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United States
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
Exchange Act of 1934 for the Quarterly period ended September 30, 2000
or
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from _______ to ______
Commission file number 0-14691
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.)
620 Airpark Road, Napa, California 94558
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no. including area code (707) 226-3900
NOT APPLICABLE
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(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.
Yes [X] No [ ]
Indicate number of shares outstanding of each of the issuer's classes of common
stock, as of the latest date practicable.
At October 26, 2000, there were 58,432,117
of the Registrant's Ordinary shares outstanding
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SENETEK PLC AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED September 30, 2000
PART I. FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements
Unaudited Consolidated Statements of Operations
Three Months Ended September 30, 2000 and September 30, 1999 3
Nine Months Ended September 30, 2000 and September 30, 1999
Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999 4
Unaudited Consolidated Statement of Stockholders' Deficit
and Comprehensive Loss Nine Months ended September 30, 2000 5
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and September 30, 1999 6
Notes to the Unaudited Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION 19
SIGNATURES 20
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Part I Financial Information
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $ 1,223 $ 3,405 $ 2,981 $ 6,098
Cost of Sales 476 1,340 1,178 2,553
--------- -------- -------- --------
Gross Profit 747 2,065 1,803 3,545
Operating Expenses:
Research & Development 55 720 743 2,400
General & Administration 1,170 947 3,689 4,625
Marketing & Promotion -- 5 -- 224
--------- -------- -------- --------
Total Operating Expenses 1,225 1,672 4,432 7,249
--------- -------- -------- --------
Income/(Loss) from Operations (478) 393 (2,629) (3,704)
Other income (expense):
Settlement Expense (Note 3) -- -- -- (2,718)
Interest Income 19 66 34 107
Interest Expense (Including
amortization of deferred financing
costs and discount) (524) (433) (1,527) (1,083)
Other 1 155 (4) 1
--------- -------- -------- --------
Income (Loss) before extraordinary loss on
extinguishment of debt (982) 181 (4,126) (7,397)
Extraordinary Loss on
extinguishment of debt(Note 3) -- -- -- (1,657)
--------- -------- -------- --------
Net income/(loss) available to common
stockholders $ (982) $ 181 $ (4,126) $ (9,054)
========= ======== ======== ========
Basic and diluted income/(loss) before
extraordinary item per
Ordinary share outstanding $ (0.02) $ 0.00 $ (0.07) $ (0.13)
Basic and diluted (loss) from
extinguishment of debt per
Ordinary share outstanding $ -- $ -- $ -- $ (0.03)
Basic and diluted income/(loss) per
Ordinary share outstanding $ (0.02) $ 0.00 $ (0.07) $ (0.16)
Weighted average
Ordinary shares
Outstanding 58,431 57,561 58,389 57,416
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 1,556 $ 1,840
Trade Receivables
(net of provisions of $911,306 at September 30, 2000 and $776,306
December 31, 1999) 1,006 1,234
Non-Trade Receivables
(net of provisions of $126,504 at September 30, 2000 and $261,504
December 31, 1999) 49 188
Inventory
(net of provisions of $160,065 at September 30, 2000 and
December 31, 1999) 573 511
Prepaids and Deposits 107 183
--------- --------
Total Current Assets 3,291 3,956
Property & Equipment, net 3,799 4,060
Goodwill - net 1,531 1,631
Deferred Financing costs - net 1,681 2,581
--------- --------
TOTAL ASSETS $ 10,302 $ 12,228
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts Payable 1,270 2,230
Accrued Liabilities 694 1,137
Convertible Short Term Debt (Note 2) 700 700
Accrued Compensation on Stock Options
- Employees 1,014 2,213
- Non-employees 2,484 2,484
--------- --------
Total Current Liabilities 6,162 8,764
Long Term Liabilities
Notes Payable
(net of unamortized discount of $193,292 at September 30, 2000
and $287,792 at December 31, 1999) 7,195 7,101
Deferred License Fees 2,825 543
--------- --------
Total Liabilities $ 16,182 $ 16,408
--------- --------
Commitments and Contingencies -- --
Stockholders' (Deficit):
Ordinary shares $0.08 (5 pence) par value:
Authorized shares: 100,000,000
Issued and outstanding shares:
September 30, 2000 - 58,432,117
December 31, 1999 - 58,148,517 4,720 4,697
Share Premium 77,331 74,903
Accumulated Deficit (87,956) (83,830)
Equity Adjustment from Foreign Currency Translation 25 50
--------- --------
