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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2011

 

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 000-14691

 

 INDEPENDENCE RESOURCES PLC


(Exact name of registrant as specified in its charter)

 

England   77-0039728
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
7 Office Way, Suite 218    
Hilton Head, SC   29928
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (843) 715-9504

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

None   None

 

Securities registered pursuant to Section 12(g) of the Act:

AMERICAN DEPOSITARY SHARES

(each American Depositary share represents

1 Ordinary share, pound sterling 0.40 par value)

(Title of Class)

 

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes ¨ No x

 

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 Item 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes: x No: ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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  

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based on the closing price of $0.67 as of the close of business on June 30, 2011, was $5,245,072.

 

As of March 31, 2012, the registrant had 17,355,760 ordinary shares outstanding, including 7,795,191 shares issued at March 31, 2012 represented by American Depositary shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

 
 

 

TABLE OF CONTENTS

 

FORM 10-K

 

For The Fiscal Year Ended December 31, 2011

 

PART I     3  
  ITEM 1. BUSINESS   3  
  ITEM 1A. RISK FACTORS   10  
  ITEM 1B. UNRESOLVED STAFF COMMENTS   10  
  ITEM 2. PROPERTIES   10  
  ITEM 3. LEGAL PROCEEDINGS   12  
  ITEM 4. MINE SAFETY DISCLOSURES   12  
           
PART II     13  
  ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES   13  
  ITEM 6. SELECTED FINANCIAL DATA   19  
  ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   19  
  ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   25  
  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   25  
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   25  
  ITEM 9A. CONTROLS AND PROCEDURES   25  
  ITEM 9B. OTHER INFORMATION   26  
           
PART III     27  
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE   27  
  ITEM 11. EXECUTIVE COMPENSATION   31  
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   33  
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE   35  
  ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES   36  
           
PART IV     37  
  ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES   37  

 

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FORWARD-LOOKING STATEMENTS

 

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results and the assumptions upon which those statements are based, are “forward-looking statements.” Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “would,”, “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The Company can give no assurance that it has identified all of the important factors that may result in material differences between actual results and its forward-looking statements, and the Company assumes no obligation to correct or update any forward-looking statements which may prove to be inaccurate, whether as a result of new information, future events or otherwise, except as may be required in connection with future reports of the Company pursuant to the Securities Exchange Act of 1934, as amended.

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

Historically, Independence Resources PLC (the “Company”) had been focused on the skincare and pharmaceutical businesses. In March 2010, after an extensive review by our Board of Directors and our outside advisors, our Board elected to change our overall direction from these sectors to the natural resources sector. Our Board realized that the business prospects of the existing portfolio of assets were not capable of generating sufficient revenue, and we had insufficient cash on hand to reach significant revenue generation from any of the product lines in our portfolio. We elected to pursue additional opportunities in the resources sector because this sector has experienced significant growth and investor interest in the past few years and our Board believes the resources sector has continued growth prospects and significant opportunities.

 

During 2011 we continued the transition from a biomedical company to one focused on natural resources. The Company terminated its participation in the secured notes related to the Relief Canyon Mine and in the process it eliminated the convertible debt associated with that acquisition leaving the Company debt free. With the exception of the Reliaject product the Company has sold or otherwise disposed of the remainder of its biomedical assets which has continued to reduce expenses associated with the biomedical lines of business. We made significant progress during the 2011 work season at our Iron Creek Project by conducting a number of geophysical surveys which have identified the existing known zones of mineralization. As a result, we believe we have discovered additional extensions to the known zones as well as possibly identified several new zones of mineralization. We plan on undertaking a drilling program to verify these results for the 2012 work season.

 

For detailed financial information, please consult our financial statements included in this Report.

 

Unless the context otherwise requires, throughout this report, the words “Independence,” “the Company,” “we,” “us,” and “our” mean Independence Resources PLC and its consolidated subsidiaries. All amounts in this report are in U.S. Dollars, unless otherwise indicated.

 

Recent Developments

 

Mineral Property Operations

 

In March 2011, we acquired 100% ownership of Iron Eagle Acquisitions, Inc (“Iron Eagle”) by issuing 8,150,000 ordinary shares valued at $0.78 or a total value of $6,357,000. As a result of the acquisition, Iron Eagle became our wholly-owned subsidiary. The acquisition agreement, dated March 16, 2011, was with Iron Eagle and its two shareholders, namely Chester Mining Company, an Idaho Corporation (“CHMN”), and Brush Prairie Minerals, Inc., a Delaware corporation (“BPMI”) (collectively the “Shareholders”). At closing, which was held on March 17, 2011, we issued 5,500,000 shares of common stock to BPMT and 2,650,000 shares to CHMN, and John Ryan, our CEO and a director, was appointed as the sole director and officer Iron Eagle. Also at closing CHMN appointed Mr. Ryan and Howard Crosby, our President, Chief Financial Officer, and a director, as directors of CHMN. BPMI appointed Messrs. Ryan and Crosby as directors of BPMI. William L. Campbell is the CEO of CHMN and BPMI and a principal shareholder of both entities. As a result of the transaction, control of the Company changed to Mr. Campbell.

 

- 3 -
 

 

Iron Eagle owns two mineral projects, one in Idaho known as the Iron Creek project and one in California known as the Gray Eagle Copper Mine.

 

Iron Creek Project, Salmon, Idaho

 

The Iron Creek Project consists of seven patented mining claims of approximately 118 acres in Lemhi County, and 187 unpatented mining claims and located about 26 miles southwest of the town of Salmon, Idaho.

 

Past work by previous operators has identified several mineralized zones of copper and cobalt, and numerous other exploration targets on the property that have not as yet been evaluated. However, extensive drilling, sampling, and geologic work have been done on two of the most advanced areas.  In these areas, previous operators calculated tonnages and grades (which are non-43-101 compliant) contained in an area called the “No Name Zone”.

 

The first mineral resource of interest referenced in the literature is an underground target described by Noranda Exploration in a 1980 report as “two distinct lenses of cobalt mineralization”. The first lens was called a “reserve” and was estimated to contain 1,050,000 tons grading 0.61% cobalt and 0.3% copper and having a strike length of about 750 feet. A second lens of high-grade cobalt mineralization occurs to the northwest, and again is described as a “reserve”. This lens extends for 600 feet of strike length, is deeper than the first lens, and averages about 0.48% cobalt and 0.24% copper. The authors estimated this resource to be around 229,000 tons.

 

The second area of major interest, also in the "No Name Zone" is described by Centurion Minerals in a 1988 report as containing at least 10,000,000 tons of open pit resources grading 2% copper equivalent grade (accounting for the cobalt as a by-product). This number was based on over 20 diamond drill holes along approximately 5,000 feet of strike length and over 200 feet of width, at an average spacing of around 200 feet. The author of the report concluded that these resources could be classified as “possible” reserves (under a S.E.C. classification) and recommended an additional 30 holes be drilled to reduce the drill spacing to something less than 200 feet. Significantly more infill drilling will be required to upgrade and verify this mineral resource, and this drilling will be guided by the work done at the project during the summer and fall of 2011.

 

Based on these reports and our own internal evaluations, in order to expand the land package and cover more of the potential targets on the property, we acquired by staking an additional 187 unpatented mining claims in and around the seven patented claims.

 

Additionally, we obtained permits from the Forest Service to undertake sampling, induced polarization, magnetic surveys, and geologic mapping on the ground. These activities were undertaken during the field season of 2011. These activities confirmed the mineral zones as outlined in historic reports and identified several potential new zones of mineralization that were previously not recognized.

 

We are currently filing a drill plan and requesting permits from the Forest Service to allow a drill program on the project to begin the summer of 2012 to confirm the resources that were previously identified, and also to target some new possible mineral resources which are indicated by the work we have completed so far.

 

Gray Eagle Copper Mine, Happy Camp, California

 

The Gray Eagle Copper Mine (“Gray Eagle”) is a past producer of significant amounts of both copper and gold. The property consists of approximately 294 acres of patented mining claims and 42 unpatented mining claims in Siskiyou County, the northernmost county of the State of California. Major production of valuable metals occurred during two different periods at Gray Eagle. Newmont Mining produced significant copper at the property in the 1940’s and Noranda Mining produced significant gold at the property in the 1980’s.

 

- 4 -
 

 

In the early 1990’s, a feasibility study was completed by Siskon Corporation which was reviewed by a major U.S. based mineral consulting firm which concluded that a mineral resource of just over 1.1 million tons of ore grading 2.59% copper and .027 ounces per ton gold using a 3.3 to 1 strip ratio, a copper cutoff grade of 1%, and recovery factors of 90% on copper and 30% on gold. We intend to confirm this resource and undertake additional drilling to further refine the mineral resources which have been identified by past work at this project, and to explore for undiscovered possible deposits in the area.

 

Based upon our internal evaluations we elected to acquire by staking an additional 42 unpatented claims. During the upcoming months we plan on obtaining the needed permits to undertake sampling and geophysical surveys on the property. We plan on beginning these geologic activities in the Spring of 2012 as weather and ground conditions allow. Once we have the results from this testing, these results will aid the Company in designing a drill program which we intend to undertake in the fall of 2012 field and season of 2013. All of these activities are dependent on raising additional capital in order to undertake this work.

 

The Gray Eagle Mine has been subject to an EPA clean up action in the past. According to publicly available EPA documents, the EPA has expended about $3 million in response costs cleaning up old mining tailings. The Company understands that several companies have been identified as potential responsible parties for this clean up. The Company has not to date received any communication from the EPA with respect to recovery of these costs or any environmental issues that may be present at the Gray Eagle property.

 

Relief Canyon Mine, Lovelock Nevada

 

In August 2008, Firstgold Corp. (“Firstgold”), Platinum Partners Value Arbitrage Fund L.P. (“Platinum”) and Lakewood Group, LLC (“Lakewood”) entered into a purchase agreement (the “Firstgold Agreement”) pursuant to which, among other things, Firstgold issued and sold to Platinum (i) senior secured promissory notes in the aggregate principal amount of $9,607,200 (the “Platinum Notes”), and (ii)  a warrant to purchase up to 12.0 million shares of Firstgold’s common stock (the “Platinum Warrant”).  In December 2009, Platinum exercised its rights to cause Firstgold to purchase the Platinum Warrant (the “Platinum Put Right”). Firstgold failed to pay amounts outstanding under the Platinum Notes, including accrued and unpaid interest in respect of the Platinum Notes and amounts in respect of the Platinum Put Right, as and when due.   The Platinum Notes are secured by all of the assets of Firstgold and the primary asset of Firstgold is the Relief Canyon Mine.

 

In April 2010, we entered into a participation agreement (the “Participation Agreement”) with Platinum, pursuant to which we purchased a participation in Platinum’s claims relating to (i) the aggregate principal amount outstanding under the Platinum Notes and related advances of $9.6 million, (ii) the accrued and unpaid interest in respect of the Platinum Notes and such related advances of $2.3 million and (iii) the amount owed by Firstgold to Platinum in respect of the exercise of the Platinum Put Right with respect to the Platinum Warrant of $3.6 million (collectively, the “Platinum Claims”), equal to an undivided percentage interest of 45% in all of such Platinum Claims (representing $7.0 million of the Platinum Claims), and a corresponding 45% pro rata interest in all collateral and guarantees, if any, Platinum has or from time to time may receive securing or supporting any of the Platinum Claims or any obligations of Firstgold arising under or in connection with any documents relating to any Platinum Claims, for the aggregate purchase price of $5.0 million.  As a result of (1) the issuance  by Firstgold of senior secured promissory notes to Platinum and Lakewood pursuant to the Firstgold Agreement, and (2) our purchase of 45% of the Platinum Claims, we held a resulting 35% interest in the Relief Canyon Mine assets.

 

On August 22, 2011, pursuant to the Participation Agreement, we requested that Platinum acquire our participation interest at the price of $5,034,281 (the “Put Price”). We and Platinum have agreed that the Put Price shall be deemed paid, in part, by application (by way of set-off) of amounts outstanding under the a secured promissory note (the “Company Note”) issued by us to DMRJ Group LLC (“DMRJ”), an affiliated entity of Platinum, on or about March 2010. The amounts owed to DMRJ pursuant to the Company Note totaled $2,876,790 (the “Company Note Amount”). Additionally we and Platinum agreed to settle the balance of amounts that had been advanced by each party to the operations of the Relief Canyon Mine project (the “Net Project Advances”). A loss of $412,367 was recognized on the transaction.

 

On September 2, 2011, we received from Platinum an amount equal to $2,535,689 (which amount represents the Put Price less the Company Note Amount plus the Net Project Advances). As a result, as of September 1, 2011, (i) the Participation Agreement is deemed terminated and of no further force and effect, (ii) the liens and security interests of DMRJ in our property are released and terminated, and (iii) all our liabilities with respect to the Company Note are discharged.

 

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Oil and Gas Operations

 

Working Interest, Dawson County, Texas

 

In May 2010, we entered into a participation agreement (the “SDX Participation Agreement”) with SDX Resources, Inc (“SDX”) pursuant to which we 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 SDX Participation Agreement, we will pay 20% of the actual cost to casing point of the initial test well, and, if necessary, the cost to plug and abandon it as a dry hole.  Additionally, we 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.  Both of these test wells were successful and have been put into production.

 

We are now receiving income on a quarterly basis from the two wells that we participated in.  We plan no further investment in this project in the near term. The Company has received estimates from SDX that the cost of plugging these wells will be approximately $17,000 to $25,000 per well. SDX does not expect this plugging to happen for several years, possibly as long as twenty years. At this time the Company will be responsible for its pro rata share of the plugging costs.

 

Management has determined that this oil and gas project is not material to the current business of the Company.

 

South Fork II Prospect, Clinton County Kentucky

 

On January 6, 2011, the Company entered into a Joint Venture (“Agreement”) with Ameratex Securities, in which the Company purchased a 4.5% working interest and 3% net revenue interest in three oil wells located in Clinton County, Kentucky for $41,250.  The Company is receiving a small royalty from this project and plans no further investment in these wells. Management has determined that this oil and gas project is not material to the current business of the Company.

 

Discontinued Operations

 

Our legacy skincare and pharmaceutical activities are reported as discontinued operations on the Consolidated Statement of Operations for all periods presented (see Note 17 of Notes to Consolidated Financial Statements for more information). As a result, we have determined that it is no longer appropriate to present a separate segment representing our operations in our skincare and pharmaceutical segment.

 

Skincare Segment

 

Pursuant to an Asset Purchase Agreement, dated March 10, 2010 (“Asset Purchase Agreement”), Skinvera LLC, a company wholly owned by Frank J. Massino, our former Chairman and Chief Executive Officer (“Skinvera”), purchased all assets and assumed all existing liabilities of our 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 its date of issuance. The Asset Purchase Agreement provides that Skinvera will pay us royalty payments based on 5% of net direct sales of skincare products and 10% of net skincare royalties, up to a maximum of $5 million. In April, 2010 we and Skinvera entered into an amendment to the Asset Purchase Agreement providing that in the event of a transaction resulting in (i) the change of control, directly or indirectly, of at least 50% of the equity interests in the Skinvera (as defined in the Asset Purchase Agreement), other than a transfer to a certain affiliate of the Skinvera, or (ii) the sale of substantially all of the Assets (as defined in the Asset Purchase Agreement), we will be entitled to receive (1) 50% of the after-tax purchase price paid to the Skinvera if such sale occurs on or before March 10, 2011 or (2) 25% of the after-tax purchase price paid to the Skinvera if such sale occurs between March 10, 2011 and March 10, 2012.

 

As of result of the transactions described above, our Skincare segment consists of Kinetin, which is our first generation cytokinin, and Zeatin, Kinetin’s analog product. By the spring, 2007, we had licensed Kinetin to 10 separate companies in various channels of distribution and geographies. We had also licensed Zeatin exclusively to Valeant Pharmaceuticals International (“Valeant”) of CostaMesa, CA. On March 30, 2007, we terminated our 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, we 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 we were a party, in return for a cash payment of $21.0 million, a waiver of $6.0 million in future marketing credits we otherwise would have owed Valeant, and a right to share in future royalties due Valeant from other Kinetin licensees through 2011. We do not intend to renew the License Acquisition Agreement.

 

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Pharmaceutical segment

 

Diagnostic Monoclonal Antibodies

 

In 1995, we entered into a license agreement with the Research Foundation for Mental Hygiene (“RFMH”), an agency of the State of New York, under which we 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, we 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 the Company to receive percentages of Signet’s net sales, subject to certain minimum royalty guarantees, and the Company to remit a portion to RFMH in accordance with the terms of its license.

 

In May 2004, we entered into an interim extension of our agreement with RFMH and in April 2005, we 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, we 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 our 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, we agreed to assign the Signet agreement to Covance Antibody Services, Inc. (“Covance”) in conjunction with Covance’s acquisition of Signet.

 

Under our agreement with Covance, we are 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 us 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, we are entitled to a minimum in total payments from Covance of $860,000 per year. Under our license agreement with RFMH, RFMH is entitled to receive from us 27% of Covance’s net sales of licensed products, with a minimum annual total of $430,000. In 2010 and 2009, Covance exceeded their minimum sales goal and the Company met its annual minimum to RFMH.

 

On July 1, 2011, the Company signed a Termination Amendment with Covance and an Assignment and Consent Agreement with Covance and RFMH pursuant to which the Company assigned to Covance, and Covance assumed all of the Company’s obligations under the RFMH License Agreement.

