Attached files
file | filename |
---|---|
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - Independence Resources PLC | v194253_ex31-2.htm |
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - Independence Resources PLC | v194253_ex31-1.htm |
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - Independence Resources PLC | v194253_ex32-1.htm |
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - Independence Resources PLC | v194253_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE
TRANSITION PERIOD FROM
TO
Commission
file number 0-14691
SENETEK
PLC
(Exact
name of registrant as specified in its charter)
England
|
77-0039728
|
|
(State or other jurisdiction of Incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
51
New Orleans Court, Suite 1A
Hilton
Head, SC
|
29928
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number including area code: (404) 418-6203
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.
Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer ¨
Non-accelerated filer ¨ Smaller reporting
company x
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
Number of
Ordinary Shares outstanding as of June 30, 2010: 7,730,708
SENETEK
PLC
INDEX
TO FORM 10-Q
QUARTER
ENDED JUNE 30, 2010
Page
|
||||
PART
I.
|
|
FINANCIAL
INFORMATION
|
|
|
Item
1
|
|
Financial
Statements
|
|
3
|
|
Condensed
Consolidated Statements of Operations for the three months ended June 30,
2010 and 2009 (unaudited)
|
|
4
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2010 (unaudited), and December
31, 2009
|
|
3
|
|
|
Condensed
Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for
the three months ended June 30, 2010 (unaudited)
|
|
5
|
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended June 30,
2010 and 2009 (unaudited)
|
|
6
|
|
|
Notes
to the Condensed Consolidated Financial Statements
|
|
7
|
|
Item
2
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
16
|
Item
3
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
23
|
Item
4
|
|
Controls
and Procedures
|
|
23
|
PART
II.
|
|
OTHER
INFORMATION
|
|
|
Item
6
|
Exhibits
|
24
|
||
SIGNATURES
|
25
|
2
PART
I - FINANCIAL INFORMATION
Item 1. FINANCIAL
STATEMENTS
CONDENSED
CONSOLIDATED BALANCE SHEETS
June
30
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 3,083,904 | $ | 4,231,804 | ||||
Short-term
investments
|
- | 6,500,000 | ||||||
Trade
receivable (net of allowances of $0 in 2010 and $5,000 in
2009)
|
367,152 | 311,024 | ||||||
Non-trade
receivables
|
67,822 | 121,708 | ||||||
Tax
receivable
|
13,747 | 9,188 | ||||||
Inventory
|
40,142 | 312,149 | ||||||
Prepaid
expenses and deposits
|
365,341 | 153,434 | ||||||
Prepaid
tax
|
2,333 | 2,331 | ||||||
Receivable
- related party
|
158,479 | - | ||||||
Total
Current Assets
|
4,098,920 | 11,641,638 | ||||||
PROPERTY
AND EQUIPMENT, NET OF DEPRECIATION
|
- | 44,297 | ||||||
OTHER
ASSETS
|
||||||||
Deferred
financing fees
|
362,361 | - | ||||||
Note
receivable
|
1,833,140 | - | ||||||
Note
and contractual rights receivable
|
5,360,000 | - | ||||||
Oil
and gas lease interests
|
108,397 | - | ||||||
Total
Other Assets
|
7,663,898 | - | ||||||
TOTAL
ASSETS
|
$ | 11,762,818 | 11,685,935 | |||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 866,833 | $ | 695,966 | ||||
Accrued
liabilities
|
293,446 | 441,965 | ||||||
Deferred
revenue and license fee
|
172,154 | 173,918 | ||||||
Other
liabilities
|
69 | 53,055 | ||||||
Total
Current Liabilities
|
1,332,502 | 1,364,904 | ||||||
LONG
TERM LIABILITIES
|
||||||||
Deferred
license fee
|
$ | 329,962 | $ | 416,039 | ||||
Convertible
debt, net of discount
|
2,044,839 | - | ||||||
Total
Long Term Liabilities
|
2,374,801 | 416,039 | ||||||
COMMITMENTS
AND CONTINGENCIES (NOTE 12)
|
- | - | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Ordinary
shares
|
||||||||
Authorized
shares: $0.65 (40 pence) par value, 100,000,000;
|
||||||||
7,730,708 and 7,645,802 shares issued and outstanding,
respectively
|
4,994,584 | 4,939,395 | ||||||
Share
premium
|
86,899,333 | 85,546,880 | ||||||
Accumulated
deficit
|
(83,910,642 | ) | (80,627,375 | ) | ||||
Accumulated
other comprehensive income-translation adjustments
|
72,240 | 46,092 | ||||||
Total
Stockholders' Equity
|
8,055,515 | 9,904,992 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 11,762,818 | $ | 11,685,935 |
3
SENETEK
PLC
CONDENSED
CONSOLIDATED STATEMENTS
OF
OPERATIONS
Three Months
|
Three Months
|
Six Months
|
Six Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
June 30
|
June 30
|
June 30
|
June 30
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
REVENUES
|
||||||||||||||||
Royalty
and license fees
|
$ | 413,672 | $ | 345,341 | $ | 843,640 | $ | 712,320 | ||||||||
Product
sales
|
- | 78,720 | 70,574 | 173,097 | ||||||||||||
TOTAL
REVENUES
|
413,672 | 424,061 | 914,214 | 885,417 | ||||||||||||
COST
OF SALES
|
||||||||||||||||
Royalty
and license fees
|
$ | 170,824 | $ | 136,036 | $ | 370,265 | $ | 281,359 | ||||||||
Product
sales
|
- | 7,622 | 5,246 | 17,327 | ||||||||||||
TOTAL
COST OF SALES
|
170,824 | 143,658 | 375,511 | 298,686 | ||||||||||||
GROSS
PROFIT
|
242,848 | 280,403 | 538,703 | 586,731 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Research
and development
|
103,332 | 379,654 | 276,342 | 783,204 | ||||||||||||
Exploration
expense
|
29,470 | - | 29,470 | - | ||||||||||||
Administration,
sales and marketing
|
699,295 | 1,227,576 | 3,299,456 | 2,341,077 | ||||||||||||
Loss
on sale of skincare line
|
- | 217,664 | - | |||||||||||||
Gain
(loss) on disposal of assets
|
4,292 | - | 3,833 | - | ||||||||||||
TOTAL
OPERATING EXPENSES
|
836,389 | 1,607,230 | 3,826,765 | 3,124,281 | ||||||||||||
LOSS
FROM OPERATIONS
|
(593,541 | ) | (1,326,827 | ) | (3,288,062 | ) | (2,537,550 | ) | ||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
28,636 | 27,988 | 41,815 | 94,083 | ||||||||||||
Interest
expense
|
(79,081 | ) | (267 | ) | (91,714 | ) | (808 | ) | ||||||||
Other
income (expense)
|
1,639 | 361 | 1,639 | 831 | ||||||||||||
Change
in fair value of warrant liability
|
- | - | 53,055 | - | ||||||||||||
TOTAL
OTHER INCOME (EXPENSE)
|
(48,806 | ) | 28,082 | 4,795 | 94,106 | |||||||||||
LOSS
BEFORE TAXES
|
(642,347 | ) | (1,298,745 | ) | (3,283,267 | ) | (2,443,444 | ) | ||||||||
INCOME
TAX EXPENSE
|
- | - | - | (2,600 | ) | |||||||||||
NET
LOSS
|
$ | (642,347 | ) | $ | (1,298,745 | ) | $ | (3,283,267 | ) | $ | (2,446,044 | ) | ||||
NET
LOSS PER COMMON SHARE,
|
||||||||||||||||
BASIC
AND DILUTED
|
$ | (0.08 | ) | $ | (0.17 | ) | $ | (0.43 | ) | $ | (0.32 | ) | ||||
WEIGHTED
AVERAGE NUMBER OF
|
||||||||||||||||
COMMON
STOCK SHARES
|
||||||||||||||||
OUTSTANDING,
BASIC AND DILUTED
|
7,705,516 | 7,645,802 | 7,675,824 | 7,645,802 |
4
SENETEK
PLC
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY
AND COMPREHENSIVE LOSS
Additional
|
Other
|
Total
|
||||||||||||||||||||||
Common
Stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Income
|
Equity
|
|||||||||||||||||||
Balance,
December 31, 2009
|
7,645,802 | $ | 4,939,395 | $ | 85,546,880 | $ | (80,627,375 | ) | $ | 46,092 | $ | 9,904,992 | ||||||||||||
Stock
based compensation expense
related
to employee and director stock options
|
400,275 | 400,275 | ||||||||||||||||||||||
Warrants
issued for convertible debt, net
