As filed with the Securities and Exchange Commission on July 27, 2005
An Exhibit List can be found on page II-6.
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(Name of small business issuer in its charter)
Colorado 4953 58-2222646
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
23832 ROCKFIELD BOULEVARD, SUITE 275
LAKE FOREST, CALIFORNIA 92630
(949) 609-0590
(Address and telephone number of principal executive offices and
principal place of business)
GORDON DAVIES, PRESIDENT
RECLAMATION CONSULTING AND APPLICATIONS, INC.
23832 ROCKFIELD BOULEVARD, SUITE 275
LAKE FOREST, CALIFORNIA 92630
(949) 609-0590
(Name, address and telephone number of agent for service)
Copies to:
ANDREA CATANEO, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLR.
NEW YORK, NEW YORK 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ] ________
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------- ------------------- ------------------ -------------------- --------------
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE PROPOSED PROPOSED MAXIMUM AMOUNT OF
REGISTERED REGISTERED (1) MAXIMUM AGGREGATE REGISTRATION
OFFERING PRICE OFFERING PRICE FEE
PER SHARE (2)
- -------------------------------------------------- ------------------- ------------------ -------------------- --------------
Common stock, $.01 par value issuable upon 32,000,000 (3) $.19 $6,137,000 $722.32
conversion of the secured convertible notes
- -------------------------------------------------- ------------------- ------------------ -------------------- --------------
Common stock, $.01 par value issuable upon 8,000,000 (4) $.28 $2,240,000 $263.65
exercise of warrants
- -------------------------------------------------- ------------------- ------------------ -------------------- --------------
Common stock, $.01 par value 5,025,288 $.19 $954,804.72 $112.38
- -------------------------------------------------- ------------------- ------------------ -------------------- --------------
Common stock, $.01 par value issuable upon 3,000,000 (5) $.30 $900,000 $105.93
exercise of stock options
- -------------------------------------------------- ------------------- ------------------ -------------------- --------------
Common stock, $.01 par value issuable upon 1,700,000 (6) $.25 $425,000 $50.02
exercise of stock options
- -------------------------------------------------- ------------------- ------------------ -------------------- --------------
Total 49,725,288 $10,656,804.72 $1,254.30
- -------------------------------------------------- ------------------- ------------------ -------------------- --------------
(1) Includes shares of our common stock, par value $0.01 per share, which
may be offered pursuant to this registration statement, which shares are
issuable upon conversion of secured convertible notes and the exercise of
warrants held by the selling stockholders. In addition to the shares set
forth in the table, the amount to be registered includes an indeterminate
number of shares issuable upon conversion of the secured convertible notes
and exercise of the warrants, as such number may be adjusted as a result of
stock splits, stock dividends and similar transactions in accordance with
Rule 416. The number of shares of common stock registered hereunder
represents a good faith estimate by us of the number of shares of common
stock issuable upon conversion of the secured convertible notes and upon
exercise of the warrants. For purposes of estimating the number of shares
of common stock to be included in this registration statement, we
calculated a good faith estimate of the number of shares of our common
stock that we believe will be issuable upon conversion of the secured
convertible notes and upon exercise of the warrants to account for market
fluctuations, and antidilution and price protection adjustments,
respectively. Should the conversion ratio result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that become
necessary. In addition, should a decrease in the exercise price as a result
of an issuance or sale of shares below the then current market price,
result in our having insufficient shares, we will not rely upon Rule 416,
but will file a new registration statement to cover the resale of such
additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, using the average of the high and low price as reported on the
Over-The-Counter Bulletin Board on July 25, 2005, which was $.19 per share.
(3) Includes a good faith estimate of the shares underlying secured
convertible notes to account for market fluctuations.
(4) Includes a good faith estimate of the shares underlying warrants
exercisable at $.28 per share to account for antidilution and price
protection adjustments.
(5) Shares underlying options exercisable at $.30 per share.
(6) Shares underlying options exercisable at $.25 per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
________________________________________________________________________________
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JULY 27, 2005
RECLAMATION CONSULTING AND APPLICATIONS, INC.
49,725,288 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
49,725,288 shares of our common stock, including up to 32,000,000 shares of
common stock underlying secured convertible notes in a principal amount of
$2,000,000, up to 8,000,000 shares of common stock issuable upon the exercise of
common stock purchase warrants, 4,700,000 shares of common stock issuable upon
the exercise of stock options and 5,025,288 shares of common stock. The secured
convertible notes are convertible into our common stock at the lower of $0.21 or
50% of the average of the three lowest intraday trading prices for the common
stock on a principal market for the 20 trading days before but not including the
conversion date. The selling stockholders may sell common stock from time to
time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions. The selling stockholders may be
deemed underwriters of the shares of common stock, which they are offering. We
will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "RCAA". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on July 25, 2005, was $.19.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ________, 2005.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by
Reclamation Consulting and Applications, Inc. with the Securities and Exchange
Commission. The selling stockholders may not sell these securities until the
registration statement becomes effective. This Prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the sale is not permitted.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements 2
Prospectus Summary 3
Risk Factors 6
Use Of Proceeds 11
Market For Common Equity And Related Stockholder Matters 12
Management's Discussion And Analysis Of Financial Condition And Results Of Operations 16
Description Of Business 20
Description Of Properties 23
Legal Proceedings 23
Management 24
Executive Compensation 25
Certain Relationships And Related Transactions 26
Security Ownership Of Certain Beneficial Owners And Management 27
Description Of Securities 28
Commission's Position On Indemnification For Securities Act Liabilities 29
Plan Of Distribution 30
Selling Stockholders 33
Legal Matters 38
Experts 38
Available Information 39
Index to Consolidated Financial Statements 40
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and any prospectus supplement contain forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events.
In some cases, you can identify forward-looking statements by words such as
"may," "should," "expect," "plan," "could," "anticipate," "intend," "believe,"
"estimate," "predict," "potential," "goal," or "continue" or similar
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements.
Unless we are required to do so under U.S. federal securities laws or other
applicable laws, we do not intend to update or revise any forward-looking
statements.
2
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
RECLAMATION CONSULTING AND APPLICATIONS, INC.
We are a Colorado corporation that specializes in the production and sales
of the AlderoxTM line of products including ASA-12TM, DCR TM, KR-7 TM, TSR TM,
and ASA Cleaners. ASA-12TM is an asphalt release agent and DCR TM is an
industrial chain lubricant. Both products were developed in response to the
asphalt industry's need for effective, economical and environmentally friendly
products. KR7TM is a concrete release agent we also developed to meet the
industry's same needs. TSRTM was specifically designed as an environmentally
friendly non-stick agent for the oil sands industry to reduce the build-up of
clay, lime and mud on the undercarriages and sides of transport vehicles and
equipment.
We were originally formed in 1976 under the name Vac-Tec Systems, Inc. and
reorganized as a public shell corporation without significant assets in early
1997, after we ceased operations in the glass vacuum coating business.
For the years ended June 30, 2004 and 2003, we generated net revenues in
the amount of $289,218 and $261,235 and net losses of $2,542,770 and $1,698,498,
respectively. For the nine months ended March 31, 2005, we generated net
revenues in the amount of $173,581 and a net loss of $2,397,627. As a result of
recurring losses from operations and an accumulated deficit of $11,112,519 as pf
June 30, 2004, our Independent Registered Public Accounting Firm, in their
report dated September 2, 2004, have expressed substantial doubt about our
ability to continue as going concern.
Our principal offices are located at 23832 Rockfield Boulevard, Suite 275,
Lake Forest, California 92630, and our telephone number is (949) 609-0590. We
are a Colorado corporation.
The Offering
Common stock offered by selling stockholders................ Up to 49,725,288 shares, including the following:
- up to 32,000,000 shares of common stock underlying secured
convertible notes in the principal amount of $2,000,000 (includes
a good faith estimate of the shares underlying secured
convertible notes to account for market fluctuations and
antidilution protection adjustments, respectively),
- up to 8,000,000 shares of common stock issuable upon the exercise
of common stock purchase warrants at an exercise price of $.28
per share (includes a good faith estimate of the shares
underlying warrants to account for antidilution protection
adjustments),
- up to 3,000,000 shares of common stock issuable upon the exercise
of stock stocks at an exercise price of $.30 per share,
3
- up to 1,700,000 shares of common stock issuable upon the exercise
of stock stocks at an exercise price of $.25 per share, and
- 5,025,288 shares of common stock.
This number represents 66.93% of our current outstanding stock.
Common stock to be outstanding after the offering........... Up to 74,295,813 shares
Use of proceeds.......................................... We will not receive any proceeds from the sale of the common stock.
However, we will receive the sale price of any common stock we sell to
the selling stockholders upon exercise of the warrants. We expect to
use the proceeds received from the exercise of the warrants, if any,
for general working capital purposes. However, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium
Partners II, LLC will be entitled to exercise up to 5,200,000 warrants
on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event that AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., or New Millennium Partners II, LLC
exercise the warrants on a cashless basis, then we will not receive
any proceeds from the exercise of those warrants. In addition, we have
received gross proceeds $700,000 from the sale of the secured
convertible notes and the investors are obligated to provide us with
an additional $1,300,000; $600,000 within five days of the filing of
this registration statement, and $700,000 within five days of this
prospectus being declared effective. The proceeds received from the
sale of the secured convertible notes will be used for business
development purposes, working capital needs, pre-payment of interest,
payment of consulting and legal fees and purchasing inventory.
Over-The-Counter Bulletin Board Symbol..................... RCAA
The above information regarding common stock to be outstanding after the
offering is based on 29,595,813 shares of common stock outstanding as of July
20, 2005 and assumes the subsequent conversion of our issued secured convertible
notes and exercise of warrants by our selling stockholders.
EXPLANATORY NOTE: ON JUNE 23, 2005, WE ENTERED INTO A SECURITIES PURCHASE
AGREEMENT WITH FOUR ACCREDITED INVESTORS. ANY ISSUANCE OF SHARES OF COMMON STOCK
PURSUANT TO THIS AGREEMENT THAT WOULD REQUIRE US TO ISSUE SHARES OF COMMON STOCK
IN EXCESS OF OUR AUTHORIZED CAPITAL IS CONTINGENT UPON US OBTAINING SHAREHOLDER
4
APPROVAL TO INCREASE OUR AUTHORIZED SHARES OF COMMON STOCK FROM 75,000,000 TO
150,000,000 AND FILING THE CERTIFICATE OF AMENDMENT TO OUR CERTIFICATE OF
INCORPORATION. ON JULY 22, 2005, WE FILED A PRELIMINARY PROXY STATEMENT WITH THE
SECURITIES AND EXCHANGE COMMISSION, WHICH IS CURRENTLY BEING REVIEWED, ASKING A
MAJORITY OF OUR SHAREHOLDERS TO AUTHORIZE THE INCREASE IN OUR AUTHORIZED SHARES
OF COMMON STOCK. IF A MAJORITY OF OUR SHAREHOLDERS APPROVE AN INCREASE IN OUR
AUTHORIZED SHARES OF COMMON STOCK, WE INTEND ON FILING THE CERTIFICATE OF
AMENDMENT TO OUR CERTIFICATE OF INCORPORATION IMMEDIATELY FOLLOWING OUR
SHAREHOLDER MEETING. WE ARE REGISTERING 40,000,000 SHARES OF COMMON STOCK
PURSUANT TO THIS PROSPECTUS THAT ARE UNDERLYING THE SECURED CONVERTIBLE NOTES
AND WARRANTS ISSUED IN CONNECTION WITH THE SECURITIES PURCHASE AGREEMENT. UPON
FILING THE CERTIFICATE OF AMENDMENT, WE WILL AMEND THIS PROSPECTUS TO INCLUDE
ADDITIONAL SHARES OF COMMON STOCK THAT ARE ISSUABLE PURSUANT TO THE SECURITIES
PURCHASE AGREEMENT.
JUNE 2005 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 23, 2005 for the sale
of (i) $2,000,000 in secured convertible notes and (ii) warrants to buy
8,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying these
secured convertible notes and warrants. The investors are obligated to provide
us with an aggregate of $2,000,000 as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 will be disbursed within five days of the filing of this
registration statement; and
o $700,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $700,000 pursuant to the
Securities Purchase Agreement.
The secured convertible notes bear interest at 10%, mature three years from
the date of issuance, and are convertible into our common stock, at the selling
stockholders' option, at the lower of (i) $0.21 or (ii) 50% of the average of
the three lowest intraday trading prices for the common stock on a principal
market for the 20 trading days before but not including the conversion date.
Accordingly, there is in fact no limit on the number of shares into which the
notes may be converted. As of July 26, 2005, the average of the three lowest
intraday trading prices for our common stock during the preceding 20 trading
days as reported on the Over-The-Counter Bulletin Board was $.19 and, therefore,
the conversion price for the secured convertible notes was $.095. Based on this
conversion price, the $2,000,000 secured convertible notes, excluding interest,
were convertible into 21,052,632 shares of our common stock.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC have contractually agreed to restrict their ability
to convert or exercise their warrants and receive shares of our common stock
such that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock.
See the "Selling Stockholders" and "Risk Factors" sections for a complete
description of the secured convertible notes.
5
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATING TO OUR BUSINESS:
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, AND MAY NEGATIVELY IMPACT OUR
ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
We incurred net losses of $2,542,770 and $1,698,498 for the years ended
June 30, 2004 and 2003, respectively. For the nine months ended March 31, 2005,
we incurred a net loss of $2,397,627. We cannot assure you that we can achieve
or sustain profitability on a quarterly or annual basis in the future. Our
operations are subject to the risks and competition inherent in the
establishment of a business enterprise. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will depend upon
various factors, including whether we will be able to continue expansion of our
revenue. We may not achieve our business objectives and the failure to achieve
such goals would have an adverse impact on us.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING, OUR BUSINESS OPERATIONS WILL BE
HARMED AND IF WE DO OBTAIN ADDITIONAL FINANCING, OUR THEN EXISTING SHAREHOLDERS
MAY SUFFER SUBSTANTIAL DILUTION.
We will require additional funds to sustain and expand our sales and
marketing activities. We anticipate that we will require up to approximately
$2,000,000 to fund our continued operations for the next twelve months from the
date of this prospectus, depending on revenues from operations. Additional
capital will be required to effectively support the operations and to otherwise
implement our overall business strategy. There can be no assurance that
financing will be available in amounts or on terms acceptable to us, if at all.
The inability to obtain additional capital will restrict our ability to grow and
may reduce our ability to continue to conduct business operations. If we are
unable to obtain additional financing, we will likely be required to curtail our
marketing and development plans and possibly cease our operations. Any
additional equity financing may involve substantial dilution to our then
existing shareholders.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS STATED THERE IS
SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN, WHICH MAY
HINDER OUR ABILITY TO OBTAIN FUTURE FINANCING.
In their report dated September 2, 2004 on our financial statements as of
and for the year ended June 30, 2004, our independent registered public
accounting firm stated that our recurring losses from operations and our
accumulated deficit as of June 30, 2004 raised substantial doubt about our
ability to continue as a going concern. Since June 30, 2004, we have continued
to experience net operating losses. Our ability to continue as a going concern
is subject to our ability to generate a profit and/or obtain necessary funding
from outside sources, including obtaining additional funding from the sale of
our securities, increasing sales or obtaining loans and grants from various
financial institutions where possible. Our continued net operating losses and
stockholders' deficiency increase the difficulty in meeting such goals and there
can be no assurances that such methods will prove successful.
IF WE ARE UNABLE TO RETAIN THE SERVICES OF MESSRS. DAVIES AND DAVIES OR IF WE
ARE UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED PERSONNEL HAVING EXPERIENCE IN
BUSINESS, WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS.
Our success depends to a significant extent upon the continued service of
Messrs. Gordon Davies and Michael Davies, our current officers and directors.
