ITEM 1 - BUSINESS
Overview
Senetek PLC is a Life Sciences company engaged in the development of technologies that target the science of healthy aging.
Senetek PLC, together with its subsidiaries (the “Company” which may be referred to as “Senetek”), is a public limited company organized under the laws of England in 1983. Senetek has three wholly-owned subsidiaries, Senetek Drug Delivery Technologies Inc. (“SSDT”) and Carmé Cosmeceutical Sciences Inc. (“CCSI”), both Delaware corporations and Senetek Denmark ApS, formed by Senetek under the laws of Denmark.
For detailed financial information, please consult the Company’s financial statements included in this Annual Report.
The Company’s corporate website is located at www.senetekplc.com. Its Annual Reports on Form 10-K for the 2006 fiscal year, in addition to its interim financial reports on Form 10-Q for fiscal 2007 and 2006, are available on its website, and SEC filings will similarly be available as soon as practicable after they are filed with the SEC. Its other SEC filings may be obtained from the Company in electronic or paper format free of charge by writing the Company at ir@senetek.net or at Investor Relations, 831 Latour Court, Napa, California, 94558.
Commercial Products
Skincare and Dermatological Therapeutics
Pyratine-6™
The first in Senetek’s second generation cytokinin pipeline to complete development, Pyratine-6™, has demonstrated superior results as compared to highly successful predecessor compounds in clinical testing. Pyratine-6™ launched in the North American physician market in early 2008.
An independent comparative analysis evaluated the effectiveness of Senetek’s second-generation patented cytokinin, Pyratine-6™ relative to its original and highly successful anti-aging active ingredient, Kinetin. The
analysis compared results of separate clinical studies conducted at the University of California, Irvine (Kinetin) and at the independent research laboratory RCTS, Inc. in Irving, Texas (Pyratine-6™). The subjects in the Pyratine-6™ clinical trial scored significantly higher on each measure than those in the Kinetin study throughout the 12 weeks of evaluation. In some measures the comparison was particularly notable, such as fine wrinkles (22% improvement with Pyratine-6™ vs. 2% improvement with Kinetin after eight weeks), skin roughness (86% improvement with Pyratine-6™ vs. 35% improvement with Kinetin after eight weeks) and overall skin aging (24% vs. 3% after eight weeks).
The Pyratine-6™ study also featured additional evaluative methodologies not included in the Kinetin study, such as the NOVA Dermal Phase Meter for measuring the skin’s moisture content, and expert evaluations of reductions in erythema (redness) and acne lesions. The NOVA apparatus measured increases in skin moisture content of 35% and 41% after eight and twelve weeks, respectively. The evaluations found 42% and 62% reductions in erythema after two and four weeks, respectively, and a 45% reduction in acne lesions after twelve weeks. Pyratine-6™ was well tolerated by all subjects, producing no measurable skin irritation or signs of allergic contact dermatitis with twice-daily application over the 12 week study period.
Based on positive results demonstrated in these clinical evaluations, Senetek has initiated another clinical trial of Pyratine-6™ for the treatment of acne rosacea, a chronic dermatosis afflicting more than 45 million people worldwide. Clinical data suggests that Pyratine-6™ may offer important advantages over currently available treatments, primarily oral and topical antibiotics, which involve long-term tolerability and other health concerns
On August 4, 2007, Senetek PLC entered into an agreement with Triax Aesthetics LLC (“Triax”), a Cranford, New Jersey based sales and marketing company focused on quality of life for patients with dermatologic conditions. Under the agreement, Senetek granted Triax an exclusive license for Pyratine-6™ in the ethical market channel in the United States and its territories, Canada and select Middle East countries.
On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution. As of April 15, 2008, the contractual dispute resolution remains in process.
As a result of the on-going process the Company does not expect to receive the minimum royalties of $10.8 million for fiscal 2008 as specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
Senetek is responsible for the production and supply of Pyratine-6 based products, will contribute periodic sales and marketing payments totaling $4.5 million in the first year of the agreement and will participate in the product marketing strategy. In return, Senetek will receive all net product revenues in the first year of the agreement (defined as calendar year 2008), with a guaranteed minimum of $10.8 million in 2008. The agreement calls for increased minimum sales annually after the first year. Subsequent to the first year of the agreement, the companies will share net revenues on a 50/50 basis. Triax will be responsible for all sales, marketing and order fulfillment during the 15 year life of the agreement.
The Company is actively pursuing additional commercial opportunities for Pyratine-6™ in other channels of distribution and geographies.
4HBAP
4HBAP is a proprietary second generation aromatic cytokinin. Representing a new classification of cytokinins, 4HBAP has successfully completed clinical tests for the treatment of photodamaged skin and its effect on the reduction of erythema. Senetek is currently seeking marketing collaboration agreements for various market channels and geographies.
Kinetin and Zeatin
The Company developed and patented Kinetin (N6-furfuryladenine), a first generation cytokinin and its analogue Zeatin.
Through March 30, 2007, Senetek licensed Kinetin to 10 companies, including Valeant Pharmaceuticals International (“Valeant”), Revlon and The Body Shop, in various channels of distribution and geographies and licensed Zeatin exclusively to Valeant.
On March 30, 2007, Senetek terminated its existing license agreement with Valeant and entered into a new license acquisition agreement with Valeant (“License Acquisition Agreement”). Under the terms of the License Acquisition Agreement, the Company granted Valeant a paid up license for its Kinetin and Zeatin compounds and assigned to Valeant future royalties from other Kinetin license agreements to which it was a party, in return for a cash payment of $21 million, a waiver of $6 million in future marketing credits the Company otherwise would have owed Valeant, and a right to share in half of the future royalties due Valeant from other Kinetin licensees through 2011.
Erectile Dysfunction
Invicorp® is a highly safe and effective treatment for erectile dysfunction (ED), a condition that affects more than 100 million men worldwide. Invicorp®, a combination of vasoactive intestinal peptide (VIP) and phentolamine mesylate (PMS), has shown excellent results in a wide range of patients, many of whom have failed on other therapies for the treatment of ED. VIP is a 28-amino-acid peptide found naturally in the male and female urogenital tracts, as well as in the central and peripheral nervous systems. It causes erection by binding to smooth-muscle receptors in the corpus cavernosum, inducing smooth-muscle relaxation and increased blood flow. In completed Phase III clinical trials conducted in the United Kingdom, Denmark, Ireland and Australia, Invicorp® demonstrated outstanding efficacy and safety. The most frequently reported side effect was transient facial flushing, which typically subsided within minutes after use.
Unlike many other ED therapies, Invicorp® has no known contraindications. Other significant advantages include: rapid onset of erection after stimulation-typically within two-to-five minutes; the ability to induce an erection up to 2 1/2 hours after administration with natural termination of an erection after ejaculation, as well as efficacy in the treatment of organic ED. Invicorp® is self-administered using a refillable syringe or a novel, yet uncomplicated, disposable drug delivery system, Reliaject®, in each case using a super-fine 30 gauge needle for ease of administration (not possible with existing injectable therapies).
In a study of treatment options for Erectile Dysfunction, Decision Resources, Inc. indicated the medical community’s enthusiasm for Invicorp®. Among the findings, the study showed that intracavernous injection therapies will continue to be the most effective second-line treatments for moderate-to-severe ED (after oral therapies have been attempted and for patients for whom oral therapies are contraindicated, such as diabetics and hypertension sufferers). Based on physician enthusiasm, the treatment’s high therapeutic index and advantages over current oral therapies, the study predicted that Invicorp® could become the alternative therapy of choice.
Invicorp® could capture a significant share of the moderate-to-severe ED market and become the therapy of choice for second-line ED treatment. Invicorp® is also expected to become first-line treatment for those with diabetes, heart disease and severe organic ED.
In June 2004, the Company entered into an exclusive license with Ardana Bioscience Ltd, a London Stock Exchange traded specialty pharmaceuticals company dedicated to improving reproductive health, for Ardana to manufacture and market Invicorp® in the European Union and European Free Trade Area. Under the license agreement, Ardana assumed full financial responsibility for completing the European drug regulatory process for Invicorp® and seeking national marketing approvals throughout Europe. The license agreement provides for Senetek to receive royalties that potentially reach 12% based on Ardana’s and its sub-licensees’ net sales of Invicorp® plus milestone payments upon regulatory approvals in specified major markets and achievement of
specified cumulative net sales in Europe. Under its agreement, Ardana has certain rights with respect to the manufacture and marketing of Invicorp® in other world markets.
Invicorp® was approved for marketing in Denmark in December 2006 under the European Mutual Recognition Procedure (“MRP”) and Ardana began commercial sales of Invicorp® in Denmark and an effort to seek national marketing approvals throughout Europe.
Ardana announced in February 2008 that it is looking to merge or sell their company. This may impact the advancement of the MRP for Invicorp® in Europe; however, Invicorp® is a valuable asset to Ardana and any prospective owner. Ardana has informed Senetek in writing that all requirements are complete to advance the MRP. Senetek negotiated back from Ardana the return of the valuable rights for Invicorp® in the territories of Brazil, India, China and Russia.
In February 2006, the Company entered into an exclusive license with Plethora Solutions Holdings PLC, an AIM London Stock Exchange traded specialty pharmaceuticals company focused on the development and marketing of products for the diagnosis, treatment and management of urological disorders, to manufacture and market Invicorp® in North America. Under the terms of the license agreement, Plethora assumes full financial responsibility for the drug regulatory process for Invicorp® in North America and for establishing this important new therapy in the key North American market, and was granted certain rights with respect to the manufacture and marketing of Invicorp® in other world markets, subject to the prior rights of Ardana Bioscience Ltd. The license agreement provides for Senetek to participate in the success of Invicorp® through royalties based on Plethora’s and its sub-licensees’ net sales of Invicorp® plus predetermined milestone payments upon achievement of regulatory approvals and cumulative net sales targets.
In February 2007, Plethora announced that meetings with the United States Food and Drug Administration had confirmed the path to submission of the New Drug Authorization for Invicorp® as a front-line therapy for erectile dysfunction. Plethora also announced that studies would be completed within 15 months and the product launch in the US is anticipated by the end of 2009. In July 2007, Plethora announced that it had secured a £4 million loan to allow for the completion of the clinical development and filing for US market approval of Invicorp®.
Diagnostic Monoclonal Antibodies
In 1995, the Company entered into a license agreement with the Research Foundation for Mental Hygiene (“RFMH”), an agency of the State of New York, under which the Company was granted exclusive rights to certain of RFMH’s cell lines capable of producing monoclonal antibodies for research on various diseases including Alzheimer’s Disease. The license was to expire 10 years from inception as to the cell lines originally covered and, as to cell lines subsequently added to the license, 10 years from their inclusion. Until mid 2000, the Company marketed these cell lines to major pharmaceutical companies, but in that year it decided to enter into an agreement for the remaining term of the RFMH license with Signet Laboratories, Inc. (“Signet”), a leading medical diagnostic and research company, under which Signet assumed the marketing of these monoclonal antibodies and development of new antibodies and assays based on the cell lines covered by the RFMH license, with Senetek to receive percentages of Signet’s net sales, subject to certain minimum royalty guarantees, and Senetek to remit a portion to RFMH in accordance with the terms of its license.
In May 2004, the Company entered into an interim extension of its agreement with RFMH and in April 2005, the Company entered into a further amendment of the agreement with RFMH under which the licenses on all existing cell lines and any new cell lines were extended through July 10, 2011, subject to renewal, on substantially the same terms with a guaranty of royalty receipts to RFMH of $430,000 per year through the new term of the license. In connection therewith, the Company entered into a new agreement with Signet, effective as of April 1, 2005 for its continued manufacture, marketing and sale of all monoclonal antibodies produced from the cell lines licensed by RFMH on revised royalty terms but subject to a guaranty that the Company’s net revenue from such sales would not be significantly less than under the original agreement, for the term of the new agreement.
In May 2006, the Company agreed to assign the Signet agreement to Covance Antibody Services, Inc. (“Covance”) in conjunction with Covance’s acquisition of Signet.
Under the Company’s agreement with Covance, the Company is entitled to receive from Covance 60% of the first $2,000,000 in annual net sales of licensed products and 35% thereafter in order for Covance to remain the exclusive distributor. Should Covance not attain their minimum sales goal of $1,880,000, it has the right to cure by making a payment to Senetek in the fourth quarter in the amount equal to 33% of the amount by which Covance’s net sales are less than $1,880,000. In any case, the Company is entitled to a minimum in total payments from Covance of $860,000 per year. Under the Company’s license agreement with RFMH, RFMH is entitled to receive from Senetek 27% of Covance’s net sales of licensed products, with a minimum annual total of $430,000. In 2007 and 2006, Covance exceeded their minimum sales goal and therefore Senetek met their annual minimum to RFMH in both years as well.
Other Commercial Arrangements
Drug Delivery Technology
Senetek developed and patented Reliaject®, a unique auto-injector which employs an ultra-fine gauge needle, preset to achieve the appropriate penetration before drug flow occurs, thereby reducing reliance on the patient’s technique for accuracy and safe delivery. Reliaject® can be adapted for self-administration of a broad range of parenteral drugs including epinephrine, the leading therapeutic agent for the treatment of anaphylaxis, a severe allergic reaction that occurs in response to food, insect venom or medication.
The Company believes that the greater ease of use and patient comfort associated with Reliaject® provides competitive advantages over Epipen®, the leading autoinjector currently marketed for anaphylaxis, accounting for sales of over $250 million a year in North America alone. Reliaject® is well suited to other injectable therapies including Senetek’s Invicorp® for the treatment of ED. Senetek has entered into a partnership with Ranbaxy Pharmaceuticals Inc., for the commercialization of Reliaject®.
In March 2006, the Company sold to Ranbaxy Pharmaceuticals Inc. all of its patents, trademarks and automated manufacturing equipment for the Reliaject® device. The Company received a down-payment of $500,000 and under the terms of the sale agreement, the Company is to receive additional milestone payments based on regulatory approvals and cumulative sales targets. In addition, the Company is to receive a specified percentage (similar to a set royalty) for a period of 15 years on Ranbaxy’s and its licensees’ quarterly net sales in North America of Reliaject® pre-filled with either epinephrine or six other scheduled parenteral drugs (including Invicorp®). Percentages will be negotiated on its net sales in any other markets for which it may be licensed and on its net sales in North America of Reliaject® pre-filled with non-scheduled parenteral drugs. Under the agreement, Ranbaxy is assuming all expenses of obtaining regulatory approvals and of marketing the product, and will be making significant infrastructure investments, including building out the required clean room suites at its New Brunswick, New Jersey facility to house the highly automated Reliaject® production line. Ranbaxy is targeting commercialization of Reliaject for 2009. Ranbaxy Pharmaceuticals is a wholly-owned subsidiary of Ranbaxy Laboratories Limited, the tenth largest generic pharmaceutical company in the world and a leader in development and marketing of new delivery methodologies for proven drugs.
Product Pipeline
Historically, the Company’s strategy had been to leverage its available research and development resources by channeling its efforts through research agreements with third-party consultants, clinicians and research scientists having particular expertise in its areas of interest with a direct focus on getting its products into the market. The Company has increased its portfolio of active compounds for evaluation by entering into cooperative research agreements and collaborations with the Institute of Experimental Botany in Prague, Czech Republic, the Institute of Bioorganic Chemistry of the Polish Academy of Sciences in Poznań, Poland and PROTEOMAGE, the European Integrated Project on Healthy Aging, financed by the European Union.
Skincare and Dermatological Therapeutics
The Company is actively pursuing the identification, screening, testing, development and marketing of a wide variety of cytokinins and non cytokinin compounds targeting a number of dermatological and skincare conditions. The Company has approximately 20 compounds that have shown positive results for indications with significant market potential. The Company expects to advance at least two of these compounds through safety and clinical testing in 2008.
Cancer Therapy
In 2006, the Nobel Prize was awarded to two American scientists for the discovery of the molecular mechanism behind RNAi. That mechanism within RNA allows for the regulation of gene expression, and represents a new model in genetic therapies for the treatment of cancers and neurological disorders.
Senetek has acquired a royalty-based license for RNAi from the Institute of Bio-Organic Chemistry of the Polish Academy of Science (PAS). This agreement grants Senetek the exclusive rights to anti-cancer technology for the treatment of brain tumors using interference RNA. The treatment developed by the Institute in cooperation with the Department of Neurosurgery and Neurotramatology, University of Medical Sciences in Poznan, Poland uses RNA interference technology to inhibit the production of tenascin-C, whose expression has been indicated to correlate with the grade of malignancy of brain tumors. Recently, in human clinical trials in Europe, the technology has demonstrated success in the treatment of patients with glioblastoma.
The Company’s commercial strategy with respect to this treatment is to partner with a pharmaceutical or RNA specialty company for development, testing and marketing.
Science Advisory Board and Scientific Collaboration
The Company’s Scientific Advisory Board is headed by Professor Brian Clark, Ph.D., Sc.D., Senetek’s Chief Scientist. Professor Clark is the discoverer of Initiation Codon for Protein Synthesis, 1965/1966 and the First Crystallization of tRNA, 1968; Head of the European Chinese Biotechnology Transfer Task Force and Past President of the International Union of Biochemistry and Molecular Biology. Board members include:
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Sir John Walker, Ph.D., F.R.S.
Nobel Prize in Chemistry, 1997; Expert in Nutrition & Aging
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Professor Claudio Francheschi, M.D.