 

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

 

We have had several agreements with various partners to undertake development work and marketing of Invicorp® over the last decade which are disclosed in historic filings of the company. The Company has two partners on Invicorp®, one covering the U.S. and Canada and one covering the rest of the world. With respect to our U.S./Canada partner, Plethora Systems, we believe Plethora is in default of their agreement and the Company intends to move to formally terminate this agreement in 2012.

 

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With respect to the rest of the world, on July 11, 2011, the Company sold a license to market, manufacture and distribute Invicorp® worldwide (excluding North America) to Evolan Pharmaceuticals for a license fee of $28,135, payment for existing inventories of Invicorp®, a future success payment of $100,000 upon successful registration in anyone of five key countries and a future royalty of 12.5% based on sales for the next fifteen years. In addition, Evolan has a first right of refusal to acquire the U.S. and Canada rights to Invicorp® should they become available.

 

Drug Delivery Technology

 

We 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.

 

In March 2006, we sold to Ranbaxy Pharmaceuticals Inc. all of our patents, trademarks and automated manufacturing equipment for the Reliaject ® device. We received a down-payment of $500,000 and under the terms of the sale agreement, we are to receive additional milestone payments based on regulatory approvals and cumulative sales targets. In February, 2011, we entered into an agreement with Ranbaxy to repurchase all of the patents, trademarks and automated manufacturing equipment sold to Ranbaxy in March 2006. This agreement was subject to finding a new development partner to fund the product work but to date, no new partner has been found. Therefore, Ranbaxy continues to have certain rights and obligations with respect to our 2006 agreement. The Company intends in 2012 to formally terminate its agreement with Ranbaxy on the grounds of non-performance.

 

Marketing and Manufacturing

 

Oil and Gas

 

The oil produced at our Dawson County, Texas and our Clinton County, KY project are transported by truck to local refineries and sold. We do not produce natural gas products for market at this time and will have to consider the economics of constructing a natural gas pipeline to transport energy produced from our leases in Dawson County, Texas or in Clinton County, KY in the event commercial quantities of natural gas are determined to exist. The products that we market or intend to market - oil and natural gas products - are commodities purchased by many distribution and retail companies. Crude oil can be sold whenever it is produced subject to transportation cost. Natural gas requires transportation from point of production to the purchaser by pipeline.

 

Competition

 

Oil and Gas

 

The oil and natural gas business is highly competitive.  Competition is particularly intense to acquire desirable producing properties, to acquire oil and natural gas exploration prospects or properties with known reserves, suitable for enhanced development and production efforts, and to hire qualified and experienced human resources.  Our competitors include the major integrated energy companies, as well as numerous independent oil and gas companies, individual proprietors, and drilling programs.  Many of these competitors possess and employ financial and human resources substantially greater than ours. Our competitors may also have a superior capability for evaluating, bidding, and acquiring desirable producing properties and exploration prospects.

 

Mining

 

We also face significant competition in our mining business.  Competition is particularly intense to acquire mineral prospects and deposits suitable for exploration and development, to acquire reserves, and to hire qualified and experienced human resources.  Our competitors in mineral property exploration, acquisition, development, and production include the major mining companies in addition to numerous intermediate and junior mining companies, mineral property investors and individual proprietors. There is a limited supply of desirable mineral lands available for claim-staking, lease, or acquisition in the United States and other areas where we may conduct exploration activities.

 

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Competition in the industry is not limited to the acquisition of mineral properties, but also extends to the technical expertise to find, advance, and operate such properties; the labor to operate the properties; and the capital for the purpose of funding such exploration and development. Many competitors not only explore for and mine, but conduct refining and marketing operations on a world-wide basis. Such competition may result in our company being unable not only to acquire desired properties, but to recruit or retain qualified employees or to acquire the capital necessary to fund our operation and advance our properties. Our inability to compete with other companies for these resources would have a material adverse effect on our results of operation, financial condition and cash flows.

 

Government Regulation

 

Oil and Gas and Mining

 

We are required to obtain licenses and permits from various governmental authorities. We anticipate that we will be able to obtain all necessary licenses and permits to carry on the activities which we intend to conduct, and that we intend to comply in all material respects with the terms of such licenses and permits.

 

If we proceed with the development of our current and future properties, we anticipate that we will be subject to increased governmental regulation. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, byproducts thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, local and foreign laws and regulations relating primarily to the protection of human health and the environment. As we have not proceeded to the development of our properties, we have not incurred any expenditures related to complying with such laws, or for remediation of existing environmental contamination. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.

 

Employees

 

As of December 31, 2011, we had four full-time employees, comprised of two employees at its corporate office in Hilton Head, SC, one employee at its accounting office in Spokane, Washington, and one employee in Walla Walla, Washington, and one part-time employee located in Salmon, ID.

 

Status as a Passive Foreign Investment Company

 

For U.S. Federal income tax purposes, an entity 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.

 

U.S. shareholders in an entity that is a PFIC in any taxable year are generally subject to tax at the highest ordinary income rates applicable to that U.S. holder and are required to pay interest on such tax based on the U.S. holder’s holding period in the shares, on (1) a portion of any gain recognized on the sale of such shares and (2) any “excess distribution” paid on such holders shares (generally, a distribution in excess of 125% of the average annual distributions paid by the entity in the three preceding taxable years).

 

Based upon advice from its outside professional tax advisors, we have determined that we were a PFIC during 2011 and 2010.

 

A detailed discussion of the implications of our status as a PFIC for U.S. holder of shares or ADSs is included in this Report under Item 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES – Passive Foreign Investment Company Considerations .

 

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ITEM 1A. RISK FACTORS

 

Not required for smaller reporting companies.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not required for smaller reporting companies.

 

ITEM 2. PROPERTIES

 

Executive Offices

 

Our executive offices are located at 7 Office Way, Suite 218, Hilton Head, SC 29928. Our current premises are adequate for our current operations and we do not anticipate that we will require additional premises in the foreseeable future.

Mineral Property

 

Relief Canyon Mine

 

In August 2008 Firstgold issued and sold to Platinum the Platinum Notes and the Platinum Warrant. In December 2009, Platinum exercised its Put Right. Firstgold has failed to pay amounts outstanding under the Platinum Notes, including accrued and unpaid interest in respect of the Platinum Notes and amounts in respect of the Put Right as and when due, and has filed a petition in the United States Bankruptcy Court, District of Nevada, In re: Firstgold Corp. (Case No. BK-10-50215 gwz). The Platinum Notes are secured by all of the assets of Firstgold and the primary asset of Firstgold is the Relief Canyon Mine located near the town of Lovelock, NV.

 

In April 2010, we entered into a participation agreement with Platinum, pursuant to which we purchased a participation in the Platinum Claims, equal to an undivided percentage interest of 45.144% in all of such claims (representing $7.0 million of the Platinum Claims), and a corresponding 45.144% pro rata interest in all collateral and guarantees, if any, Platinum has or from time to time may receive securing or supporting any of the Platinum Claims or any obligations of Firstgold arising under or in connection with any documents relating to any Platinum Claims, for the aggregate purchase price of $5.0 million.

 

On August 22, 2011, pursuant to the Participation Agreement, we requested that Platinum acquire our participation interest at the price of $5,034,281 (the “Put Price”). We and Platinum have agreed that the Put Price shall be deemed paid, in part, by application (by way of set-off) of amounts outstanding under the a secured promissory note (the “Company Note”) issued by us to DMRJ Group LLC (“DMRJ”), an affiliated entity of Platinum, on or about March 2010. The amounts owed to DMRJ pursuant to the Company Note totaled $2,876,790 (the “Company Note Amount”). Additionally we and Platinum agreed to settle the balance of amounts that had been advanced by each party to the operations of the Relief Canyon Mine project (the “Net Project Advances”). A loss of $412,367 was recognized on the transaction.

 

On September 2, 2011, we received from Platinum an amount equal to $2,535,689 (which amount represents the Put Price less the Company Note Amount plus the Net Project Advances). As a result, as of September 1, 2011, (i) the Participation Agreement is deemed terminated and of no further force and effect, (ii) the liens and security interests of DMRJ in our property are released and terminated, and (iii) all our liabilities with respect to the Company Note are discharged.

 

Iron Creek Project, Salmon, Idaho

 

In March 2011, we acquired 100% ownership of Iron Eagle Acquisitions, Inc (“Iron Eagle”) by issuing 8,150,000 ordinary shares valued at $0.78 or a total value of $6,357,000, of which $2,067,000 was allocated to the Iron Creek Project and $4,290,000 to Gray Eagle Copper Mine. As a result of the acquisition, Iron Eagle became our wholly-owned subsidiary.

 

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Iron Eagle owns a mineral property called the “Iron Creek Project” consisting of seven patented mining claims of approximately 118 acres in Lemhi County, and 187 unpatented mining claims located 26 miles southwest of the town of Salmon, Idaho. Past work by previous operators has identified several mineralized zones of copper and cobalt, and numerous other exploration targets on the property that have not as yet been evaluated. We plan to conduct drilling and sampling work on this property to further refine the mineral resources which have been identified by past exploration at this project.

 

Past work by previous operators has identified several mineralized zones of copper and cobalt, and numerous other exploration targets on the property that have not as yet been evaluated. However, extensive drilling, sampling, and geologic work have been done on two of the most advanced areas.  In these areas, previous operators calculated tonnages and grades (which are non-43-101 compliant) contained in an area called the “No Name Zone”.

 

The first mineral resource of interest referenced in the literature is an underground target described by Noranda Exploration in a 1980 report as “two distinct lenses of cobalt mineralization”. The first lens was called a “reserve” and was estimated to contain 1,050,000 tons grading 0.61% cobalt and 0.3% copper and having a strike length of about 750 feet. A second lens of high-grade cobalt mineralization occurs to the northwest, and again is described as a “reserve”. This lens extends for 600 feet of strike length, is deeper than the first lens, and averages about 0.48% Co and 0.24% Cu. The authors estimated this resource to be around 229,000 tons.

 

The second area of major interest, also in the "No Name Zone" is described by Centurion Minerals in a 1988 report as containing at least 10,000,000 tons of open pit resources grading 2% Cu equivalent grade (accounting for the cobalt as a by-product). This number was based on over 20 diamond drill holes along approximately 5,000 feet of strike length and over 200 feet of width, at an average spacing of around 200 feet. The author of the report concluded that these resources could be classified as “possible” reserves (under a S.E.C. classification) and recommended an additional 30 holes be drilled to reduce the drill spacing to something less than 200 feet. Significantly more infill drilling will be required to upgrade and verify this mineral resource, and this drilling will be guided by the work done at the project the summer and fall of 2011.

 

In order to expand the land package and cover more of the potential targets on the property, we acquired by staking an additional 187 unpatented mining claims in and around the seven patented claims.

 

Additionally, we obtained permits during the summer of 2011 from the Forest Service to undertake sampling, induced polarization, magnetic surveys, and geologic mapping on the ground. We accomplished these activities during the summer and fall of 2011 and obtained favorable results. As a result, we intend to file a drilling plan and permits for drilling and other activities to occur the summer and fall of 2012 to confirm the mineral resources that were previously identified by other operators, and also to target some new possible mineral resources which are indicated by the work we have completed so far. The activities on this project for the work season of 2012 are dependent on the availability of sufficient funding.

 

Gray Eagle Copper Mine, Happy Camp, California

 

Iron Eagle also owns a mineral property called the Gray Eagle Copper Mine (“Gray Eagle”) which is a past producer of significant amounts of both copper and gold, consisting of approximately 294 acres of patented mining claims in Siskiyou County, the northernmost county of the State of California. Major production of valuable metals occurred during two different periods at Gray Eagle. Newmont Mining produced significant copper at the property in the 1940’s and Noranda Mining produced significant gold at the property in the 1980’s.

 

In the early 1990’s, a feasibility study was completed by Siskon Corporation which was reviewed by a major U.S. based mineral consulting firm which concluded that a mineral resource of just over 1.1 million tons of ore grading 2.59% copper and .027 ounces per ton gold using a 3.3 to 1 strip ratio, a copper cutoff grade of 1%, and recovery factors of 90% on copper and 30% on gold. We intend to confirm this resource and undertake additional drilling to further refine the mineral resources which have been identified by past work at this project, and to explore for undiscovered possible deposits in the area.

 

We acquired by staking an additional 42 unpatented claims. During the upcoming months we plan on obtaining the needed permits to undertake sampling and geophysical surveys on the property. We plan on beginning these geologic activities in the Spring of 2012 and as funds allow. Once we have the results from this testing, these results will aid the Company in designing a drill program which we intend to undertake in the fall of 2012 or during 2013.

 

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Oil and Gas Property

 

In May 2010, we entered into a participation agreement (the “SDX Participation Agreement”) with SDX Resources, Inc (“SDX”) pursuant to which we 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 SDX Participation Agreement, we will pay 20% of the actual cost to casing point of the initial test well, and, if necessary, the cost to plug and abandon it as a dry hole.  Additionally, we 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.  Both of these test wells were successful and have been put into production.

 

We are now receiving income on a quarterly basis from the two wells that we participated in.  We plan no further investment in this project in the near term.

 

South Fork II Prospect, Clinton County Kentucky

 

On January 6, 2011, the Company entered into a Joint Venture (“Agreement”) with Ameratex Securities, in which the Company purchased a 4.5% working interest and 3% net revenue interest in three oil wells located in Clinton County, Kentucky for $41,250.  The Company is receiving a small royalty from this project and plans no further investment in these wells.

 

ITEM 3. LEGAL PROCEEDINGS

 

In the fall of 2010 Miller Tabak & Company, a New York based investment banking firm, filed a breach of contract action against the Company in New York Supreme Court seeking an amount of approximately $350,000 for alleged non-payment of a commission. Management does not believe the claim has any merit and is defending the claim vigorously. However, it is possible that a settlement will be reached between the Company and Miller Tabak in a range of $0 to $360,000. Both parties have been ordered to commence mediation which should take place in April 2012.

 

Besides the legal proceedings mentioned above, we are not a party to any material pending legal proceedings.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

There are no reportable events requiring disclosure pursuant to this item.

 

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PART II

 

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 our ordinary shares. Our American Depositary Shares, each representing one ordinary share and evidenced by one ADS, are quoted on the Over the Counter Bulletin Board and OTC Markets under the symbol “SNKTY.” Trading of the ADSs in the over-the-counter market has been limited and sporadic and the quotations set forth below are not necessarily indicative of actual market conditions. These prices reflect inter-dealer prices without retail mark-up, mark-down, or commission, and may not necessarily reflect actual transactions. The depositary for these ADSs is The Bank of New York. The high and low bid prices for the ADSs for the periods listed below are as follows:

 

Fiscal Year Ended December 31, 2011

 

Fiscal Period  High   Low 
         
First Quarter  $0.98   $0.63 
Second Quarter   1.00    0.75 
Third Quarter   0.93    0.64 
Fourth Quarter   0.82    0.57 

 

Fiscal Year Ended December 31, 2010

 

Fiscal Period  High   Low 
         
First Quarter  $1.24   $0.70 
Second Quarter   1.20    0.68 
Third Quarter   0.77    0.57 
Fourth Quarter   1.00    0.58 

 

As of March 31, 2012 there were 17,355,760 ordinary shares outstanding and 206 holders of record of ordinary shares, one of which is The Bank of New York which holds ADSs representing 7,795,191 ordinary shares. The closing bid prices of our ADSs on March 31, 2012, were a high of $0.76 and a low of $0.75.

 

Dividends.     Under the English Companies Act of 1985, a limited company may not declare or pay cash dividends while it has an accumulated deficit. On December 16, 2008, shareholders approved a reclassification of share premium to accumulated deficit for the UK Company. This reclassification, which has no net effect on the equity or financial position of the Company, was undertaken to create distributable reserves. On January 21, 2009, the reclassification was confirmed by the English High Court. Effective with this confirmation, we may now pay dividends or repurchase shares up to the level of the positive balance in accumulated profit and loss in the UK Company.

 

We have not paid, nor do we currently anticipate the payment of, any cash dividends on the ordinary shares. Any future determinations to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our Board of Directors deems relevant.

Taxation

 

The following discussion describes the material US Federal income tax and UK tax consequences of the purchase, ownership and disposition of our shares or ADSs (evidenced by American Depositary Receipts (“ADR”)) for beneficial owners:

 

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·who are residents of the United States for purposes of the United Kingdom/United States Income Tax Convention (the “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”);

 

·whose ownership of our shares or ADSs is not, for the purposes of the Conventions, attributable to a permanent establishment in the United Kingdom;

 

·who otherwise qualify for the full benefits of the Conventions; and

 

·who are US holders (as defined below).

 

The statements of US federal income tax and UK tax laws set out below:

 

·are based on the laws in force and as interpreted by the relevant taxation authorities as at the date of this annual report;

 

·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

 

·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 our 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 our shares or ADSs as part of a hedging, integrated, conversion or constructive sale transaction or straddle, persons that receive shares of ADSs as compensation for the performance of services, 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 our outstanding voting share capital and we are classified as a “controlled foreign corporation” for US Federal tax purposes.

 

As used herein, the term “US holder” means a beneficial owner of our shares or ADSs who or which is:

 

·a citizen or individual resident of the United States;

 

·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;

 

·an estate, the income of which is subject to US Federal income taxation regardless of its source; or

 

·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.