Loss of the services of either Messrs. Davies' could have a material adverse
effect on our growth, revenues, and prospective business. In addition, in order
to successfully implement and manage our business plan, we will be dependent
upon, among other things, successfully recruiting qualified personnel having
experience in business. Competition for qualified individuals is intense. There
can be no assurance that we will be able to find, attract and retain existing
employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
6
MANY OF OUR COMPETITORS ARE LARGER AND HAVE GREATER FINANCIAL AND OTHER
RESOURCES THAN WE DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US TO
COMPETE WITH THEM.
The asphalt and concrete lubricant industry is extremely competitive and
includes several companies that have achieved substantially greater market
shares than we have, and have longer operating histories, have larger customer
bases, and have substantially greater financial, development and marketing
resources than we do. If overall demand for our products should decrease, it
could have a materially adverse affect on our operating results.
Our Trademark and Other Intellectual Property Rights May not be Adequately
Protected Outside the United States, Resulting in Loss of Revenue.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent as do the laws of the United States.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SECURED CONVERTIBLE NOTES AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of July 20, 2005, we had 29,595,813 shares of common stock issued and
outstanding, secured convertible notes outstanding that may be converted into an
estimated 7,368,422 shares of common stock at current market prices and
outstanding warrants to purchase 2,800,000 shares of common stock. Additionally,
we have an obligation to sell secured convertible notes that may be converted
into an estimated 13,684,211 shares of common stock at current market prices and
issue warrants to purchase 5,200,000 shares of common stock in the near future.
In addition, the number of shares of common stock issuable upon conversion of
the outstanding secured convertible notes may increase if the market price of
our stock declines. All of the shares, including all of the shares issuable upon
conversion of the secured convertible notes and upon exercise of our warrants,
may be sold without restriction. The sale of these shares may adversely affect
the market price of our common stock.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH
WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our secured convertible
notes is essentially limitless. The following is an example of the amount of
shares of our common stock that are issuable, upon conversion of our secured
convertible notes (excluding accrued interest), based on market prices 25%, 50%
and 75% below the market price, as of July 25, 2005 of $0.19.
Number of % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
- ------- --------- ------------- --------- -----------
25% $.1425 $.07125 28,070,176 48.68%
50% $.095 $.0475 42,105,264 58.72%
75% $.0475 $.02375 84,210,527 73.99%
As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible notes will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
7
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES MAY HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The secured convertible notes are convertible into shares of our common
stock at a 50% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as the selling stockholders convert and sell material amounts of common stock
could have an adverse effect on our stock price. In addition, not only the sale
of shares issued upon conversion or exercise of secured convertible notes and
warrants, but also the mere perception that these sales could occur, may
adversely affect the market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the secured convertible notes and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC
may not convert their secured convertible notes and/or exercise their warrants
if such conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II,
LLC from converting and/or exercising some of their holdings and then converting
the rest of their holdings. In this way, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC could
sell more than this limit while never holding more than this limit. There is no
upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
IN THE EVENT THAT OUR STOCK PRICE DECLINES, THE SHARES OF COMMON STOCK ALLOCATED
FOR CONVERSION OF THE SECURED CONVERTIBLE NOTES AND REGISTERED PURSUANT TO THIS
PROSPECTUS MAY NOT BE ADEQUATE AND WE MAY BE REQUIRED TO FILE A SUBSEQUENT
REGISTRATION STATEMENT COVERING ADDITIONAL SHARES. IF THE SHARES WE HAVE
ALLOCATED AND ARE REGISTERING HEREWITH ARE NOT ADEQUATE AND WE ARE REQUIRED TO
FILE AN ADDITIONAL REGISTRATION STATEMENT, WE MAY INCUR SUBSTANTIAL COSTS IN
CONNECTION THEREWITH.
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the secured
convertible notes, we have made a good faith estimate as to the amount of shares
of common stock that we are required to register and allocate for conversion of
the secured convertible notes. Accordingly, we have allocated and registered
37,000,000 shares to cover the conversion of the secured convertible notes. In
the event that our stock price decreases, the shares of common stock we have
allocated for conversion of the secured convertible notes and are registering
hereunder may not be adequate. If the shares we have allocated to the
registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
In June 2005, we entered into a Securities Purchase Agreement for the sale
of an aggregate of $2,000,000 principal amount of secured convertible notes. The
secured convertible notes are due and payable, with 10% interest, three years
from the date of issuance, unless sooner converted into shares of our common
stock. Although we currently have $700,000 secured convertible notes
outstanding, the investors are obligated to purchase additional secured
convertible notes in the aggregate of $1,300,000. In addition, any event of
default such as our failure to repay the principal or interest when due, our
failure to issue shares of common stock upon conversion by the holder, our
failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
8
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the secured convertible
notes, including a default interest rate of 15% on the outstanding principal
balance of the notes if the default is not cured with the specified grace
period. We anticipate that the full amount of the secured convertible notes will
be converted into shares of our common stock, in accordance with the terms of
the secured convertible notes. If we were required to repay the secured
convertible notes, we would be required to use our limited working capital and
raise additional funds. If we were unable to repay the notes when required, the
note holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITIES PURCHASE AGREEMENT, SECURED
CONVERTIBLE NOTES, WARRANTS, SECURITY AGREEMENT OR INTELLECTUAL PROPERTY
SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS,
INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS,
INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In connection with the Securities Purchase Agreements we entered into in
June 2005, we executed a Security Agreement and an Intellectual Property
Security Agreement in favor of the investors granting them a first priority
security interest in all of our goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property. The Security Agreements and Intellectual Property
Security Agreements state that if an even of default occurs under the Securities
Purchase Agreement, Secured Convertible Notes, Warrants, Security Agreements or
Intellectual Property Security Agreements, the Investors have the right to take
possession of the collateral, to operate our business using the collateral, and
have the right to assign, sell, lease or otherwise dispose of and deliver all or
any part of the collateral, at public or private sale or otherwise to satisfy
our obligations under these agreements.
RISKS RELATING TO OUR COMMON STOCK:
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
9
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
10
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd., and New Millennium Partners II, LLC will be entitled to exercise up to
5,200,000 warrants on a cashless basis if the shares of common stock underlying
the warrants are not then registered pursuant to an effective registration
statement. In the event that AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., or New Millennium Partners II, LLC exercise the warrants on a
cashless basis, then we will not receive any proceeds from the exercise of those
warrants. In addition, we have received gross proceeds $700,000 from the sale of
the secured convertible notes and the investors are obligated to provide us with
an additional $1,300,000; $600,000 within five days of the filing of this
registration statement, and $700,000 within five days of this prospectus being
declared effective. The proceeds received from the sale of the secured
convertible notes will be used for business development purposes, working
capital needs, pre-payment of interest, payment of consulting and legal fees and
purchasing inventory.
SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 23, 2005 for the sale
of (i) $2,000,000 in secured convertible notes and (ii) warrants to purchase
8,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying these
secured convertible notes and warrants. The investors are obligated to provide
us with an aggregate of $2,000,000 as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 will be disbursed within five days of the filing of this
registration statement; and
o $700,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $700,000 pursuant to the
Securities Purchase Agreement.
The secured convertible notes bear interest at 10%, mature three years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.21; or
o 50% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days before but
not including the conversion date.
We have a call option under the terms of the secured convertible notes. The
call option provides us with the right to prepay all of the outstanding secured
convertible notes at any time, provided we are not in default and our stock is
trading at or below $.21 per share. Prepayment of the notes is to be made in
cash equal to either (i) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the secured
convertible notes; (ii) 135% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date of the
secured convertible notes; and (iii) 150% of the outstanding principal and
accrued interest for prepayments occurring after the 60th day following the
issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
11
We also have a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.25. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36, multiplied by 104%.
The full principal amount of the secured convertible notes is due upon
default under the terms of secured convertible notes. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date that the investors distributed
the final $700,000. In the event that we breach any representation or warranty
regarding the condition of our company as set forth in the Securities Purchase
Agreement, we are liable to pay liquidated damages in shares or cash, at the
election of the investors, equal to three percent of the outstanding amount of
the secured convertible notes per month plus accrued and unpaid interest. In the
event that we breach any covenant as set forth in the Securities Purchase
Agreement, including the failure to comply with blue sky laws, timely file all
public reports, use the proceeds from the sale of the secured convertible notes
in the agreed upon manner, obtain written consent from the investors to
negotiate or contract with a party for additional financing, reserve and have
authorized the required number of shares of common stock or the maintenance of
our shares of common stock on an exchange or automated quotation system, then we
are liable to pay liquidated damages in shares or cash, at the election of the
investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the secured
convertible notes) under the secured convertible notes;
o Any representation or warranty we made in the Security Agreement or in
the Intellectual Property Security Agreement shall prove to have been
incorrect in any material respect when made;
o The failure by us to observe or perform any of our obligations under
the Security Agreement or in the Intellectual Property Security
Agreement for ten (10) days after receipt of notice of such failure
from the investors; and
o Any breach of, or default under, the Warrants. An event of default
under the secured convertible notes occurs if we:
o Fail to pay the principal or interest when due;
o Do not issue shares of common stock upon receipt of a conversion
notice;
o Fail to file a registration statement within 45 days after June 23,
2005 or fail to have the registration statement effective within 120
days after June 23, 2005;
o Breach any material covenant or other material term or condition in
the secured convertible notes or the Securities Purchase Agreement;
o Breach any representation or warranty made in the Securities Purchase
Agreement or other document executed in connection therewith;
o Apply for or consent to the appointment of a receiver or trustee for
us or any of our subsidiaries or for a substantial part of our of our
subsidiaries' property or business, or such a receiver or trustee
shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be entered or
filed against us or any of our subsidiaries or any of our property or
other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless otherwise
consented to by the investors;
o Institute or have instituted against us or any of our subsidiaries any
bankruptcy, insolvency, reorganization or liquidation proceedings or
12
other proceedings for relief under any bankruptcy law or any law for
the relief of debtors;
o Fail to maintain the listing of our common stock on one of the OTCBB
or an equivalent replacement exchange, the Nasdaq National Market, the
Nasdaq SmallCap Market, the New York Stock Exchange, or the American
Stock Exchange; or
o Default under any other secured convertible note issued pursuant to
the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security Agreement
or the Intellectual Property Security Agreement, the investors shall have the
right to exercise all of the remedies conferred under the Security Agreement,
the Intellectual Property and under the secured convertible notes, and the
investors shall have all the rights and remedies of a secured party under the
Uniform Commercial Code and/or any other applicable law (including the Uniform
Commercial Code of any jurisdiction in which any collateral is then located).
The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose, enter,
with the aid and assistance of any person, any premises where the
collateral, or any part thereof, is or may be placed and remove the
same, and we shall assemble the collateral and make it available to
the investors at places which the investors shall reasonably select,
whether at our premises or elsewhere, and make available to the
investors, without rent, all of our respective premises and facilities
for the purpose of the investors taking possession of, removing or
putting the collateral in saleable or disposable form; and
o To operate our business using the collateral and shall have the right
to assign, sell, lease or otherwise dispose of and deliver all or any
part of the collateral, at public or private sale or otherwise, either
with or without special conditions or stipulations, for cash or on
credit or for future delivery, in such parcel or parcels and at such
time or times and at such place or places, and upon such terms and
conditions as the investors may deem commercially reasonable, all
without (except as shall be required by applicable statute and cannot
be waived) advertisement or demand upon or notice to us or our right
of redemption, which we expressly waived. Upon each such sale, lease,
assignment or other transfer of collateral, the investors may, unless
prohibited by applicable law which cannot be waived, purchase all or
any part of the collateral being sold, free from and discharged of all
trusts, claims, right of redemption and equities by us, which we
waived and released.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.28 per share. The selling stockholders will be entitled
to exercise the warrants on a cashless basis if the shares of common stock
underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the secured
convertible notes issued pursuant to the Securities Purchase Agreement, dated
June 23, 2005.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
13
stock held by them and their affiliates in the aggregate after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreements and related documents
are incorporated by reference as exhibits to our Form SB-2 registration
statement relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the
secured convertible notes is determined by dividing that portion of the
principal of the notes to be converted and interest, if any, by the conversion
price. For example, assuming conversion of the $2,000,000 of secured convertible
notes on July 26, 2005, at a conversion price of $0.095, the number of shares
issuable upon conversion would be:
$2,000,000/$0.095 = 21,052,632 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price as of July 25, 2005 of $0.19.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
- ------- -------- ------------ ---------- -----------
25% $.1425 $.07125 28,070,176 48.68%
50% $.095 $.0475 42,105,264 58.72%
75% $.0475 $.02375 84,210,527 73.99%
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"RCAA."
For the periods indicated, the following table sets forth the high and low
bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
High($) Low ($)
------ -------
FISCAL YEAR 2004
First Quarter $ 0.85 0.44
Second Quarter 0.86 0.56
Third Quarter 0.80 0.41
Fourth Quarter 0.53 0.32
FISCAL YEAR 2005
First Quarter 0.49 0.30
Second Quarter 0.40 0.19
Third Quarter 0.38 0.21
Fourth Quarter 0.38 0.19
FISCAL YEAR 2006
First Quarter (1) 0.20 0.19
(1) As of July 25, 2005
14
HOLDERS
As of July 20, 2005, we had approximately 680 holders of our common stock.
The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of common stock whose shares are
held in the names of various security brokers, dealers, and registered clearing
agencies. The transfer agent of our common stock is Computershare Trust Company,
350 Indiana Street, Suite 800, Golden, Colorado 80401.
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends to stockholders in the foreseeable
future. In addition, any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deem relevant.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
GENERAL OVERVIEW
We are a Colorado corporation that specializes in the production and sales
of the AlderoxTM line of products including ASA-12TM, DCR TM, KR-7 TM, TSR TM,
and ASA Cleaners. ASA-12TM is an asphalt release agent and DCR TM is an
industrial chain lubricant. Both products were developed in response to the
asphalt industry's need for effective, economical and environmentally friendly
products. KR7TM is a concrete release agent we also developed to meet the
industry's same needs. TSRTM was specifically designed as an environmentally
friendly non-stick product for the oil sands industry to reduce the build-up of
clay, lime and mud on the undercarriages and sides of transport vehicles and
equipment.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies which
we believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
Revenue Recognition
- -------------------
We recognize revenue when merchandise is shipped to a customer in
accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements" ("SAB 104").
Stock-Based Compensation
- ------------------------
We account for employee stock-based compensation under the "intrinsic
value" method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), as opposed to the fair
value method prescribed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). Pursuant to the provisions
of APB 25, we generally do not record an expense for the value of stock-based
awards granted to employees.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (Revised), "Share-Based Payment". This standard revised SFAS No. 123, APB
Opinion No. 25 and related accounting interpretations and eliminates the use of
the intrinsic value method for employee stock-based compensation. SFAS No.
123(R) requires compensation costs related to share-based payment transactions
to be recognized in financial statements over the period that an employee
16
provides service in exchange for the award. The effective date of this standard
for the Company will be January 1, 2006. We are currently assessing the impact
that this new standard will have on our financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB has issued FASB Statement No. 151, "Inventory
Costs, an Amendment of ARB No. 43, Chapter 4" ("FAS No. 151"). The amendments
made by FAS No. 151 are intended to improve financial reporting by clarifying
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges and
by requiring the allocation of fixed production overheads to inventory based on
the normal capacity of the production facilities.
The guidance is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted for inventory
costs incurred during fiscal years beginning after November 23, 2004. The
provisions of FAS No. 151 will be applied prospectively. We do not expect the
adoption of FAS No. 151 to have a material impact on our consolidated financial
position, results of operations or cash flows.
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R
requires companies to recognize in the statement of operations the grant- date
fair value of stock options and other equity-based compensation issued to
employees. FAS No. 123R is effective beginning in the Company's second quarter
of fiscal 2006. We are in process of evaluating the impact of this pronouncement
on our financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. We believe that the adoption of this
standard will have no material impact on our financial statements.