Professor, University of Bologna and Scientific Director of the Italian National Research Center on Aging-Department of Gerontological Studies, Bologna, Italy
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Dr. Gerald Weinstein, M.D., Clinical Investigator
University of California Department of Dermatology, Irvine (Emeritus); World Renowned Expert on Photo Damaged Skin and Psoriasis
Scientific Collaborators to the Company include:
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Professor Miroslav Strnad
Director, Institute of Experimental Botany, Olomouc Czech Republic
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Professor dr. hab. Jan Barciszewski
Institute of Bioorganic Chemistry, Polish Academy of Sciences, Poznań, Poland
A key element of the Company’s strategic business plan is to add to its existing portfolio of cytokinins and other compounds that have strong anti-aging properties. This task is being undertaken under the direction of the Company’s Chief Scientist. The Company is leveraging its relationship network to enhance and add to its already rich portfolio of existing skincare and dermatological compounds.
The Company has entered into a cooperative research agreement with the Institute of Experimental Botany in Prague, Czech Republic. The principal fields of scientific work in the Institute consist of plant physiology,
genetics and biotechnology. In genetic research, the Institute carries out work on induced mutagenesis and DNA repair, induction of genetic variability in tissue and cell cultures in vitro, and the molecular genetics of pollen. Its physiological focuses include adaptation and acclimation mechanisms of photosynthesis, hormonal and ecological control of plant growth and development, the mechanisms of action of growth regulators, physiology of plant viruses and plant pathophysiology. Senetek’s agreement with the Institute, as initially signed, provided for a “one off” relationship in which Senetek would have a specified period of access to the Institute’s then existing portfolio of compounds with the right to an exclusive license of any selected compounds in the fields of medical and cosmetic skin care, on pre-set terms. In October 2004, this agreement was expanded to provide Senetek with ongoing access to all of the Institute’s developing technology with dermatological potential with a right to an exclusive worldwide license of selected compounds for all fields of use, plus a right of first offer on any other technology for an exclusive worldwide license within the field of dermatological anti-aging applications. In December 2005, this agreement was further expanded, Senetek being granted the right to receive exclusive global licenses, for all applications, to any cytokinin developed, in-licensed or otherwise acquired by the Institute and the right to co-exploit with the Institute any cytokinins that Senetek does not elect to in-license. Under the agreement, Senetek paid $90,000 in 2007 and $70,000 in 2006 to support the Institute’s continued research on certain cytokinins and is committed to paying $80,000 in 2008 in support of this and additional research into other classes of naturally-derived cytokinins. The parties also agreed to co-fund the prosecution of 5 new global patent applications. Senetek has evaluated and screened more than 25 new compounds sourced from the Institute.
In November 2006, the Company signed agreements with the Institute of Bioorganic Chemistry of the Polish Academy of Sciences in Poznań, Poland for the exclusive rights to three compounds for the treatment of skin aging, as well as technology used for the treatment of brain tumors using interference RNA. The collaboration with the Institute will provide Senetek three new compounds with differentiating benefits for treating skin aging and possibly other aging conditions through their use in licensed cosmeceutical, nutritional and prescription products. In addition, Senetek acquired the rights to technology developed by the Institute in cooperation with Department of Neurosurgery and Neurotraumatology, University of Medical Sciences in Poznań, Poland for the treatment of human brain tumors using RNA interference. Under the terms of the collaborative agreement, Senetek will have rights for all applications of the in-licensed technology in exchange for royalty payments to be paid to the Institute upon commercialization. The parties have also agreed to co-fund the prosecution of three new global patent applications
In May 2006, the Company finalized its participation in a consortium named PROTEOMAGE to study evolutionarily conserved mechanisms of aging using advanced proteome analysis. The consortium is comprised of 19 members, principally leading government- and university-based research centers, including the University of Aarhus, which is Project Coordinator, the Austrian Academy of Science, the University of Paris, University College London, the University of Cambridge and the Shanghai Institutes for Biological Sciences, as well as three commercial enterprises including Senetek’s research subsidiary, Senetek ApS, Denmark.
The consortium has received a 10.7 million Euro grant from the European Commission to be used over the next five years to gain insights into the molecular mechanisms of healthy aging. Consortium members will use a proteomic analysis of aging processes in a variety of aging models, including human cell cultures, to study such aging-related activities as changes in protein concentration and protein modification, protein networks and interactions, signaling mediated by extracellular proteins, and protein turnover and degradation. It is hoped that these studies will lead to new protocols for early diagnosis and intervention in age-associated conditions, many with commercial implications. Among the areas to be studied are identification of plant extracts and compounds that stimulate proteasome activity with reduced levels of oxidized and other damaged proteins, and identification of natural and synthetic small molecules that stimulate cellular protein degradation machinery.
Among the benefits of consortium membership is access to a wide range of leading edge know-how and research results and the possibility of forming commercial collaborations with other project participants.
The Company operates a dedicated laboratory facility in leased space at the Science Park adjacent to the University of Aarhus, Denmark. Under the direction of Dr. Clark, the laboratory conducts compound screening, testing for cellular toxicity, testing for cellular biological activity and initial safety testing. The facility consists of two fully equipped laboratories and three administrative offices which house a full-time research biologist and a chemical technician.
As new active ingredients successfully pass biological activity testing and initial safety testing, Senetek collaborates with the Department of Dermatology of the University of California at Irvine for comprehensive consulting and pre-clinical and clinical testing services. The Department’s faculty has extensive experience in collaborating with the pharmaceutical and cosmetic industries in new product development and is internationally recognized for its contributions in both basic and clinical derma pharmacology. Dr. Jerry McCullough, Department Chairman, has a consulting agreement with the Company and is closely involved in Senetek’s in vivo studies.
These relationships form the basis for a continuous, interactive flow of new product identification, evaluation and testing activity between Senetek’s dedicated laboratory in Aarhus, its research and development collaborations, and the University of California-Irvine and other clinical evaluators and testers the Company employs, as appropriate.
The Company’s research and development expenditures amounted to $1,164,000 and $1,313,000 in 2007 and 2006, respectively. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The Company expects research and development spending to increase as it accelerates development of its pipeline of proprietary technologies for skincare. Research and development expenditures associated with cancer therapy are expected to be minimal as the Company intends to partner with a pharmaceutical or an RNA specialty company to fund these costs. Research and development expense associated with Invicorp® are expected to be zero because the Company’s licensees, Ardana Bioscience and Plethora Solutions, have assumed responsibility for further regulatory and market development work for these products. Covance Antibody Services Inc. bears responsibility for new product development for monoclonal antibodies.
Marketing and Manufacturing
Marketing
On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution. As of April 15, 2008, the contractual dispute resolution remains in process.
As a result of the on-going process the Company does not expect to receive the minimum royalties of $10.8 million for fiscal 2008 as specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
In the case of emerging skincare and dermatological therapeutic products, the Company may opt to:
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enter similar marketing collaborations;
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develop or co-develop its own distribution capability within certain channels which can be efficiently serviced without significant infrastructure;
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enter license agreements whereby the licensee assumes responsibility for marketing and government approvals within their respective licensed territories.
In the case of Invicorp® and Monoclonal Antibodies, the Company’s commercial partners have undertaken full responsibility for sales, distribution and marketing, as well as regulatory compliance. In the case of cancer therapy, the Company intends to partner with a pharmaceutical or an RNA specialty company to help fund these costs.
Manufacturing
The Company contracts with third parties for the manufacture and/or filling and labeling of its skincare products. While the Company relies on particular suppliers for the raw materials and componentry used in the manufacture of such products, should these suppliers become unavailable or unable to supply in required volumes, management believes that alternative sources of approvable supplies would be available.
With regard to the Company’s ED medication, Invicorp®, its license agreements with Ardana Bioscience and Plethora Solutions grant its licensees the exclusive right to manufacture the product. The active ingredients, VIP and PMS, are currently available from suppliers in quantities believed to be adequate for the licensees’ requirements following marketing approvals in their respective territories. These suppliers have developed synthetic production methods that are included in the product marketing application updates with regulatory authorities in Europe. Management believes that, should these suppliers become unavailable or unable to supply in required volumes, alternative sources of approvable supplies are available, although the licensees could experience regulatory delays associated with qualifying the new active ingredient manufacturers. Covance Antibody Services Inc. manufactures and sells the monoclonal antibodies produced from the cell lines licensed to us.
Competition
The bulk of the Company’s current revenues are derived from patented and patent applied for dermatological and skincare products, with smaller amounts being derived from agreements for the manufacture and sale of monoclonal antibodies used in research and from “named patient” sales of Invicorp® in England. While the Company’s patents and patent licenses currently protect it from competition from sales of products within the specific scope of its patents and license rights, many companies are engaged in the development and marketing of products competitive with its patented and licensed products. Regarding the Company’s ED product, Invicorp®, assuming necessary marketing approvals are obtained; the Company or its commercial partners will compete directly with other companies having established ED injectable products in the marketplace, including Pfizer, Schwarz Pharma, and Vivus, which market Caverject®, Edex® and Muse®, respectively. However, although management believes Invicorp® offers advantages over these therapies including a favorable side effect profile, high level of efficacy in organic ED, natural erection and termination, and shorter time to onset. Pfizer, the manufacturer of the oral sildenafil product Viagra®, and two other recent market entrants, Eli Lilly’s Cialis® and Bayer/GlaxoSmithKline’s Levitra®, control the bulk of the ED therapy market, which currently represents in excess of 92% of the worldwide ED market. However, the Company considers Invicorp® to be complementary to, rather than competitive with, these oral therapies as it addresses the needs of patients for whom the oral therapies are contra-indicated, not effective or not well-tolerated. Reliaject®, the proprietary autoinjector technology recently sold to Ranbaxy in which the Company has retained continuing rights to participate in net sales and product milestones, assuming necessary marketing approvals are obtained, will allow Ranbaxy to compete directly with King Pharmaceuticals’ Epipen®, the leading autoinjector currently marketed for anaphylactic shock. But management believes that the greater ease of use and patient comfort associated with Reliaject® could provide Ranbaxy with significant competitive advantages over Epipen® for this market as well as in the military and homeland security sectors for administration of antidotes to chemical and biological agents. The monoclonal antibody market is diverse and fragmented throughout the world and the monoclonal antibodies sold by any one source, including Covance, represent a very small percentage of the total market.
The life science industry, including biopharmaceutical, pharmaceutical and cosmeceutical industries is highly competitive. The Company competes and will continue to compete with research and development programs at biotechnology, biopharmaceutical, pharmaceutical and cosmeceutical companies, as well as academic institutions, government agencies and public and private organizations throughout the world. Virtually all of its existing or potential competitors have substantially greater financial, technical and human resources than Senetek’s. The Company’s commercial competitors have the capability and resources to develop or acquire and
market products that compete with its existing and planned products, and the timing of the market introduction of its own and its competitors’ products will be important competitive factors affecting its future results.
The Company cannot predict the extent to which any of the pharmaceutical products the Company currently out-licenses or has sold with ongoing payment rights, will become commercially viable. Assuming that these products are approved for sale in a sufficient number of countries in which approvals are sought, management believes that competition for Invicorp® will be based, among other things, on product efficacy, ease of administration, convenience, speed of onset and third party reimbursement, while competition for Reliaject® will be based, among other things, on price, entry into additional therapeutic categories and marketing acumen. The Company’s competitive position and ability to remain viable in the future also will depend upon its ability to contract for effective and productive research and attract and retain qualified personnel to develop and effectively exploit the results of such research. The Company expects competition to intensify in all fields in which the Company is involved.
Government Regulation
General
The research, pre-clinical development, clinical trials, manufacturing and marketing of the pharmaceutical products are subject to extensive regulation, including pre-marketing approval requirements, of the FDA and equivalent foreign regulatory agencies. Product development and approval within this regulatory framework take a number of years and involve the expenditure of substantial resources. Many products ultimately do not reach the market because of toxicity or lack of effectiveness as demonstrated by required testing. Furthermore, regulatory agencies may suspend clinical trials at any time if it is believed that the subjects participating in such trials are being exposed to unacceptable health risks. In addition, there can be no assurance that this regulatory framework will not change or that additional regulations will not arise at any stage during product development that may affect approval, delay an application, or require additional expenditures. Accordingly, the Company cannot assure that the regulatory requirements for the commercialization of Reliaject® and Invicorp® will be completed successfully within any specified time period, if at all, or that pre-marketing approvals will be granted.
The business comprising the Company’s skincare and dermatological therapeutic products does not currently include any prescription drugs and therefore is generally is not subject to pre-marketing approval. However various statutes and regulatory restrictions apply to this business in the United States and most other countries. For future compounds the Company will consider taking some through the drug approval process, either in addition to or instead of the cosmeceutical route.
Product Approval-United States
In the United States, the Federal Food, Drug and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company’s pharmaceuticals. The steps required before a pharmaceutical product may be marketed in the United States include:
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Preclinical laboratory testing;
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Submission to the FDA of an Investigational New Drug Application which must become effective before human clinical trials may commence;
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Adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug;
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Submission of a New Drug Application to the FDA; and
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FDA approval of the New Drug Application prior to any commercial sale or shipment of the drug.
Clinical trials of new pharmaceuticals in humans are designed to establish both the safety and the efficacy of the pharmaceutical in treating a particular disease or condition. These studies are usually conducted in three phases of testing. In Phase I, a small number of volunteers are given the new compound in order to identify toxicities and characterize the compound’s behavior in humans. In Phase II, small numbers of patients with the targeted disease are given the compound to test its efficacy in treating the targeted disease and to establish dose levels. Phase III studies are large-scale studies designed to confirm a compound’s efficacy for the targeted disease and identify toxicities that might not have been seen in smaller studies. Once adequate data have been obtained in clinical testing to demonstrate that the compound is both safe and effective for the intended use, all available data is submitted to the FDA as part of the New Drug Application.
Senetek’s Investigational New Drug application to the FDA for Invicorp® was withdrawn. Under the terms of its license agreement with Plethora Solutions, it has agreed to assume all regulatory responsibility and cost in North America, which will include meetings with the FDA to discuss reinstatement of the Investigational New Drug application and the clinical trials and other support that would be required for approval, while there can be no assurance that this effort ultimately will be successful. Plethora Solutions received FDA approval in 2007 to commence Phase III studies of Invicorp®.
Current FDA regulations govern the manufacture, labeling, advertising and marketing of over-the-counter drug products covered by the Federal Food, Drug and Cosmetics Act, which are required to obtain pre-market approval if they do not fall within the parameters of FDA-issued “monographs”. These regulations cover sunscreen products, including certain products of the Company’s existing licensees. Currently, such regulations do not apply to non-drugs, though the FDA does regulate issues such as labeling and has the power to seize products found to be mislabeled or adulterated.
There can be no assurance that the Federal Food, Drug and Cosmetics Act or the regulations thereunder will not be changed so as to increase the pre-marketing approval and pharmacovigilence requirements for products subject to regulation as drugs or to subject non-drug products to increased regulation.
Product Approval-Other Countries
Marketing of pharmaceutical products in other countries requires regulatory approval from the notified bodies in each particular country. The current approval process varies from country to country, and the time to approval may vary from that required for FDA approval, although the review of clinical studies by regulatory agencies in foreign jurisdictions to establish the safety and efficacy of the product generally follows a similar process to that in the United States. Similarly, non-pharmaceutical products generally are not subject to pre-marketing approval requirements in foreign countries although they are regulated in a manner similar to the United States and, in the case of certain countries such as Japan, such products may require reformulation to remove ingredients, such as certain preservatives, not considered acceptable by the particular country.
Invicorp® was approved for marketing in Denmark in December 2006 under the MRP. Following Denmark’s approval of the MRP dossier for Invicorp® and release of translated copies to those Member States selected to receive it, such Member States will have a period in which they may review and comment upon the dossier, following which each State may grant or withhold marketing authorization or impose conditions or limitations upon such authorization. No assurance can be given as to the number of Member States that will ultimately authorize marketing by Ardana following release of the MRP dossier. Ardana announced in February 2008 that it is looking to merge or sell their company. This may impact the advancement of the MRP for Invicorp® in Europe.
Post-Approval
The marketing and manufacture of pharmaceutical products are subject to post-approval regulatory review, and later discovery of previously unknown problems with a product, manufacturer or facility may result in the regulatory agencies requiring further clinical research or imposing restrictions on the product or the
manufacturer, including withdrawal of the product from the market. Additionally, any adverse reactions or events involving such products must be reported to these agencies. Previously unidentified adverse events or an increased frequency of adverse events occurring post-approval could result in labeling modifications, additional contraindications and other restrictions that could adversely affect future marketability. Ultimately, marketing approvals may be withdrawn if compliance with regulatory standards is not maintained or if a product is found to present an unacceptable risk. Any such restriction, suspension or revocation of regulatory approvals could have a material adverse effect on us.
Third-Party Reimbursement
Management believes that the availability of third-party reimbursement of all or a portion of the cost of Invicorp® and RNA interference cancer therapy may affect the overall marketability of the products.
In the United States, government-funded and private insurance programs reimburse or pay directly all or a portion of the cost of many medical treatments, prescription drugs and medical devices. The U.S. Health Care Financing Administration (“HCFA”) sets reimbursement policy for the Medicare program in the United States, and has established a national coverage policy for the diagnosis and treatment of ED in Medicare beneficiaries. Private insurance coverage for ED treatment, however, varies widely across the United States, and the introduction and popularity of Pfizer’s Viagra® resulted in some plans establishing broad coverage exclusions for ED treatment. It is not clear whether such plans would include injectable therapy for moderate to severe ED within the same exclusion as these oral therapies.