|
590,165 | 590,165 | ||||||||||||||||||||||
Beneficial
conversion rights, net
|
224,165 | 224,165 | ||||||||||||||||||||||
Stock
issued for financing fees
|
84,906 | 55,189 | 34,811 | 90,000 | ||||||||||||||||||||
Options
issued for directors fees
|
81,340 | 81,340 | ||||||||||||||||||||||
Acceleration
of options
|
21,697 | 21,697 | ||||||||||||||||||||||
- | ||||||||||||||||||||||||
Comprehensive
loss:
|
- | |||||||||||||||||||||||
Net
loss
|
(3,283,267 | ) | (3,283,267 | ) | ||||||||||||||||||||
Translation
adjustments
|
26,148 | 26,148 | ||||||||||||||||||||||
Total
comprehensive loss
|
(3,257,119 | ) | ||||||||||||||||||||||
Balance,
June 30, 2010 (unaudited)
|
7,730,708 | $ | 4,994,584 | $ | 86,899,333 | $ | (83,910,642 | ) | $ | 72,240 | $ | 8,055,515 |
5
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six
Months Ended
|
Six
Months Ended
|
|||||||
June 30,
2010
|
June
30, 2009
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net loss
|
$ |
(3,283,267
|
) | $ |
(2,446,044
|
) | ||
Adjustments
to reconcile net loss to net cash
|
||||||||
provided
(used) by operating activities:
|
||||||||
Depreciation
|
3,034 | 35,079 | ||||||
Reserve
for doubtful accounts
|
(5,278 | ) | 1,000 | |||||
Loss
on sale of skincare line
|
217,664 | |||||||
Loss
on abandonment of assets
|
5,988 | |||||||
Stock
based compensation
|
503,312 | 177,203 | ||||||
Amortization
of debt discount and deferred financing fees
|
88,430 | |||||||
Change
in fair value of warrant liability
|
(53,055 | ) | ||||||
Changes
in operating assets and liabilities
|
||||||||
Decrease
(increase) in:
|
||||||||
Trade
receivables
|
(49,850 | ) | (166,726 | ) | ||||
Non-trade
receivables
|
53,886 | 34,846 | ||||||
Tax
receivable
|
(4,559 | ) | (25,059 | ) | ||||
Inventory
|
(31,667 | ) | (116,682 | ) | ||||
Prepaid
expenses and deposits
|
(229,815 | ) | (9,601 | ) | ||||
Prepaid
tax
|
— | (4,192 | ) | |||||
Interest
receivable
|
(33,140 | ) | (116 | ) | ||||
Receivable
- related party
|
(158,479 | ) | ||||||
Increase
(decrease) in:
|
||||||||
Accounts
payable
|
(189,560 | ) | (111,642 | ) | ||||
Accrued
liabilities
|
(9,876 | ) | (230,653 | ) | ||||
Deferred
revenue and license fees
|
(87,866 | ) | (91,514 | ) | ||||
Other
liabilities
|
69 | - | ||||||
Net
cash provided (used) by operating activities
|
(3,264,029 | ) | (2,954,101 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Redemption(purchase)
of short-term investments
|
6,500,000 | (64,678 | ) | |||||
Note
and contractual rights receivable
|
(5,000,000 | ) | ||||||
Cash
advance for note receivable
|
(1,800,000 | ) | ||||||
Purchase
of property and equipment
|
(27,753 | ) | ||||||
Acquisition
of oil & gas lease interest
|
(108,397 | ) | ||||||
Net
cash provided (used) by investing activities
|
(408,397 | ) | (92,431 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from convertible debt
|
3,000,000 | - | ||||||
Financing
fees paid
|
(501,622 | ) | - | |||||
Effect
of exchange rate changes on cash
|
26,148 | 13,000 | ||||||
Net
cash provided by financing activities
|
2,524,526 | 13,000 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
(1,147,900 | ) | (3,033,532 | ) | ||||
Cash
and cash equivalents, beginning of period
|
4,231,804 | 5,832,499 | ||||||
Cash
and cash equivalents, end of period
|
$ | 3,083,904 | $ | 2,798,967 | ||||
NON-CASH
TRANSACTIONS:
|
||||||||
Initial
valuation of derivative liability
|
$ | $ | 53,055 | |||||
Warrants
issued with convertible debt
|
$ | 735,165 | $ | |||||
Beneficial
conversion rights to convertible debt
|
$ | 279,165 | $ | |||||
Stock
issued for financing fees
|
$ | 90,000 |
6
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Historically,
Senetek PLC was a life sciences company engaged in the research, development and
commercialization of technologies that targeted the science of healthy aging,
after an extensive review by the Board of Directors of the Company and outside
advisors, the Board elected to change the overall direction of the Company from
these sectors to the natural resources sector.
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.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles for interim financial information. Accordingly, the unaudited
condensed consolidated financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
in the United States for complete financial statements. The accompanying
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
In the
opinion of management, the unaudited interim financial statements included
herein reflect all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the Company’s consolidated financial position as of
June 30, 2010 and the results of operations and cash flows for the periods ended
June 30, 2010 and 2009. The interim results of operations are not
necessarily indicative of the results that may be expected for the full fiscal
year.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
The
Company recognizes revenue when (i) persuasive evidence of an arrangement
exists, (ii) shipment of products has occurred, (iii) the sales price
charged is fixed or determinable, and (iv) collection is reasonably assured. The
Company's shipment terms are FOB shipping point.
The
Company recognizes revenue from skincare product sales in the physician channel
of distribution when the product is shipped. For sales of skin care
products the Company provides no return right to its customers.
For its
other channel of distribution, the Company has a 30-day return policy.
Therefore, all revenue associated with this channel is deferred for 30 days
following the sale. Revenue recognized for the six months ended June
30, 2010 and 2009 in this channel was $5,000 and $0,
respectively. There was no deferred revenue as of June 30, 2010 or
2009.
Remittances
received from the Company’s marketer, Covance Antibody Services, Inc.
(“Covance”) on its sales of monoclonal antibodies are recognized based upon a
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 as earned, which is generally on a straight-line basis over the life
of the contract.
7
Stock-Based
Compensation
The
Company records compensation expense for all awards granted. After assessing
alternative valuation models and amortization assumptions, the Company has
selected the Black-Scholes-Merton option-pricing formula with 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.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make complex and subjective
estimates and assumptions that affect the reported amounts in the Company’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 revenue
recognition, collectability of notes and accounts receivable, the determination
of fair value of stock compensation awards, realizability of deferred tax
assets, valuation of derivatives, note and contractual rights receivable and
impairment of long lived assets.
The
Company believes the estimates used are reasonable and appropriate based on
current facts and circumstances. It is possible, however, that other
parties applying reasonable judgment to the same facts and circumstances could
develop different estimates. Additionally, changes in actual
experience or changes in other qualitative factors could cause our estimates to
fluctuate.
