<PAGE>
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 June 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
--------------------------------------------------------------------------------
(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
--------------------------------------------------------------------------------
(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 August 11, 2000, there were 58,421,117
of the Registrant's Ordinary shares outstanding
<PAGE>
SENETEK PLC AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 - Financial Statements
Unaudited Consolidated Statements of Operations
Three Months Ended June 30, 2000 and June 30, 1999 3
Six Months Ended June 30, 2000 and June 30, 1999
Consolidated Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999 4
Unaudited Consolidated Statement of Stockholders' Deficit
and Comprehensive Loss Six Months ended June 30, 2000 5
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and June 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 11
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk. 18
PART II. OTHER INFORMATION 18
SIGNATURES 20
</TABLE>
<PAGE>
Part I Financial Information
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $ 778 $ 1,759 $ 1,758 $ 2,693
Cost of Sales 280 620 702 1,213
------- ------- ------- -------
Gross Profit 498 1,139 1,056 1,480
Operating Expenses:
Research & Development 398 811 688 1,680
General & Administration 1,379 2,093 2,519 3,678
Marketing & Promotion -- 128 -- 219
------- ------- ------- -------
Total Operating Expenses 1,777 3,032 3,207 5,577
------- ------- ------- -------
Loss from Operations (1,279) (1,893) (2,151) (4,097)
Other income (expense):
Settlement Expense (Note 3) -- (2,718) -- (2,718)
Interest Income 8 40 15 41
Interest Expense (Including
amortization of deferred financing
costs and discount) (505) (443) (1,003) (650)
Other (3) (144) (5) (154)
------- ------- ------- -------
Loss before extraordinary loss on
extinguishment of debt (1,779) (5,158) (3,144) (7,578)
Extraordinary Loss on
extinguishment of debt(Note 3) -- (1,657) -- (1,657)
------- ------- ------- -------
Net loss available to common
stockholders $(1,779) $(6,815) $(3,144) $(9,235)
======= ======= ======= =======
Basic and diluted loss before
extraordinary item per
Ordinary share outstanding $ (0.03) $ (0.09) $ (0.05) $ (0.13)
Basic and diluted loss from
extinguishment of debt per
Ordinary share outstanding $ (0.00) $ (0.03) $ (0.00) $ (0.03)
Basic and diluted loss per
Ordinary share outstanding $ (0.03) $ (0.12) $ (0.05) $ (0.16)
Weighted average
Ordinary shares
Outstanding 58,416 57,258 58,343 57,237
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 2,575 $ 1,840
Trade Receivables
(net of provisions of $911,306 at June 30, 2000 and $776,306
December 31, 1999) 959 1,234
Non-Trade Receivables
(net of provisions of $126,504 at June 30, 2000 and $261,504
December 31, 1999) 49 188
Inventory
(net of provisions of $160,065 at June 30, 2000 and
December 31, 1999) 472 511
Prepaids and Deposits 60 183
-------- --------
Total Current Assets 4,115 3,956
Property & Equipment, net 3,945 4,060
Goodwill - net 1,564 1,631
Deferred Financing costs - net 1,981 2,581
-------- --------
TOTAL ASSETS $ 11,605 $ 12,228
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts Payable 1,579 2,230
Accrued Liabilities 594 1,095
Capital Leases 89 42
Convertible Short Term Debt 700 700
Accrued Compensation on Stock Options
- Employees 2,213 2,213
- Non-employees 2,484 2,484
-------- --------
7,659 8,764
Long Term Liabilities
Notes Payable
(net of unamortized discount of $224,792 at June 30, 2000
and $287,792 at December 31, 1999) 7,164 7,101
Deferred License Fees 2,887 543
-------- --------
Total Liabilities $ 17,710 $ 16,408
-------- --------
Commitments and Contingencies -- --
Stockholders' (Deficit):
Ordinary shares $0.08 (5 pence) par value:
Authorized shares: 100,000,000
Issued and outstanding shares:
June 30, 2000 - 58,421,117
December 31, 1999 - 58,148,517 4,719 4,697
Share Premium 76,117 74,903
Accumulated Deficit (86,974) (83,830)
Equity Adjustment from Foreign Currency Translation 33 50
-------- --------
Total Stockholders' (Deficit) $ (6,105) $ (4,180)
======== ========
Total Liabilities and Stockholders' (Deficit) $ 11,605 $ 12,228
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
FOR THE SIX MONTHS ENDED JUNE 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 272,600 22 452 -- -- 474
One million warrants issued in connection
with Revlon Licensing Agreement 762 762
Comprehensive Loss
Net loss -- -- -- (3,144) -- (3,144)
Translation loss, net of tax -- -- -- -- (17) (17)
---------- ------ ------- ----------- ----------- --------
Total Comprehensive Loss (3,144) (17) (3,161)
---------- ------ ------- ----------- ----------- --------
Balances, June 30, 2000 58,421,117 $4,719 $76,117 $ (86,974) $ 33 $ (6,105)
========== ====== ======= =========== =========== ========
</TABLE>
(1) For the three months ended June 30, 2000 the translation loss was $0 and
the comprehensive loss was $1,365.