 

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If a partnership (or an entity that is treated as a partnership for US Federal income tax purposes) holds our 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 our 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 our 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 our 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 our shares represented by the ADSs evidenced by the ADRs.

 

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

 

In general

 

A Non-U.S. corporation will be classified as a “passive foreign investment company,” or a PFIC, for U.S. federal income tax purposes in any taxable year in which, after applying certain look-through rules, either:

 

·at least 75% of its gross income is “passive income” (generally, dividends, interest, royalties, rents and gains from the sale of assets that give rise to such income); or

 

·at least 50% of the quarterly average value of its gross assets is attributable to assets that produce “passive income” or are held for the production of passive income.

 

Based on our existing operations and assets, we have determined that we were a PFIC for the taxable year ended December 31, 2010, for the taxable year ended December 31, 2011, and, depending upon our future operations and assets, there is a substantial risk that we could be treated as a PFIC in subsequent years. If we are treated as a PFIC, a direct (and in certain cases, indirect) U.S. Holder would be subject to special rules with respect to (i) any gain realized on the sale or other disposition of shares or ADSs and (ii) any “excess distribution” by us to the U.S. Holder in respect of the shares or ADSs (generally, any distributions to the U.S. Holder in respect of the shares or ADSs during a single taxable year that total more than 125% of the average annual distributions received by the U.S. Holder in respect of the shares or ADSs during the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the shares or ADSs).

 

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Under these rules, (a) the gain or excess distribution would be allocated ratably over the U.S. Holder’s holding period for the shares or ADSs, (b) the amount allocated to the taxable year in which the gain or excess distribution was realized or to any year before we became a PFIC would be taxable as ordinary income, (c) the amount allocated to each other taxable year would be subject to tax at the highest tax rate in effect for ordinary income for that year and (d) an interest charge generally applicable to underpayments of tax would be imposed in respect of the tax attributable to each such prior year. These rules effectively prevent a U.S. Holder from treating gain on the shares or ADSs as capital gain. For these purposes, gifts, exchanges pursuant to a corporate reorganization and use of the shares or ADSs as security for a loan may be treated as a disposition. Moreover, if we are a PFIC, dividends received by individual U.S. Holders and certain other non-corporate U.S. Holders will not be treated as qualified dividend income taxable at reduced rates generally applicable to long term capital gains.

 

Where a foreign corporation is a PFIC in any year during a U.S. Holder’s holding period, it will generally be treated as a PFIC for each subsequent year absent a “purging” election by the U.S. Holder. Finally, a person who acquires the shares or ADSs from a deceased U.S. Holder generally will be denied a step-up in tax basis for U.S. federal income tax purposes to fair market value at the date of such deceased U.S. Holder’s death, which would otherwise be available with respect to a decedent dying prior to or after 2010. Instead such person will have a tax basis in the shares or ADSs equal to the lower of the fair market value of the shares or ADSs or the U.S. Holder’s historical tax basis therein.

 

Mark to Market Election

 

The above results may be mitigated with respect to us if a “mark-to-market” election is available. A mark-to-market election is available to a U.S. Holder only if the shares or ADSs are considered “marketable stock”. Generally, stock will be considered marketable stock if it is “regularly traded” on a “qualified exchange” within the meaning of applicable U.S. Treasury regulations. A “qualified exchange” includes a national securities exchange that is registered with the Securities and Exchange Commission or a national market system established under section 11A of the Securities and Exchange Act of 1934 (the “Act”). Since our shares are only traded on the OTCBB and OTC Markets, either of, which is neither a registered national securities exchange nor a national market system established under Section 11A of the Act, a U.S. Holder will not be able to make a mark-to-market election with respect to our shares or ADSs.

 

QEF Election and Deemed Sale Election

 

The above adverse results can also be eliminated if a U.S. Holder is eligible for and timely makes a valid qualified electing fund, or “QEF” election. If a QEF election were made, such U.S. Holder generally would be required to include in income on a current basis its pro rata share of our ordinary earnings and net capital gains. In order for a U.S. Holder to be able to make a QEF election, we would be required to provide such U.S. Holder with certain information. US Holders of shares or ADSs who sold their shares or ADSs during 2007 and declared a long-term capital gain on their federal income tax filing for 2007 should contact their tax advisor to discuss whether an amended filing is necessary.

 

We do intend to provide information necessary for making a QEF election for the 2011 and 2010 tax years and expects similarly to provide such information for any future tax years in which it is a PFIC. This information will be provided on our website prior to the end of April 2012. Accordingly, US Holders who wish to make a QEF election for the year ended December 31, 2011 should plan on filing an extension for their U.S. federal income tax returns in order to allow time for us to provide the information required for the QEF election and time for their tax advisors to incorporate this information.

 

US Holders of shares or ADSs who acquired Company shares or ADSs during 2009 and 2008 may file a QEF election for the 2009 or 2008 tax year with a timely filed 2009 or 2008 tax return. However, US Holders of shares or ADSs who acquired such shares or ADSs prior to 2008 who file a QEF election for the 2008 tax year (or who file a QEF election for a later tax year with a timely filed tax return) will not have filed a “timely” QEF election since the election will not apply to our first year as a PFIC (which was 2007). Nonetheless, a US Holder can still benefit from the QEF election regime so long as the US Holder timely files a so-called “deemed sale election”. In such a case, a US Holder will be treated as having sold his or her shares or ADSs on the first day of the tax year for which the QEF election is made. A US Holder who realizes gain on such a deemed sale will be subject to the US tax consequences as if he had actually sold his shares or ADSs. Thus, any gain realized on the sale would be treated as an excess distribution and would be subject to the rules applicable to a PFIC.

 

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We believe that most pre-existing US Holders should be able to make a QEF election and a deemed sale election for either 2010 or 2011 without adverse US tax consequences. A US Holder can make a deemed sale election even if his or her shares or ADSs have a value lower than the US Holder’s basis in the Company’s shares or ADSs. In such a case, the US Holder reports the loss for informational purposes but does not recognize the loss. No change occurs in the basis of the stock. On January 1, 2010, the opening market price of the Company’s ADSs was $1.22 per share. On January 1, 2011 the opening market price of Company’s ADSs was $0.71 per share. We expect that most US Holders will be able to make a deemed sale election without adverse tax consequences for either 2009 or 2010 because the depressed price of our shares or ADSs would result in the US Holder realizing a loss (and not a gain) upon making the deemed sale election, however, because results will vary from US holder to US holder as a result of individual circumstances, it is critical that each US Holder check with its own tax advisor concerning the effect of electing to make a deemed sale election for either 2009 or 2010.

 

IRS Form 8621

 

To make a QEF election and a deemed sale election for either the 2010 tax year or the 2011 tax year, a US Holder must attach a properly completed IRS Form 8621 to a timely filed (including extensions) US federal tax return for the year in question. If a US Holder is not required to file a US federal income tax return or other return for the tax year, the IRS Form 8621 should be filed directly with the Internal Revenue Service Center, Ogden, UT, 84201-0201.

 

PLEASE BE ADVISED THAT EACH SHAREHOLDER MUST MAKE AN INDIVIDUAL DETERMINATION AS TO WHEN AND WHETHER TO MAKE ANY OF THE ABOVE ELECTIONS AND THE CONSEQUENCES THEREOF. ACCORDINGLY, WE ARE UNABLE TO PROVIDE A US HOLDER SPECIFIC ADVICE IN THIS REGARD AND EACH US HOLDER IS STRONGLY URGED TO CONSULT HIS OR HER OWN TAX ADVISER.

 

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).

 

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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 us 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 Depositary 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 generally 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 our shares or ADSs in the event that the beneficial owner of a share or ADS:

 

·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

 

·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

 

We have included a detailed discussion of the tax consequences to holders of ordinary shares or ADSs for the payment of dividends as we do not currently anticipate the payment of, any cash dividends. The decision whether to pay, and the amount of any dividends, will be based, among other things, upon our 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 empowered to declare interim dividends. Effective January 21, 2009, the English High Court confirmed the reclassification of share premium to accumulated deficit for the UK Company, as approved by the shareholders on December 16, 2008. The reclassification, which has no effect on our equity or financial position, was undertaken to create distributable reserves.

 

ITEM 6. SELECTED FINANCIAL DATA

 

As a smaller reporting company we have elected not to provide the information required by this item.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Historically, Independence Resources PLC had been focused on the skincare and pharmaceutical businesses. In March 2010, after an extensive review by our Board of Directors and our outside advisors, our Board elected to change our overall direction from these sectors to the natural resources sector. Our Board realized that the business prospects of the existing portfolio of assets were not capable of generating sufficient revenue, and we had insufficient cash on hand to reach significant revenue generation from any of the product lines in our portfolio. We elected to pursue additional opportunities in the resources sector because this sector has experienced significant growth and investor interest in the past few years and our Board believes the resources sector has continued growth prospects and significant opportunities.

 

During 2011 we continued the transition from a biomedical company to one focused on natural resources. The Company terminated its participation in the secured notes related to the Relief Canyon Mine and in the process it eliminated the convertible debt associated with that acquisition leaving the Company debt free. With the exception of the Reliaject product the Company has sold or otherwise disposed of the remainder of its biomedical assets which has continued to reduce expenses associated with the biomedical lines of business. We made significant progress during the 2011 work season at our Iron Creek Project by conducting a number of geophysical surveys which have identified the existing known zones of mineralization. As a result, we believe we have discovered additional extensions to the known zones as well as possibly identified several new zones of mineralization. We plan a drill program to verify these results for the 2012 work season.

 

For detailed financial information, please consult our financial statements included in this Report.

 

Unless the context otherwise requires, throughout this report, the words “Independence,” “the Company,” “we,” “us,” and “our” mean Independence Resources PLC and its consolidated subsidiaries.

 

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Recent Developments

 

Mineral Property Operations

 

Iron Creek Project, Salmon, Idaho

 

In March 2011, we acquired 100% ownership of Iron Eagle Acquisitions, Inc (“Iron Eagle”) by issuing 8,150,000 ordinary shares valued at $0.78 or a total value of $6,357,000. As a result of the acquisition, Iron Eagle became our wholly-owned subsidiary.

 

Iron Eagle owns a mineral property called the “Iron Creek Project” consisting of seven patented mining claims of approximately 118 acres in Lemhi County, and about 26 miles southwest of the town of Salmon, Idaho. Past work by previous operators has identified several mineralized zones of copper and cobalt, and numerous other exploration targets on the property that have not as yet been evaluated. We plan to conduct drilling and sampling work on this property to further refine the mineral resources which have been identified by past exploration at this project.

 

Past work by previous operators has identified several mineralized zones of copper and cobalt, and numerous other exploration targets on the property that have not as yet been evaluated. However, extensive drilling, sampling, and geologic work have been done on two of the most advanced areas.  In these areas, previous operators calculated tonnages and grades (which are non-43-101 compliant) contained in an area called the “No Name Zone”.

 

The first mineral resource of interest referenced in the literature is an underground target described by Noranda Exploration in a 1980 report as “two distinct lenses of cobalt mineralization”. The first lens was called a “reserve” and was estimated to contain 1,050,000 tons grading 0.61% cobalt and 0.3% copper and having a strike length of about 750 feet. A second lens of high-grade cobalt mineralization occurs to the northwest, and again is described as a “reserve”. This lens extends for 600 feet of strike length, is deeper than the first lens, and averages about 0.48% Co and 0.24% Cu. The authors estimated this resource to be around 229,000 tons.

 

The second area of major interest, also in the "No Name Zone" is described by Centurion Minerals in a 1988 report as containing at least 10,000,000 tons of open pit resources grading 2% Cu equivalent grade (accounting for the cobalt as a by-product). This number was based on over 20 diamond drill holes along approximately 5,000 feet of strike length and over 200 feet of width, at an average spacing of around 200 feet. The author of the report concluded that these resources could be classified as “possible” reserves (under a S.E.C. classification) and recommended an additional 30 holes be drilled to reduce the drill spacing to something less than 200 feet. Significantly more infill drilling will be required to upgrade and verify this mineral resource, and this drilling will be guided by the work done at the project the summer and fall of 2011.

 

In order to expand the land package and cover more of the potential targets on the property, we acquired by staking an additional 187 unpatented mining claims in and around the seven patented claims.

 

Additionally, we obtained permits from the Forest Service to undertake sampling, induced polarization, magnetic surveys, and geologic mapping on the ground. These activities will be undertaken throughout the remainder of the field season of 2011. Once the results from this work are obtained, we intend to amend and expand our permits with the Forest Service to allow a drill program on the project to begin the Spring of 2012 to confirm the resources that were previously identified, and also to target some new possible mineral resources which are indicated by the work we have completed so far.

 

Gray Eagle Copper Mine, Happy Camp, California

  

Iron Eagle also owns a mineral property called the Gray Eagle Copper Mine (“Gray Eagle”) which is a past producer of significant amounts of both copper and gold, consisting of approximately 294 acres of patented mining claims in Siskiyou County, the northernmost county of the State of California. Major production of valuable metals occurred during two different periods at Gray Eagle. Newmont Mining produced significant copper at the property in the 1940’s and Noranda Mining produced significant gold at the property in the 1980’s.

 

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In the early 1990’s, a feasibility study was completed by Siskon Corporation which was reviewed by a major U.S. based mineral consulting firm which concluded that a mineral resource of just over 1.1 million tons of ore grading 2.59% copper and .027 ounces per ton gold using a 3.3 to 1 strip ratio, a copper cutoff grade of 1%, and recovery factors of 90% on copper and 30% on gold. We intend to confirm this resource and undertake additional drilling to further refine the mineral resources which have been identified by past work at this project, and to explore for undiscovered possible deposits in the area.

 

We acquired by staking an additional 42 unpatented claims. During the upcoming months we plan on obtaining the needed permits to undertake sampling and geophysical surveys on the property. We plan on beginning these geologic activities in the spring of 2012. Once we have the results from this testing, these results will aid the Company in designing a drill program which we intend to undertake in the fall of 2012.

 

Relief Canyon Mine, Lovelock Nevada

 

In August 2008, Firstgold Corp. (“Firstgold”), Platinum Partners Value Arbitrage Fund L.P. (“Platinum”) and Lakewood Group, LLC (“Lakewood”) entered into a purchase agreement (the “Firstgold Agreement”) pursuant to which, among other things, Firstgold issued and sold to Platinum (i) senior secured promissory notes in the aggregate principal amount of $9,607,200 (the “Platinum Notes”), and (ii)  a warrant to purchase up to 12.0 million shares of Firstgold’s common stock (the “Platinum Warrant”).  In December 2009, Platinum exercised its rights to cause Firstgold to purchase the Platinum Warrant (the “Platinum Put Right”). Firstgold failed to pay amounts outstanding under the Platinum Notes, including accrued and unpaid interest in respect of the Platinum Notes and amounts in respect of the Platinum Put Right, as and when due.   The Platinum Notes are secured by all of the assets of Firstgold and the primary asset of Firstgold is the Relief Canyon Mine.

 

In April 2010, we entered into a participation agreement (the “Participation Agreement”) with Platinum, pursuant to which we purchased a participation in Platinum’s claims relating to (i) the aggregate principal amount outstanding under the Platinum Notes and related advances of $9.6 million, (ii) the accrued and unpaid interest in respect of the Platinum Notes and such related advances of $2.3 million and (iii) the amount owed by Firstgold to Platinum in respect of the exercise of the Platinum Put Right with respect to the Platinum Warrant of $3.6 million (collectively, the “Platinum Claims”), equal to an undivided percentage interest of 45% in all of such Platinum Claims (representing $7.0 million of the Platinum Claims), and a corresponding 45% pro rata interest in all collateral and guarantees, if any, Platinum has or from time to time may receive securing or supporting any of the Platinum Claims or any obligations of Firstgold arising under or in connection with any documents relating to any Platinum Claims, for the aggregate purchase price of $5.0 million.  As a result of (1) the issuance  by Firstgold of senior secured promissory notes to Platinum and Lakewood pursuant to the Firstgold Agreement, and (2) our purchase of 45% of the Platinum Claims, we held a resulting 35% interest in the Relief Canyon Mine assets.

 

On August 22, 2011, pursuant to the Participation Agreement, we requested that Platinum acquire our participation interest at the price of $5,034,281 (the “Put Price”). We and Platinum have agreed that the Put Price shall be deemed paid, in part, by application (by way of set-off) of amounts outstanding under the a secured promissory note (the “Company Note”) issued by us to DMRJ Group LLC (“DMRJ”), an affiliated entity of Platinum, on or about March 2010. The amounts owed to DMRJ pursuant to the Company Note totaled $2,876,790 (the “Company Note Amount”). Additionally we and Platinum agreed to settle the balance of amounts that had been advanced by each party to the operations of the Relief Canyon Mine project (the “Net Project Advances”). A loss of $412,367 was recognized on the transaction.

 

On September 2, 2011, we received from Platinum an amount equal to $2,535,689 (which amount represents the Put Price less the Company Note Amount plus the Net Project Advances). As a result, as of September 1, 2011, (i) the Participation Agreement is deemed terminated and of no further force and effect, (ii) the liens and security interests of DMRJ in our property are released and terminated, and (iii) all our liabilities with respect to the Company Note are discharged.