Fair Value of Financial
Instruments
The
carrying values of cash, short-term investments, receivables, note receivable,
investments, convertible debt, and other liabilities approximate their fair
values due to the short-term nature of these items. Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The
Company uses fair value measurements based on quoted prices in active markets
for identical assets or liabilities (Level 1), significant other observable
inputs (Level 2) or unobservable inputs for assets or liabilities (Level 3),
depending on the nature of the item being valued.
The table
below sets forth, by level, the Company's financial assets and liabilities that
are accounted for using fair value:
Fair Value Measurements
June 30, 2010
|
||||||||||||||||
December 31,
2009
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Liabilities:
|
||||||||||||||||
Warrants
|
$ | 53,055 | $ | – | $ | – | $ | – |
Earnings per Ordinary
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. Options and warrants to purchase Ordinary shares totaling
4,196,725 and 1,482,162, were outstanding at June 30, 2010 and 2009,
respectively, but were excluded in the computation of diluted earnings per
Ordinary share as the effect of such inclusion would have been
antidilutive.
8
Recent Accounting
Pronouncements
In
February 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure
Requirements. This Update amends to Subtopic 855-10,
Subsequent Events – Overall, to require SEC filers to evaluate subsequent events
through the date that the financial statements are issued, but does not require
them to disclose the date through which subsequent events have been
evaluated.
In
January 2010, FASB issued ASU 2010-06 Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
which requires new disclosures about transfers into and out of Level 1
and 2 of the fair value hierarchy and separate disclosures about purchases,
sales, issuances, and settlements relating to Level 3
measurements. Specifically, for assets and liabilities that are
measured at fair value on a recurring basis in periods after initial
recognition. This ASU also includes conforming amendments to the guidance on
employers’ disclosures about postretirement benefit plan assets (Subtopic
715-20) which include a change in terminology from major categories of assets to
classes of assets and a cross-reference to the guidance in Subtopic 820-10 on
how to determine appropriate classes to present fair value disclosures.
Effective for interim and annual reporting periods beginning after December 15,
2009, except for the separate disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years.
NOTE
3 – LICENSE REVENUES
For the
six months ended June 30, 2010 and 2009, royalty and licensing fees recorded
were $843,640 and $712,320, respectively, primarily consisting of $750,220 and
$625,243, respectively, in royalty revenues related to its agreement with
Covance Antibody Services, Inc. (“Covance”). Under this agreement,
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. Should
Covance not attain annual minimum sales of $1,880,000, it is obligated to pay
Senetek 33% of the shortfall. 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 the Research Foundation for Mental Hygiene
(“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.
NOTE
4 – INVENTORY
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 cost or market using
the first-in, first-out method.
In
conjunction with the sale of the majority of the skincare line on March 10,
2010, $304,000 in inventory was removed from the consolidated balance
sheet. See Note 9.
June 30,
2010
|
December 31,
2009
|
|||||||
|
||||||||
Raw
materials
|
$ | 40,142 | $ | 175,000 | ||||
Work
in process
|
– | 3,000 | ||||||
Finished
goods
|
–
|
134,000 | ||||||
Total
inventory
|
$ | 40,142 | $ | 312,000 |
9
NOTE
5 – PARTICIPATION AGREEMENT
On May
14, 2010, Senetek Plc (the “Company”) entered into a Participation Agreement
(“Agreement”) with SDX Resources, Inc (“SDX”) in which the Company purchased
a 15% working interest in certain oil and gas leases
located in Dawson County, Texas (“Subject Leases”) of which SDX is the Lessee of
record, for $108,397. Under the terms of the Agreement, the Company
will pay 20% of the actual cost to casing point of the Initial Test Well, and if
necessary, the cost to plug and abandon the Initial Test Well as a dry hole. The
drilling of the Initial Test Well will commence on or before September 1, 2010,
subject to rig availability. Additionally, the Company will pay
17.647059% of the actual cost to casing point of the Second Test Well, and if
necessary, the cost to plug and abandon it as a dry hole. The
Second Test Well will commence within one hundred and twenty (120) days of
completion of the Initial Test Well.
Contemporaneously
with the Agreement, an Operating Agreement was executed naming Breck Operating
Corp as the Operator of all operations and other activities conducted on the
Subject Leases.
NOTE
6 – NOTE AND CONTRACTUAL RIGHTS RECEIVABLE
On April
1, 2010, Senetek consummated the purchase of $7.0 million of amounts owed
to a partnership that is majority owned by Platinum Partners Value Arbitrage
Fund (“Seller”) (See Note 10) pursuant to outstanding notes (the “Notes) and
contractual rights (the “Rights”, together with the Notes the “Seller Claims”)
for $5.0 million and an additional $360,000 in acquisition costs. The
amounts are owed to Seller from an entity (the “Debtor”) focused in the area of
natural resources which has filed a petition in the United States Bankruptcy
Court. The debtor is a company called Firstgold Corporation and the
main asset of Firstgold is the Relief Canyon Mine located near
Lovelock, Nevada. Further information on Firstgold and Relief Canyon Mine can be
obtained at the website www.firstgoldcorp.com.
Senetek
received only the following representations from the Seller in substantially the
following form: (i) Seller has good and valid title to the Notes and
has not pledged or transferred the Notes, or any of the Claims, to any third
party, and (ii) upon acquisition of Senetek’s interest in the Seller Claims
as contemplated hereby, Senetek will acquire such interest free and clear of any
liens or encumbrances made by or through Seller; (iii) Debtor has not in
its bankruptcy action, as of the date hereof, contested the validity, perfection
or priority of any security interest in collateral securing the Seller Claims
and (iv) no consent or filing with the court having jurisdiction in the
bankruptcy action is necessary or required in connection with the sale of the
Senetek interest in the Seller Claims.
At a
bankruptcy hearing held on April 20, 2010, Firstgold’s management reported
its inability to timely develop a reorganization plan to restart business
operations. In light of the foregoing, Firstgold stipulated to allowing its
primary secured lenders, Platinum Long Term Growth, LLC (“Platinum”) and
Lakewood Group, LLC (“Lakewood”), to pursue their contractual and state law
rights and remedies to foreclose and take possession of all collateral securing
their debt obligations with Firstgold pursuant to their security interests. The
collateral securing their debt obligations includes substantially all of
Firstgold’s assets including the Relief Canyon Mine property, all improvements
to the mine property, and additional mining properties and interests. In
addition, Firstgold agreed to relinquish possession of the collateral to allow
Platinum and Lakewood to preserve and protect such collateral as of
April 21, 2010. Management assesses collectability each quarter
and has determined that a reserve is not necessary at June 30,
2010.
NOTE
7 – OTHER LIABILITIES
On
January 1, 2009, the Company recorded the value of its outstanding warrants as a
liability in accordance with FASB ASC 815-40; 815-10-65-3 (Emerging Issues Task
Force Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own
Stock”).
