As filed with the Securities and Exchange Commission on November 23, 2005
An Exhibit List can be found on page II-6.
Registration No. 333-126916
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
- --------------------------------------------------------------------------------
AMENDMENT NO. 2
TO
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 (7)
- -------------------------------------------------- ------------------- ------------------ -------------------- --------------
(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.
(7) Fee previously paid.
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 NOVEMBER 23, 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 November 21, 2005, was
$.10.
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.
1
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
2
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.
3
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, 2005 and 2004, we generated net revenues in
the amount of $242,965 and $289,218 and net losses of $3,702,609 and $2,542,770,
respectively. For the three months ended September 30, 2005, we we generated net
revenues in the amount of $48,177 and a net loss of $45,530. As a result of
recurring losses from operations and our inability to establish profitable
operations as of June 30, 2005, our Independent Registered Public Accounting
Firm, in their report dated October 3, 2005, 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,
4
- 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 66.91% of our current outstanding stock.
Common stock to be outstanding after the offering........... Up to 74,320,913 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 for resale 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 of $1,300,000 from the sale
of the secured convertible notes and the investors are obligated to
provide us with an additional $700,000 within two days of this
registration statement 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 29,620,813 shares of common stock outstanding as of
November 21, 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
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
5
SECURITIES AND EXCHANGE COMMISSION, ASKING A MAJORITY OF OUR SHAREHOLDERS TO
AUTHORIZE THE INCREASE IN OUR AUTHORIZED SHARES OF COMMON STOCK. IN RESPONSE TO
COMMENTS RECEIVED, WE FILED AMENDED PRELIMINARY PROXY STATEMENTS ON OCTOBER 21,
2005 AND NOVEMBER 23, 2005. 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 REGISTRATION STATEMENT 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
REGISTRATION STATEMENT 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. The four accredited investors, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC subscribed for 50.1%, 33.8%, 14.4% and 1.7%,
respectively, of the total offering. Each accredited investor purchased, or will
purchase, such percentage of each closing under the Securities Purchase
Agreement.
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 was disbursed on July 28, 2005; and
o $700,000 will be disbursed within two days of the effectiveness of
this registration statement.
Accordingly, we have received a total of $1,300,000 pursuant to the
Securities Purchase Agreement. Pursuant to the Securities Purchase Agreement, we
have issued 5,200,000 warrants to purchase shares of common stock and we are
obligated to issue 2,800,000 additional warrants together with $700,000 in
secured convertible notes within two days from the effective date of this
registration statement.
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 November 22, 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 $.07667 and,
therefore, the conversion price for the secured convertible notes was $.038335.
Based on this conversion price, the $2,000,000 secured convertible notes,
excluding interest, were convertible into 52,171,645 shares of our common stock.
In connection with the Securities Purchase Agreement dated June 23, 2005,
we granted the investors registration rights. Pursuant to the registration
rights agreement, if we did not file the registration statement by August 7,
2005, or if we did not have the registration statement declared effective on or
before October 21, 2005, we are obligated to pay liquidated damages in the
amount of 2.0% per month of the face amount of the issued and outstanding
secured convertible notes, which equals $26,000, until the registration
statement is declared effective. At our option, these liquidated damages can be
paid in cash or restricted shares of our common stock. If we decide to pay the
liquidated damages in cash, we would be required to use our limited working
capital and potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Assuming that we are
decided to to pay liquidated damages for one month on November 21, 2005, the
$26,000 (2.0% of the $1,300,000 of secured convertible notes outstanding on
6
November 21, 2005) on November 21, 2005, would result in the issuance of
approximately 678,232 shares of common stock. As of the date hereof, the
investors have not demanded payment of the liquidated damages and we have not
determined if we will make such liquidated damages payments in cash, stock or a
combination of both.
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.
7
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 $3,702,609 and $2,542,770 for the years ended
June 30, 2005 and 2004, respectively. For the three months ended September 30,
2005, we incurred a net loss of $45,530. 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
$3,500,000 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 October 3, 2005 on our financial statements as of and
for the year ended June 30, 2005, our independent registered public accounting
firm stated that our recurring losses from operations and our inability to
establish profitable operations as of June 30, 2005 raised substantial doubt
about our ability to continue as a going concern. Since June 30, 2005, 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' deficit increase the difficulty in meeting such goals
and there can be no assurance 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.
8
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, 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 November 21, 2005, we had 29,620,813 shares of common stock issued
and outstanding, secured convertible notes outstanding issued pursant to the
Securities Purchase Agreement dated June 23, 2005 that may be converted into an
estimated 33,911,570 shares of common stock at current market prices and
outstanding warrants to purchase 5,200,000 shares of common stock issued pursant
to the Securities Purchase Agreement dated June 23, 2005. Additionally, we have
an obligation pursuant to the Securities Purchase Agreement dated June 23, 2005,
to sell $700,000 in secured convertible notes within two days of this
regisration statement being declared effective that may be converted into an
estimated 18,260,076 shares of common stock at current market prices and issue
warrants to purchase 2,800,000 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 issued pursant to the Securities Purchase
Agreement dated June 23, 2005 may increase if the market price of our stock
declines. All of the shares registered pursuant to this registration statement,
including all of the shares issuable upon conversion of the secured convertible
notes and upon exercise of our warrants, may be resold without restriction
pursuant to this registration statement once the registration statement is
declared effective. 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 November 21, 2005 of $0.10.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
- ------ ----- ------ -------- -----
25% $.075 $.0375 53,333,334 64.29%
50% $.05 $.025 80,000,000 72.98%
75% $.025 $.0125 160,000,000 84.38%
9
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.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK, WHICH
COULD 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 stockholder converts and sells material amounts of common stock
could encourage short sales by investors, however, the purchasers of the secured
convertible notes have contractually agreed that while any portion of the
secured convertible notes are outstanding, they will not enter into or effect
any short sales in our common stock. Short sales by other investors could place
further downward pressure on the price of the common stock. The selling
stockholder could sell common stock into the market in anticipation of covering
the short sale by converting their securities, which could cause the further
downward pressure on the 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
REGISTRATION STATEMENT 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
32,000,000 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.
10
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 $1,300,000 secured convertible notes
outstanding, the investors are obligated to purchase additional secured
convertible notes in the aggregate of $700,000. 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,
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 event 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.
WE ARE OBLIGATED TO PAY LIQUIDATED DAMAGES AS A RESULT OF OUR FAILURE TO HAVE
THIS REGISTRATION STATEMENT DECLARED EFFECTIVE PRIOR TO OCTOBER 21, 2005, AND
THE PAYMENT OF LIQUIDATED DAMAGES WILL EITHER RESULT IN DEPLETING OUR WORKING
CAPITAL OR ISSUANCE OF SHARES OF COMMON STOCK WHICH WOULD CAUSE DILUTION TO OUR
EXISTING SHAREHOLDERS.
Pursuant to the terms of our registration rights agreement entered into in
connection with our securities purchase agreement dated June 23, 2005, if we did
not have a registration statement registering the shares underlying the secured
convertible notes and warrants declared effective on or before October 21, 2005,
we are obligated to pay liquidated damages in the amount of 2.0% per month of
the face amount of the issued and outstanding secured convertible notes
outstanding, which equals $26,000, until the registration statement is declared
effective. At our option, these liquidated damages can be paid in cash or
restricted shares of our common stock. If we decide to pay the liquidated
damages in cash, we would be required to use our limited working capital and
potentially raise additional funds. If we decide to pay the liquidated damages
in shares of common stock, the number of shares issued would depend on our stock
price at the time that payment is due. Assuming that we are decided to to pay
liquidated damages for one month on November 21, 2005, the $26,000 (2.0% of the
$1,300,000 of secured convertible notes outstanding on November 21, 2005) on
November 21, 2005, would result in the issuance of approximately 678,232 shares
of common stock. The issuance of shares upon payment of liquidated damages 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. As
of the date hereof, the investors have not demanded payment of the liquidated
damages and we have not determined if we will make such liquidated damages
payments in cash, stock or a combination of both.
11
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.
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.
12
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 for resale 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 of
$1,300,000 from the sale of the secured convertible notes and the investors are
obligated to provide us with an additional $700,000 within two days of this
registration statement 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. The four accredited investors, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC subscribed for 50.1%, 33.8%, 14.4% and 1.7%,
respectively, of the total offering. Each accredited investor purchased, or will
purchase, such percentage of each closing under the Securities Purchase
Agreement.
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 was disbursed on July 28; and
o $700,000 will be disbursed within two days of the effectiveness of
this registration statement.
Accordingly, we have received a total of $1,300,000 pursuant to the
Securities Purchase Agreement. Pursuant to the Securities Purchase Agreement, we
have issued 5,200,000 warrants to purchase shares of common stock and we are
obligated to issue 2,800,000 additional warrants together with $700,000 in
secured convertible notes within two days from the effective date of this
registration statement.
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.
13
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 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;
14
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 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 for resale 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.
15
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.
In connection with the Securities Purchase Agreement dated June 23, 2005,
we granted the investors registration rights. Pursuant to the registration
rights agreement, if we did not file the registration statement by August 7,
2005, or if we did not have the registration statement declared effective on or
before October 21, 2005, we are obligated to pay liquidated damages in the
amount of 2.0% per month of the face amount of the issued and outstanding
secured convertible notes, which equals $26,000, until the registration
statement is declared effective. At our option, these liquidated damages can be
paid in cash or restricted shares of our common stock. If we decide to pay the
liquidated damages in cash, we would be required to use our limited working
capital and potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Assuming that we are
decided to to pay liquidated damages for one month on November 21, 2005, the
$26,000 (2.0% of the $1,300,000 of secured convertible notes outstanding on
November 21, 2005) on November 21, 2005, would result in the issuance of
approximately 678,232 shares of common stock. As of the date hereof, the
investors have not demanded payment of the liquidated damages and we have not
determined if we will make such liquidated damages payments in cash, stock or a
combination of both.
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 November 22, 2005, at a conversion price of $0.038335, the number of
shares issuable upon conversion would be:
$2,000,000/$0.038335 = 52,171,645 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 November 21, 2005 of $0.10.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
- ------ ----- ------ -------- -----
25% $.075 $.0375 53,333,334 64.29%
50% $.05 $.025 80,000,000 72.98%
75% $.025 $.0125 160,000,000 84.38%
16
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"RCAA."
For the periods indicated, the following table sets forth the high and low
bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
High($) 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 0.21 0.08
Second Quarter (1) 0.13 0.06
(1) As of November 21, 2005.
HOLDERS
As of November 21, 2005, we had approximately 692 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 deems relevant.
17
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 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 ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, as opposed to the fair value method
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." 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 ("FASB") 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 provides service in exchange for the award. The effective date of this
standard for the Company will be July 1, 2006. We are currently assessing the
impact that this new standard will have on our financial statements.
18
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
Amendment of Accounting Research Board ("ARB") No. 43, Chapter 4." The
amendments made by SFAS 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 SFAS No. 123R, "Share-Based Payment, an
Amendment of SFAS No. 123. SFAS 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. SFAS No. 123R is effective in the
first annual period beginning after December 15, 2005. We are in process of
evaluating the impact of this pronouncement on our financial statements.
In December 2004, the FASB issued SFAS 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.
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.
19
Comparison of the Three Months Ended September 30, 2005 with the Three Months
Ended September 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 2005 September 30, 2004 Change Change
-------------------------------- ------------------------------ --------- --------------
Amount in Percent of Amount in Percent of
($) Revenues ($) Revenues ($) (%)
------------- --------------- ------------- ------------- ----------- --------------
Net revenues $ 48,177 100.00% $ 126,811 100.00% (78,634) (62.01)%
Cost of revenues 36,180 75.10% 55,754 43.97% (19,574) (35.11)%
------------- --------------- ------------- ------------- ----------- --------------
Gross profit 11,997 24.90% 71,057 56.03% (59,060) (83.12)%
Selling, general and
administrative expenses 834,772 1732.72% 439,599 346.66% 395,173 89.89%
------------- --------------- ------------- ------------- ----------- --------------
Loss from operations (822,775) (1707.82)% (368,542) (290.62)% (454,233) 123.25%
------------- --------------- ------------- ------------- ----------- --------------
Other income (expense)
Interest income -- -- 19,019 15.00% (19,019) (100.00)%
Interest expense (162,231) (336.74)% (34,422) (27.14)% (127,809) 371.30%
Change in fair value
of derivative
liabilities 940,276 1951.71% -- -- 940,276 --
------------- --------------- ------------- ------------- ----------- --------------
Total other expenses 778,045 1614.97% (15,403) (12.15)% 0.00%
Loss before provision
for income tax (44,730) (92.85)% (383,945) (302.77)% 339,215 (88.35)%
Provision for income
taxes 800 1.66% 800 0.63% -- --
------------- --------------- ------------- ------------- ----------- --------------
Net loss (45,530) (94.51)% (384,745) (303.40)% 339,215 (88.17)%
NET REVENUES
Net Revenues for the three-month period ended September 30, 2005 decreased
to $48,177 from $126,811 for the three-month period ended September 30, 2004.
This decrease in net revenues of $78,634, or approximately 62.01% over the prior
period is due primarily to the reorganization of our sales representative
infrastructure.
COST OF REVENUES
Cost of revenues for the three-month period ended September 30, 2005
decreased to $36,180 from $55,754 for the three-month period ended September 30,
2004. This decrease in cost of revenues of $19,574, or approximately 35.11% over
the prior period is due primarily to the reorganization of our sales
representative infrastructure.