Outside of the United States, most third-party reimbursement programs are governmentally funded. In some countries, no reimbursement currently is made for ED therapy, while other countries limit the amount of reimbursement or limit reimbursement to ED treatment that is related to specific other medical conditions. In addition, in certain European countries, the sales price of a product must be approved. The pricing review period often begins after market approval is granted. Restrictions on the pricing of Invicorp® could adversely affect the profitability of the product.
Intellectual Property
The Company relies on a combination of patents, trade secrets, trademarks and confidentiality agreements to protect its business interests. It believes that patents are of material importance to the success of its business model and that trademarks are also of significance. The Company’s strategy is to consider new products and compounds only if they are patentable and to file patent applications to protect inventions and improvements considered important to the development of its business in the principal countries where protection from manufacture or marketing of infringing products is commercially warranted. As of December 31, 2007, the Company held 89 issued patents and 4 pending patent applications, comprised of patents covering certain combinations of active ingredients for the treatment of ED, granted in 19 countries and pending in 16 other countries, patents for the class of cytokinins including Kinetin and Zeatin for ameliorating the effects of aging on skin, granted in 36 countries and pending in two other countries, and patents for such cytokinins for ameliorating the effects of hyperproliferative skin diseases, including psoriasis, granted in 16 countries.
It is noted, however, that patents, including those for pharmaceuticals and skincare ingredients, generally involve complex legal and factual issues. In the United States, for example, the first inventor to conceive and document a novel invention is generally entitled to patent it, even if another person who subsequently conceived the invention was the first person to file a patent application on it. This issue of priority of invention may be further complicated by the fact that patent applications in the United States are not published until 18 months after filing. Accordingly, a patent-holder may be subject to interference proceedings in the U.S. Patent and Trademark Office (“PTO”) long after the patent was issued based upon another party’s claim of earlier invention. Furthermore, as only novel and unobvious inventions are patentable, a patent-holder may be subject to proceedings in federal court attacking the validity of the patent based on alleged obviousness in view of the
“prior art”, or on alleged improprieties in prosecuting the patent in the PTO. Issues of novelty and abuse of patent also may arise under the laws of most foreign countries in which the Company holds patents or has filed patent applications. The Company has successfully defended against claims of invalidity and unenforceability of its patents covering Kinetin and Zeatin. However, while it believes that its patents are valid and enforceable, there can be no assurance that if, in the future, it must enforce any one or more of its patents, or such patents are challenged by a third party, such patents ultimately would be upheld. Similarly, while management believes that the Company’s products do not infringe the valid claims of any third party’s patents, there can be no assurance that it would prevail if a third party sought to enforce its patent against the Company by a suit for an injunction or damages.
Interference and similar proceedings in the PTO or equivalent foreign patent offices, whether brought by the Company to protect its patents or brought by a third party challenging such patents, are time-consuming, disruptive of management time and attention and highly costly, and injunctive and other patent litigation in court is likely to be many times more time-consuming, disruptive and costly. Furthermore, in the United States (unlike many foreign countries) a party generally is not entitled to reimbursement of any portion of its legal fees and expenses even if it is wholly successful in its prosecution or defense, so that the Company could be exposed to costs which could have a material adverse effect on its business even if the Company were successful in enforcing its patents against an infringer or successful in defending against proceedings to invalidate its patents or proceedings alleging infringement by the Company of a third party’s patents. Additionally, if the Company were unsuccessful in proceedings challenging its patents, third parties licensed by the Company under those patents might seek to terminate such licenses and cease paying royalties. If the Company were unsuccessful in defending against a claim that it had infringed a third party’s patent, even unknowingly, the Company could be subject to a permanent injunction against engaging in the infringing business as well as an award of damages measured by the profits obtained from past infringement. Additionally, because of the Company’s relative lack of financial and management resources, it could be less able than its competitors to bear such risks.
Discontinued Operations
The Company previously developed or acquired a number of skincare products designed to meet specific niche segments of the market: Mill Creek, Sleepy Hollow Botanicals and Biotene H-24, sold in the health store channel, as well as Silver Fox, a product for gray hair (the “Mill Creek Line”), and Allercreme, a hypoallergenic range of skincare and cosmetic products for women with sensitive skin, developed in conjunction with dermatologists and sold in the mass market (the “Allercreme Line”). The Company determined that continued marketing of these lines was outside of its strategic direction due to their low margin potential and excessive costs of marketing.
In 1999, the Company entered into a license agreement with United States International Trading Corporation (“USITC”) under which USITC purchased the Company’s inventories of finished goods and componentry for the Mill Creek Line and paid a licensing fee for the exclusive right to manufacture and market these products in exchange for royalties subject to specified annual minimums. Under the license agreement, USITC was also granted an option to purchase the rights to the Mill Creek Line for $2.8 million which it exercised in 2002 in exchange for a $2.3 million secured promissory note. As of December 31, 2007, the note was fully paid.
Employees
As of December 31, 2007, the Company had seven full-time employees, comprised of two employees at its research facility in Denmark, and five employees at its Napa, California headquarters.
ITEM 2
ITEM 2 - PROPERTIES
The Company leases a 3,000 square foot facility in Napa for its headquarters under a lease expiring in February 2010. During October 2003, the Company entered into a quarterly lease agreement at a business park adjacent to Aarhus University in Denmark for approximately 2,000 square feet. The facility is used for research and development and was renovated and equipped in 2004. The lease requires quarterly payment and can be cancelled by giving three months notice. Management believes that present facilities are adequate for is current needs.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
On March 16, 2007, the Company received $1,320,000 in settlement of claims against a professional services provider for past performance related matters. The Company has recorded the settlement as other income in the quarter ended March 31, 2007. In conjunction with the settlement, the Company recorded approximately $10,000 in related legal costs and expenses.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 2007 Senetek PLC held a combined Annual General Meeting and Extraordinary General Meeting of Shareholders (the “Meeting”) pursuant to a Notice and Proxy Statement duly filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Anthony Williams, who had been appointed a Director of the Company in February 2003, was re-elected as a Director of the Company at the Meeting. The following persons’ terms of office as Directors of the Company continued after the Meeting: Frank J. Massino, Kerry Dukes and Rodger Bogardus.
The following is a brief description of each matter voted upon at the Meeting, including the votes cast for, against and withheld and the number of abstentions and broker non-votes as to each such matter:
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is currently no established public trading market for the Company’s ordinary shares. Senetek ADSs, each representing one ordinary share and evidenced by one American Depositary Receipt (“ADR”) began trading on the over-the-counter market in the United States in November 1984 and were traded through the NASDAQ Small Cap Market from May 1986 through November 10, 2004. On November 10, 2004, the Company’s ADSs were delisted from the NASDAQ Stock Market and began trading on the electronic over-the-counter quotation system of the National Association of Securities Dealers (the “NASD”) Over-the-Counter Bulletin Board (the “OTCBB”) under the symbol “SNTKY”. On December 13, 2007, the eight-to-one reverse share split authorized by shareholders on December 10, 2007 was effective and Senetek’s symbol changed to “SNKTY”. The OTCBB is a regulated quotation service for subscribing members of the NASD that displays the real-time quotes, last-sale prices and volume information in over-the-counter securities. The OTCBB market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The depository for these ADSs is The Bank of New York.
The following table sets out the range of high and low sale prices for the Company’s ADSs for the periods indicated, adjusted retroactively for its December 10, 2007, eight-to-one reverse share split.
Fiscal Year Ended December 31, 2007
Fiscal Year Ended December 31, 2006
As of March 31, 2008 there were 7,645,802 ordinary shares outstanding and 205 holders of record of ADSs representing 7,574,546 American Depository shares. The trading prices of the Company’s ADSs on March 31, 2008, were a high of $1.89 and a low of $1.75.
Dividends. Senetek has not paid, nor does it currently contemplate the payment of, any cash dividends on the ordinary shares. The decision whether to pay, and the amount of any dividends, will be based upon, among other things, the Company’s earnings, capital requirements, financial conditions and applicable law. Any dividend, either cash or stock, must be recommended by the Board of Directors and approved by the shareholders through the Board of Directors. The Board of Directors is, however, empowered to declare interim dividends. However, under the English Companies Act of 1985, a limited company may not declare or pay cash dividends while it has an accumulated deficit. The Company had an accumulated deficit of ($72,210,000) at December 31,
2007. Accordingly, the Board of Directors will not be in a position to consider the question of dividends until the accumulated deficit has been absorbed by profits or by the application against the deficit with the approval of shareholders and the United Kingdom Companies’ Court, which forms part of the Chancery Division of the High Court, of an equivalent figure forming part of the share premium on the Company’s balance sheet.
Taxation
The following discussion describes the material US Federal income tax and UK tax consequences of the purchase, ownership and disposition of the Company’s shares or ADSs (evidenced by ADRs) for beneficial owners:
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who are residents of the United States for purposes of the current applicable United Kingdom/United States Income Tax Convention (either the “Income Tax Convention” or the “New Income Tax Convention”, as described below under “New Income Tax Convention”) and the United Kingdom/United States Estate and Gift Tax Convention (the “Estate and Gift Tax Convention” and, together with the Income Tax Convention, the “Conventions”);
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whose ownership of the Company’s shares or ADSs is not, for the purposes of the Conventions, attributable to a permanent establishment in the United Kingdom;
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who otherwise qualify for the full benefits of the Conventions; and
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who are US holders (as defined below).
The statements of US federal income tax and UK tax laws set out below:
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are based on the laws in force and as interpreted by the relevant taxation authorities as at the date of this annual report;
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are subject to any changes in US law or the laws of England and Wales, in the interpretation thereof by the relevant taxation authorities, or in the Conventions, occurring after such date; and
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are based, in part, on representations of the depositary, and assume that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.
No assurance can be given that taxing authorities or the courts will agree with this analysis.
This discussion does not address all aspects of US and UK taxation that may be relevant to you and is not intended to reflect the individual tax position of any beneficial owner, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of investors or that are generally assumed to be known by investors. The portions of this summary relating to US Federal taxation are based upon the US Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed US Treasury regulations promulgated thereunder, published rulings by the US Internal Revenue Service (“IRS”), and court decisions, all in effect as at the date hereof, all of which authorities are subject to change or differing interpretations, which changes or differing interpretations could apply retroactively. This summary is limited to investors who hold the Company’s shares or ADSs as capital assets within the meaning of Section 1221 of the Code, generally property held for investment, and this summary does not purport to deal with the US Federal or UK taxation consequences for investors in special tax situations, such as dealers in securities or currencies, persons whose functional currency is not the US Dollar, life insurance companies, tax exempt entities, financial institutions, traders in securities that elect to use a “mark-to-market” method of accounting for their securities holdings, regulated investment companies, persons holding the Company’s shares or ADSs as part of a hedging, integrated, conversion or constructive sale transaction or straddle or persons subject to the alternative minimum tax, who may be subject to special rules not discussed below. In particular, the following summary does not address the adverse tax treatment to you that would follow if you own, directly or by attribution, 10% or more of the Company’s outstanding voting share capital and the Company is classified as a “controlled foreign corporation” for US Federal tax purposes.
As used herein, the term “US holder” means a beneficial owner of the Company’s shares or ADSs who or which is:
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a citizen or resident of the United States;
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a corporation (or other entity that is treated as a corporation for US Federal income tax purposes) created or organized in or under the laws of the United States or any political subdivision thereof;
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an estate, the income of which is subject to US Federal income taxation regardless of its source; or
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a trust (1) that is subject to the supervision of a court within the United States and the control of one or more US holders as described in section 7701(a)(30) of the Code or (2) that has a valid election in effect under applicable US Treasury regulations to be treated as a US holder.
If a partnership (or an entity that is treated as a partnership for US Federal income tax purposes) holds the Company’s shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding the Company’s shares or ADSs, you should consult your tax advisors.
The summary does not include any description of the tax laws of any State or local government or of any jurisdictions other than the United States and the United Kingdom that may be applicable to the ownership of the Company’s shares or ADSs. You are urged to consult your own tax advisor regarding the US Federal, State, and local tax consequences to you of the ownership of the Company’s shares or ADSs, as well as the tax consequences to you in the United Kingdom and any other jurisdictions.
For the purposes of the Conventions and the Code, you will be treated as the owner of the Company’s shares represented by the ADSs evidenced by the ADRs.
New Income Tax Convention
The United States and the United Kingdom have concluded a new income tax convention (the “New Income Tax Convention”). The New Income Tax Convention has been ratified by the competent authorities in both countries. The New Income Tax Convention is effective:
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in respect of US or UK withholding taxes, for amounts paid on or after May 1, 2003;
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in the US, in respect of other taxes, for taxable periods beginning on or after January 1, 2004;
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in the UK, for individuals from April 1, 2004; and
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in the UK, for corporations from the first financial year beginning on or after April 1, 2004;
Except that a person entitled to the benefit of the existing Income Tax Convention may elect to remain subject to the terms of that convention and not the New Income Tax Convention for a further period of one year.
The New Income Tax Convention contains rules that modify the treatment under the Income Tax Convention of US holders who own shares or ADSs of a UK corporation in several aspects. Throughout the following discussions, the Company has included specific references to the new rules under the New Income Tax Convention as appropriate. You should consult your own tax advisors as to how the Income Tax Convention and New Income Tax Convention would affect you with respect to your ownership of the Company’s shares or ADSs (including the application of the anti-conduit rules contained in the New Income Tax Convention) and if and how you should elect to defer the application of the New Income Tax Convention.
Taxation of Capital Gains
United Kingdom
If you are not resident or ordinarily resident in the United Kingdom for UK tax purposes, you will not be liable for UK tax on capital gains realized or accrued on the sale or other disposition of shares or ADSs unless the shares or ADSs are held in connection with your trade or business (which for this purpose includes a profession or a vocation) carried on in the United Kingdom through a branch or agency and the shares or ADSs are or have been used, held or acquired for the purposes of such trade or business or such branch or agency.
An individual US holder of the shares who ceases to be resident or ordinarily resident in the UK for UK tax purposes for a period of less than 5 tax years and who disposes of shares during that period may also be liable on returning to the UK for UK capital gains tax despite the fact that the individual may not be resident or ordinarily resident in the UK at the time of the disposal.
United States
Subject to the Passive Foreign Investment Company discussion below, gain or loss realized by you on the sale or other disposition of the shares or ADSs will be subject to US Federal income tax as capital gain or loss in an amount equal to the difference between your tax basis in the shares or ADSs and the amount realized on the disposition. The capital gain or loss will be long-term capital gain or loss if the US holder has held the shares or ADSs for more than one year at the time of the sale or exchange. A gain or loss realized by you generally will be treated as US source gain or loss for US foreign tax credit purposes.
Passive Foreign Investment Company Considerations
Generally, for US Federal income tax purposes, the Company will be a “passive foreign investment company”, or a “PFIC”, for any taxable year if either (1) 75% or more of its gross income is “passive” income or (2) 50% or more of the value of its assets, determined on the basis of a quarterly average, is attributable to assets that produce or are held for the production of passive income. Passive income generally includes dividends, interest, royalties and rents not arising from the active conduct of a trade or business, and gains from the sale of assets that produce such income. If the Company is a PFIC in any taxable year that you own its shares or ADSs, you may be subject to tax at the highest ordinary income rates applicable to you and pay interest on such tax based on your holding period in the shares of ADSs, on (1) a portion of any gain recognized on the sale of its shares or ADSs and (2) any “excess distribution” paid on its shares or ADSs (generally, a distribution in excess of 125% of the average annual distributions paid by the Company in the three preceding taxable years).
Based on the Company’s current activities and assets, it does not believe that it is a PFIC, and it does not expect to become a PFIC in the foreseeable future for US Federal income tax purposes. The Company’s belief that it is not a PFIC and its expectation that it will not become a PFIC in the future is based on its current and planned activities, and may change in the future. The determination of whether it is a PFIC is made annually. Accordingly, it may be possible that the Company will become a PFIC in the current or any future year due to changes in its asset or income composition.
UK Inheritance and Gift Tax
If you are an individual domiciled in the United States and are not a national of the United Kingdom for the purposes of the Estate and Gift Tax Convention, any share or ADS beneficially owned by you will not be subject to UK inheritance tax on your death or on a gift made by you during your lifetime, provided that any applicable US Federal gift or estate tax liability is paid, except where the share or ADS is part of the business property of your UK permanent establishment or pertains to your UK fixed base used for the performance of independent personal services. The Estate and Gift Tax Convention generally provides for tax paid in the United Kingdom to be credited against tax payable in the United States, based on priority rules set out in that Convention, in the
exceptional case where a share or ADS is subject to both UK inheritance tax and US Federal gift or estate tax. Where the shares or ADSs have been placed in trust by a settlor who, at the time of the settlement, was a US holder, the shares or ADSs will generally not be subject to UK inheritance tax if the settlor, at the time of the settlement, was domiciled in the United States for the purposes of the Estate and Gift Tax Convention and was not a national of the United Kingdom.
US Gift and Estates Taxes
If you are an individual US holder, you will be subject to US gift and estate taxes with respect to the shares or ADSs in the same manner and to the same extent as with respect to other types of personal property.