10
Below is
the cumulative effect of recording the warrant liability:
Other
Liability
|
Share
Premium
|
Accumulated
Deficit
|
||||||||||
Increase/(decrease)
|
||||||||||||
January
1, 2009 derivative instrument liability related to
warrants
|
$ | 53,055 | $ |
–
|
$ | 53,055 | ||||||
Reversal
of prior accounting related to warrants
|
─
|
(500,000 | ) | (500,000 | ) | |||||||
$ | 53,055 | $ | (500,000 | ) | $ | (447,000 | ) |
A
Black-Scholes option-pricing model was used to estimate the fair value of the
Company’s warrants using the following assumptions at June 30,
2010:
Number
of
Shares
|
Dividend
Yield
|
Volatility
|
Risk-Free
Rate
|
Expected
Life
(in years)
|
Stock
price
|
||||||||||||||||
Warrant
|
375,000 |
None
|
37 | % | .32 | % | .68 | $ | .80 |
The fair
value of outstanding derivative instruments not designed as hedging instruments
on the accompanying Consolidated Balance Sheet was as follows:
Derivative
Instruments
|
Balance Sheet
Location
|
June 30, 2010
|
December 31, 2009
|
|||||||
Warrant
|
Other liabilities
|
$ | 0 | $ | 53,055 |
There was
$53,055 and $0 in expense associated with changes in derivative instrument fair
values recorded in the accompanying Statement of Operations for the six months
ended June 30, 2010 and 2009.
NOTE
8 – STOCK COMPENSATION EXPENSE
The
following table summarizes stock-based compensation expense for the six months
ended June 30, 2010 and 2009, which was allocated as follows:
Six Months Ended
June 30,
|
||||||||
2010
|
2009
|
|||||||
Stock-Based
Compensation Expense
|
||||||||
Administration,
sales and marketing
|
$ | 503,312 | $ | 177,432 | ||||
Research
and development
|
– | – | ||||||
Stock-based
compensation expense included in operating expenses and net
loss
|
$ | 503,312 | $ | 177,432 |
As of
June 30, 2010 the unrecorded deferred stock-based compensation balance related
to stock options was $475,020 and was expected to be recognized over a period of
two years. As of June 30, 2009, the unrecorded deferred stock-based
compensation balance related to stock options was $446,000 and was expected to
be recognized over a weighted average period of 2.13 years.
11
Stock Option
Plans
The
Company has three share-based plans under which non-qualified stock options have
been granted to employees, non-employees and board members. The
Company is also authorized, under its Articles of Association and applicable
laws and rules, to grant equity-based incentives such as stock options or
restricted stock, outside of shareholder approved plans by action of its Board
of Directors.
Effective
March 10, 2010, in accordance with the Securities Purchase Agreement dated March
4, 2010, between Senetek and DMRJ Group LLC, vesting was accelerated for all
options to purchase Ordinary Shares held by the Company’s officers and Directors
as of December 1, 2009, the options were extended for five years and the
exercise price was re-priced to $1.25, options held by non officers and
directors were not extended or re-priced, compensation expense of approximately
$354,000 was recognized during the three months ended June 30, 2010.
The
Company adopted the Senetek Equity Plan in 2006 providing for issuance of
non-qualified options and restricted stock to employees, non-employees and board
members. For the six months ended June 30, 2010 and 2009, 950,000 and 27,000
options were granted respectively. The following assumptions were used to
estimate fair value of the options issued during the six months ended June 30,
2010: strike price of 1.05, exercise price of 1.05, risk-free interest rate of
approximately .32%; volatility of 70.2%; and a life of 5 years (See Note
12). As of June 30, 2010, there were 62,943 stock options issued
outside of the shareholder approved plan.
There are
two expired share option plans (Plan 1 and Plan 2) under which stock options to
employees, non-executive Directors and consultants had previously been
issued. Both share option plans expired in December
2005. Options issued under the two expired plans remain in place,
subject to the original terms of each plan. No stock options were
exercised from Plan 1 or Plan 2 for the six months ended June 30, 2010 or
2009. During the six months ended June 30, 2010, 2,937 options
expired and 37,500 options that previously expired in December 2009 were
extended to March 10, 2015 and re-priced at $1.25. During the six months ended
June 30, 2009, 84,375 options granted under Plan 1 expired, no options granted
under Plan 2 expired and 31,250 options were extended to March 10, 2015,
re-priced at $1.25.
Outstanding
Options:
Senetek
Equity Plan - At June 30, 2010, 1,886,563 stock options with a weighted average
exercise price of $1.16 were outstanding, of which 904,065 stock options with a
weighted average exercise price of $1.26 were exercisable.
Outside
the Senetek Equity Plan - At June 30, 2010, 62,943 stock options with a weighted
average exercise price of $1.25 were outstanding, all of which were
exercisable.
Plan 1 -
At June 30, 2010, 37,500 stock options with a weighted average exercise price of
$1.25 were outstanding, all of which were exercisable.
Plan 2 -
At June 30, 2010, 62,500 stock options with a weighted average exercise price of
$2.63 were outstanding, all of which were exercisable.
The
intrinsic value of the Company’s outstanding vested stock options in all three
plans at June 30, 2010, was $0 as the exercise prices of such options exceeded
the market price of the Company’s stock.
The fair
value of option grants is estimated on the date of grant using the
Black-Scholes-Merton model to value the stock option based on its terms and
conditions. The stock-based compensation balance is adjusted for estimated
forfeitures of 2%, based on historical pre-vesting forfeitures. The
Company used a 0% forfeiture rate for options granted to its Chief Executive
Officer.
12
NOTE
9 – ASSET PURCHASE AGREEMENT
On March
10, 2010, the Company executed an Asset Purchase Agreement and a Note with
Skinvera LLC (“Purchaser”), a company wholly owned by Frank J. Massino, former
Chairman and Chief Executive Officer of the Company, whereby Skinvera purchased
all assets and all liabilities of the Companies skincare line, except assets and
liabilities related to Kinetin and Zeatin. Mr. Massino received
$1.8 million in cash in return for a $1.8 million Secured Promissory Note which
bears interest at 6% per annum and is due on the seventh anniversary of the
Note. The Company, was granted a continuing first-priority security
interest in those assets purchased by Skinvera LLC from Senetek pursuant to the
Asset Purchase Agreement with Senetek PLC, The Asset Purchase Agreement includes
provisions for royalty payments to the Company from Skinvera based on 5% of net
direct sales of skincare products and 10% of net skincare royalties; up to a
maximum of $5 million. The Company and Mr. Massino have amended the
Asset Purchase Agreement such that in the event of a near term transaction
resulting (i) in the change of control, directly or indirectly, of at least 50%
of the equity interests of the Purchaser (as defined in the Asset Purchase
Agreement), other than a transfer to a certain affiliate of the Purchaser, or
(ii) the sale of substantially all of the Assets (as defined in the Asset
Purchase Agreement), the Company shall be entitled to receive (i) 50% for the
after-tax purchase price paid to the Purchaser if such sale occurs on or before
March 10, 2011 or (ii) the 25% of the after-tax price paid to the Purchaser if
such sale occurs between March 10, 2011 and March 10, 2012. A loss on
the sale of approximately $217,000 was recognized during the quarter ended March
31, 2010. This transaction is not considered to be a discontinued
operation as Senetek retained a portion of their skincare business, specifically
assets related to Kinetin and Zeatin.
The
following table sets forth the assets and liabilities that were
sold:
Inventory
|
$ | 309,000 | ||
Inventory
Reserves
|
$ | (5,000 | ) | |
Fixed
Assets
|
$ | 113,000 | ||
Accum
Depr – Fixed Assets
|
$ | (78,000 | ) | |
Accounts
Receivable, net of allowances
|
$ | (1,000 | ) | |
Prepaid
Insurance
|
$ | 18,000 | ||
Accrued
Liabilities
|
$ | (139,000 | ) | |
Net
assets sold
|
$ | 217,000 |
NOTE
10 – CONVERTIBLE DEBT
In March
2010, Senetek and DMRJ Group, LLC, affected a Security Purchase Agreement, a
Note and a Warrant Purchase Agreement (“Transaction”). DMRJ Group, LLC is a
Delaware limited liability company affiliated with Platinum Partners Value
Arbitrage Fund L.P., an accredited institutional investor with its investment
manager headquartered in New York, New York.