17
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. We
will evaluate the impact of EITF 03-01 once final guidance is issued.
RESULTS OF OPERATIONS
Our revenues are difficult to forecast and may vary significantly from
quarter to quarter and year to year. In addition, our expense levels for each
quarter are, to a significant extent, fixed in advance based upon our
expectation as to the net revenues to be generated during that quarter. We
therefore are generally unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in net revenues. Further as a result of
these factors any delay in product introductions, whether due to internal delays
or delays caused by third party difficulties, or any significant shortfall in
demand in relation to our expectations, would have an almost immediate adverse
impact on our operating results and on our ability to maintain profitability in
a quarter.
COMPARISON OF THE YEAR ENDED JUNE 30, 2004 WITH THE YEAR ENDED JUNE 30, 2003
We have incurred net losses for twelve months ended June 30, 2004 of
$2,272,770 as compared to a net loss of $1,698,498 for the twelve months ended
June 30, 2003. The losses for the twelve months ended June 30, 2004 and 2003 can
be attributed in part to significant costs incurred in the introduction of our
AlderoxTM line of products to the marketplace. We are optimistic that sales of
our proprietary AlderoxTM line of products will continue to lead towards
contracts which will begin to generate significant revenues to cover our
operating expenses.
The revenues for the twelve months ending June 30, 2003 are $261,235 and
are from the sales of AlderoxTM products. The revenues from the twelve months
ending June 30, 2004 are $289,218 and are from the sales of AlderoxTM products.
The Cost of Goods Sold represents sixty four percent (64%) as compared to
one hundred thirteen percent (113%) of sales for the twelve months ending June
30, 2003. The Costs of Goods are not consistent between years as a result of the
varying sources, which created sales revenues in each year.
Operating expenses consist primarily of general and administrative
expenses. For the twelve months ended June 30, 2004 operating expenses totaled
$1,774,600 as compared to $1,823,307 for the twelve months ended June 30, 2003.
The decrease in operating expenses between the years of $48,707 can be primarily
attributed to the Distribution and Manufacturing Agreements with North American
Systems, Inc.
Interest expense and other finance charges decreased from $106,454 for the
twelve months ended June 30, 2003 to $45,622 for the twelve months ending June
30, 2004. The decrease between years can be attributed to the decrease in Notes
payable between years 2003 and 2004.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2005 WITH THE THREE MONTHS ENDED
MARCH 31, 2004
We have incurred losses of $1,794,105 for the three months ended March 31,
2005 as compared to a net loss of $221,153 for the three months ended March 31,
2004. These are primarily non cash losses.
The Cost of goods sold represents one hundred thirty four percent (134%) of
net revenue for the three months ending March 31, 2005. The cost of sales for
the three months ending March 31, 2004 was forty seven percent (47%) of net
revenue. Revenues for both of the periods were derived from the sales of the
Alderox(R) line of products.
18
Operating expenses consist primarily of general and administrative
expenses. For the three months ended March 31, 2005 operating expenses totaled
$1,766,895 as compared to $180,368 for the three months ended March 31, 2004.
The increase in general and administrative expenses is mainly due to stock
issuances for consulting fees and the write off of bad debt of $958,968 from
North American Systems, Inc.
During the nine months ended March 31, 2005 the Company recognized a
$21,975 loss on the settlement of debts.
Interest expense increased during the three months ended March 31, 2005 by
$18,822 over the same period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had a working capital deficit of $1,097,607. This
compares to a working capital deficit of $435,308 as of March 31, 2004. The
principal use of cash for the three months ended March 31, 2005 and 2004 was to
fund the net loss from operations. We received cash from issuance of notes
amounting to $160,501 during the three month period ending March 31, 2005.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet our current
and projected cash flow deficits from operations and development.
By adjusting our operations and development to the level of capitalization,
we believe we have sufficient capital resources to meet projected cash flow
deficits through the next twelve months. However, if thereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations, liquidity and
financial condition.
Our independent certified public accountant has stated in their report,
dated as of September 2, 2004, that as a result of accumulated deficit of
$11,112,519 as of June 30, 2004 and net losses of $2,542,770 and $1,698,498 for
the years ended June 30, 2004 and 2003 respectively, these factors among others
may raise substantial doubt about our ability to continue as a going concern.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 23, 2005 for the sale
of (i) $2,000,000 in secured convertible notes and (ii) warrants to buy
8,000,000 shares of our common stock. The investors are obligated to provide us
with an aggregate of $2,000,000 as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 will be disbursed within five days of the filing of this
registration statement; and
o $700,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $700,000 pursuant to the
Securities Purchase Agreement.
The proceeds received from the sale of the secured convertible notes were
used for business development purposes, working capital needs, pre-payment of
interest, payment of consulting and legal fees and purchasing inventory.
The secured convertible notes bear interest at 10%, mature three years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.21 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on a principal market
for the 20 trading days before but not including the conversion date. The full
principal amount of the secured convertible notes is due upon default under the
terms of secured convertible notes. The warrants are exercisable until five
years from the date of issuance at a purchase price of $0.28 per share. In
19
addition, the conversion price of the secured convertible notes and the exercise
price of the warrants will be adjusted in the event that we issue common stock
at a price below the fixed conversion price, below market price, with the
exception of any securities issued in connection with the Securities Purchase
Agreement. The conversion price of the secured convertible notes and the
exercise price of the warrants may be adjusted in certain circumstances such as
if we pay a stock dividend, subdivide or combine outstanding shares of common
stock into a greater or lesser number of shares, or take such other actions as
would otherwise result in dilution of the selling stockholder's position. The
selling stockholders have contractually agreed to restrict their ability to
convert or exercise their warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights.
Since the conversion price will be less than the market price of the common
stock at the time the secured convertible notes are issued, we anticipate
recognizing a charge relating to the beneficial conversion feature of the
secured convertible notes during the quarter in which they are issued, including
the fourth quarter of fiscal 2005 when $700,000 of secured convertible notes
were issued.
We will still need additional investments in order to continue operations
to cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations.
ACQUISITION OR DISPOSITION OF PLANT AND EQUIPMENT
Other than as provided herein, we do not anticipate the sale or acquisition
of any significant property, plant or equipment during the next twelve months.
We do not anticipate the acquisition of any significant property, plant or
equipment during the next 12 months.
INFLATION
In the opinion of management, inflation has not had a material effect on
our operations.
20
BUSINESS
INTRODUCTION
We are a Colorado corporation that specializes in the production and sales
of the AlderoxTM line of products including ASA-12TM, DCR TM, KR-7 TM, TSR TM,
and ASA Cleaners. ASA-12TM is an asphalt release agent and DCR TM is an
industrial chain lubricant. Both products were developed in response to the
asphalt industry's need for effective, economical and environmentally friendly
products. KR7TM is a concrete release agent we also developed to meet the
industry's same needs. TSRTM was specifically designed as an environmentally
friendly non-stick product for the oil sands industry to reduce the build-up of
clay, lime and mud on the undercarriages and sides of transport vehicles and
equipment.
We were originally formed in 1976 under the name Vac-Tec Systems, Inc. and
reorganized as a public shell corporation without significant assets in early
1997, after we ceased operations in the glass vacuum coating business.
PRODUCTS
AlderoxTM ASA-12TM, DCRTM, KR-7TM, TSRTM and ASA Cleaners
- ---------------------------------------------------------
We manufacture, sell and service the AlderoxTM line of products throughout
the United States, Canada, the United Kingdom and India through independent
distributors and sales representatives. AlderoxTM ASA-12TM is a ready-to-use
product that allows asphalt to slide easily from truck beds. AlderoxTM DCRTM is
a ready-to-use industrial chain lubricant used to reduce start-up power
requirements while ensuring that highly polymerized asphalt mixes do not
build-up on industrial asphalt drag chains or slats. AlderoxTM KR7TM is a
ready-to-use product that allows concrete to easily release from concrete molds
and forms.
We believe the advantages of the AlderoxTM line of products over its
competitors are as follows:
- 100% biodegradable
- Completely non-hazardous
- Easily applied
- No negative impact to equipment or asphalt/concrete - Exclusive
filming technology
AlderoxTM ASA-12TM, DCRTM, KR7TM, TSRTM and ASA Cleaners were designed for
use in the asphalt, concrete and oil sands industries. The products are
manufactured by RCAI and the formulations are patented in the United States..
Our manufacturing facility is located in West Vally City, Utah.
SALES AND MARKETING
Our marketing program includes the development of international markets and
support of existing distributors and independent sales representatives
throughout the United States, Canada, the United Kingdom and India This support
includes; the development of compliance data, sales materials, product
demonstrations and sales leads. Compliance Data is performance data we generated
from on-site pilot testing. This data specifically shows the characteristics of
asphalt release from trucks prior to applying AlderoxTM ASA-12TM and after
applying AlderoxTM ASA-12TM in comparison with other competitive products
currently used by our potential customers..
RAW MATERIALS
Our products are produced by using 100% natural ingredients. The formulas
used in our AlderoxTM line of products are patented in the United States.
21
COMPETITION
We compete with over 60 other companies who have competing products. Our
competition consists of companies that are mainly smaller than us and with less
financial resources who operate on a strictly regional basis and some companies
who are larger, such as Zep Industries and the ChemMark Corporation, with
greater financial resources and larger organizations.
Competition in this industry focuses on price, quality, features,
performance, specialization, expertise, reliability, technology, customer
relationships, marketing, advertising, sales, publicity, distribution, serving
particular market niches, and appealing to particular consumers.
GOVERNMENTAL REGULATION
There are certain government regulations through state approvals for
asphalt release agents on a state by state basis. Each state has their own
approval process, with some being more stringent than others. This process is
designed to assure the states that the products that are approved meet certain
environmental regulations. Our customers are responsible for compliance with
these regulations and we have not assumed any responsibility for compliance as a
provider of products to our customers. Not all of the individual states require
approval. We are not aware of any government regulations that are required prior
to product sale and use of concrete release agents such as AlderoxTM KR7TM,
industrial chain lubricants such as AlderoxTM DCRTM, non-stick undercoatings and
coatings, such as AlderoxTM TSRTM or cleaners, such as our ASA Cleaners.
We have obtained government approval for all of Canada, the United Kingdom
and India for both Alderox(TM) ASA-12(TM) and KR7(TM). ASA-12(TM) and KR7(TM)
have been recognized as the national standard for asphalt and concrete release
agents in Canada and now carry the Canadian Environmental Choice Eco-Logo. We
will apply for national standard Eco-Logo status for TSR(TM) and DCR(TM) in the
future. We are not aware of any Canadian government approvals necessary for the
sale of TSR(TM), DCR(TM) or ASA cleaners. In the United States, we are approved
for use in; Washington, Oregon, Idaho, California, Utah, Colorado, Arizona, New
Mexico, Oklahoma, Alaska, Hawaii, Florida, Georgia, Tennessee, Pennsylvania,
Connecticut, New Jersey and West Virginia. We have applied for approval in;
Kansas, Nebraska, Wyoming, Alabama, Arkansas, Louisiana, Missouri, Mississippi,
Nevada, New York, North Carolina, South Carolina, Ohio, Virginia, Delaware,
Maryland, Vermont, Rhode Island, New Hampshire and Massachusetts. Initial steps
are being taken to apply for approval in; Maine, DC, Kentucky, Wisconsin,
Illinois, Indiana, Michigan, North Dakota, South Dakota and Texas. We are not
aware of any United States government approvals necessary for the sales of
Alderox(TM) KR7(TM), DCR(TM) or ASA Cleaners.
PATENTS AND PROPRIETARY TECHNOLOGY
It is our intention to vigorously protect our proprietary property through
the filing of U.S. and international patent applications, both broad and
specific, where necessary and reasonable. We believe we will attain both strong
and broad patent protection for our technologies. We intend to protect our
inventions in all major countries where significant markets for our product may
be created. It is our intention that all our products be protected under various
pending patents, issued patents, copyrights and trademarks.
We have the policy of disclosing our proprietary information only under a
confidentiality agreement. This agreement has a special clause regarding
ownership by us of all inventions related to, or based in any way upon, our
technologies.
22
FILINGS
- ----------------------------------------------------- ---------------------------- ------------- ---------------------
Application or Patent No. Registration or
Patent Country Filing Date
- ----------------------------------------------------- ---------------------------- ------------- ---------------------
Release Agent Formulas and Methods Pat. #6,902,606 USA June 7, 2005
- ----------------------------------------------------- ---------------------------- ------------- ---------------------
Release Agent Formulas and Methods App. #2896/DELNP/2004 India Feb. 26, 2004
- ----------------------------------------------------- ---------------------------- ------------- ---------------------
Release Agent Formulas and Methods App. #04775812.3 EPO Jan, 18, 2005
- ----------------------------------------------------- ---------------------------- ------------- ---------------------
Release Agent Formulas and Methods App. #PCT/US04/ 05953 Multiple Feb. 26, 2004
- ----------------------------------------------------- ---------------------------- ------------- ---------------------
Registration or
Trademark Application or Registration No. Country Filing Date
Alderox Registration #2905209 USA Nov. 23, 2004
Alderox KR7 Application #78401951 USA Apr. 14, 2004
Application #1214444 Canada Apr. 23, 2004
Application #003775822 EU Apr. 19, 2004
Application #719884 N. Zealand Oct. 14, 2004
Registration #1025053 Australia Oct. 13, 2004
Application # 1315205 India Oct, 18, 2004
ASA 12 Registration #2905208 USA Nov. 23, 2004
Application #1214445 Canada Apr. 23, 2004
Application # 003767357 EU Apr. 15, 2004
Alderox TSR Application #78401946 USA Apr. 14, 2004
Application #1214438 Canada Apr. 23, 2004
Application # 003778156 EU Apr. 19, 2004
Registration #1025054 Australia Feb. 14, 2005
Application # 1315206 India Oct. xx, 2004
Registration # 719883 N. Zealand Apr. 14, 2004
RESEARCH AND DEVELOPMENT
The technology and products sold by us are in the early stages of market
acceptance. As a result, in order to accomplish a sale, a customer will
typically require a significant research and development effort, in the form of
testing and trials. These costs are funded in part by us, and expensed as a
sales expense.
In addition, we believe there may be additional undiscovered applications
for the AlderoxTM line of products. We are currently exploring additional
markets.
EMPLOYEES
At July 1, 2005, we had approximately seven employees, including two in
management, two in administrative, two in sales, and one in production and
shipping. There exist no organized labor agreements or union agreements between
23
our employees and us. We have employment agreements with our executive officers,
Gordon Davies and Michael Davies. We believe that our relations with our
employees are good.
DESCRIPTION OF PROPERTIES
Our principal executive offices are located at 23832 Rockfield Boulevard,
Suite 275, Lake Forest, California 92630, and our telephone number is (949)
609-0590. We occupy approximately 876 square feet of office space under a month
to month informal lease agreement. The monthly rent is $1,850. We believe that
our current office space and facilities are sufficient to meet our present needs
and do not anticipate any difficulty securing alternative or additional space,
as needed, on terms acceptable to us.
Our manufacturing warehouse is located at 3752 West 2270 South, West Valley
City, Utah 84120. We are under a 30 month lease commencing March 15, 2005 for
this 9,020 square feet warehouse. Our monthly lease payments are $5,067.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
disclosed below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
A former employee sued us for a breach of contract claim arising from an
employment agreement entered into between the ex- employee and us on April 7,
2003. The original complaint was filed on Feb. 5, 2004 and asserts the following
causes of action: breach of contract, breach of covenant of good faith and fair
dealing, and fraud. The plaintiff is demanding compensatory and punitive damages
as well as attorneys' fees and costs.
We filed our Cross-Complaint on April 15, 2004 alleging breach of contract,
negligence, intentional misrepresentation, rescission, and declaratory relief.