UK Stamp Duty and Stamp Duty Reserve Tax
Transfers of ADRs
No UK stamp duty will be payable on an instrument transferring an ADR or on a written agreement to transfer an ADR provided that the instrument of transfer or the agreement to transfer is executed and remains at all times outside the United Kingdom. Where these conditions are not met, the transfer of, or agreement to transfer an ADR could, depending on the circumstances, attract a charge to ad valorem stamp duty at the rate of 0.5% of the value of the consideration (if this charge is no more than £5, the transfer is exempt).
No stamp duty reserve tax will be payable in respect of an agreement to transfer an ADR, whether made in or outside the United Kingdom.
Where no sale is involved and no transfer of beneficial ownership has occurred, a transfer of shares by the depositary or its nominee to the holder of an ADR upon cancellation of the ADR is subject to UK stamp duty of £5 per instrument of transfer.
Issue and Transfer of Ordinary Shares in Registered Form
Except in relation to persons whose business is or includes the issue of depositary receipts of the provision of clearance services or their nominees, the allotment and issue of shares by the Company will not normally give rise to a charge to UK stamp duty or stamp duty reserve tax.
Transfers of shares, as opposed to ADSs, will attract ad valorem stamp duty normally at the rate of 0.5% of the value of the consideration (if this charge is no more than £5, the transfer is exempt). A charge to stamp duty reserve tax, normally at the rate of 0.5% of the consideration, arises, in the case of an unconditional agreement to transfer shares, on the date of the agreement, and in the case of a conditional agreement the date on which the agreement becomes unconditional. The stamp duty reserve tax is payable on the seventh day of the month following the month in which the charge arises. Where an instrument of transfer is executed and duly stamped before the expiry of a period of six years beginning with the date of that agreement, any stamp duty reserve tax that has not been paid ceases to be payable, and if any stamp duty reserve tax has been paid a claim may be made for its repayment.
Transfer of Ordinary Shares into Depository or Clearance Services
Subject to certain exemptions, stamp duty will be charged at the rate of 1.5% (if this charge is no more than £5, the transfer is exempt), or there will be a charge to the stamp duty reserve tax at the rate of 1.5% on the amount or value of the consideration paid, or in some circumstances the issue price or open market value, on a transfer or issue of shares (1) to, or to a nominee for, a person whose business is or includes the provision of clearance services, or (2) to, or to a nominee for, a person whose business is or includes the issuing of depositary receipts. It is understood that the UK Inland Revenue Stamp Office considers the depositary to fall within one or the other of the above two categories. The stamp duty reserve tax on the deposit of ordinary shares with the depositary will be payable by the person depositing those shares. Where stamp duty reserve tax is charged on a transfer of shares and ad valorem stamp duty is chargeable on the instrument effecting the transfer, the amount of the stamp duty reserve tax charged is an amount equal to the excess, if any, of the stamp duty reserve tax charge due on the transfer after the deduction of the stamp duty paid.
You will not be entitled to a foreign tax credit with respect to any UK stamp duty or stamp duty reserve tax, but may be entitled to a deduction subject to applicable limitations under the Code. You are urged to consult your own tax advisors regarding the availability of a deduction under their particular circumstances.
Information Reporting and Backup Withholding
Payments that relate to the ordinary shares or ADSs that are made in the United States or by a US related financial intermediary will be subject to information reporting. Information reporting generally will require each paying agent making payments, which relate to a share or ADS, to provide the IRS with information, including the beneficial owner’s name, address, taxpayer identification number, and the aggregate amount of dividends paid to such beneficial owner during the calendar year. These reporting requirements, however, do not apply to all beneficial owners. Specifically, corporations, securities broker-dealers, other financial institutions, tax-exempt organizations, qualified pension and profit sharing trusts and individual retirement accounts are all exempt from reporting requirements.
If you are a depositary participant or indirect participant holding shares or ADSs on behalf of a beneficial owner, or paying agent making payments for a share or ADS, you may be required to backup withhold, as a backup against the beneficial owner’s US Federal income tax liability, a portion of each payment of dividends on the Company’s shares or ADSs in the event that the beneficial owner of a share or ADS:
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fails to establish its exemption from the information reporting requirements;
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is subject to the reporting requirements described above and fails to supply its correct taxpayer identification number in the manner required by applicable law; or
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under-reports its tax liability.
This backup withholding tax is not an additional tax and may be credited against US Federal income tax liability if the required information is furnished to the IRS.
Taxation of Dividends
The Company has not included a detailed discussion of the tax consequences to holders of ordinary shares or ADSs of the payment of dividends in light of the Company’s present inability to pay dividends. As noted above, pursuant to the English Companies Act of 1985 a company may not pay a dividend while it has an accumulated deficit. As of December 31, 2007, the Company’s accumulated deficit is approximately $72 million.
EQUITY COMPENSATION PLAN INFORMATION
(As of December 31, 2007)
(1) Share amounts and prices listed are after the eight-to-one reverse share split approved by shareholders on December 10, 2007. 500,780 shares issued include 121,875 and 75,000 shares from Plan 1 and Plan 2, respectively, which expired on December 31, 2005.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
Not required for smaller reporting company; see Regulation S-K Section 229.305(e)
ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Company Overview
Senetek PLC is a Life Sciences company engaged in the development of technologies that target the science of healthy aging.
The Company’s business is comprised of two segments, Skincare and Pharmaceutical.
The Skincare segment is comprised of:
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Pyratine-6™, one of Senetek’s second generation cytokinin for the treatment of aging skin. In August 2007, the Company entered into an agreement with Triax granting Triax an exclusive license for Pyratine-6™ in the ethical market channel in the United States and its territories, Canada and select Middle East countries.
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On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution. As of April 15, 2008, the contractual dispute resolution remains in process. As a result of the on-going process the Company does not expect to receive the minimum royalties of $10.8 million for fiscal 2008 as specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
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Senetek is actively pursuing additional commercial opportunities for Pyratine-6™ in other channels of distribution and geographies.
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4HBAP is proprietary second generation aromatic cytokinin. Representing a new classification of cytokinins, 4HBAP has successfully completed clinical tests for the treatment of photodamaged skin and its effect on the reduction of erythema. Senetek is currently seeking marketing collaboration agreements for various market channels and geographies.
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Kinetin, Senetek’s first generation cytokinin is an essential plant growth factor that retards senescence of plants and delays age-related changes in cultured human skin cells. Kinetin, marketed under the Kinerase® trademark is currently the leading anti-aging product sold in the North American physician market. Through March 30, 2007, Senetek licensed Kinetin to 10 companies, including Valeant, Revlon and The Body Shop in various channels of distribution and geographies and licensed Zeatin, Kinetin’s analog, exclusively to Valeant. On March 30, 2007, Senetek terminated its existing license agreement with Valeant and entered into a new license acquisition agreement with Valeant (“License Acquisition Agreement”). Under the terms of the License Acquisition Agreement, the Company granted Valeant a paid up license for its Kinetin and Zeatin compounds and assigned to Valeant future royalties from other Kinetin license agreements to which it was a party, in return for a cash payment of $21 million, a waiver of $6 million in future marketing credits the Company otherwise would have owed Valeant, and a right to share in future royalties due Valeant from other Kinetin licensees through 2011.
The Pharmaceutical segment is comprised of:
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Invicorp®, a highly safe and effective treatment for erectile dysfunction (“ED”), a condition that affects more than 100 million men worldwide. Invicorp® is expected to capture a significant share of the moderate-to-severe ED market and become the therapy of choice for second-line ED treatment. Invicorp® has received marketing authorization in Denmark as well as in England. Additionally, Invicorp® has been approved in New Zealand. Senetek has entered into exclusive licensing and
collaborative marketing agreements for the commercialization of Invicorp® with Ardana BioSciences for the European market and with Plethora Solutions for the U.S. market.
•
Reliaject®; a unique auto-injector system which employs an ultra-fine gauge needle, preset to achieve the appropriate penetration before drug flow occurs, thereby reducing reliance upon the patient’s technique for accuracy and safe delivery. In March 2006, the Company sold to Ranbaxy Pharmaceuticals Inc. all of its patents, trademarks and automated manufacturing equipment for the Reliaject® device. The Company received a down-payment of $500,000 and under the terms of the sale agreement, the Company is to receive additional payments based on regulatory approvals and cumulative sales milestones. In addition, the Company is to receive a specified percentage (similar to a set royalty) for a period of 15 years on Ranbaxy’s and its licensees’ quarterly net sales in North America of Reliaject® pre-filled with epinephrine and other parenteral drugs. Percentages will be negotiated on its net sales in any other markets for which it may be licensed and on its net sales in North America of Reliaject® pre-filled with non-scheduled parenteral drugs. Under the agreement, Ranbaxy is assuming all expenses of obtaining regulatory approvals and of marketing the product.
•
Diagnostic monoclonal antibodies used in Alzheimer’s and other disease research which the Company licenses from RFMH and sells to Covance Antibody Services Inc.
•
Senetek has acquired a royalty-based license for RNA interference from the Institute of Bio-Organic Chemistry of the Polish Academy of Science (“PAS”). This agreement grants Senetek the exclusive rights to anti-cancer technology for the treatment of brain tumors using RNA interference technology to inhibit the production of tenascin-C, whose expression has been indicated to correlate with the grade of malignancy of brain tumors. Recently the technology has been applied to patients with glioblastoma multiforme, a severe form of brain tumor, with resounding success.
In the case of emerging skincare and dermatological therapeutic products, the Company may opt to enter marketing collaborations where it will potentially benefit from a higher percentage of revenues; to develop or co-develop its own distribution capability within certain channels which can be efficiently serviced without significant infrastructure or enter license agreements whereby the licensee assume responsibility for marketing and government approvals within their respective licensed territories.
In the case of Invicorp® and monoclonal antibodies, the Company’s commercial partners have undertaken full responsibility for sales, distribution and marketing, as well as regulatory compliance. In the case of cancer therapy, the Company intends to partner with a pharmaceutical or an RNA specialty company to help fund these costs.
The Company conducts research and development of new skincare products at its dedicated laboratory facility in Aarhus, Denmark. In addition, it leverages its research and development staff and resources through research agreements with third-party consultants, clinicians and research scientists having particular expertise in its areas of interest.
The markets in which the Company competes are highly competitive. The Company continuously strives to make advances and compete based on forward-looking technology, superior performance and quality, and by identifying and developing products that will achieve competitive advantage.
Overview of Operating Results
Historically, Senetek derived substantially all revenues from royalty based licensing arrangements. As a result of the License Acquisition Agreement with Valeant in the first quarter of 2007, Senetek now has a strong balance sheet in place. The Company is positioned to transfer from a licensing model to revenue sharing with brand equity. Senetek expects this model to deliver an increased revenue stream with higher margin potential and create long-term value.
During 2007 the Company made significant progress toward its revenue growth goals as a result of the License Acquisition Agreement with Valeant in the first quarter of 2007 which resulted in receipt of $21million in cash and recognition of $3,750,000 in previously deferred revenue related to the prior license agreement. In addition, the Company successfully completed clinical testing and trial of Pyratine-6™ for treatment of the signs of aging and effectiveness in reducing erythema, skin redness caused by increased blood flow to capillaries. A second clinical trial for the treatment of acne rosacea is nearing completion. In August 2007, Senetek entered into an agreement with Triax granting Triax an exclusive license for Pyratine-6™ in the ethical market channel in the United States and its territories, Canada and select Middle East countries.
On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution. As of April 15, 2008, the contractual dispute resolution remains in process.
As a result of the on-going process the Company does not expect to receive the minimum royalties of $10.8 million for fiscal 2008 as specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
Senetek is actively pursuing additional commercial opportunities for Pyratine-6™ in other market channels and geographies. Clinical trials were also completed for another compound, 4HBAP, for the treatment of photodamaged skin and its effect on the reduction of erythema. Senetek is actively pursuing commercial opportunities for 4HBAP. A number of other biologically active new compounds have advanced in clinical testing and trial.
For 2007, revenues from Skincare increased significantly as compared to 2006. Skincare revenues for 2007 were $25,102,000 up 257% from 2006. The increase is principally attributed to increased royalties from the License Acquisition Agreement with Valeant in March 2007. Pharmaceutical revenues decreased in 2007 as compared to 2006. Pharmaceutical revenues for 2007 were $1,369,000 down 2% from 2006. The slight reduction from 2006 to 2007 is attributable to the lack of sales of polyclonal antibodies in 2007 to the Company’s commercial partner, Covance offset in part by increased sales of monoclonal antibodies in 2007 to Covance.
The gross profit rate for 2007 was 95% compared to 88% in 2006. The significant increase in 2007 was due to the high margin License Acquisition Agreement with Valeant which provided $24,750,000 in revenue.
Beginning in the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards 123(R), “Share Based Payment,” on a modified prospective basis. The Company incurred $151,000 and $171,000 of stock based compensation operating expense for 2007 and 2006, respectively, as a result of the adoption. No new stock option grants were made in 2007 however stock compensation expense in future quarters could increase if new stock option grants are made to new and current employees and Directors.
Operating expenses in 2007 increased by 22% from 2006. This increase is primarily due to amortization of the marketing fee paid to Triax in 2007. The Company expects to increase investment in research and development of new skincare products and to market newly developed compounds. Its future operating expenses may rise due to this investment.
In March 2006, the Company retired its outstanding Senior Secured Notes along with related stock warrants and issued new warrants. The unamortized discount on the date of retirement, $927,000, was expensed in 2006 and that expense is reflected in net income.
In March 2006, the Company recognized a $250,000 gain on the sale of the Reliaject® assets to Ranbaxy Pharmaceutical which is included in net income for 2006.
Liquidity and Capital Resources
As of December 31, 2007, the Company’s principal sources of liquidity included cash and cash equivalents resulting from Company operations. Management believes its cash and cash equivalents and cash expected to be generated by its business activities will be sufficient to meet its working capital needs for at least the next twelve months. Should the Company be faced with currently unanticipated significant cash requirements in connection with gaining regulatory approvals of its products currently in development or in connection with protecting its patents or defending against patent infringement litigation, the Company’s present capital resources might be inadequate to fund its capital needs. Additionally, if the Company were to engage in a business combination transaction, its current cash position could be adversely impacted and its need for additional financing accelerated, although the impact of any such transaction cannot be evaluated at this time.
Net cash provided by continuing operating activities totaled $18,016,000 for 2007 compared to 1,269,000 for 2006. The change is primarily attributed to the income from License Acquisition Agreement with Valeant in March 2007.
Cash and cash equivalents increased to $19,979,000 at December 31, 2007 from $3,368,000 at December 31, 2006, principally reflecting net cash provided by continuing and discontinued operations of $18,019,000 in 2007 reduced by $1,500,000 to pay off the Company’s revolving line of credit with Silicon Valley Bank.
The financial statements set forth in Part IV of this Report have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are presented in U.S. dollars.
Revenues
Substantially the Company’s entire revenue base in 2007 and 2006 was derived from license fees and royalties on its patented Kinetin and Zeatin skincare ingredients and remittances received from Covance Antibody Services Inc. on sales of monoclonal antibodies produced from cell lines licensed by the Company from RFMH. On March 30, 2007, Senetek completed a License Acquisition Agreement with Valeant. Under the terms of the License Acquisition Agreement, the Company has granted Valeant a paid up license for Kinetin and Zeatin and assigned to Valeant future royalties from other Kinetin licensees, in return for a cash payment of $21 million, a waiver of $6 million in future marketing credits the Company otherwise would have owed to Valeant, and a right to share in future royalties due to Valeant from other Kinetin licensees through 2011. As a result, the Company’s future revenues from its Kinetin and Zeatin products are expected to be minimal, if any. Additionally, if RFMH’s patents were successfully challenged, the Company’s revenue from Covance’s sales would be substantially reduced or eliminated.
Skincare Segment
Skincare revenues increased $18,060,000, or 257%, for 2007 compared to 2006. This increase was primarily due the License Acquisition Agreement with Valeant in March 2007 which provided $24,750,000 in skincare revenues offset in a small part by the loss of direct-to-the public skincare product sales of Kinetin during 2006 as a result of the July 2005 amendment to the original Valeant license agreement.
The Company expects its 2008 revenue and net income to decrease significantly from 2007. On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution. As of April 15, 2008, the contractual dispute resolution remains in process.
As a result of the on-going process the Company does not expect to receive the minimum royalties of $10.8 million for fiscal 2008 as specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
The Company is also dependent upon successful development of new active ingredients for its future revenue growth.
Pharmaceuticals Segment
2007 Pharmaceutical revenues were $1,369,000, a 2% decrease from 2006. While royalties on monoclonal antibodies increased $58,000, or 4%, there were no sales of polyclonal antibodies or Invicorp in 2007 as compared to $65,000 in polyclonal antibody sales and $13,000 in Invicorp sales in 2006.
Revenues from sales of monoclonal and polyclonal antibodies are expected to continue to fluctuate as the sales of these products follow patterns determined by project-driven research organizations. The Company’s agreement with Covance guarantees Senetek minimum payments for monoclonal antibodies of $860,000 in 2008 through 2010 and $442,000 in 2011, partially offset by Senetek’s guaranteed payments to RFMH of $430,000 in 2008 through 2010 and $221,000 in 2011.
Gross Profit
Gross profit for 2007 increased from 2006 due to higher Skincare royalties, primarily from Valeant. Despite the large increase in Skincare revenue, gross profit as a percentage of Skincare revenue increased 3% in 2007 as compared to 2006 due to the direct correlation between Kinetin Skincare revenues and Kinetin cost of sales as the founders of Kinetin receive a fixed percentage of Kinetin revenue. Pharmaceutical gross margin was stable in 2007 and 2006.