In March,
2010 the Company issued to DMRJ a secured, convertible promissory note in the
amount of $3,000,000, bearing no interest and is convertible into shares of the
Company’s common stock at a rate of one share for each $1.25 of principal
outstanding, with a maturity of 7 years. The note may be converted
prior to the end of the 7 years, and is mandatorily convertible on the due
date. The note may not be settled in cash, except in the event of
default. Additionally the Company issued 1,800,000 warrants with the
note at an exercise price of $1.75 per share and a term of five years. The fair
value of the warrants was estimated using the Black Scholes Option Price
Calculation. The following assumptions were made to value the warrants: strike
price of $1.75, risk free interest rate of 2.39%, expected life of five years,
and expected volatility of 63.46% with no dividends expected to be issued. The
fair value of the warrants totaled $735,165 at the issuance date and was
recorded on the balance sheet as a debt discount. Additionally, the conversion
feature of the notes resulted in a beneficial conversion amount of $279,165, and
$502,000 in deferred financing costs were incurred. The fair value of the
warrants, beneficial conversion and deferred financing costs are being amortized
over the life of the convertible debt and the amortized amounts are included in
interest expense in the financial statements.
13
In
connection with the Transaction, Frank J. Massino was terminated without cause
as Chief Executive Officer and resigned as Chairman of the Board of Directors.
Mr. Massino has been retained as a part-time consultant for a three year
period to assist in management of certain of the Company’s existing investments
and interests, for which he was paid $360,000. Also, William F. O’Kelly was
terminated without cause as Chief Financial Officer and Mr. Rodger Bogardus
resigned from the Board of Directors. In addition on March 10, 2010, the
effective date of the Transaction, all options to purchase Ordinary Shares held
by the Company’s officers and directors as of December 1, 2009 became
immediately vested and were extended for five years with re-pricing of the
exercise price to $1.25 per share or the Market Price on the date of the
Transaction, whichever is greater. Mr. Massino was paid $1,286,874 and Mr.
O’Kelley was paid $107,500 in severance payments respectively. The
severance payments were recognized as expense during the quarter ended March 31,
2010.
John P.
Ryan has been appointed to succeed Mr. Massino as Chief Executive Officer
and Chairman of the Board of Directors. In addition, Mr. Howard Crosby has
been appointed to succeed Mr. O’Kelly as the Chief Financial Officer and to
the Board of Directors and Dr. Wesley Holland has been appointed to the
Board of Directors.
NOTE
11 – SEGMENT REPORTING AND CONCENTRATION OF RISK
Financial
information regarding the operating segments was as follows:
Three Months Ended June 30,
2010
|
Three Months Ended June 30, 2009
|
|||||||||||||||||||||||
Pharma-
ceutical
|
Skincare
|
Total
|
Pharma-
ceutical
|
Skincare
|
Total
|
|||||||||||||||||||
Revenues
|
$ | 370,634 | $ | 43,038 | $ | 413,672 | 302,302 | $ | 121,759 | $ | 424,061 | |||||||||||||
Cost
of sales
|
163,481 | 7,343 | 170,824 | 136,036 | 7,622 | 143,658 | ||||||||||||||||||
Gross
profit
|
$ | 207,153 | $ | 35,696 | $ | 242,848 | $ | 166,266 | $ | 114,136 | $ | 280,403 | ||||||||||||
Gross
profit percentage
|
56 | % | 83 | % | 59 | % | 55 | % | 94 | % | 66 | % | ||||||||||||
Unallocated
operating expenses
|
836,389 | 1,607,230 | ||||||||||||||||||||||
Operating
loss
|
$ | (593,541 | ) | $ | (1,326,827 | ) |
Six Months Ended June 30, 2010
|
Six Months Ended June 30, 2009
|
|||||||||||||||||||||||
Pharma-
ceutical
|
Skincare
|
Total
|
Pharma-
ceutical
|
Skincare
|
Total
|
|||||||||||||||||||
Revenues
|
$ | 839,779 | $ | 74,435 | $ | 914,214 | $ | 625,243 | $ | 260,174 | $ | 885,417 | ||||||||||||
Cost
of sales
|
361,576 | 13,935 | 375.511 | 281,359 | 17,327 | 298,686 | ||||||||||||||||||
Gross
profit
|
$ | 478,203 | $ | 60,500 | $ | 538,703 | $ | 343,914 | $ | 243,998 | $ | 586,731 | ||||||||||||
Gross
profit percentage
|
52 | % | 91 | % | 59 | % | 55 | % | 93 | % | 66 | % | ||||||||||||
Unallocated
operating expenses
|
3,826,765 | 3,124,281 | ||||||||||||||||||||||
Operating
loss
|
$ | (3,288,062 | ) | $ | (2,537,550 | ) |
One
customer accounted for all pharmaceutical revenues for the six months ended June
30, 2010 and 2009.
One
customer accounted for 100% and 92% of accounts receivable at June 30, 2010 and
2009, respectively.
14
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Research and Commercial
Agreements
An
agreement with the Institute of Experimental Botany (the “Institute”) was
extended in the second quarter 2009 for an additional six years through December
31, 2014. Under this agreement Senetek was committed to pay $100,000
in 2009, $80,000 in 2010 and $75,000 in each of the years 2011 through 2014 to
support the Institute's continued research on certain cytokinins. The
2009 commitment of $100,000 was paid in the second quarter of
2009. As part of the March 2010, Asset Purchase Agreement between
Senetek and Skinvera, the remaining liability for this agreement was transferred
to Skinvera as described in Note 9.
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. In connection therewith, the Company entered into a new agreement with
Signet Laboratories Inc. (“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 the assignment of the Signet agreement to Covance in
conjunction with Covance’s acquisition of Signet, on substantially the same
terms, with a minimum guaranty of royalty receipts to Senetek of $860,000 per
year through the term of the license.
Other
On
April 30, 2010, the Company agreed to compensate Mr. John P.
Ryan, the Company’s Chief Executive Officer, at a salary of $185,000 per annum
and to provide health benefits; and compensate Mr. Howard Crosby,
President and Chief Financial Officer, at a salary of $165,000 per annum and to
provide health benefits. Additionally, the Company granted 100,000 stock options
to each of Messrs. Ryan and Crosby in connection with their service as officers
of the Company. The stock options have a 5 year term, an exercise price of $1.05
and shall vest in 2 equal installments every 6 months. On April 30, 2010,
the Company granted 150,000 stock options to each of the directors of the
Company, including, Messrs. Ryan and Crosby, in connection with their service as
directors of the Company. The stock options have a 5 year term, an exercise
price of $1.05 and shall vest in 3 equal installments every 6
months. For the six months ended June 30, 2010, $81,340 of
compensation expense has been recognized.
NOTE
13 – RELATED PARTY
Mr.
Anthony Williams, a Director of the Company, has been a partner of the law firm
DLA Piper US, LLP since November 2009 and prior to that was a partner of the law
firm Baker & McKenzie LLP. Both law firms have rendered legal services to
the Company. June 30, 2010 and 2009 legal fees paid to DLA Piper US,
LLP totaled $156,739 and $0, respectively. No fees were paid in 2010
or 2009 to Baker & McKenzie, LLP.
15
|
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Some
of the information in this Form 10-Q contains forward-looking statements that
involve substantial risks and uncertainties. You can identify these statements
by forward-looking words such as “may,” “will,” “should,” “expect,”
“anticipate,” “potential,” “believe,” “estimate,” “intends” and “continue” or
similar words. You should read statements that contain these words carefully
because they: (i) discuss management’s expectations about Senetek’s future
performance; (ii) contain projections of its future operating results or of its
future financial condition; or (iii) state other “forward-looking” information.
