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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities X
Exchange Act of 1934 for the Quarterly period ended March 31, 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 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.
March 31, 1999 (all one class): 57,215,856
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SENETEK PLC AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1 - Financial Statements
Unaudited Consolidated Statement of Operations
Three Months Ended March 31, 1999 and March 31, 1998 3
Consolidated Balance Sheet
March 31, 1999 (unaudited) and December 31, 1998 4
Unaudited Consolidated Statement of Cash Flows
Three Months Ended March 31, 1999 and March 31, 1998 5
Notes to the Unaudited Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 22
SIGNATURES 23
</TABLE>
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Part I Financial Information
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 3 Months Ended
March 31, March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Revenues:
Product Sales $ 934 $ 1,615
Cost of Sales (593) (903)
-------- --------
Gross Profit 341 712
Operating Expenses:
Research & Development (869) (1,545)
General & Administration (1,585) (1,842)
Marketing & Promotion (91) (419)
Selling Expenses -- (153)
-------- --------
Total Operating Expenses (2,545) (3,959)
Loss from Operations (2,204) (3,247)
Interest income 1 41
Interest expense (1) (19)
Other income/(expense) (216) 97
-------- --------
Loss before Taxation (2,420) (3,128)
Taxation -- --
-------- --------
Net Loss $ (2,420) $ (3,128)
-------- --------
Net loss per ordinary
share outstanding $ (0.04) $ (0.06)
Weighted average Ordinary shares
outstanding 57,216 52,512
-------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
----------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and Cash Equivalents $ 328 $ 808
Inventory at cost 531 731
Trade Receivables 699 1,265
Non-Trade Receivables 120 129
Receivable from Employee -- --
Prepaids and Deposits 2,143 1,360
-------- --------
Total Current Assets 3,821 4,293
Property and Equipment, net 3,188 3,366
Goodwill and Other Intangible Assets - net 1,732 1,766
Deferred Financing costs 1,036 1,241
Total Assets $ 9,777 $ 10,666
======== ========
Liabilities & Stockholders' Equity
Current Liabilities
Line of Credit 2,389 2,389
Accounts Payable 3,407 1,602
Accrued Liabilities 1,072 1,630
Accrued Compensation on Stock Options
- Employees 4,274 4,112
- Non-employees 1,918 1,708
13,060 11,441
Long Term Liabilities
Capital Leases 46 46
Stockholders' Equity:
Ordinary shares $0.08 (5pence) par value:
Authorized shares: 100,000,000
Issued and outstanding shares:
March 31, 1999 - 57,215,856
December 31, 1998 - 57,215,856 4,626 4,625
Share Premium 66,477 66,472
Accumulated Deficit (74,388) (71,968)
Equity Adjustment from Foreign Currency Translation (44) 50
-------- --------
Total Stockholders' Equity $ (3,329) $ (821)
======== ========
Total Liabilities and Stockholders' Equity $ 9,777 $ 10,666
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,420) $(3,128)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 417 90
Gain on disposal of fixed assets -- (7)
Stock Option Compensation 372 602
Changes in assets and liabilities:
Trade Receivables (increase)/
decrease 566 (288)
Non-trade Receivables (increase)/
decrease 9 74
Inventory (increase)/decrease 200 (365)
Prepaids and deposits
(increase)/decrease (783) (152)
Accounts payable and accrued
liabilities increase/(decrease) 1,247 (785)
Other Assets (increase)/decrease -- --
------- -------
Net Cash Used by Operating Activities $ (392) $(3,959)
======= =======
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment $ -- $ (268)
------- -------
Net Cash Used by Investing Activities $ -- $ (268)
======= =======
</TABLE>
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SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Issuance of Ordinary Shares from
Exercise of Warrants $ 6 537
Net repayment of Short term loans and
overdrafts -- (900)
------- -------
Net Cash Provided By Financing Activities $ 6 (363)
======= =======
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (386) $(4,590)
Cash and cash equivalents at the beginning
of period 808 6,216
Effect of exchange rate changes on cash (94) (1)
Cash and Cash Equivalents at the
end of the period $ 328 $ 1,625
======= =======
Supplemental disclosures of cash flow information are as follows:
Amounts Paid
(in $ thousands)
1999 1998
--------- ---------
<S> <C> <C>
Interest $ 1 4
Income Taxes -- --
</TABLE>
E
See accompanying notes to consolidated financial statements
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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
three months ended March 31, 1998. CCSI was incorporated on June 21,
1995 and commenced trading 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.
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 1998
Annual Report on Form 10-K.
Results of operations for the three months ended March 31, 1999 are not
necessarily indicative of results to be achieved for the full fiscal
year.
2. 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. Sales, recognized at the time of shipment, are stated at the net
invoiced value of goods and services supplied to customers after
deduction of a value added tax where applicable.
5. During the 3 months ended March 31, 1999, the Company did not issue any
Ordinary shares.
6. 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:
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Three Months - January 1, 1999 through March 31, 1999
<TABLE>
<CAPTION>
Weighted Average
Actual Equivalent
---------- ----------------
<S> <C> <C>
Shares outstanding at beginning
of the period 57,215,856 57,215,856
Exercise of warrants -- --
Exercise of options -- --
---------- ----------
Shares outstanding at the end
of the period 57,215,856 57,215,856
---------- ----------
</TABLE>
7. Inventory at cost comprises:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- ------------
(in $ thousands)
<S> <C> <C>
Finished Goods $244 $465
Raw Materials 287 265
Work in Progress 0 1
---- ----
$531 $731
---- ----
</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,
1998.
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.