 

Oil and Gas Operations

 

Working Interest, Dawson County, Texas

 

In May 2010, we entered into a participation agreement (the “SDX Participation Agreement”) with SDX Resources, Inc (“SDX”) pursuant to which we 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 SDX Participation Agreement, we will pay 20% of the actual cost to casing point of the initial test well, and, if necessary, the cost to plug and abandon it as a dry hole.  Additionally, we 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.  Both of these test wells were successful and have been put into production.

 

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We are now receiving income on a quarterly basis from the two wells that we participated in.  We plan no further investment in this project in the near term.

 

South Fork II Prospect, Clinton County Kentucky

 

On January 6, 2011, the Company entered into a Joint Venture (“Agreement”) with Ameratex Securities, in which the Company purchased a 4.5% working interest and 3% net revenue interest in three oil wells located in Clinton County, Kentucky for $41,250.  The Company is receiving a small royalty from this project and plans no further investment in these wells.

 

Legacy Skincare and Pharmaceutical Assets

 

Our skincare and pharmaceutical activities are reported as discontinued operations on the Consolidated Statement of Operations for all periods presented (see Note 17 of Notes to Consolidated Financial Statements for more information). As a result, we have determined that it is no longer appropriate to present a separate segment representing our skincare and pharmaceutical activities.

 

Results of Operations

 

Overview of Operating Results

 

   2011   2010 
         
Mining revenue   -    - 
Oil and gas revenue   110,279    - 
Total revenue   110,279    - 
           
Operating expenses   (5,051,531)   (5,620,973)
Operating loss  $(4,941,252)  $(5,620,973)
           
Net loss from continuing operations   (5,468,149)   (5,639,793)
           
Net income from discontinued operations   582,644    480,324 
           
Net loss  $(4,885,505)  $(5,159,469)

 

In 2011 and 2010 we focused our resources on changing our overall direction to the natural resources sector.

 

For 2011, revenue from oil and gas increase as compared to 2010. Oil and gas revenue for 2011 was $110,279 up 100% from 2010. This increase was attributable to the completion of the wells included in our working interest agreements.

 

The Company records compensation expense for stock awards granted. The Company incurred approximately $243,000 and $653,000 in stock based compensation operating expense for 2011 and 2010, respectively. In 2011 and 2010, options for 0 and 950,000 shares, respectively, were issued to employees, officers and directors of the Company.

 

Operating expenses in 2011 decreased by 11% from 2010. This is primarily due to a decrease in research and development , a decrease in administration, sales and marketing expense and severance payments in the first quarter of 2010, offset by a write down of the long term receivable related to the March, 2010 transaction in the amount of $1,455,584, a loss on settlement of notes and contractual rights receivable in the amount of $412,367 and exploration costs associated with the natural resources.

 

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   Summary of Exploration Costs 
           % change in 
           2011 versus 
   2011   2010   2010 
Oil & gas   140,729   $134,545    5%
Mining   327,749    -    100%
Total   468,478    134,545    248%

  

Exploration costs increased due to our acquisition of Iron Eagle Acquisitions, Inc.

 

Administration, Sales and Marketing  Summary of Administration, Sales and Marketing 
    2011    2010    

% change in

2011 versus

2010

 
Administration, sales and marketing  $2,713,263   $4,942,595    (45)%

 

For the years ended December 31, 2011 and 2010, the following administration, sales and marketing expenses were incurred:

 

Expense Category  2011   2010 
         
Payroll, benefits and consulting  $868,100   $3,037,480 
Stock-based compensation expense   243,406    653,199 
Advertising and marketing   20,083    86,931 
Legal and accounting   1,122,076    664,883 
Travel and related   167,941    166,233 
Rent and office expenses   128,782    291,270 
Insurance-liability       40,979 
Depreciation and other non-cash expenses   2,293    1,620 
Other   160,582     
Total  $2,713,263   $4,942,595 

 

Administration, sales and marketing expenses decreased in 2011 as compared to 2010 primarily due to decreases in payroll, stock based compensation, travel, and rent and office expenses, and severance payments in 2010 to the former Chief Executive Officer and Chief Financial Officer. partially offset by the increase in professional fees, depreciation and other.

 

Other Income and Expense

 

Other income and expense in 2011 was a net expense of $526,897 compared to net expense of $391,574 in 2010.   The primary recurring component of other income and expense is interest income on cash accounts and short-term investments and interest expense on debt.  Interest income increased in 2011, as compared to 2010, due to increased cash and investment balances. Interest expense increased in 2011, as compared to 2010, due to convertible debt entered into in connection with the March 2010 transaction.  Also included in other income and expense in 2011 is an impairment of an investment of $337,663.

 

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.

 

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Impairment of Long-Lived Assets

 

The Company reviews the carrying value of its long lived assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Assessing impairment involves significant assumptions and estimates. These assumptions and estimates are based on the Company’s best judgments.

 

Income Taxes

 

The Company has significant U.S. deferred tax assets, primarily due to net operating loss carryforwards. 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, 2010. As a result of the Iron Eagle acquisition that occurred in March 2011, the Company believes it may have undergone a change in ownership, but it has yet to perform an analysis of the transaction and the potential effect on its net operating losses (“NOLs”).

 

Management believes that 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.

 

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- option-pricing formula and 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.

 

Derivatives

 

When appropriate, the Company determines the fair value of its derivative instruments at the end of each reporting period. After assessing alternative valuation models and amortization assumptions, the Company has selected the Black-Scholes option-pricing formula and 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.

 

Liquidity and Capital Resources

 

   2011   2010 
         
Cash and cash equivalents  $1,520,320   $1,714,697 
Current ratio   2.07    2.18 
Decrease in cash and cash equivalents  $(194,377)  $(9,017,107)

 

During 2011, our principal sources of liquidity included cash and cash equivalents resulting from proceeds from the purchase of our Participation Interest from Platinum and stock sales.  Management believes its cash, cash equivalents, short-term investments, sale or license fees from our legacy pharmaceutical products, distributions from our oil and gas projects, and timber sales from Iron Creek and Gray Eagle properties will be sufficient to meet our working capital needs for at least the next twelve months. We intend to raise new capital in the form of new equity or debt to further advance our mining projects. If we are not successful at raising new capital we intend to do no work on our mining projects, and invest no further capital in our oil and gas projects.

 

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Net cash used by continuing operating activities totaled $1,854,893 and $3,904,186 for 2011 and 2010, respectively.  The change is primarily attributed to the decrease in non-cash related loss in 2011 as compared to 2010 as a result of a decrease in overall spending of the Company during 2011.

 

Cash and cash equivalents decreased to $1,520,320 at December 31, 2011 from $1,714,697 at December 31, 2010, principally reflecting the net cash used by operations of $1,854,893 in 2011, partially offset by proceeds from the repurchase of our Participation Interest from Platinum and sales of common stock.    The decrease in cash and cash equivalents was also due to acquisition of investments and mining interests and equipment.

 

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.

 

Off Balance-Sheet Arrangements

 

There are no off-balance sheet arrangements that have or are reasonably likely to have a current of future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Statement of information furnished

 

The accompanying consolidated financial statements have been prepared in accordance with Form 10-K instructions for a smaller reporting company and in the opinion of management contain all adjustments necessary to present fairly the consolidated financial position as of December 31, 2011 and 2010, the results of operations and cash flows for the years then ended. These results have been determined on the basis of U.S. generally accepted accounting principles and practices applied consistently. Refer to Item 15.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Disclosure in response to this item is incorporated herein by reference to Item 4.01 of Form 8-K dated May 10, 2010, and filed with the Commission on May 14, 2010.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures

 

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2011.

 

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Changes in internal control over financial reporting

 

There were no changes to the Company’s internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s annual report on internal control over financial reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f).  The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to its management and its Board of Directors regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles that:

 

·pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Therefore, internal control over financial reporting determined to be effective provides only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Management assessed our internal control over financial reporting as at December 31, 2011 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the report entitled “Internal Control—Integrated Framework.”  Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as at December 31, 2011.

 

ITEM 9B. OTHER INFORMATION

 

None

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Each director is elected for a one year term until the next annual meeting of shareholders and their successor is elected and qualified.

 

The following table sets forth the name, age, position with us and period of service on the Board for each director:

 

            Director
Name   Age   Position with Company   Since
John P. Ryan   49   Chairman of the Board of Directors and Chief Executive Officer   2010
Howard Crosby   58   President, Chief Financial Officer and Director   2010
Anthony Williams   66   Corporate Secretary and Director   2003
Wesley Holland   56   Director   2010
Kerry Dukes   49   Director   2006
Bobby Cooper   66   Director   2011
John May   63   Director   2011

 

There are no family relationships among any of the persons listed above.

 

John P. Ryan was appointed Chief Executive Officer effective March 10, 2010. Mr. Ryan has been the President of Fontana Capital Corporation, a closely held consulting company for the last ten years as well as an officer and/or director of High Plains Uranium, Inc., U.S. Silver Corporation, Tomco Energy Plc, Platinum Diversified Mining, Inc., and Gold Crest Mines, Inc.

 

Mr. Ryan has extensive executive experience and provides our Board with valuable insight regarding our products and services, and provides valuable public company expertise to our Board.

 

Howard Crosby was appointed President and Chief Financial Officer, effective March 10, 2010 and has served as a director since such time. Mr. Crosby has been the President of Crosby Enterprises, Inc., a closely held family investment company, for more than twenty years as well as an officer and director of High Plains Uranium, Inc., AQM Copper, Inc. (formerly Apoquindo Minerals).,  White Mountain Titanium Corporation, Tomco Energy, Plc, Platinum Diversified Mining, Inc., and Gold Crest Mines, Inc.

 

Mr. Crosby has extensive experience in corporate finance and strategic planning and provides valuable insight on business strategy development and strategic partnership to our Board.

 

Anthony Williams has served as a director since February 2003.  Mr. Williams was appointed Vice Chairman of the Board of Directors in October 2003 and in March 2010 he was appointed Non-Executive Vice Chairman of the Board.  Mr. Williams has been a partner of DLA Piper, LLP (US), a global law firm since November 2009. From 2005 until November 2009, Mr. Williams was a partner at the law firm of Baker & McKenzie LLP and from 1981 until September 2005, Mr. Williams was a partner at the law firm of Coudert Brothers LLP and previously served as Chairman of the Executive Committee and as Administrative Partner of the firm, responsible for worldwide operations. Mr. Williams was affiliated with Coudert Brothers LLP from 1973 through September 2005, first as an associate and then as a partner. In September 2006, Coudert Brothers LLP filed for Chapter 11 bankruptcy protection in the Southern District of New York Bankruptcy Court. He received an A.B. in Government and Economics from Harvard University and a Juris Doctor from New York University School of Law. He has been admitted to the Bars of the United States Supreme Court, the State of New York and State of California.

 

Mr. Williams’ extensive business and legal experience provides our Board with a valuable resource for assessing and managing legal risks and planning corporate strategy.

 

Wesley R. Holland, MD, was has served as a director since March 10, 2010. Dr. Holland has nearly 30 years of experience in diagnostic radiology. He has been a radiologist at Sunshine Radiology since January 2010. Prior to that, he was a radiologist at Hilton Head Radiology Associates from February 1984 to December 2009. He was licensed in California from 1981 to 1994 and is currently licensed in South Carolina and in Florida. His specific expertise is in utilizing critical molecular and nuclear diagnostic imaging procedures to diagnose and treat disease and disorders such as heart disease and cancer.

 

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Dr. Holland has extensive experience in the biomedical industry, and provides our Board a valuable resource for assessing and managing risks and developing our corporate strategies.

 

Kerry Dukes was has served as a director since May 2006. Mr. Dukes is Chief Executive Officer and co-founder of Ardour Capital Investments LLC, a registered investment banking and securities broker-dealer firm in New York City, where he has served since November 2003 and is responsible for the organization, recruitment, financing and implementation of Ardour’s business plan. Mr. Dukes has more than 20 years of experience in the investment banking and securities businesses. Prior to co-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, an investment bank. 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. Dukes’ leadership abilities and finance experience in the United States enable him to make a meaningful contribution to our Board.

 

Bobby Cooper was appointed a Non-Executive Director in May 2011. From 1993 to 1997, Mr. Cooper served as President of Kennecott Corporation, a wholly-owned subsidiary of Rio Tinto Group. During his tenure at Kennecott, Mr. Cooper was responsible for the construction and operations of numerous active mines in North America including the operations at the Bingham Canyon Mine in Utah. Since retiring Kennecott Corporation in 1997, Mr. Cooper has devoted himself to entrepreneurial ventures.  Mr. Cooper currently serves as a Director of Ontario Graphite, a privately held graphite producer located in Canada, Wyo-Ben, a private bentonite producer located in Billings, MT with properties in Northern Wyoming.  Mr. Cooper’s has also served as Chairman and Director of US Silver, a silver producer located in Wallace, Idaho. In addition, he served as Chairman and Director of High Plains Uranium, a uranium exploration and production company, a director and CEO of Platinum Diversified Mining, a Special Purpose Acquisition Company listed on the London AIM, a director and Audit Committee Chair of Western Prospector, a Canadian based uranium company with mining properties in Mongolia, and a director and CEO of Ancash Mining, a private Peruvian poly-metallic project located in the Andes of Peru.

 

Mr. Cooper has over 20 years of experience in the mining industry, most recently as President of Kennecott Corporation. He brings a global mining perspective to the Board with experience in a variety of resources.  As a director of U.S. Silver Corporation and a past director of Western Prospector and Anrqsh Mining, Mr. Cooper contributes his board level experience in the mining industry.

 

John May was appointed a Non-Executive Director in May 2011. Mr. May is a professional accountant and long-time business entrepreneur. Mr. May is a Fellow of the Institute of Chartered Accountants in England and Wales. He is Chairman and Policy Director of the Small Business Bureau Limited and Policy Director of “The Genesis Initiative Limited”, lobbying groups for small business to the UK Parliament. Since July 1994, Mr. May has been the principal of his own chartered accountancy practice. From January 1977 to June 1994, Mr. May was a senior partner with Crowe Clark Whitehill, Chartered Accountants, where he served for eight years on the managing board and for nine years as Chairman of its Thames Valley offices. In his capacity as UK National Marketing Partner and Head of its Property Consultancy division, he was a director of its UK and international associations. Mr. May was Finance Director of London AIM market listed PSG Solutions Plc (formerly London & Boston Investments Plc) until December 2005. Since July 2006 and June 2008, respectively, he has served as a non-executive director of London Pacific Partners Inc. and White Mountain Titanium Corp., both US public companies.  Since January 2010 and December 2006, respectively, he has served as Chairman of Specialist Energy Group Plc and Chairman of Red Leopard Holdings Plc, both London AIM listed companies. Since November 2007 has served as a non-executive director of Petrolatina Energy Plc, an oil company with assets in Columbia and also listed on London AIM.

 

Mr. May’s background with Crowe Clark Whitehill, Chartered Accountants brings significant accounting, financial, risk analysis, and audit experiences to the Board. As a director on the board of White Mountain Titanium Corp. and London Pacific Partners Inc., Mr. May contributes his board level experience and background in mining.

 

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Executive Officers

 

John P. Ryan is Chairman of the Board of Directors and Chief Executive Officer (see above). In connection with the March 2010 Transaction, Frank Massino was terminated without cause as Chief Executive Officer and resigned as Chairman of the Board of Directors.

 

Howard Crosby is the President and a member of the Board of Directors (see above). In connection with the March 2010 Transaction William F. O’Kelly was terminated without cause as Chief Financial Officer and resigned as Secretary of the Company.

 

Executive officers serve in their offices (without fixed terms) at the pleasure of the Board of Directors.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

The following table identifies each person who, at any time during the fiscal year ended December 31, 2011, was a director, officer, or beneficial owner of more than 10% of our common stock that failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year:

 

       Number of     
       Transactions Not     
   Number of Late   Reported on a   Reports Not 
Name  Reports   Timely Basis   Filed 
             
Bobby Cooper   1    1    0 
William Campbell   1    1    0 
Travis Campbell   1    1    0 
Chester Mining Co.   1    1    0 
Brush Prairie Minerals, Inc.   1    1    0 
John P. Ryan   1    1    0 
Howard Crosby   1    1    0 

 

Code of Ethics

 

We have adopted a code of ethics that applies to our chief executive officer, chief operating officer and senior financial officer, in addition to our Code of Business Conduct, which applies to all employees, directors and consultants. Our website is currently under construction and our Code of Business will be available on our website at http://www.senetekplc.com as soon as possible.  In the event of any amendment to, or waiver from, the code of ethics, we will publicly disclose the amendment or waiver by posting the information on our website.

 

Our policies do not permit any of our employees, including our executive officers, to “hedge” ownership by engaging in short sales or trading in any derivatives involving our securities.

 

Change in Procedures for Recommending Directors

 

There were no material changes to the procedures by which our security holders may recommend nominees to our Board of Directors from those procedures set forth in our Proxy Statement for our 2012 Annual General Meeting of Shareholders.

 

Audit Committee

 

The Audit Committee is comprised of Kerry Dukes, Chairman, Anthony Williams and Wesley Holland.    The Board of Directors has determined that all of the members of the Audit Committee, other than Dr. Holland, are “independent” within the meaning of the listing standards of the NASDAQ Stock Market and applicable Securities and Exchange Commission (“SEC”) rules and 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.

