pharmaceutical Sector, sales decreased by 6.4% from $357,000 for the
third quarter of 1997, to $334,000 for the third quarter of 1998. This is due
mainly to reduced sales of monoclonal antibodies to research organizations.
In the Cosmetics Sector, sales decreased by 27.2% from $1,017,000 in the third
quarter of 1997 to $740,000 for the third quarter of 1998. This is primarily due
to a reduction in the CCSI product portfolio resulting in the elimination of a
large number of low margin items.
World-wide sales for the first nine months of 1998 totalled $3,846,000, a
decrease of 14.1% from sales of $4,477,000 for the first nine months of 1997.
Pharmaceutical Sector sales increased by 34.4% from $842,000 for the first nine
months of 1997, to $1,132,000 for the first nine months of 1998. This is due
mainly to additional sales of monoclonal antibodies in the first half of 1998.
Cosmetic Sector sales decreased by 25.3% from $3,635,000 for the first nine
months of 1997, to $2,714,000 for the first nine months of 1998. This is
primarily due to a reduction in the CCSI product portfolio resulting in the
elimination of a large number of low margin items.
COST OF GOODS SOLD
Cost of goods sold for the third quarter of 1998, which includes contract
manufacturing and material costs, was 50% of sales, or $534,000, down 36.8% from
$845,000 in the third quarter of 1997. The decrease is due mainly to decreased
sales volume in the cosmetics sector.
In the Pharmaceutical Sector, cost of goods sold for the third quarter of 1998
was 33% of sales, or $110,000 down 21.4% from $140,000 in the third quarter of
1997. This is due to lower distribution costs and decreased sales volume of
monoclonal antibodies.
In the Cosmetics Sector, cost of goods sold for the third quarter of 1998 was
57% of sales, or $424,000 a decrease of 39,9% from $705,000 in the third quarter
of 1997. This is primarily due to the decreased sales volumes of CCSI products
following the reduction of the product range and the elimination of low gross
margin products. A favourable product mix resulted in a much improved cost of
goods sold to net sales percentage.
Cost of goods sold for the first nine months of 1998 was 57% of sales, or
$2,204,000, down 23.6% from $2,886,000 for the first nine months of 1997. The
decrease is due mainly to decreased sales volume in the cosmetics sector which
was partly offset by a favourable product mix.
In the Pharmaceutical Sector, cost of goods sold for the first nine months of
1998 was 43% of sales, or $452,000 up 32.9% from $340,000 for the first nine
months of 1997. This is due primarily to the increased sales volume of
monoclonal antibodies.
In the Cosmetics Sector, cost of goods sold for first nine months of 1998 was
65% of sales, or $1,752,000,a decrease of 31.2% from $2,546,000 for the first
nine months of 1997. This is primarily due to decreased sales volumes of CCSI
products following the rationalization of the product range and the elimination
of low gross margin products.
OPERATING EXPENSES
RESEARCH & DEVELOPMENT
Research and Development ("R&D") expenditure for the third quarter of 1998
totalled $2,287,000, an increase of 98.2% from $1,154,000 in the third quarter
of 1997.
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The Pharmaceutical Sector R&D accounted for 99.5% of the total for the Company
for the third quarter of 1998, compared to 98.3% for the third quarter of
1997.The increased expenditure was due mainly to additional spending on pivotal
clinical studies, regulatory approvals and toxicological studies, in particular
for the upcoming New Drug Application ("NDA") submission with the FDA in the
United States and a write-off of $868,000 to development costs
of Vasoactive Intestinal Polypeptide and Phentolamine Mesylate raw material
inventories purchased in 1998 under supply arrangements with third party
vendors.
R&D expenditure for the first nine months of 1998 totalled $5,536,000, an
increase of 74.5% from $3,173,000 for the first nine months of 1997.
In the Pharmaceutical Sector R&D accounted for 99.6% of the total for the
Company for the first nine months of 1998, compared to 96.9% for the first nine
months of 1997.The increased expenditure was due mainly to additional clinical
spending on pivotal clinical studies, regulatory approvals and toxicological
studies, in particular for the upcoming NDA submission with the FDA in the
United States and a write-off of $868,000 to development costs of Vasoactive
Intestinal Polypeptide and Phentolamine Mesylate raw material inventories
purchased in 1998 under supply arrangements with third party vendors.