There will be events in the future that the Company is not able to predict or
over which it has no control, which may adversely affect its future results of
operations, financial condition or stock price. The risk factors described in
the 2009 Form 10-K, as well as any cautionary language in this Form 10-Q,
provide examples of risks, uncertainties and events that may cause the Company’s
actual results to differ materially from the expectations described in its
forward-looking statements. You should be aware that the occurrence of any of
the risks, uncertainties, or events described in this Form 10-Q could seriously
harm Senetek’s business and that, upon the occurrence of any of these events,
the price of its securities could decline. All forward-looking statements
included in this Form 10-Q are based on information available to the Company on
the date hereof. Senetek assumes no obligation to update any such
forward-looking statements except as may be required in connection with future
reports of the Company pursuant to the Securities Exchange Act of
1934.
COMPANY
OVERVIEW
Historically
the Company had been focused on the skincare and pharmaceutical businesses. In
March 2010, after an extensive review by the Board of Directors of the Company
and outside advisors, the Board elected to change the overall direction of the
Company from these sectors to the natural resources sector. The Board realized
that the business prospects of the existing portfolio of assets were not capable
of generating sufficient revenue, and the Company had insufficient cash on hand
to reach significant revenue generation from any of the product lines in the
Company’s portfolio. The Company elected to pursue opportunities in
the resources sector as this sector has been experiencing significant growth and
investor interest in the past few years and the Board believes the sector has
continued growth prospects and significant opportunities exist within the
sector. A further discussion of this transition follows below.
MARCH
TRANSACTION
In
March 2010, Senetek and DMRJ Group, LLC, effected a Security Purchase Agreement,
a Note and a Warrant Purchase Agreement (“Transaction”). DMRJ Group, LLC is a
Delaware limited liability company affiliated with Platinum Partners Value
Arbitrage Fund L.P., an accredited institutional investor with its investment
manager headquartered in New York, New York.
The
Company issued a Secured Convertible Promissory Note to DMRJ in the principal
amount of $3.0 million, which bears no interest and is convertible at a price of
$1.25 per share at any time from inception to the fifth anniversary of the Note,
at which time conversion is mandatory. Except in the event of default, the Note
is not repayable in cash. In addition, the Company issued a five-year warrant to
purchase 1.8 million of the Company’s ordinary shares at an exercise price
of $1.75 per share. As a result of these transactions, DMRJ has effective
control of Senetek and its subsidiaries.
16
Frank J.
Massino was terminated without cause as Chief Executive Officer and resigned as
Chairman of the Board of Directors. Mr. Massino has been retained as a
part-time consultant for a three year period to assist in management of certain
of the Company’s existing investments and interests, for which he was paid
$360,000. Also, William F. O’Kelly was terminated without cause as Chief
Financial Officer and Mr. Rodger Bogardus resigned from the Board of
Directors. In addition on March 10, 2010, the effective date of the
Transaction, all options to purchase Ordinary Shares held by the Company’s
officers and directors as of December 1, 2009 became immediately vested and
were extended for five years with re-pricing of the exercise price to $1.25 per
share or the Market Price on the date of the Transaction, whichever is greater.
Mr. Massino was paid $1,286,874 and Mr. O’Kelley was paid $107,500 in severance
payments respectively.
John P.
Ryan was appointed to succeed Mr. Massino as Chief Executive Officer and
Chairman of the Board of Directors. Mr. Howard Crosby was appointed to
succeed Mr. O’Kelly as the Chief Financial Officer and to the Board of
Directors and Dr. Wesley Holland has been appointed to the Board of
Directors. Two of the Directors of Senetek, Mr. Anthony Williams and Mr. Kerry
Dukes have remained on the Board.
The
intent of the new Board is to refocus the Company in the natural resources
sector where the new management has the majority of its expertise and
experience. With this new focus the Company has taken several steps in acquiring
projects in both gold mining and in oil and gas exploration which are more fully
described below.
RELIEF
CANYON MINE/FIRSTGOLD CORPORATION TRANSACTION
Relief Canyon Mine
Acquisition and Status
On April 1, 2010 the Company purchased
$7 million of face value secured notes for $5 million and an additional
$360,000 in acquisition costs from Platinum Partners and Lakewood Group. Both of
these entities are hedge funds based in the New York City area. The total amount
of the secured notes is approximately $20 million, thus the purchase gave the
Company approximately a 35% interest in the secured notes and the assets backing
the secured notes, The secured notes are secured by the all of the assets of
Firstgold Corporation, a company in Chapter 11 bankruptcy court in the United
States Bankruptcy Court, Reno, NV. The primary asset of Firstgold Corporation is
the Relief Canyon Mine located near the town of Lovelock, NV. Additional
detailed information on the Relief Canyon Mine, Firstgold Corporation and the
existing bankruptcy case may be found at http://www.
reliefcanyon.com.
The intent of the Company is to gain
100% ownership of the Relief Canyon Mine and ultimately to bring the mine into
production at some point in the future. The assets of the mine consist of the
existing mineral resource, processing plant, crushing equipment, conveyors, and
stackers, rolling stock, as well as permits and posted cash bonds. However,
there is no assurance at this time that the Company will be successful in
acquiring 100% control of the Relief Canyon Mine as this requires further
financing to be obtained, which may not be available on favorable terms or at
all.
Based
upon a resource report prepared by Mine Development Associates of Reno, NV, and
an internally prepared financial model, the Company believes the Relief Canyon
Mine has sufficient resources for at least three and one-half years of
production at a rate of approximately 38,500 recovered ounces per year. This
mine life and production rate assumes the lease or other acquisition of the
western extension of the ore body which is located on ground owned by Newmont
Mining Corporation, Denver, Colorado and under leasehold to Victoria Gold Mines,
Toronto, Ontario. The western extension of the ore body contains approximately
26,250 ounces of the estimated 134,750 recovered ounces over the three and
one-half year mine life. In addition to this acquisition, it is also believed
that other nearby resources could be acquired on favorable terms and thus the
mine life could be extended further beyond three and one-half years, but there
can be no assurance of any additional acquisitions of ground near the project.
Failure to at least acquire the western extension of the ore body would both
shorten the mine life and complicate the anticipated mine plan.
The
Relief Canyon Mine has all of the major permits needed to operate the existing
processing plant. These are the Bureau of Land Management (“BLM”) – Plan of
Operations, the Nevada Div. of Environmental Protection (“NDEP”) – Water
Pollution Control Permit and NDEP – Reclamation Permit. All of these permits
need to be amended to allow restart of the Relief Canyon Mine open pit and for
new mining operations to occur. RCP filed the Amended Plan of Operations with
the BLM the first week of August and anticipates filing the Amended Water
Pollution Control Permit by the end of August. The amended Reclamation Permit
will be filed once the review by NDEP and the BLM progress sufficiently to
submit the detailed reclamation plan and bond cost estimate for the amended
project. No assurance can be made if and when such permits will be successfully
amended and the ability to restart mining from the pit will
resume.
17
Currently
approximately $2.8MM of reclamation bonding is already in place for the project.
Recently changes to how the bond requirement is calculated with respect to heap
leach closure have occurred and the current bond is only sufficient for closure
of the current heap leach pads assuming no further material is added. The
preliminary estimates of RCP for closure on the current pad once it is fully
loaded is $3.8MM, and for the whole project, once all possible pads are fully
loaded is $6.1MM. These numbers are reviewed every three years and
may change over the life of the mine due to regulatory changes or for other
technical reasons. At this time, no further bonding is required for the project
and additional reclamation bonding is not anticipated until mining resumes from
the pit.