Total Stockholders' (Deficit) $ (5,880) $ (4,180)
--------- --------
Total Liabilities and Stockholders' (Deficit) $ 10,302 $ 12,228
========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED September 30, 2000
(in thousands, except shares outstanding)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
Ordinary Shares Share Accumulated Currency Net
Shares Amount Premium Deficit Translation(1) Equity
---------- ------ ------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 2000: 58,148,517 $4,697 $74,903 $(83,830) $ 50 $(4,180)
Exercise of options 283,600 23 467 -- -- 490
One million warrants issued in connection
with Revlon Licensing Agreement 762 762
Cancellation of vested stock options
Previously classified as accrued compensation 1,199 1,199
Comprehensive Loss
Net loss -- -- -- (4,126) -- (4,126)
Translation loss, net of tax -- -- -- -- (25) (25)
---------- ------ ------- ----------- ----------- --------
Total Comprehensive Loss (4,126) (25) (4,151)
---------- ------ ------- ----------- ----------- --------
Balances, September 30, 2000 58,432,117 $4,720 $77,331 $(87,956) $ 25 $ (5,880)
========== ====== ======= =========== =========== ========
</TABLE>
(1) For the three months ended September 30, 2000 the translation loss was $8
and the comprehensive loss was $990.
For the nine months ended September 30, 1999 the translation loss was $10
and the comprehensive loss was $9,044. For the three months ended September
30, 1999 the translation gain was $29 and the comprehensive income was
$210.
See accompanying notes to unaudited consolidated financial statements.
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SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,126) $(9,054)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 510 438
Loss on disposal of fixed assets 64
Stock Option Compensation -- (24)
Amortization of Deferred Finance costs 994 850
Settlement Expenses -- 2,718
Extinguishment of Debt -- 1,657
Shares issued in lieu of debt 107
Changes in assets and liabilities:
Trade Receivables 228 11
Non-trade Receivables 139 (1,067)
Inventory (62) 205
Prepaids and deposits 76 997
Accounts payable and accrued
Liabilities (1,403) 980
Deferred License Fees 3,044 100
------- -------
Net Cash Used in Operating Activities $ (600) $(2,018)
======= =======
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment $ (149) $(2,074)
------- -------
Net Cash Used in Investing Activities $ (149) $(2,074)
======= =======
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Issuance of Ordinary shares from
Exercise of Options and Warrants $ 490 $ 118
Proceeds from Notes Payable issued net of
$249,000 cash finance costs -- $ 4,751
------- -------
Net Cash Provided By Financing Activities $ 490 $ 4,869
======= =======
</TABLE>
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SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
------- ------
<S> <C> <C>
Effect of exchange rate changes on cash (25) 10
NET INCREASE (DECREASE) IN CASH ------- ------
AND CASH EQUIVALENTS $ (284) $ 787
Cash and cash equivalents at the beginning
of period 1,840 808
Cash and Cash Equivalents at the ------- ------
end of the period $1,556 $1,595
====== ======
</TABLE>
Supplemental disclosures of cash flow information are as follows:
Amounts Paid
(in $ thousands)
2000 1999
-------- --------
Interest $ 590 $ 59
Income Taxes -- --
See accompanying notes to unaudited consolidated financial statements
7
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SENETEK PLC AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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, 2000 and September 30,1999. CCSI was incorporated on
June 21, 1995 and commenced its operations 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 unaudited consolidated financial statements have been prepared
in accordance with U.S. generally accepted accounting principles (U.S.
GAAP) and 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. 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 unaudited statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1999
Annual Report on Form 10-K.
Results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of results to be achieved for the full fiscal year.
2. Liquidity
The Company has funded losses of $1.0 million and $4.1 million for the
three and nine months ended September 30, 2000 from (a) revenues, (b) a $3
million license fee received in the second quarter, and (c) approximately
$0.5 million of proceeds received in connection with the exercise of
options. Management has reduced operational expenditures through the
elimination of non essential facilities, reduction in staffing, improved
purchasing efficiencies and the out licensing of non-core product lines.