For the six months ended June 30, 1999 the translation loss was $19 and the
comprehensive loss was $9,235. For the three months ended June 30, 1999 the
translation gain was $75 and the comprehensive loss $6,815.
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,144) $ (9,235)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 332 320
Stock Option Compensation -- 744
Amortization of Deferred Finance costs 663 500
Settlement Expenses -- 2,718
Extinguishment of Debt -- 1,657
Changes in assets and liabilities:
Trade Receivables decrease 275 408
Non-trade Receivables decrease/(increase) 139 (138)
Inventory decrease/(increase) 39 (37)
Prepaids and deposits decrease 123 156
Accounts payable and accrued Liabilities
(decrease) (1,106) (434)
Deferred License Fees increase 3,106 100
-------- --------
Net Cash Provided/(Used)by Operating Activities $ 427 $ (3,241)
======== ========
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment $ (149) $ (113)
-------- --------
Net Cash Used by Investing Activities $ (149) $ (113)
======== ========
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Issuance of Ordinary shares from
Exercise of Options and Warrants $ 474 $ 118
Proceeds from Notes Payable issued net of
$249,000 cash finance costs -- 4,751
-------- --------
Net Cash Provided By Financing Activities $ 474 $ 4,869
======== ========
</TABLE>
6
<PAGE>
SENETEK PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
2000 1999
-------- --------
Effect of exchange rate changes on cash (17) (19)
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 735 $ 1,496
Cash and cash equivalents at the beginning
of period 1,840 808
------- -------
Cash and Cash Equivalents at the
end of the period $ 2,575 $ 2,304
======= =======
Supplemental disclosures of cash flow information are as follows:
Amounts Paid
(in $ thousands)
2000 1999
------- -------
Interest $ 590 $ 150
Income Taxes -- --
See accompanying notes to unaudited consolidated financial statements
7
<PAGE>
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 six months
ended June 30, 2000. 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 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 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 six months ended June 30, 2000 are not
necessarily indicative of results to be achieved for the full fiscal year.
2. Liquidity
The Company has funded losses of $1.8 million and $3.1 million for the
three and six months ended June 30, 2000 from revenues and existing
resources, including a $3 million license fee recorded this quarter.
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. In connection with the Revlon
licensing agreement we issued to Revlon 1.0 million 3 year share warrants
to purchase an equivalent number of Senetek PLC Ordinary shares at an
exercise price of $6.00 per share. 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.
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 8% per
annum and maturing in April 2002.
Research and development spending has decreased as our Invicorp sexual
dysfunction product reaches the final stages of development in Europe with
most costs recognized by June 30,2000. However, we expect future research
and development spending for sexual dysfunction 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.
8
<PAGE>
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) OMP Inc. and Rohto
Pharmaceuticals (March 2000) Revlon Consumer Products (June 2000) and The
Body Shop (June 2000).