BUSINESS
Senetek PLC ("Senetek" or "the Company") is a science driven biotechnology
company that develops, manufactures and markets proprietary products for
the enhancement of quality of life, primarily products for the diagnosis
of and treatment of aging-related healthcare problems. Our business
divisions include biopharmaceuticals, drug delivery and skincare. In
connection with product development we sponsor research in the life
sciences and biotechnology fields.
SenetekPLC is a public limited company that was registered in England in 1983
(registration number 1759068).
In December, 1993, we 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
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purposes of designing, manufacturing and exploiting the syringe,
initially as a delivery system for its erectile dysfunction product.
Subsequently, other applications for the syringe have been investigated,
notably that of Epinephrine, as an antidote against anaphylactic shock.
We have 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.
We have a development center in the United Kingdom, whose staff are
involved in the monitoring of Phase III clinical trials in the UK and
Europe, together with product licensing applications and regulatory work
with the relevant medicines evaluation agencies in Europe.
In September 1995, we extended our interest in skincare 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.
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.
PRODUCT RESEARCH AND DEVELOPMENT
General
A significant proportion of our historic and current operating expenses
have related to the discovery and development of biomedical products,
for which we have established clinical research agreements with
consultants and research scientists. Under these agreements, we fund
agreed programs of the consultants', clinicians' or research scientists'
work and retain exclusive rights to manufacture and market world wide
any products arising from such research. Currently no products, except
for the Kinetin line of products, and 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 require us to fund research
in amounts to be determined between the parties. The researchers are
responsible for filing progress reports with us. Currently, our research
and development efforts consist of the work being done under these
agreements, through liaison with the research teams involved, and with
specialized consultants on matters such as formulation, stability,
clinical trials and regulatory matters covering the products involved in
such research.
Biopharmaceuticals
The main activity in which we are involved is the treatment of male
erectile dysfunction, which includes the development, manufacture and
sale of a patented self-administered automatic injector syringe as a
delivery system.
We have continued to consult 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. We
propose to expedite the development and subsequent commercialization of
Invicorp(TM) either through our own resources, if commercially
advantageous, or in co-operation with potential pharmaceutical partners,
distributors or licensees.
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 erectile dysfunction 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 Authorization was granted
by the Danish Medicines Agency on 13th July 1998. Marketing
Authorization Applications have been made and are currently under review
by the relevant authorities in the United Kingdom ("UK"), the Republic
of Ireland, Switzerland, New Zealand and South Africa. In March 1999,
the United Kingdom's Committee on the Safety of Medicines informed us
that it was prepared to advise the United Kingdom's licensing authority
to grant a Marketing Authorization for Invicorp upon our compliance with
specified conditions. An
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application under the European Mutual Recognition Procedure ("MRP") is
pending dependent on the choice of Reference Member State ("RMS") in
Europe. We plan to file a New Drug Application ("NDA") with the Federal
Food & Drug Administration ("FDA") in the United States ("US") as soon
as possible.
We continue to sell monoclonal antibodies purchased from outside
suppliers and derived from our sponsored research into diagnostic
procedures for Alzheimer's disease and other cell lines to the
scientific community for research purposes.
DRUG DELIVERY
Self-Administered Auto-Injector Syringe (ReliaJect(TM))
Our 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 delivery of other drugs using
the ReliaJect(TM) device, in additional to Invicorp(TM) and epinephrine
(adrenaline) referred to below is under active review.
Epinephrine in the ReliaJect(TM) Auto-Injection Device
We have filed an Abbreviated New Drug Application ("ANDA") with the US
FDA during 1998 for the proposed administration of epinephrine by
injection with the ReliaJect(TM) auto-injection device, under the
proposed brand name "AdrenaJect". Epinephrine (adrenaline in Europe) is
a well recognized 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 during the year 2000.
In addition, we are developing a pediatric formulation for epinephrine
in the ReliaJect(TM) auto-injection device with a view to filing an ANDA
with the FDA as soon as possible.
On October 26 1998, we entered into an agreement with ICN
Pharmaceuticals Inc ("ICN") for the supply and distribution of
AdrenaJect. Notably, the agreement provides for an initial purchase
order valued at $1.5 million and a licensing fee of $3 million based on
defined milestones in return for exclusive world wide distribution
rights. No amounts have been included in income up to the present time.
Skin Aging
Researchactivity relating our Kinetin, anti-aging compound continues to be
carried out through research groups in the US including the University
of California, Irvine.
We also hold 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 presently part of our 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, Kinetin preparations have revealed in
trials at the University of California the reduction of fine lines and
wrinkles, mottled hyperpigmentation, telangiectasia and tactile skin
roughness.
On July 7, 1998 we entered into an agreement with Osmotics Corporation
for the exclusive distribution of Kinetin based products in the prestige
market. The agreement provides for, among other things, performance
based minimum guaranteed royalty payments over a ten year period. In
October 1998 , we granted to ICN Pharmaceuticals Inc. an exclusive
license to supply Kinetin based products to the North American ethical
skin care market, which includes dermatologists and cosmetic surgeons.
The ICN agreement includes a supply guarantee, royalty on net sales and
minimum purchase guarantee. In addition, ICN agreed to spend at least
$3.5 million for advertising and promotional activities for Kinetin
based products in the first year of the agreement.
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We hold patents for anti-aging on a promising new cytokinin, Zeatin. We
have formulated a plan for development of Zeatin in 1999.
Other products are designed to meet specific niche segments of the
market. These products include Sleepy Hollow Botanicals, and Biotene
H-24. We also have two specialty lines: Silver Fox, a product for gray
hair, and Allercreme a hypoallergenic range of skincare products for
sensitive skin, developed in conjunction with dermatologists.