In June 2000 we received a $3 million non-refundable license fee from
Revlon Consumer Products in exchange for worldwide rights for Kinetin in
the mass market, excluding parts of Asia. Revenue will be recognized over
the term of the license agreement. In connection with the Revlon licensing
agreement we issued to Revlon 1.0 million warrants to purchase an
equivalent number of Senetek PLC Ordinary shares at an exercise price of
$6.00 per share. These warrants expire three years from the date of
issuance. The fair value of the warrants issued was calculated as $762,000
using the Black Scholes option pricing model, assuming an expected life of
3 years, annualized volatility of 92% and a risk free investment return of
6.0% per annum. The $762,000 deferred financing cost has been netted
against the $3.0 million deferred license income and will be amortized over
the term of the agreement.
Under the terms of an agreement dated December 13, 1999 the Company issued
to a capital equipment supplier a Convertible Promissory Note for $700,000
in exchange for an equivalent amount previously recorded in accounts
payable. The Note was due for repayment on August 1, 2000. We are currently
proposing revised repayment terms with the supplier. In accordance with the
terms of the agreement we are accruing interest from August 1, 2000 on the
outstanding debt. The terms of the agreement give the supplier rights of
8
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recovery by pledge of certain of the Company's accounts receivable.
In April 1999 we received $4.8 million (net of expenses) in cash and
refinanced $2,389,000 of our previously outstanding indebtedness that would
have been due in April 2000 for two new notes bearing interest at 9% per
annum and maturing in April 2002.
Research and development spending has decreased as our Invicorp erectile
dysfunction product reaches the final stages of development in Europe with
most costs recognized by September 30,2000. However, we expect future
research and development spending for sexual dysfunction products to
increase significantly as we commence trials for Invicorp in the U.S. and
start development work on the topical peptide program with Tel Aviv
University and the Weizmann Institute of Science in Israel.
Our patented Kinetin product was made commercially available during the
first quarter of 1999 by reason of a distribution agreement entered into
with ICN Pharmaceuticals Inc. Additional license agreements have been
entered into with OMP Inc.(December 1999), Revlon Consumer Products (June
2000) and The Body Shop (June 2000).
Our cash position at September 30, 2000 was $1,556,000 and this cash
position is expected to fund operations through Fiscal 2000. The company
expects to acquire additional sources of liquidity, either through an
increase in revenue or external sources, to fund its operations during
fiscal year 2001 and beyond. There can, however, be no assurance that we
will generate sufficient revenues over the coming 12 months or that we will
be able to obtain necessary financing from external sources.
3. Financing Activities
In April 1999 we received $4,751,000 (net of $249,000 in expenses) in cash
and refinanced the balance owed of $2,389,000 under a 1998 Credit Agreement
in exchange for new notes bearing interest at 9% per annum and maturing in
April 2002. The notes require semi annual payment of interest only until
maturity and are secured by the Company's assets.
The Company issued Series A warrants to purchase an aggregate of 738,857
ordinary shares at $1.50 per share (subject to downward adjustment under
certain circumstances), expiring in five years in connection with this
agreement. Series B and C warrants to purchase approximately 3.3 million
and 1.2 million Ordinary shares at $1.50 and $2 per share were issued in
connection with the Agreement but are only exercisable to the extent
$7,389,000 is not repaid in cash. The Series B and C warrants expire in ten
years.
The fair value of 500,000 of the Series A warrants and all of the Series B
warrants was determined to be $3.1 million using the Black Scholes model.
The fair value of these warrants will be amortized over the life of the new
notes because such warrants, under the terms of the financing agreement,
were issued in connection with the $5.0 million new financing. On the other
hand, the $1.0 million fair value of the remaining 238,857 Series A
warrants and all of the Series C warrants were included in the loss on
extinguishment of debt discussed below as these warrants were issued to
refinance existing debt under the terms of the
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April 1999 financing agreement.
As the outstanding borrowings under the 1998 Credit Agreement were
refinanced by notes with substantially different terms as defined by EITF
96-19, Debtors Accounting for a Modification or Extinguishment of Debt
Instruments, (EITF 96-19), the Company is required to recognize the
difference between the fair value of the new notes issued to refinance the
old debt and the carrying value of the old debt net of unamortized issuance
costs as a loss on the extinguishment of debt. During the three months
ended June 30,1999, the Company recognized a $1.7 million loss on the
extinguishment of debt.