GENERAL AND ADMINISTRATION
General and Administration ("G&A") expenses for the third quarter of 1998
totalled $2,736,000, an increase of 204% from $899,000 in the third quarter of
1997.
Pharmaceutical Sector G&A expenses for the third quarter of 1998 totalled
$5,447,000, an increase of 225% from $725,000 in the second quarter of 1997. The
increase is due mainly to the ongoing costs of retaining (1) a Public relations
company in the second half of 1997 to focus on investor relations and the
product development status of Invicorp and Kinetin and (2) a Consulting company
in the second half of 1997 focusing on Marketing opportunities and product
licensing negotiations with potential Pharmaceutical partners for Invicorp and
also the setting up of raw materials supply and contract manufacturing
agreements for Invicorp to ensure commercial supply chain capability. Other
reasons for the increased expenditure are the recognition of $1,102,000 of stock
compensation expense for employee based stock option plans in accordance with
Accounting Principle Board Opinion No. 25 ("APB 25") and for non employee based
stock option plans in accordance with Financial Accounting Standard No 123 ("FAS
123"). Also, a change in the basis of the allocation of salaries and welfare and
benefits to between G&A and Marketing results in an increase compared to the
same basis period in 1997.
Cosmetic Sector G & A expenses for the third quarter of 1998 totalled $380,000,
an increase of 118% from $174,000 in the third quarter of 1997. The increase is
due to the recognition of $46,000 of stock compensation expense for employee
based stock option plans in accordance with APB 25 and higher operating expenses
relating to business development activities.
G&A expenses for the first nine months of 1998 totalled $6,472,000, an increase
of 136% from $2,746,000 in the first nine months of 1997.
Pharmaceutical Sector G&A expenses for the first nine months of 1998 totalled
$5,447,000, an increase of 188% from $1,892,000 in the first nine months of
1997. The increase is due mainly to the ongoing costs of retaining (1) a Public
relations company in the second half of 1997 to focus on investor relations and
the product development status of Invicorp and Kinetin and (2) a Consulting
company also in the second half of 1997 focusing on Marketing opportunities and
product licensing negotiations with potential Pharmaceutical partners for
Invicorp and also the setting up of raw materials supply and contract
manufacturing agreements for Invicorp to ensure commercial supply chain
capability. Other reasons for the increased expenditure are the recognition of
$1,763,000 of stock compensation expense for employee based stock option plans
in accordance with Accounting Principle Board Opinion No. 25 ("APB 25") and for
non employee based stock option plans in accordance with Financial Accounting
Standard No 123 ("FAS 123"). Also, a change in the basis of the allocation of
salaries and welfare and benefits to G&A and Marketing results in an increase
compared to the same basis period in 1997.
Cosmetic Sector G & A expenses for the first nine months of 1998 totalled
$1,025,000, an increase of 20.0% from $854,000 for the first nine months of
1997. The increase is mainly due to the recognition of $263,000 of stock
compensation expense for employee based stock option plans in accordance with
APB 25. This increase is partly offset by a reduced level of allocated G&A costs
from US shared services following the relocation of most of the US operations to
one site ( Napa, California ) in 1998 compared to the same basis period in 1997.
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MARKETING AND PROMOTION
Marketing and promotion expenses in the third quarter of 1998 totalled $536,000,
a decrease of 58.1% from $1,278,000 in the third quarter of 1997.
Pharmaceutical Sector marketing and promotion expenses for the third quarter of
1998 were $448,000, a decrease of 28.2% from $624,000 in the third quarter of
1997. The decrease is due mainly to reclassification of public/investor
relations and marketing/product licensing consultancy costs to G&A..These costs
are referred to in the General and Administration note above.
Cosmetics Sector marketing and promotion expenses for the third quarter of 1998
were $88,000, a decrease of 86.5% from $654,000 in the third quarter of 1997.
The decrease is due mainly to the advertising costs associated with the
promotion of the KINETIN (TM) products in 1997 which have not recurred in 1998.
Marketing and promotion expenses for the first nine months of 1998 totalled
$983,000, a decrease of 64.7% from $2,788,000 for the first nine months of 1997.