Our research and development expenditure amounted to $7,980000,
$5,026,000 and $2,187,000 for fiscal 1998, 1997 and 1996 respectively.
Manufacturing And Marketing
General
In the case of any emerging products, we anticipate that manufacturing
and marketing activities will be arranged by co-development and
marketing agreements with companies that have already established a
majority presence in specialized fields. In this event, revenues will
arise primarily through third party distribution and licensing
arrangements pursuant to which we will receive a percentage of sales, up
front license fees and/or milestone payments in exchange for a grant of
specified marketing rights to designated products .
Reliaject
We anticipate completing the installation of required machinery for the
manufacture of needle case assemblies and other components for Reliaject
during the second quarter of 1999. We 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" component. We will provide these Reliaject components to
specialized contract manufacturers in Europe and North America who will
assemble Reliaject and fill the syringe with pharmaceutical compounds
such as Invicorp and epinephrine and perform final assembly and pack
preparation prior to shipment.
Invicorp
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.
However, we have recently developed a new proprietary process for the
manufacture of phentolamine mesylate that is superior and more
economical than existing methodology.
Skincare
We outsource the manufacture, filling and labeling of our skincare and
health and beauty products. We have granted licenses for the manufacture
of our Mill Creek line of skincare products in South Africa and the
United Kingdom. The majority of our skincare and health and beauty
products are sold within the North American Free Trade Area ("NAFTA")
through our marketing organization covering two main sectors, natural
products and specialty mass markets. We have signed distribution
agreements for distribution within the US and abroad. We do not
significantly rely on main or specialized suppliers for our skincare and
health and beauty products, and we do not anticipate any problems with
access to raw materials which are required for our contract
manufacturing processes.
Monoclonal Antibodies
In accordance with an agreement entered into with the Research
Foundation for Mental Hygiene Inc., we have 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. We continue to sell these antibodies,
which are obtained from outside suppliers to the scientific community
for research purposes in consideration for a royalty entitlement in
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favor of the Foundation. We rely on the supply of monoclonal antibodies
from a specific biotech organization at the present time.
COMPETITION
The biomedical, drug delivery, biopharmaceutical and pharmaceutical industries
are highly competitive. Our 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 efforts
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 organizations may seek intellectual
property protection, discover what could be considered as competing products, or
establish collaborative arrangements in our area of research and development.
The vast majority of our existing or potential competitors have substantially
greater financial, technical and human resources and name recognition than we
do. These competitors are often better equipped to research, develop, patent,
conduct pre-clinical testing and human clinical trials, manufacture, and market
products. In addition many of these companies have extensive experience in
pre-clinical testing and human clinical trials. These Companies may develop,
license, or acquire products that compete with our products. The timing of the
market introduction of competitors' products will be important competitive
factors. Accordingly, the relative speed with which we 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 our success.
We cannot predict the extent to which any of the products we are currently
developing may become commercially viable. Once products have been approved for
sale we believe that competition will be based , among other things, on product
efficacy, safety, reliability, price and patent position. Our competitive
position also depends on our ability to attract and retain qualified and
experienced personnel to develop proprietary products, processes and
technologies that we can market and sell and the degree of intellectual property
protection available for those products. We expect competition to intensify in
all fields in which we are involved as new products are developed and become
known. Furthermore, the patent situation in this field is complex and the
protection afforded by patents in any jurisdiction may be limited.
Invicorp
Our Management is presently discussing the possibility of entering into
licensing agreements with major pharmaceutical companies , assuming that
marketing authorization approval is granted by the United Kingdom's regulatory
agency, the MCA, for Invicorp during the second quarter of 1999. Certain
products that compete with Invicorp have been or are being developed by our
competitors, including Pharmacia & Upjohn, (Caverject); Pfizer (Viagra) and
Vivus (Muse) . Although our management believes there will be a substantial
demand for Invicorp , we cannot assure that Invicorp or future products will
obtain regulatory approvals or that we will be able to successfully market these
products.
Reliaject
There are already a number of syringes on the market. In particular, 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.
Based upon the extensive clinical trials conducted in the United Kingdom in
which the Reliaject(TM) device was used for the delivery of Invicorp(TM), we
believe that Reliaject, which can, after instruction, be used by patients
without medical supervision, is capable of competing successfully with products
currently on the market.
Skincare
The vast health and beauty care market is dominated by large multi-national
organizations, who have far greater resources and market exposure than we do.
Our products are designed to meet specific niche segments of the market. Our
products include the Mill Creek line, Sleepy Hollow Botanticals and Biotene
H-24. The specialty mass market lines are Silver Fox, a
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product for gray hair, and Allercreme, a hypoallergenic product line for
sensitive skin that was developed in conjunction with dermatologists. Silver Fox
and Allercreme are currently marketed under a distribution agreement entered
into with Quinlan Inc.
GOVERNMENT REGULATION
Our research, pre-clinical development, clinical trials, manufacturing and
marketing of our products are subject to extensive regulation , rigorous testing
and approval processes of the FDA and equivalent foreign regulatory agencies.
Product Approval - US
In the US, the Federal Food, Drug and Cosmetic Act and the Public Health Service
Act governs the testing, manufacture, safety, efficacy, labeling, storage,
record keeping, approval, advertising, and promotion of our 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.
The steps required before a pharmaceutical product may be marketed in the United
States include:
o preclinical laboratory testing,
o submission to the FDA of an Investigational New Drug application
which must become effective before human clinical trials may be
commenced,
o adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug,
o submission of a New Drug Application to the FDA and
o FDA approval of the New Drug Application prior to any commercial
sale or shipment of the drug.