Also, in April 1999 the Company entered into a settlement agreement to
resolve the terms of various transactions that had been entered into by the
previous management of the Company. The settlement terms involved the
issuance of 2,300,000 Series A warrants and 625,000 new Ordinary shares.
Accordingly the Company has recorded $2.7 million of expense in the second
quarter of 1999 related to the settlement terms. Included in the $2.7
million settlement expense is an estimate related to the fair value of the
625,000 ordinary shares based on the August 19, 1999 share closing price.
4. Inventory at cost, net of reserves comprises:
September 30, December 31,
2000 1999
-------- ------------
(in thousands)
Finished Goods $ 40 $ 44
Raw Materials 533 467
---- ----
$573 $511
5. Options during the nine months ended September 30, 2000:
The Company issued new Ordinary shares amounting to 283,600 through the
exercise of options under the Company's approved plans at an average price
of $1.73 per share.
Options were granted under the Company's No. 1 plan for employees amounting
to 320,000, at exercise prices ranging from $1.41 to $2.03.
6. Earnings (loss) per Share
Earnings (loss) per share were computed under the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share. The
following is a reconciliation of the numerators and denominators of basic
and diluted earnings per share computations.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
(in thousands) (in thousands)
Numerator:
Basic and Diluted Net (Loss) income
Per ordinary share outstanding $ (982) $ 181 $(4,126) $(9,054)
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Denominator:
Basic and diluted weighted average 58,431 57,561 58,389 57,416
Options and warrants to purchase 14,325,073 shares of stock were
outstanding at September 30,2000 and options and warrants to purchase
14,112,231 shares of stock were outstanding at September 30,1999 but were
not included in the computation of diluted loss per Ordinary share
outstanding because the effect would have been antidilutive.
7. Segment Reporting
Three months ended September 30,2000
(in thousands)
Pharmaceutical Skincare Total
--------------- -------- --------
Net sales to external customers $ 266 $ 957 $ 1,223
Operating (loss) income (929) 451 (478)
(Loss) income before taxation (1,407) 425 (982)
Three months ended September 30,1999
(in thousands)
Pharmaceutical Skincare Total
-------------- -------- --------
Net sales to external customers $ 297 $ 3,108 $ 3,405
Operating (loss) income (1,169) 1,562 393
(Loss) income before taxation (1,271) 1,452 181
Nine months ended September 30,2000
(in thousands)
Pharmaceutical Skincare Total
-------------- -------- --------
Net sales to external customers $ 928 $ 2,053 $ 2,981
Operating (loss) income (3,040) 411 (2,629)
(Loss) income before taxation (4,455) 329 (4,126)
Nine months ended September 30,1999
(in thousands)
Pharmaceutical Skincare Total
--------------- -------- --------
Net sales to external customers $ 949 $ 5,149 $ 6,098
Operating (loss) income (5,618) 1,914 (3,704)
(Loss) income before extraordinary (9,060) 1,663 (7,397)
item and taxation
8. Recently issued accounting pronouncements
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements: ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of
revenue in the financial statements. The guidance in SAB 101, as amended by
SAB 101B, is required to be followed starting with the fourth quarter of
the current fiscal year. The Company does not believe that the guidance
contained in SAB 101 will have a material affect
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on the Company's financial results.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock
Compensation, and Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes
of applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards in
a business combination. FIN 44 is effective July 2, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998,
or January 12, 2000. The Company believes that the impact of FIN 44 will not
have a material effect on the Company's financial position or results of
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
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,
1999.
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 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.
RESULTS OF OPERATIONS
REVENUES
Sales of pharmaceutical products includes sales of monoclonal antibodies and
named patient pharmaceutical products.
Our product sales revenues of $1,223,000 for the third quarter of 2000
comprised of $266,000 from the sale of pharmaceutical products and $957,000 from
the sale of Kinetin products and skincare products.
Our product sales revenues of $3,405,000 for the third quarter of 1999
comprised $297,000 from the sale of pharmaceutical products and $3,108,000 from
the sale of Kinetin products and skincare products.
The 10.4% decrease in pharmaceutical products sales for the third quarter of
2000 compared to the third quarter of 1999 was due to a decrease in sales
volume.