Pharmaceutical Sector marketing and promotion expenses for the first nine months
of 1998 were $776,000, a decrease of 50.5% from $1,567,000 for the first nine
months of 1997.The decrease is due mainly to reclassification of public/investor
relations and marketing/product licensing consultancy costs to G&A, as referred
to in General and Administration above. A revision to the basis of salary
allocations as adopted in the 1998 Business Plan is another reason for the
decrease.
Cosmetics Sector marketing and promotion expenses for the first nine months of
1998 were $207,000, a decrease of 83.0% from $1,221,000 for the first nine
months of 1997. The decrease is due mainly to the advertising costs associated
with the promotion of the KINETIN (TM) products in 1997 which have not recurred
in 1998.
SELLING EXPENSES
Selling expenses are only recorded in the Cosmetics Sector and totalled $147,000
for the third quarter of 1998, a decrease of 53.3% from $315,000 in the third
quarter of 1997.
Selling expenses for the first nine months of 1998 totalled $381,000, a decrease
of 36.2% from $597,000 in the first nine months of 1997. The reduction relates
to decreased salaries and broker commissions following the restructuring of the
cosmetics business in the second half of 1997.
OPERATING LOSS
Operating loss from continued operations for the third quarter of 1998 totalled
$5,166,000, an increase of 65.7% from $3,117,000 in the third quarter of 1997.
Operating loss from continued operations in the pharmaceuticals sector for the
third quarter of 1998 totalled $4,856,000, an increase of 114.5% from $2,264,000
in the third quarter of 1997.
Operating loss from continued operations in the cosmetics sector for the third
quarter of 1998 totalled $310,000, a decrease of 63.7% from $853.000 in the
third quarter of 1997
Operating loss from continued operations for the first nine months of 1998
totalled $11,730,000, an increase of 52.1% from $7,713,000 for the first nine
months of 1997.
Operating loss from continued operations in the pharmaceuticals sector for the
first nine months of 1998 totalled $11,062,000 an increase of 83.5% from
$6,030,000 for the first nine months of 1997.
Operating loss from continued operations in the cosmetics sector for the first
nine months of 1998 totalled $671,000 a decrease of 60.1% from $1,682,000 for
the first nine months of 1997.
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As explained above, increased R&D (which includes the reclassification of raw
material inventories), Public/Investor Relations, Marketing/product licensing ,
supply chain set up spending and the recognition of stock compensation expense
were the main reasons for the increase in operating loss.
OTHER INCOME AND EXPENSE
On July 7,1998 $6,600,000 less 10% commission was received by the Company under
the terms of a $ 10,000,000 credit agreement with Windsor Capital dated 28 April
1998. The terms of this agreement also provide that the Company agrees to issue
1,885,714 warrants to purchase 1,885,714 Ordinary shares ( represented by
American Depositary Receipts ("ADRs")) at $3.50 per share and 377,142 warrants
to purchase 377,142 Ordinary shares (represented by ADRs) at $6.00 per share. An
S- 3 registration was filed with the SEC on October 21, 1998 covering the
warrant conversion entitlements of the subscriber for the full $10,000,000
credit available in the amounts of 2,857,000 warrants to purchase 2,857,143
Ordinary shares ( represented by ADR's ) at $3.50 per share and 571,429 warrants
to purchase 571,429 Ordinary shares ( represented by ADR's ) at $6.00 per share.
Included in other expense for the third quarter of 1998 and the first nine
months of 1998 is $627,000 for the amortization of Deferred Financing costs
relating to the issue of the above warrants and the 10% fee on the Windsor
Capital Credit arrangement.
The fair value of the warrants was calculated using the Black Scholes option
pricing model assuming an expected life of 2 years and 2.5 years for the $3.50
and $6.00 warrants respectively, an annualized volatility of 74% and a risk free
investment rate of 6.1%. The average fair value for the warrants for the first
nine months of 1998 are $1.81 and $ 1.40 respectively. There were no similar
charges in the corresponding periods of 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of 1998, the Company's liquidity represented by cash
and deposits at banks decreased by $3,285,000 to $2,931,000. New funding
amounted to $9,828,000 from the exercise of Warrants and Options and the sale of
1,100,000 ordinary shares at $3.00 per share less 10% commission to Windsor
Capital Limited under the terms and conditions of Regulation S and an increase
in the line of credit made available under the Windsor Capital credit agreement.