Our cash position at year-end 1999 was $1,840,000, the Company's current
cash position is $2,000,000 and the improved 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 funding sources, to fund its operations during fiscal year 2000
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 8% 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 3,333,333 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 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 unamoritized
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 we 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 involve the issue 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.
9
<PAGE>
4. Inventory at cost, net of reserves comprises:
June 30, December 31,
2000 1999
-------- ------------
(in thousands)
Finished Goods $ 41 $ 44
Raw Materials 431 467
---- ----
$472 $511
5. Options during the six months ended June 30, 2000:
The Company issued new Ordinary shares amounting to 272,600 through the
exercise of options under the Company's approved plans at an average price
of $1.74 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 per Share
Earnings 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Numerator:
Basic and Diluted Net Loss
Per ordinary share outstanding $ 1,779 $ 6,815 $ 3,144 $ 9,235
Denominator:
Basic and diluted weighted average 58,416 57,258 58,343 57,237
</TABLE>
Options and warrants to purchase 14,325,073 shares of stock were
outstanding at June 30,2000 and options and warrants to purchase 16,262,231
shares of stock were outstanding at June 30,1999 but were not included in
the computation of diluted loss per Ordinary share outstanding because the
effect would have been antidilutive.
10
<PAGE>
7. Segment Reporting
Three months ended June 30,2000
(in thousands)
Pharmaceutical Skincare Total
-------------- -------- --------
Net sales to external customers $ 360 $ 418 $ 778
Operating loss (1,088) (191) (1,279)
Loss before taxation (1,588) (191) (1,779)
Three months ended June 30,1999
(in thousands)
Pharmaceutical Skincare Total
-------------- -------- --------
Net sales to external customers $ 355 $1,404 $ 1,759
Operating loss (income) (2,662) 769 (1,893)
(Loss) income before extraordinary (5,818) 660 (5,158)
item
Six months ended June 30,2000
(in thousands)
Pharmaceutical Skincare Total
-------------- -------- --------
Net sales to external customers $ 662 $1,096 $ 1,758
Operating loss (2,111) (40) (2,151)
Loss before taxation (3,049) (95) (3,144)
Six months ended June 30,1999
(in thousands)
Pharmaceutical Skincare Total
-------------- -------- --------
Net sales to external customers $ 651 $2,042 $ 2,693
Operating loss(income) (4,449) 352 (4,097)
(Loss) income before extraordinary (7,746) 168 (7,578)
item
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
11
<PAGE>
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 $778,000 for the second quarter of 2000
comprised of $360,000 from the sale of pharmaceutical products and $418,000 from
the sale of Kinetin products and skincare products.
Our product sales revenues of $1,759,000 for the second quarter of 1999
comprised $355,000 from the sale of pharmaceutical products and $1,404,000 from
the sale of Kinetin products and skincare products.
The 1.1% increase in pharmaceutical products sales for the second quarter of
2000 compared to the second quarter of 1999 was due to an increase in sales
volume.
The 70.2% sales decrease in Kinetin and skincare products sales for the second
quarter of 2000 compared to the second quarter of 1999 was due mainly to a
decrease in supply of Kinetin products to ICN Pharmaceuticals. ICN has advised
us that it is reducing its inventory of Kinerase in preparation of launching
our proprietary new and enhanced Kinerase products. ICN has advised us that it
has increased its user base from 2000 to 4500 direct accounts.
Our product sales revenues of $1,758,000 for the first six months of 2000
comprised $662,000 from the sale of pharmaceutical products and $1,096,000 from
the sale of Kinetin products and skincare products.
Our product sales revenues of $2,693,000 for the first six months of 1999
comprised $651,000 from the sale of pharmaceutical products and $2,042,000 from
the sale of Kinetin products and skincare products.
The 1.7% increase in pharmaceutical products sales for the first six months of
2000 compared to the first six months of 1999 was due to an increase in sales
volume.
The 46.3% sales decrease in Kinetin and skincare products sales for the first
six months of 2000 compared to the first six 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 advised us that it is reducing its inventory of
Kinerase in preparation of launching our proprietary new and enhanced Kinerase
products.