Historical gross profit percent from Skincare revenues is high because it is primarily royalty based. Gross margin will decrease markedly in 2008 as costs of goods sold increases as a result of sales and marketing of Pyratine-6. In the case of other emerging skincare products, Senetek may opt to develop or co-develop its own distribution capability within certain channels which can be efficiently serviced without significant infrastructure. In this case, the Company would expect its revenues and gross profit to be higher but its gross profit percentage to be lower.
Gross profit from monoclonal and polyclonal antibodies is expected to fluctuate as the sales of these products follow patterns determined by project-driven research organizations. The Company’s agreement with RFMH guarantees RFMH minimum royalty payments from Senetek for monoclonal antibodies of $430,000 in 2007 through 2010 and $221,000 in 2011 in conjunction with the Company’s agreement with Covance which guarantees Senetek minimum payments from Covance for monoclonal antibodies of $860,000 in 2008 through 2010 and $442,000 in 2011.
Research and Development
Research and development expense consists primarily of employee related expenses, contract costs of research agreements with third-party consultants, clinicians and research scientists and product testing.
Research and development spending in 2007 was slightly lower compared to 2006. Skincare research and development spending declined 11% in 2007 compared to 2006 due to a higher level of clinical test work in 2006 on 4HBAP and PRK 124.
Senetek expects to accelerate research and product development and, as a result, research and development expense will increase in the future as progress continues on 4HBAP and AK-801.
Administration, Sales and Marketing
For the years ended December 31, 2007 and 2006, the following Administration, Sales and Marketing expenses were incurred:
Administration, sales and marketing expenses increased in 2007 as compared to 2006 almost entirely due to marketing fees resulting from the August 2007 agreement with Triax which called for periodic marketing payments in the first year of the agreement.
On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution. As of April 15, 2008, the contractual dispute resolution remains in process.
In January 2008 the Company paid $1,125,000 in Marketing Fees to Triax and has paid a total of $2,250,000 since the inception of the agreement. As a result of the on-going dispute resolution process, the Company does not expect to pay the remaining $2,250,000 in Marketing Fees for fiscal 2008 specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
In addition, Travel and Related expenses have increased as a result of business development related international travel. Conversely, comparative Legal and Other Professional Fees have continued to decrease as litigation and patent infringement issues have diminished.
Other Income and Expense
The primary recurring components of other income and expense is interest income on cash accounts and interest expense on the Company’s borrowings.
During the year ended December 31, 2007 the Company recorded $1,308,000 related to the write-off of Goodwill. The Company’s recorded goodwill resulted from the prior acquisition of Carmé Cosmeceutical Sciences Inc., which is part of the Skincare business segment. As a result of the Valeant transaction and the related transfer of the rights of future Kinetin and Zeatin royalties, the goodwill balance of $1,308,000 was determined to be impaired and written off in March 2007.
In April 1999, the Company issued $7,389,000 in aggregate principal amount of secured promissory notes. In connection with the issuance of these promissory notes, the Company issued Series A, B and C warrants for an aggregate of 375,000 ordinary shares at $9.60 per share, 412,500 ordinary shares at $12.00 per share and 150,000 ordinary shares at $16.00 per share. The Series A, B and C warrants originally expired 10 years from the date of issuance, or April 14, 2009. The estimated fair value of the warrants was recorded as notes payable discount and
was amortized as additional interest expense over the terms of the promissory notes. On June 20, 2001, under an amendment to the Securities Purchase Agreement, the maturity of these notes was extended to April 2004. During 2003 and 2004, the Company further amended the promissory notes and Series A, B and C warrants resulting in an increase in the related discount of $1,447,000 and $367,000 respectively. On March 31, 2006, the Company paid the outstanding principal amount of the notes and accrued interest, with the result that the notes and outstanding Series A, B and D warrants were canceled. The Company recognized a loss of approximately $927,000, representing the unamortized discount on the notes, related to the extinguishment of the debt. The amortization of the discount on the notes, which is included in interest expense, amounted to $243,000 for 2006.
On March 20, 2006, the Company sold to Ranbaxy Pharmaceuticals Inc. all of its patents, trademarks and automated manufacturing equipment for the Reliaject® device (the “Reliaject® assets”). The Company received a down-payment of $500,000 for the Reliaject® assets, which had a corresponding recorded value of $250,000. The $250,000 gain was recorded to other income.
Discontinued Operations
On December 31, 2002, the Company closed a transaction in which USITC purchased its rights to the Mill Creek personal care line, the Silver Fox hair care line and other brands. On November 10, 2004, the Company and USITC entered into an agreement to restructure a note associated with the purchase. Under the terms of the restructuring, Senetek received $1,435,000 in cash and a $400,000, two and one half year, secured amortizing note bearing interest at 8% per annum. Under the terms of the agreement, if USITC fails to pay any of the quarterly payments due under the new $400,000 note, all of its obligations under the original $2.3 million note, less amounts actually paid, will be reinstated and subject to acceleration for non-performance. In 2007 and 2006, payments of $89,000 and $223,000, respectively, made by USITC on the $400,000 promissory note was recognized as income from discontinued operations. Concurrent with the payment for the quarter ended June 30, 2007, the note was paid in full.
Taxation
Refer to Income Taxes below and Note 11 to the Financial Statements for discussion of the Company’s significant deferred tax assets and liabilities and net operating loss carryforwards.
Contractual Obligations
The Company has contractual obligations related to non-cancelable lease agreements and purchase obligations as listed below. Contractual obligations related to employment agreements are detailed in the “Compensation Discussion & Analysis” under Part III, Item 11 of this report on Form 10-K.
(1) The Company is committed to provide $80,000 in support to the Institute of Experimental Botany in Prague, Czech Republic for its continued research on certain cytokinins and other classes of naturally-derived cytokinins.
(2)
The Company was obligated to pay certain Marketing Fees under its agreement with Triax. On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution. As of April 15, 2008, the contractual dispute resolution remains in process. In January 2008 the Company paid $1,125,000 in Marketing Fees to Triax and has paid a total of $2,250,000 since the inception of the agreement. As a result of the on-going dispute resolution process, the Company does not expect to pay the remaining $2,250,000 in Marketing Fees for fiscal 2008 specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
(3) The Company has a contractual obligation to RFMH for minimum payments of $430,000 per year through July 10, 2011. In conjunction, Senetek receives contractual minimum payments from Covance of $860,000 per year, without right of offset, for the same period.
Government Policy
It is the Company’s opinion that there are no aspects of government policy which, as far as can be foreseen, are likely to have a material effect on the conduct of its business, except as generally described in Part I, Item 1, of this Form 10-K under the heading “Government Regulation.”
Impact of Inflation
Management believes that inflation has not had any material effect on the results of the Company’s operations to date.
Critical Accounting Policies
A “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s significant accounting policies are described in the Notes to the consolidated financial statements included in this Form 10-K. Management believes that the following accounting policies fit the definition of critical accounting policies. The critical accounting policies were discussed with the entire board of directors of the Company.
Revenue Recognition
Royalties from the Company’s skincare licensees are recognized based on estimates that approximate the point products have been sold by the licensees. The Company receives sales reports from the licensee and based upon this information, plus subsequent cash receipts, records royalty revenue. Royalty revenue is generally paid by the licensee within 30 days of quarter end. Estimates are adjusted to reflect actual results within one quarter of product sales by licensee. Historically, license revenue has not differed significantly from management’s estimates.
Royalties received from the Company’s licensee on their sale of monoclonal antibodies are recognized based upon a percentage of actual sales pursuant to the contract terms. Upfront license fees received from the licensing of manufacturing and distribution rights for the Company’s skincare products are deferred and recognized as revenue is earned, which is generally on a straight-line basis over the life of the contract. Revenues from the sales of Pyratine-6 are recorded in the quarter in which the sales occur. Royalties from Invicorp® are recorded quarterly, as reported by the licensees.
Revenue from the sale of the Company’s skincare products and of Invicorp® is recognized at the time of shipment, which is when legal title and risk of loss is transferred to the Company’s customers, and is recorded at the net invoiced value of goods supplied to customers after deduction of sales and value added tax where applicable
Impairment of Goodwill and Other Long-lived Assets
The Company assesses the impairment of goodwill annually and other long-lived assets such as property and equipment and other intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors it considers important which could trigger an impairment review include the following:
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Significant underperformance relative to expected historical or projected future operating results;
•
Significant changes in the manner of the Company’s use of the acquired assets or the strategy for its overall business;
•
Significant negative industry or economic trends.
When the Company determines that the carrying value of goodwill and other long-lived assets and property and equipment may not be recoverable based upon the existence of one or more of the above indicators of impairment, it measures any impairment based on a projected discounted cash flow method using a discount rate determined by its management to be commensurate with the risk inherent in its current business model.
The Company reviews the carrying value of its property and equipment and intangible assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. The determination of fair value is a critical and complex consideration when assessing impairment that involves significant assumptions and estimates. These assumptions and estimates are based on the Company’s best judgments.
The Company’s recorded goodwill as of December 31, 2006 resulted from the prior acquisition of Carmé Cosmeceutical Sciences Inc., which is part of the Skincare business segment. As a result of the Valeant transaction, the goodwill balance of $1,308,000 was determined to be impaired and written off in March 2007.
Income Taxes
As a result of certain historical losses related to development of Reliaject®, the Company has significant US deferred tax assets that could be utilized if it generates future taxable income for Reliaject® and is otherwise required to pay income taxes. Pursuant to the “change in ownership” provisions of the Tax Reform Act of 1986, utilization of its net operating loss that carries over may be limited if a cumulative change of ownership of more than 50% occurs within any three-year period. The Company has determined that such a change in ownership has not occurred through December 31, 2007. Management believes that Reliaject® will ultimately generate profitability and that the deferred tax asset will have value, but due to lack of operating history and general uncertainty, it provided for a 100% valuation allowance against its entire deferred tax asset. Should the Company’s operating results indicate that its profitability is more likely than not to lead to the utilization of all or a portion of the deferred tax asset, it will reverse all or a portion of the Company’s valuation allowance. Subsequent changes to the estimated net realizable value of the deferred tax asset could cause its provision for income taxes to vary significantly from period to period, although its cash tax payments would remain unaffected until the benefit of the NOL is utilized, assuming that a “change in ownership” does not limit those losses.
While the Company has closed its UK office, it is actively engaged in promoting regulatory approval and commercialization of Invicorp® through its licensee in the UK, Ardana Bioscience Ltd, and believes that this continuation of trade preserves the Company’s UK NOLs. Management is budgeting for improved performance and future operating results which may generate future taxable income and it may reduce the valuation allowance when realization is deemed to be more likely than not. The United Kingdom tax-loss carryforwards are available indefinitely against profits from the same trade carried on in the United Kingdom, but could be limited if there was a greater than 50% change in ownership in any three-year period.
Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS 123(R), “Share-Based Payment”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors, including employee stock options and employee stock purchases, based on estimated fair values.
The Company adopted SFAS 123(R) using the modified prospective method, which requires the Company to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS 123(R). The fair value concepts were not changed significantly in SFAS 123(R); however, in adopting SFAS 123(R), companies must choose among alternative valuation models and amortization assumptions. After assessing alternative valuation models and amortization assumptions, the Company will continue using both the Black-Scholes option-pricing formula and straight-line amortization of compensation expense over the requisite service period of the grant. The Company will reconsider use of this model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. Under SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”), the Company was not required to estimate forfeitures in the expense calculation for the stock compensation pro forma footnote disclosure; however, SFAS 123(R) requires an estimate of forfeitures and upon adoption the Company changed its methodology to include an estimate of forfeitures. The adoption of SFAS 123(R) had no effect on cash flows from operating activities.
Subsequent Events
On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution. As of April 15, 2008, the contractual dispute resolution remains in process.
As a result of the on-going process the Company does not expect to receive the minimum royalties of $10.8 million for fiscal 2008 as specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
On January 18, 2008, 697,350 stock options were granted to Senetek employees and directors. The options were priced at $2.50 per share, the closing price on the date of grant, with a term of 7 years. 458,750 shares vest 20% immediately and 20% on each anniversary of the grant date through January 18, 2012. The remaining 238,600 shares vest ratably over 48 months. All other terms of the grants were in accordance with the terms of the Senetek Equity Plan. Of the total stock options granted, 63,500 stock options were granted outside the Senetek Equity Plan in accordance with the terms of the Senetek Equity Plan.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting company; see Regulation S-K Section 229.301(c)
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a) (1) and 15(a) (2) of Part IV of this Report on Form 10-K.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A(T)-
ITEM 9A(T)-CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s chief executive officer and its principal financial officer have evaluated the effectiveness of its disclosure controls and procedures, as defined under Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2007. Based on that evaluation, its chief executive officer and its principal financial officer have concluded that its disclosure controls and procedures were effective to provide reasonable assurance that information that it is required to disclose in reports that the Company files with the SEC is recorded, processed, summarized and reported within the time periods specified by the Exchange Act rules.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of Senetek’s management, including its Chief Executive Officer and Chief Financial Officer, Senetek conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2007 based on the guidelines established in Internal control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the results of this evaluation, Senetek’s management has concluded that its internal control over financial reporting was effective as of December 31, 2007 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external reporting purposes in accordance with generally accepted accounting principles. The results of management’s assessment were reviewed with the Audit Committee of Senetek’s Board of Directors.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
During 2007, there were no changes to the Company’s internal controls over financial reporting which were identified in connection with the evaluation of its disclosure controls and procedures required by the Exchange Act rules and which have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
None
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
As of December 31, 2007, the Company had four Directors.
Mr. Massino became Chairman and Chief Executive Officer of Senetek PLC in November 1998. Prior to becoming Chairman and Chief Executive Officer of Senetek, Mr. Massino served as President of Carmé Cosmeceutical Sciences, Inc., a wholly-owned subsidiary of Senetek. Drawing on professional management experience at major corporations such as Glaxo Inc., Ortho Pharmaceutical Corporation, Johnson & Johnson, Pfizer and IBM, Mr. Massino has reshaped the corporate structure of Senetek, defined its strategic direction and focused the Company soundly on its core competencies, successfully commercialized lead products, greatly expanded the Company’s IP portfolio, eliminated the debt, and turned the Company profitable. Mr. Massino has created and developed strategic scientific collaborations and industry partnerships that will allow the Company to accelerate product development and commercialization and sustain future growth of the Company.
During his career, Mr. Massino has successfully negotiated more than 60 licensing agreements and marketing collaborations with major pharmaceutical companies. For nine years he held executive management positions at Ortho Pharmaceutical, including Director of Business Development and New Products, and in 1982, was named “Division Manager of the Year.” While at Ortho, Mr. Massino was Product Manager Retin-A®, a leading prescription product for the treatment of acne. In addition, he was involved in the development and launch of Renova®, which in 1995, was FDA approved for anti-aging applications. As Product Director of Marketing and Division Sales Manager at Glaxo Inc., he repositioned a mature line of corticosteroids into a $60 million psoriasis business, successfully launched two new ethical pharmaceutical products and championed the internal development of two critically important product line extensions.
Mr. Massino holds bachelor’s degrees in Finance and Chemistry from the University of Illinois and is a graduate of the Marketing Management Program of the Columbia Executive Program at Columbia University and the Management of Managers Program of the Graduate School of Business Administration at the University of Michigan. Mr. Massino is also highly experienced in drug delivery technology and holds a patent on a drug delivery device, and is a contributing inventor of Pyratine-6 and 4HBAP. He is an active member of the Licensing Executives Society. Under the Company’s Articles of Association, as an Executive Director, Mr. Massino’s term as a director does not expire.
Mr. Williams was appointed a Director in February 2003. Since September 2005 he has been a partner at Baker & McKenzie LLP, a global law firm headquartered in Chicago. For more than thirty years prior to that he was a Corporate Partner at Coudert Brothers LLP, a New York City-based international law firm where he also had served as Chairman of the Executive Committee from 1993 to 2001 and as Administrative Partner, responsible for worldwide operations. In September 2006 Coudert Brothers LLP filed for Chapter 11 bankruptcy protection in the Southern District of New York Bankruptcy Court. He is a graduate of Harvard University and New York University School of Law. He has been admitted to the Bar at the United States Supreme Court, the State of New York and State of California. Mr. Williams sits on the board of the following companies and organizations: RAG American Coal Holdings, Inc., DBT America Inc., Trautman Wasserman & Company Inc., IE Holdings, Ltd., Brook Capital Corporation, Plymouth Holdings Limited, River Ventures, Inc., Fenn Wright & Manson and the German American Chamber of Commerce.
Mr. Dukes was appointed a Director in May 2006 and elected by the shareholders in December 2006. Mr. Dukes is Chief Executive Officer and co-founder of Ardour Capital Investments LLC, a registered investment banking and securities brokerage firm based in New York City, where he is responsible for the organization, recruitment, financing and implementation of Ardour’s business plan. Mr. Dukes has more than 20 years experience in the investment banking and securities industry. Before founding Ardour, Mr. Dukes served as Director/Senior Managing Partner/Head of Global Activities for BlueStone Capital Partners and Trade.com, where he started-up and grew the firm’s brokerage operations and was instrumental in negotiating and selling a significant interest in the company to ABN Amro Bank, N.V. Prior to BlueStone, Mr. Dukes served as a Board Member, Chief Operating Officer and Managing Director of Commonwealth Associates. Mr. Dukes began his career in the management program at Shearson Lehman. He has served on the boards of numerous public companies, including Commonwealth Associates Growth Fund and Food Integrated Resources. Mr. Dukes attended the State University of New York.