GROSS PROFIT
Gross profit for the three-month period ended September 30, 2005 decreased
to $11,997 from $71,057 for the three-month period ended September 30, 2004.
This decrease in gross profits of $59,060, or approximately 83.12% over the
prior period is due primarily to the reorganization of our production and
distribution systems and sales representative infrastructure.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three-month period
ended September 30, 2005 increased to $834,772 from $439,599 for the three-month
period ended September 30, 2004. This increase in selling, general and
administrative expenses of $395,173, or approximately 89.89% over the prior
period is due primarily to the reorganization of our production and sales
infrastructure and financing activities.
20
LOSS FROM OPERATIONS
Loss from operations for the three-month period ended September 30, 2005
increased to $822,775 from $368,542 for the three-month period ended September
30, 2004. This increase in loss from operations of $454,233, or approximately
123.25% over the prior period is due primarily to the reorganization of our
production and distribution and sales representative systems.
INTEREST EXPENSE
Interest expense for the three month period ended September 30, 2005
increased to $162,231 from $34,422 for the three month period ended September
30, 2004. This increase in interest expense of $162,231, or approximately
371.30% over the prior period is due primarily to the increase in the amount of
outstanding notes payable and amortization of the debt discounts amounting to
$110,766 during the three months ended September 30, 2005. For the three months
ended September 30, 2004, there was no debt discount amortization as no
convertible debt was outstanding.
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
Change in fair value of derivative liabilities for the three month period
ended September 30, 2005 was $940,276, and we had no change in the fair value of
derivative liabilities for the three month period ended September 30, 2005.
Change in the fair value of derivative liabilities for the three month period
ended September 30, 2005 was primarily the result of a decrease in the computed
volatility of the market price of our common stock as well as a decline in the
market price of the stock, thereby making conversion of the stock or the
exercise of warrants less attractive to the holders of those instruments.
NET LOSS
Net loss for the three month period ended September 30, 2005 decreased to
$45,530 from $384,745 for the three month period ended September 30, 2004. This
decrease in net loss of $339,215, or approximately 88.17% over the prior period
is due primarily to the change in the fair value of the derivative warrant
liabilities, as described above.
COMPARISON OF THE YEAR ENDED JUNE 30, 2005 WITH THE YEAR ENDED JUNE 30, 2004
- ---------------------------------------------------------------------------------------------------------
June 30, 2005 June 30, 2004
------------- -------------
Net Revenues $ 242,965 100.00% $ 289,218 100.00%
Cost of Revenues 192,937 79.41% 185,280 64.06%
------------ ------------
Gross Profit 50,028 20.59% 103,938 35.94%
Selling, General and Administrative
Expenses 2,210,588 909.84% 2,044,600 706.94%
------------ ------------
Operating Expenses 2,210,588 909.84% 2,044,600 706.94%
------------ ------------
Loss from Operations (2,160,560) (889.25)% (1,940,662) (671.00)%
Other Income (Expense)
Interest Income 60,491 24.90% 46,284 16.00%
Loss on uncollectible notes receivable (1,080,320) (444.64)% -- 0.00%
Loss on settlement of debt -- (578,695)
Interest Expense (486,795) (200.36)% (45,622) (15.77)%
Legal Settlement (34,625) (14.25)% --
Loss on Impairment of Inventory -- (583) (0.20)%
Loss on disposal of property and
equipment -- (22,692) (7.85)%
------------ ------------
Total Other Income (1,541,249) (634.35)% (601,308) (207.91)%
------------ ------------
Loss before provision for income taxes (3,701,809) (1497.09)% (2,541,970) (878.91)%
Provision for Income Taxes 800 800
------------ ------------
Net Loss (3,702,609) (1497.42)% (2,542,770) (879.19)%
- ---------------------------------------------------------------------------------------------------------
21
NET REVENUES
Net Revenues for the twelve months ended June 30, 2005 decreased to
$242,965 from $289,218 for the twelve months ended June 30, 2004. The decrease
in net sales of $46,253, or approximately 15.99%, over the 2004 period is due
primarily to the termination of our distributorship relationship with North
American Systems, Inc.
COST OF REVENUES
Cost of sales for the twelve months ended June 30, 2005 increased to
$192,937 from $185,280 for the twelve months ended June 30, 2004. The overall
increase in cost of sales of $7,657, or approximately 4.13%, over the 2004
period is directly attributable to costs and expenses associated with the
introduction of our Alderox(TM) line of products to the marketplace.
GROSS PROFIT
Overall gross profit for the twelve months ended June 30, 2005 decreased to
$50,028 from $103,938 for the twelve months ended June 30, 2004. The overall
decrease in gross profit of $53,910 or approximately 51.87% over the 2004 period
is directly attributable to an increase in costs and expenses associated with
the introduction of our Alderox(TM) line of products to the marketplace and a
reduced sales volume due to the termination of North American Systems, Inc.
OPERATING EXPENSES
Total operating expenses for the twelve months ended June 30, 2005
increased to $2,210,588 from $2,044,600 for the twelve months ended June 30,
2004. The overall increase in operating expenses of approximately $165,988 or
approximately 8.12%, over the 2004 period is covered below in our discussions of
Selling, General and Administrative Expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the twelve months ended
June 30, 2005 increased to $2,210,588 from $2,044,600 for the twelve months
ended June 30, 2004. The overall increase in operating expenses of approximately
$165,988 or approximately 8.12%, over the 2004 period is due primarily to the
acquisition of our production facility in West Valley, Utah and the sales
infrastructure of the United States market from North American Systems, Inc.
INTEREST INCOME
Interest Income for the twelve months ended June 30, 2005 increased to
$60,491 from $46,284 for the twelve months ended June 30, 2004. The overall
increase in our Interest Income of $14,207 or approximately 30.70% over the 2004
period is due primarily to increase in the note receivable balance through
November 2004 over the balance in the prior year pursuant to the Revolving Loan
Agreement with North American Systems, Inc.
LOSS ON UNCOLLECTIBLE NOTES RECEIVABLE
For the twelve months ended June 30, 2005, we recorded a loss on
uncollectible notes receivables of $1,080,320, and for the twelve months ended
June 30, 2004, we did not record a loss on uncollectible notes receivables. Our
loss from uncollectible notes receivable for the twelve months ended June 30,
2005 is due to the insolvency of North American Systems, Inc.
22
LOSS ON SETTLEMENT OF DEBTS
For the twelve months ended June 30, 2005, we did not record a loss on
settlement of debts as no such transactions occurred, and for the twelve months
ended June 30, 2004, we recorded a loss on settlement of debts of $578,695.
INTEREST EXPENSE
Interest Expense for the twelve months ended June 30, 2005 increased to
$486,795 from $45,622 for the twelve months ended June 30, 2004. The overall
increase in our Interest Expense of $441,173 or approximately 967.02% over the
2004 period is due primarily to financing activities.
LEGAL SETTLEMENT
During our fiscal year ended June 30, 2005, we had net legal settlements in
the amount of $34,625, with no such legal settlements in fiscal 2004.
LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT
For the twelve months ended June 30, 2005, we did not record a loss on
disposal of property and equipment as no such transactions occurred, and for the
twelve months ended June 30, 2004, we recorded a loss on disposal of property
and equipment of $22,692.
NET LOSS
Net Loss for the twelve months ended June 30, 2005 increased to $3,702,609
from $2,542,770 for the twelve months ended June 30, 2004. This increase in Net
Loss of $1,159,839 or approximately 45.61% over the 2004 period is due primarily
to the termination of the Distributorship Agreement with North American Systems,
Inc.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, we had a working capital deficit of $1,143,039.
This compares to a working capital deficit of $1,096,142 as of June 30, 2005.
The principal use of cash for the three months ended September 30, 2005 was to
fund the net loss from operations.
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 registered public accounting firm has stated in their
report, dated as of October 3, 2005, that as a result of accumulated deficit of
$14,815,128 as of June 30, 2005 and net losses of $3,702,609 and $2,542,770 for
the years ended June 30, 2005 and 2004 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 four accredited investors, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC subscribed for 50.1%, 33.8%, 14.4% and 1.7%,
respectively, of the total offering. Each accredited investor purchased, or will
purchase, such percentage of each closing under the Securities Purchase
Agreement.
The investors are obligated to provide us with an aggregate of $2,000,000
as follows:
23
o $700,000 was disbursed on June 23, 2005;
o $600,000 was disbursed on July 28, 2005; and
o $700,000 will be disbursed within two days of the effectiveness of
this registration statement.
Accordingly, we have received a total of $1,300,000 pursuant to the
Securities Purchase Agreement. Pursuant to the Securities Purchase Agreement, we
have issued 5,200,000 warrants to purchase shares of common stock and we are
obligated to issue 2,800,000 additional warrants together with $700,000 in
secured convertible notes within two days from the effective date of this
registration statement.
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
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 recognized 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 and the
first quarter of fiscal 2006 when $600,000 of secured convertible notes were
issued.
In connection with the Securities Purchase Agreement dated June 23, 2005,
we granted the investors registration rights. Pursuant to the registration
rights agreement, if we did not file the registration statement by August 7,
2005, or if we did not have the registration statement declared effective on or
before October 21, 2005, we are obligated to pay liquidated damages in the
amount of 2.0% per month of the face amount of the issued and outstanding
secured convertible notes, which equals $26,000, until the registration
statement is declared effective. At our option, these liquidated damages can be
paid in cash or restricted shares of our common stock. If we decide to pay the
liquidated damages in cash, we would be required to use our limited working
capital and potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Assuming that we are
decided to to pay liquidated damages for one month on November 21, 2005, the
$26,000 (2.0% of the $1,300,000 of secured convertible notes outstanding on
November 21, 2005) on November 21, 2005, would result in the issuance of
approximately 678,232 shares of common stock. As of the date hereof, the
investors have not demanded payment of the liquidated damages and we have not
determined if we will make such liquidated damages payments in cash, stock or a
combination of both.
24
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.
INFLATION
In the opinion of management, inflation has not had a material effect on
our operations.
25
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 Valley 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.
26
COMPETITION
We compete with over 60 other companies. 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, Washington, 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.
27
FILINGS
- ----------------------------------------------------- ---------------------------- ------------- ---------------------
Registration or
Patent Application or Patent No. 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 November 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
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.
28
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 an eight
month lease agreement effective September 1, 2005. The monthly rent is $1,919.
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.
CASE #05CC05777 FILED IN THE SUPERIOR COUNT OF CALIFORNIA SANTA ANA ON MAY 18,
2005.
On May 2, 2005, a complaint was filed by Pacific Business Capital
Corporation against us, our President, Gordon Davies, and our Vice President,
Michael Davies, in the matter entitled Pacific Business Capital vs. Reclamation
Consulting and Applications, Inc., et. al., Case No. 05CC05777, filed with the
Superior Court of State of California, County of Orange. The complaint alleges,
among other things, a cause of action for breach of contract and seeks the
return of approximately $55,000, which the plaintiffs allege they loaned us
under a "partly written, partly oral" agreement, pursuant to which a total of
$80,000 was loaned to us. Our management has denied that the plaintiffs are owed
the amounts sought and we intend to vigorously defend this action on the basis
brought by the plaintiffs. Specifically, our management denies that any such
agreement for such loan ever existed, and that we never received any funds
pursuant thereto, if any, from the plaintiffs. On August 2, 2005, a hearing on
our Demurrer to the Complaint, filed on May 2, 2005, was held, pursuant to which
the court granted our Demurrer on the grounds set forth therein, but granted
plaintiffs leave to amend their Complaint. On August 29, 2005, plaintiffs again
filed an amended complaint against us, Mr. Gordon Davies, and Mr. Michael
Davies. On October 24, 2005 the Court has set the action for trial on June 26,
2006 at 9:00 A.M. in Department C-22 of the Superior Court of California County
of Orange, Central Justice Center located at 700 Civic Center Drive West, Santa
Ana, California. This matter is currently in the discovery phase and, as such,
our counsel has advised us that it is premature to attempt to estimate any
potential outcome or loss at this time.
29
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
- --------------------------------------------------------------------------------
Gordon W. Davies 37 President and Director
Michael C. Davies 36 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.
30
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, 2005, 2004 and 2003 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 2005 135,200 0 0 - 1,000,000 - -
President 2004 135,200 0 0 - - - -
2003 135,200 0 0 - - - -
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Michael Davies 2005 135,200 0 0 - 1,000,000 - -
Chief Financial Officer 2004 135,200 0 0 - - - -
2003 135,200 0 0 - - - -
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 $.40 per share.
These employment contracts have non-compete provisions and various other
provisions, including a death disability benefit of 3 months' pay plus 3 months'
benefits.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants of
stock options during fiscal 2005 to our President, Mr. Gordon W. Davies and our
Vice President and Chief Financial Officer, Mr. Michael C. Davies. The exercise
prices in each case equal the last reported sales price per share of our common
stock as reported by the Over-the-Counter Bulletin Board on the date of grant.
The percentage of total options granted to our employees in the last fiscal year
is based on options to purchase an aggregate of 2,640,000 shares of common stock
granted to all of our employees in fiscal 2005:
31
NUMBER OF SHARES OF PERCENT OF TOTAL
COMMON STOCK OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) LAST FISCAL YEAR ($/SH) DATE
- ----------------------- ------------------- ----------------- -------- -----------
Gordon W. Davies 1,000,000 38% $0.25 06/30/2008
Michael C. Davies 1,000,000 38% $0.25 06/30/2008
FISCAL YEAR END OPTION VALUES
No options were exercised by any of our officers during the 2005 fiscal year.