Bankruptcy Court
Process
Firstgold Corporation filed bankruptcy
under Chapter 11 as debtor-in-possession on January 27, 2010 and was able to
obtain a small amount of Debtor-in-Possession (“DIP”) financing from the Secured
Creditors (Platinum and Lakewood). This DIP financing was sufficient to fund
Firstgold until the end of April, 2010 at which point they were out of operating
capital and no further DIP financing funds were available. As a result, on April
21, 2010 the Court awarded the secured creditors operatorship of the Relief
Canyon Mine in order to preserve the security and maintenance of the on-site
assets. The secured creditors (including Senetek) then formed a Colorado LLC
named “Relief Canyon Partners LLC” (“RCP”) to be the operating entity at the
project.
RCP is
managed by a three person operating committee consisting of Mark Mueller (from
Platinum/Lakewood), John Ryan, and Eric Klepfer. Mr. Klepfer is an outside
independent contractor who specializes in the mining sector and specifically in
mine permitting, environmental permitting and general compliance. Mr. Klepfer
was named the Operating Manager for RCP and has been directly managing the
project since April 21, 2010.
RCP has maintained a small
administrative office in Lovelock, NV where an administrative assistant and one
engineer are employed. In addition there are four personnel at the mine and mill
site, and five personnel at the Company assay lab facility in Lovelock. RCP has
continued to operate the assay lab as it makes a small profit.
Funding for RCP initially came from the
secured creditors on a basis proportional to their interest. As a result, as of
the end of May, 2010 the Company had advanced $158,479 to RCP to cover payrolls
and other expenses. However, on June 7, 2010, with court approval, RCP sold an
excess piece of drilling equipment along with associated drill pipe and support
vehicles for $978,750. Following this sale the Company was reimbursed the amount
of $141,426 of its previous advances for working capital. Therefore, The Company
does not expect further draws from Senetek will be necessary in order to fund
RCP during the third quarter of 2010.
In addition to operating the asset, RCP
has been actively marketing the project to other potential buyers. This is a
requirement of the bankruptcy court process and also was a requirement of the
other secured creditors whose goal is to eventually sell their interest in the
project for cash or other liquid assets. The Company also considers
the possibility that if a significant cash bid were offered for the Project, the
Board of the Company would have to carefully evaluate the bid against the
alternative of obtaining financing and acquiring and operating the
project on its own. However, at the date of this report, no compelling cash bids
have been made and the Company feels that the marketing to other potential
purchasers of the project is near its end.
Should the secured creditors not
receive an acceptable bid for the Project they may ultimately acquire the
project through a bankruptcy process known as a Section 363 bid. Essentially,
this bid process would allow the secured creditors to “credit bid” the amount of
their secured note. The Court would review the bid as well as the marketing
process and any other bid proposals received and must be persuaded that the
Credit Bid is likely the highest value bid that would be received for the assets
in order for a court sale of the assets to be concluded. As of the date of this
report, RCP and the secured creditors have not yet began the credit bid
process.
18
OIL
AND GAS OPERATIONS
On May
14, 2010, the Company entered into a Participation Agreement (“Agreement”) with
SDX Resources, Inc (“SDX”) in which the Company purchased a 15% working
interest in certain oil and gas leases located in Dawson County, Texas
(“Subject Leases”) of which SDX is the Lessee of record, for
$108,397. Under the terms of the Agreement, the Company will pay 20%
of the actual cost to casing point of the Initial Test Well, and if necessary,
the cost to plug and abandon the Initial Test Well as a dry hole. The drilling
of the Initial Test Well will commence on or before September 1, 2010, subject
to rig availability. Additionally, the Company will pay 17.647059% of
the actual cost to casing point of the Second Test Well, and if necessary, the
cost to plug an abandon it as a dry hole. The Second Test Well
will commence within one hundred and twenty (120) days of completion of the
Initial Test Well.
Contemporaneously
with the Agreement, an Operating Agreement was executed naming Breck Operating
Corp. as the Operator of all operations and other activities conducted on the
Subject Leases.
The
Company has also began investigating acquiring leaseholds prospective for oil
and gas in Indiana and Ohio in the historic Trenton field. To date the Company
has not acquired any leaseholds and is still in the process of investigating the
region and favorable potential locations.
LEGACY
SKINCARE AND PHARMACEUTICAL ASSETS OF THE CORPORATION
The
legacy assets of the Company can be divided into the Skincare segment and the
Pharmaceutical Segment. A discussion of these assets follows below.
Skincare
Segment
In
conjunction with the March Transaction, the Company executed an Asset Purchase
Agreement and a Note with Skinvera LLC, a company wholly owned by Frank J.
Massino, former Chairman and Chief Executive Officer of the Company, whereby
Skinvera purchased all assets and assumed all existing liabilities of the
Company’s skincare business (except for assets and liabilities related to
Kinetin and Zeatin) and received $1.8 million in cash in return for a $1.8
million Secured Promissory Note which bears interest at 6% per annum and is
due on the seventh anniversary of the Note. The Asset Purchase Agreement
includes provisions for royalty payments to the Company from Skinvera based on
5% of net direct sales of skincare products and 10% of net skincare royalties;
up to a maximum of $5 million. The Company and the Purchaser amended the Asset
Purchase Agreement such that in the event of a near-term transaction
resulting in (i) the change of control, directly or indirectly, of at least 50%
of the equity interests in the Purchaser (as defined in the Asset Purchase
Agreement), other than a transfer to a certain affiliate of the Purchaser, or
(ii) the sale of substantially all of the Assets (as defined in the Asset
Purchase Agreement), the Company shall be entitled to receive (i)
50% of the after-tax purchase price paid to the Purchaser if
such sale occurs on or before March 10, 2011 or (ii) 25% of the
after-tax purchase price paid to the Purchaser if such sale occurs
between March 10, 2011 and March 10, 2012.
The
majority of the skincare segment, with the exception of Kinetin and Zeatin, was
sold to Skinvera LLC on March 10, 2010. The remaining Skincare segment consists
of Kinetin, which is Senetek’s first generation cytokinin. By the spring of
2007, Senetek had licensed Kinetin to ten separate companies in various channels
of distribution and geographies. Also, Senetek licensed Zeatin, Kinetin’s analog
product exclusively to Valeant Pharmaceuticals International (“Valeant”) of
Costa Mesa, CA. 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.
19
Pharmaceutical
segment
The Pharmaceutical segment consists of
four separate areas, each discussed below:
|
·
|
Invicorp®,
a 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 an exclusive licensing and
collaborative marketing agreement for the commercialization of Invicorp®
with Plethora Solutions for the U.S. market whereby Plethora assumed all
expenses of obtaining regulatory approvals and of marketing the
products. Senetek is currently seeking licensees for other
worldwide locations and continues to advance the product in Denmark and
United Kingdom by selling the product to select users on a “named patient”
basis.
|
|
·
|
Reliaject®
is a unique auto-injector system which employs an ultra-fine gauge needle
which is 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 assumed all expenses of obtaining regulatory approvals and of
marketing the product. Senetek officials met with Ranbaxy in April, 2010
and learned that the approvals for the product are still at least two
years away. Therefore, the Company does not anticipate royalties from
Reliaject for at least several more
years.
|
|
·
|
Diagnostic
monoclonal antibodies used in Alzheimer’s and other disease research which
the Company licenses from RFMH and sells to Covance Antibody Services Inc.