The 69.2% sales decrease in Kinetin and skincare products sales for the third
quarter of 2000 compared to the third quarter of 1999 was due mainly to a
decrease in the sale of Kinetin products to ICN Pharmaceuticals. ICN has been
reducing its inventory of Kinerase and has placed a purchase order for product
delivery in the fourth quarter.
Our product sales revenues of $2,981,000 for the first nine months of 2000
comprised $928,000 from the sale of pharmaceutical products and $2,053,000 from
the sale of Kinetin products and skincare products.
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Our product sales revenues of $6,098,000 for the first nine months of 1999
comprised $949,000 from the sale of pharmaceutical products and $5,149,000 from
the sale of Kinetin products and skincare products.
The 2.2% decrease in pharmaceutical products sales for the first nine months of
2000 compared to the first nine months of 1999 was due to a decrease in sales
volume.
The 60.1% sales decrease in Kinetin and skincare products sales for the first
nine months of 2000 compared to the first nine months of 1999 was due to three
factors. Increased Kinetin product sales to Obaji Medical Products were offset
by a decrease in direct sales of Mill Creek products, which have been replaced
with quarterly royalties, and a decrease in sales of Kinetin products to ICN
Pharmaceuticals. ICN has been reducing its inventory of Kinerase and has placed
an order for product delivery in the fourth quarter.
COST OF GOODS SOLD
Despite fluctuations in revenue we have been able to maintain and slightly
improve our gross margins.
Cost of goods sold for the third quarter of 2000, which includes contract
manufacturing and material costs, was $476,000, down 64.5% from $1,340,000 in
the third quarter of 1999. The reduction is due mainly to a decrease in sales
volumes as a result of the out-licensing of the Mill Creek and Silver Fox lines
for which the company receives royalties. We have also derived savings from the
implementation of a cost reduction program which combines more efficient in
house procurement systems including stricter vendor selection criteria.
In the Pharmaceutical Sector, cost of goods sold for the third quarter of 2000
was $189,000, up 170% from $70,000 in the third quarter of 1999. This is due
mainly to a change in the method of determining royalties on the sale of
monoclonal antibodies to our licensor and the payment of a management fee to a
new distributor. Offsetting this was a decrease in named patient sales
resulting from an interruption of Invicorp supply during repositioning of the
product in a more cost efficient drug delivery device.
In the Skincare Sector, cost of goods sold for the third quarter of 2000 was
$287,000, a decrease of 77.4% from $1,270,000 in the third quarter of 1999. This
is due mainly to a 69.2% decrease in net sales of skincare products that
included a reduction in sales volumes as a result of out-licensing all of the
Mill Creek and Silver Fox lines for which the Company receives royalties. We
have also derived savings from the implementation of a cost reduction program
that combines more efficient in house procurement systems including stricter
vendor selection criteria.
Cost of goods sold for the first nine months of 2000, which includes contract
manufacturing and material costs, was $1,178,000, down 53.9% from $2,553,000 in
the first nine months of 1999. The decrease is due mainly to a 60.1% decrease in
net sales in the skincare sector that included a reduction in sales volumes as a
result of the out-licensing of the Mill Creek and Silver Fox lines for which the
Company receives royalties. We have also derived savings from the implementation
of a cost reduction program which combines more efficient in house procurement
systems including stricter vendor selection criteria.
In the Pharmaceutical Sector, cost of goods sold for the first nine months of
2000 was $445,000, up 29.0% from $345,000 in the first nine months of 1999. This
is due mainly to an adjustment to royalties payable on the sale of monoclonal
antibodies to our licensor and the payment of a management fee to a new
distributor. Off setting this was a decrease in named patient sales resulting
from an interruption of Invicorp supply during repositioning of the product in a
more cost efficient drug delivery device.
In the Skincare Sector, cost of goods sold for the first nine months of 2000 was
$733,000, a decrease of 66.8% from $2,208,000 in the first nine months of 1999.
This is mainly due to a 60.1% decrease in net sales that include a reduction in
sales volumes as a result of the out-licensing of the Mill Creek and Silver Fox
lines for which the company receives royalties.
13
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The table below shows the cost of goods sold and the resulting gross profit as a
percentage of revenues for the relevant reporting periods.