The following table sets forth the number of shares of our common stock subject
to exercisable and unexercisable stock options that the Named Executive Officers
held at June 30, 2005:
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
NAME UNEXERCISED OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END
- -------------------- ------------------------------------- ---------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Gordon W. Davies 2,500,000 0 $ --
Michael C. Davies 2,500,000 0 $ --
STOCK OPTION PLANS
The following table discloses, in tabular format, information regarding our
equity securities authorized for issuance pursuant to any compensation plans as
of the end of our fiscal year ended June 30, 2005.
Number of Securities to Weighted-average exercise Number of Securities
be issued upon exercise price of outstanding remaining available for
of outstanding options, options, warrants and future issuance under
Plan Category warrants and rights rights equity compensation
plans (excluding
securities reflected in
column (a))
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders 0 0 0
Equity compensation plans not approved 22,441,750 $0.31 0
by security holders
- ----------------------------------------------------------------------------------------------------------------------------
Total 22,441,750 $0.31 0
32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended June 30, 2005, we settled debts to related
parties for an aggregate amount of $146,500 in exchange for the issuance of
732,500 shares of our common stock. The debts settled were $30,000 to
Billfighter Investements Limited, $48,500 to David McGuire and $68,000 to Kurt
Baum.
During the quarter ended September 30, 2005, we settled debts to related
parties for an aggregate amount of $208,525 with cash as follows:
Anthony Wilson $97,400
Jerry Graber $20,000
Del Stephens $31,000
Kurt Baum $20,000
Paul Fuller $ 6,667
Richard Jurkovac $15,000
Theodore Cohn $12,000
Fred Davies $ 5,000
Blair Porter $ 1,458
At September 30, 2005, we have debt owing to related parties aggregating
$421,399 as follows:
o We have an unsecured convertible note payable to one shareholder, Jerry
Graber, bearing interest at 10% per annum, convertible into shares of our common
stock at $0.25 per share and due upon demand. At September 30, 2005, the
aggregate principal and interest due and owing under this note was $6,000.
o We have an unsecured convertible note payable to one shareholder, Paul
Fuller, bearing interest at 15% per annum, convertible into shares of our common
stock at $0.75 per share and due on June 30, 2006. Pursuant to the terms of the
Note, we are required to make monthly payments in the aggregate amount of
$1,833. At September 30, 2005, the aggregate principal and interest due and
owing under this note was $13,333.
o We have an unsecured note payable to one shareholder, Blair Porter,
bearing interest at 15% per annum and due upon demand. At September 30, 2005,
the aggregate principal and interest due and owing under this note was $14,598.
o We have unsecured notes payable to some of our shareholders, bearing
interest at 10% per annum and due upon demand. At September 30, 2005, the
aggregate principal and interest due and owing under these notes was $333,763.
The shareholders and amounts due under these notes are as follows:
Anthony Wilson $ 91,500
Canvasback Company Ltd. $ 151
Dale Christianson $ 5,000
Fred Davies $ 5,112
Kurt Baum $115,000
Paul Hazel $ 50,000
Randy Ricker $ 27,000
Theodore Cohn $ 6,000
Lana Bailey/Cooperative $ 34,000
o We have an unsecured note payable to one shareholder, Del Stephens,
bearing interest per annum at the credit card rate and due upon demand. At
September 30, 2005, the aggregate principal and interest due and owing under
this note was $10,555.
o We have an unsecured note payable to one shareholder, Billfighters
Investments Limited, bearing interest per annum at 5% and due upon demand. At
September 30, 2005, the aggregate principal and interest due and owing under
this note was $43,150.
Total interest expense recorded on related-party notes payable for fiscal
2005 was $55,619.
Total interest expense for the three months ending September 30, 2005 was
$13,013.
In addition, we issued 1,000,000 options to Fred Davies, the father of our
named executive officers, for services rendered, resulting in consulting expense
of $192,249.
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of November 21, 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) 9.39% 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) 16.70% 7.29%
As a Group (2 persons)
Kurt Baum Common Stock 3,969,320 13.40% 5.34%
680 S. Avon Avenue
Azusa, California 91702
(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 November 21, 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 29,620,813 shares issued and outstanding on November 21, 2005.
(3) Percentage based on 74,320,813 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.
34
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 75,000,000 shares of common stock, par
value $.01. As of November 21, 2005, there were 29,620,813 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 November 21, 2005, there were no shares of preferred stock
issued.
OPTIONS
There are currently 22,441,750 outstanding options to purchase shares of
our common stock that have been issued to our officers, directors and employees.
5,248,000 options are exercisable at $0.25 per share. 8,000,000 options are
exercisable at $0.28 per share. 3,000,000 options are exercisable at $0.30 per
share. 6,043,750 options are exercisable at $0.40 per share. 150,000 options are
exercisable at $0.56 per share. All of the options are currently exercisable,
except for 750,000 options, exercisable at $0.30 per share, issued to Monarch
Bay Capital, which are exercisable on February 17, 2006. We are registering for
resale the shares of common stock underlying the 3,000,000 options exercisable
at $0.30 per share and 1,700,000 shares of common stock underlying options
exercisable at $0.25 per share.
WARRANTS
In connection with a Securities Purchase Agreement dated June 23, 2005, we
have issued 5,200,000 warrants to purchase shares of common stock and are
obligated to issue 2,800,000 additional warrants pursuant to the Securities
Purchase Agreement dated June 23, 2005, which requires that 2,800,000 warrants
be issued together with $700,000 in secured convertible notes within two days
from the effective date of this registration statement. The warrants are
exercisable until five years from the date of issuance exercisable at a purchase
price of $0.28 per share. We will not receive any compensation for the issuance
of the warrants, however, we will receive the sale price of any common stock we
sell to the selling stockholders upon exercise of the warrants. 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 for resale pursuant to an effective
registration statement.
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 the resale of the shares of
common stock underlying all of our warrants in this registration statement.
CONVERTIBLE SECURITIES
Not including approximately 15,880,000 shares of common stock issuable upon
exercise of outstanding options and warrants and 2,800,000 warrants that we are
obligated to issue in the near future, approximately 37,142,858 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
2,800,000 warrants to purchase 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 2,800,000 warrants be issued
together with $700,000 in secured convertible notes within two days from the
effective date of this registration statement.
35
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. The four accredited investors, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC subscribed for 50.1%, 33.8%, 14.4% and 1.7%,
respectively, of the total offering. Each accredited investor purchased, or will
purchase, such percentage of each closing under the Securities Purchase
Agreement.
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 was disbursed on July 28, 2005; and
o $700,000 will be disbursed within two days of the effectiveness of
this registration statement.
Accordingly, we have received a total of $1,300,000 pursuant to the
Securities Purchase Agreement. Pursuant to the Securities Purchase Agreement, we
have issued 5,200,000 warrants to purchase shares of common stock and we are
obligated to issue 2,800,000 additional warrants together with $700,000 in
secured convertible notes within two days from the effective date of this
registration statement.
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%.
36
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.
In connection with the Securities Purchase Agreement dated June 23, 2005,
we granted the investors registration rights. Pursuant to the registration
rights agreement, if we did not file the registration statement by August 7,
2005, or if we did not have the registration statement declared effective on or
before October 21, 2005, we are obligated to pay liquidated damages in the
amount of 2.0% per month of the face amount of the issued and outstanding
secured convertible notes, which equals $26,000, until the registration
statement is declared effective. At our option, these liquidated damages can be
paid in cash or restricted shares of our common stock. If we decide to pay the
liquidated damages in cash, we would be required to use our limited working
capital and potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Assuming that we are
decided to to pay liquidated damages for one month on November 21, 2005, the
$26,000 (2.0% of the $1,300,000 of secured convertible notes outstanding on
November 21, 2005) on November 21, 2005, would result in the issuance of
approximately 678,232 shares of common stock. As of the date hereof, the
investors have not demanded payment of the liquidated damages and we have not
determined if we will make such liquidated damages payments in cash, stock or a
combination of both.
37
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.
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.
RULE 144
In general, Rule 144 allows a stockholder (or stockholders where shares are
aggregated) who has beneficially owned shares of our common stock for at least
one year and who files a Form 144 with the SEC to sell within any three-month
period a number of those shares that does not exceed the greater of:
o 1% of the number of shares of our common stock then outstanding, or
o the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of the Form 144 with respect to
such sale.
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.
38
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.
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:
39
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.
40
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
Name Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants* Conversion (1) Offering** Offering** (4) (4)
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Offshore, Ltd. 30,145,994 50.44% Up to 1,555,708 (2) 4.99% -- --
(3) 20,040,000
shares of
common stock
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Qualified 20,338,016 40.71% Up to 1,555,708 (2) 4.99% -- --
Partners, LLC (3) 13,520,000
shares of
common stock
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Partners, LLC 8,664,717 22.63% Up to 1,555,708 (2) 4.99% -- --
(3) 5,760,000
shares of
common stock
- ------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
New Millennium 1,022,918 3.34% Up to 1,022,918 3.34% -- --
Capital Partners 680,000
II, LLC (3) shares of
common stock
========================================================================================================================
Monarch Bay Capital (4) -- -- 3,384,615 (5) 1,555,708(5) 4.99% -- --
Canvasback Company -- -- 1,449,340 1,449,340 4.89% -- --
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) 4.73% -- --
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% -- --
41
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% -- --
========================================================================================================================
TOTAL: 49,725,288
* This column represents an estimated number based on a conversion price as of a
recent date of November 22, 2005 of $.038335, 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 November 22, 2005,
the secured convertible notes would have had a conversion price of $.038335. 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.
42
(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 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
2,250,000 options are currently exercisable and 750,000 options become
exercisable on 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.
----------------------------------
Except as disclosed below, all of the selling stockholders purchased their
shares and/or warrants from other shareholders or from us in private placements
between July 2003 and April 2005. The value of the shares during the private
placements ranged from $0.20 to $0.40 per share. Monarch Bay Capital and
Canvasback Company Limited, along with Messrs. Davies, Rosegard and Wilson
received shares for services rendered to us. Mr. Fagnano received shares
pursuant to his employment agreement with us. At the time of each private
placement, each selling stockholder was not affiliated with us nor an officer,
director or 5% stockholder.
43
All of the offerings and sales to the selling stockholders 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 selling
stockholders, we have made independent determinations that all of the selling
stockholders 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
selling stockhlders were provided with access to our Securities and Exchange
Commission filings.
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 four accredited investors, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC subscribed for 50.1%, 33.8%, 14.4% and 1.7%,
respectively, of the total offering. Each accredited investor purchased, or will
purchase, such percentage of each closing under the Securities Purchase
Agreement.
The investors are obligated to provide us with the funds as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 was disbursed on July 28, 2005; and
o $700,000 will be disbursed within two days of the effectiveness of
this registration statement.
Accordingly, we have received a total of $1,300,000 pursuant to the
Securities Purchase Agreement. Pursuant to the Securities Purchase Agreement, we
have issued 5,200,000 warrants to purchase shares of common stock and we are
obligated to issue 2,800,000 additional warrants together with $700,000 in
secured convertible notes within two days from the effective date of this
registration statement.
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.
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%.
44
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;
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.
45
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 for resale 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.
46
In connection with the Securities Purchase Agreement dated June 23, 2005,
we granted the investors registration rights. Pursuant to the registration
rights agreement, if we did not file the registration statement by August 7,
2005, or if we did not have the registration statement declared effective on or
before October 21, 2005, we are obligated to pay liquidated damages in the
amount of 2.0% per month of the face amount of the issued and outstanding
secured convertible notes, which equals $26,000, until the registration
statement is declared effective. At our option, these liquidated damages can be
paid in cash or restricted shares of our common stock. If we decide to pay the
liquidated damages in cash, we would be required to use our limited working
capital and potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Assuming that we are
decided to to pay liquidated damages for one month on November 21, 2005, the
$26,000 (2.0% of the $1,300,000 of secured convertible notes outstanding on
November 21, 2005) on November 21, 2005, would result in the issuance of
approximately 678,232 shares of common stock. As of the date hereof, the
investors have not demanded payment of the liquidated damages and we have not
determined if we will make such liquidated damages payments in cash, stock or a
combination of both.
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 November 22, 2005, at a conversion price of $0.038335, the number of
shares issuable upon conversion would be:
$2,000,000/$0.038335 = 52,171,645 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 November 21, 2005 of $0.10.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
- ------ ----- ------ -------- -----
25% $.075 $.0375 53,333,334 64.29%
50% $.05 $.025 80,000,000 72.98%
75% $.025 $.0125 160,000,000 84.38%
47
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
Corbin & Company, LLP, independent registered public accounting firm, have
audited, as set forth in their report thereon appearing elsewhere herein, our
financial statements at June 30, 2005 and for the year then ended that appear in
the prospectus. 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 year 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 firms' opinion based on their expertise in accounting and auditing.
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 100 F Street, N.E., Washington D.C. 20549. Copies of such material
can be obtained from the Public Reference Section of the SEC at 100 F Street,
N.E., 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.