 

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Shareholder Communications

 

The Company encourages stockholder communications to our board of directors and/or individual directors. Stockholders who wish to communicate with our board of directors or an individual director should send their communications to the care of Anthony Williams, Secretary, Independence Resources, PLC, 7 Office Way, Suite 218, Hilton Head, SC 29928.

 

Board Leadership Structure

 

In accordance with our Articles of Association, the Board elects our officers, including our Chief Executive Officer, Chief Financial Officer, and such other officers as the Board may appoint from time to time. The Board has not currently separated the positions of Chairman of the Board and Chief Executive Officer, and John P. Ryan currently serves as our Chairman and Chief Executive Officer. The Board does not believe that separating these positions is necessary at this time in light of the composition of the Board, the management team and our overall leadership structure, the experience of Mr. Ryan in overseeing our day-to-day business while overseeing the Board, and our current business strategy. Mr. Ryan has managed the competing demands for his time to effectively lead the Board and the management team. Combining the Chairman and Chief Executive Officer roles fosters clear accountability, effective decision-making, and alignment of corporate strategy. Our Articles of Association and corporate governance guidelines do not require that our Chairman and Chief Executive Officer positions be separate. The Board periodically considers whether changes to our overall leadership structure are appropriate.

 

Our Chairman is responsible for chairing meetings of the Board. In his absence, the Board may choose one of the Directors to chair the relevant meeting of the Board, and this tends to be our Vice-Chairman or the independent director present who has the most seniority. Our Chairman is also responsible for chairing meetings of shareholders. In his absence, the Board may appoint one of the Directors to chair the relevant meeting. That failing, the holders of Ordinary shares present and entitled to vote may choose one of their number to chair the relevant meeting.

 

Board’s Role in Risk Oversight

 

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including strategic risks, enterprise risks, financial risks, regulatory risks, and others. Management is responsible for the day-to-day management of risks the company faces, while our board of directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.

 

The Board believes that full and open communication between management and the Board is essential for effective risk management and oversight. Our Chairman meets regularly with our Chief Financial Officer, and other senior officers to discuss strategy and risks facing our business. Senior management attends board meetings and is available to address any questions or concerns raised by our board of directors on risk management-related and any other matters. The Board receives presentations from senior management on strategic matters involving our operations and holds strategic planning sessions with senior management to discuss strategies, key challenges, and risks and opportunities for our business.

 

While the Board is ultimately responsible for risk oversight at our company, our board committees assist our Board of Directors in fulfilling its oversight responsibilities in certain areas of risk.

 

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ITEM 11. EXECUTIVE COMPENSATION

 

Executive Compensation Tables and Narrative Disclosure

 

Current Compensation

 

SUMMARY COMPENSATION TABLE

 

Name and                    
Principal          Option   All Other     
Position  Year   Salary   Awards (1)   Compensation   Total 
John P. Ryan (2)   2011   $181,923       $27,297(3)  $209,220 
Chairman and Chief Executive Officer (PEO)   2010   $150,134   $131,015       $281,149 
Howard Crosby (2)   2011   $161,923           $161,923 
Chief Financial Officer   2010   $133,906   $131,015       $264,921 

 

(1) The amounts in this column represent the dollar amounts of the aggregate grant date fair value computed in accordance with ASC Topic 718.  See the notes to our financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for a discussion of all assumptions made by us in determining the FASB ASC Topic 718 values of our stock awards.

 

(2) Mr. Ryan was appointed to the Board and the position as Chief Executive Officer of the Company on March 10, 2010. Mr. Crosby was appointed to the Board and the position as Chief Financial Officer of the Company on March 10, 2010.

 

(3) During 2011, Mr. Ryan received $27,297 in health benefits pursuant to the employment agreement described below.

 

Employment Agreements

 

We had historically maintained employment agreements with key executives principally to define terms under which employment would cease and to provide explicit benefits if termination of employment occurs for certain reasons. There are no written employment agreements with our current executive officers although we have entered into oral agreements with Messrs. Ryan and Crosby.

 

Material Terms of Employment Agreements

 

John P. Ryan

 

On April 30, 2010, we entered into an oral agreement with John P. Ryan, our Chief Executive Officer, in which we agreed to compensate him at a salary of $185,000 per annum and to provide health benefits.  We also granted Mr. Ryan options to purchase 100,000 of our ordinary shares in connection with his service as our Chief Executive Officer.  The stock options have a five year term, an exercise price of $1.05 per share, and vest in two equal installments every six months.

 

Howard Crosby

 

On April 30, 2010, we entered into an oral agreement with Howard Crosby, our President and Chief Financial Officer, in which we agreed to compensate him at a salary of $165,000 per annum and to provide health benefits.  Additionally, we granted options to purchase 100,000 of our ordinary shares to Mr. Crosby in connection with his service as our President and Chief Financial Officer.  The stock options have a five year term, an exercise price of $1.05 and vest in two equal installments every six months.

 

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Current Equity Holdings and Realization on Equity Holdings

 

OUTSTANDING EQUITY AWARDS

As at December 31, 2011

 

   Number of         
   Securities         
   Underlying         
   Unexercised   Option   Option 
   Options   Exercise   Expiration 
Name and Principal Position  Exercisable   Price   Date 
John P. Ryan (1)   150,000(2)  $1.05    04/30/2015 
Chairman and Chief Executive Officer   100,000(3)  $1.05    04/30/2015 
Howard Crosby (1)   150,000(3)  $1.05    04/30/2015 
Chief Financial Officer   100,000(3)  $1.05    04/30/2015 

 

(1) Mr. Ryan was appointed to the Board and the position as Chief Executive Officer of the Company on March 10, 2010. Mr. Crosby was appointed to the Board and the position as Chief Financial Officer of the Company on March 10, 2010.

 

(2) Options vest in three equal installments every six months.

 

(3) Options vest in two equal installments every six months.

 

Option Exercises and Stock Vested

 

An “Option Exercises and Stock Vested” table has not been included as it is not required for Smaller Reporting Companies.

 

Post Employment Compensation

 

Disclosures for Pension Benefits and Non-Qualified Deferred Compensation are not included as there were no applicable transactions for the reporting period.

 

Director Compensation Tables and Narrative Disclosure

 

   Fees Earned or    
Name (1)  Paid in Cash  Total 
Anthony Williams  $20,000  $20,000 
Kerry Dukes  $28,000  $28,000 
Wesley Holland  $20,000  $20,000 
Bobby Cooper  $10,000  $10,000 
John May  $10,000  $10,000 

 

 (1) Messrs. Ryan, Crosby, and Holland were appointed to the board on March 10, 2010. Messrs. Ryan and Crosby's compensations are discussed in the Executive Compensation tables. 

 

Effective July 1, 2010, each non-employee Director receives a $5,000 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 Director’s responsibility, experience, performance and ability to influence our long-term growth and profitability.

 

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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 our Executive Officers. The Compensation Committee is comprised of Mr. Kerry Dukes (Chairman), Dr. Wesley Holland and Mr. Anthony Williams.

 

In addition, the committee may also request independent compensation survey data and proxy information from companies similar in nature and size for comparative purposes. Our 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 we adjust or restate performance measures in a manner that would reduce the size of an award or payment.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth information regarding the beneficial ownership of our outstanding voting shares as of March 31, 2012, by: (i) all persons known to us to be the beneficial owner of more than 5% of our outstanding shares, (ii) each of our directors; (iii) each of our named executive officers; and (iv) our executive officers and directors as a group, in each case based on information provided to us by such beneficial owners or statements filed with the Commission pursuant to section 13(d) or 13(g) of the Exchange Act. Except as indicated by the notes to the following table, the holders listed below have sole voting power and investment power over the shares beneficially held by them. The address of each of our directors and executive officers is that of our principal executive office, 7 Office Way, Suite 218, Hilton Head, South Carolina, 29928.

 

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   Number of     
   Shares     
   Beneficially     
Name and Address of Beneficial Owner  Owned (1) (2)   Percentage of Class (1) 
5% Beneficial Owners (other than management)          
           
William L. Campbell(3)
P.O. Box 14006
Spokane, WA 99214
   8,150,000    47.0%
           
Brush Prairie Minerals, Inc. (4)
905 N. Pines Rd.
Suite A
Spokane Valley, WA 99206
   5,500,000    31.7%
           
Chester Mining Company(5)
905 N. Pines Rd.
Suite A
Spokane Valley, WA 99206
   2,650,000    15.3%
           
Seaside 88, LP(6)
11911 US Highway One
Suite 201-13
North Palm Beach, FL 33408
   1,600,000    9.2%
           
Executive Officers and Directors          
           
John P. Ryan   251,400    1.4%
           
Howard Crosby   417,501    2.4%
           
Kerry Dukes   195,750    1.1%
           
Anthony Williams   280,957    1.6%
           
Wesley Holland   150,000    * 
           
Bobby Cooper   0    - 
           
John May   0    - 
           
All Directors and Executive Officers as a group (7 persons)   1,129,507    6.5%

 * Less than one percent

 

(1) 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. At March 31 2012, there were 17,355,760 voting shares outstanding.

 

(2) Includes the following number of shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days of March 31, 2012: Mr. Ryan: 250,000 shares of non-qualified stock option; Mr. Crosby: 250,000 shares of non-qualified stock option; Mr. Dukes: 92,500 non-qualified stock option; Mr. Williams: 146,250 shares of non-qualified stock option; and Dr. Holland: 150,000 shares of non-qualified stock option. In connection with the transaction between us and DMRJ Group, LLC, vesting was accelerated for all options to purchase Ordinary shares held by our officers and directors as of December 1, 2009.  The options were extended for five years and the exercise price was re-priced to the greater of $1.25 or the market price on March 10, 2010.

 

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(3) The shares beneficially owned by Mr. Campbell consist of 5,500,000 shares owned by Brush Prairie Minerals, Inc. and 2,650,000 shares owned by Chester Mining Company, both of which are included separately in this table. Mr. Campbell has shared power to vote and direct the deposition of these shares with such entities.

 

(4) This entity shares voting and dispositive control of these shares with Mr. Campbell and these shares are included in this table with the shares beneficially owned by him. Mr. Campbell disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein.

 

(5) This entity shares voting and dispositive control of these shares with Mr. Campbell and his adult son, Travis W. Campbell. These shares are included in this table with the shares beneficially owned by William L. Campbell. Each William L. Campbell and Travis W. Campbell disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein.

 

(6) Seaside 88, LP is a Florida limited partnership of which Seaside 88 Advisors, LLC serves as general partner. William J. Ritger and Denis M. O’Donnell are managing members of the general partner. Each of Seaside 88 Advisors and Messrs. Ritger and O’Donnell disclaims beneficial ownership of these shares except to the extent of its or his pecuniary interest therein.

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table sets forth certain information, as at December 31, 2011, with respect to our equity compensation plans:

 

   Number of securities to   Weighted-average   Number of securities 
   be issued upon exercise   exercise price of   remaining available for 
   of outstanding options,   outstanding options,   future issuance under 
Plan Category  warrants and rights   warrants and rights   equity compensation plans 
             
Equity compensation plans approved by security holders (1)   1,000,000   $2.45    0 
                
Equity compensation plans not approved by security holders(2)   1,012,443   $2.32    0 
                
Total   2,012,443         0 

 

(1)Represents options outstanding and shares available for future issuance under the Company’s Equity Plan. Also includes 62,500 options outstanding under Plan 2 which has been terminated as to future grants.

 

(2)Represents options issued outside of the 2006 Senetek Equity Plan at the discretion of the Board of Directors.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Mr. Anthony Williams, a director of the Company, has been a partner of the law firm DLA Piper US, LLP since November 2009. DLA Piper has rendered legal services to the Company, legal fees paid to DLA Piper US, LLP in 2011 and 2010 were $111,664 and 180,850, respectively.

 

Wesley Holland, one or our directors, provides certain consulting services to us in connection with developing and marketing our life science technologies and products. Payments to Dr. Holland in 2011 and 2010 were $108,000 and $100,000, respectively.

 

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On March 10, 2010, we consummated the sale of the assets related to our skin-care business to Skinvera LLC, a company wholly owned by Frank Massino, our former Chairman and Chief Executive Office, pursuant to an Asset Purchase Agreement, whereby Skinvera purchased all assets and assumed all existing liabilities of our skincare business (except for assets and liabilities related to kinetin and zeatin). Skinvera 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 its date of issuance. The Asset Purchase Agreement include provisions for royalty payments to us 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.

 

In December 2011 we allotted 1,400 of our ordinary shares to each of Howard Crosby and John Ryan in exchange for the transfer of certain non-cash assets from each of those directors to us. Those non-cash assets were 100 shares each in the share capital of Hecla Mining Company, a NYSE-listed corporation.

 

The Companies Act prohibits a public company from allotting shares to any person for non-cash consideration unless certain conditions are met, including that the asset transferred to the relevant company in exchange for the shares in the company has to be independently valued.  We have sought an appropriate valuation report from BDO LLP which was received in final form on December 20, 2010 and which confirmed that the aggregate value of the assets transferred to us by each of Howard Crosby and John Ryan was not less than the aggregate value of our ordinary shares allotted to each of those directors by us.  As such, we allotted the relevant shares to each of those directors with an effective date of December 22, 2010.

 

During the year ended December 31, 2011, the Company purchased 15,000 shares of Silver Scott Mines, Inc. for $5,266 and sold the shares prior to year end for $4,066. Mr. Ryan, Mr. Crosby and Mr. Holland are Directors of Silver Scott Mines, Inc. In addition, Mr. Ryan and Mr. Crosby are Directors of Shoshone Silver/Gold Mines, Inc and Mineral Mountain Mining and Milling Co. Also, Mr. Ryan is a Director of Consolidated Goldfields. At December 31, 2011, the Company has investments in shares of common stock in these companies.

 

The audit committee of the Board is specifically authorized and directed in its written charter to review and approve all related party transactions that are required to be disclosed to shareholders pursuant to item 404(a) of Regulation S-K.

 

We generally do not engage in transactions in which our executive officers or directors or any of their immediate family members or any of our 5% stockholders have a material interest. Our Code of Business Conduct, which sets forth standards applicable to all employees, officers and directors, generally prohibits transactions that could result in a conflict of interest. Any change or waiver of our Code of Business Conduct for any executive officer or director will be disclosed, if and to the extent required by applicable law, rule or regulation as from time to time in effect, pursuant to a filing on Form 8-K or posted on our website (www.senetekplc.com) or any other means as may be required or allowed by applicable law, rule or regulation.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

DeCoria Maichel & Teague P.S. was appointed by the Board to serve as our registered public accounting firm in the United States in May 2010. 

 

Aggregate fees billed by DeCoria Maichel & Teague P.S. for 2011 and 2010, 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:

 

DECORIA MAICHEL & TEAGUE P.S.—Registered Public Accounting Firm in the United States:

 

Type of Service  2011   2010 
Audit fees (1)  $50,000   $100,000 
Other audit-related fees (2)        
Tax fees (3)   25,000    25,000 
All other fees (4)        
Total  $75,000   $125,000 

 

(1) Audit fees: This category consists of fees for professional services rendered by DeCoria Maichel & Teague P.S. for review of the financial statements included in its quarterly reports on Form 10-Q and services that are normally provided by the registered public accounting firms in connection with 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.

 

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(2) Other audit-related fees: None

(3) Tax fees: This category consists of fees for professional services rendered by DM-T for United States tax compliance including tax return preparation, technical tax advice and tax planning.

(4) All other fees: None

 

Aggregate fees billed by our former principal accountants, Macias Gini & O’Connell LLP for 2011 and 2010 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:

 

MACIAS GINI & O’CONNELL LLP—Principal Accountants in the United States:

 

Type of Service  2011   2010 
Audit fees (1)  $   $10,000 
Other audit-related fees (2)        
Tax fees (3)        
All other fees (4)        
           
Total  $   $10,000 

 

(1)Audit fees: This category consists of fees for professional services rendered by Macias Gini & O’Connell LLP for audits of our 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 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.
(2)Other audit-related fees: None
(3)Tax fees: None
(4)All other fees: None

 

The Audit Committee established a policy governing our use of our 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 2011 and 2010, 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. In 2011 and 2010, neither Macias Gini & O’Connell LLP nor DeCoria Maichel & Teague P.S. rendered any other professional services for audit related matters, tax compliance and tax advice, and no hours were expended on DeCoria Maichel & Teague P.S. engagement to audit the financial statements that were attributable to work performed by persons other than its full-time, permanent employees.