Mr. Bogardus was appointed a Director in May 2006 and elected by the shareholders in December 2006. Mr. Bogardus is President and founder of Ingredia Resources LLC, which consults with cosmetics and personal care companies in designing, developing and marketing unique functional ingredients for use in topically applied products. Prior thereto, Mr. Bogardus was Vice President and Category Head, Research and Development, of GlaxoSmithKline, a global healthcare company, with responsibility for denture care brands, from July 2001 to July 2002, and Senior Vice President, Research & Technology, of Block Drug Company, a global healthcare company, from January 1999 to June 2001, when Block Drug was acquired by GlaxoSmithKline. From 1992 through 1998 Mr. Bogardus was Senior Vice President, Global Research and Development Group, of Mary Kay, Inc., a direct selling cosmetics company; from 1986 through 1992 he was Director, European Technology Center, of Colgate-Palmolive Company, a global personal care products company; and prior thereto he held responsible product research and development positions with Richardson-Vicks, Inc., a subsidiary of Procter & Gamble Company, S.C. Johnson & Son, Inc. and The Gillette Company, all global personal care products companies. Mr. Bogardus holds a B.S. degree in Chemistry from Milliken University.
Executive Officers
Frank J. Massino, Chairman of the Board of Directors and Chief Executive Officer (see above).
William O’Kelly, age 53, has been Chief Financial Officer of the Company since April 2006 and Secretary of the Company since August 2006. From July 2005 until April 2006 Mr. O’Kelly was a financial consultant to Netopia, Inc, a manufacturer and distributor of broadband customer premises equipment, remote management software and broadband services. From July 2001 to July 2005 he was Chief Financial Officer and Secretary of Agentis Software, an application development software company which he co-founded; and from April 1998 to July 2001 he was Vice President-Finance and Treasurer of Informix Software, a database software company with revenues in excess of $1 billion. Prior to that he was Chief Financial Officer of Chemical Supplier Technology, an on-site manufacturer of high purity chemicals for silicon wafer and chip fabrication factories from February 1996 to April 1998 and Corporate Controller of Air Liquide America Corporation, an industrial gas manufacturing subsidiary with revenues in excess of $1 billion from August 1993 to February 1996. For 16 years prior to that he performed audit and tax services as a certified public accountant with the accounting firm of Ernst & Young. Mr. O’Kelly holds a BS degree in Accounting from the University of Florida.
Independent Directors
The Board has determined that the following Directors of the Company (constituting a majority of all Directors) are “independent” within the meaning of the listing standards of the NASDAQ Stock Market: Mr. Bogardus, Mr. Dukes and Mr. Williams.
Financial Expert
The Board of Directors has determined that Mr. Dukes is an “audit committee financial expert” by reason, among other things, of his experience as chief executive officer of a registered securities investment banking and broker-dealer firm and as an investment banker involved in over 20 registered public offerings of securities. Mr. Dukes and Mr. Bogardus constitute the Audit Committee of the Board.
Communication with Directors
Individuals may submit communications to the Board or to the non-management Director by sending the communications in writing to the attention of the Secretary of the Company at Senetek PLC, 831 Latour Court, Napa, CA 94558. All communications that relate to matters that are within the scope of responsibilities of the Board and the Committees will be forwarded to the appropriate Director.
Director Nomination Process
All four of the seats on the Nominating Committee are currently vacant and the functions of the Committee are performed by the full Board. The duties of the Nominating Committee consist, among other things, of identifying individuals qualified to become Board members, selecting, or recommending to the Board, the Director nominees for the next Annual General Meeting, selecting, or recommending to the Board, Director candidates to fill any vacancies on the Board, and receiving proposals for Director nominees from beneficial holders of the Company’s ordinary shares. A copy of the Nominating Committee’s charter is available on the Company’s website at www.senetekplc.com. The Nominating Committee makes an assessment of the suitability of candidates for election to the Board, taking into account business experience, independence, and character. The Board has not, thus far, considered it appropriate to adopt specific, minimum objective criteria for director nominees. There have been no material changes to the procedures by which security holders may recommend nominees to the Board since the distribution of the Company’s last proxy statement for its election of directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s directors and executive officers, and persons who own more than ten percent of a registered class of its equity securities, to file with the Commission and any exchange or other system on which such securities are traded or quoted, initial reports of ownership and reports of changes in ownership of common shares and other equity securities of the Corporation.
To its knowledge, based solely on a review of the copies of such reports furnished to the Company, it believes that all reporting obligations of its officers, directors and greater than 10% shareholders under Section 16(a) were satisfied during the year ended December 31, 2007.
Code of Ethics
The Company has adopted a code of ethics that applies to all of its employees, Directors and consultants, and includes additional provisions specifically applicable to its chief executive officer and senior financial officers. A copy of this code of ethics (which is entitled “Senetek PLC-Code of Business Conduct”) can be found on the Company’s website at senetekplc.com. In the event of any amendment to, or waiver from, the code of ethics, the Company will publicly disclose the amendment or waiver by posting the information on its website.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Executive Compensation Tables and Narrative Disclosure
Current Compensation
SUMMARY COMPENSATION TABLE
(1) Detail of All Other Compensation
(2) Stock and option compensation expense is computed in accordance with SFAS 123(R). See Note 9 of Notes to Consolidated Financial Statements for computation details.
Effective January 1, 2007, Mr. Massino’s base salary was increased from $340,000 to $360,000 and effective January 1, 2008, his base salary was increased from $360,000 to $370,000. Effective January 1, 2007, Mr. O’Kelly’s base salary was increased from $190,000 to $215,000 and effective January 1, 2008, his base salary was increased from $215,000 to $222,310.
The Compensation Committee awarded the base salary increases described in the preceding paragraph, the 2007 cash bonuses included in the “Summary Compensation Table” and the equity grants fully described in the preceding section entitled Material Terms of Grant Based Awards. The Compensation Committee concluded that total compensation for the Chief Executive Officer and the Chief Financial Officer was fair and adequate.
There were no options granted during 2007, therefore the “Grants of Plan-Based Awards” table has not been included.
The Company does not plan to release material non public information for the purpose of affecting executive compensation and it does not plan or coordinate grants to existing or new executives around the release of material non public information.
Employment Agreements
The Company maintains employment agreements with key executives principally to define terms under which employment will cease and to provide explicit benefits if termination of employment occurs for certain reasons. These termination benefits are generally comparable to its benchmarked public companies, including IGI, Barrier Therapeutics, PhotoMedex, Antares Pharma, Bentley Pharmaceuticals, Vivus and Palatin Technologies, and have been constructed to provide an orderly transition for the Company if a termination event were to occur.
Material Terms of Employment Agreements
The Company has an employment agreement dated November 1, 1998 with Mr. Massino, as amended effective June 30, 2000, October 31, 2002, January 1, 2003 and April 2006. The agreement and amendments provide for a perpetual three-year term and an annual salary of $340,000 per annum subject to discretionary increases by the Compensation Committee from time to time. Mr. Massino’s base salary was increased from $360,000 to $370,000 as of January 1, 2008. The contract also provides for an automobile allowance of $1,000 per month and reimbursement of related automobile operating expenses. Under the agreement, Mr. Massino is entitled to an annual bonus, to be determined by the Compensation Committee, and is eligible to participate in the Company’s management bonus plan, if any.
Under the terms of the employment agreement, in the event that Mr. Massino’s employment is terminated by the Company (other than for “permanent disability” or “cause”, as such terms are defined in the agreement) or by Mr. Massino for “good reason” (as defined in the agreement), Mr. Massino would become entitled to a lump sum payment equal to the product of multiplying his base salary (and a deemed bonus, if any, as determined in accordance with the agreement) by three (i.e., the number of years remaining under the “evergreen” provisions of his employment agreement). Further, in such circumstance, all unvested and/or unexercisable options held by Mr. Massino would become immediately vested and exercisable. The agreement also provides for payment upon consummation of certain changes of control (as defined below), provided that the Company would not be required, on a change of control, to pay Mr. Massino any amounts that would constitute an “excess parachute payment” under the Internal Revenue Code. For purposes of the employment agreement with Mr. Massino, a “change of control” would include, among other events set forth in that agreement, (i) a sale, lease or transfer of all or substantially all of its assets, (ii) the adoption by its shareholders of a plan relating to Senetek’s liquidation or dissolution, (iii) Senetek’s merger or consolidation, following which its shareholders immediately prior to such event hold less than 50% of the voting power of the surviving or resulting corporation, (iv) an acquisition by an individual or group of more than 50% of the Company’s voting securities, and (v) a change in the Board of Directors that results in less than a majority of the Board being comprised of directors that have served on the Board of Directors for at least 12 months or who were approved by a majority of the Board at the time of their election or appointment.
The Company has a payment agreement dated March 5, 2007 with Mr. O’Kelly that requires the Company to make certain severance payments to Mr. O’Kelly in the event his employment is terminated under certain circumstances. If: (A) following a Change of Control, the Company does not retain Mr. O’Kelly as Chief Financial Officer or he is not offered a position of Equivalent Authority by the Company or a Successor Enterprise or (B) Mr. O’Kelly does not continue his employment with the Company or a Successor Enterprise after a Relocation, then, in either such event, the Company will continue to pay him his base salary as at the date of the Change of Control or Relocation for a period of six months following his separation from the Company or the Successor Enterprise.
The Compensation Committee believes the change in control provisions for the Chief Executive Officer and the Chief Financial Officer are appropriate because neither individual would likely be retained in the event of such a transaction and the provision of change in control benefits serves as an incentive in the best interest of shareholders if such a transaction is under consideration.
Current Equity Holdings and Realization on Equity Holdings
OUTSTANDING EQUITY AWARDS
(1) Share amounts and prices listed are after the eight-to-one reverse share split approved by shareholders on December 10, 2007
(2) Vesting at 781 shares per month through December 17, 2010
(3) On June 6, 2006, the Compensation committee awarded 150,000 non-qualified options to Mr. Massino and 25,000 non-qualified options to Mr. O’Kelly. For Mr. Massino, the award was relatively large because it was the first since 2002 and also because 100,000 previously granted options expired in 2006. For Mr. O’Kelly, it was an initial employment award in line with past Company practices. The option grants have a term of seven years and were priced at the Company’s share market price at the close of business on the grant date. The option grants vest 25% each with respect to calendar years 2006, 2007, 2008 and 2009 if and only if one of the two conditions (“A” or “B”) described below are satisfied. If neither condition is satisfied with respect to the calendar year, the tranche applicable to that year plus any unvested cumulative tranches from prior years are carried forward to the following year and fully vested if one of the two conditions are met with respect to that year. The criteria for Condition B was met in 2007 and 2006; the shares are 50% vested at December 31, 2007
Condition A
At any time during the calendar year, the closing price of Senetek PLC American Depositary Shares for a consecutive 60 day period averages “X” or higher, as defined below (provided that options shall not vest within the first six months after grant).
Condition B
“Net Operating Income” for the calendar year is greater than or equal to “Y” as defined below. For purposes of this calculation, “Net Operating Income” is defined as Operating Income computed in accordance with U.S. Generally Accepted Accounting Principles plus all operating expenses associated with any program to migrate from a UK legal entity to a US legal entity and operating expenses associated with the evaluation or institution of a share buyback program. Such expenses include, but are not limited to, professional fees, travel and temporary help and specifically exclude imputed value of any CEO or CFO compensation expense except if that compensation expense is directly attributable to the subject programs.
(1) Share prices listed are after the eight-to-one reverse share split approved by shareholders on December 10, 2007
OPTION EXERCISES AND STOCK VESTED
(1) Share amounts and prices listed are after the eight-to-one reverse share split approved by shareholders on December 10, 2007
(2) Represents the difference between market value on the date of exercise and the exercise price
(3) Represents the value of restricted shares pursuant to a December 18, 2006 restricted stock grant that vested on December 18, 2007. The closing per share price on December 18, 2007 was $3.00.
Post Employment Compensation
Neither a “Pension Benefit Table” nor a “Non-Qualified Deferred Compensation Table” has been included as there were no applicable transactions in the reporting periods.
Potential Payments upon Termination or Change in Control
The Company currently has an employment agreement with Mr. Massino and a payment agreement with Mr. O’Kelly that include severance and change of control provisions. These provisions are fully described in the preceding section titled Material Terms of Employment Agreements. In the event Mr. Massino was to be terminated without cause or in the event of a change in control as described above, Mr. Massino would be entitled to a minimum lump sum payment of $370,000 (his current salary) plus a deemed bonus times three. In addition, all unvested stock options and restricted stock would immediately vest. In the event Mr. O’Kelly was to be terminated as a result of a change in control or relocation as described above, Mr. O’Kelly would be entitled to a lump sum payment of $107,500. No severance or change of control payments have been made or are currently due with respect to these agreements. There are no other employment agreements in place and no claims existed at December 31, 2007 with respect to employment agreements with past employees.
Director Compensation Tables and Narrative Disclosure
DIRECTOR COMPENSATION TABLE
(1) Mr. Massino is Chairman of the Board. His compensation is discussed in the Executive Compensation tables.
(2) Stock option compensation expense is computed in accordance with SFAS 123(R). See Note 9 of Notes to the Consolidated Financial Statements for computation details. Grant date fair value of option awards during 2006 were as follows: Mr. Williams, $34,800; Mr. Dukes, $17,400; Mr. Bogardus, $17,400. No grants were made in 2007.
(3) Mr. Williams holds an aggregate total of 56,250 stock options at December 31, 2007. Mr. Dukes and Mr. Bogardus each hold an aggregate total of 12,500 stock options at December 31, 2007. Share amounts listed are after the eight-to-one reverse share split approved by shareholders on December 10, 2007.
Effective January 1, 2008, non-employee Directors receive a $3,125 quarterly cash stipend. New non-employee Directors historically have been granted an option to purchase shares upon joining the Board. There is no established policy requiring such a grant. Subsequent equity grants in the form of stock options, restricted stock or a combination of stock options and restricted stock typically take place annually and are based on each Directors responsibility, experience, performance and ability to influence the Company’s long-term growth and profitability.
Compensation Committee
Compensation Committee Practices and Procedures
The Compensation Committee of the Board of Directors, comprised solely of independent Directors, has the responsibility and authority to establish the compensation program for the Company’s Executive Officers. The Compensation Committee is comprised of Mr. Kerry Dukes (Chairman) and Mr. Rodger Bogardus. The Compensation Committee has the responsibility and authority to establish the compensation program for the Company’s Executive Officers.
In addition, the committee may also request independent compensation survey data and proxy information from companies similar in nature and size for comparative purposes. The Company’s executives may advise the committee but play no role in compensation decisions. The committee reserves the right to also consider other unique factors in setting compensation levels and to adjust or recover for awards of payments if the Company adjusts or restates performance measures in a manner that would reduce the size of an award or payment.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of Senetek’s outstanding ordinary shares as of March 31, 2008 by (i) each of Senetek’s Directors who is also a stockholder; (ii) its Chief Executive Officer; (iii) its other executive officers currently in office; and (iv) all executive officers and Directors of Senetek as a group. There are no persons believed by Senetek to own beneficially more than 5% of the Company’s outstanding ordinary Shares. The holders listed below have sole voting power and investment power over the shares beneficially held by them. The address of each of its Directors and executive officers is that of Senetek.
* Less than one percent
(1) Share amounts listed are after the eight-to-one reverse share split approved by shareholders on December 10, 2007
(2) For purposes of this table, a person or a group of persons is deemed to have “beneficial ownership” as of a given date of any shares which that person has the right to acquire within 60 days after that date. For purposes of computing the percentage of outstanding shares held by each person or group of persons named above on a given date, any shares which that person or persons has the right to acquire within 60 days after that date are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
(3) Includes the following number of shares issuable upon exercise of options or warrants that currently are exercisable or will become exercisable within 60 days of March 31, 2008: Mr. Massino: 292,920; Mr. O Kelly: 12,500; Mr. Williams 43,750; Mr. Dukes: 6,250; and Mr. Bogardus: 6,250
See Item 5 above for information regarding the Company’s equity compensation plans.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Anthony Williams, a Director of the Company, has been a partner of the law firm of Baker & McKenzie LLP since September 2005 and prior to that was a partner of the law firm of Coudert Brothers LLP. Legal fees paid to Baker & McKenzie LLP in 2007 and 2006 were $268,000 and $232,000, respectively.
The Company is required to pay the two discoverers of Kinetin an equal royalty based on the Company revenues from Kinetin. One of the discoverers of Kinetin, Dr. Brian Clark, is the Chief Scientist for the Company. Total royalty expense related to Kinetin sales for 2007 and 2006 were $573,000 and $158,000, respectively, of which Dr. Clark received 50%. For his role as Chief Scientist, Dr. Clark is paid an annual consulting fee of $108,000.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
The Board of Directors appointed Macias Gini & O’Connell LLP (“Macias Gini”) as independent accountants to examine the Company’s consolidated financial statements for the year ended December 31, 2007 and to render other professional services as required and appointed BDO Stoy Hayward (“BDO Stoy”) as its independent accountants to examine the Company’s English accounts and reports.
Aggregate fees billed by the Company’s principal accountants, Macias Gini for 2007 and 2006, for audit services related to the most recent two years, and for other professional services billed in the most recent two fiscal years, were as follows:
(1) Audit fees: This category consists of fees for professional services rendered by Macias Gini for audits of the Company’s annual financial statements, review of the financial statements included in its quarterly reports on Form 10-Q and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements and statutory audits required by non-U.S. jurisdictions.