48
INDEX TO FINANCIAL STATEMENTS
RECLAMATION CONSULTING AND APPLICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms F-1
Balance Sheet as of June 30, 2005 F-3
Statements of Operations for the years ended June 30, 2005 and 2004 F-5
Statements of Stockholders' Deficit for the years ended
June 30, 2005 and 2004 F-6
Statements of Cash Flows for the years ended June 30, 2005 and 2004 F-8
Notes to Financial Statements F-10 to F-26
Balance Sheet as of September 30, 2005 (Unaudited) F-27
Statements of Operations for the three months ended
September 30, 2005 and 2004 (Unaudited) F-28
Statements of Cash Flows for the three months ended
September 30, 2005 and 2004 (Unaudited) F-29
Notes to the Financial Statements (Unaudited) F-31 to F-43
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Reclamation Consulting and Applications, Inc.
We have audited the accompanying balance sheet of Reclamation Consulting and
Applications, Inc. (the "Company") as of June 30, 2005 and the related
statements of operations, stockholders' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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, 2005 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, the Company has incurred
recurring losses and has yet to establish profitable operations. These factors,
among others, raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
CORBIN & COMPANY, LLP
/s/CORBIN & COMPANY, LLP
Irvine, California
October 3, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Reclamation Consulting and Applications, Inc.
We have audited the accompanying statements of operations, stockholders' equity,
and cash flows of Reclamation Consulting and Applications, Inc. (formerly,
Recycling Centers of America, Inc.) for the year 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 audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Reclamation
Consulting and Applications, Inc. for the year 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 for the year ended June 30,
2004. These factors as discussed in Note 15 to the financial statements included
in the 10KSB for the year ended June 30, 2004, 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 referred to above. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Fountain Valley, California
September 2, 2004
F-2
RECLAMATION CONSULTING AND APPLICATIONS, INC.
BALANCE SHEET
JUNE 30, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ --
Accounts receivable 31,215
Inventories 45,692
Prepaid interest 46,000
Prepaid professional fees 25,000
Other prepaid expenses and current assets 35,328
--------------
Total current assets 183,235
Property and equipment, net 53,400
Deferred financing costs, net 40,000
--------------
$ 276,635
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 122,258
Accrued professional fees 60,000
Payroll taxes payable 222,533
Accrued interest payable 70,505
Other accrued expenses 47,856
Current portion of accrued judgment payable 39,300
Notes payable - related parties 415,575
Notes payable, net of unamortized discount 301,350
--------------
Total current liabilities 1,279,377
Accrued judgment payable, net of current portion 65,100
Derivative liabilities 1,709,081
--------------
Total liabilities 3,053,558
--------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value;
75,000,000 shares authorized, 29,628,813
shares issued and outstanding 296,208
Additional paid-in capital 11,731,997
Treasury stock (1,500,000 shares), at cost (15,000)
Shares to be issued (100,000 shares) 25,000
Accumulated deficit (14,815,128)
--------------
Total stockholders' deficit (2,776,923)
--------------
$ 276,635
==============
See reports of independent registered public accounting firms
and accompanying notes to the financial statements
F-3
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
2005 2004
-------------- --------------
Net revenue $ 242,965 $ 289,218
Cost of revenue 192,937 185,280
-------------- --------------
Gross profit 50,028 103,938
Selling, general and administrative expenses 2,210,588 2,044,600
-------------- --------------
Loss from operations (2,160,560) (1,940,662)
-------------- --------------
Other income (expense):
Interest income 60,491 46,284
Loss on uncollectible notes receivable (1,080,320) --
Loss on settlement of debt -- (578,695)
Interest expense (486,795) (45,622)
Legal settlement (34,625) --
Loss on impairment of inventory -- (583)
Loss on disposal of property and equipment -- (22,692)
-------------- --------------
(1,541,249) (601,308)
-------------- --------------
Loss before provision for income taxes (3,701,809) (2,541,970)
Provision for income taxes 800 800
-------------- --------------
Net loss $ (3,702,609) $ (2,542,770)
============== ==============
Net loss per share - basic and diluted $ (0.13) $ (0.12)
============== ==============
Weighted-average common shares outstanding - basic and diluted 27,491,556 21,968,260
============== ==============
See reports of independent registered public accounting firms
and accompanying notes to the financial statements
F-4
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
Common Stock
--------------------------------- Additional
Number of Paid-in Treasury Shares to
Shares Amount Capital Stock Be Issued
------------ ------------ ------------ -------- ---------
Balance at July 1, 2003 18,669,659 $ 186,696 $ 7,318,209 $(15,000) $71,167
Issuance of shares for cash
received in the prior year 127,918 1,279 49,888 (51,167)
Issuance of shares for service
received in the prior year 50,000 500 19,500 (20,000)
Issuance of shares for debt
settlement 1,546,131 15,461 1,176,493
Issuance of shares on loan
conversion 41,432 414 26,917
Issuance of shares for cash 4,279,805 42,798 1,753,635
Issuance of shares for services
rendered 777,675 7,777 519,156
Option granted for services 31,500
10,000 shares of common stock to
be issued for service rendered 5,000
Net loss for the year ended
June 30, 2004
------------ ------------ ------------ -------- -------
Balance at June 30, 2004 25,492,620 254,926 10,895,296 (15,000) 5,000
Issuance of common shares
for cash 1,922,943 19,229 452,027 5,000
Issuance of shares for services
rendered 1,672,750 16,728 391,390 (5,000)
Conversion of notes payable 732,500 7,325 139,175
Conversion of interest payable 25,000 250 4,650
Cancellation of common shares
for legal settlement (225,000) (2,250) (67,525)
Issuance of stock options for
services rendered 495,530
Common shares to be issued for
conversion of note payable
(100,000 shares) 20,000
Beneficial conversion feature
of convertible debt 100,000
Stock warrants reclassified
as derivative liabilities (678,546)
Net loss
------------ ------------ ------------ -------- -------
29,620,813 $ 296,208 $ 11,731,997 $(15,000) $25,000
============ ============ ============ ======== =======
F-5
Total
Accumulated Stockholders'
Deficit Deficit
------------ -------------
Balance at July 1, 2003 $ (8,569,749) $ (1,008,677)
Issuance of shares for cash
received in the prior year
Issuance of shares for service
received in the prior year
Issuance of shares for debt
settlement 1,191,954
Issuance of shares on loan
conversion 27,331
Issuance of shares for cash 1,796,433
Issuance of shares for services
rendered 526,933
Option granted for services 31,500
10,000 shares of common stock to
be issued for service rendered 5,000
Net loss for the year ended
June 30, 2004 (2,542,770) (2,542,770)
------------ ------------
Balance at June 30, 2004 (11,112,519) 27,703
Issuance of common shares
for cash 476,256
Issuance of shares for services
rendered 403,118
Conversion of notes payable 146,500
Conversion of interest payable 4,900
Cancellation of common shares
for legal settlement (69,775)
Issuance of stock options for
services rendered 495,530
Common shares to be issued for
conversion of note payable
(100,000 shares) 20,000
Beneficial conversion feature
of convertible debt 100,000
Stock warrants reclassified
as derivative liabilities (678,546)
Net loss (3,702,609) (3,702,609)
------------ ------------
$(14,815,128) $ (2,776,922)
============ ============
See reports of independent registered public accounting firms
and accompanying notes to the financial statements
F-6
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,702,609) $ (2,542,770)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on uncollectible notes receivable 1,080,320 --
Loss on settlement of debt -- 578,695
Allowance for doubtful accounts -- 270,000
Issuance of stock options for services rendered 495,530 31,500
Issuance of shares for services rendered 403,118 531,933
Fair value of derivative liabilities recorded to interest expense 330,535 --
Cancellation of common shares for legal settlement (69,775) --
Amortization of discount on notes payable 62,500 --
Loss on impairment of inventory -- 583
Depreciation 8,201 5,338
Loss on disposal of fixed assets -- 22,692
(Increase) decrease in current assets:
Accounts receivable (31,215) (224,968)
Inventories (45,692) 98,116
Prepaid expenses and other current assets (89,375) 8,238
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 55,156 93,671
Customer deposits (7,542) 7,542
------------ ------------
Total adjustments 2,191,761 1,423,340
------------ ------------
Net cash used in operating activities (1,510,848) (1,119,430)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances on notes receivable (301,902) (714,178)
Acquisition of property and equipment (4,757) (1,948)
------------ ------------
Net cash used in investing activities (306,659) (716,126)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable and convertible debentures 1,875,466 98,112
Payment of deferred financing costs (40,000)
Payments on notes payable and convertible debentures (495,258) (58,246)
Issuance of common shares for cash 476,256 1,796,433
------------ ------------
Net cash provided by financing activities 1,816,464 1,836,299
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,043) 743
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,043 300
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ -- $ 1,043
============ ============
Continued
F-7
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 62,755 $ 25,003
============ ============
Income taxes $ -- $ --
============ ============
Non-cash investing and financing activities:
Conversion of notes payable and accrued interest to common stock $ 171,400 $ 1,219,285
============ ============
Beneficial conversion feature of convertible debt $ 100,000 $ --
============ ============
Debt discount on convertible debt $ 700,000 $ --
============ ============
Stock warrants reclassified as derivative liabilities $ 678,546 $ --
============ ============
Acquisition of fixed assets through reduction of accounts receivable $ 44,902 $ --
============ ============
See reports of independent registered public accounting firms
and accompanying notes to the financial statements
F-8
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Reclamation Consulting and Applications, Inc. (the "Company") is a Colorado
corporation, originally formed in 1976. The Company's primary business is the
production and sale of Alderox(TM), ASA-12(TM) and applicator systems.
ASA-12(TM) is an asphalt/concrete release agent that was developed by the
Company in response to the industry's need for an effective, economical and
environmentally friendly product. The Company's customers are located throughout
the United States.
BASIS OF PRESENTATION
The Company's financial statements are prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the
United States and have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. The Company has incurred cumulative losses of
$14,815,128, including net losses of $3,702,609 and $2,542,770 for the years
ended June 30, 2005 and 2004, respectively.
In view of the matters described in the preceding paragraph, the recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon future sustainable profitable operations of the
Company, which in turn is dependent upon the Company's ability to raise
additional capital, obtain financing, increase its customer base and manage its
costs. 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, which it believes are sufficient to
provide the Company with the ability to continue as a going concern: (i)
obtaining additional equity and debt financing (see Notes 7 and 11); (ii)
controlling of salaries and general and administrative expenses; (iii) managing
accounts payable; and (iv) evaluating its distribution and marketing methods.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include the realizability of
long-lived assets, the fair value of derivative liabilities, and the fair value
of common shares/options granted for services. Actual results could differ from
those estimates.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers cash
equivalents to include highly liquid investments with original maturities of
three months or less.
F-9
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
ACCOUNTS RECEIVABLE
The Company performs periodic evaluations of its customers and maintains
allowances for potential credit losses as deemed necessary. The Company
generally does not require collateral to secure its accounts receivable. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. Although the Company expects
to collect amounts due, actual collections may differ from the estimated
amounts.
INVENTORIES
Inventories consist of raw materials and finished goods and are stated at the
lower of cost (determined using the average cost method) or market. The Company
regularly monitors potential excess or obsolete inventories by comparing the
market value to cost. When necessary, the Company reduces the carrying amount of
inventories to their market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and improvements are
charged to the asset accounts while replacements, maintenance and repairs that
do not improve or extend the lives of the respective assets are expensed. At the
time property and equipment are retired or otherwise disposed of, the asset and
related accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or charged to
income.
The Company depreciates its property and equipment using the straight-line
method over the following estimated useful lives:
Computers and office equipment 3-5 years
Test equipment 5 years
Vehicles 5 years
LONG-LIVED ASSETS
The Company accounts for its long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the historical cost carrying value of an asset may no longer be
appropriate. The Company assesses recoverability of the carrying value of an
asset by estimating the future net cash flows expected to result from the asset,
including eventual disposition. If the future net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value or disposable
value. As of June 30, 2005, the Company does not believe there has been any
impairment of its long-lived assets. There can be no assurance, however, that
market conditions will not change or demand for the Company's products and
services will continue, which could result in impairment of long-lived assets in
the future.
F-10
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences attributable
to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not that such assets will not be
realized through future operations.
CONVERTIBLE DEBENTURES
In certain instances, the convertible feature of the Company's notes payable
provides for a rate of conversion that is below market value (see Notes 6 and
7). This feature is characterized as a beneficial conversion feature ("BCF"),
which is recorded by the Company pursuant to Emerging Issues Task Forces
("EITF") Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," and EITF
Issue No. 00-27, "Application of EITF Issue No. 98-5 to Certain Convertible
Instruments."
The Company's convertible debt is recorded net of the debt discount related to
the BCF. The Company amortizes the discount to interest expense over the life of
the debt on a straight-line basis, which approximates the effective interest
method. For the years ended June 30, 2005 and 2004, the Company recorded $62,500
and $0, respectively, of amortization related to the BCF.
DEFERRED FINANCING COSTS
The Company records direct costs of obtaining debt as deferred financing costs
and amortizes these costs to interest expense over the life of the debt on a
straight-line basis, which approximates the effective interest method. For the
years ended June 30, 2005 and 2004, the Company did not record any deferred
financing cost amortization.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, related-party notes
payable and notes payable. Pursuant to SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," the Company is required to estimate the fair
value of all financial instruments at the balance sheet date. The Company cannot
determine the estimated fair value of related-party notes payable as the
transactions originated with related parties and instruments similar to its
convertible notes payable could not be located. Other than these items, the
Company considers the carrying values of its financial instruments in the
financial statements to approximate their fair values.