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 second quarter of 2000, which includes contract
manufacturing and material costs, was $280,000, down 54.8% from $620,000 in the
second 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 second quarter of 2000
was $138,000, down 7.3% from $150,000 in the second quarter of 1999.
12
<PAGE>
This reflects 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 second quarter of 2000 was
$142,000, a decrease of 70.0% from $470,000 in the second quarter of 1999. This
is due mainly to a 70.2% decrease in net sales of skincare products that
included a reduction in sales volumes as a result of out-licensing and 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 six months of 2000, which includes contract
manufacturing and material costs, was $702,000, down 42.1% from $1,213,000 in
the first six months of 1999. The decrease is due mainly to a 46.3% 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 six months of
2000 was $256,000, down 7.2% from $276,000 in the first six months of 1999.
This reflects 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 six months of 2000 was
$446,000, a decrease of 52.4% from $937,000 in the first six months of 1999.
This is mainly due to a 46.3% 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.
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 Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
Cost of Goods Sold 36% 35% 40% 45%
Gross Profit 64% 65% 60% 55%
OPERATING EXPENSES
Research & Development
Research and Development expenditures for the second quarter of 2000 were
$398,000, a decrease of 50.9% from $811,000 in the second 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 94.2% of our
total research and development spending for the second quarter of 2000, compared
to 98.8% for the second quarter of 1999. The decreased expenditure is due mainly
13
<PAGE>
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 FDA 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 do 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, the clinical hold is now lifted.
In June 2000 we received a Marketing Authorization Approval from the Medicines
Assessment Advisory Committee in New Zealand. Invicorp received approval in
Denmark in 1998 and approval in the UK is anticipated during 2000.
Research and Development expenditure for the first six months of 2000 was
$688,000, a decrease of 59.0% from $1,680,000 compared to the first six 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.
Pharmaceutical Sector research and development accounted for 94.6% of our
total research and development spending for the first six months of 2000,
compared to 98.4% for the first six months of 1999.
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.
General and Administration
General and Administration expenses for the second quarter of 2000 totaled
$1,379,000, a decrease of 34.1% from $2,093,000 in the second quarter of 1999.
This is due mainly to net savings arising from the cost reduction programs we
implemented in the second quarter of 1999. These savings are partly offset by
substantial legal expenses as we contest the Osmotics litigation and to ensure a
rigorous patent and trademark strategy to protect our key intellectual property.
Pharmaceutical Sector general & administrative expenses for the second quarter
of 2000 totaled $934,000, a decrease of 52.2% from $1,956,000 in the second
quarter of 1999. This decrease is mainly due to the net savings arising from our
cost reduction programs which were implemented during the second quarter of 1999
combined with stricter management controls. During the second quarter of 1999 we
recognized $384,000 of stock compensation expense as compared to $0 in the
second quarter of 2000.
Skincare Sector general and administration expenses for the second quarter of
2000 totaled $445,000, an increase of 225% from $137,000 in the second quarter
of 1999. This is due mainly to legal expenses incurred in connection with
licensing arrangements.
General and Administration expenses for the first six months of 2000 totaled
$2,519,000, a decrease of 31.5% from $3,678,000 in the first six months of 1999.
Pharmaceutical Sector general & administration expenses for the first six months
of 2000 totaled $1,866,000, a decrease of 38.0% from $3,010,000 in the first six
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
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management controls. During the first six months of 1999 we recognized $744,000
of stock compensation expense as compared to $0 in the first six months of 2000.
Skincare Sector general and administration expenses for the first six months of
2000 totaled $653,000, a decrease of 2.2% from $668,000 in the first six months
of 1999. We recorded approximately $300,000 of legal expenses in the second
quarter of 2000 mainly in connection with licensing arrangements.
Marketing and Promotion
Marketing and promotion expenses in the second quarter of 2000 totaled $0, a
decrease of 100% from $128,000 in the second quarter of 1999. This decrease is
due to the elimination of non-essential advertising and marketing consulting
spending.