Invicorp has received Investigational New Drug approval from the FDA, and we
plan to file a New Drug Application with the FDA for Invicorp at the earliest
practical opportunity.
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 behavior 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 we have concluded 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 New Drug Application.
Our clinical trials for future products will generate safety data as well as
efficacy data and will require substantial time and significant funding. We
cannot assure that clinical trials related to future products would be completed
successfully within any specified time period, if at all. Furthermore, the FDA
may suspend clinical trials at any time, if it is believed that the subjects
participating in such trials are being exposed to unacceptable health risks.
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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Product Approval - Other countries
Marketing of products in other countries requires regulatory approval from the
relevant medicines evaluation in a particular country. The current approval
process varies from country to country, and the time to approval may vary from
that required for FDA approval. The review of clinical studies by regulatory
agencies in foreign jurisdictions follows a similar process to that in the U.S.
In July 1998, we received Marketing Authorization from the Danish government for
Invicorp. We have submitted Marketing Authorization Applications for Invicorp in
several other countries. We anticipate approvals from the United Kingdom and
Ireland during 1999. However, these applications will be subject to rigorous
approval processes. We cannot assure that approval in these or other countries
will be granted or that these approvals if granted, will not contain significant
limitations in the form of warnings, precautions or contraindications with
respect to condition of use. Any delay in obtaining, or failure to obtain such
approval would adversely affect our ability to generate product revenue. In
addition, in certain European countries, the sales price of a product must be
approved. The pricing review period often begins after market approval is
granted. Thus, even if a product is approved by a regulatory authority,
satisfactory prices will need to be approved for such product.
Noncompliance
Failure to comply with the applicable regulatory requirements can, among other
things, result in fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution. In addition, the marketing and
manufacturing of pharmaceutical products are subject to continuing FDA and other
regulatory review, and later discovery of previously unknown problems with a
product, manufacturer or facility may result in the FDA and other regulatory
agencies requiring further clinical research or restrictions on the product or
the manufacturer, including withdrawal of the product from the market. The
restriction, suspension or revocation of regulatory approvals or any other
failure to comply with regulatory requirements would have a material adverse
effect on our business, financial condition and results of operations.
Post-Approval
After regulatory approval is obtained, our products are subject to continual
review. Manufacturing, labeling and promotional activities are continually
regulated by the FDA and equivalent foreign regulatory agencies, and we must
also report certain adverse events involving our drugs to these agencies.
Previously unidentified adverse events or an increased frequency of adverse
events that occur post-approval could result in labeling modifications of
approved products, which could adversely effect future marketing of a drug.
Finally, approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. The
restriction, suspension or revocation of regulatory approvals or any other
failure to comply with regulatory requirements would have a material adverse
effect on our business, financial condition and results of operations.
We obtain certain materials and components for the manufacture of our products
from third parties. In addition, we outsource the manufacture of certain
products (see "Business--Manufacturing and Marketing"). These parties are
required to comply with strict standards established by us. Certain
manufacturers and suppliers are required by the Federal Food, Drug, and Cosmetic
Act, as amended, and by FDA regulations, to follow Good Manufacturing Practices,
or GMP, requirements and are subject to routine periodic inspections by the FDA
and certain state and foreign regulatory agencies for compliance with GMP and
other applicable regulations. Upon routine inspection of these facilities, we
cannot assure that the FDA and other regulatory agencies will find the
manufacturing process or facilities to be in compliance with GMP and other
regulations. Failure to achieve satisfactory GMP compliance as confirmed by
routine inspections could have a material adverse effect on our ability to
continue to manufacture and distribute our products and, in the most serious
case, result in the issuance of a regulatory warning letter or seizure or recall
of products, injunction and/or civil fines or closure of our manufacturing
facility until GMP compliance is achieved.
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 countries in 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
We believe that patents and other proprietary rights are an essential element of
our business. As part of our grant agreements with various researchers, we have
exclusive license rights to any commercially valuable products developed by the
contracted
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researchers within the scope of the agreements, in exchange for royalty
entitlements. Our policy is to file patent applications to protect inventions
and improvements that we consider important to the development of our business.
Typically, patents in the U.S. expire 19 years after the grant date.
We also rely upon trade secrets, know-how, continuing technological innovations
and licensing opportunities to develop and maintain our competitive position. We
have filed patent applications for our products in most major countries,
including those that are signatories to the Patent Conference Treaty. Thus far,
Reliaject is patented in most of these countries and in major areas in Asia and
South America. We have also received patent approvals covering our technology
for the treatment of:
o the effects of aging on skin in the U.S., Australia, Canada and
Taiwan.
o psoriasis and other similar skin diseases in the U.S., Canada,
Australia, Denmark, France, Germany, Greece, Italy, Netherlands,
Sweden and the United Kingdom.
o male sexual dysfunction in the U.S., Australia, Georgia,
Hungary, Latvia, Lithuania, Slovakia, Taiwan and Venezuela
Patent positions generally, including those for pharmaceutical and health
service organizations such as us, 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, we cannot be sure that any
patents that are or may be issued to us will provide significant proprietary
protection or will not be circumvented or invalidated. Because patent
applications in the U.S. are maintained in secrecy until patents issued, and
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, we cannot be certain that we or any licensor was the
first creator or that we or our licensor was the first to file patent
applications for these inventions. Moreover, we might have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine priority of inventions, which could result in substantial cost to us,
whether or not the eventual outcome was favorable to us. We cannot assure that
our 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 our business. Some of these
technologies applications, or patents may conflict with our development efforts
or patent applications.