F-11
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's derivative financial instruments consist of embedded derivatives
related to the Callable Secured Convertible Term Notes (the "Notes") entered
into on June 23, 2005 (see Note 7). These embedded derivatives include certain
conversion features, variable interest features, call options and default
provisions. The accounting treatment of derivative financial instruments
requires that the Company record the derivatives and related warrants at their
fair values as of the inception date of the agreement (estimated at $1,030,535)
and at fair value as of each subsequent balance sheet date (no difference at
June 30, 2005 as only seven days have elapsed since the date of the Notes). In
addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the Notes, the Company is
required to classify all other non-employee stock options and warrants as
derivative liabilities and mark them to market at each reporting date. The fair
value of such options and warrants that were reclassified as liabilities from
additional paid-in capital at June 30, 2005 totaled $678,546. Any change in fair
value will be recorded as non-operating, non-cash income or expense at each
reporting date. If the fair value of the derivatives is higher at the subsequent
balance sheet date, the Company will record a non-operating, non-cash charge. If
the fair value of the derivatives is lower at the subsequent balance sheet date,
the Company will record non-operating, non-cash income. Conversion-related
derivatives were valued using the Binomial Option Pricing Model with the
following assumptions: dividend yield of 0%; annual volatility of 169%; and risk
free interest rate of 3.67% as well as probability analysis related to trading
volume restrictions. The remaining derivatives were valued using discounted cash
flows and probability analysis. The derivatives are classified as long-term
liabilities (see Note 7).
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," as revised by
SAB No. 104. As such, the Company recognizes revenue when persuasive evidence of
an arrangement exists, title transfer has occurred, the price is fixed or
readily determinable and collectibility is probable. Sales are recorded net of
sales discounts.
Revenues from sales to distributors and agents are recognized upon shipment when
there is evidence that an arrangement exists, delivery has occurred under the
Company's standard FOB shipping point terms, the sales price is fixed or
determinable and the ability to collect sales proceeds is reasonably assured.
The contracts regarding these sales do not include any rights of return or price
protection clauses.
NET LOSS PER SHARE
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted earnings
per share. Basic EPS includes no dilution and is computed by dividing income or
loss available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings or losses of the entity.
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) as if funds obtained thereby were used to
purchase common stock at the average market price during the period.
For the years ended June 30, 2005 and 2004, basic and diluted loss per share are
the same since the calculation of diluted per share amounts would result in an
anti-dilutive calculation that is not permitted and therefore not included. Such
dilutive amounts would have included shares potentially issuable pursuant to
convertible debentures (see Notes 6 and 7) and outstanding options and warrants
(see Note 10).
F-12
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
ISSUANCE OF STOCK FOR NON-CASH CONSIDERATION
All issuances of the Company's stock for non-cash consideration have been
assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily
determinable. The majority of the non-cash consideration received pertains to
services rendered by consultants and others and has been valued at the market
value of the shares on the dates issued. In certain instances, the Company has
discounted the values assigned to the issued shares for illiquidity and/or
restrictions on resale (see Note 10).
STOCK-BASED COMPENSATION
Stock-based awards to non-employees are accounted for using the fair value
method in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," and EITF Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date used to determine the fair value of the equity instrument issued is the
earlier of the date on which the third-party performance is complete or the date
on which it is probable that performance will occur.
Stock-based compensation for employees is accounted for in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." The Company has elected to adopt the disclosure only
provisions of SFAS No. 123, which requires pro forma disclosures in the
financial statements as if the measurement provisions of SFAS No. 123 had been
adopted. In addition, the Company has made the appropriate disclosures as
required under SFAS No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure."
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 No. 123, the
Company's net loss and net loss per share for the years ended June 30, 2005 and
2004 would have been adjusted to the pro forma amounts, as follows (in
thousands, except per share amounts):
2005 2004
--------- ---------
Net loss - as reported $ (3,703) $ (2,543)
Stock-based compensation expense reported in
net income, net of tax -- 31
Stock-based compensation expense determined
under fair-value based method, net of tax (112) (57)
--------- ---------
Pro forma net loss $ (3,815) $ (2,569)
========= =========
Basic and diluted, as reported $ (0.13) $ (0.12)
========= =========
Basic and diluted, pro forma $ (0.14) $ (0.12)
========= =========
F-13
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash balances at financial institutions that are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
From time-to-time, the Company's cash balances exceed the amount insured by the
FDIC. Management believes the risk of loss of cash balances in excess of the
insured limit to be low.
The majority of revenues in the years ended June 30, 2005 and 2004 were
generated from a few customers. For the year ended June 30, 2005, total sales to
two major customers amounted to $178,822 and as of June 30, 2005, no amounts
were due from these major customers. For the year ended June 30, 2004, sales to
the two major customers amounted to $321,239.
RECLASSIFICATIONS
Certain amounts in June 30, 2004 financial statements have been reclassified to
conform with the June 30, 2005 presentation. Such reclassification had no effect
on net loss as previously reported.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment," which replaces SFAS No. 123 and supersedes APB
Opinion No. 25. SFAS No. 123R addresses the accounting for transactions in which
an enterprise receives employee services in exchange for equity instruments of
the enterprise or liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options and restrictive stock
grants, to be recognized as a compensation cost based on their fair values. The
pro forma disclosures previously permitted under SFAS No. 123 no longer will be
an alternative to financial statement recognition. Under SFAS No. 123R, the
Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at the date of adoption. The transition methods
include prospective and retroactive adoption options. Under the retroactive
option, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options and restricted
stock at the beginning of the first quarter of adoption of SFAS No. 123R, while
the retroactive methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period restated. The
Company is required to adopt SFAS No. 123R in its fiscal year beginning after
December 15, 2005. The Company is currently assessing the impact that adoption
of this Standard will have on its results of operations, financial position and
cash flows. The Company preliminarily believes that adoption of this standard
will result in additional charges to reported earnings.
In September 2004, the EITF finalized its consensus on EITF Issue No. 04-8, "The
Effect of Contingently Convertible Debt on Diluted Earnings Per Share" ("EITF
04-8"). EITF 04-8 addresses when the dilutive effect of contingently convertible
debt with a market price trigger should be included in diluted earnings per
share. Under EITF 04-8, the market price contingency should be ignored and these
securities should be treated as non-contingent, convertible securities and
always included in the diluted EPS computation unless their inclusion would be
anti-dilutive. EITF 04-8 requires these securities be included in diluted EPS
using either the if-converted method or the net share settlement method,
depending on the conversion terms of the security. EITF 04-8 is effective for
all periods ending after December 15, 2004 and is to be applied by
retrospectively restating previously reported EPS. The adoption of EITF 04-8
will have an effect on the Company's diluted EPS computation if, in future
periods, the inclusion of contingently convertible debt becomes dilutive.
F-14
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
In November 2004, The FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and spoilage. SFAS No. 151
requires that these costs be expensed as incurred and not included in overhead.
SFAS No. 151 also requires that allocation of fixed production overhead to
conversion costs be based on normal capacity of the production facilities. This
standard is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not believe the adoption of the statement
will result in a significant impact to the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary
Assets, an amendment of APB Opinion 29, Accounting for Non-Monetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that exchanges of non-monetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for non-monetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of non-monetary assets that do not have
"commercial substance." The provisions in SFAS No. 153 are effective for
non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company does not believe the adoption of this statement will have
a material impact on its financial statements.
NOTE 3 - ACCOUNTS RECEIVABLE
All accounts receivable are trade related. These receivables are current and no
reserve for uncollectible accounts is deemed necessary.
NOTE 4 - NOTES RECEIVABLE
At November 4, 2004, the Company had notes receivable of $1,119,378 due from
North American Systems, Inc. ("NAS"), the former sole United States distributor
of the Company's line of Alderox(TM) products under a revolving loan agreement
with the Company (the "Agreement"). The Agreement with NAS required that the
Company provide loans to NAS to meet working capital requirements until sale of
the Alderox(TM) products commenced. The notes bore interest at 10% per annum and
were secured by the assets of NAS. As of November 4, 2004, NAS also owed
$275,844 of unsecured accounts receivable to the Company.
The Agreement was terminated on November 4, 2004 due to NAS defaulting on the
Agreement. At that date, the Company purchased $44,902 of fixed assets owned by
NAS by reducing the accounts receivable balance owing from NAS. The Company
believes that no amounts owing from NAS will be recovered. The Company recorded
an allowance for doubtful accounts of $270,000 against the notes receivable in
fiscal 2004 and wrote off the remaining unreserved balance of $1,080,320 in
2005. The write-off of the notes and accounts receivable in fiscal 2005 are
recorded as other expense in the accompanying statements of operations.
F-15
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at June 30, 2005:
Computers and office equipment $ 23,333
Test equipment 29,974
Vehicles 17,408
----------
70,715
Less accumulated depreciation (17,315)
----------
$ 53,400
==========
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consists of the following at June 30, 2005:
Unsecured notes payable to shareholders, bearing interest at 10 percent per
annum, convertible to common stock at $0.25 per share, due on demand $ 21,000
Unsecured note payable to shareholder, bearing interest at 15 percent per
annum, convertible to common shares at $0.75 per share, monthly
principal payments of $1,833, due June 30, 2006 20,000
Unsecured notes payable to shareholder, bearing interest at 15 percent per
annum, due on demand 16,056
Unsecured notes payable to shareholders, bearing interest at 10 percent per
annum, due on demand 336,964
Unsecured notes payable to shareholders, bearing interest at credit card rate,
as defined, due on demand 21,555
----------
$ 415,575
==========
Interest expense on notes payable - related parties for the years ended June 30,
2005 and 2004 was $55,619 and $7,707, respectively. All related-party notes
payable are reflected as current liabilities as they are either due on demand or
mature on June 30, 2006.
During the year ended June 30, 2005, the Company borrowed $50,000 from a
shareholder that was to be repaid prior to June 30, 2005. As of June 30, 2005, a
balance of $15,000 was due on the note. The investor has an option to convert up
to the full loan amount into restricted shares of the Company's common stock at
$0.25 per share. The Company recorded a discount on the debt of $50,000 and
amortized the entire $50,000 as non-cash interest expense during 2005.
F-16
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 7 - NOTES PAYABLE
Notes payable consist of the following at June 30, 2005:
Callable, secured, convertible notes, net of unamortized debt discount
of $700,000 (see below) $ --
Note payable, bearing interest at 10 percent per annum, convertible to common
stock at 70% of the average of the 5 lowest closing bid prices of the
common stock for the 20 days preceding the date of conversion, with a floor
of $0.18 per share and a ceiling of $0.30 per share, due March 2006,
secured by accounts receivable, inventories and property and equipment, net
of unamortized debt discount of $37,500 (see below) 12,500
Note payable, bearing interest at 15 percent per annum, convertible to common
shares at $0.40 per share, due on demand, secured by substantially all
assets of the Company 8,000
Note payable, bearing interest at 15 percent per annum, convertible to common
shares at $0.40 per share, due September 2005, secured by substantially
all assets of the Company 75,000
Note payable, bearing interest at 15 percent per annum, convertible to common
shares at $0.40 per share, due October 2005, secured by substantially all
assets of the Company 50,000
Notes payable, bearing interest at 10 percent per annum and paid semi-annually,
convertible to common shares at $0.40 or $0.45 per share, due August 2005,
secured by substantially all assets of the Company 50,000
Note payable, bearing interest at 15 percent per annum, convertible to common
shares at $0.75 per share, due September 2005, secured by substantially
all assets of the Company 50,000
Unsecured notes payable, bearing interest at 10 percent per annum, convertible to
common shares at $0.40 per share, due December 31, 2005 55,850
----------
$ 301,350
==========
During the year ended June 30, 2005, the Company borrowed $50,000 from an
investor, which is payable in March 2006. The investor has an option to convert
up to the full loan amount into restricted shares of the Company's common stock
at $0.25 per share. The Company recorded a discount on the debt of $50,000 and
amortized $12,500 as non-cash interest expense during 2005.
On June 23, 2005, the Company entered into a Securities Purchase Agreement (the
"SPA") with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC
and New Millennium Capital Partners II, LLC (collectively, the "Investors") for
the sale of (i) $2,000,000 in Notes and (ii) warrants to purchase 8,000,000
shares of the Company's common stock.
The Investors are obligated to provide the Company with the funds as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 was disbursed on July 28, 2005 (within five days of filing a
registration statement covering the number of shares of common stock underlying
the secured convertible notes and the warrants); and
o $700,000 will be disbursed within two days of the effectiveness of the
registration statement.
F-17
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 7 - NOTES PAYABLE, continued
The Notes bear interest at 10%, mature three years from the date of issuance and
are convertible into the Company's common stock, at the Investors' option, at
the lower of $0.21 per share or 50% of the average of the three lowest intraday
trading prices for the common stock on the Over-The-Counter Bulletin Board for
the 20 trading days before, but not including, the conversion date.
The full principal amount of the Notes is due upon a default under the terms of
the SPA. In addition, the Company granted the Investors a security interest in
substantially all of its assets and intellectual property. The Company filed a
registration statement with the Securities and Exchange Commission within 45
days of closing, which included the common stock underlying the Notes and the
warrants. If the registration statement is not declared effective within 120
days from the date of closing, the Company will be required to pay a penalty to
the Investors. In the event the Company breaches any representation or warranty
in the SPA, the Company is required to pay a penalty in shares or cash, at the
election of the Investors, in an amount equal to three percent of the
outstanding principal amount of the Notes per month plus accrued and unpaid
interest.
The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.28 per share. The Investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered for resale pursuant to an effective registration statement. In
the event the Investors exercise the warrants on a cashless basis, the Company
will not receive any proceeds. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the Notes issued pursuant to the SPA.