(2) Other audit-related fees: None
(3) Tax fees: None
(4) All other fees: None
Aggregate fees billed by the Company’s principal accountants in the United Kingdom, BDO Stoy for 2007 and 2006, for audit services related to the most recent two years, and for other professional services billed in the most recent two fiscal years, were as follows:
(1) Audit fees: This category consists of fees for professional services rendered by BDO Stoy for audits of the Company’s annual financial statements and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit and statutory audits required by United Kingdom jurisdictions.
(2) Other audit-related fees: None
(3) Tax fees: This category consists of fees for professional services rendered by BDO Stoy for United Kingdom tax compliance including tax return preparation, technical tax advice and tax planning.
(4) All other fees: None
The Audit Committee established a policy governing the Company’s use of the Company’s auditors for non-audit services. Under the policy, management may use non-audit services of the auditors that are permitted under SEC rules and regulations, provided that management obtains the Audit Committee’s approval before such services are rendered. In 2007 and 2006, all fees identified above under the captions “Audit Fees”, “Other Audit-Related Fees”, “Tax Fees” and “All Other Fees” were approved by the Audit Committee or the full Board when the Board lacked sufficient non-management Directors to constitute an Audit Committee. The Audit Committee determined that the rendering of other professional services for audit related matters, tax compliance and tax advice was compatible with these firms maintaining their independence. In 2007 and 2006, no hours were expended on the principal accountant’s engagement to audit the financial statements that were attributable to work performed by persons other than the principal accountant’s full-time, permanent employees.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) The following consolidated financial statements are included in Item 8:
Report of Independent Registered Public Accounting Firm:
Macias Gini & O’Connell LLP
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations for the years ended December 31, 2007 and 2006
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Income for the years ended December 31, 2007 and 2006
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006
Notes to the Consolidated Financial Statements
Schedule II-Valuation and Qualifying Accounts
(a)(2) The following financial statement schedules are submitted herewith:
Schedule II is included in Item 8.
(a)(3) The following Exhibits are filed or incorporated by reference as part of this Report on Form 10-K:
* Confidential treatment has been requested as to certain portions of those exhibits
+ Agreements related to Management Contracts or Compensation Plans
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Napa, State of California, on this April 15, 2008.
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Frank J. Massino and William F. O’Kelly, and each of them, with full power of substitution and full power to act without the other, his true and lawful attorney-in-fact and agent to act for him in his name, place and stead, in any and all capacities to sign any or all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits hereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to all intents and purposes, as they or he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Board of Directors and
Stockholders of Senetek PLC
Napa, California
We have audited the accompanying consolidated balance sheets of Senetek PLC and its subsidiaries (the Company) as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive income and cash flows for each of the two years in the period ended December 31, 2007. We have also audited the accompanying financial statement schedule. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Senetek PLC and its subsidiaries at December 31, 2007 and 2006 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related schedule presents fairly, in all material respects, the information set forth therein.
/s/ MACIAS GINI & O’CONNELL LLP
Macias Gini & O’Connell LLP
Sacramento, California
April 15, 2008
SENETEK PLC
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
SENETEK PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to the consolidated financial statements.
SENETEK PLC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME
($ in thousands, except for share data)
See accompanying notes to consolidated financial statements.
SENETEK PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Senetek PLC is a Life Sciences company engaged in the development of technologies that target the science of healthy aging.
Senetek PLC, together with its subsidiaries (the “Company” which may be referred to as “Senetek”), is a public limited company organized under the laws of England in 1983. Senetek has three wholly-owned subsidiaries, Senetek Drug Delivery Technologies Inc. (“SSDT”) and Carmé Cosmeceutical Sciences Inc. (“CCSI”), both Delaware corporations and Senetek Denmark ApS, formed by Senetek under the laws of Denmark.
2. Principal Accounting Policies
(a) Basis of Presentation
The consolidated financial statements incorporate the accounts of Senetek PLC and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The accounts have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
On December 10, 2007 Senetek implemented an eight-to-one reverse share split. All share and per share figures in the financial statements and the notes to the financial statements retroactively reflect this reverse share split.
(b) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in Senetek’s financial statements and notes thereto. On a regular basis, management evaluates these estimates and assumptions. Actual results may differ materially from these estimates.
Examples of significant estimates and assumptions made by management involve the establishment of provisions for bad debt, the determination of fair value of stock compensation awards, realizability of deferred tax assets, impairment of long lived assets, and goodwill valuation.
(c) Cash and Cash Equivalents
For the purposes of the statement of cash flows and balance sheet, the Company considers any highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
At times, cash balances may be in excess of FDIC insurance limits. The Company has not experienced any losses with respect to bank balances in excess of government provided insurance. At December 31, 2007, the Company held $19,892,000 in bank balances in excess of the insurance limits.
(d) Revenue, Deferred Revenues and Accounts Receivable
Revenue from the sale of skincare products, polyclonal antibodies and named patient product sales of Invicorp® is recognized at the time of shipment, which is when legal title and risk of loss is transferred to the Company’s customers, and is recorded at the net invoiced value of goods supplied to customers after deduction of sales and value added tax where applicable. Remittances received from the Company’s marketer, Covance Antibody Services, Inc. (“Covance”) on its sales of monoclonal antibodies are recognized based upon a
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
percentage of actual Covance sales pursuant to the contract terms. Upfront license fees received from the licensing of manufacturing and distribution rights for the Company’s skincare products where the Company has substantive continuing obligations are deferred and recognized as revenue is earned, which is generally on a straight-line basis over the life of the contract. When the Company does not have substantive continuing obligations, such license fees are recognized as revenue. Royalties from the Company’s skincare licensees are recognized based on estimates that approximate the percentage due on products estimated to have been sold by the licensees. The Company receives sales reports from the licensee and based upon this information, plus subsequent cash receipts, records royalty revenue. Historically, license revenue has not differed significantly from management’s estimates. Estimates are adjusted to reflect actual results within one quarter of product shipment.
Revenue on the sale of Pyratine-6 is recognized when reported by Triax.
On March 30, 2007, the Company completed a License Acquisition Agreement with Valeant. Under the terms of the License Acquisition Agreement, the Company has granted Valeant a paid up license for Kinetin and Zeatin and assigned to Valeant future royalties from other Kinetin licensees, in return for a cash payment of $21 million, a waiver of $6 million in future marketing credits the Company otherwise would have owed to Valeant, and a right to share in future royalties due to Valeant from other Kinetin licensees through 2011. The $21 million cash payment will be fully includable in 2007 revenue along with approximately $3,750,000 in previously deferred revenue related to the prior license agreement.
Accounts receivable are uncollateralized customer obligations typically due in 30 days under the terms of respective license agreements. The Company performs continuing credit evaluations of its customers’ financial condition. Senior management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible in its allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to us, management believes the allowance for doubtful accounts as of December 31, 2007 is adequate.
(e) Inventories and Inventory Reserves
Inventories, consisting of raw materials, work in process and finished goods, are stated at standard cost. Standard cost is determined using the average costing method. Inventories are valued at the lower of costs or market.
Reserves for slow moving and obsolete inventories are developed based on historical experience, product demand and shelf life of a product. The Company continuously evaluates the adequacy of inventory reserves and makes adjustments to the reserves as required. At December 31, 2007, it was determined that no reserve for inventory was required.
(f) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight line basis using the following estimated useful lives:
•
Office furniture, fixtures and equipment: 3 to 15 years
•
Laboratory equipment: 5 years
•
Leasehold improvements are amortized over the estimated useful lives of the assets or the related lease term, whichever is the shorter.
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(g) Goodwill
Intangible assets consist of goodwill arising from business combinations. Prior to 2002, goodwill, representing the excess of the purchase price over the estimated fair value of the net assets of the acquired business (Carme), was amortized over the period of expected benefit of 15 years. However, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which requires that the Company cease amortization of all intangible assets having indefinite useful economic lives. Such assets including goodwill are not to be amortized until their lives are determined to be finite, however, a recognized intangible asset with an indefinite useful life should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value.
On March 30, 2007, Senetek completed a License Acquisition Agreement with Valeant. Under the terms of the License Acquisition Agreement, the Company granted Valeant a paid up license for Kinetin and Zeatin (acquired in conjunction with Carme acquisition) and assigned to Valeant future royalties from other Kinetin licensees in return for a cash payment of $21 million, a waiver of $6 million in future marketing credits the Company otherwise would have owed to Valeant, and a right to share in future royalties due to Valeant from other Kinetin licensees through 2011. As a result of this transaction and the related significant reduction on future royalties from the Kinetin and Zeatin products, goodwill of $1,308,000 was determined to be impaired and concurrently written off in March 2007.
(h) Impairment of Long-Lived Assets
The Company reviews the carrying value of its property and equipment and intangible assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable.
(i) Research and Development
Expenditures on research and development are expensed as incurred.
(j) Foreign Exchange
All assets and liabilities in the balance sheets of foreign branches and subsidiaries whose functional currency is other than U.S. dollars are translated at period-end exchange rates. All income and expenditure items in the profit and loss account of foreign branches and subsidiaries whose functional currency is other than U.S. dollars are translated at average annual exchange rates. Translation gains and losses arising from the translation of the financial statements of foreign branches and subsidiaries whose functional currency is other than the U.S. dollar are not included in determining net income but are accumulated in a separate component of stockholders’ equity as a component of comprehensive income. Foreign currency transaction gains and losses are included in the determination of net income in the period in which they occur. The functional currency of the Company’s United Kingdom and Denmark operations is the Pound Sterling and Danish Kroner, respectively.
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(k) Calculation of the Number of Shares and Net Income per Share
Earnings per share were computed under the provisions of SFAS No. 128, “Earnings per Share”. Basic earnings per share are computed using the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed exercise of dilutive stock options and warrants using the treasury stock method. The following is a reconciliation of the numerators and denominators of the basic and fully diluted earnings per share computation.
Options and warrants to purchase stock and shares issuable upon the conversion of debt to stock, totaling 209,000 and 760,625 were outstanding at December 31, 2007 and 2006, respectively, but were excluded from the calculation of diluted earnings per share as their effect would have been antidilutive.
(l) Financial Instruments
The carrying values of cash, receivables and current liabilities approximate their fair values due to the short-term nature of these items. Fair value is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
(m) Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rules in effect for the year in which differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is established to reduce the deferred tax assets when the Company determines it is more likely than not that the related tax benefits will not be realized. The Company periodically reviews the valuation of deferred tax assets in light of expected future operating results.
(n) Stock Compensation Expense
On January 1, 2006, the Company adopted SFAS 123(R), “Share Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors for employee stock options. Accordingly, stock based compensation cost is
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
measured at grant date, based on the estimated fair value of the award, and is recognized as expense over the employee requisite service period. The Company’s stock compensation is accounted for as an expense and an addition to equity. See Note 9 for additional information.
(o) Advertising Expenses
The Company’s policy is to expense advertising costs as incurred. Advertising costs in 2007 and 2006 amounted to $34,000 and $37,000, respectively, and were incurred in connection with press releases, website support, and an email campaign.
(p) Recent accounting pronouncements
The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, in September 2006. The new standard provides guidance on the use of fair value in such measurements. It also prescribes expanded disclosures about fair value measurements contained in the financial statements. In February 2008, FASB issued FASB Staff Position No. 157-2 that defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. In addition, FASB also agreed to exclude from the scope of FASB 157 fair value measurements made for purposes of applying SFAS No. 13 “Accounting for Leases” and related interpretive accounting pronouncements. Senetek is in the process of evaluating the new standard which is not expected to have a material effect on its consolidated financial position or results of operations although financial statement disclosures will be revised to conform to the new guidance.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted in certain circumstances provided that the entity also elects to adopt the provisions of SFAS No. 157, “Fair Value Measurements.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is currently evaluating the impact on the financial statements of adopting SFAS No. 159 but it is not expected to have a material impact.
In December 2007, the FASB issued FAS No. 141(R), “Business Combinations” (“FAS 141(R)”) which requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. FAS141(R) is prospectively effective to business combinations for which the acquisition is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of FAS 141(R) on the Company’s consolidated financial statements will be determined in part by the nature and timing of any future acquisitions completed.
In December 2007, the FASB issued FAS No. 160, “Non-Controlling Interests in Consolidated Financial Statements (as amended)” (“FAS 160”) which improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report non-controlling (minority) interests in subsidiaries in the same way as equity consolidated financial statements. Moreover, FAS 160 eliminates the diversity that currently exists in accounting from transactions between an entity and non-controlling interests by requiring they be treated as equity transactions. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008; earlier adoption is prohibited. The Company does not expect FAS 160 to have an impact on its consolidated financial statements.
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(q) Shipping and handling costs
The Company records shipping and handling fees billed to customers as revenue included in product sales. Costs associated with shipping and handling activities are comprised of outbound freight and associated direct labor costs, and are recorded in cost of sales.
(r) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
3. Concentration of Risk
The Company’s customers are located principally in the United States. One customer in the skincare segment and one customer in the pharmaceutical segment accounted for approximately 93% and 5% of net revenues, respectively, and 0% and 100% of receivables, respectively, in 2007. The same customers were 67% and 16% of net revenues in 2006, respectively.
4. Inventory
All inventory is recorded at standard cost, using the average cost method, and valued at the lower of cost or market. In conjunction with the sale of certain of its raw materials inventory and finished goods inventory in January 2006, the Company reversed its inventory reserves of $432,000. Inventory consists of the following:
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Property and Equipment
Property and equipment are summarized as follows:
6. Accrued Liabilities
Accrued liabilities comprise the following:
7. Borrowing Arrangements
On March 30, 2006, the Company entered into an agreement for a revolving line of credit (the “Revolving Credit Agreement”) with Silicon Valley Bank providing for the Company to borrow from time to time up to the lesser of $1,500,000 or 80% of the succeeding four calendar quarters’ minimum guaranteed royalty payments due under the Company’s Kinetin and Zeatin license agreement with Valeant Pharmaceuticals International as amended July 2005. The Revolving Credit Agreement has a term of two years, and the Company granted the Bank a first position security interest on its patents covering certain cytokinins, including Kinetin and Zeatin, and the proceeds thereof, including the Company’s license agreements thereunder. On March 30, 2007, the Company terminated its line of credit with Silicon Valley Bank and paid off the outstanding balance of $1,500,000 as a condition of the License Acquisition Agreement with Valeant.
On March 31, 2006, the Company entered into an agreement (the “Prepayment Agreement”) with the holders of its outstanding $3,289,000 principal amount of senior secured notes (the “Notes”) and its Series A, B, and D warrants exercisable for 375,000, 412,500 and 429,688 ordinary shares, respectively, at exercise prices of
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
$8.00, $10.00 and $3.20, respectively, per share, issued pursuant to the Securities Purchase Agreement entered into in 1999 and amended in 2003 and 2004. The Prepayment Agreement provided that on the date of prepayment of the balance of the Notes (the “Note Closing Date”), all of the outstanding Series A, B, and D warrants would be cancelled, the Securities Purchase Agreement as amended would be terminated, and the Company would issue new Series E warrants to purchase a total of 375,000 ordinary shares on substantially the same terms as the Series D warrants, including its March 4, 2011, expiration date, but at an exercise price of $2.00 per share. The Prepayment Agreement permits the holders of the Series E warrants to register under the Securities Act of 1933 the ordinary shares purchasable thereunder on Form S-3 Registration Statements on up to two separate occasions and indemnifies the holders against delays in receipt of ADSs following proper tenders of ordinary shares, in each case on the same terms as applied to the Series D warrants. In addition, the Prepayment Agreement provided that on the Closing Date, the Note holders’ two designees as Directors of Senetek would resign.
On March 31, 2006, the Company paid the outstanding principal amount of the Notes and accrued interest, with the result that the Notes and outstanding Series A, B, and D warrants were canceled, the Noteholders’ designees on the Company’s Board of Directors resigned, the Securities Purchase Agreement was terminated, and the Series E warrants were issued. The Company recognized a loss of approximately $927,000, representing the unamortized discount on the Notes, related to the extinguishment of the debt. The fair value of the Series E warrants was determined to be less than the fair value of the cancelled warrants; therefore the Company did not recognize any additional expense related to the issuance of warrants. In 2006, the Company paid $243,000 in interest related to the Notes.
8. Stock Option Plan
On December 10, 2007, Senetek implemented an eight-to-one reverse share split; by design of the Plans, the options are also reverse split in the same ratio. All share and per share figures in the financial statements and notes to the financial statements retroactively reflect this reverse share split. In accordance with SFAS123(R) the Company has accounted for the reverse share split as an equity restructuring that is considered to be a modification designed to equalize the fair value of awards before and after an equity restructuring. As a result, no incremental compensation cost was recognized for the reverse share split.
In December 1985, Senetek adopted a share option plan (the “No. 1 Plan”) for employees with shareholder approval. Under the No. 1 Plan, options to purchase ordinary shares are granted by the Board of Directors, subject to the exercise price of the option being not less than the market value of an ordinary share on the grant date. After the first twelve months following the date of the grant, options are exercisable at the rate of 25 percent, for each full year of employment. In the event the optionee’s employment is terminated, the option may not be exercised unless the Board of Directors so permits. The options expire seven years from the date of the grant. On May 16, 1997, shareholders approved the extension of the No. 1 Plan until December 1, 2005 and an increase in the number of shares available for grant to 750,000. The No. 1 Plan expired by its terms in December 2005.