Covance is the Company’s commercial partner and has undertaken full
responsibility for sales, distribution and marketing, as well as
regulatory compliance. The agreement with RFMH is slated to expire in
July, 2011. Senetek met with RFMH and had discussions with Covance in
early June, 2010. As a result of those discussions, an agreement was
signed June 19, 2010 with Covance whereby Covance is authorized to
negotiate directly with RFMH for an extension of the license beyond July,
2011. Under the Covance agreement, if Covance is successful in relicensing
with RFMH, Senetak shall continue to receive a portion of the royalty
stream from sales of diagnostic monoclonal antibodies for an additional
two year period.
|
|
·
|
Senetek
has acquired two royalty-based licenses for RNA interference from the
Institute of Bio-Organic Chemistry of the Polish Academy of Sciences
(“PAS”). The agreements grant Senetek the exclusive rights to
anti-cancer technology for the treatment of brain tumors using RNAi
technology to inhibit the production of tenascin-C, whose expression has
been indicated to correlate with the grade of malignancy of brain tumors
and RNAi based therapeutic technology for the potential use against a
broad range of cancers. The efficacy of any of these possible treatments
has not been demonstrated in accordance with prevailing U.S. F.D.A.
standards and the Company makes no claims as to the usefulness of these
treatments at this time. The Company intends to partner with a
pharmaceutical or an RNA specialty company to help fund the costs of
testing of these treatments under highly controlled
conditions.
|
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.
20
Overview
of Operating Results
Revenues
for the second quarter of 2010 totaled $413,672. Royalties on sales
of monoclonal antibodies were $370,634, an increase from the $302,302 in
monoclonal antibody royalties in the second quarter of 2009. Sales of monoclonal
antibodies have historically been subject to periodic fluctuations based on many
factors including timing of research spending and business consolidations in the
pharmaceutical market.. Total gross profit margin for the second quarter of 2010
and 2009 was 59% and 66%, respectively, of revenue.
Operating
expenses for the three months ended June 30, 2010 decreased 59% as compared to
the same period in 2009, primarily due to a decrease in salaries.
Net loss
for the second quarter of 2010 was $642,347 as compared to a net loss of
$1,298,745 for the second quarter of 2009. The decreased net loss is
primarily due to an overall reduction in expenses resulting from the divestiture
of the majority of the skincare segment in the first quarter of
2010.
Liquidity
and Capital Resources
As of
June 30, 2010, the Company’s principal sources of liquidity included cash, cash
equivalents and short-term investments resulting from Company
operations. Management believes its cash, cash equivalents,
short-term investments 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
used by operating activities totaled $3,264,029 for the six months ended June
30, 2010 compared to net cash used by operating activities of $2,954,101 for the
six months ended June 30, 2009. The increase is primarily attributed
to severance payments in the first quarter of 2010. The Company expects to
continue to use cash in operating activities and investments for the remainder
of 2010.
Cash and
cash equivalents decreased to $3,083,904 at June 30, 2010, from $4,231,804 at
December 31, 2009, partially due to the note receivable disbursement of
$1,800,000 and net cash used in
operations.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of the Company’s financial condition and results of
operations are based upon its condensed consolidated financial statements, which
have been prepared in accordance with United States generally accepted
accounting principles for interim period financial reports. Management reviews
the accounting policies used in reporting Senetek’s financial results on a
regular basis. The preparation of these condensed consolidated financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing
basis, the Company evaluates processes used to develop estimates, including
those related to the allowance for doubtful accounts, sales reserves,
depreciation and amortization, contingencies, deferred tax assets, and other
assets. Estimates are based on historical experience, expectations of
future results, and on various other assumptions that are believed to be
reasonable for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates due to actual outcomes being different from those on
which assumptions were based. Management, on an ongoing basis,
reviews these estimates and judgments. Senetek’s Board of Directors reviews any
changes in the Company’s methodology for arriving at its estimates, and
discusses the appropriateness of any such changes with management and its
independent auditors on a quarterly basis.
21
You
should read Item 7 of Senetek’s Annual Report on Form 10-K for the year ended
December 31, 2009, for information pertaining to its critical accounting
policies, which include the following:
|
·
|
Revenue
recognition;
|
|
·
|
Impairment
of long-lived assets, including other intangible
assets;
|
|
·
|
Income
taxes;
|
|
·
|
Stock-based
compensation
|
There
have been no changes to Senetek’s critical accounting policies since December
31, 2009, the date of its last audited financial statements.
Results
of Operations for the three months ended June 30, 2010 and 2009
This data
has been derived from the statements of operations elsewhere in this Form 10-Q
and in the June 30, 2009 10-Q. The operating results for any period should not
be considered indicative of results for any future period. This information
should be read in conjunction with the condensed consolidated financial
statements and notes thereto included elsewhere in this Form 10-Q and in the
Annual Report on Form 10-K for the year ended December 31,
2009.
Total
revenues for the six months ended June 30, 2010, were $914,214; a 9% increase
from total revenue of $885,417for the six months ended June 30, 2009. The
increase is principally attributed to increased sales by Covance.
Total
expenses for the six months ended June 30, 2010, were $4,110,563; an increase
from total expenses of $3,426,375 for the six months ended June 30, 2009. The
increase is principally attributed to severance payments in the first quarter of
2010. The expenses of the Company in comparable form are shown below
by major categories of expense.
Three Months Ended
June 30
|
Six Months Ended June
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Expense
Category
|
||||||||||||||||
Payroll,
benefits and consulting
|
$ | 328,000 | $ | 450,000 | $ | 2,027,000 | $ | 895,000 | ||||||||
Stock-based
compensation expense
|
103,000 | 92,000 | 503,000 | 177,000 | ||||||||||||
Advertising
and marketing
|
— | 279,000 | 78,000 | 468,000 | ||||||||||||
Legal
and other professional fees
|
144,000 | 74,000 | 254,000 | 191,000 | ||||||||||||
Travel
and related
|
22,000 | 140,000 | 115,000 | 269,000 | ||||||||||||
Rent
and office expenses
|
76,000 | 104,000 | 259,000 | 183,000 | ||||||||||||
Insurance-liability
|
26,000 | 56,000 | 34,000 | 111,000 | ||||||||||||
Depreciation
and other non-cash expenses
|
— | 1,000 | 2,000 | 2,000 | ||||||||||||
Other
|
32,000 | 27,000 | 45,000 | |||||||||||||
Total
|
699,000 | 1,228,000 | 3,299,000 | 2,341,000 |
22
For the
six months ended June 30, 2010, administration, sales and marketing expenses
increased 41% over the prior year comparable period. This is
principally the result of one time severance payments made in the first quarter
of 2010.
Interest
Income
Interest
income for the six ended June 30, 2010 has decreased $52,268 as compared to the
same period in the prior year due to reduced cash balances combined with reduced
interest rates in the current year.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
required for smaller reporting company; see Regulation S-K Section
229.305(e)
Item
4. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures.
Based on
management’s evaluation (with the participation of the Company’s principal
executive officer and principal accounting officer), as of the end of the period
covered by this report, Senetek’s principal executive officer and principal
accounting officer have concluded that the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, (the “Exchange Act)) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms.
(b)
Changes in Internal Controls.
There
were no changes in Senetek’s internal control over financial reporting during
the quarterly period ended June 30, 2010, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
23
|
PART
II - OTHER INFORMATION
Item
6. EXHIBITS
(a)
Exhibits
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
24
SIGNATURES
Pursuant
to the requirements 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.
SENETEK
PLC
|
||
(Registrant)
|
||
Date: August
16, 2010
|
By:
|
/s/ J. P.
RYAN
|
John
P. Ryan
Chairman
of the Board and Chief Executive Officer
(Principal
Executive Officer)
|
||
Date: August
16, 2010
|
By:
|
/s/ HOWARD CROSBY
|
Howard
Crosby
President,
Chief Financial Officer and Director
(Principal
Financial and Accounting
Officer)
|
25