The Investors have agreed to restrict their ability to convert their Notes or
exercise their warrants and receive shares of the Company's 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.
Under a Guaranty and Pledge Agreement, Mr. Gordon Davies, Company President,
agreed (i) to unconditionally guarantee the timely and full satisfaction of all
obligations, whether matured or unmatured, now or hereafter existing or created
and becoming due and payable to the Investors, their successors, endorsees,
transferees or assigns under the SPA and other transaction documents to the
extent of 517,400 shares of the Company's common stock owned by Mr. Davies, and
(ii) to grant to the Investors, their successors, endorsees, transferees or
assigns a security interest in the 517,400 shares, as collateral security for
such obligations.
The Notes include certain features that are considered embedded derivative
financial instruments, such as a variety of conversion options, a variable
interest rate feature, events of default and a variable liquidated damages
clause. These features are described below, as follows:
o The Notes' conversion features are identified as an embedded derivative and
have been bifurcated and recorded on the Company's balance sheet at their fair
value;
o The Company has a partial call option to allow the Company to pre-empt the
conversion of the Notes in a given month and partially offset the BCF, which is
identified as an embedded derivative and has been bifurcated and recorded on the
Company's balance sheet at its fair value;
o Annual interest on the Notes is equal to 10% provided that no interest shall
be due and payable for any month in which the Company's trading price is greater
than $0.3125 for each trading day of the month, which potential interest rate
reduction is identified as an embedded derivative and has been bifurcated and
recorded on the Company's balance sheet at its fair value;
F-18
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 7 - NOTES PAYABLE, continued
o The SPA includes a penalty provision based on any failure to meet registration
requirements for shares issuable under the conversion of the note or exercise of
the warrants, which represents an embedded derivative, but such derivative has a
de minimus value and has not been included in this analysis at June 30, 2005;
and
o The SPA contains certain events of default including not having adequate
shares registered to effectuate allowable conversions; in that event, the
Company is required to pay a conversion default payment at 24% interest, which
is identified as an embedded derivative and has been bifurcated and recorded on
the Company's balance sheet at its fair value.
The initial relative fair value assigned to the embedded derivatives was
$504,601.
In conjunction with the Notes, the Company issued warrants to purchase 8,000,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values as of the
inception date of the SPA, which totaled $525,934.
The Company recorded the first $700,000 of fair value of the derivatives and
warrants to debt discount (equal to the total proceeds received as of June 30,
2005), which will be amortized to interest expense over the term of the Notes.
No amortization was recorded for the year ended June 30, 2005. The remaining
balance of $330,535 was recorded as interest expense for the year ended June 30,
2005.
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the
unrestricted and restricted portions of the Notes into shares of the Company's
common stock. The lower the market price of the Company's common stock at the
respective times of conversion, the more shares the Company will need to issue
to convert the principal and interest payments then due on the Notes. If the
market price of the Company's common stock falls below certain thresholds, the
Company will be unable to convert any such repayments of principal and interest
into equity, and the Company will be forced to make such repayments in cash. The
Company's operations could be materially adversely impacted if the Company is
forced to make repeated cash payments on the Notes.
Future minimum principal payments are as follows under notes payable for the
year ending June 30:
2006 $ 338,850
2007 --
2008 700,000
----------
$1,038,850
==========
F-19
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 8 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company conducts its operations utilizing leased facilities and equipment
under non-cancelable operating lease agreements expiring at various dates
through 2007. Future minimum lease commitments, excluding property taxes and
insurance for the years ending June 30 are:
2006 $ 61,230
2007 58,217
2008 1,320
--------
$120,767
========
Rent expense for all leased facilities and equipment was $67,277 and $38,661 for
the years ended June 30, 2005 and 2004, respectively.
LITIGATION
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 a total of $128,000 in exchange for the return to the
Company of 200,000 shares of the Company's common stock. The payments were paid
in combined monthly installments of $14,333 through December 31, 2004 and no
balance was due to the employees as of June 30, 2005. The value of the returned
shares of $69,775 is shown as other expense in the accompanying statement of
operations for the year ended June 30, 2005.
On May 2, 2005, a complaint was filed against the Company, our president, Gordon
Davies, and our vice president, Michael Davies. The complaint alleges, among
other things, a cause of action for breach of contract and seeks the return of
approximately $55,000, which the plaintiff alleges was loaned to the Company
under a "partly written, partly oral" agreement, pursuant to which a total of
$80,000 was loaned. Company management has denied that the plaintiff is owed the
amounts sought and intends to vigorously defend this action. Specifically,
Company management denies that any such agreement ever existed, and that the
Company never received any loans from the plaintiff. On August 2, 2005, a
hearing on the Company's demurrer to the complaint was held, pursuant to which
the demurrer was granted and required the plaintiff to amend their complaint. On
August 29, 2005, an amended complaint was filed against the Company, Mr. Gordon
Davies and Mr. Michael Davies. This matter is currently in the discovery phase
and, as such, counsel has advised Company management that it is premature to
attempt to estimate any potential outcome or loss at this time.
In September 2005, litigation between the Company and a former lessor was
settled through arbitration. The complaint alleged breach of contract by the
Company for not paying amounts due as per the lease terms. The terms of the
settlement require the Company to pay $30,000 on March 1, 2006. Beginning April
1, 2006, the Company is required to pay monthly installments of $3,100 for
twenty-four months. These amounts are accrued in the accompanying financial
statements as other expense. The Company may prepay the remaining balance at a
twenty percent discount at any time. If the Company defaults on any of the
required payments, the additional $40,000 due under the terms of the original
lease will become due and payable. This amount has not been accrued as the
Company believes the possibility of default under the agreement is remote. The
payment of the settlement is personally guaranteed by Mr. Gordon Davies.
F-20
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 8 - COMMITMENTS AND CONTINGENCIES, continued
Future minimum payments under the former lessor settlement agreement for the
years ending June 30 are:
2006 $ 39,300
2007 37,200
2008 27,900
--------
$104,400
========
INDEMNITIES AND GUARANTEES
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
California. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. The
Company is also required to indemnify the Investors under the terms of the
Notes. The duration of the guarantees and indemnities varies, and is generally
tied to the life of the agreement. These guarantees and indemnities do not
provide for any limitation of the maximum potential future payments the Company
could be obligated to make. Historically, the Company has not been obligated nor
incurred any payments for these obligations and, therefore, no liabilities have
been recorded for these indemnities and guarantees in the accompanying balance
sheet.
NOTE 9 - INCOME TAXES
The provision (benefit) for income taxes consists of the following for the years
ended June 30:
2005 2004
----------- -----------
Current:
Federal $ -- $ --
State 800 800
----------- -----------
800 800
----------- -----------
Deferred
Federal (1,240,000) (860,000)
State (220,000) (130,000)
----------- -----------
(1,460,000) (990,000)
Less change in valuation allowance 1,460,000 990,000
----------- -----------
-- --
----------- -----------
$ 800 $ 800
=========== ===========
F-21
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 9 - INCOME TAXES, continued
The components of the net deferred tax asset as of June 30, 2005 is as follows:
Net operating loss carryforwards $ 5,900,000
Valuation allowance (5,900,000)
-----------
$ --
===========
Deferred income taxes are provided for the tax effects of temporary differences
in the reporting of income and deductions for financial statement and income tax
reporting purposes and arise principally from net operating loss carryforwards
and accelerated depreciation methods used for income tax reporting.
The Company's effective tax rate differs from the federal and state statutory
rates due to the valuation allowance recorded for the deferred tax asset due to
unused net operating loss carryforwards. An allowance has been provided for by
the Company which reduced the tax benefits accrued by the Company for its net
operating losses to zero, as it cannot be determined when, or if, the tax
benefits derived from these operating losses will materialize.
As of June 30, 2005, the Company has available net operating loss carryforwards
of approximately $14,750,000 for federal and California purposes which expire in
various years through 2025 and 2015 for federal and California purposes,
respectively. The Company's use of its net operating losses may be restricted in
future years due to the limitations pursuant to IRC Section 382 on changes in
ownership.
The following is a reconciliation of the provision for income taxes at the
expected rates to the income taxes reflected in the statements of operations:
2005 2004
------- -------
Tax expense (benefit) at federal statutory rate (34)% (34)%
State tax expense, net of federal tax effect (6) (6)
Permanent differences 1 1
Change in valuation allowance (39) (39)
------- -------
--% --%
======= =======
NOTE 10 - STOCKHOLDERS' EQUITY
COMMON STOCK
During the years ended June 30, 2005 and 2004 the Company issued common shares
at various times, as described per the following. The shares 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. Restricted shares were discounted for
illiquidity and restrictions on trading.
F-22
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 10 - STOCKHOLDERS' EQUITY, continued
2004
During the year ended June 30, 2004, the Company issued 4,407,723 shares of
common stock for cash amounting $1,796,432.
During the year ended June 30, 2004, the Company issued 777,675 shares of common
stock for services rendered amounting $526,933.
During the year ended June 30, 2004, the Company issued 1,587,563 shares of
common stock for settlement that an conversion of note payable amounting to
$1,219,185.
As of June 30, 2004, the Company has 10,000 shares of common stock to be issued
for service rendered valued at $5,000.
2005
During the year ended June 30, 2005, the Company issued 1,922,943 shares of
common stock and committed to issue common stock for cash amounting $476,256.
During the year ended June 30, 2005, the Company issued 1,672,750 shares of
common stock for services rendered amounting $403,118.
During the year ended June 30, 2005, the Company cancelled 225,000 shares
amounting $69,775 as part of a legal settlement.
During the year ended June 30, 2005, the Company issued 732,500 shares of common
stock and committed to issue 100,000 shares of common stock amounting to
$166,500 for the conversion of notes payable.
During the year ended June 30, 2005, the Company issued 25,000 shares of common
stock amounting to $4,900 for the payment of accrued interest.
STOCK OPTIONS AND WARRANTS
The Company has no stock option plans.
The number and weighted-average exercise prices of options and warrants granted
by the Company are as follows for the years ended June 30, 2005 and 2004:
F-23
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 10 - STOCKHOLDERS' EQUITY, continued
Number of Options Weighted-Average
and Warrants Exercise Price
--------------- ---------------
Outstanding, July 1, 2003 7,397,500 $ 0.40
Granted 50,000 0.40
Exercised (921,250) 0.40
Forfeited/expired (432,500) 0.40
---------------
Outstanding, June 30, 2004 6,193,750 0.40
Granted 16,248,000 0.27
Exercised -- --
Forfeited/expired -- --
---------------
Outstanding, June 30, 2005 22,441,750 $ 0.31
===============
Exercisable, June 30, 2005 20,191,750 $ 0.32
===============
Weighted average fair value of options
and warrants granted during the year
ended June 30, 2005 $ 0.19
Following is a summary of the status of options and warrants outstanding at June
30, 2005:
Weighted Average
Remaining
Contractual Life
Exercise Price Outstanding (Years) Exercisable
- -------------- -------------- ---------------- -------------
$0.25 5,248,000 4.5 years 5,248,000
$0.28 8,000,000 5.0 years 8,000,000
$0.30 3,000,000 5.9 years 750,000
$0.40 6,043,750 2.9 years 6,043,750
$0.56 150,000 4.0 years 150,000
The Company granted options to various consultants for services rendered which
were accounted for using the fair value of the options granted based on the
Black-Scholes option-pricing model. The Company recorded $495,530 and $31,500 as
consulting expense during the years ended June 30, 2005 and 2004, respectively.
Included in 2005 consulting expense is $192,249 for the issuance of one million
warrants to a party related to the Company's president and vice president. The
Company has also issued 2,250,000 warrants to a consultant that vest at the rate
of 750,000 warrants each on August 17, 2005, November 17, 2005 and February 17,
2006. The fair value of each group of 750,000 warrants is $136,500 and will be
recognized as compensation expense in the accompanying financial statements upon
vesting.
F-24
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended June 30, 2005 and 2004
NOTE 10 - STOCKHOLDERS' EQUITY, continued
The Company accounts for stock based compensation to employees under APB 25
using the intrinsic value method. Pro forma information of the effect on
operations as required by SFAS No. 123 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 was based on the following assumptions for the years ended June 30, 2005
and 2004:
2005 2004
---- ----
Expected life 1-5 years 1-5 years
Risk-free interest rate 3.67% 5%
Dividend yield 0% 0%
Volatility 169% 50%
NOTE 11 - SUBSEQUENT EVENTS
In July 2005, the Company borrowed $112,200 from a shareholder. The loan bears
interest at ten percent per annum and is payable on demand.
F-25
RECLAMATION CONSULTING AND APPLICATIONS, INC.
BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ --
Accounts receivable 39,190
Inventories 53,488
Prepaid interest 58,750
Prepaid insurance 20,000
Prepaid expenses and other current assets 26,050
------------
Total current assets 197,478
Property and equipment, net 54,821
Deferred financing costs, net 38,167
------------
$ 290,466
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 203,182
Accrued payroll and related expenses 277,266
Accrued interest payable 75,868
Other accrued expenses 20,151
Current portion of accrued judgment payable 39,300
Notes payable - related parties 421,399
Current portion of notes payable 303,351
------------
Total current liabilities 1,340,517
Accrued judgment payable, net of current portion 65,100
Notes payable, net of current portion 98,266
Derivative and warrant liabilities 1,634,036
------------
Total liabilities 3,137,919
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 75,000,000 shares authorized,
29,620,813 shares issued and outstanding 296,208
Additional paid-in-capital 11,731,997
Treasury stock (1,500,000 shares), at cost (15,000)
Accumulated deficit (14,860,658)
------------
Total stockholders' deficit (2,847,453)
------------
$ 290,466
============
See reports of independent registered public accounting firms
and accompanying notes to the financial statements
F-26
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
------------ ------------
Net revenue $ 48,177 $ 126,811
Cost of revenue 36,180 55,754
------------ ------------
Gross profit 11,997 71,057
Selling, general and administrative expenses 834,772 439,599
------------ ------------
Loss from operations (822,775) (368,542)
------------ ------------
Other income (expense):
Interest income -- 19,019
Interest expense (162,231) (34,422)
Change in fair value of derivative and warrant
liabilities 940,276 --
------------ ------------
Net other income (expense) 778,045 (15,403)
------------ ------------
Loss before provision for income taxes (44,730) (383,945)
Provision for income taxes 800 800
------------ ------------
Net loss $ (45,530) $ (384,745)
============ ============
Net loss per share - basic and diluted $ (0.00) $ (0.01)
============ ============
Weighted-average common shares outstanding - basic and diluted 29,620,813 25,927,904
============ ============
See reports of independent registered public accounting firms
and accompanying notes to the financial statements
F-27
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (45,530) $(384,745)
Adjustments to reconcile net loss to net cash used in
operating activities:
Issuance of stock options and warrants for services rendered 265,231 --
Issuance of shares for services rendered -- 155,841
Change in fair value of derivative and warrant liabilities (940,276) --
Amortization of discount on notes payable 110,766 --
Depreciation and amortization 6,039 1,328
(Increase) decrease in operating assets:
Accounts receivable (7,975) (138,990)
Note receivable -- (120,572)
Inventories (7,796) --
Prepaid expenses and other current assets 1,528 (12,154)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 53,315 11,846
Customer deposits -- (2,052)
--------- ---------
Total adjustments (519,168) (104,753)
--------- ---------
Net cash used in operating activities (564,698) (489,498)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (5,627) (2,600)
--------- ---------
Net cash used in investing activities (5,627) (2,600)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable 789,850 216,500
Payments on notes payable (219,525) (445)
Receipt of cash for shares to be issued -- 45,000
Issuance of common shares for cash -- 230,000
--------- ---------
Net cash provided by financing activities 570,325 491,055
--------- ---------
Net decrease in cash and cash equivalents -- (1,043)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- 1,043
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ --
========= =========
Continued
See reports of independent registered public accounting firms
and accompanying notes to the financial statements
F-28
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR: Interest $ 18,552 $ 1,838
========= =========
Income taxes $ -- $ --
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable and accrued interest to common stock $ -- $ 30,000
========= =========
Debt discount on convertible debt $ 600,000 $ --
========= =========
Issuance of notes payable for cancellation of shares to be issued $ 25,000 $ --
========= =========
Prepaid interest offset against accrued interest payable $ 27,250 $ --
========= =========
Cancellation of 62,500 shares of common stock $ -- $ 26,275
========= =========
See reports of independent registered public accounting firms
and accompanying notes to the financial statements
F-29
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Reclamation Consulting and Applications, Inc., ("us", "we", the "Company" or the
"Registrant") is a Colorado corporation that currently specializes in the
production and sale of its Alderox(TM) products, including Alderox(TM),
ASA-12(TM), DCR(TM), KR-7(TM), PaverBlend(TM), TSR(TM), and ASA Cleaners. These
products are made from our patented formula relating specifically to an improved
release agent for mitigating the sticking of asphalt, concrete and other similar
products to various surfaces. Release agents are commonly applied to containers,
mixers, truck beds and forms prior to pouring asphalt or concrete into them, and
act as a barrier to mitigate adhesion of the asphalt, concrete or other material
to the relevant surfaces.
BASIS OF PRESENTATION
The accompanying interim financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") for interim financial reporting. These interim financial statements are
unaudited and, in the opinion of management, include all adjustments (consisting
of normal recurring adjustments and accruals) necessary to present fairly the
balance sheet, operating results and cash flows for the periods presented in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). Operating results for the three months ended September 30,
2005 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2006 or for any other interim period during such year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been omitted in accordance with
the rules and regulations of the SEC. These interim financial statements should
be read in conjunction with the audited financial statements and notes thereto
contained in the Company's Form 10-KSB for the year ended June 30, 2005.
GOING CONCERN
The Company's financial statements are prepared using the accrual method of
accounting in accordance with GAAP and have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. The Company has incurred
cumulative losses of $14,860,658, including net losses of $45,530 and $384,745
for the three months ended September 30, 2005 and 2004, respectively, and has a
working capital deficit of $1,143,039.
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 future sustainable profitable operations of the Company,
which in turn is dependent upon the Company's ability to raise additional
capital, obtain financing, increase its customer base and manage its costs. 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, which it believes are sufficient to
provide the Company with the ability to continue as a going concern: (i)
obtaining additional equity and debt financing (see Notes 8 and 10); (ii)
controlling of salaries and general and administrative expenses; (iii) managing
accounts payable; and (iv) evaluating its distribution and marketing methods.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include the
recoverability of long-lived assets, the fair value of derivative and warrant
liabilities, and the fair value of common shares/options granted for services.
Actual results could differ from those estimates.
F-30
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers cash
equivalents to include highly liquid investments with original maturities of
three months or less.
ACCOUNTS RECEIVABLE
The Company performs periodic evaluations of its customers and maintains
allowances for potential credit losses as deemed necessary. The Company
generally does not require collateral to secure its accounts receivable. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. Although the Company expects
to collect amounts due, actual collections may differ from the estimated
amounts.
INVENTORIES
Inventories consist of raw materials and finished goods and are stated at the
lower of cost (determined using the average cost method) or market. The Company
regularly monitors potential excess or obsolete inventories by comparing the
market value to cost. When necessary, the Company reduces the carrying amount of
inventories to their market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and improvements are
charged to the asset accounts while replacements, maintenance and repairs that
do not improve or extend the lives of the respective assets are expensed. At the
time property and equipment are retired or otherwise disposed of, the asset and
related accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or charged to
income.
The Company depreciates its property and equipment using the straight-line
method over the following estimated useful lives:
Computers and office equipment 3-5 years
Test equipment 5 years
Vehicles 5 years
LONG-LIVED ASSETS
The Company accounts for its long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the historical cost carrying value of an asset may no longer be
appropriate. The Company assesses recoverability of the carrying value of an
asset by estimating the future undiscounted net cash flows expected to result
from the asset, including eventual disposition. If the future undiscounted net
cash flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset's carrying value and fair
value or disposable value. As of September 30, 2005, the Company does not
believe there has been any impairment of its long-lived assets. There can be no
assurance, however, that market conditions will not change or demand for the
Company's products and services will continue, which could result in impairment
of long-lived assets in the future.
F-31
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences attributable
to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not that such assets will not be
realized through future operations.
CONVERTIBLE DEBENTURES
In certain instances, the convertible feature of the Company's notes payable
provides for a rate of conversion that is below market value (see Note 8). This
feature is characterized as a beneficial conversion feature ("BCF"), which is
recorded by the Company pursuant to Emerging Issues Task Force ("EITF") Issue
No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios," and EITF Issue No.
00-27, "Application of EITF Issue No. 98-5 to Certain Convertible Instruments."
The Company's notes payable are recorded net of the debt discount related to
BCF. The Company amortizes the discount to interest expense over the life of the
debt on a straight-line basis, which approximates the effective interest method.
For the three months ended September 30, 2005, the Company recorded $110,766 of
amortization related to BCF.
DEFERRED FINANCING COSTS
The Company records direct costs of obtaining debt as deferred financing costs
and amortizes these costs to interest expense over the life of the debentures on
a straight-line basis, which approximates the effective interest method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, related-party notes
payable and notes payable. Pursuant to SFAS No. 107, "Disclosures About the Fair
Value of Financial Instruments," the Company is required to estimate the fair
value of all financial instruments at the balance sheet date. The Company cannot
determine the estimated fair value of related-party notes payable as the
transactions originated with related parties nor the fair value of the
convertible notes payable as instruments similar to its convertible notes
payable could not be located. Other than these items, the Company considers the
carrying values of its financial instruments in the financial statements to
approximate their fair values.
F-32
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's derivative financial instruments consist of embedded derivatives
related to the Callable Secured Convertible Term Notes (the "Notes") entered
into on June 23, 2005 (see Note 8). These embedded derivatives include certain
conversion features, variable interest features, call options and default
provisions. The accounting treatment of derivative financial instruments
requires that the Company record the derivatives and related warrants at their
fair values as of the inception date of the agreement and at fair value as of
each subsequent balance sheet date ($1,274,522 as of September 30, 2005). In
addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the Notes, the Company is
required to classify all other non-employee stock options and warrants as
derivative liabilities and mark them to market at each reporting date. The fair
value of such options and warrants at September 30, 2005 totaled $359,514. Any
change in fair value will be recorded as non-operating, non-cash income or
expense at each reporting date. If the fair value of the derivatives is higher
at the subsequent balance sheet date, the Company will record a non-operating,
non-cash charge. If the fair value of the derivatives is lower at the subsequent
balance sheet date, the Company will record non-operating, non-cash income.
Conversion-related derivatives were valued using the Binomial Option Pricing
Model with the following assumptions: dividend yield of 0%; annual volatility of
140%; and risk free interest rate of 4.18% as well as probability analysis
related to trading volume restrictions. The remaining derivatives were valued
using discounted cash flows and probability analysis. The derivatives are
classified as long-term liabilities (see Note 8).
During the quarter ended September 30, 2005, the net decrease in the derivative
and warrant liability was $940,276, which was recorded as a component of other
income in the accompanying statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," as revised by
SAB No. 104. As such, the Company recognizes revenue when persuasive evidence of
an arrangement exists, title transfer has occurred, the price is fixed or
readily determinable and collectibility is probable. Sales are recorded net of
sales discounts.
Revenues from sales to distributors and agents are recognized upon shipment when
there is evidence that an arrangement exists, delivery has occurred under the
Company's standard FOB shipping point terms, the sales price is fixed or
determinable and the ability to collect sales proceeds is reasonably assured.
The contracts regarding these sales do not include any rights of return or price
protection clauses.
NET LOSS PER SHARE
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted earnings
per share. Basic EPS includes no dilution and is computed by dividing income or
loss available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings or losses of the entity.
Dilution is computed by applying the treasury stock method for options and
warrants. 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) as if funds
obtained thereby were used to purchase common stock at the average market price
during the period.
For the three months ended September 30, 2005 and 2004, basic and diluted loss
per share are the same since the calculation of diluted per share amounts would
result in an anti-dilutive calculation that is not permitted and therefore not
included. Such dilutive amounts would have included shares potentially issuable
pursuant to convertible debentures (see Notes 7 and 8) and outstanding options
and warrants (see Note 10).
F-33
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
ISSUANCE OF STOCK FOR NON-CASH CONSIDERATION
All issuances of the Company's stock for non-cash consideration have been
assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily
determinable. The majority of the non-cash consideration received pertains to
services rendered by consultants and others and has been valued at the market
value of the shares on the dates issued. In certain instances, the Company has
discounted the values assigned to the issued shares for illiquidity and/or
restrictions on resale (see Note 10).
STOCK-BASED COMPENSATION
Stock-based awards to non-employees are accounted for using the fair value
method in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," and EITF Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date used to determine the fair value of the equity instrument issued is the
earlier of the date on which the third-party performance is complete or the date
on which it is probable that performance will occur.
Stock-based compensation for employees is accounted for in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." The Company has elected to adopt the disclosure only
provisions of SFAS No. 123, which requires pro forma disclosures in the
financial statements as if the measurement provisions of SFAS No. 123 had been
adopted. In addition, the Company has made the appropriate disclosures as
required under SFAS No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure."
The Company's net loss and net loss per share determined under SFAS No. 123 were
the same as reported in the accompanying statements of operations for the three
months ended September 30, 2005 and 2004 as no options were issued to employees
during these periods.
CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash balances at financial institutions that are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
From time-to-time, the Company's cash balances exceed the amount insured by the
FDIC. Management believes the risk of loss of cash balances in excess of the
insured limit to be low.
The majority of revenues in the three months ended September 30, 2005 and 2004
were generated from a few customers. For the three months ended September 30,
2005, total sales to two major customers, amounted to $34,126, or approximately
70.7% of our sales and as of September 30, 2005, accounts receivable from these
two customers accounted for approximately 87.1% of our total accounts
receivable.
RECLASSIFICATIONS
Certain amounts in September 30, 2004 financial statements have been
reclassified to conform with the September 30, 2005 presentation. Such
reclassification had no effect on net loss as previously reported.
F-34
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment," which replaces SFAS No. 123 and supersedes APB
Opinion No. 25. SFAS No. 123R addresses the accounting for transactions in which
an enterprise receives employee services in exchange for equity instruments of
the enterprise or liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options and restrictive stock
grants, to be recognized as a compensation cost based on their fair values. The
pro forma disclosures previously permitted under SFAS No. 123 no longer will be
an alternative to financial statement recognition. Under SFAS No. 123R, the
Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at the date of adoption. The transition methods
include prospective and retroactive adoption options. Under the retroactive
option, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options and restricted
stock at the beginning of the first quarter of adoption of SFAS No. 123R, while
the retroactive methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period restated. The
Company is required to adopt SFAS No. 123R in its fiscal year beginning after
December 15, 2005. The Company is currently assessing the impact that adoption
of this Standard will have on its results of operations, financial position and
cash flows. The Company preliminarily believes that adoption of this standard
will result in additional charges to reported earnings.