In 1995, we acquired numerous trademarks formerly owned by Carme Inc. To the
best of our knowledge, there has been no indication to date that such trademarks
are invalid or are subject to challenge.
Typically, we require our employees, consultants and sponsored researchers to
execute confidentiality agreements as part of their employment, consulting or
research arrangements with us. We cannot assure, however, that these agreements
will produce meaningful or adequate protection for our 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.
RESULTS OF OPERATIONS
Revenues
Our product sales revenues of $934,000 for the first quarter of 1999 comprised
$77,000 from the sale of pharmaceutical products, $218,000 from the sale of
monoclonal antibodies and $639,000 from the sale of skincare and health and
beauty products.
Our product revenues of $1,615,000 for the first quarter of 1998 comprised
$93,000 from the sale of pharmaceutical products, $350,000 from the sale of
monoclonal antibodies and $1,173,000 from the sale of skincare and health and
beauty products.
The 17.2% sales decrease in pharmaceutical products was due to a temporary
suspension of named patient sales in the United Kingdom.
The 37.7% sales decrease in monoclonal antibodies is due to volume.
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The 45.5% sales decrease in skincare and beauty products was due mainly to a
continual focus on eliminating unprofitable SKUs from the product line. As such
there were fewer products for sale in the product line during the first quarter
of 1999 compared to the first quarter of 1998.
Cost of Goods Sold
Cost of goods sold for the first quarter of 1999, which includes contract
manufacturing and material costs, was $593,000, down 34.3% from $903,000 in the
first quarter of 1998. The decrease is due mainly to decreased sales volume in
the skincare and health and cosmetics sector.
In the Pharmaceutical Sector, cost of goods sold for the first quarter of 1999
was $126,000 down 25.9% from $170,000 in the first quarter of 1998. This is due
to decreased sales volume of monoclonal antibodies and Invicorp named patient
sales in the United Kingdom.
In the Skincare and Health and Beauty Sector, cost of goods sold for the first
quarter of 1999 was 73.2% of sales (1998, 62.5% of sales), or $467,000 a
decrease of 36.3% from $733,000 in the first quarter of 1998. This is primarily
due to the decreased sales volumes of Carme products following the reduction of
the product range and the elimination of low gross margin products. Additional
spending was incurred in the first quarter of 1999 on the finalization of the
Kinetin supply chain.
OPERATING EXPENSES
Research & Development
Research and Development expenditure for the first quarter of 1999 totaled
$869,000, a substantial decrease of 43.7% from $1,544,000 in the first quarter
of 1998. Research spending on Invicorp development is decreasing as clinical
trials for EU countries are now nearly complete. This spending will continue to
decrease as Invicorp receives approvals from Medical Evaluation Agencies in
Europe and we enter the era of commercialization.
The Pharmaceutical Sector research and development accounted for 98.0% of our
total research and development spending for the first quarter of 1999, compared
to 99.8% for the first quarter of 1998. The decreased expenditure is due mainly
to the fact that development spending for Invicorp and Reliaject with the
exception of Invicorp trials in the US has already been incurred. Invicorp
received a Marketing Authorization Approval from Denmark in 1998. We also
received a confirmation from the United Kingdom' s Committee on the Safety of
Medicines in March 1999 that it would recommend to the Medicines Control Agency
in the United Kingdom that a Marketing Authorization Approval should be granted.
We are negotiating with a European Drug Company for the licensing of Invicorp
which will give us an initial license fee, future royalty streams and supply
chain revenues.
General and Administration
General and Administration expenses for the first quarter of 1999 totaled
$1,585,000, a decrease of 14.0% from $1,842,000 in the first quarter of 1998.
Pharmaceutical Sector general & administrative expenses for the first quarter of
1999 totaled $1,285,000, a decrease of 17.7% from $1,562,000 in the first
quarter of 1998. The decrease is due mainly to the Corporate restructuring which
took place at the end of 1998. We recognized $150,000 of stock compensation
expense for employee based stock option plans in accordance with Accounting
Principle Board Opinion No. 25 and $210,000 for non employee based stock option
plans in accordance with Financial Accounting Standard No 123.
Skincare and Health and Beauty Sector G & A expenses for the first quarter of
1999 totaled $300,000, an increase of 7.1% from $280,000 in the first quarter of
1998. This increase is due mainly to one time expenses, including legal,
accounting and administration costs, incurred by us in connection with the
licensing arrangements for the Mill Creek and Allercreme, as well as the Kinetin
launches.
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Marketing and Promotion
Marketing and promotion expenses in the first quarter of 1999 totaled $91,000, a
decrease of 78.3% from $419,000 in the first quarter of 1998. This decrease was
due mainly to the elimination of non-essential public relations and advertising
spending.
Pharmaceutical Sector marketing and promotion expenses for the first quarter of
1999 were $51,000, a decrease of 85.6% from $355,000 in the first quarter of
1998. The decrease is due mainly to the elimination of certain marketing
consulting arrangements and bringing such activities in house.
Skincare and Health and Beauty Sector marketing and promotion expenses for the
first quarter of 1999 were $40,000, a decrease of 37.5% from $64,000 in the
first quarter of 1998. The decrease is the result of a more focused marketing
plan coupled with the elimination of unprofitable SKUs.
OPERATING LOSS
Operating loss from continued operations for the first quarter of 1999 totaled
$2,205,000, a decrease of 32.1% from $3,247,000 in the first quarter of 1998.
Operating loss from continued operations in the pharmaceuticals sector for the
first quarter of 1999 totaled $1,788,000, a decrease of 43.9% from $3,185,000 in
the first quarter of 1998.