Marketing and promotion expenses in the first six months of 2000 totaled
$0, a decrease of 100.0% from $219,000 in the first six months of 1999. The
decrease is due to the elimination of non-essential marketing expenditures.
OPERATING LOSS
The operating loss for the second quarter of 2000 totaled $1,279,000, a decrease
of 32.4% from $1,893,000 in the second quarter of 1999.
The operating loss in the pharmaceuticals sector for the second quarter of 2000
totaled $1,088,000, a decrease of 59.1% from $2,662,000 in the second quarter of
1999. This is mainly due to the results of our cost reduction program.
The operating loss in the skincare sector for the second quarter of 2000 totaled
$191,000, a decrease of 125% from a profit of $769,000 in the second quarter of
1999. This was mainly due to decreased net sales of Kinetin and skincare
products. Increased Kinetin product sales to OMP, Inc. 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 advised us that it is reducing its inventory of Kinerase in preparation of
launching our proprietary new and enhanced Kinerase products.
The operating loss for the first six months of 2000 totaled $2,151,000, a
decrease of 47.5% from $4,097,000 in the first six months of 1999.
The operating loss in the pharmaceuticals sector for the first six months of
2000 totaled $2,111,000, a decrease of 52.6% from $4,449,000 in the first six
months of 1999. This is mainly due to the results of our cost reduction program
and maximized utilization of company resources.
The operating loss in the skincare sector for the first six months of 2000
totaled $40,000, a decrease of 111% from a profit of $352,000 in the first six
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 second quarter of 2000 is interest expense on
notes payable of $7,389,000 amounting to $166,000. Also included in other
expense for the second 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 second quarter of 1999 is $2.7 million
relating to the fair value of Series A warrants and Ordinary shares issued to
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Windsor Capital and others for the settlement of disputes arising from
commitments made by the previous management of the Company.
The Company refinanced $2.4 million in 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.
Included in other expense for the first six months of 2000 is interest expense
on notes payable of $7,389,000 amounting to $332,000. Also included in other
expense for the second quarter of 2000 is $600,000 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 six 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 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.
Taxation
Gross deferred tax assets, which approximate $29.4 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 six months of 2000, the Company's liquidity represented by cash
and deposits at banks increased by $735,000 to $2,575,000.
Net cash provided by operating activities from continuing operations totaled
$427,000 in the first six months of 2000, an increase of $3,668,000 from the
first six months of 1999. The overall increase was partially attributed to a
$1,147,000 decrease in operating losses adjusted for non cash expenses and
$2,521,000 for changes in working capital. The change in working capital
includes a licensing fee of $3 million from Revlon, which is referred to below.
Our consolidation and corporate cost reduction programs have reduced our
operating costs.
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.
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 only produced $30,139,000 in gross revenues and has cumulative losses of
$86,974,000 (including a net loss of $11,862,000 in fiscal 1999).
There can be no assurance that marketing of our biopharmaceutical products will
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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.
Our recent licensing agreements with Revlon, The Body Shop, OMP Inc. and Rohto
Pharmaceuticals entitle us to be paid 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.
Need for Financing
Our cash position at year-end 1999 was $1,840,000, the Company's current cash
position is $2,000,000 and the improved 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 funding
sources, to fund its operations during fiscal year 2000 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.
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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.
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
have not been formally served with the complaint, but 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.
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(b) Reports on Form 8-K
The Company filed a Form 8-K on July 17, 2000, reporting the following:
Item 5. OTHER EVENTS
George Van Lear has resigned as President of Senetek Plc and has left the
Company to pursue other opportunities. Frank Massino, the Company's Chief
Executive Officer, will assume Dr. Van Lear's duties as President. Senetek Plc
has no immediate plans to seek a replacement for Dr. Van Lear.
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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: August 11, 2000 /s/ FRANK J MASSINO
--------------- --------------------------------
Frank J Massino
Chief Executive Officer
Date: August 11, 2000 /s/ STEWART W SLADE
--------------- --------------------------------
Stewart W Slade
Acting Principal Financial and
Accounting Officer
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