An amended Cross-Complaint was filed July 6, 2004.
The case was settled during the period ending December 31, 2004 and we
settled for $1,000.
CASE #05CC05777 FILED IN THE SUPERIOR COUNT OF CALIFORNIA SANTA ANA ON MAY 18,
2005.
Pacific Business Capital has sued us and our officers, Gordon Davies and
Michael Davies, to recover an $55,000 debt allegedly owed under a supposed
"partially written and partially oral" agreement by which the total of $80,000
was loaned to us. We filed a Demurrer to all causes of action of complaint filed
by plaintiff Pacific Business Capital Corporation.
CASE # 050907049 FILED IN THE THIRD JUDICIAL DISTRICT COURT SALT LAKE COUNTY,
STATE OF UTAH ON APRIL 15, 2005
Jamestown, L.C. has sued us for breach of a property lease agreement dated
May 30, 2002 in the amount of $54,272.58, plus interest and attorney fees and
costs of court and $54,272.58 under the second cause of action, unjust
enrichment/quantum merit. We filed an Order Staying All Proceedings Pending
Mediation and Arbitration and are currently awaiting an arbitration date.
24
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
- --------------------------------------------------------------------------------
Gordon W. Davies 37 President and Director
Michael C. Davies 35 Chief Financial Officer, Vice President
and Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are three seats on our board of directors, although only two are currently
filled.
Directors serve without cash compensation and without other fixed
remuneration. Officers are elected by the Board of Directors and serve until
their successors are appointed by the Board of Directors. Biographical resumes
of each officer and director are set forth below.
GORDON W. DAVIES - PRESIDENT AND DIRECTOR
From 1991 to 1994, Mr. Davies was an Accounts Executive for Innovative
Environmental Services, Ltd., located in Vancouver, British Columbia, which is a
company in the business of wastewater treatment equipment. From 1993 to 1993 he
held a Sales Manager position at Transenviro,Inc. in Irvine, California. From
1994 to 1996, Mr. Davies was the Sales/Marketing & Proposals Manager for Babcock
King-Wilkinson, LP in Irvine, California, and in 1996 he was the acting CEO for
this company. Babcock King-Wilkinson, LP is in the business of wastewater
treatment system process design/engineering and equipment supply operations on a
worldwide basis. From 1996 to 2000 Mr. Davies has been the President and a
Director of Aquadynamic Technologies, Inc. He is also a Director of
Aquatek,Inc., the wholly-owned subsidiary of Aquadynamic Technologies, Inc.
Aquatek, Inc. is an engineering design house and supplier of computer-automated
process and motor control systems for water and wastewater treatment systems.
From 1996 to 1998 Mr. Davies was the General Manager of Wil-Flow, Inc. From 1997
to the present, Mr. Davies has held the position of President and a Director for
us. Gordon Davies is the brother of Michael Davies.
MICHAEL C. DAVIES - CHIEF FINANCIAL OFFICER, VICE PRESIDENT AND DIRECTOR
From 1988 to 1991, Mr. Davies was the Owner/Manager of Fuel Oil Polishing
Company located in Vancouver, British Columbia, Canada. Mr. Davies' company was
in the sales, marketing and project management of fuel oils polishing within the
Province of British Columbia. From 1991 to 1993 he was an Accounts Executive
with Innovative Environmental Services, Ltd. in Vancouver, a company in the
business of sales and marketing of wastewater treatment equipment. From 1993 to
1994 he was the Marketing Manager for Transenviro, Inc., located in Irvine,
California. Transenviro is an international supplier of wastewater treatment
equipment and process design engineering. From 1994 to 1996 Mr. Davies was the
Marketing Manager for Babcock King-Wilkinson, LP, Irvine, California, a
wastewater treatment business. From 1996 to 2000 Mr. Davies has held the
positions of Vice President and a Director for Aquadynamic Technologies, Inc.
and Aquatek, Inc., which is a wholly owned subsidiary of Aquadynamic
Technologies. Aquadynamic Technologies, Inc. was acquired by Registrant and
became Registrant's wholly-owned subsidiary in November of 1997. From 1996 to
1998 Mr. Davies held the position of Vice President, Sales/Director for
Wil-Flow, Inc., the sole supplier of its patented RGD (Rapid Gravity Dewatering)
wastewater sludge dewatering system. From 1997 to the present, Mr. Davies has
been the Vice President, Chief Financial Officer and a Director. Mr. Davies is
the brother of Gordon Davies.
25
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and
each of our most highly-compensated executive officers whose total annual salary
and bonus for the fiscal year ending June 30, 2004, 2003 and 2002 exceeded
$100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Gordon Davies 2004 135,200 0 0 - - - -
President 2003 135,200 0 0 - - - -
2002 135,200 0 0 $150,000 950,000 - -
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Michael Davies 2004 135,200 0 0 - - - -
Chief Financial Officer 2003 135,200 0 0 - - - -
2002 135,200 0 0 $150,000 950,000 - -
EMPLOYMENT AGREEMENTS
On January 6, 2005, we entered into five-year employment contracts with
Gordon Davies to serve as Chief Executive Officer and President and Michael
Davies to serve as Chief Financial Officer. The employment agreements are
identical. The base salary under the agreement is $135,200 per annum, plus
benefits. If we realize a minimum net profit for our 12 months ended June 30,
2005 of $250,000 or more, base compensation increases by 20% effective as of the
beginning of the second twelve months of the employment agreement. If we realize
a net profit of at least $250,000 over the 12 months ended June 30, 2006, 2007,
2008 and 2009, the base compensation increases by an additional 20% over the
preceding year's compensation.
In addition, the employment agreements provide for bonuses on a sliding
scale based on our realizing net profits each fiscal year. A bonus equal to 10%
of the base salary will be paid in any fiscal year in which net profits equal or
exceed $250,000. This percentage increases on a sliding scale as net profits in
any fiscal year over the three year contract term increase above $500,000, with
a bonus equal to 100% of base salary to be paid if in any fiscal year we realize
a net income of $2,500,000 or more.
In addition, the employment contracts grant each employee 1,500,000 options
to acquire our common stock. These options are all pre-existing options granted
under previous contracts with each employee. All the stock option have vested
under the following terms for each employee, 500,000 shares vested on January
15, 2002, 500,000 shares vested on January 15, 2003, and 500,000 shares vested
on January 15, 2004. The option exercise price is $.40 per share.
These employment contracts have non-compete provisions and various other
provisions, including a death disability benefit of 3 months' pay plus 3 months'
benefits.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
During the fiscal year ended June 30, 2004, we granted 150,000 options to
one of our employees.
STOCK OPTION PLANS
None.
26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between August 2001 and June 2004, we borrowed a total of $121,763 from
seven shareholders. In connection with these loans, we have issued notes payable
to each of the shareholders. All of the notes are unsecured and payable on
December 31, 2005. $93,763 of the notes bear interest at 10% per annum and
$28,000 of the notes bear interest at 20% per annum.
27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of July 20, 2005
o by each person who is known by us to beneficially own more than 5% of
our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
PERCENTAGE OF PERCENTAGE OF
CLASS CLASS
NAME AND ADDRESS NUMBER OF PRIOR TO AFTER
OF OWNER TITLE OF CLASS SHARES OWNED(1) OFFERING(2) OFFERING(3)
- --------------------------------------------------------------------------------------------------
Gordon Davies Common Stock 3,017,400 (4) 9.40% 3.93%
23832 Rockfield Blvd.
Suite 275
Lake Forest, California 92630
Michael Davies Common Stock 2,764,500 (4) 8.61% 3.60%
23832 Rockfield Blvd.
Suite 275
Lake Forest, California 92630
All Officers and Directors Common Stock 5,781,900 (5) 16.71% 7.29%
As a Group (2 persons)
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options or warrants currently exercisable or convertible, or exercisable
or convertible within 60 days of July 20, 2005 are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other
person.
(2) Based upon 29,595,813 shares issued and outstanding on July 20, 2005.
(3) Percentage based on 74,295,813 shares of common stock outstanding after
the offering, assuming that all shares registered are sold.
(4) Includes 2,500,000 shares issuable upon currently exercisable stock
options.
(5) Includes 5,000,000 shares issuable upon currently exercisable stock
options.
28
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 75,000,000 shares of common stock, par
value $.01. As of July 20, 2005, there were 29,595,813 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Computershare Trust Company, located in Golden, Colorado,
as independent transfer agent or registrar.
PREFERRED STOCK
We are authorized to issue up to 100,000 shares of preferred stock, par
value $1.00. As of July 20, 2005, there were no shares of preferred stock
issued.
OPTIONS
There are currently 6,180,000 outstanding options to purchase shares of our
common stock that have been issued to our officers, directors and employees.
3,250,000 options were granted pursuant to employment agreements and are
exercisable at $0.40 per share. 150,000 options were granted pursuant to an
employment agreement and are exercisable at $0.56 per share. The options issued
pursuant to the employment agreements have varying expiration dates. We have
also issued 2,780,000 options to officers, directors and employees that expire
on June 30, 2008 and are exercisable at $0.25 per share.
WARRANTS
In connection with a Securities Purchase Agreement dated June 23, 2005, we
have issued 2,800,000 warrants to purchase shares of common stock and are
obligated to issue 5,200,000 additional warrants. The warrants exercisable until
five years from the date of issuance exercisable at a purchase price of $0.28
per share.
In connection with consulting agreements, we have issued warrants to
purchase 4,500,000 shares of our common stock. 3,000,000 of the warrants are
exercisable at $0.30 per share and the remaining 1,500,000 warrants are
exercisable at $0.25 per share. We are registering shares of common stock
underlying all of our warrants in this prospectus.
CONVERTIBLE SECURITIES
Not including approximately 5,800,000 shares of common stock issuable upon
exercise of outstanding options and warrants and 5,200,000 warrants that we are
obligated to issue in the near future, approximately 7,368,422 shares of common
stock are issuable upon conversion of outstanding secured convertible notes
issued pursuant to the Securities Purchase Agreement dated June 23, 2005. The
5,200,000 warrants to shares of common stock that we are obligated to issue in
the near future are to be issued pursuant to the Securities Purchase Agreement
dated June 23, 2005, which requires that 2,400,000 warrants be issued together
with $600,000 in secured convertible notes within five days of the filing of
this registration statement and 2,800,000 warrants be issued together with
$700,000 in secured convertible notes within five days from the effective date
of this prospectus.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 23, 2005 for the sale
of (i) $2,000,000 in secured convertible notes, and (ii) warrants to purchase
8,000,000 shares of our common stock.
29
This prospectus relates to the resale of the common stock underlying these
secured convertible notes and warrants. The investors are obligated to provide
us with an aggregate of $2,000,000 as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 will be disbursed within five days of the filing of this
registration statement; and
o $700,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $700,000 pursuant to the
Securities Purchase Agreement.
The notes bear interest at 10%, mature three years from the date of
issuance, and are convertible into our common stock, at the investors' option,
at the lower of:
o $0.21; or
o 50% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days before but
not including the conversion date.
We have a call option under the terms of the secured convertible notes. The
call option provides us with the right to prepay all of the outstanding secured
convertible notes at any time, provided we are not in default and our stock is
trading at or below $.21 per share. Prepayment of the notes is to be made in
cash equal to either (i) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the secured
convertible notes; (ii) 135% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date of the
secured convertible notes; and (iii) 150% of the outstanding principal and
accrued interest for prepayments occurring after the 60th day following the
issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
We also have a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.25. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36, multiplied by 104%.
The full principal amount of the secured convertible notes are due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance, exercisable at a
purchase price of $0.28 per share. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights.
COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Colorado law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
30
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers
or persons controlling us pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any
state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares
o a combination of any such methods of sale; and o any other method
permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, or Regulation S, rather than under this
prospectus. The selling stockholders shall have the sole and absolute discretion
not to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
31
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sales, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement
with a broker-dealer for the resale of the common stock, then we would be
required to amend the registration statement of which this prospectus is a part,
and file a prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
32
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Notes Full Prospectus Before the Owned Before Offering Offering
Name and/or Warrants* Conversion (1) Offering** Offering** (4) (4)
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Offshore, Ltd. 14,555,369 32.97% Up to 1,554,395 (2) 4.99% -- --
(3) 22,545,000
shares of
common stock
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Qualified 9,819,790 24.91% Up to 1,554,395 (2) 4.99% -- --
Partners, LLC (3) 15,210,000
shares of
common stock
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Partners, LLC 4,183,579 12.39% Up to 1,554,395 (2) 4.99% -- --
(3) 6,480,000
shares of
common stock
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
New Millennium 493,895 1.64% Up to 493,895 1.64% -- --
Capital Partners 765,000
II, LLC (3) shares of
common stock
========================================================================================================================
Monarch Bay Capital (4) -- -- 3,384,615 (5) 1,554,395 (5) 4.99% -- --
Canvasback Company -- -- 1,449,340 1,449,340 4.90% -- --
Ltd. (6)
Billfighter Investment -- -- 900,000 (8) 900,000 (8) 2.99% -- --
Ltd. (7)
Fred Davies (9) -- -- 1,100,000 (10) 1,449,340 (10) 3.60% -- --
PAC Trading Corp. (11) -- -- 200,000 (12) 200,000 (12) 0.67% -- --
Audrey Davies (13) -- -- 200,000 200,000 0.68% -- --
Cooperative Holdings (14) -- -- 150,000 150,000 0.51% -- --
Nick Fagnano -- -- 50,000 50,000 0.17% -- --
Ron Rosegard -- -- 50,000 50,000 0.17% -- --
Tony Wilson -- -- 400,000 400,000 1.35% -- --
Paul Hazell -- -- 525,000 525,000 1.77% -- --
Richard Jurkovac -- -- 25,000 25,000 0.08% -- --
33
Kelly Welton -- -- 52,500 52,500 0.18% -- --
David McGuire -- -- 300,000 300,000 1.01% -- --
Larry Derr -- -- 100,000 100,000 0.34% -- --
Tracy Matson -- -- 78,000 78,000 0.26% -- --
Jerry Willes -- -- 100,000 100,000 0.34% -- --
Johan Lauw -- -- 320,000 320,000 1.08% -- --
William Ford -- -- 235,000 235,000 0.79% -- --
Jeff Elliott -- -- 95,833 95,833 0.32% -- --
* This column represents an estimated number based on a conversion price as
of a recent date of July 26, 2005 of $.095, divided into the principal
amount.
** These columns represent the aggregate maximum number and percentage of
shares that the selling stockholders can own at one time (and therefore,
offer for resale at any one time) due to their 4.99% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rule, beneficial ownership includes any shares as
to which the selling stockholders has sole or shared voting power or
investment power and also any shares, which the selling stockholders has
the right to acquire within 60 days. The actual number of shares of common
stock issuable upon the conversion of the secured convertible notes is
subject to adjustment depending on, among other factors, the future market
price of the common stock, and could be materially less or more than the
number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion
of the secured convertible notes and exercise of warrants, based on current
market prices. Because the number of shares of common stock issuable upon
conversion of the secured convertible notes is dependent in part upon the
market price of the common stock prior to a conversion, the actual number
of shares of common stock that will be issued upon conversion will
fluctuate daily and cannot be determined at this time. Under the terms of
the secured convertible notes, if the secured convertible notes had
actually been converted on July 26, 2005, the secured convertible notes
would have had a conversion price of $.095. The actual number of shares of
common stock offered in this prospectus, and included in the registration
statement of which this prospectus is a part, includes such additional
number of shares of common stock as may be issued or issuable upon
conversion of the secured convertible notes and exercise of the related
warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under
the Securities Act of 1933. However the selling stockholders have
contractually agreed to restrict their ability to convert their secured
convertible notes or exercise their warrants and receive shares of our
common stock such that the number of shares of common stock held by them in
the aggregate and their affiliates after such conversion or exercise does
not exceed 4.99% of the then issued and outstanding shares of common stock
as determined in accordance with Section 13(d) of the Exchange Act.