Net cash used by operating activities from continuing operations totalled
$11,398,000 in the first nine months of 1998, an increase of $4,048,000 from the
first nine months of 1997.
Cash used for capital expenditure was $1,655,000 in the first nine months of
1998, an increase of $1,105,000 from the first nine months of 1997. The main
reason for this increase is the set up of supply chain capability for the
manufacture of Reliaject components pending commercialization of the Invicorp
and Adrenaject applications.
The Company anticipates that expenditure could exceed income by approximately
$3,000,000 through the ongoing development of its pharmaceutical products and on
its administrative and marketing structure during the fourth quarter of 1998. In
addition, it is planned to incur further payments on capital equipment during
the fourth of 1998 of approximately $1,500,000 and raw materials during the
second half of 1998 of approximately $1,400,000.
The Company is exploring the possibility of increased debt funding to cover the
ongoing operating expenses and capital expenditure until the Company generates
sufficient income from the commercial exploitation of its products.
Additionally, substantial warrant holders at September 30,1998 may exercise
their right to convert their warrants into shares upon payment to the Company of
the exercise price as the conversion dates approach.
Initial payments based on milestones for Invicorp and Adrenaject and supply
arrangements for Adrenaject and Kinetin, are anticipated in 1999 as discussed
above. However such revenues, if and when received, may not be sufficient to
meet the Company's projected financial requirements through 1998.
Management is discussing the possibility of entering into licensing arrangements
with several major pharmaceutical companies. These discussions may lead to a
license agreement of a substantial nature in due course, although no assurance
can be given that the Company will be successful in securing such an agreement.
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FUTURE PROSPECTS
The Company proposes to expedite the development and subsequent
commercialization of the MSD product either through its own resources or in
co-operation with one or more partners or licensees. The Company continues to
seek agreements on acceptable terms with parties who have expressed interest in
acquiring rights for certain major territories and although discussions are in
progress regarding world-wide licensing rights, there can be no assurance that
agreements on acceptable terms will ultimately be effected with the parties
concerned. However, in the event that terms cannot be negotiated on a
sufficiently attractive basis, the Company may decide, financial considerations
permitting, to undertake the commercial exploitation for its own account for
certain territories. In this event, the pre-marketing costs for this activity
are likely to be substantial.
Following the successful conclusion of the Phase III clinical trials in the UK
for the MSD product, and the filing of a Product License Application in April
1997, the immediate objective of the Company is to obtain the grant of a Product
License. Pending this all-important grant, it is anticipated that sales of MSD,
which at present are restricted to clinicians for use on a "named-patient"
basis, may continue to increase although such income is unlikely to make a
material contribution to the Company's revenues.
The auto-injector syringe has been fully developed and is available for
commercialization. It has been utilized for testing purposes as a delivery
system for the MSD product and for Epinephrine (for which, subject to FDA
approval, it may be possible to commence effecting sales in conjunction with the
syringe in the first quarter of 1999). However, production at what it is hoped
will be a substantial commercial volume is dependent upon the completion and
installation of additional specialized plant and machinery currently contracted
for at a cost, which is estimated to be in the region of $4,200,000 in the
period fiscal 1997 through 1998.
With regard to the development and marketing of KINETIN (TM) and its potential
associated products, the Company has undertaken additional studies of its
effects on anti-aging and is seeking agreement on acceptable terms with parties
who have expressed interest in acquiring rights for various skin care related
applications. In July 1998 the Company entered into an agreement with Osmotics
Corporation whose Customers include Sak's ( Fifth Avenue) and Harrods ( of
London) for the supply of kinetin anti-aging preparations.
In the case of monoclonal antibodies derived from the Company's sponsored
research into Alzheimer's disease, and from other sources, increased sales to
scientific institutions are being achieved at an encouraging volume and whilst
the amounts involved are unlikely to be substantial, the Company anticipates
that it should be possible to achieve and maintain a flow of revenue, although
such income is unlikely to make a significant contribution to the Company's
revenues.