Operating loss from continued operations in the skincare and health and beauty
sector for the first quarter of 1999 totaled $417,000, an increase from $61,000
in the first quarter of 1998. This was due mainly to decreased revenues on
product sales and the set up of additional supply chain functionality for
Kinetin.
OTHER INCOME AND EXPENSE
Included in other expense for the first quarter of 1999 is $205,000 for the
amortization of deferred financing costs relating to the issue of warrants and a
10% fee on the drawdown of the $6.6 million line of credit arrangement in the
third quarter of 1998.
The fair value of the warrants was calculated using the Black Scholes option
pricing model assuming an expected life of 2 years for the warrants, an
annualized volatility of 74% and a risk free investment rate of 6.1%. There were
no similar charges in the corresponding periods of 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1999, the Company's liquidity represented by cash
and deposits at banks decreased by $386,000 to $328,000.
Net cash used by operating activities from continuing operations totaled
$392,000 in the first quarter of 1998, a decrease of $3,567,000 from the first
quarter of 1998. The decrease was $812,000 for operating losses adjusted for non
cash expenses and $2,755,000 for changes in working capital.
In April 1999, we entered into a Securities Purchase Agreement with an affiliate
of the investor who originally loaned the us $6.6 million in July 1998. The
terms of the agreement are that we receive $5 million in cash and have
re-financed the remaining balance of $2.4 million under the current agreement ,
in exchange for new investment notes bearing interest at 8%. The notes require
semi annual payments of interest only until maturity and are secured by all of
Senetek's assets.
With respect to our recurring operating cash losses, we have implemented a major
cost reduction program in 1999 to reduce operating expenses which includes the
following:
o In the UK, effective May 31, 1999 we will be combining two
offices into one with a 55% reduction in staff.
o In the US, further cost savings will occur when we close our St
Louis Corporate research facility and combine these operations
with our Napa office during the second half of 1999.
o Effective January 1999 a substantial reduction of non-value
added costs in the areas of public relations, advertising and
travel.
o In the US, the out licensing of our Mill Creek and Allercreme
product lines in the second quarter of 1999, will enable an
almost complete downsizing of our CCSI operation. The Allercreme
and Mill Creek agreements provide for a non-refundable licensing
fee, the purchase of inventory and guaranteed quarterly royalty
payments.
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Research expenditure on Invicorp product development is becoming less as this
product receives approvals from Medical Evaluation Agencies in Europe. Invicorp
received a Marketing Authorization Approval from Denmark in 1998. As previously
noted, we also received a confirmation from the United Kingdom's Committee on
the Safety of Medicines in the first quarter of 1999 that it would recommend to
the Medicines Control Agency that a Marketing Authorization Approval should be
granted. We plan to use Denmark as raporteur for the European Mutual Recognition
Process for the approval of additional European licenses and have retained an
outstanding Regulatory Affairs consultant to assist in this process. We are
currently negotiating with a European Drug Company for the licensing of Invicorp
which will give us an initial license fee, future royalty streams and supply
chain revenues. These discussions may lead to a license agreement of a
substantial nature in due course, although no assurance can be given that we
will be successful in securing such an agreement.
Our Reliaject drug delivery device, which has been utilized for testing purposes
as a delivery system for the Invicorp product and for Epinephrine, is now ready
for commercial deployment, with almost all development costs recognized as of
December 31,1998. We have entered into an agreement with ICN Pharmaceuticals for
the worldwide distribution rights for AdrenaJect (Reliaject filled with
epinephrine). We will receive $ 3 million from ICN following approval of our
Abbreviated New Drug Application for AdrenaJect by the Federal Food and Drug
Administration and product launch, anticipated during the year 2000.
Our patented Kinetin products were successfully launched near the end of the
first quarter, 1999, through distribution agreements entered into with ICN
Pharmaceuticals, Inc. and Osmotics Corporation.
FUTURE PROSPECTS
We propose to expedite the development and subsequent commercialization of our
Invicorp product either through our own resources or in co-operation with one or
more partners or licensees. We continue 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 certain licensing
rights, there can be no assurance that agreements on acceptable terms will
ultimately be effected with the parties concerned.
Following the successful conclusion of the Phase III clinical trials in the
United Kingdom for Invicorp, and the filing of a Marketing Authorization
Approval in April 1997, it is our immediate objective to obtain the grant of a
Marketing Authorization Approval. We have received a confirmation from the
United Kingdom's Committee on the Safety of Medicines in the first quarter of
1999 that it would recommend to the Medicines Control Agency that a Marketing
Authorization Approval should be granted. We plan to use Denmark as raporteur
for the European Mutual Recognition Process for the approval of additional
European licenses and have retained an outstanding Regulatory Affairs consultant
to assist in this process. In addition, we are currently negotiating with a
European drug company for the licensing of Invicorp. These discussions may lead
to a license agreement of a substantial nature in due course, providing us an
initial license fee, future royalty streams and/or supply chain revenues,
although no assurance can be given that we will be successful in securing such
an agreement.
Pending the grant of Marketing Authorization Approval, we expect sales of
Invicorp, which at present are restricted to clinicians for use on a
"named-patient" basis, to continue although such sales are unlikely to make a
material contribution to our revenues.
With regard to the development and marketing of Kinetin (TM) , in July 1998 we
entered into an agreement with Osmotics Corporation whose customers include
Sach's (Fifth Avenue) and Harrods (of London) for the supply of Kinetin
anti-aging preparations. In October 1998 we entered into an agreement with ICN
Pharmaceuticals to supply Kinetin to dermatologists in North America. Our
patented Kinetin product was made commercially available during the first
quarter of 1999 by ICN Pharmaceuticals, Inc. and Osmotics Corporation, and
initial sales show that the product is being accepted in the market place.