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
Cost of Goods Sold 39% 39% 40% 42%
Gross Profit 61% 61% 60% 58%
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and Development expenditures for the third quarter of 2000 were
$55,000, a decrease of 92.4% from $720,000 in the third quarter of 1999. This
reduction in expenditures results from improved efficiencies in our R&D programs
and decreased spending for the development of Invicorp and Adrenaject as both
projects near final stages of development.
Pharmaceutical Sector research and development accounted for 87.5% of our total
research and development spending for the third quarter of 2000, compared to
98.6% for the third quarter of 1999. The decreased expenditure is due mainly to
the fact that development spending for Invicorp in Europe has reached final
stages and we have recognized savings arising from the closure of our St. Louis
research operations in August 1999.
In August 1999 Senetek announced that it had received word from the Medicines
Control Agency of the United Kingdom and the Federal Food and Drug
Administration of the US that a competitor's safety trial on phentolamine
mesylate revealed preclinical tumors (proliferation of brown fat cells). The
Committee on Safety of Medicines in the UK met at the end of July to review the
phentolamine situation. We received a letter dated August 8, 2000 from the
Medicines Control Agency confirming that the Committee on the Safety of
Medicines had advised the Medicines Control Agency that the development of
hibernomas in rat carcinogenicity studies with phentolamine mesylate does not
represent a significant carcinogenic risk to humans. The Medicines Control
Agency went on to say that as there is no longer a safety concern with Invicorp,
it has lifted the clinical hold on Invicorp.
In October 2000 the Medicines Control Agency granted Senetek a Marketing
Authorization Approval for Invicorp in the United Kingdom. In June 2000 the
Medicines Assessment Advisory Committee granted Senetek a Marketing
Authorization Approval for Invicorp in New Zealand. In July 1998 the Danish
Medicines Agency granted Senetek a Marketing Authorization Approval for Invicorp
in Denmark.
Research and Development expenditure for the first nine months of 2000 was
$743,000, a decrease of 69.0% from $2,400,000 incurred in the first nine months
of 1999. This reduction in expenditures results from improved efficiencies in
our R&D programs and decreased spending for the development of Invicorp and
Adrenaject as both projects near final stages of development.
However, we expect future research and development spending for sexual
dysfunction to increase significantly as we prepare for Invicorp clinical trials
in the U.S. and start development work on the topical peptide program with The
University of Tel Aviv and the Weizmann Institute of Science in Israel.
Pharmaceutical Sector research and development accounted for 94.1% of our
total research and development spending for the first nine months of 2000,
compared to 98.5% for the first nine months of 1999.
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GENERAL AND ADMINISTRATION
General and Administration expenses for the third quarter of 2000 totaled
$1,170,000, an increase of 23.5% from $947,000 in the third quarter of 1999.
This is mainly due to increased legal expenses in connection with the Osmotics
litigation, the negotiation of additional commercial agreements and the
development of a rigorous patent and trademark strategy to protect our key
intellectual property, and a one time credit of $840,000 recorded in the third
quarter of 1999 for the cancellation of unvested stock compensation accruals
relating to prior management.
Pharmaceutical Sector general & administrative expenses for the third quarter of
2000 totaled $958,000, an increase of 40.3% from $683,000 in the third quarter
of 1999. This is mainly due to increased legal expenses in connection with the
Osmotics litigation, the negotiation of additional commercial agreements and the
development of a rigorous patent and trademark strategy to protect our key
intellectual property, and a one time credit of $840,000 recorded in the third
quarter of 1999 for the cancellation of unvested stock compensation accruals
relating to prior management.
Skincare Sector general and administration expenses for the third quarter of
2000 totaled $212,000, a decrease of 19.7% from $264,000 in the third quarter of
1999. This is due mainly to operational savings resulting from cost reduction
programs combined with stricter management controls.
General and Administration expenses for the first nine months of 2000 totaled
$3,689,000, a decrease of 20.2% from $4,625,000 in the first nine months of
1999.
Pharmaceutical Sector general & administration expenses for the first nine
months of 2000 totaled $2,824,000, a decrease of 23.5% from $3,693,000 in the
first nine months of 1999. This decrease is mainly due to the net savings
arising from the results of cost reduction programs implemented in the second
quarter of 1999 combined with stricter management controls.
Skincare Sector general and administration expenses for the first nine months of
2000 totaled $865,000, a decrease of 7.2% from $932,000 in the first nine months
of 1999. This decrease is mainly due to the net savings arising from the results
of cost reduction programs implemented in the second quarter of 1999 combined
with stricter management controls.