Accordingly, the number of shares of common stock set forth in the table
for the selling stockholders exceeds the number of shares of common stock
that the selling stockholders could own beneficially at any given time
through their ownership of the secured convertible notes and the warrants.
In that regard, the beneficial ownership of the common stock by the selling
stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(2) The selling stockholders are affiliates of each other because they are
under common control. AJW Partners, LLC is a private investment fund that
is owned by its investors and managed by SMS Group, LLC. SMS Group, LLC, of
which Mr. Corey S. Ribotsky is the fund manager, has voting and investment
control over the shares listed below owned by AJW Partners, LLC. AJW
Offshore, Ltd., formerly known as AJW/New Millennium Offshore, Ltd., is a
private investment fund that is owned by its investors and managed by First
Street Manager II, LLC. First Street Manager II, LLC, of which Corey S.
Ribotsky is the fund manager, has voting and investment control over the
shares owned by AJW Offshore, Ltd. AJW Qualified Partners, LLC, formerly
34
known as Pegasus Capital Partners, LLC, is a private investment fund that
is owned by its investors and managed by AJW Manager, LLC, of which Corey
S. Ribotsky and Lloyd A. Groveman are the fund managers, have voting and
investment control over the shares listed below owned by AJW Qualified
Partners, LLC. New Millennium Capital Partners II, LLC, is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky
is the fund manager, has voting and investment control over the shares
owned by New Millennium Capital Partners II, LLC. We have been notified by
the selling stockholders that they are not broker-dealers or affiliates of
broker-dealers and that they believe they are not required to be
broker-dealers.
(3) Assumes that all securities registered will be sold.
(4) David Walters has voting and investment control over the shares owned
by this entity.
(5) Includes 3,000,000 shares of common stock underlying stock options, of
which 750,000 options are currently exercisable and 750,000 options become
exercisable on each of August 17, 2005, November 17, 2005 and February 17,
2006. The selling stockholder is contractually obligated to not
beneficially hold at any one time more than 4.99% of our issued and
outstanding shares of common stock.
(6) John Benjamine has voting and investment control over the shares owned
by this entity.
(7) Bernadine Romney has voting and investment control over the shares
owned by this entity.
(8) Includes 500,000 shares of common stock underlying currently
exercisable stock options.
(9) Fred Davies is the father of Gordon and Michael Davies, our officers
and directors.
(10) Includes 1,000,000 shares of common stock underlying currently
exercisable stock options.
(11) Paul Rademaker has voting and investment control over the shares owned
by this entity.
(12) Includes 200,000 shares of common stock underlying currently
exercisable stock options.
(13) Audrey Davies is the mother of Gordon and Michael Davies, our officers
and directors.
(14) Theodore R. Cohn has voting and investment control over the shares
owned by this entity.
TERMS OF SECURED CONVERTIBLE NOTES
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 23, 2005 for the sale
of (i) $2,000,000 in secured convertible notes and (ii) warrants to buy
8,000,000 shares of our common stock.
The investors are obligated to provide us with the funds as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 will be disbursed within five days of the filing of this
registration statement; and
o $700,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $700,000 pursuant to the
Securities Purchase Agreement.
The secured convertible notes bear interest at 10%, mature three years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.21; or
o 50% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days before but
not including the conversion date.
35
We have a call option under the terms of the secured convertible notes. The
call option provides us with the right to prepay all of the outstanding secured
convertible notes at any time, provided we are not in default and our stock is
trading at or below $.21 per share. Prepayment of the notes is to be made in
cash equal to either (i) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the secured
convertible notes; (ii) 135% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date of the
secured convertible notes; and (iii) 150% of the outstanding principal and
accrued interest for prepayments occurring after the 60th day following the
issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
We also have a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.25. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36, multiplied by 104%.
The full principal amount of the secured convertible notes is due upon
default under the terms of secured convertible notes. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date that the investors distribute
the final $700,000. In the event that we breach any representation or warranty
regarding the condition of our company as set forth in the Securities Purchase
Agreement, we are liable to pay liquidated damages in shares or cash, at the
election of the investors, equal to three percent of the outstanding amount of
the secured convertible notes per month plus accrued and unpaid interest. In the
event that we breach any covenant as set forth in the Securities Purchase
Agreement, including the failure to comply with blue sky laws, timely file all
public reports, use the proceeds from the sale of the secured convertible notes
in the agreed upon manner, obtain written consent from the investors to
negotiate or contract with a party for additional financing, reserve and have
authorized the required number of shares of common stock or the maintenance of
our shares of common stock on an exchange or automated quotation system, then we
are liable to pay liquidated damages in shares or cash, at the election of the
investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the secured
convertible notes) under the secured convertible notes;
o Any representation or warranty we made in the Security Agreement or in
the Intellectual Property Security Agreement shall prove to have been
incorrect in any material respect when made;
o The failure by us to observe or perform any of our obligations under
the Security Agreement or in the Intellectual Property Security
Agreement for ten (10) days after receipt of notice of such failure
from the investors; and
o Any breach of, or default under, the Warrants.
An event of default under the secured convertible notes occurs if we:
o Fail to pay the principal or interest when due;
36
o Do not issue shares of common stock upon receipt of a conversion
notice;
o Fail to file a registration statement within 45 days after June 23,
2005 or fail to have the registration statement effective within 120
days after June 23, 2005;
o Breach any material covenant or other material term or condition in
the secured convertible notes or the Securities Purchase Agreement;
o Breach any representation or warranty made in the Securities Purchase
Agreement or other document executed in connection therewith;
o Apply for or consent to the appointment of a receiver or trustee for
us or any of our subsidiaries or for a substantial part of our of our
subsidiaries' property or business, or such a receiver or trustee
shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be entered or
filed against us or any of our subsidiaries or any of our property or
other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless otherwise
consented to by the investors;
o Institute or have instituted against us or any of our subsidiaries any
bankruptcy, insolvency, reorganization or liquidation proceedings or
other proceedings for relief under any bankruptcy law or any law for
the relief of debtors;
o Fail to maintain the listing of our common stock on one of the OTCBB
or an equivalent replacement exchange, the Nasdaq National Market, the
Nasdaq SmallCap Market, the New York Stock Exchange, or the American
Stock Exchange; or
o Default under any other secured convertible note issued pursuant to
the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security Agreement
or the Intellectual Property Security Agreement, the investors shall have the
right to exercise all of the remedies conferred under the Security Agreement,
the Intellectual Property and under the secured convertible notes, and the
investors shall have all the rights and remedies of a secured party under the
Uniform Commercial Code and/or any other applicable law (including the Uniform
Commercial Code of any jurisdiction in which any collateral is then located).
The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose, enter,
with the aid and assistance of any person, any premises where the
collateral, or any part thereof, is or may be placed and remove the
same, and we shall assemble the collateral and make it available to
the investors at places which the investors shall reasonably select,
whether at our premises or elsewhere, and make available to the
investors, without rent, all of our respective premises and facilities
for the purpose of the investors taking possession of, removing or
putting the collateral in saleable or disposable form; and
o To operate our business using the collateral and shall have the right
to assign, sell, lease or otherwise dispose of and deliver all or any
part of the collateral, at public or private sale or otherwise, either
with or without special conditions or stipulations, for cash or on
credit or for future delivery, in such parcel or parcels and at such
time or times and at such place or places, and upon such terms and
conditions as the investors may deem commercially reasonable, all
without (except as shall be required by applicable statute and cannot
be waived) advertisement or demand upon or notice to us or our right
of redemption, which we expressly waived. Upon each such sale, lease,
assignment or other transfer of collateral, the investors may, unless
prohibited by applicable law which cannot be waived, purchase all or
any part of the collateral being sold, free from and discharged of all
trusts, claims, right of redemption and equities by us, which we
waived and released.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.28 per share. The selling stockholders will be entitled
to exercise the warrants on a cashless basis if the shares of common stock
underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the secured
convertible notes issued pursuant to the Securities Purchase Agreement, dated
June 23, 2005.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
37
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them and their affiliates in the aggregate after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreements and related documents
are incorporated by reference as exhibits to our Form SB-2 registration
statement relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the
secured convertible notes is determined by dividing that portion of the
principal of the notes to be converted and interest, if any, by the conversion
price. For example, assuming conversion of the $2,000,000 of secured convertible
notes on June 6, 2005, at a conversion price of $0.095, the number of shares
issuable upon conversion would be:
$2,000,000/$0.095 = 21,052,632 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price as of July 25, 2005 of $0.19.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
- ------ -------- ------------- -------- -----------
25% $.1425 $.07125 28,070,176 48.68%
50% $.095 $.0475 42,105,264 58.72%
75% $.0475 $.02375 84,210,527 73.99%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Kabani & Company, Inc., independent registered public accounting firm, have
audited, as set forth in their report thereon appearing elsewhere herein, our
financial statements at June 30, 2004 and for the two years then ended that
appear in the prospectus. The financial statements referred to above are
included in this prospectus with reliance upon the independent registered public
accounting firm's opinion based on its expertise in accounting and auditing.
38
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Reclamation Consulting and
Applications, Inc., filed as part of the registration statement, and it does not
contain all information in the registration statement, as certain portions have
been omitted in accordance with the rules and regulations of the Securities and
Exchange Commission.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
39
INDEX TO FINANCIAL STATEMENTS
RECLAMATION CONSULTING AND APPLICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets as of June 30, 2004 F-2
Statements of Operations for the years ended June 30, 2004 and 2003 F-3
Statements of Stockholders' Deficit for the years ended
June 30, 2004 and 2003 F-4
Statements of Cash Flows for the years ended June 30, 2004 and 2003 F-5
Notes to Financial Statements F-6 to F-14
Balance Sheet as of March 31, 2005 (Unaudited) F-15
Statements of Operations for the three and nine months ended
March 31, 2005 and 2004 (Unaudited) F-16
Statements of Cash Flows for the nine months ended
March 31, 2005 and 2004 (Unaudited) F-17
Notes to the Financial Statements (Unaudited) F-18 to F-24
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders Reclamation Consulting and
Applications, Inc.
We have audited the accompanying balance sheet of Reclamation Consulting and
Applications, Inc. (formerly, Recycling Centers of America, Inc.) as of June 30,
2004 and the related statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended June 30, 2004. 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 audit.
We conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board ( United States) Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements 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 Reclamation Consulting and
Applications, Inc. as of June 30, 2004, and the results of its operations and
its cash flows for each of the two years in the period ended June 30, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has accumulated deficit of $ 11,112,519 as of June 30,
2004. The Company incurred net losses of $ 2,542,770 and $ 1,698,498 for the
years ended June 30, 2004 and 2003 respectively. These factors as discussed in
Note 15 to the financial statements, raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 15. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KABANI & COMPANY, INC.
- -------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Fountain Valley, California
September 2, 2004
F-1
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
BALANCE SHEET
JUNE 30, 2004
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 1,043
Accounts receivable 262,844
Notes recivable, net of allowance of
doubtful debts of $ 270,000 547,476
Employee advances 16,953
---------------------------------
Total current assets 828,316
PROPERTY AND EQUIPMENT, net 11,942
---------------------------------
$ 840,258
=================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 193,053
Accrued expenses 384,242
Customer deposit 7,542
Convertible loans 50,104
---------------------------------
Total current liabilities 634,941
LONG TERM LIABILITIES:
Note payable-related party 121,763
Convertible debentures 55,850
---------------------------------
Total liabilities 812,554
COMMITMENTS
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value;
Authorized shares 75,000,000;
25,492,620 shares issued and outstanding 254,926
Additional paid in capital 10,895,296
Treasury stock (15,000)
Shares to be issued 5,000
Accumulated deficit (11,112,519)
---------------------------------
Total stockholders' equity 27,704
---------------------------------
$ 840,258
=================================
The accompanying notes are an integral part of these financial statements.
F-2
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
-------------------------------------------------------
Net revenue $ 289,218 $ 261,235
Cost of revenue 185,280 295,675
-------------------------------------------------------
Gross loss 103,938 (34,440)
Total operating expenses 2,044,600 1,823,307
-------------------------------------------------------
Loss from operations (1,940,662) (1,857,747)
Non-operating income (expense):
Interest income 46,284 -
Interest expense (45,622) (106,454)
Loss on Impairment of inventory (583) (127,034)
Loss on disposal of asset (22,692) -
Gain (loss) on settlement of debts (578,695) 393,537
-------------------------------------------------------
Total non-operating income (expense) (601,308) 160,049
Loss before income tax (2,541,970) (1,697,698)
-------------------------------------------------------
Provision for income tax 800 800
Net loss $ (2,542,770) $ (1,698,498)
=======================================================
Basic and diluted weighted average
shares outstanding 21,968,260 16,602,590
=======================================================
Basic and diluted net loss per share $ (0.12) $ (0.10)
=======================================================
The accompanying notes are an integral part of these financial statements.
F-3
RECLAMATION CONSULTING AND APPLICATION, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA,
INC.) STATEMENTS OF STOCKHOLDERS' DEFICIT FOR
THE YEARS ENDED JUNE 30, 2004 AND 2003
Common stock Total
---------------- Additional stockholders'
Number of paid in Treasury Stock to Accumulated equity
shares Amount capital stock be issued deficit (deficit)
Balance at June 30, 2002 12,211,523 $ 122,495 $5,011,575 $(15,000) $1,050,594 $(6,871,251) $ (701,587)
Issuance of shares for cash recived in the
prior year 743,594 7,436 290,002 - (297,438) - -
Issuance of shares for service recived in the
prior year 153,125 1,531 42,875 - (44,406) - -
Issuanve of shares for debt settlement 1,875,000 18,750 690,000 - (708,750) - -
Issuance of shares on loan conversion 1,253,369 12,533 330,470 - - - 343.003
Issuance of shares for cash 1,138,440 11,384 207,416 - - - 218,800
Issuance of shares for service 1,019,608 10,196 394,014 - - - 404,210
Issuance of shares for compensation 425,000 4,250 113,725 - - - 117,975
Conversion provision on debenture and notes - (379) 236,632 - - - 236,253
Cancellation of shares issued to founder (150,000) (1,500) 1,500 - - - -
177,918 shares of common stock to be issued
for cash received - - - - 71,167 - 71,167
Net loss for the year ended June 30, 2003 - - - - - (1,698,498) (1,698,498)
----------- --------- ---------- --------- ------- ------------ ------------
Balance at June 30, 2003 18,669,659 $ 186,696 $7,318,209 $(15,000) 71,167 $(8,569,749) $(1,008,677)
Issuance of shares for cash recived in the
prior year 127,918 1,279 49,888 - (51,167) - -
Issuance of shares for service recived in the
prior year 50,000 500 19,500 - (20,000) - -
Issuanve of shares for debt settlement 1,546,131 15,461 1,176,493 - - - 1,191,954
Issuance of shares on loan conversion 41,432 414 26,917 - - - 27,331
Issuance of shares for cash 4,279,805 42,798 1,753,635 - - - 1,796,433
Issuance of shares for service 777,675 7,777 519,156 - - - 526,933
Option granted for services - - 31,500 - - - 31,500
10,000 shares of common stock to be issued
for service rendered - - - - 5,000 - 5,000
Net loss for the year ended June 30, 2004 - - - - - (2,542,770) (2,542,770)
----------- --------- ---------- --------- ------- ------------ ------------
Balance at June 30, 2004 25,492,620 254,926 10,895,296 (15,000) 5,000 (11,112,519) 27,704
=========== ========= ========== ========= ======= ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,542,770) $(1,698,498)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 5,338 37,504
Issuance of shares for services
and compensation 526,933 522,185
Shares to be issued for service 5,000 -
Loss (gain) on settlement of debts 578,695 (393,537)
Allowance for doubtful debts 270,000 -
Impairment of inventory 583 127,034
Loss on disposal of asset 22,692 -
Option granted for compensation
and services 31,500 -
Debenture conversion provision - 236,253
Shares to be issued for services - -
(Increase)/decrease in current assets:
Accounts receivable (224,967) 34,185
Notes receivable (714,178) -
Inventory 98,116 11,186
Prepaid expenses 11,476 (3,462)
Employee advances (6,523) (10,430)
Other assets 3,285 (3,285)
Increase/(decrease) in current Liabilities:
Accounts payable and accrued Expenses 93,672 142,020
Customer deposit 7,542 -
----------- -----------
Total adjustments 709,163 699,653
----------- -----------
Net cash used in operating activities (1,833,607) (998,845)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (1,948) (140,637)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible loans 15,000 90,604
Repayment of convertible loans (35,000) -
Proceeds from shareholder loans - 479,234
Proceeds from other loans 83,112 278,302
Repayment of loans (23,246) -
Cash received for shares to be issued - 71,167
Common stock issuance for cash 1,796,433 218,800
----------- -----------
Net cash provided by financing activities 1,836,299 1,138,107
----------- -----------
NET DECREASE IN CASH & CASH EQUIVALENTS 743 (1,375)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 300 1,675
----------- -----------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 1,043 300
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATIONS AND DESCRIPTION OF BUSINESS
Reclamation Consulting and Applications, Inc. (formerly, Recycling Centers of
America, Inc.) (the "Company") is a Colorado corporation, originally formed in
1976 under the name of Vac-Tech Systems, Inc. The Company changed its name to
Recycling Centers of America on March 26, 1999. On January 16, 2002, an article
of amendment was filed to change the name of corporation to Reclamation
Consulting and Applications, Inc.