In the case of monoclonal antibodies derived from our sponsored research into
Alzheimer's disease, and from other sources, sales to scientific institutions
are being achieved at a rate of $ 1 million per annum which generates a
contribution of around $700,000 per annum; we anticipate we will maintain these
revenues over future periods.
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It is not practicable at the present time to indicate future operating results
and equity capital requirements, but it is anticipated that revenues will be
generated during fiscal 1999, through (i) the receipt of licensing fees or
contributions from intending partners relating to the Invicorp project and
distribution by our partners of Kinetin products, (ii) from the trading results,
disposals and licensing arrangements for the skincare and health and beauty
product lines, (iii) from the sales of monoclonal antibodies, (iv) from sales or
licensing of the syringe and (v) from sales of the Invicorp product to
clinicians on a named-patient basis. Such revenues, if received, may not be
sufficient to address our future anticipated expenditures.
FACTORS AFFECTING THE COMPANY
History of Losses
Although we were formed almost 16 years ago in October 1983, and are now close
to realizing our commercial objectives, our business is subject to the risks
inherent in the establishment of a relatively new business enterprise in the
field of biopharmaceuticals.
The likelihood of the success of our business must be considered in the light of
the problems, expenses, difficulties and delays frequently encountered in
connection with the development of new products and the competitive and
regulatory environment in which we are operating. Since inception, the Company
has only produced $21,052,000 in gross revenues and has cumulative losses of
$74,388,000 (including a net loss of $22,492,000 in fiscal 1998).
Although certain of our biopharmaceutical products may be marketed in the fourth
quarter of 1999, there can be no assurance that marketing will begin when we
anticipate, if at all, or that revenues from our other products, including
Kinetin, will rise to a level that will allow us to operate profitably during
the fiscal year ending December 31, 1999.
Need for Financing
Our monthly cash requirements have been substantially reduced in 1999 to less
than 50% of the average monthly 1998 rate. We currently have sufficient equity,
cash flow or bank facilities to continue our operations during fiscal 1999 and,
as indicated, we have obtained additional financing through a Securities
Purchase Agreement, including re-financing of a line of credit. In the event
that we are unable to obtain further funding, or the costs of development and
operations prove greater than anticipated, we may be required to further curtail
our operations or seek alternative financing arrangements. There can be no
assurances that such additional financing, if available, will be on terms
acceptable to us. If our cash requirements cannot be successfully addressed,
there would be a material adverse effect on our business, financial condition
and results of operations.
Dependence on Key Personnel
On November 4, 1998 we 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 remained as Senetek's Chairman of the Board of Directors
until December 31,1998 when Mr. Massino became Chairman.
On April 16,1999 we announced the appointment of Dr. George van Lear as Chief
Operating Officer.
We are dependent, in particular, upon the services of Mr. Frank Massino, our
Chairman and Chief Executive Officer and Dr George van Lear our Chief Operating
Officer. If Mr. Massino and Dr. van Lear were unable to provide their services
to us for whatever reason, our business could be adversely affected. Since these
executives are involved in most aspects of our business, there can be no
assurance that suitable replacements could be found if they were unable to
perform services for us. In addition, our ability to market our products and
fulfil our business plan will depend, in large part, upon our ability to attract
and retain qualified personnel in our field. Competition for such personnel is
intense and there can be no assurance that we 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
We are engaged in a field characterized by extensive research efforts. Despite
our current access to leading expertise in the field,
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there remains a risk that the research financed by us in the future could prove
unproductive. Furthermore, there can be no assurance that research and
discoveries by other companies will not render our programs superfluous or
obsolete. This is true for all companies who operate in the same field.
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 proved 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 we will not be subject to liability from the use of our
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 our products and believes that our
exposure to liability will thereby be lessened. However, there can be no
assurance that this result will be achieved.
Factors Affecting the Company's Business
Reliance on Suppliers
We contract out manufacture of all of our products and purchase raw materials
from third-party suppliers. We recently established a dual supply chain for
Kinetin.
Although we believe that other suppliers are available who can produce similar
materials and products, there can be no assurance that such materials would be
available to us on an immediate basis if needed, or at prices similar to those
now paid by us.
Product Liability Risks of Cosmetics
We are subject to the risk of product liability claims related to the use of our
products which are designed for application to human hair and skin. We carry
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 us 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
our products and services and other risks identified in our 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. We undertake 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 Problem
The term "Year 2000 issues" is used to describe the various problems that may
result from the improper processing of dates and date-sensitive calculations by
computers and other machinery as the year 2000 approaches. These problems
generally arise from the fact that most of the world's computer hardware and
software have used only two digits to identify the year in a date, often meaning
that the computer will fail to distinguish dates in the "2000's" from those in
the "1900's." This could result in system failure or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
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Our State of Readiness
We have instituted a year 2000 project. As a part of this project, we have
completed an initial evaluation of our computer systems and significant software
programs, including our network hardware and operating system and accounting and
business process software, as well as our non-information technology systems. In
anticipation of potential year 2000 system problems, we have begun to replace
our management information systems with a platform designed to be year 2000
compliant. We expect to complete this process in the second quarter of 1999. We
have retained a consulting firm to coordinate successful system implementation,
including testing of year 2000-related problems. We will commence testing for
year 2000 compliance upon full implementation of our new system and will
continue this testing throughout 1999. We presently believe that upon completion
of successful system conversions, the year 2000 issue will not pose significant
operational problems for us. However, although our new systems are designed to
be year 2000 compliant, we cannot assure you that the systems contain all
necessary data code changes. If we do not complete our conversions in a timely
fashion, the year 2000 issue could have a material impact on our operations. As
a part of our year 2000 project, we have assessed our products in connection
with year 2000 issues. Our products do not contain any software, date-sensitive
fields or embedded microprocessors; therefore, we do not believe that our
products will present year 2000 issues. We are also in the process of contacting
our vendors and other third parties on which we rely to obtain information about
their year 2000 compliance. We plan to complete these contacts by the end of the
second quarter of 1999. Based on our review of responses we have received to
date, we do not expect this issue to have a material adverse effect on our
business.