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this Report

(1) Financial Statements:

 

Report of Independent Registered Public Accounting Firm

 

Consolidated balance sheets as of December 31, 2011 and 2010

 

Consolidated statements of operations for the years ended December 31, 2011 and 2010

 

Consolidated statements of stockholders’ equity and comprehensive loss for the years ended December 31, 2011 and 2010

 

Consolidated statements of cash flows for the years ended December 31, 2011 and 2010

 

Notes to consolidated financial statements

 

- 37 -
 

 

(2) The following Exhibits are filed or incorporated by reference as part of this Report on Form 10-K:

 

Exhibit  
No. Description
2.1 Stock-for-Stock Exchange Agreement dated March 16, 2011, with Iron Eagle Acquisitions, Inc. Filed as an Exhibit to Registrant’s Report on Form 8-K filed on March 18, 2011, and incorporated hereby by reference.
3.1 Certificate of Incorporation of Senetek PLC Filed as an Exhibit with corresponding Exhibit Number to Registrant’s Registration Statement on Form F-1, Registration No. 33-3535, and incorporated herein by reference
3.2 Amended and Restated Articles of Association of Senetek PLC Filed as an Exhibit to Registrant’s Report on Form 8-K filed on April 5, 2011, and incorporated herein by reference
3.3 Certificate of Incorporation on Change of Name dated November 8, 2011 Filed herewith
+10.1 Senetek No. 1 Share Option Scheme for Employees Filed as an Exhibit to Registrant’s Report on Form S-8 on October 8, 1993, Registration No. 33-70136, and incorporated herein by reference
+10.2 Senetek No. 2 Executive Share Option Scheme for Non-Executive Directors and Consultants Filed as an Exhibit to Registrant’s Registration Statement on Form S-8 on October 8, 1993, Registration No. 33-70136, and incorporated herein by reference
10.3 Deposit Agreement dated October 3, 2005 between Senetek PLC and The Bank of New York Filed as an Exhibit to Registrant’s Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference
*10.4 Amendment #1 dated December 1, 2003 to the license agreement dated August 1, 2003 between Valeant Pharmaceuticals (formerly ICN Pharmaceuticals) and Senetek PLC Filed as an exhibit to Registrant’s Report on Form 10-K for the period ended December 31, 2003 and incorporated herein by reference
10.5 Agreement with Valeant Pharmaceuticals International for Zeatin dated May 4, 2004 Filed as an exhibit to Registrant’s Report on Form 10-Q for the period ended June 30, 2004 and incorporated herein by reference
*10.6 Amended License Agreement with Valeant Pharmaceuticals International for Kinetin dated May 4, 2004 Filed as an exhibit to Registrant’s Report on Form 10-Q for the period ended June 30, 2004 and incorporated herein by reference
*10.7 Amendment to License Agreement between Senetek PLC and Valeant Pharmaceuticals International dated as of October 31, 2004 Filed as an exhibit to Registrant’s Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference
*10.8 Amendment to License Agreement between Senetek PLC and Valeant Pharmaceuticals International dated as of July 15, 2005 Filed as an exhibit to Registrant’s Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference
*10.9 Asset Sale and Purchase Agreement between Senetek PLC and Ranbaxy Pharmaceuticals Inc. dated as of March 15, 2006 Filed as an exhibit to Registrant’s Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference
10.10 License and Intellectual Property Acquisition Agreement dated March 30, 2007 between Senetek PLC and Valeant Pharmaceuticals North America Filed as an exhibit to Registrant’s Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference

 

- 38 -
 

 

Exhibit  
No. Description
10.11 Warrant Agreement between Senetek Plc and DMRJ Group, LLC dated March 4, 2010 Filed as an exhibit to Registrant’s Report on Form 10-K filed April 15, 2010 and incorporated by reference
10.12 Trademark License Agreement between Senetek Plc and Skinvera LLC dated March 10, 2010 Filed as an exhibit to Registrant’s Report on Form 10-K filed April 15, 2010 and incorporated by reference
10.13 Collateral Pledge and Security Agreement between Senetek Plc and Skinvera LLC dated March 10, 2010 Filed as an exhibit to Registrant’s Report on Form 10-K filed April 15, 2010 and incorporated by reference
10.14 Secured Promissory Note from Skinvera LLC dated March 10, 2010 Filed as an exhibit to Registrant’s Report on Form 10-K filed April 15, 2010 and incorporated by reference
10.15 Asset Purchase Agreement between Senetek Plc and Skinvera LLC dated March 10, 2010 Filed as an exhibit to Registrant’s Report on Form 10-K filed April 15, 2010 and incorporated by reference
21.1 Subsidiaries of Independence Resources PLC Filed herewith
24 Power of Attorney included on the signature page to this Annual Report on Form 10-K
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

* Confidential treatment has been requested as to certain portions of those exhibits.

+ Agreements related to Management Contracts or Compensation Plans.

 

- 39 -
 

 

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 Hilton Head, State of South Carolina, on this April 13, 2012.

 

  INDEPENDENCE RESOURCES PLC
       
  By:   /s/ John P. Ryan
      John P. Ryan
      Chief Executive Officer

 

POWER OF ATTORNEY TO SIGN AMENDMENTS

 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint John P. Ryan and Howard Crosby, 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.

 

Signature

 

Title

 

Date

     

/s/ John P. Ryan

John P. Ryan

  Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
  April 13, 2012
     

/s/ Howard Crosby

Howard Crosby

  President, Chief Financial Officer, and Director (Principal Financial and Accounting Officer)   April 13, 2012
     

 

Anthony Williams

  Director    
     

/s/ Wesley Holland

Wesley Holland

  Director   April 12, 2012
     

/s/ Kerry Dukes

Kerry Dukes

  Director   April 13, 2012
         

/s/ John J. May

Director

April 13, 2012

John J. May         
         

 /s/ Bobby Cooper

 

Director

 

 April 13, 2012

 Bobby Cooper        

  

- 40 -
 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Independence Resources PLC

 

We have audited the accompanying consolidated balance sheets of Independence Resources PLC (“the Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Independence Resources PLC as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/DeCoria, Maichel & Teague, PS

 

DeCoria, Maichel & Teague P.S.

Spokane, Washington

 

March 28, 2012

 

- 41 -
 

 

INDEPENDENCE RESOURCES PLC
CONSOLIDATED BALANCE SHEETS

 

   December 31,
2011
   December 31,
2010
 
         
ASSETS          
           
CURRENT ASSETS          
Cash and cash equivalents  $1,520,321   $1,714,697 
Investments - available for sale   122,421    354,408 
Trade receivables (net of allowances of $0 in 2011 and $5,000 in 2010)   25,476    295,791 
Other receivables   27    20,217 
Inventory   -    129,794 
Prepaid oil and gas expense   -    193,999 
Receivable - related party   5,500    79,794 
Other current assets   88,965    57,035 
Total Current Assets   1,762,710    2,845,735 
           
PROPERTY, PLANT AND EQUIPMENT, net   353,605    - 
           
OIL AND GAS PROPERTIES, USING SUCCESSFUL EFFORTS ACCOUNTING          
Unproved properties   149,647    108,397 
Wells and related equipment   578,843    307,241 
    728,490    415,638 
MINING PROPERTIES          
Mining claims   6,357,000    - 
           
OTHER ASSETS          
Other assets   328,500    - 
Note and interest receivable, net - related party   -    1,347,584 
Note and contractual rights receivable   -    5,360,000 
Total Other Assets   328,500    6,707,584 
           
TOTAL ASSETS  $9,530,305   $9,968,957 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Accounts payable  $462,417   $937,745 
Accrued liabilities   215,145    197,512 
Deferred revenue and license fee   172,154    172,154 
Total Current Liabilities   849,716    1,307,411 
           
LONG TERM LIABILITIES          
Deferred license fee   71,731    243,885 
Convertible debt, net of discount   -    893,627 
Conversion option liability   -    1,478,670 
Total Long Term Liabilities   71,731    2,616,182 
           
TOTAL LIABILTIES   921,447    3,923,593 
           
COMMITMENTS AND CONTINGENCIES (See Note 13)          
           
STOCKHOLDERS' EQUITY          
Ordinary shares          
Authorized shares: $0.65 (40 pence) par value, 100,000,000; 17,355,760 and 7,733,508 shares issued and outstanding   10,999,743    4,996,339 
Share premium   88,351,983    86,797,791 
Accumulated deficit   (90,672,350)   (85,786,845)
Accumulated other comprehensive income (loss) - translation   (4,044)   37,587 
Accumulated other comprehensive income (loss) - unrealized gain (loss) on investments available for sale   (66,474)   492 
Total Stockholders' Equity   8,608,858    6,045,364 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $9,530,305   $9,968,957 

 

See accompanying notes to the consolidated financial statements.

 

- 42 -
 

 

INDEPENDENCE RESOURCES PLC
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

   Year
Ended
December 31
2011
   Year
Ended
December 31
2010
 
         
REVENUES          
Oil and gas revenue  $110,279   $- 
           
OPERATING EXPENSES          
Administration, sales and marketing   2,713,263    4,942,595 
Exploration expense   468,478    134,545 
Loss on disposal of assets   1,839    3,833 
Provision for long term note receivable - related party   1,455,584    540,000 
Loss on settlement of notes and contractual rights receivable   412,367    - 
TOTAL OPERATING EXPENSES   5,051,531    5,620,973 
           
LOSS FROM OPERATIONS   (4,941,252)   (5,620,973)
           
OTHER INCOME (EXPENSE)          
Interest income   144,047    100,325 
Interest expense   (330,559)   (223,969)
Other income (expense)   61    10,304 
Royalty income   9,135    10,182 
Change in fair value of warrant liability   -    53,055 
Change in fair value of option liability   36,795    663,148 
Gain (loss) on sale of investment   (1,200)   - 
Exchange gain (loss)   (47,513)   - 
Gain (loss) on impairment of investment - available for sale   (337,663)   - 
Loss on extinguishment of debt   -    (1,004,619)
TOTAL OTHER INCOME(EXPENSE)   (526,897)   (391,574)
           
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES   (5,468,149)   (6,012,547)
           
INCOME TAX BENEFIT (EXPENSE)   -    372,754 
           
NET LOSS FROM CONTINUING OPERATIONS   (5,468,149)   (5,639,793)
           
INCOME FROM DISCONTINUED OPERATIONS   582,644    480,324 
           
NET LOSS   (4,885,505)   (5,159,469)
           
OTHER COMPREHENSIVE INCOME (LOSS)          
Unrealized gain (loss) on investments available for sales   (66,966)   492 
Translation adjustments   (41,631)   (8,505)
           
COMPREHENSIVE LOSS  $(4,994,102)  $(5,167,482)
           
NET LOSS PER COMMON SHARE,          
Loss from continuing operations  $(0.36)  $(0.73)
Income from discontinued operations   0.04    0.06 
Loss per common share  $(0.32)  $(0.67)
           
WEIGHTED AVERAGE NUMBER OF COMMON STOCK SHARES OUTSTANDING, BASIC AND DILUTED    15,345,229     7,709,482 

 

See accompanying notes to the consolidated financial statements.

 

- 43 -
 

 

INDEPENDENCE RESOURCES PLC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 

                   Accumulated     
                   Other   Total 
   Ordinary Shares   Share   Accumulated   Comprehensive   Stockholders' 
   Shares   Amount   Premium   Deficit   Income   Deficit 
                         
Balance, December 31, 2009   7,645,802   $4,939,395   $85,546,880   $(80,627,376)  $46,092   $9,904,991 
                               
Stock based compensation expense related to employee and director stock options             653,199              653,199 
                               
Warrant issued for convertible debt, net of financing fees             464,448              464,448 
                             - 
Beneficial Conversion Rights, net of financing fees             98,448              98,448 
                             - 
Stock issued for financing fees   84,906    55,189    34,811              90,000 
                             - 
Stock issued for investment in Hecla Mining   2,800    1,755    5              1,760 
                             - 
Net loss                  (5,159,469)        (5,159,469)
Unrealized gain on investments - available for sale                       492    492 
Translation adjustments                               (8,505)   (8,505)
Balance, December 31, 2010   7,733,508    4,996,339    86,797,791    (85,786,845)   38,079    6,045,364 
                               
Stock based compensation expense related to employee and director stock options             243,406              243,406 
                               
Stock issued for acquisition of Iron Eagle Acquisitions, Inc   8,150,000    5,053,000    1,304,000              6,357,000 
                             - 
Units issued for cash   1,336,538    862,190                   862,190 
                               
Shares issued for convertible debt   135,714    88,214    6,786              95,000 
                             - 
Net loss                  (4,885,505)        (4,885,505)
Unrealized loss on investments - available for sale                       (66,966)   (66,966)
Translation adjustments                               (41,631)   (41,631)
Balance, December 31, 2011   17,355,760   $10,999,743   $88,351,983   $(90,672,350)  $(70,518)  $8,608,858 

 

See accompanying notes to the consolidated financial statements.

 

- 44 -
 

 

INDEPENDENCE RESOURCES PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Year Ended 
   December 31,
2011
   December 31
2010
 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(4,885,505)  $(5,159,469)
Adjustments to reconcile net loss to net cash used by operating activities:          
Depreciation   2,293    3,034 
Reserve for doubtful accounts   -    (5,278)
Loss on sale of skincare line   -    224,728 
Loss on abandonment of assets   -    5,998 
Stock based compensation   243,406    653,199 
Amoritzation of debt discount and deferred financing fees   330,553    220,344 
Change in fair value of warrant liability   -    (53,055)
Change in fair value of option liability   (36,795)   (663,148)
Provision for note receivable - related party   1,455,584    540,000 
Loss on settlement of note and contractual right receivable   412,367      
Loss on sale of investment   1,200      
Loss on extinguishment of debt   -    1,004,619 
Impairment of investment   337,663      
Changes in operating assets and liabilities          
Decrease (increase) in:          
Trade receivables   270,315    21,511 
Other receivables   20,190    110,679 
Inventory   129,794    (121,319)
Other current assets   (31,930)   73,298 
Prepaid oil and gas expense   193,999    (193,999)
Interest receivable - related party   (108,000)   (87,584)
Receivable related party   79,821    (79,794)
Increase (decrease) in:          
Accounts payable   (115,327)   (118,222)
Accrued liabilities   17,633    (105,810)
Deferred revenue and license fee   (172,154)   (173,918)
           
Net cash used by operating activities   (1,854,893)   (3,904,186)
CASH FLOWS FROM INVESTING ACTIVITIES:          
Redemption (purchase) of short-term investments        6,500,000 
Purchase of note and contractual rights receivable   -    (5,000,000)
Cash received on settlement of note and contractual rights receivable   2,016,578    - 
Cash advance for note receivable - related party   (5,527)   (1,800,000)
Purchase of investments - available for sale   (219,539)   (352,156)
Proceeds from sale of investments - available for sale   4,066      
Deposit on equipment   (328,500)     
Purchase of equipment   (355,899)     
Purchase of oil and gas lease and wells and related equipment   (271,602)   (307,241)
Acquisition of oil and gas unproved properties   (41,250)   (108,397)
Net cash provided (used) by investing activities   798,327    (1,067,794)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from convertible debt   -    3,000,000 
Payments on convertible debt   -    (35,000)
Financing fees paid   -    (501,622)
Proceeds from sale of stock   862,190    - 
Net cash provided by financing activities   862,190    2,463,378 
Net increase (decrease) in cash and cash equivalents   (194,376)   (2,508,602)
Net foreign exchange differences   -    (8,505)
Cash and cash equivalents, beginning of year   1,714,697    4,231,804 
Cash and cash equivalents, end of year  $1,520,321   $1,714,697 
SUPPLEMENTAL CASH FLOW INFORMATION:   -      
NON-CASH TRANSACTIONS:          
Warrants issued with convertible debt  $-   $578,541 
Beneficial conversion rights to convertible debt  $-   $122,541 
Stock issued for financing fees  $-   $90,000 
Stock issued for acquisition of Iron Eagle Acquisitions, Inc.  $6,357,000   $- 
Stock issued for conversion of debt  $95,000   $- 
Note and contractual right receivable paid with accounts payable  $-   $360,000 
Stock issued for investment  $-   $1,760.00 

 

See accompanying notes to the consolidated financial statements.

 

- 45 -
 

  

INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Historically, Independence Resources PLC was a life sciences company engaged in the research, development and commercialization of technologies that targeted the science of healthy aging. In early 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.

 

Independence Resources PLC, together with its subsidiaries (the “Company”), is a public limited company organized under the laws of England in 1983. The Company was originally incorporated under the name of Senetek PLC and changed its name to Independence Resources PLC on November 8, 2011. 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. The Company has four wholly-owned subsidiaries, Senetek Drug Delivery Technologies Inc. (“SSDT”) and Carmé Cosmeceutical Sciences Inc. (“CCSI”), both Delaware corporations, Iron Eagle Acquisitions, Inc. (“Iron Eagle”), a Nevada corporation, and Senetek Denmark ApS, formed by the Company under the laws of Denmark.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

Basis of Presentation

 

The consolidated financial statements incorporate the accounts of Independence Resources 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”).

 

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; fair value of investments and stock compensation awards, realizability of deferred tax assets; and the 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.

 

Cash and Cash Equivalents

 

For the purposes of the statements of cash flows and balance sheets, the Company considers any highly liquid investments purchased with a 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, 2011and 2010, the Company held $759,175 and $1,197,655, respectively, in bank balances in excess of the insurance limits.

 

Investments in Marketable Securities

 

The Company accounts for marketable securities as required by ASC 320 Investments – Debt & Equity Topic of the FASB Accounting Standards Codification. At acquisition, the Company classifies debt securities and equity securities into one of the following three categories

 

- 46 -
 

 

INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Held to Maturity – the positive intent and ability to hold to maturity. Amounts are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts. Interest earned on these securities is included in interest income.

 

Trading Securities – bought principally for purpose of selling them in the near term. Amounts are reported at fair value, with unrealized gains and losses included in earnings.

 

Available for Sale – not classified in one of the above categories. Amounts are reported at fair value, with unrealized gains and losses excluded from earnings and reported separately as a component of stockholders’ equity. Realized gains and losses on the sale of securities are recognized on a specific identification basis. Unrealized gains and losses originally included in accumulated other comprehensive income are reclassified to current period net income (loss) when the sale or determination of an other than temporary impairment of securities occurs.