It is not practicable at the present time to indicate the probable future
operating results and equity capital requirements, but it is anticipated that
some revenues may continue to be generated by the Company during fiscal 1998,
possibly, through (i) the receipt of licensing fees or contributions from
intending partners relating to the MSD and KINETIN (TM) projects, and from
Ephinephrine, (ii) from the trading results, partial disposals or licensing
arrangements from CCSI, (iii) from the sales of monoclonal antibodies, (iv) from
sales or licensing of the syringe and (v) from sales of the MSD product to
clinicians on a named-patient basis. However, no assurances can be given that
this course of events will transpire. Such revenues, if received, may not be
sufficient to address the anticipated expenditures and capital commitments of
the Company in the near future.
FACTORS AFFECTING THE COMPANY
HISTORY OF LOSSES
The Company, despite its inception over 15 years ago in October 1983, is still
developing its commercial objectives, and its business is subject to all the
significant risks inherent in the establishment of a relatively new business
enterprise.
The likelihood of the success of the Company must be considered in the light of
the problems, expenses, difficulties, complications and delays frequently
encountered in connection with the formation of a new business, the development
of new products and the competitive and regulatory environment in which the
Company is operating. Since inception, the Company has only produced $19,292,000
in gross revenues and has cumulative losses of $61,627,000 (including a net loss
of $15,539,000 in fiscal 1997).
21
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Although certain of the Company's products may be marketed in the fourth
quarter of 1998, there can be no assurance that marketing will begin when the
Company anticipates, if at all, or that sales from its other products will rise
to a level that will allow it to operate profitably during the fiscal year
ending December 31, 1998.
NEED FOR FINANCING
The Company's cash requirements have been and will continue to be significant.
Senetek currently has sufficient equity, cash flow or bank facilities to
continue its operations during fiscal 1998 but, as indicated, the Company has
obtained additional financing through the sale of equity securities in the
Company and the grant of a line of credit. In the event that the Company is
unable to receive adequate funding, or the costs of development and operations
prove greater than anticipated, the Company could be required to curtail its
operations or to seek alternative financing arrangements. There can be no
assurances that such additional financing, if available, will be on terms
acceptable to the Company. If the Company's cash requirements cannot be
successfully addressed, there would be a material adverse effect on the
Company's business, its financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
On November 4, 1998 the Company announced the resignations of Mr Anthony Cataldo
as Chief Executive Officer and Mr Clifford Brune as Chief Operating Officer. On
the same day Mr Frank Massino was promoted to the position of Chief Executive
Officer. Mr Cataldo will remain as Senetek's Chairman of the Board of Directors.
Mr Brune will continue with Senetek in a consulting role.
The Company is dependent, in particular, upon the services of Mr. Anthony
Cataldo, its Chairman and Mr Frank Massino, its Chief Executive Officer. If Mr.
Cataldo and Mr Massino were unable to provide their services to the Company for
whatever reason, the Company's business could be adversely affected. Since these
executives are involved in most aspects of the Company's business, there can be
no assurance that suitable replacements could be found if they were unable to
perform services for the Company. In addition, the Company's ability to market
its products and fulfil its business plan will depend, in large part, upon its
ability to attract and retain qualified personnel in its field. Competition for
such personnel is intense and there can be no assurance that the Company would
be able to attract or retain such personnel.
Additional risk factors not discussed above are:
FACTORS AFFECTING THE COMPANY'S INVICORP (TM) PRODUCT, AND THE RELIAJECT (TM)
AUTO-INJECTOR SYRINGE
Product Research and Technological Obsolescence
The Company is engaged in a field characterized by extensive research efforts.
Despite the Company's current access to leading expertise in the field, there
remains a risk that the research financed by the Company in the future could
prove unproductive. Furthermore, there can be no assurance that research and
discoveries by other companies will not render the Company's programs
superfluous or obsolete.
Exposure to Liability for the Company's Products
During recent years, lawsuits resulting in very substantial liability have been
filed against companies engaged in the manufacture of pharmaceutical and other
medical-related products or devices which have subsequently provided harmful to
human health. Many of these cases have exposed companies to liability long after
the products have been brought to market, even though, at the time of their
development, based on extensive research, there were no perceived risks of
injury. Thus, notwithstanding FDA or other foreign governmental approval, there
can be no assurance that the Company will not be subject to liability from the
use of its products. There is no assurance that product liability coverage will
be adequate to protect against future claims. Management intends to have third
parties manufacture and distribute certain of the Company's products and
believes that the Company's exposure to liability will thereby be lessened.