MARKETING AND PROMOTION
We incurred no marketing and promotion expenses in the third quarter of 2000, a
decrease of 100% from $5,000 in the third quarter of 1999. This decrease is due
to the elimination of non-essential advertising and marketing consulting
spending.
We incurred no marketing and promotion expenses in the first nine months of
2000, a decrease of 100.0% from $224,000 in the first nine months of 1999. The
decrease is due to the elimination of non-essential marketing expenditures.
OPERATING LOSS
The operating loss for the third quarter of 2000 totaled $478,000, an increase
of 222% from operating income of $393,000 in the third quarter of 1999.
The operating loss in the pharmaceuticals sector for the third quarter of 2000
totaled $929,000, a decrease of 20.5% from $1,169,000 in the third quarter of
1999. This is mainly due to the results of our cost reduction program.
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The operating income in the skincare sector for the third quarter of 2000
totaled $451,000, a decrease of 71.1% from operating income of $1,562,000 in the
third quarter of 1999. This was mainly due to decreased sales of Kinetin and
skincare products.
The operating loss for the first nine months of 2000 totaled $2,629,000, a
decrease of 29.0% from $3,704,000 in the first nine months of 1999.
The operating loss in the pharmaceuticals sector for the first nine months of
2000 totaled $3,040,000, a decrease of 45.9% from $5,618,000 in the first nine
months of 1999. This is mainly due to the results of our cost reduction program
and maximized utilization of company resources.
The operating income in the skincare sector for the first nine months of 2000
totaled $411,000, a decrease of 78.5% from an operating income of $1,914,000 in
the first nine months of 1999. This was mainly due to decreased net sales of
Kinetin and skincare products.
OTHER INCOME AND EXPENSE AND EXTRAORDINARY ITEM
Included in other expense for the third quarter of 2000 is interest expense on
notes payable of $7,389,000 amounting to $166,000. Also included in other
expense for the third quarter of 2000 is $300,000 relating to the amortization
of deferred financing costs arising from the calculation of the fair value of
the Series A and B warrants issued in connection with the notes payable.
Included in other expense for the first nine months of 2000 is interest expense
on notes payable of $7,389,000 amounting to $500,000. Also included in other
expense for the first nine months of 2000 is $900,000 relating to the
amortization of deferred financing costs arising from the calculation of the
fair value of the Series A and B warrants issued in connection with the notes
payable.
Included in other expense for the first nine months of 1999 is $2.7 million
relating to the fair value of Series A warrants and Ordinary shares issued to
Windsor Capital and others for the settlement of disputes arising from
commitments made by the previous management of the Company. Also included were
deferred financing costs of $205,000 arising from the calculation of the fair
value of warrants issued in connection with a 1998 Line of Credit which was
extinguished in April 1999.
The Company refinanced $2.4 million of this debt during the second quarter of
1999. The terms of the refinance represented a substantial modification of the
original terms resulting in a $1.7 million extraordinary loss on extinguishment
of debt.
TAXATION
Gross deferred tax assets, which approximate $29.7 million, and relate
periodically to substantial cumulative net operating losses incurred are 100%
reserved as realization is not considered more probable than not.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2000, the Company's liquidity represented by
cash and deposits at banks decreased by $284,000 to $1,556,000.
Net cash used in operating activities from continuing operations totaled
$600,000 in the first nine months of 2000, a decrease of $1,418,000 from the
first nine months of 1999. The overall reduction in net cash used by operating
activities was partially attributed to a $622,000 decrease in operating losses
adjusted for non cash expenses and $796,000 for changes in assets and
liabilities. The change in assets and liabilities includes a licensing fee of $3
million from Revlon, which is referred to below. Also included in the changes in
assets and liabilities are the reduction of accounts payable by $1.4 million
from our December 31, 1999 position. Our consolidation and corporate cost
reduction programs have reduced our operating costs.
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In June 2000 we received a $3,000,000 non refundable license fee from Revlon
Consumer Products in return for the rights to distribute Kinetin products in the
global mass market excluding certain Asian countries. These monies and the
financing completed in April 1999 have thus far proved sufficient to fund our
development activities and operating costs. This fee will be recognized in
income over the term of the license agreement.