 

We periodically review our investments for indications of other than temporary impairment considering many factors, including the extent and duration to which a security's fair value has been less than its cost, overall economic and market conditions, and the financial condition and specific prospects for the issuer. Impairment of investment securities results in a charge to income when a market decline below cost is determined to be other than temporary.

 

Revenue, Deferred Revenue and Accounts Receivable

 

The Company recognizes revenue for its pharmaceutical business 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.

 

Oil and gas revenues are recorded using the sales method. Under this method, the Company recognizes revenues based on actual volumes of oil and gas sold to purchasers.

 

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.

 

Inventories

 

Inventories, consisting of raw materials, work in process and finished goods, are stated at cost. Inventories are valued at the lower of cost or market using the first in, first out method.

 

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

 

Plant and laboratory equipment: 5 years

 

When assets are retired or sold, the costs and related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is reflected in current period net income (loss).

 

Impairment of Long-Lived Assets

 

The Company reviews the carrying value of its long-lived assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Oil and Gas Properties

 

The Company uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance. Other unproved properties will be amortized based on management’s estimates of successful drilling and average holding period. Capitalized costs of producing oil and gas properties, after considering estimated dismantlement and abandonment costs and estimated salvage values, are depreciated and depleted by the unit-of-production method. Support equipment and other property and equipment are depreciated over their estimated useful lives.

 

On the sale or retirement of a complete unit of a proven property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proven property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income.

 

On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any unrecorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.

 

Mineral exploration and development costs

 

All exploration expenditures are expensed as incurred. Significant property acquisition payments for active exploration properties are capitalized. If no minable ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned. Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a unit of production basis over proven and probable reserves.

 

Should a property be abandoned, its capitalized costs are charged to operations. The Company charges to operations the allocable portion of capitalized costs attributable to properties sold. Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area.

 

Mineral properties and interests

 

Costs of acquiring mineral properties are capitalized by project area upon purchase of the associated claims. Costs to acquire mineral interests are capitalized when paid. Costs to maintain the mineral rights and leases are expensed as incurred. When a property reaches the production stage, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves.

 

Mineral properties are periodically assessed for impairment of value and any diminution in value. As of December 31, 2011, there was no impairment of mineral properties.

 

Research and Development

 

Expenditures on research and development are expensed as incurred.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

Calculation of the Number of Shares and Net Income 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.  

 

Options, warrants, and shares related to the convertible note totaling 5,148,233 and 8,460,220 shares were outstanding at December 31, 2011 and 2010, respectively, but were excluded from the calculation of diluted earnings per share as their effect would have been antidilutive.

 

Financial Instruments

 

The carrying values of cash, investments available for sale, receivables, and notes receivable 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.

 

Fair Value Measurements

 

The Company discloses the following information for each class of assets and liabilities that are measured at fair value:

a.the fair value measurement;
b.the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3);
c.for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following:

 

1)total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earnings  are reported in the statement of operations;

 

2)the amount of these gains or losses attributable to the change in unrealized gains or losses relating to those assets or liabilities still held at the reporting period date and a description of where those unrealized gains or losses are reported;
3)purchases, sales, issuances, and settlements (net); and

 

4)transfers into and/or out of Level 3.

 

d.The amount of the total gains or losses for the period in (c)(1) included in earnings  that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of operations; and
e.In annual periods only, the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period.

 

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.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

Stock Compensation Expense

 

The Company measures the stock-based compensation costs of share-based compensation arrangements based on the grant date fair value and generally recognizes the costs in the financial statements over the employee’s requisite service period. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant date fair value.

 

Recent accounting pronouncements  


In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-05, which, among other things, amended Subtopic 220 with respect to the presentation of other comprehensive income and its components in the financial statements.  The update amended Subtopic 220 so that a Securities and Exchange Commission filer may present other comprehensive income either in a single continuous statement or in two separate but consecutive statements.  The filer is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented.  The amendments in this update apply to both annual and interim periods beginning after December 15, 2011, with the exception of the amendment regarding presentation of reclassification adjustments, which has been deferred to a later date.  Adoption of this update is not anticipated to have a material impact on the consolidated financial statements.

 

In May 2011, the FASB issued ASU 2011-04, which amends Subtopic 820 to clarify the application of existing common fair value measurement and disclosure requirements.  ASU 2011-04 provides clarification for the following:

 

1.the application of the highest and best use of valuation premise concepts;
2.measuring the fair value of an instrument classified in shareholders' equity; and
3.disclosures about fair value measurements.

 

In January 2010, the FASB issued ASU 2010-06, which amends Subtopic 820-10 to require new disclosures on fair value measurements as follows:

 

1.The amounts of and reasons for significant transfers in and out of Levels 1 and 2.
2.Separate information about purchases, sales, issuances, and settlements in Level 3 fair value measurements.

 

ASU 2010-06 also provides amendments to Subtopic 820-10 that clarify existing fair value measurement disclosures as follows:

 

1.A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities.  A class is often a subset of assets or liabilities within a line item in the statement of financial position.

 

2.A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.  Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.

 

The new disclosures and clarifications of existing disclosures discussed above are effective for interim and annual periods beginning after December 15, 2011, except for the disclosures about fair value measurements.  Those disclosures are effective for fiscal years beginning after December 31, 2010.  Adoption of this guidance has not, and is not expected to have a material impact on the consolidated financial statements.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

During February 2010, the FASB issued ASU 2010-08, which corrected existing guidance for various topics.  The update became generally effective for the first reporting period (including interim periods) beginning after issuance.  These conditions did not have a material impact on the consolidated financial statements.

 

Reclassifications

 

Certain amounts from prior periods have been reclassified to conform with the current period presentation. These reclassifications have resulted in no changes to the Company’s accumulated deficit and net losses presented in prior periods.

 

NOTE 3 - INVESTMENTS - AVAILABLE FOR SALE

 

The following summarizes the securities available for sale at December 31, 2011.

 

   Number of
Shares
   Cost Basis   Fair Value
(Level 1 Inputs)
 
Security               
                
Consolidated Goldfields*   71,657   $9,532   $8,599 
                
Hecla Mining   200    1,760    1,046 
                
Merger Mines Corp   4,700    705    611 
                
Metropolitan Mines, Ltd   35,850    6,453    4,302 
                
Mineral Mountain Mining and Milling Co*   19,947    8,378    7,979 
                
New Jersey Mining Company   20,000    4,200    4,000 
                
PM Pan Minerals   3,050,000    -    - 
                
Shoshone Silver Mining*   365,000    69,175    54,750 
                
Thunder Mountain Gold   523,535    88,602    41,134 
        $188,805   $122,421 

 

* Related parties, see Note 19

 

The following summarizes the securities available for sale at December 31, 2010.

 

   Number of
Shares
   Cost Basis   Fair Value
(Level 1 Inputs)
 
             
Security               
                
Hecla Mining   200    1,760    2,252 
                
PM Pan Minerals   1,050,000    352,156    352,156 
                
        $353,916   $354,408 

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Based upon communications with the chief executive officer of PM Pan Minerals, management of the Company determined that decline in fair value of the investment in PM Pan Minerals was other than temporary and therefore recognized a loss of $337,663 during the year ended December 31, 2011.

 

The fair value of securities is determined by quoted market prices.

 

NOTE 4 - INVENTORY

 

Inventory at December 31, 2010 included $129,794 of finished good relating to the Company’s pharmaceuticals segment.

 

During 2011, the Company sold the remaining finished goods inventory. See Note 17 for discussion of discontinued operations.

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

Property and equipment are summarized as follows:

 

   December 31,
2011
   December  31,
2010
 
         
Cost:          
Office furniture, fixtures and equipment  $38,446   $38,446 
Equipment   355,899    - 
           
    394,345    38,446 
           
Accumulated depreciation:          
Office furniture and fixtures   38,446    38,446 
Plant and laboratory equipment   2,294    - 
           
    40,740    38,446 
           
Net carrying value  $353,605   $- 

 

Depreciation expense for the years ended December 31, 2011 and 2010 was $2,293 and $3,034, respectively. In 201, the majority of the Company’s property and equipment were sold as part of the asset purchase agreement with Skinvera LLC. See Note 7.

 

NOTE 6 – STOCK EXCHANGE AGREEMENT

 

On March 16, 2011, Senetek consummated a stock for stock exchange agreement with Iron Eagle Acquisitions, Inc., a Nevada corporation (“Iron Eagle”), and the two shareholders of Iron Eagle, namely Chester Mining Company, an Idaho corporation (“CHMN), and Brush Prairie Minerals, Inc., a Delaware corporation (“BPMI”) (collectively the “Shareholders”).  Pursuant to the terms of the agreement, the Company issued 8,150,000 ordinary shares in exchange for all of the issued and outstanding shares of Iron Eagle.  John Ryan, the Chief Executive Officer and Chairman of the Company was appointed as the sole director and officer of Iron Eagle.  As a result of this transaction, the Company acquired one hundred percent of the outstanding stock of Iron Eagle thereby making it a wholly owned subsidiary of the Company.  The transaction was valued at the market price of the Company’s common stock on the date of the transaction, which was $0.78 for a total value of $6,357,000.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Iron Eagle’s sole assets are mining claims, consisting of approximately 294 acres located in Siskiyou County, CA, known as the Grey Eagle Mine, valued at $4,290,000, and approximately 118 acres located in Lemhi County, Idaho, valued at $2,067,000, and no outstanding liabilities.  The value of the acquisition was allocated wholly to the mining claims.

 

Subsequent to the acquisition, both Mr. Ryan and Mr. Howard Crosby, a director of the Company, were each appointed as Directors of Brush Prairie Minerals, Inc. and of Chester Mining Company.

 

NOTE 7 – 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 Company’s 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 the Company pursuant to the Asset Purchase Agreement. 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; $9,135 and $10,182, respectively was recognized as royalty income under this arrangement during the years ended December 31, 2011 and 2010. A loss on the sale of approximately $217,000 was recognized during the year ended December 31, 2010. See Note 17 regarding discontinued operations.

 

The following table sets forth the approximate carrying value of the assets and liabilities that were acquired by Skinvera.

 

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 

 

At December 31, 2010 and 2011, the Company reserved $540,000 and the remaining balance of $1,455,584, respectively, of the note and interest receivable based on an estimate to the ultimate collectability of amounts due, based on the Company’s knowledge of Skinvera’s business activities. The reserve is shown on the Consolidated Statements of Operation as Provision for long term note receivable – related party. At December 31, 2011, Mr. Massino and Skinvera are no longer considered to be related parties.

 

NOTE 8 – NOTE AND CONTRACTUAL RIGHTS RECEIVABLE

 

On April 1, 2010, the Company consummated the purchase of $7.0 million of amounts owed to a partnership that is majority owned by Platinum Partners Value Arbitrage Fund L.P (“Platinum”), an accredited institutional investor with is investment manager headquartered in New York, New York, (“Seller”) 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 amount purchased represented 45.144% of Platinum’s holdings on the date of the transaction. 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.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

On August 22, 2011, the Company requested that Platinum acquire its participation interest in the Platinum Claims at the price of $5,034,281 (the “Put Price”).  The Company and Platinum agreed that the Put Price will be paid, in part, by application (by way of set-off) of amounts outstanding under the a secured promissory note (the “Convertible Note”) issued by the Company to DMRJ Group LLC (“DMRJ”), an affiliated entity of Platinum, on or about March 2010.  The amounts owed to DMRJ pursuant to the Convertible Note totaled $2,876,790 (the “Convertible Note Amount”)(See Note 9). Additionally the Company and Platinum agreed to settle the balance of amounts that had been advanced by each party to the operations of the Relief Canyon Mine project (the “Net Project Advances”).

 

On September 1, 2011, the Company received from Platinum an amount equal to $2,535,689 (which amount represents the Put Price less the Convertible Note Amount plus the Net Project Advances). As a result, as of September 1, 2011, (i) the Participation Agreement was deemed terminated and of no further force and effect, (ii) the liens and security interests of DMRJ in the property of the Company are released and terminated, (iii) all liabilities of the Company with respect to the Convertible Note were discharged, and (iv) the strike price of the warrants issued with the Convertible Note were repriced to $1.00. A loss of $412,367 was recognized on the transaction

 

NOTE 9 – CONVERTIBLE DEBT

 

In March, 2010 the Company issued to DMRJ a secured, convertible promissory note in the amount of $3,000,000, bearing no interest and initially 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 or at the option of the Company. Financing costs of approximately $592,000 were incurred. 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 on the date of issuance: strike price of $1.75, risk free interest rate of 2.39%, expected life of five years, and expected volatility of 56.9% with no dividends expected to be issued. The fair value of the warrants totaled $578,541 at the issuance date and this amount, net financing costs of $114,093, was recorded as a debt discount with a credit to additional paid in capital. Additionally, the conversion feature of the notes resulted in a beneficial conversion amount of $122,541 and this amount, net financing costs of $24,093, was recorded as a debt discount with a credit to additional paid in capital. The fair value of the warrants, beneficial conversion and deferred financing costs were being amortized over the life of the convertible debt and the amortized amounts are included in interest expense in the financial statements.

 

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 was retained as a part-time consultant 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. Approximately $353,100 of compensation expense was recognized during the year ended December 31, 2010 as a result of the repricing. 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 year ended December 31, 2010.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

John P. Ryan was appointed to succeed Mr. Massino as Chief Executive Officer and Chairman of the Board of Directors. In addition, 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 was appointed to the Board of Directors.

 

On November 9, 2010, the Company and DMRJ agreed to amend the terms of the currently outstanding $3.0 million convertible note issued pursuant to the Securities Purchase Agreement to (i) reduce the conversion price set forth in the Note to $0.70 (subject to further adjustment as currently set forth in the Note) and (ii) so long as the Note is unpaid and outstanding, if the Company enters into any subsequent financings on terms more favorable to an investor than the terms governing the Note, as determined by DMRJ, then DMRJ may exchange the Note for the securities issued or to be issued in connection with such subsequent financing.  Other terms of the original convertible note remained the same.

 

The Company has considered the impact of ASC 470-50 “Debt-Modifications and Extinguishments” on the accounting treatment of the change in conversion price of the convertible note. ASC 470-50 states that a transaction resulting in a significant change in the nature of a debt instrument should be accounted for as an extinguishment of debt. The difference between the reacquisition price and the net carrying amount of the extinguished debt should be recognized currently in income of the period of extinguishment. The Company has concluded that the issuance of the amended and restated debentures constituted a substantial modification. During the year ended December 31, 2010, the Company recognized a loss on extinguishment of the convertible note of $1,004,779 representing the difference between the fair value of the amended and restated convertible note and the carrying value of the original convertible note. 

  

The Company has complied with the provisions of ASC 815 “Derivatives and Hedging”, and recorded the fair value of $2,141,818 for the embedded conversion option liability associated with the amended convertible note in 2010 with an offset to the carrying value of the debt. The assumptions used in the Black-Scholes option pricing model at November 9, 2010 are as follows: (1) dividend yield of 0%; (2) expected volatility of 61.2%, (3) risk-free interest rate of 1.27%, and (4) expected life of 4.33 years. The fair value of the embedded conversion option was $1,478,670 at December 31, 2010, representing a decrease in the fair value of the liability of $663,148 during the year ended December 31, 2010. The assumptions used in the Black-Scholes option pricing model at December 31, 2010 are as follows: (1) dividend yield of 0%; (2) expected volatility of 60.7%, (3) risk-free interest rate of 2.01%, and (4) expected life of 4.33 years.

 

In connection with the transaction described in Note 8, the convertible note was deemed paid in full.  As a result, the fair value of the conversion option was written off and included in the loss recognized on the transaction.   The fair value of the conversion option on the date of the transaction was $1,441,875, representing an decrease in the fair value of the liability of $36,795 during the period from January 1, 2011 to the transaction date.   The assumptions used in the Black-Scholes option pricing model at September 1, 2011 using Level 2 inputs were as follows: (1) dividend yield of 0%; (2) expected volatility of 67.6%, (3) risk-free interest rate of 1.76%, and (4) expected life of 3.70 years.

 

 NOTE 10 – OIL AND GAS PROPERTIES

 

In May 2010, the Company entered into a Participation Agreement (“Agreement”) with SDX Resources, Inc. (“SDX”) in which the Company purchased a 15% of a 69% 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 commenced on September 1, 2010, and $195,137 in intangible drilling cost, $69,975 in lease and well equipment, $22,952 in prepaid expense and $8,305 in lease operating expense was spent per the Participation Agreement. This well was completed for production and achieved commercial production in early 2011. The well was completed in the Mississippian formation, which was the lowest of the targeted production horizons, and after initial production rates in the 50-70 barrel per day ranges, has leveled off at a steady production rate of approximately 30 barrels per day, with virtually no water cut. The Company received approximately $54,400 in income from this well during 2011 and plans no further investment in this project in the near term.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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. During the year ended December 31, 2010 drilling commenced on the second  test well, the McCarthy #1,  and $171,048 in prepaid expense, $21,803 in intangible drilling costs, $20,326 in lease and well equipment, and $1,452 in lease operating expense was spent per the Participation Agreement. The well commenced drilling during the first week of January 2011, and achieved a total depth of 10,500 feet. The Company received approximately $52,300 in income during 2011 from this well and plans no further investment in this project.