However, there can be no assurance that this result will be achieved.
FACTORS AFFECTING THE COMPANY'S COSMETICS BUSINESS
Reliance on Suppliers
Although CSSI no contracts out manufacture of all of its own products, it
purchases raw materials from third-party suppliers. CCSI does not presently have
any long-term contracts with these suppliers and, as a consequence, any of these
relationships may be terminated by either party, at any time.
22
<PAGE>
Although CCSI believes that other suppliers are available who can produce
similar materials and products, there can be no assurance that such materials
would be available to the Company on an immediate basis if needed, or at prices
similar to those now paid by CCSI.
Product Liability Risks of Cosmetics
CCSI is subject to the risk of products liability claims related to the use of
its products which are designed for application to human hair and skin. CCSI
carries product liability insurance which management believes will be adequate
to cover risks associated with such use; however, there can be no assurance that
existing or future insurance coverage will be sufficient to cover any possible
product liability risks or that such insurance will continue to be available to
CCSI on economically feasible terms.
Safe Harbor Statement
The statements in this report that relate to future plans, events or
performances are forward-looking statements that involve risks and
uncertainties, including risks associated to uncertainties pertaining to
customer orders, demand for product and services , development of markets for
the Company's products and services and other risks identified in the Company's
Commission filings. Actual results, events and performance may differ
materially. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only of the date hereof. The Company
undertakes no obligation to release publicly the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Year 2000 Computer Software Conversion
The Company relies on numerous computer programs in its day to day business.
Older computer programs use only two digits to identify a year in its date
filed. As a result, when the Company has to identify the year 2000, the computer
will think it means the year 1900 and the operation attempting to be performed
may fail or crash resulting in the potential interference in the operations of
the Company's business. The Company has formulated plans to safeguard against
the Year 2000 conversion problem. The cost of the implementation of the Year
2000 safeguards will not be material to the Company, however, the Company may
not be able to completely implement its plan to protect against the Year 2000
conversion problem.
In addition, the Company is in the process of contacting its major customers and
suppliers to determine the extent to which the Company's interface systems are
vulnerable to any failure by third parties to upgrade their own software. The
Company believes that its large customers and suppliers are addressing the
issues and will timely adjust their systems. However, if such modifications are
not made by its vendors or customers, or are not completed in a timely manner,
the Company's operations could adversely be affected.
Part II Other Information
Item 1. Legal Proceedings
On August 11, 1998, the Company entered into a written compromise
of an action commenced by a former employee in the UK High Court.
The amount of compromise agreed to by the Company is not deemed to
be material.
There are presently no pending legal proceedings against the
Company other than those encountered in the Company's ordinary
course of business.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule as of and for the nine months
ended September 30, 1998
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the third quarter
of fiscal year 1998.
Subsequent Events
(a) Appointment of New Members to Board of Directors
On November 3, 1998 Mr. Frank Massino joined the Board of
Directors in an executive capacity.
On November 3, 1998 Mr. Andreas Tobler joined the Board of
Directors in a non executive capacity.
(b) Subsequent 8-K Reports
A report on Form 8-K, dated November 2, 1998 was filed with the
Commission November 6, 1998 reporting the resignation of Price
Waterhouse as independent accountant.
A report on Form 8-K, dated November 5, 1998 was filed with the
Commission, November 6, 1998 reporting the appointment of
Deloitte & Touche as independent accountants.
A report on Form 8-K/A, dated November 13 was filed with the
Commission on November 18, 1998 supplementing the Form 8-K dated
November 2, 1998 and filed with the Commission on November 6,
1998. The Form 8-K/A reported that Price Waterhouse the Company's
former independent accountant agreed with the statements
contained in the Form 8-K dated November 2, 1998 and filed
November 6, 1998.
23
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SENETEK PLC
(REGISTRANT)
/S/FRANK J MASSINO
------------------------
Date: NOVEMBER 19, 1998 FRANK J MASSINO
CHIEF EXECUTIVE OFFICER
/S/STEWART W SLADE
-------------------------
Date: NOVEMBER 19, 1998 STEWART W SLADE
CHIEF FINANCIAL OFFICER
24
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