The Costs to Address Our Year 2000 Issues
In 1998, we spent approximately $130,000 to address year 2000 issues, including
the purchase of new software. We expect that our assessment, remediation and
contingency planning activities for its internal systems will be ongoing through
1999. We currently expect the total cost for these activities to be
approximately $20,000 in 1999. This cost estimate does not include replacement
of internal software and hardware in the normal course of business. We do not
believe that these costs will materially affect our liquidity or financial
condition. The costs of our year 2000 project and the date established for
completion of year 2000 modifications are based on our management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. We cannot guarantee that we will achieve
these estimates; actual results could differ materially from those we currently
anticipate.
The Risks Associated With Our Year 2000 Issues
Our failure to resolve year 2000 issues by December 31, 1999 could result in
system failures or miscalculation, causing disruptions in our operations and
normal business activities. In addition, the failure of our vendors or other
third parties on whom we rely to remediate their year 2000 issues could result
in disruptions in our ability to obtain parts and materials or other problems
related to our daily operations. Since third party year 2000 compliance is not
within our control, and since we have not completed the process of obtaining
compliance information from vendors and others, we cannot assure that a vendor's
or other third party's failure to achieve year 2000 compliance would not have a
material adverse effect on our business.
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Part II Other Information
Item 1 . Legal Proceedings
On June 11, 1998 we filed a lawsuit against Mad Dogs & Englishmen Inc. and Mad
Dog Enterprises d/b/a Mad Dogs & Englishmen ( together " Mad Dogs" ) in the
Supreme Court of New York. On December 11, 1996 we entered into a written
agreement with Mad Dogs under which Mad Dogs agreed to promote our cosmetics
business and to hire a consultant familiar with the Cosmetics industry in
connection therewith. We are seeking damages of approximately $ 10 million under
a breach of contract. Mad Dogs served us with an answer to our complaint in
August 1998.
Ronald Trahan Associates, Inc. and Ronald C. Trahan have filed a lawsuit against
Senetek PLC claiming breach of an alleged contract between Ronald Trahan
Associates, Inc. The plaintiff alleges damages approximating $ 170,000 . The
plaintiff also claims a right to treble damages. This breach of contract claim
was filed around January 25,1999 in Middlesex Superior Court in Massachusetts.
On March 8, 1999, we removed the lawsuit to the U.S. District Court for the
District of Massachusetts. On March 24, 1999 we moved to dismiss one of the
claims of the lawsuit. We believe the claims in this lawsuit have no merit and
intend to defend against the lawsuit vigorously.
In January and February 1999, we received several letters from counsel to David
Pettit, a former consultant to Senetek. Mr. Pettit voluntarily resigned from his
consulting position with us in early November 1998. Mr. Pettit alleges that his
consulting agreement with Senetek was terminated following a change in Senetek's
management and has threatened a lawsuit seeking damages of $ 127,000. No suit
has yet been filed. We believe Mr. Pettit's claims have no merit and, in the
event a lawsuit is filed, intend to defend against such claims vigorously.
On March 11, 1999, our legal counsel received a letter from counsel to Clifford
Brune, former Chief Operating Officer of Senetek, who left his position as COO
in late 1998. The letter threatened a lawsuit seeking damages of $ 777,600,
representing amounts allegedly owed to Mr. Brune under an alleged consulting
contract with Senetek. No suit has yet been filed. We believe that Mr. Brune's
claims have no merit and in the event a lawsuit is filed, intend to defend
against such claims vigorously.
Paul Logan, former Chief Financial Officer and Secretary of Senetek and a
current member of the Board of Directors, filed a lawsuit against Senetek on
March 12, 1999 in the United Kingdom's Employment Tribunal. Mr. Logan alleges
that he entered into a verbal agreement with our former Chairman and Chief
Executive Officer under which Mr. Logan was to provide consulting services to
Senetek for 12 days per year for three years, including attendance at board of
directors meetings, beginning on October 1, 1998, in exchange for consulting
fees of 109,000 pounds per year plus other benefits. Mr. Logan seeks unpaid
consulting fees under the alleged oral consulting agreement. We believe that the
claims in this lawsuit have no merit and have filed a dissent with the
Employment Tribunal. We intend to defend against Mr. Logan's lawsuit vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule as of and for the three months
ended March 31, 1999.
(b) Reports on Form 8-K
A report on Form 8-K, dated January 26, 1999, was filed with the
Commission on February 1, 1999 reporting the resignation of
Deloitte & Touche as independent accountant.
A report on Form 8-K, dated February 23, 1999, was filed with
the Commission on March 1, 1999 reporting the appointment of BDO
- Stoy Hayward as independent accountant.
22
<PAGE> 23
SIGNATURES
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)
Date: May 21, 1999 /S/FRANK J. MASSINO
----------------------------------------
Frank J Massino
Chief Executive Officer
Date: May 21, 1999 /S/STEWART W. SLADE
----------------------------------------
Stewart W Slade
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENT AND NOTES.
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
<RECEIVABLES> 699
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<CURRENT-ASSETS> 3,821
<PP&E> 3,188
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0
0
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<EXTRAORDINARY> 0
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