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes option transactions under the No. 1 Plan for the two years ended December 31, 2007:
The following table summarizes information about the No. 1 Plan options outstanding at December 31, 2007.
In May 1987, the Company adopted a share option plan (“the No. 2 Plan”) for Non-Executive Directors and Consultants with shareholder approval. Under the No. 2 Plan, options to purchase ordinary shares were granted by the Board of Directors, subject to the exercise price being not less than the market value of an ordinary share on the grant date. Options granted under this plan are exercisable in their entirety one year after the date of grant. In the event the optionee ceases to be a non-executive Director or consultant, the option may not be exercised unless the Board of Directors so permits. The options expire seven years from the date of grant. In 1997, shareholders approved an extension of the Plan until December 1, 2005 and an increase in the number of shares available for grant to 500,000. The No. 2 Plan expired by its terms in December 2005.
The following table summarizes option transactions under the No. 2 Plan for the two years ended December 31, 2007:
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes information about the No. 2 Plan for non-executive Directors and consultants’ options outstanding at December 31, 2007.
In May 2006, the Company adopted, and on December 12, 2006, the Company’s stockholders approved, the Senetek Equity Plan providing for issuance of non-qualified options and restricted stock to employees, non-employees and board members. Options are granted at the discretion of the Compensation Committee of the Board of Directors. The options will generally become exercisable for 25% of the option shares one year from the date of grant and then ratably over the following 36 months. The Compensation Committee of the Board of Directors has the discretion to use a different vesting schedule. 237,500 stock options were granted on June 6, 2006 at a price of $2.08 per share, 3,124 stock options were granted on August 1, 2006 at a price of $1.92 per share and 37,500 stock options were granted on December 18, 2006 at a price of $1.60 per share. The grants were made at the closing stock price on the grant date. On December 18, 2006, 25,781 shares of restricted stock were granted under the Senetek Equity Plan; these shares vested on December 18, 2007 and were issued.
On December 10, 2007, Senetek’s stockholders approved an amendment to the Senetek Equity Plan to increase the maximum shares from 625,000 to 937,500, representing an increase of 312,500 shares.
The following table summarizes option and restricted stock transactions under the Senetek Equity Plan in 2007.
The following table summarizes information about the Senetek Equity Plan options outstanding at December 31, 2007 and 2006:
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The intrinsic value of the Company’s outstanding vested stock options at December 31, 2007 was $149,000. The intrinsic value at December 31, 2006 was $0 as the exercise prices of the options exceeded the market price of the Company’s stock.
9. Stock Compensation Expense
On January 1, 2006, the Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors for employees’ stock options. Accordingly, stock-based compensation cost is measured at grant date, based on the estimated fair value of the award, and is recognized as expense over the employee requisite service period. The Company’s stock compensation is accounted for as an expense and an addition to equity.
Impact of adoption of SFAS 123(R)
The Company elected to adopt the modified prospective application method as provided by SFAS 123(R). Accordingly, during 2006, the Company recorded stock-based compensation cost totaling the amount that would have been recognized during the period(s) had the fair value method been applied since the effective date of SFAS 123. Previously reported amounts have not been restated. The fair value of option grants is estimated on the date of grant using a binomial option-pricing model. No options were issued in 2007.
Assumptions used to value the stock-based compensation grants were as follows:
The following table summarized stock-based compensation expense related to employee stock options under SFAS 123(R) for 2007 and 2006, which was allocated as follows (in thousands):
As of December 31, 2007, the unrecorded deferred stock-based compensation balance related to stock options was $69,000 expected to be recognized over a weighted average period of 2.13 years.
10. Stockholders’ Equity
Reverse Share split
On December 10, 2007, Senetek implemented an eight-to-one reverse share split. All share and per share figures in the financial statements and notes to the financial statements retroactively reflect this reverse share split.
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following warrants were issued and amended in association with the new Securities Purchase Agreement and the Settlement Agreement, dated on April 14, 1999 and the retirement of Senior Secured notes in March 2006, and are outstanding at December 31, 2007:
The series E warrants were issued in association with the retirement of senior secured Notes in March 2006. The warrants referred to above entitled the holder to purchase ordinary shares convertible into American Depository Receipts of the Company at the purchase prices referred to above at any time commencing 90 days from the date of subscription and prior to the expiration date. The offer and sale of the warrants was made in compliance with and in reliance upon the provision of Regulation S under the United States Securities Act of 1933, as amended.
11. Taxation
Effective January 1, 2007, the Company adopted Financial Accounting Standards Interpretation, or FIN No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
As a result of the implementation of FIN 48, the Company recognized no change in the liability for unrecognized tax benefits related to tax positions taken in prior periods, and no corresponding change in accumulated deficit.
As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits as of the January 1, 2007 adoption date and December 31, 2007. Also, the Company had no amounts of unrecognized tax benefits that, if recognized, would affect its effective tax rate for January 1, 2007 and December 31, 2007.
The Company’s policy for deducting interest and penalties is to treat interest as interest expense and penalties as taxes. As of December 31, 2007, the Company had no amount accrued for the payment of interest and penalties related to unrecognized tax benefits and no amounts as of the adoption date of FIN 48.
The tax return years 2003 through 2006 remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. Net operating loss carryforwards (“NOLs”) generated in 1997 through 2005, remain open to examination by the major domestic taxing jurisdictions.
Senetek is incorporated in England with two U.S. subsidiaries and one Danish subsidiary. The Company is subject to United Kingdom corporation tax on a worldwide basis with relief for foreign taxes in cases where double taxation relief agreements have been established. The U.S. subsidiaries are subject to United States tax on a worldwide basis (including state taxes) with similar relief for foreign taxes.
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
There was no tax allocated to Discontinued Operations in 2007 or 2006.
Income tax expense (benefit) differed from the amounts computed by applying the US federal income tax rate of 34% to pretax income from continuing operations as a result of the following:
Deferred tax assets are comprised of the following:
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Included in Senetek’s net operating loss carryforwards are provisional tax losses available to the Company in the United Kingdom, estimated to be approximately $40,377,000 at the end of fiscal year 2007. The deferred tax asset value of these losses is approximately $12,719,000 but no benefit has been recognized in the financial statements, as the benefit is offset by an equal valuation allowance. As of December 31, 2007, management did not consider it more likely than not that it would generate taxable income to utilize such tax loss carryforwards. The United Kingdom tax-loss carryforwards are available indefinitely against profits from the same trade carried on in the United Kingdom. The United Kingdom tax loss carryforwards could be limited if there was a greater than 50% change in ownership in any three year period.
The federal provisional tax losses available in the U.S. are estimated to be approximately $13,610,000 at the end of fiscal year 2007. The deferred tax asset value of these losses is approximately $4,627,000 but no benefit has been recognized in the financial statements as the benefit is offset by an equal valuation allowance. As of December 31, 2007, management did not consider it more likely than not that it would generate taxable income to utilize such tax loss carryforwards. A 100% provision has been established for this asset. Federal net operating losses expire at varying dates from 2008 through 2026. At December 31, 2007, there are no California net operating losses or related deferred tax assets. Available Federal operating losses could be limited if there was a greater than 50% change in ownership in any three year period. The net change in the total valuation allowance for the years ended December 31, 2007 and 2006 was decreases of $10,113,000 and $1,616,000, respectively.
12. Discontinued Operations
On December 31, 2002, the Company closed a transaction in which USITC purchased Senetek’s rights to the Mill Creek personal care line, the Silver Fox hair care line and other brands acquired in the 1995 acquisition of Carmé Inc. (referred to hereafter as the intellectual property) for $500,000 cash including a 1999 deposit, and a promissory note of $2.3 million payable in 23 quarterly installments commencing September 30, 2003 towards the agreed-upon purchase price of $2.8 million.
Based on the prior history with the customer, the gain on the transaction was recognized when collection is probable, which was deemed to be when cash is received. Accordingly, the original balance of the unpaid promissory note of $2.3 million was netted with the deferred gain on the Company’s balance sheet. Gain on the transaction in excess of the initial receipts of $500,000 was deferred until collection is deemed to be probable. All gains arising from this transaction will be classified as a component of discontinued operations.
On November 10, 2004, the Company and USITC entered into an agreement to restructure the note. Under the terms of the restructuring, Senetek received $1,435,000 during 2004, together with a $400,000 two and one half year, secured amortizing note bearing interest at 8% per annum. Under the terms of the agreement, if USITC fails to pay any of the quarterly payments due under the new $400,000 note, all of its obligations under the original $2.3 million note, less amounts actually paid, will be reinstated and subject to acceleration for non-performance. In 2007, Senetek received $89,000 in payments comprised of $86,000 in principal and $3,000 in interest. In 2006, Senetek received $223,000 in payments comprised of $202,000 in principal and $21,000 in interest. Concurrent with the June 30, 2007 payment, the note was paid in full.
13. Segment Reporting
Senetek is a life science product development company engaged in developing and marketing proprietary products that fulfill important unmet consumer needs related to aging. Its business is comprised of two business segments: dermatological/skincare compounds principally addressing photoaging and other skincare needs (“Skincare”); and pharmaceuticals, currently principally those addressing sales of monoclonal antibodies, sexual dysfunction and drug delivery of liquid injectable products (automatic injectors) (“Pharmaceutical”). The Company’s organization is structured in a functional manner.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Financial information regarding the operating segments was as follows:
The Company’s customers are principally in the United States.
(1) The Company’s recorded goodwill as of December 31, 2006 resulted from the prior acquisition of Carmé Cosmeceutical Sciences Inc., which is part of the Skincare business segment. As a result of the Valeant transaction, the goodwill balance of $1,308,000 was determined to be impaired and written off in March 2007.
The Company’s registered office is located in the United Kingdom. The majority of its employees are based in the United States from where it liaises with the U.S. investing public and from where the primary sales and development of skincare activities are directed.
14. Commitments and Contingencies
(a) Research
Under an agreement with the Institute of Experimental Botany, Senetek paid $90,000 and $70,000 in 2007 and 2006, respectively, to support the Institute’s continued research on certain cytokinins and is committed to pay $80,000 in 2008 in support of this and additional research into other classes of naturally-derived cytokinins.
In April 2005, the Company entered into an amendment of the agreement with RFMH, under which the licenses on all existing monoclonal antibody cell lines and any new cell lines were extended through July 10, 2011 with a minimum guaranty of royalty receipts to RFMH of $430,000 per year through the new term of the license.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(b) Commitments under Operating Leases
Minimum future lease payments and operating expense reimbursements under non-cancelable leases are as follows:
Rent expense was approximately $139,000 and $196,000 in 2007 and 2006, respectively.
(c) Marketing Fee
Senetek was committed to pay $3,375,000 in 2008 for Marketing Fees under the agreement with Triax.
On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution (see Note 16). As of April 15, 2008, the contractual dispute resolution remains in process.
In January 2008 the Company paid $1,125,000 in Marketing Fees to Triax and has paid a total of $2,250,000 since the inception of the agreement. As a result of the on-going dispute resolution process, the Company does not expect to pay the remaining $2,250,000 in Marketing Fees for fiscal 2008 specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
(d) Litigation
On April 11, 2003, the Company filed lawsuit against OMP, Inc. (“OMP”) in the Los Angeles County Superior Court for common law misappropriation, breach of confidence, breach of contract, breach of implied covenant of good faith and fair dealing, intentional and negligent interference with prospective economic advantage, statutory and common law unfair competition, and unjust enrichment, and on October 28, 2003, OMP filed a lawsuit against Senetek in the United States District Court for the Northern District of California for violation of the Sherman Act and unfair competition as a result of Senetek’s alleged abuse of patents. In March 2004, the Company entered into a settlement agreement with OMP under which, in exchange for Senetek granting OMP the ongoing non-exclusive right to market and sell specified Obagi-K products containing Kinetin in Japan limited to its existing channel of trade, Senetek received an up front payment of $1.5 million in April 2004 and is to receive an additional $500,000 of quarterly royalty payments based on sales in Japan of skincare products containing Kinetin under the Obagi name. Through December 31, 2007, the Company had received $267,000 of the total $500,000.
(e) Employment Contracts and Deferred Compensation Plans
The Company has an employment agreement with Mr. Frank J. Massino, the Company’s Chairman and CEO, most recently amended as of April 2006. The agreement and amendments, which were approved by the Compensation Committee of the Board of Directors, provide for a perpetual three-year term and an annual salary of $340,000 per annum subject to annual increases (salary was $360,000 for 2007 and increased to $370,000
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
effective January 1, 2008). The contract also provides for an automobile allowance of $1,000 per month and reimbursement of related automobile operating expenses. Under the agreement, Mr. Massino is entitled to an annual bonus, to be determined by the Compensation Committee, and is eligible to participate in the Company’s management bonus plan, if any. In the event that Mr. Massino’s employment is terminated by the Company (other than for “permanent disability” or “cause”, as such terms are defined in the agreement) or by Mr. Massino for “good reason” (as defined in the agreement), Mr. Massino would become entitled to a lump sum payment equal to the product of multiplying his base salary (and a deemed bonus, if any, as determined in accordance with the agreement) by three (i.e., the number of years remaining under the “evergreen” provisions of his employment agreement). Further, in such circumstance, all unvested and/or unexercisable options held by Mr. Massino would become immediately vested and exercisable. The agreement also provides for payment of three years’ worth of additional compensation upon consummation of certain changes of control (as defined in the agreement), provided that the Company would not be required, on a change of control, to pay Mr. Massino any amounts that would constitute an “excess parachute payment” under the Internal Revenue Code.
The Company has a payment agreement dated March 5, 2007 with Mr. William O’Kelly, the Company’s Chief Financial Officer that requires the Company to make certain severance payments to Mr. O’Kelly in the event his employment is terminated under certain circumstances. If: (A) following a Change of Control, the Company does not retain Mr. O’Kelly as Chief Financial Officer or he is not offered a position of Equivalent Authority by the Company or a Successor Enterprise or (B) Mr. O’Kelly does not continue his employment with the Company or a Successor Enterprise after a Relocation, then, in either such event, the Company will continue to pay his base salary as at the date of the Change of Control or Relocation for a period of six months following his separation from the Company or the Successor Enterprise.
(f) Indemnifications
Under its Articles of Association, the Company is required to indemnify its officers and Directors for all costs, losses and liabilities they may incur as a result of the officer or Director’s serving in such capacity subject to statutory restrictions. The term of the indemnification period is for the officer’s or Director’s lifetime.
The maximum potential amount of future payments the Company could be required to make under the indemnification provisions contained in its Articles of Association is unlimited except as provided by applicable law. However, the Company has a Director’s and Officer’s liability insurance policy that limits its exposure and enables it to recover all or a portion of any future amounts paid by the Company to indemnify a Director or officer. As a result of its insurance policy coverage, management believes the estimated fair value of these indemnification obligations is minimal and has no liabilities recorded for these agreements as of December 31, 2007.
The Company enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with licensees, research institutes at which studies are conducted, landlords, investment bankers and financial advisers. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of their performance of such agreements except in cases of their negligence or default. These indemnification provisions often include indemnifications relating to representations made by the Company, including those with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the Company has obtained insurance providing coverage for losses such as these, against which the Company has agreed to indemnify a third party. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions generally is limited. The Company has not incurred material costs in connection with defending these indemnification agreements. As a result, management believes the estimated fair value of these obligations is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2007.
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
15. Related Party Transactions
The Company is required to pay the two discoverers of Kinetin an equal royalty based on the Company revenues from Kinetin. One of the discoverers of Kinetin is Dr. Brian Clark; the Chief Scientist for the Company. Total royalty expense related to Kinetin Sales for 2007 and 2006 totaled $573,000 and $158,000, respectively, of which Dr. Clark received 50%. As of December 31, 2007 and 2006, $139,000 and $158, 000 is included in accounts payable. For his role as Chief Scientist, Dr. Clark was paid an annual fee of $108,000 in 2007 and 2006.
Mr. Anthony Williams, a Director of the Company, has been a partner of the law firm of Baker & McKenzie LLP since September 2005 and prior to that was a partner of the law firm of Coudert Brother LLP. Both law firms have rendered legal services to the Company. 2007 and 2006 legal fees paid to Baker & McKenzie LLP totaled $268,000 and $232,000, respectively.
16. Subsequent Events
On March 4, 2008, the Company announced it had entered into a contractual dispute resolution process with Triax, the privately-held specialty pharmaceuticals marketer which Senetek licensed in August 2007 to sell a line of skincare products featuring Senetek’s new Pyratine-6™ active ingredient in the ethical channel of distribution. As of April 15, 2008, the contractual dispute resolution remains in process.
As a result of the on-going process the Company does not expect to receive the minimum royalties of $10.8 million for fiscal 2008 as specified in the contract. The Company is unable to predict the outcome of the contractual dispute resolution process.
On January 18, 2008, 697,350 stock options were granted to Senetek employees and directors. The options were priced at $2.50 per share, the closing price on the date of grant, with a term of 7 years. 458,750 shares vest 20% immediately and 20% on each anniversary of the grant date through January 18, 2012. The remaining 238,600 shares vest ratably over 48 months. All other terms of the grants were in accordance with the terms of the Senetek Equity Plan. Of the total stock options granted, 63,500 stock options were granted outside the Senetek Equity Plan in accordance with the terms of the Senetek Equity Plan.
SCHEDULE II
SENETEK PLC
VALUATION AND QUALIFYING ACCOUNTS