Under the terms of an agreement dated December 13, 1999 the Company issued to a
capital equipment supplier a Convertible Promissory Note for $700,000 in
exchange for an equivalent amount previously recorded in accounts payable. The
Note was due for repayment on August 1, 2000. We are currently proposing revised
repayment terms with the supplier. In accordance with the terms of the agreement
we are accruing interest from August 1, 2000 on the outstanding debt. The terms
of the agreement give the supplier rights of recovery by pledge of certain of
the Company's accounts receivable.
HISTORY OF LOSSES
Although we were formed almost 16 years ago in October 1983, 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 produced $31,362,000 in gross revenues and has cumulative losses of
$87,956,000 (including a net loss of $11,862,000 in fiscal 1999).
There can be no assurance that marketing of our biopharmaceutical products 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, 2000, and periods thereafter.
Our recent licensing agreements with Revlon and The Body Shop for the mass and
alternative markets, OMP Inc. and Rohto Pharmaceuticals for Japan, and OMP Inc.
for Taiwan, Hong Kong and Singapore are scheduled to provide us with additional
royalty incomes based on the licensees net sales during the first half of 2001.
With respect to our recurring operating cash losses, we have implemented major
cost reduction programs in 1999 and 2000 to reduce operating expenses to
include:
- In the UK, effective May 31, 1999 we combined two offices into one
with a 55% reduction in staff.
- In the US, further cost savings occurred upon closing our St Louis
research facility and combining these operations with our Napa
headquarters during the second half of 1999.
- Substantial reduction of costs in the areas of payroll, equipment
leasing costs, advertising and travel related expense, consulting
fees.
- In the US, the licensing of our Mill Creek product line in the second
quarter of 1999, enabled us to reduce substantially our Carme
Cosmeceutical Sciences operation. In May 2000 we entered into an
agreement to sublet 8,500 sq. ft of warehouse space in our Napa
facility to a third party on a month to month basis.
NEED FOR FINANCING
Our cash position at year-end 1999 was $1,840,000, the Company's current cash
position is $1,556,000 and this cash position is expected to fund operations
through Fiscal 2000. The
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company expects to acquire additional sources of liquidity, either through an
increase in revenue or external sources, to fund its operations during fiscal
year 2001 and beyond. There can, however, be no assurance that we will generate
sufficient revenues over the coming 12 months or that we will be able to obtain
necessary financing from external sources.
FACTORS AFFECTING THE COMPANY
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, 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.
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.
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Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risks include fluctuations in interest rates, variability in
interest rate spread relationships (i.e., Prime to LIBOR spreads) and exchange
rate variability.
We believe that fluctuations in interest rates and currency exchange rates in
the near term would not materially affect our consolidated operating results,
financial position or cash flows as we have limited risks related to interest
rate and currency exchange rate fluctuations.
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 for a
breach of that agreement. Mad Dogs served us with an answer to our complaint in
August 1998. There have been no substantive developments in the lawsuit since
the filing of the answer to our complaint.
During January 2000, Senetek and CCSI terminated the licensing agreement with
Osmotics Corporation for multiple breaches of contract, including non-payment of
royalties and selling outside its authorized channel of distribution. The
dispute is now pending before the American Arbitration Association (AAA).
Osmotics claims that it owes no royalties or damages arising from post-
termination or other infringement of Senetek's Kinetin patents, because the
patents are invalid. In August 2000 Osmotics filed suit in the United States
District Court for the Northern District of California seeking a declaratory
judgment that Senetek's Kinetin-related patents are invalid. Senetek and CCSI
intend to defend Osmotics' claims vigorously. Senetek and CCSI seek to have
their claims of breach of contract decided by the panel of AAA arbitrators in
Los Angeles, California pursuant to the arbitration provision in the licensing
agreement with Osmotics, notwithstanding Osmotics' filing of the declaratory
judgment on patent issues in Federal District Court. Management does not feel
that the termination of the Osmotics license agreement, the AAA dispute, nor
Osmotics' request for declaratory judgment will have a material adverse effect
on the company.
Item 2. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 2000.
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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)
Date: November 8, 2000 /S/ FRANK J MASSINO
------------------ ------------------------
Frank J Massino
Chief Executive Officer
Date: November 8, 2000 /S/ STEWART W SLADE
------------------ ------------------------
Stewart W Slade
Acting Principal Financial and
Accounting Officer
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