 

Contemporaneously with the Agreement, SDX executed an operating agreement naming Breck Operating Corp. as the Operator of all operations and other activities conducted on the Subject Leases.

 

On January 6, 2011, the Company entered into a Joint Venture (“Agreement”) with Ameratex Securities, in which the Company purchased a 4.5% working interest (3% net revenue interest) in three oil wells located in Clinton County, Kentucky for $41,250. Two of the three wells have been drilled and one is in production as of September 30, 2011. The Company received approximately $3,550 in income in 2011 from this well and plans no further investment in the project.

 

NOTE 11 – ACCRUED LIABILITIES

 

Accrued liabilities comprise the following:

 

   December 31,
2011
   December  31,
2010
 
         
Audit and tax fees   164,242    172,000 
Other liabilities and accruals   50,903    25,512 
           
   $215,145   $197,512 

 

NOTE 12 – DERIVATIVES

 

The Company currently does not use derivative instruments to manage its exposures to currency risk or interest rates. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. All derivative financial instruments are recognized in the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or other comprehensive income if they qualify for cash flow hedge accounting.

 

 The fair value of outstanding derivative instruments not designed as hedging instruments on the accompanying Consolidated Balance Sheets was as follows:

 

Derivative Instruments  Balance Sheet Location   December 31, 2011    December 31, 2010 
              
Conversion option liability  Long-term liabilities  $-   $1,478,670 

 

A Black-Scholes option-pricing model was used to estimate the fair value, using Level 2 inputs, of the Company’s derivatives using the following assumptions at December 31, 2010:

 

   Number of
Shares
   Dividend
Yield
  Volatility   Risk-Free Rate   Expected Life
(in years)
   Stock price 
Conversion option   4,235,714   None   60.7%   2.01    4.19   $.71 

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – 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 Security Purchase Agreement (See Note 9) dated March 4, 2010, between Independence Resources and DMRJ, 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 $353,100 was recognized during the year ended December 31, 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. The fair value of option grants is estimated on the date of grant using the Black-Scholes 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 Officers and Directors. The following assumptions were used to estimate fair value of the options issued during the year ended December 31, 2010: market price of 1.05, exercise price of 1.05, risk-free interest rate of approximately 2.43%; volatility of 58.9%; and a life of 5 years.

 

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.

 

The intrinsic value of all of the Company’s outstanding vested stock options at December 31, 2011 and 2010 was $0 as the exercise prices of such options exceeded the market price of the Company’s stock. Transactions concerning stock options for the years ended December 31, 2011 and 2010 are summarized as follows:

 

           Senetek   Outside 
   Plan   Plan   Equity   of 
   1   2   Plan (1)   Plan 
                 
Balances, December 31, 2009   -    62,500    937,500    64,943 
Granted   -    -    -    950,000 
Exercised   -    -    -    - 
Expired        (31,250)   (937)   (2,500)
Reinstated as part of repricing   37,500                
                     
Balances December 31, 2010   37,500    31,250    936,563    1,012,443 
Granted   -    -    -      
Exercised   -    -    -    - 
Expired   -         (7,186)     
                     
Balances, December 31, 2011   37,500    31,250    929,377    1,012,443 
                     
Exercisable and outstanding at December 31, 2011   37,500    31,250    929,377    1,012,443 
                     
Weighted average exercise price at December 31, 2011  $1.25   $1.25   $1.27   $1.06 
                     
Weighted average contractual life at December 31, 2011 in years   3.18    3.18    3.18    3.33 

 

(1) includes 25,781 of restricted stock issued in 2007

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The Company recognized stock-based compensation expense, classified as administration, sales and marketing expense in the statements of operations, of $243,406 and $653,199 for the years ending December 31, 2011 and 2010, respectively.

 

As of December 31, 2011 all unrecorded deferred stock-based compensation balance related to stock options was fully recognized. As of December 31, 2010, the unrecorded deferred stock-based compensation balance related to stock options was approximately $248,000 and was expected to be recognized over a weighted average period of .50 years.

 

Effective March 10, 2010, in accordance with the transaction between Independence Resources and DMRJ Group LLC, vesting was accelerated for all options. See Note 9 for additional information.

 

NOTE 14 – STOCKHOLDERS EQUITY

 

The following warrants were outstanding at December 31, 2011:

 

Warrant
Type
  Warrants
Issued and
Unexercised
   Exercise
Price
   
   Expiration
Date
Convertible Debt Warrants   1,800,000   $1. 00   March 2015

 

The following warrants were outstanding at December 31, 2010:

 

Warrant
Type
  Warrants
Issued and
Unexercised
   Exercise
Price
   
   Expiration
Date
Series E   375,000   $2.00   March 2011
Convertible Debt Warrants   1,800,000   $1.75   March 2015

 

The series E warrants were issued in association with the retirement of senior secured notes in March 2006. The warrants entitled the holder to purchase ordinary shares convertible into American Depositary 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 convertible debt warrants were issued in association with the March 2010 Security Purchase Agreement (see Note 9) with DMRJ Group, LLC. The warrants entitle the holder to purchase ordinary shares of the Company at the purchase price referred to above at any time prior to the expiration date.

 

NOTE 15 – INCOME TAXES

 

Income taxes are determined using an annual effective tax rate, which generally differs from the U.S. Federal statutory rate, primarily because of state and local income taxes, the treatment of share-based payments that are not designed to normally result in tax deductions, various expenses that are not deductible for tax purposes, and differences in tax rates in certain non-U.S. jurisdictions. Independence Resources’s effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used to estimate the annual effective tax rate.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the historical and projected future taxable income and tax planning strategies in making this assessment. The Company will continue to maintain a full valuation allowance, since negative evidence outweighs positive evidence.

 

Independence Resources is incorporated in England with branch operations in the U.S. along with three U.S. subsidiaries and a 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. branch and U.S. subsidiaries are subject to United States tax only. U.K. tax law presently allows excess current year trading losses to be offset against trading profits of the prior year, without limit; and £50,000 of trading losses against trading profits in the two years preceding that. Since there are no taxable profits to offset in the preceding three years, for which relief is available, it will not be possible to carry-back U.K. tax losses arising in the 2011 period. The full amount will therefore be carried forward.

 

Domestic and foreign components of loss from operations before income taxes for the years ended December 31, 2011 and 2010 are as follows:

 

   Year ended December 31 
   2011   2010 
         
Loss from operations before income taxes included the following:          
U.S. loss  $(4,245,552)  $(5,233,185)
Foreign loss   (639,953)   (299,038)
           
Total loss  $(4,885,505)  $(5,532,223)

  

Major components of our income tax provision (benefit) for the years ended December 31, 2011 and 2010 are as follows:

  

   Year ended December 31 
   2011   2010 
         
Income tax provision (benefit) is comprised of the following:          
Current federal taxes  $   $ 
Current state and local taxes        
Current foreign taxes        
Federal tax refund received for prior year income taxes       (372,754)
           
Total tax provision (benefit)  $   $(372,754)

 

Income tax provision or benefit differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax loss from continuing operations as a result of the following:

 

   2011   2010 
Computed expected tax benefit   34%   34%
State tax rate, net of federal benefit   1%   1%
Timing differences and losses for which no benefit has been recognized   (35)%   (26)%
Credits and other      (2)%
       —    7%

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 The components of deferred tax assets and liabilities are as follows (1):

 

   December 31 
   2011   2010 
         
Net operating loss carryforwards   23,967,000   $22,428,000 
Reserves and accruals   935,000    403,000 
Stock-based compensation   775,000    1,288,000 
Financial instruments       102,000 
Depreciation and amortization   35,000    343,000 
Other   3,000    3,000 
Tax credits   191,000    191,000 
           
Gross deferred tax asset  $25,906,000   $24,758,000 
Valuation allowance   (25,906,000)   (24,758,000)
           
Net deferred tax asset  $   $ 

 

 

(1)No deferred tax liability at December 31, 2011 or 2010

 

Included in Independence Resource’s net operating loss carryforwards are provisional tax losses available to the Company in the U.K., estimated to be approximately $51,313,000 as of December 31, 2011. The U.K. tax loss carryforwards are available indefinitely against profits from the same trade carried on in the U.K. The U.K. tax loss carryforwards could be limited if there was a greater than 50% change in ownership in any three year period.

 

At December 31, 2011, the Company has federal net operating loss carryforwards of approximately $26,610,000. Federal net operating losses expire at varying dates from 2012 through 2031. At December 31, 2011, state net operating losses are estimated to be $9,448,000. State net operating losses expire at varying dates from 2012 through 2021. Research and development tax credits of approximately $190,000 expire at varying dates from 2012 to 2029.

 

The Company is considered a loss corporation per Internal Revenue Code Section 382. The Company has not experienced an ownership change as defined in Section 382 and therefore is not limited in its utilization of U.S. NOL carryovers and other tax attributes at December 31, 2011.

 

During 2011 and 2010, the Company had no uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in the income tax provision. Interest and penalties are computed based upon the difference between its uncertain tax positions and the amount deducted or expected to be deducted in its tax returns. During 2011 and 2010, the Company did not accrue or pay for any interest and penalties.

 

The Company is subject to routine corporate income tax audits in the U.S. and the U.K. The statute of limitations for the Company’s 2007 through 2010 tax years remain open for U.S. purposes. The statute of limitations for the Company’s 2010 tax year remains open for U.K. purposes. NOL carryforwards generated in 1996 through 2010 remain open to examination by the major domestic taxing jurisdictions.

 

At December 31, 2011 and 2010, management did not consider it more likely than not that it’s net deferred tax assets would be realizable and, as a result, the Company has established a 100% valuation allowance against such assets. The net change in the total valuation allowance for the years ended December 31, 2011 and 2010 was increases of approximately $1,148,000 and $2,800,000, respectively. The change in the valuation allowance is primarily related to changes in the Company’s NOLs.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16 – SEGMENT REPORTING

 

At December 31, 2011, Independence Resources is comprised of two business segments: mining exploration and oil and gas. The Company’s organization is structured in a functional manner. Mining exploration became a new segment during the year ended December 31, 2011. Oil and gas became a segment in 2010. Prior to December 31, 2011, Independence Resources was comprised of three business segments: compounds addressing photoaging and other skincare needs (“Skincare”); pharmaceuticals, principally those addressing sales of monoclonal antibodies, erectile dysfunction and drug delivery of liquid injectable products (automatic injectors) (“Pharmaceutical”), and natural resources. At December 31, 2011, due to the divestment in the Skincare and Pharmaceutical lines, management of the Company determined that these two segments met the definition of discontinued operations and thus are no longer presented as separate segments. This change is retroactive for all periods presented in these financial statements.

 

Financial information regarding the operating segments at December 31, 2011 and 2010 was as follows:

 

2011
   Mining Exploration   Oil & Gas   Total 
             
Revenue  $-   $110,279   $110,279 
                
Exploration expense   (327,749)   (140,729)   (468,478)
                
Unallocated operating expenses             (4,583,053)
                
Operating loss   (327,479)   (30,450)  $(4,941,252)
                
Assets  $7,039,105   $728,490   $7,767,595 
                
Unallocated Assets             1,762,710 
                
Total Assets            $9,530,305 
                
Capital additions, including non –cash  $7,039,105   $312,852   $7,351,957 

 

 

2010
    Mining Exploration    Oil & Gas    Total 
                
Revenue  $-   $   $- 
                
Exploration expense        (134,545)   (134,545)
                
Unallocated operating expenses             (5,486,428)
                
Operating loss  $-   $(134,545)  $(5,620,973)
                
Assets  $-   $689,431   $689,431 
                
Unallocated Assets             9,279,526 
                
Total Assets            $9,968,957 
                
Capital additions, including non –cash  $-   $415,638   $415,638 

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s customers are principally in the United States.

 

NOTE 17 – DISCONTINUED OPERATIONS

 

During the year ended December 31, 2011, with the exception of the Reliaject product, the Company has sold or otherwise disposed of the remainder of its pharmaceutical and skincare assets which has continued to reduce expenses associated with the biomedical lines of business.

 

On July 1, 2011, the Company signed a Termination Amendment with Covance and an Assignment and Consent Agreement with Covance and RFMH pursuant to which the Company assigned to Covance, and Covance assumed all of the Company’s obligations under the RFMH License Agreement

 

On July 11, 2011, the Company sold a license to market, manufacture and distribute Invicorp worldwide (excluding North America) to Evolan Pharmaceuticals for a license fee of $28,135, payment for existing inventories of Invicorp®, a future success payment of $100,000 upon successful registration in anyone of five key countries and a future royalty of 12.5% based on sales for the next fifteen years. In addition, Evolan has a first right of refusal to acquire the U.S. and Canada rights to Invicorp® should they become available.

 

The following table details selected financial information included in the income from discontinued operations in the consolidated statements of operations for the year ended December 31, 2011 and 2010:

 

   December 31,
2011
   December 31,
2010
 
Royalties and licensing  $942,108    1,613,164 
Product sales   140,419    70,574 
Cost of sales   (373,882)   (750,023)
General administration   (19,116)   - 
Research and development   (106,885)   (228,663)
Loss on sale of skincare line        (224,728)
Income from discontinued operations  $582,644    480,324 

 

NOTE 18 – COMMITMENTS AND CONTINGENCIES

 

Claim against the Company

 

In the fall of 2010 Miller Tabak & Company, a New York based investment banking firm, filed a breach of contract action against us in New York Supreme Court seeking an amount of approximately $360,000 for alleged non-payment of a commission. We do not believe the claim has any merit and intend to defend the claim vigorously, it is however possible that a settlement will be reached between the Company and Miller Tabak in a range of $0 to $360,000. No amount has been accrued at December 31, 2011 relating to this claim.

 

Employment Contracts

 

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 , 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 year ended December 31, 2010, approximately $252,000 of compensation expense relating to these stock options has been recognized and $278,000 of compensation expense relating to unvested shares at December 31, 2010 was be recognized as compensation expense in 2011.

 

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INDEPENDENCE RESOURCES PLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 19 – RELATED PARTY TRANSACTIONS

 

In addition to related party transactions discussed in Notes 4, 8 and 11, the Company had the following related party transactions:

 

Mr. Anthony Williams, a Director of the Company, has been a partner of the law firm DLA Piper US, LLP since November 2009. DLA Piper has rendered legal services to the Company, legal fees paid to DLA Piper US, LLP in 2011 and 2010 were $111,664 and 180,850, respectively.

 

Wesley Holland, one or our directors, provides certain consulting services to us in connection with developing and marketing our life science technologies and products. Payments to Dr. Holland in 2011 and 2010 were $108,000 and $100,000,respectively.

 

The Company allotted 1,400 of our ordinary shares to each of Howard Crosby and John Ryan in exchange for the transfer of certain non-cash assets from each of those directors to us. Those non-cash assets were 100 shares each in the share capital of Hecla Mining Company, a NYSE-listed corporation.

 

During the year ended December 31, 2011, the Company purchased 15,000 shares of Silver Scott Mines, Inc. for $5,266 and sold the shares prior to year end for $4,066. Mr. Ryan, Mr. Crosby and Mr. Holland are Directors of Silver Scott Mines, Inc. In addition, Mr. Ryan and Mr. Crosby are Directors of Shoshone Silver/Gold Mines, Inc and Mineral Mountain Mining and Milling Co. Also, Mr. Ryan is a Director of Consolidated Goldfields. At December 31, 2011, the Company has investments in shares of common stock in these companies.

In August 2011, the Company loaned $5,500 to Big Bear Mining Co which has directors in common with the Company.

 

NOTE 20 – SUBSEQUENT EVENTS

 

Subsequent to the end of the reporting period the Company has negotiated an agreement to acquire a sand and gravel lease covering prospective properties located on the Chippewa Indian Reservation (Turtle Mountain Band) in North Dakota. The Company believes that certain of the sands may have applications as fracturing proppant sands (“frac sands”). The Company believes there are ready markets for such frac sands, as well as conventional sand and gravel markets, in Western North Dakota and Eastern Montana in the rapidly developing Bakken oil fields. The terms of the deal required the Company to pay a $200,000 initial payment while the Company undertakes due diligence on the frac sand potential, as well as on the overall sand and gravel potential of the property. Upon successful conclusion of due diligence and initiation of production from any of the properties covered under the sand and gravel lease, the Company would issue 3,000,000 shares of its common stock, make an additional $250,000 cash payment, as well as grant a royalty interest to the current owner of the sand lease.

 

Also subsequent to the reporting period the Company acquired additional mineral properties located in the eastern part of the Coeur d’Alene Mining District of North Idaho. The Company paid $60,000 in cash for a total of sixteen unpatented mining claims. Three of these claims are located very proximate to the east of the Lucky Friday/Gold Hunter Mine complex operated by Hecla Mining Company. The remainder of the claims (the SB group) are located on a down dip possible extension of the historic Snowstorm Mine. The Snowstorm was a historic mine in the District which produced from a strata-bound copper-silver ore body.

 

Also subsequent to the end of the reporting period the Company reached an agreement in principal to acquire 70 percent of Coeur d’Alene Mine Contracting LLC. This contracting company is focused on underground mine development and production. Upon completion of the acquisition the Company will issue 2,250,000 shares of its common stock and pay the principals of the LLC a total of $200,000 in cash as well as pay a third party consultant a fee of $25,000.

 

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