Presently, the Company's primary business is the production and sale of Alderox
TM line of products including ASA-12TM, DCR TM, KR-7 TM, TSR TM, and ASA
Cleaners. ASA-12 TM is an asphalt release agent, DCR TM is a drag chain
lubricant. KR7TM is a concrete release agent and TSRTM was specifically designed
for the oil sands industry.
During the period ended December 31, 2003, the Company appointed North American
Systems (NAS) as the sole United States distributor of Company's AlderoxTM line
of products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
Cash and cash equivalents
The Company considers all liquid investments with a maturity of three months or
less from the date of purchase that are readily convertible into cash to be cash
equivalents.
Accounts Receivable:
The Company's customer base consists of a geographically dispersed customer's
base. The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Reserves are recorded primarily on a
specific identification basis.
Property & Equipment
Property and equipment is carried at cost. Depreciation of property and
equipment is provided using the straight-line method for substantially all
assets with estimated lives of three to seven years.
Expenditures for maintenance and repairs are charged to expense as incurred.
Income taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 (SFAS 109). Under SFAS 109, deferred income taxes are reported
using the liability method. Deferred tax assets are recognized for deductible
temporary differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
F-6
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
Revenue Recognition
The Company recognizes its revenue in accordance with the Securities and
Exchange Commissions ("SEC") Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements" ("SAB 104"). Revenue is recognized when
merchandise is shipped to a customer.
Using Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
Statement of financial accounting standard No. 107, Disclosures about fair value
of financial instruments, requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statements
of financial position for current assets and current liabilities qualifying, as
financial instruments are a reasonable estimate of fair value.
Earnings per share
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". Basic net
loss per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per share is based on the assumption that all
dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
Weighted average number of shares used to compute basic and diluted loss per
share is the same in these financial statements since the effect of dilutive
securities is anti-dilutive.
Stock-based compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and
related interpretations with pro forma disclosure of what net income and
earnings per share would have been had the Company adopted the new fair value
method. The company uses the intrinsic value method prescribed by APB25 and has
opted for the disclosure provisions of SFAS No.123.
Issuance of shares for service
The Company accounts for the issuance of equity instruments to acquire goods and
services based on the fair value of the goods and services or the fair value of
the equity instrument at the time of issuance, whichever is more reliably
measurable.
Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure
About Segments of an Enterprise and Related Information" requires use of the
"management approach" model for segment reporting. The management approach model
is based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
F-7
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
structure, or any other manner in which management disaggregates a company.
Currently, SFAS 131 has no effect on the Company's financial statements as
substantially all of the Company's operations are conducted in one industry
segment.
Recent Pronouncements
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used, on reported
results. The Statement is effective for the Companies' interim reporting period
ending January 31, 2003.
In compliance with FAS No. 148, the Company has elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation plan as defined by APB No. 25 and has made the applicable
disclosures below.
Had the Company determined employee stock based compensation cost based on a
fair value model at the grant date for its stock options under SFAS 123, the
Company's net earnings per share would have been adjusted to the pro forma
amounts for the year ended June 30, 2004 and 2003, as follows ($ in thousands,
except per share amounts). :
Year ended June 30,
2004 2003
-------- --------
Net loss - as reported $ (2,543) $ (1,698)
Stock-Based employee compensation
expense included in reported net
income, net of tax 31
Total stock-based employee
compensation expense determined
under fair-value-based method for all
rewards, net of tax (57) (194)
-------- -------
Pro forma net loss $ (2,569) $ (1,892)
======== =======
Earnings (loss) per share:
Basic, as reported $ (0.12) $ (0.10)
Diluted, as reported $ (0.12) $ (0.11)
Basic, pro forma $ (0.12) $ (0.10)
Diluted, pro forma $ (0.12) $ (0.11)
On May 15, 2003, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 150 (FAS 150), Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. FAS 150 changes the accounting
for certain financial instruments that, under previous guidance, could be
classified as equity or "mezzanine" equity, by now requiring those instruments
to be classified as liabilities (or assets in some circumstances) in the
statement of financial position. Further, FAS 150 requires disclosure regarding
the terms of those instruments and settlement alternatives. FAS 150 affects an
entity's classification of the following freestanding instruments: a)
F-8
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
Mandatorily redeemable instruments b) Financial instruments to repurchase an
entity's own equity instruments c) Financial instruments embodying obligations
that the issuer must or could choose to settle by issuing a variable number of
its shares or other equity instruments based solely on (i) a fixed monetary
amount known at inception or (ii) something other than changes in its own equity
instruments d) FAS 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. The guidance in FAS 150 is
generally effective for all financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. For private companies, mandatorily
redeemable financial instruments are subject to the provisions of FAS 150 for
the fiscal period beginning after December 15, 2003. The adoption of SFAS 150
does not have a material effect on the earnings or financial position of the
Company.
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46R). FIN 46R addresses consolidation by business enterprises of variable
interest entities and significantly changes the consolidation application of
consolidation policies to variable interest entities and, thus improves
comparability between enterprises engaged in similar activities when those
activities are conducted through variable interest entities. The Company does
not hold any variable interest entities.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period presentation.
3. ACCOUNTS RECEIVABLE
All accounts receivable are trade related. These receivables are current and no
reserve for uncollectible accounts is deemed necessary.
4. NOTES RECEIVABLE
The notes receivable comprises of $ 817,476 due from North American Systems Inc.
(NAS), the sole United States distributor of the Company's line of AlderoxTM
products, working in Salt Lake City (SLC) under a revolving loan agreement. The
receivable is for the sale of all the assets of the Company in SLC as well as
other amounts transferred to the distributor at various times during the period
according to the agreement with NAS and is secured by assets of NAS. Part of the
agreement with NAS requires that the Company will provide loans to NAS to be
used towards meeting the working capital requirements until such time when NAS
is able to start paying the amount owed to the Company through sale of the
Company's line of AlderoxTM products. The receivable bears interest at the rate
of 10% per annum. The agreement terminates October 14, 2005. As of June 30,
2004, the Company has recorded an allowance for doubtful debts of $ 270,000
against the notes receivable.
NSA also owes $ 262,844 in account receivable to the Company.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2004:
Computers and office equipment $ 16,140
Test equipment 4,916
------
21,056
Less accumulated depreciation (9,114)
-------
Balance $ 11,942
=======
Depreciation expense was $5,338 and $37,504 for the year ended June 30, 2004 and
2003.
Disposal of fixed assets
F-9
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
During the year, the Company appointed North American Systems (NAS) as the sole
United States distributor of the Company's products ASA-12, KR-7, TSR, DCR and
cleaners. On August 1, 2003 the Company sold all the assets in Salt Lake City to
NAS. The assets transferred had a carrying value of $111,834. The Company
recorded $71,355 as a receivable from NAS and offset the remaining balance of
$40,479 against outstanding debts to NAS.
During the year, the Company disposed off the vehicles and recorded loss of $
22,692 in the accompanying financial statement.
6. NOTES PAYABLE - RELATED PARTY
Notes payable consisted of the following at June 30, 2004:
Note payable to shareholder
bearing interest rate of 10 %,
unsecured, payable on
December 31, 2005 $27,000
Notes payable to shareholder,
bearing interest rate of 20%,
unsecured payable on
December 31, 2005 28,000
Notes payable to shareholder,
bearing interest rate of 10%,
unsecured payable on
December 31, 2005 28,000
Notes payable bearing interest
rate of 10%, unsecured
payable on December 31, 2005 38,763
---------
Total Notes payable $ 121,763
=========
Interest expense for the year ended June 30, 2004 and June 30, 2003 amounted to
$7,707 and $ 37,239 respectively.
7. CONVERTIBLE LOANS
The Company has convertible loans outstanding at June 30, 2004 totaling $50,104.
The loans are convertible to stock at the price of $ 0.40 or $ 0.45. The
investor has an option to convert their loan, or any portion, of to the
restricted capital stock of the Company at price per the agreement and receiving
one share, up front at inception of the loan, for each dollar invested. Interest
will accumulate at rate of 10% per annum until conversion date and paid semi
annually over the term of the agreement leaving the initial loan until
expiration of the agreement convertible to Company's restricted capital stock
per the agreement or principal returned with the last interest payment. Loan can
be converted at any time within the 3 year loan period.
8. CONVERTIBLE DEBENTURES
The Company, through a 506 D Securities Offerings, solicited investment funds.
The Convertible Debentures bear interest at ten percent (10%) per annum payable
annually and are convertible into restricted common shares of the Company at
$0.40 per share. The Company has the right to change the conversion price of the
debentures. The Debentures are unsecured and are due and payable by December 31,
2005. The Company recorded beneficial conversion feature expense for $ 236,253
during the year ended June 30, 2003.
9. COMMITMENTS
The Company conducts its operations utilizing leased facilities and equipment
under non-cancelable operating lease agreements expiring at various dates
through the year 2007. Future minimum lease commitments, excluding property
taxes and insurance are approximately as follows:
F-10
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
Year ending June 30,
2005 $77,118
2006 61,386
2007 57,814
===========
Total $ 196,318
Rent expenses for all leased facilities and equipment were $ 38,661 and $75,700
for the year ended June 30, 2004 and 2003, respectively.
10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The majority of the Sales in the year ended June 30, 2004 and 2003 was made to a
few customers. At June 30, 2004, the total sales to two major customers was
$321,239 and the receivable balance from these major customers was $262,844. In
fiscal year 2003, the two major customers comprised approximately $187,078 of
the Company's total sale and the receivable balance from these major customers
was $11,939. Management believes that customer acceptance, billing, and
collection policies are adequate to minimize potential risk on trade
receivables.
11. INCOME TAXES
No provision was made for Federal income tax since the Company has significant
net operating loss carryforwards. Through June 30, 2004, the Company incurred
net operating losses for tax purposes of approximately $11,100,000. The net
operating loss carryforwards may be used to reduce taxable income through the
year 2024. The availability of the Company's net operating loss carryforwards
are subject to limitation if there is a 50% or more positive change in the
ownership of the Company's stock. The provision for income taxes consists of the
state minimum tax imposed on corporations.
Temporary differences which give rise to deferred tax assets and liabilities at
June 30, 2004 comprised of depreciation and amortization and net operating loss
carry forward. The gross deferred tax asset balance as of June 30, 2004 was
approximately $4,440,000. A 100% valuation allowance has been established
against the deferred tax assets, as the utilization of the loss carrytforwards
cannot reasonably be assured.
The following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Consolidated
Statements of Operations:
June 30, June 30,
2004 2003
-------- -------
Tax expense (credit) at statutory rate-federal (34)% (34)%
State tax expense net of federal tax ( 6) ( 6)
Permanent differences 1 1
Changes in valuation allowance (39) (39)
Tax expense at actual rate - -
12. STOCKHOLDERS' EQUITY
Common Stock:
During the year ended June 30, 2004 and 2003, the Company issued stocks at
various times, as described per the following. The stocks were valued at the
average fair market value of the freely trading shares of the Company as quoted
on OTCBB on the date of issuance:
F-11
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
During the fiscal year 2004, the Company issued 4,279,805 shares of common stock
for cash amounting $1,796,433 and 1,546,131 shares of common stock for
settlement of debt amounting $1,191,954 and 41,432 shares of common stock for
conversion of loan amounting $27,331.
The Company issued 777,675 shares of common stock for services in fiscal year
2004 for services amounting $526,933.
The Company issued 127,918 shares in the year ended June 30, 2004 for cash
received in the prior year and issued 50,000 shares in the year ended June 30,
2004 for conversion of loan for prior year.
The Company has 10,000 shares of common stock to be issued for service rendered
valued at $5,000.
During the fiscal year 2003, the Company issued 1,138,440 shares of common stock
for cash amounting $218,800 and 1,253,369 shares of common stock for conversion
of loans amounting $343,003.
The Company issued 1,019,608 shares of common stock for services in fiscal year
2003 for services amounting $404,210 and 425,000 shares of common stock for
compensation amounting $117,975.
The Company issued 743,594 shares in the year ended June 30, 2003 for cash
received in the prior year and issued 153,125 shares in the year ended June 30,
2003 for service received in the prior year.
The Company issued 1,875,000 shares for debt settlement recorded in the prior
year.
The Company cancelled 150,000 shares for founder's shares.
The Company received cash of $71,167 for 177,918 shares to be issued.
Stock Options:
The number and weighted average exercise prices of options granted by the
Company are as follows:
Options Outstanding
Number Weighted
of Average
Options Exercise
Price
--------- ------------
Outstanding June 30, 2002 7,555,208 $0.40
Granted during the year 1,257,500 $0.40
Exercised (125,000) (0.40)
Expired/forfeited (1,290,208) (0.40)
Outstanding June 30, 2003 7,397,500 $0.40
Granted during the year 150,000 $0.40
Exercised (921,250) $0.40
Expired/forfeited (432,500) $0.40
Outstanding June 30, 2004 6,193,750 $0.40
Following is a summary of the status of options outstanding at June 30, 2004:
F-12
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life Price Number Price
- -------------- -------- -------- -------- -------- ---------
$ 0.40 181,250 4 months $ 0.40 181,250 $ 0.40
$ 0.40 537,500 6 months $ 0.40 537,500 $ 0.40
$ 0.40 450,000 1.5 years $ 0.40 450,000 $ 0.40
$ 0.40 4,875,000 2.6 years $ 0.40 4,875,000 $ 0.40
$ 0.56 150,000 5 months $ 0.56 150,000 $ 0.56
The Company granted options to various consultants for services rendered. These
options were accounted for using the fair value of the options granted based on
the Black- Scholes option-pricing model. The Company recorded $31,500 during the
year ended June 30, 2004 and $-0- in 2003 as consulting expense.
The Company accounts for stock based compensation to employees under APB 25
using the intrinsic value method.
Pro forma information regarding the effect on operations is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that statement. Pro forma
information using the Black-Scholes method at the date of grant based on the
following assumptions for the year ended June 30, 2004 and 2003 was as follows:
Expected life (years) 1-5 years
Risk-free interest rate 3% and 5.0%
Dividend yield 0% and 0%
Volatility 100% and 50%
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as
defined under the Financial Accounting Standard No. 95.
The Company paid income taxes of $0 and interest of $25,003 during the fiscal
year 2004. The Company paid income taxes of $0 and interest of $15,400 during
the fiscal year 2003.
Supplemental disclosure of non-cash investing and financing activities:
The cash flow statements do not include following non-cash investing and
financing activities:
During the fiscal year 2004, the company issued 1,546,131 shares of common stock
for debt settlement valued $1,191,954 and issued 41,432 shares of common stock
for conversion of loan valued $27,331.
During the fiscal year 2003, the Company issued 1,253,369 shares of common stock
for conversion of loans amounting $343,003.
14. LITIGATION:
A former employee sued the Company for a breach of contract claim arising from
an employment agreement entered into between the ex-employee and the Company on
April 7, 2003. The original complaint was filed on Feb. 5, 2004 and asserts the
following causes of action: breach of contract, breach of covenant of good faith
and fair dealing, and fraud. The plaintiff is demanding compensatory and
punitive damages as well as attorneys' fees and costs.
F-13
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(FORMERLY, RECYCLING CENTERS OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
The Company filed its Cross-Complaint on April 15, 2004 alleging breach of
contract, negligence, intentional misrepresentation, rescission, and declaratory
relief. An amended Cross-Complaint was filed July 6, 2004.
The amount of potential loss is $19,000 on the case. The company has accrued
this amount in the accompanying financial statement.
The Company settled a lawsuit with two former employees during the year ended
June 30, 2004. The former employees had alleged that the Company and its officer
were liable to them for losses suffered by the former employees due to breach of
employment contract. Per the settlement agreement, the Company agreed to pay to
the former employees in a total amount of $128,000 in exchange of 200,000 shares
of the Company's common stock. The payments will be paid in combined monthly
installment of $14,333. Per the settlement agreement, these settlements shall
pay off before December 31, 2004. The Company has recorded $128,000 as accrued
expense in the accompanying financial statements. The Company has paid $71,109
through June 30, 2004.
15. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of business. Through June 30, 2004, the Company had incurred
cumulative losses of $11,112,519 including net losses of $2,542,770 and
$1,698,498 for the fiscal years 2004 and 2003, respectively.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to raise additional capital, obtain
financing and to succeed in its future operations. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
during the period ended June 30, 2004, towards (i) obtaining additional equity
financing (ii) controlling of salaries and general and administrative expenses
(iii) management of accounts payable and (iv) evaluation of its distribution and
marketing methods.
F-14
RECLAMATION CONSULTING AND APPLICATIONS, INC.
BALANCE SHEET
MARCH 31, 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Accounts receivable $ 9,596
Notes recivable 51,834
Inventory 44,096
Prepaid expense 2,519
Advances to officers 58,652
Employee advances 22,635
-----------
Total current assets 189,331
PROPERTY AND EQUIPMENT, net 55,168
OTHER ASSETS:
Deposits 14,993
-----------
$ 259,492
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 219,681
Accrued expenses 408,994
Customer deposit 5,490
Note payable - related parties 546,819
Convertible loans 50,104
Convertible debentures 55,850
-----------
Total current liabilities $ 1,286,937
COMMIMENTS & CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value;
Authorized shares 75,000,000,
28,823,751 shares issued and outstanding 288,238
Additional paid in capital 12,166,480
Treasury stock (15,000)
Shares to be issued 127,156
Prepaid Consulting (83,375)
Accumulated deficit (13,510,945)
-----------
Total stockholders' Deficit (1,027,446)
-----------
$ 259,492
===========
The accompanying notes are an integral part of these financial statements.
F-15
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
Three Months Nine Months
Ended March 31, Ended March 31,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net revenue $ 11,413 $ 116,481 $ 173,581 162,011
Cost of revenue 15,254 55,226 92,240 87,293
---------- ---------- ---------- ----------
Gross Profit (loss) (3,842) 61,255 81,341 74,718
Operating expenses
Bad debt 958,968 - 1,067,678 1,057
General & Administrative expenses 807,927 180,638 1,378,125 1,351,410
---------- ---------- ---------- ----------
Total operating expenses 1,766,895 180,638 2,445,803 1,352,467
---------- ---------- ---------- ----------
Loss from operations (1,770,736) (119,383) (2,364,462) (1,277,749)
Non-operating income (expense):
Interest Income 20,365 29,166 60,491 29,166
Interest expense (21,758) (2,936) (71,681) (33,126)
Loss on settlement of debts (21,975) - (21,975) (585,224)
Litigation Settlement - (128,000) - (128,000)
Loss on disposal of asset - - - (22,692)
---------- ---------- ---------- ----------
Total non-operating income (expense) (23,368) (101,770) (33,165) (739,876)
---------- ---------- ---------- ----------
Loss before income tax (1,794,105) (221,153) (2,397,627) (2,017,625)
Provision for income tax - - 800 800
---------- ---------- ---------- ----------
Net loss $(1,794,105) $ (221,153) $(2,397,627) $(2,017,625)
========== ========== ========== ==========
Basic and diluted weighted
average shares outstanding* 28,232,118 23,426,637 26,926,496 22,677,919
========== ========== ========== ==========
Basic and diluted net
loss per share $ (0.06) $ (0.01) $ (0.09) $ (0.09)
========== ========== ========== ==========
*Weighted average number of shares used to compute basic and diluted loss per
share is the same in these financial statements since the effect of dilutive
securities is anti-dilutive.
The accompany notes are an integral part of these financial statements.
F-16
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 2005 and 2004
(Unaudited)
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,398,427) $(2,018,425)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,276 4,110
Issuance of shares for services and compensation 686,432 518,413
Issuance of shares for interest expense 1,900 -
Bad debts 1,067,678 -
Loss on conversion of debts 21,975 -
Loss on settlement of debts - 585,224
Options issue for compensation - -
Loss on disposal of fixed assets - 22,692
(Increase)/decrease in current assets:
Accounts receivable (51,014) (112,780)
Note receivable (159,064) (561,577)
Inventory (44,096) 36,908
Prepaid expenses (2,519) -
Other Receivable - (29,000)
Employee advances (64,334) 1,790
Other assets (14,993) 897
(Decrease) in current liabilities:
Accounts payable and accrued expenses 44,482 70,181
Customer deposit (2,052) 10,638
--------- ---------
Total adjustments 1,488,672 547,496
--------- ---------
Net cash used in operating activities (909,755) (1,470,929)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (2,600) (1,217)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of note payable 235,500 215,268
Payments on note payable (32,445) (195,707)
Proceeds from loan 354,501 15,000
Payment of loans (132,500) (10,000)
Receipt of cash for shares to be issued 110,156 78,900
Issuance of common stock for cash 376,100 1,368,985
--------- ---------
Net cash provided by financing activities 911,312 1,472,446
--------- ---------
NET INCRASE IN CASH & CASH EQUIVALENTS (1,043) 300
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 1,043 -
--------- ---------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 0 $ 300
========= =========
The accompanying notes are an integral part of these financial statements.
F-17
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATIONS AND DESCRIPTION OF BUSINESS
Reclamation Consulting and Applications, Inc. (formerly, Recycling Centers of
America, Inc.) (the "Company") is a Colorado corporation, originally formed in
1976 under the name of Vac-Tech Systems, Inc. The Company changed its name to
Recycling Centers of America on March 26, 1999. On January 16, 2002, an article
of amendment was filed to change the name of corporation to Reclamation
Consulting and Applications, Inc.
Presently, the Company's primary business is the production and sale of the
Alderox(R) line of products including ASA-12(R), KR-7(R), TSR(R), and ASA
Cleaners. ASA-12(R) is an asphalt release agent, KR7(R) is a concrete release
agent and TSR(R) was specifically designed as a non-stick coating for the oil
sands industry.
The Company also has an exclusive distributorship agreement with Topia Energy,
Inc. Under the agreement, the Company markets the sale of BioDiesel Driven
biodiesel fuel. This agreement appoints the Company as the worldwide exclusive
distributor of Topia Energy, Inc.,s biodiesel within the marine industry. The
Company also markets Topia Energy, Inc.,s biodiesel outside of the marine
industry under a registered commission protected account basis. There are no
geographical or time limitations on this exclusive agreement.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed interim financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for the presentation of interim financial information, but
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The audited financial
statements for the year ended June 30, 2004 were filed on October 1, 2004 with
the Securities and Exchange Commission and is hereby referenced. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the nine month period ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ended June 30, 2005.
3. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
4. NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB has issued FASB Statement No. 151, "Inventory Costs,
an Amendment of ARB No. 43, Chapter 4" ("FAS No. 151"). The amendments made by
FAS No. 151 are intended to improve financial reporting by clarifying that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities.
The guidance is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted for inventory
costs incurred during fiscal years beginning after November 23, 2004. The
provisions of FAS No. 151 will be applied prospectively. The Company does not
expect the adoption of FAS No. 151 to have a material impact on its consolidated
financial position, results of operations or cash flows.
F-18
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's second quarter of fiscal 2006.
The Company is in process of evaluating the impact of this pronouncement on its
financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.
5. NOTES RECEIVABLE
The Company has a note receivable of $ 51,834 due from North American Systems,
Inc. (NASI) a former distributor of the Company,s Alderox(R) line of products.
This receivable has been secured through inventory of NASI. The Company wrote-
off receivables from NASI amounting to $958,968 during the period ended March
31, 2005. The Company bought back the fixed assets sold to NASI in September
2002 at $44,902. These assets have been recorded at the net book value as on
March 31, 2005.
6. ADVANCES TO OFFICERS
Some officers of the Company borrowed money amounting to $58,652. These are non
interest bearing and due on demand.
7. ACCRUED EXPENSES
The following is the composition of accrued expenses as of March 31, 2005.
Payroll tax liability $ 238,105
Accrued interest 52,766
Accrued vacation 32,516
Accrued taxes 2,400
Others 83,207
-----------
Total $ 408,994
===========
8. NOTES PAYABLE - RELATED PARTIES
Notes payable consist of the following at March 31, 2005:
Note payable bearing interest rate of 10%, unsecured, payable on November 30,
2005 $20,000
Note payable bearing interest rate of 15%, unsecured, payable on September 17,
2005 $125,000
Note payable bearing interest rate of 15%, Secured by assets of the Company
payable on April 22, 2005 $20,000
Note payable bearing interest rate of 15%, unsecured, payable on October 29,
2005 $50,000
F-19
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note payable bearing interest rate of 10%, unsecured, payable on September 8,
2005 $5,112
Note payable bearing interest rate of 10%, unsecured, payable on December 31,
2005 $104,705
Note payable to related party - stockholder bearing interest rate of 0%,
unsecured, payable on January 1, 2005 $24,000
Note payable to related party - stockholder bearing interest rate of 0%,
unsecured, payable on January 21, 2005 $7,500
Note payable to related party - stockholder bearing interest rate of 10%,
unsecured, payable on March 10, 2005 $10,000
Note payable to related party - stockholder bearing interest rate of 10%,
unsecured, payable on March 14, 2005 $10,000
Note payable to related party - stockholder
bearing interest rate of 0%,
unsecured, payable on April 1, 2005 $30,500
Note payable to related party - stockholder
bearing interest rate of 10%,
unsecured, payable on March 10, 2005 $50,000
Note payable to related party - stockholder
bearing interest rate of 0%,
unsecured, payable on June 1, 2005 $20,000
Note payable to related party - stockholder
bearing interest rate of 15%,
unsecured, payable on September 30, 2005 $20,000
Note payable to related party - stockholder
bearing interest rate of 10%,
secured by the assets of the Company,
payable on March 10, 2006 $50,001
-----------
Total notes payable to related parties $546,819
===========
Interest expense for related parties for notes and loans payable for the period
ended March 31, 2005 and 2004 amounted to $4,621 and $2,936 respectively.
9. CONVERTIBLE LOANS-SHAREHOLDERS
The Company has convertible loans outstanding at March 31, 2005 totaling
$50,104. The loans are convertible to stock at the price of $ 0.40 or $ 0.45.
The investor has an option to convert their loan, or any portion, of to the
restricted capital stock of the Company at price per the agreement and receiving
one share, up front at inception of the loan, for each dollar invested. Interest
will accumulate at rate of 10% per annum until conversion date and paid semi
annually over the term of the agreement leaving the initial loan until
expiration of the agreement convertible to Company,s restricted capital stock
per the agreement or principal returned with the last interest payment. Loan can
be converted at any time within the 3 year loan period.
F-20
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
10. CONVERTIBLE DEBENTURES
The Company, through a 506 D Securities Offerings, solicited investment funds.
The Convertible Debentures bear interest at ten percent (10%) per annum payable
annually and are convertible into restricted common shares of the Company at
$0.40 per share. The Company has the right to change the conversion price of the
debentures. The Debentures are unsecured and are due and payable by December 31,
2005. The convertible debenture outstanding amounted to $55,850 at March 31,
2005.
11. COMMITMENTS
The Company entered into an employment agreement with an individual to act as
the President on January 6, 2005. This agreement has the same terms as the past
agreement and expires January 6, 2010. Under the agreement, during the first
twelve months of employment, the Company agrees to compensate Employee (from the
commencement of this agreement) at the rate of not less than $135,200 per year
base compensation for the first year of employment. Thereafter, Employee,s
annual compensation shall be increased by 20% on each anniversary date of this
agreement, provided that the Company reaches a minimum net profit of $250,000.
In no event shall Employee,s minimum base compensation be reduced below $135,200
per year. Such compensation shall be payable monthly or on such more frequent
basis as the Company may establish. The agreement shall have an initial five-
year term, which shall be automatically renewed each year thereafter unless the
Company, upon thirty (30) days prior notice notifies Employee of its intent not
to renew the Agreement. Notwithstanding the foregoing, the Company or the
Employee may at any time terminate this Agreement and the employment
relationship on thirty (30) days prior notice to the other, with the
consequences hereinafter set forth.
The option to purchase 1,500,000 shares of common restricted stock in the
Company has been granted in Employee,s name. All options shall expire 5-years
from the vesting date. 1,500,000 of these options have been carried over from
Employee,s previous Employment Agreement with the Company.
Additional stock options shall be granted to Employee each year following the
above schedule on the anniversary date of this Agreement, the amount and price
of which to be determined solely by the Company.
The Company entered into an employment agreement with an individual to act as
the Chief Financial Officer on January 6, 2005. This agreement has the same
terms as the past agreement and expires January 6, 2010. Under the agreement,
during the first twelve months of employment, the Company agrees to compensate
Employee (from the commencement of this agreement) at the rate of not less than
$135,200 per year base compensation for the first year of employment.
Thereafter, Employee,s annual compensation shall be increased by 20% on each
anniversary date of this agreement, provided that the Company reaches a minimum
net profit of $250,000. In no event shall Employee,s minimum base compensation
be reduced below $135,200 per year. Such compensation shall be payable monthly
or on such more frequent basis as the Company may establish. The agreement shall
have an initial five-year term, which shall be automatically renewed each year
thereafter unless the Company, upon thirty (30) days prior notice notifies
Employee of its intent not to renew the Agreement. Notwithstanding the
foregoing, the Company or the Employee may at any time terminate this Agreement
and the employment relationship on thirty (30) days prior notice to the other,
with the consequences hereinafter set forth.
The option to purchase 1,500,000 shares of common restricted stock in the
Company has been granted in Employee,s name. All options shall expire 5-years
from the vesting date. 1,500,000 of these options have been carried over from
Employee,s previous Employment Agreement with the Company.
Additional stock options shall be granted to Employee each year following the
above schedule on the anniversary date of this Agreement, the amount and price
of which to be determined solely by the Company.
F-21
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
12. NET LOSS PER SHARE
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". Basic net
loss per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per share is based on the assumption that all
dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
Weighted average number of shares used to compute basic and diluted loss per
share is the same in this financial statement since the effect of dilutive
securities is anti-dilutive.
13. STOCKHOLDERS' DEFICIT
Common Stock:
During the period ended March 31, 2005, the Company issued 1,497,163 shares of
common stock for cash amounting $376,100.
During the period ended March 31, 2005, the Company issued 1,158,968 shares of
common stock for services amounting $271,753. The Company recorded $83,375
prepaid consulting for this issuance.
During the period ended March 31, 2005, the Company cancelled 62,500 shares
amounting $625.
During the period ended March 31, 2005, the Company issued 5,000 shares of
common stock towards payment of interest expense on the notes amounting to $
1,900.
During the period ended March 31, 2005, the Company issued 732,500 shares of
common stock in settlement of debts amounting to $146,500. A loss on conversion
of $21,975 was incurred in this conversion of debts to equity.
Shares to be issued:
During the period ended March 31, 2005, the Company received $110,156 for
492,267 shares to be issued.
During the period ended March 31, 2005, the Company commits to issue 70,000
shares of common stock for services and compensation amounting to $17,000.
Stock Options:
During the period ended March 31, 2005, the Company granted 2,120,000 stock
options to non-employees with an exercise price of $0.25 per share. These
options are vested immediately and the Company recorded a $414,679 expense in
relation for the option grant.
During the period ended March 31, 2005, the Company granted 2,740,000 stock
options to employees with an exercise price of $0.25 per share. These options
are vested immediately.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used, on reported
results.
F-22
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
The following table illustrates the effect on net loss per share if the Company
had applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation.
Net loss:
As reported $(2,398,427)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards 526,761
--------------
Pro forma $(2,925,188)
==============
Basic and diluted net loss per share:
As reported $ (0.09)
==============
Pro forma $ (0.10)
==============
The above pro forma effects of applying SFAS 123 are not necessarily
representative of the impact on reported net loss for future years.
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as
defined under the Financial Accounting Standard No. 95.
The Company paid income tax $ 0 for each nine month period ended March 31, 2005
and 2004. Interest expenses of $76,702 and $33,127 was paid during the nine
month period ended March 31, 2005 and 2004, respectively.
Supplemental disclosure of non-cash investing and financing activities:
The cash flow statements do not include following non-cash investing and
financing activities:
During the period ended March 31, 2005, the Company issued 1,158,968 shares of
common stock for services amounting $271,153.
During the period ended March 31, 2005, the Company cancelled 62,500 shares.
During the period ended March 31, 2005, the Company issued 5,000 shares of
common stock towards payment of interest expense on the notes amounting to $
1,900.
15. RELATED PARTY TRANSACTIONS
Certain of the Company's major shareholders have loaned money to the Company at
various times. The notes payable to the related parties have been presented in
Note 8. Interest expense for related parties for the period ended March 31, 2005
and 2004 amounted to $31,682 and $12,521 respectively.
During the period ended March 31, 2005, the Company settled debt to a related
party for $146,500 and agreed to issue 732,500 shares towards the settlement.
16. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of business. Through March 31, 2005, the Company had incurred
cumulative losses of $13,510,945 including net losses of $2,398,427 for the nine
month period ended March 31, 2005. The continuing losses have adversely affected
the liquidity of the Company.
F-23
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company,s ability to raise additional capital, obtain
financing and to succeed in its future operations. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
during the period ended March 31, 2005, towards (i) obtaining additional equity
financing and (ii) evaluation and reorganization of its distribution and
marketing methods.
F-24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Colorado law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,254.30
Accounting fees and expenses 10,000.00*
Legal fees and expenses 45,000.00*
Miscellaneous 3,745.70
-----------
TOTAL $60,000.00*
===========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On August 22, 2002, we issued 12,500 shares in exchange for services
rendered valued at $5,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On August 22, 2002, we issued 50,000 shares related to a private placement
valued at $20,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On September 20, 2002, we issued 125,000 shares related to employee bonuses
valued at $50,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On September 20, 2002, we issued 12,500 shares in exchange for services
rendered valued at $5,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On September 20, 2002, we issued 184,479 shares related to a private
placement valued at $53,791.60. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On October 12, 2002, we issued 3,000,000 shares in exchange for debt
reduction valued at $306,687. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On March 31, 2003, we issued 81,500 shares related to a loan pay down
valued at $38,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On March 31, 2003, we issued 167,000 shares related to a private placement
valued at $66,800. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On March 31, 2003, we issued 46,869 shares in exchange for debt reduction
valued at $6,928.70. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On March 31, 2003, we issued 141,400 shares in exchange for consulting
services valued at $49,490. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On June 25, 2003, we issued 403,208 shares in exchange for valuable
services rendered valued at $162,533. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On June 25, 2003, we issued 357,000 shares related to a private placement
valued at $142,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On August 4, 2003, we issued 37,500 shares in exchange for a loan reduction
valued at $15,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On August 4, 2003, we issued 50,000 shares related to a loan reduction
valued at $20,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On August 4, 2003, we issued 308,750 shares in exchange for a capital
stock purchase valued at $123,500. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On August 23, 2003, we issued 33,750 shares related to a standard loan
conversion valued at $13,500. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On August 23, 2003, we issued 55,555 shares related to a loan conversion
valued at $25,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On August 23, 2003, we issued 6,666 shares related to an accrued interest
conversion valued at $3,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
II-2
On September 29, 2003, we issued 662,918 shares related to private
placement valued at $265,167. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On September 29, 2003, we issued 172,500 shares related to a loan
conversion valued at $69,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On September 29, 2003, we issued 90,675 shares in exchange for services
rendered valued at $36,270. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On September 30, 2003, we issued 974,883 shares in exchange for a note
payable convertible valued at $389,953.29. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
On September 30, 2003, we issued 77,693 shares in exchange for accrued
interest converted valued at $31,077.33. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
On September 30, 2003, we issued 170,000 shares in exchange for a payoff of
a convertible loan valued at $68,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On September 30, 2003, we issued 26,943 shares in exchange for a payoff of
a convertible debenture valued at $10,777. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
On September 30, 2003, we issued 201,375 shares related to private
placement valued at $80,550. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On November 21, 2003, we issued 20,000 shares related to the payoff of a
convertible loan valued at $8,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On November 21, 2003, we issued 318,750 shares related to a private
placement valued at $127,500. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On November 21, 2003, we issued 550,000 shares in exchange for services
rendered valued at $418,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On December 9, 2003, we issued 50,000 shares in exchange for services
rendered valued at $31,500. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On December 24, 2003, we issued 50,000 shares related to a private
placement valued at $25,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On December 23, 2003, we issued 452,500 shares related to a private
placement valued at $206,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On December 20, 2003, we issued 30,000 shares related to debt reduction
valued at $12,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On January 21, 2004, we issued 242,100 shares related to a private
placement valued at $116,050. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On February 9, 2004, we issued 522,300 shares related to a private
placement valued at $227,400. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
II-3
On March 25, 2004, we issued 577,750 shares related to a private placement
valued at $247,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On April 16, 2004, we issued 87,000 shares in exchange for services
rendered valued at $43,500. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On April 16, 2004, we issued 198,000 shares related to a private placement
valued at $94,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On April 16, 2004, we issued 7,073 shares related to a note payable
conversion valued at $2,283. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On June 29, 2004, we issued 182,500 shares related to private placement
valued at $73,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On June 29, 2004, we issued 665,779 shares related to a note payable
conversion valued at $252,996. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On August 20, 2004, we issued 399,593 shares in exchange for services
rendered valued at $119,877.90. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On August 24, 2004, we issued 726,663 shares related to a private placement
valued at $218,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On August 27, 2004, we issued 40,000 shares related to a private placement
valued at $12,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On October 5, 2004, we issued 5,000 shares related to an accrued interest
converted valued at $1,500. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On October 6, 2004, we issued 49,375 shares in exchange for services
rendered valued at $14,812.50. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On January 3, 2005, we issued 710,000 shares in exchange for services
rendered valued at $142,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On January 4, 2005, we issued 150,000 shares related to a note payable
conversion valued at $30,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On January 4, 2005, we issued 150,000 shares related to a private placement
valued at $30,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On January 4, 2005, we issued 340,000 shares related to a loan payable
conversion valued at 68,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On February 28, 2005, we issued 580,500 shares related to a private
placement valued at $116,100. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On February 28, 2005, we issued 242,500 shares related to a loan payable
conversion valued at $48,500. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 23, 2005 for the sale
of (i) $2,000,000 in secured convertible notes and (ii) warrants to buy
8,000,000 shares of our common stock.
II-4
The investors are obligated to provide us with an aggregate of $2,000,000
as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 will be disbursed within five days of the filing of this
registration statement; and
o $700,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $700,000 pursuant to the
Securities Purchase Agreement.
The secured convertible notes bear interest at 10%, mature three years from
the date of issuance, and are convertible into our common stock, at the selling
stockholders' option, at the lower of (i) $0.21 or (ii) 50% of the average of
the three lowest intraday trading prices for the common stock on a principal
market for the 20 trading days before but not including the conversion date. The
full principal amount of the secured convertible notes are due upon default
under the terms of secured convertible notes. In addition, we have granted the
investors a security interest in substantially all of our assets and
intellectual property and registration rights. The warrants are exercisable
until five years from the date of issuance at a purchase price of $0.28 per
share. In addition the warrants exercise price gets adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of Reclamation Consulting and
Applications or executive officers of Reclamation Consulting and Applications,
and transfer was restricted by Reclamation Consulting and Applications in
accordance with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
II-5
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Reclamation Consulting and
Applications, Inc., a Colorado corporation.
Exhibit No. Description
3.1 Articles of Incorporation, filed as an exhibit to the registration
statement on Form 10-SB, filed with the Securities and Exchange
Commission (the "Commission") on March 8, 2000 and incorporated herein
by reference.
3.2 Articles of Amendment to the Articles of Incorporation, filed as an
exhibit to the registration statement on Form 10-SB, filed with the
Commission on March 8, 2000 and incorporated herein by reference.
3.3 Articles of Amendment to the Articles of Incorporation, filed as
an exhibit to the registration statement on Form 10-SB, filed with the
Commission on March 8, 2000 and incorporated herein by reference.
3.4 By-laws, filed as an exhibit to the registration statement on Form
10-SB, filed with the Commission on March 8, 2000 and incorporated
herein by reference.
4.1 Securities Purchase Agreement, dated June 23, 2005, by and among
Reclamation Consulting and Applications, Inc. and AJW Offshore, Ltd.,
AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium
Capital Partners II, LLC, filed as an exhibit to the Current Report on
Form 8-K filed with the Commission on June 28, 2005 and incorporated
herein by reference.
4.2 Callable Secured Convertible Note issued to AJW Offshore, Ltd., dated
June 23, 2005, filed as an exhibit to the Current Report on Form 8-K
filed with the Commission on June 28, 2005 and incorporated herein by
reference.
4.3 Callable Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated June 23, 2005, filed as an exhibit to the Current Report on
Form 8-K filed with the Commission on June 28, 2005 and incorporated
herein by reference.
4.4 Callable Secured Convertible Note issued to AJW Partners, LLC, dated
June 23, 2005, filed as an exhibit to the Current Report on Form 8-K
filed with the Commission on June 28, 2005 and incorporated herein by
reference.
4.5 Callable Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated June 23, 2005, filed as an exhibit to the
Current Report on Form 8-K filed with the Commission on June 28, 2005
and incorporated herein by reference.
4.6 Stock Purchase Warrant issued to AJW Offshore, Ltd., dated June 23,
2005, filed as an exhibit to the Current Report on Form 8-K filed with
the Commission on June 28, 2005 and incorporated herein by reference.
4.7 Stock Purchase Warrant issued to AJW Qualified Partners, LLC, dated
June 23, 2005, filed as an exhibit to the Current Report on Form 8-K
filed with the Commission on June 28, 2005 and incorporated herein by
reference.
4.8 Stock Purchase Warrant issued to AJW Partners, LLC, dated June 23,
2005, filed as an exhibit to the Current Report on Form 8-K filed with
the Commission on June 28, 2005 and incorporated herein by reference.
4.9 Stock Purchase Warrant issued to New Millennium Capital Partners II,
LLC, dated June 23, 2005, filed as an exhibit to the Current Report on
Form 8-K filed with the Commission on June 28, 2005 and incorporated
herein by reference.
II-6
4.10 Registration Rights Agreement, dated as of June 23, 2005, by and among
Reclamation Consulting and Applications, Inc., AJW Offshore, Ltd., AJW
Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital
Partners II, LLC, filed as an exhibit to the Current Report on Form
8-K filed with the Commission on June 28, 2005 and incorporated herein
by reference.
4.11 Security Agreement, dated as of June 23, 2005, by and among
Reclamation Consulting and Applications, Inc., AJW Offshore, Ltd., AJW
Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital
Partners II, LLC, filed as an exhibit to the Current Report on Form
8-K filed with the Commission on June 28, 2005 and incorporated herein
by reference.
4.12 Intellectual Property Security Agreement, dated June 23, 2005, by and
among Reclamation Consulting and Applications, Inc., AJW Offshore,
Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC, filed as an exhibit to the
Current Report on Form 8-K filed with the Commission on June 28, 2005
and incorporated herein by reference.
4.13 Guaranty and Pledge Agreement, dated June 23, 2005, by and among
Reclamation Consulting and Applications, Inc., Gordon Davies, AJW
Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC, filed as an exhibit to the
Current Report on Form 8-K filed with the Commission on June 28, 2005
and incorporated herein by reference.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed
herewith).
10.1 Employment Agreement for Gordon Davies, dated as of January 6, 2005.
10.2 Employment Agreement for Michael Davies, dated as of January 6, 2005.
10.3 Distribution Agreement, dated as of February 3, 2005, by and between
the Company and ITA Asphalt Limited.
10.4 Distribution Agreement, dated as of July 7, 2005, by and between the
Company and Jimmy Watts.
10.5 Distribution Agreement, dated as of July 12, 2005, by and between the
Company and Mark Lang.
10.6 Distribution Agreement, dated as of June 30, 2005, by and between the
Company and Don Pickett.
10.7 Contract Sales Representative Agreement, dated as of October 27, 2004,
by and between the Company and Dennis Jackman.
10.8 Amendment to Contract Sales Representative Agreement, dated as of
October 27, 2004, by and between the Company and Dennis Jackman.
10.9 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini.
10.10 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini.
10.11 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini.
II-7
10.12 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini.
10.13 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini.
10.14 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane Jacomini.
10.15 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane Jacomini.
10.16 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane Jacomini.
10.17 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane Jacomini.
10.18 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane Jacomini.
10.19 Distribution Agreement, dated as of August 10, 2004, by and between
the Company and Aurtech Marketing, Pty., Ltd.
10.20 Distribution Agreement, dated as of December 5, 2003, by and between
the Company and Canadian Release Agents, Ltd.
23.1 Consent of Kabani & Company, Inc. (filed herewith).
23.2 Consent of legal counsel (see Exhibit 5.1).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-8
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant, Reclamation Consulting and Applications, Inc.,
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and has duly caused this registration
statement on Form SB-2 to be signed on its behalf by the undersigned, in the
City of Lake Forest, State of California, on July 27, 2005.
RECLAMATION CONSULTING AND APPLICATIONS, INC.
By: /s/ GORDON DAVIES
---------------------------------------
Gordon Davies,
Chief Executive Officer, Principal Executive
Officer and Director
By: /s/ MICHAEL DAVIES
---------------------------------------
Michael Davies,
Chief Financial Officer, Principal
Financial Officer and Principal Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ GORDON DAVIES Chief Executive Officer (Principal July 27, 2005
- ------------------------- Executive Officer), President and
Gordon Davies Director
/s/ MICHAEL DAVIES Chief Financial Officer (Principal July 27, 2005
- ------------------------- Financial Officer and Principal
Michael Davies Accounting Officer) and Director
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