In September 2004, the EITF finalized its consensus on EITF Issue No. 04-8, "The
Effect of Contingently Convertible Debt on Diluted Earnings Per Share" ("EITF
04-8"). EITF 04-8 addresses when the dilutive effect of contingently convertible
debt with a market price trigger should be included in diluted earnings per
share. Under EITF 04-8, the market price contingency should be ignored and these
securities should be treated as non-contingent, convertible securities and
always included in the diluted EPS computation unless their inclusion would be
anti-dilutive. EITF 04-8 requires these securities be included in diluted EPS
using either the if-converted method or the net share settlement method,
depending on the conversion terms of the security. EITF 04-8 is effective for
all periods ending after December 15, 2004 and is to be applied by
retrospectively restating previously reported EPS. The adoption of EITF 04-8
will have an effect on the Company's diluted EPS computation if, in future
periods, the inclusion of contingently convertible debt becomes dilutive.
In November 2004, The FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and spoilage. SFAS No. 151
requires that these costs be expensed as incurred and not included in overhead.
SFAS No. 151 also requires that allocation of fixed production overhead to
conversion costs be based on normal capacity of the production facilities. This
standard is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The adoption of this statement did not have a significant
impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary
Assets, an amendment of APB Opinion 29, Accounting for Non-Monetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that exchanges of non-monetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendment eliminates the narrow exception
for non-monetary exchanges of similar productive assets and replaces it with a
broader exception for exchanges of non-monetary assets that do not have
"commercial substance." The provisions in SFAS No. 153 are effective for
non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The adoption of this statement did not have a material impact on the
Company's financial statements.
NOTE 3 - ACCOUNTS RECEIVABLE
All accounts receivable are trade related. These receivables are current and no
reserve for uncollectible accounts is deemed necessary.
F-35
NOTE 4 - INVENTORIES
Inventories consist of the following as of September 30, 2005:
Raw materials $22,633
Finished goods 30,855
-------
$53,488
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at September 30, 2005:
Computers and office equipment $ 26,357
Test equipment 32,579
Vehicles 17,408
--------
76,344
Less accumulated depreciation (21,523)
--------
$ 54,821
Depreciation expense was $4,206 and $1,328 for the three months ended September
30, 2005 and 2004, respectively.
NOTE 6 - DEFERRED FINANCING COSTS
Deferred financing costs consist of the following as of September 30, 2005:
Cost $ 40,000
Less accumulated amortization (1,833)
--------
$ 38,167
Amortization expense was $1,833 for the three months ended September 30, 2005.
F-36
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consist of the following at September 30, 2005:
Unsecured note payable to stockholder, bearing interest at 10
percent per annum, convertible to common stock at $0.25 per share,
due on demand $ 6,000
Unsecured note payable to stockholder, bearing interest at 15
percent per annum, convertible to common stock at $0.75 per share,
monthly principal payments of $1,833, due June 30, 2006 13,333
Unsecured note payable to stockholder, bearing interest at 15
percent per annum, due on demand 14,598
Unsecured notes payable to stockholders, bearing interest at 10
percent per annum, due on demand 333,763
Unsecured note payable to stockholder, bearing interest at 5
percent, due on demand 43,150
Unsecured note payable to stockholder, bearing interest at credit
card rate, as defined, due on demand 10,555
---------
$ 421,399
=========
Interest expense on notes payable - related parties for the three months ended
September 30, 2005 and 2004 was $13,013 and $4,315, respectively. All
related-party notes payable are reflected as current liabilities as they are
either due on demand or mature on June 30, 2006.
F-37
NOTE 8 - NOTES PAYABLE
Notes payable consist of the following at June 30, 2005:
Callable, secured, convertible notes payable, net of unamortized discount
of $1,201,734 (see below) $ 98,266
Note payable, bearing interest at 10 percent per annum, convertible to
common stock at 70% of the average of the 5 lowest closing bid prices of
the common stock for the 20 days preceding the date of conversion, with a
floor of $0.18 per share and a ceiling of $0.30 per share, due March 2006,
secured by accounts receivable, inventories and property and equipment, net
of unamortized debt discount of $25,000 (see below) 25,001
Note payable, bearing interest at 15 percent per annum, convertible to
common shares at $0.40 per share, due on demand, secured by substantially
all assets of the Company 75,000
Note payable, bearing interest at 15 percent per annum, convertible to
common shares at $0.40 per share, due October 2005, secured by
substantially all assets of the Company 50,000
Notes payable, bearing interest at 10 percent per annum and paid
semi-annually, convertible to common shares at $0.40 or $0.45 per share,
due on demand, secured by substantially all assets of the Company 47,500
Note payable, bearing interest at 15 percent per annum, convertible to
common shares at $0.75 per share, due on demand, secured by substantially
all assets of the Company 50,000
Unsecured notes payable, bearing interest at 10 percent per annum,
convertible to common shares at $0.40 per share, due December 31, 2005 55,850
---------
401,617
Less: current portion (303,351)
---------
$ 98,266
=========
During the year ended June 30, 2005, the Company borrowed $50,001 from a
noteholder, which is payable in March 2006. The noteholder has an option to
convert up to the full loan amount into restricted shares of the Company's
common stock at $0.25 per share. The Company recorded a BCF-related
discount on the debt of $50,000 and amortized $12,500 as non-cash interest
expense during the three months ended September 30, 2005.
On June 23, 2005, the Company entered into a Securities Purchase Agreement
(the "SPA") with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW
Partners, LLC and New Millennium Capital Partners II, LLC (collectively,
the "Investors") for the sale of (i) $2,000,000 in Notes and (ii) warrants
to purchase 8,000,000 shares of the Company's common stock.
F-38
NOTE 8 - NOTES PAYABLE, continued
The Investors are obligated to provide the Company with the funds as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 was disbursed on July 28, 2005 (within five days of filing a
registration statement covering the number of shares of common stock underlying
the secured convertible notes and the warrants); and
o $700,000 will be disbursed within two days of the effectiveness of a
registration statement (see below).
The Notes bear interest at 10%, mature three years from the date of issuance and
are convertible into the Company's common stock, at the Investors' option, at
the lower of $0.21 per share or 50% of the average of the three lowest intraday
trading prices for the common stock on the Over-The-Counter Bulletin Board for
the 20 trading days before, but not including, the conversion date.
The full principal amount of the Notes is due upon a default under the terms of
the SPA. In addition, the Company granted the Investors a security interest in
substantially all of its assets and intellectual property. The Company filed a
registration statement with the Securities and Exchange Commission within 45
days of closing, which included the common stock underlying the Notes and the
warrants. If the registration statement is not declared effective within 120
days from the date of closing, the Company will be required to pay a penalty to
the Investors. In the event the Company breaches any representation or warranty
in the SPA, the Company is required to pay a penalty in shares or cash, at the
election of the Investors, in an amount equal to three percent of the
outstanding principal amount of the Notes per month plus accrued and unpaid
interest.
The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.28 per share. The Investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered for resale pursuant to an effective registration statement. In
the event the Investors exercise the warrants on a cashless basis, the Company
will not receive any proceeds. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the Notes issued pursuant to the SPA.
The Investors have agreed to restrict their ability to convert their Notes or
exercise their warrants and receive shares of the Company's 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.
Under a Guaranty and Pledge Agreement, Mr. Gordon Davies, the Company's
president, agreed (i) to unconditionally guarantee the timely and full
satisfaction of all obligations, whether matured or unmatured, now or hereafter
existing or created and becoming due and payable to the Investors, their
successors, endorsees, transferees or assigns under the SPA and other
transaction documents to the extent of 517,400 shares of the Company's common
stock owned by Mr. Davies, and (ii) to grant to the Investors, their successors,
endorsees, transferees or assigns a security interest in the 517,400 shares, as
collateral security for such obligations.
The Notes include certain features that are considered embedded derivative
financial instruments, such as a variety of conversion options, a variable
interest rate feature, events of default and a variable liquidated damages
clause. These features are described below, as follows:
o The Notes' conversion features are identified as an embedded derivative and
have been bifurcated and recorded on the Company's balance sheet at their fair
value;
o The Company has a partial call option to allow the Company to pre-empt the
conversion of the Notes in a given month and partially offset the BCF, which is
identified as an embedded derivative and has been bifurcated and recorded on the
Company's balance sheet at its fair value;
F-39
NOTE 8 - NOTES PAYABLE, continued
o Annual interest on the Notes is equal to 10% provided that no interest shall
be due and payable for any month in which the Company's trading price is greater
than $0.3125 for each trading day of the month, which potential interest rate
reduction is identified as an embedded derivative and has been bifurcated and
recorded on the Company's balance sheet at its fair value;
o The SPA includes a penalty provision based on any failure to meet registration
requirements for shares issuable under the conversion of the note or exercise of
the warrants, which represents an embedded derivative, but such derivative has a
de minimus value and has not been included in this analysis at September 30,
2005; and
o The SPA contains certain events of default including not having adequate
shares registered to effectuate allowable conversions; in that event, the
Company is required to pay a conversion default payment at 24% interest, which
is identified as an embedded derivative and has been bifurcated and recorded on
the Company's balance sheet at its fair value.
The initial relative fair value assigned to the embedded derivatives was
$504,601 as of June 30, 2005. The fair value of the embedded derivatives was
$701,212 as of September 30, 2005.
In conjunction with the Notes, the Company issued warrants to purchase 5,200,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values as of the
inception date of the agreement, which totaled $525,934 as of June 30, 2005. As
of September 30, 2005, the fair value of these warrants was $573,310.
The Company recorded the first $1,300,000 of fair value of the derivatives and
warrants to debt discount (equal to the total proceeds received as of September
30, 2005), which will be amortized to interest expense over the term of the
Notes. Amortization expense for the three months ended September 30, 2005 was
$98,266.
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the
unrestricted and restricted portions of the Notes into shares of the Company's
common stock. The lower the market price of the Company's common stock at the
respective times of conversion, the more shares the Company will need to issue
to convert the principal and interest payments then due on the Notes. If the
market price of the Company's common stock falls below certain thresholds, the
Company will be unable to convert any such repayments of principal and interest
into equity, and the Company will be forced to make such repayments in cash. The
Company's operations could be materially adversely impacted if the Company is
forced to make repeated cash payments on the Notes.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
LITIGATION
On May 2, 2005, a complaint was filed against the Company, our president, Gordon
Davies, and our vice president, Michael Davies. The complaint alleges, among
other things, a cause of action for breach of contract and seeks the return of
approximately $55,000, which the plaintiff alleges was loaned to the Company
under a "partly written, partly oral" agreement, pursuant to which a total of
$80,000 was loaned. Company management has denied that the plaintiff is owed the
amounts sought and intends to vigorously defend this action. Specifically,
Company management denies that any such agreement ever existed, and that the
Company never received any loans from the plaintiff. On August 2, 2005, a
hearing on the Company's demurrer to the complaint was held, pursuant to which
the demurrer was granted and required the plaintiff to amend its complaint. On
August 29, 2005, an amended complaint was filed against the Company, Mr. Gordon
Davies and Mr. Michael Davies. A trial date has been set for June 2006. Counsel
has advised the Company that it is premature to attempt to estimate any
potential outcome or loss at this time.
F-40
NOTE 9 - COMMITMENTS AND CONTINGENCIES, continued
In September 2005, litigation between the Company and a former lessor was
settled through arbitration. The complaint alleged breach of contract by the
Company for not paying amounts due as per the lease terms. The terms of the
settlement require the Company to pay $30,000 on March 1, 2006. Beginning April
1, 2006, the Company is required to pay monthly installments of $3,100 for
twenty-four months. The Company may prepay the remaining balance at a twenty
percent discount at any time. If the Company defaults on any of the required
payments, the additional $40,000 due under the terms of the original lease will
become due and payable. This amount has not been accrued as the Company believes
the possibility of default under the agreement is remote. The payment of the
settlement is personally guaranteed by Mr. Gordon Davies.
Future minimum payments under the former lessor settlement agreement for the
years ending June 30 are:
2006 $ 39,300
2007 37,200
2008 27,900
--------
$104,400
========
INDEMNITIES AND GUARANTEES
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Colorado. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. The
Company is also required to indemnify the Investors for certain matters as
defined under the terms of the Notes. The duration of the guarantees and
indemnities varies, and is generally tied to the life of the agreement. These
guarantees and indemnities do not provide for any limitation of the maximum
potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying balance sheet.
NOTE 10 - STOCKHOLDERS' EQUITY
COMMON STOCK
During the three months ended September 30, 2004, the Company issued common
shares at various times, as described per the following. The shares 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. Restricted shares were discounted for
illiquidity and restrictions on trading.
2004
During the year three months ended September 30, 2004, the Company issued
766,663 shares of common stock for cash amounting $230,000.
During the three months ended September 30, 2004, the Company issued 399,593
shares of common stock for services rendered amounting $155,841.
During the year three months ended September 30, 2004, the Company cancelled
62,500 shares of common stock amounting to $26,275.
F-41
NOTE 10 - STOCKHOLDERS' EQUITY, continued
As of September 30, 2004, the Company had received $45,000 for 150,000 shares of
common stock to be issued.
2005
During the three months ended September 30, 2005, the Company settled debt to a
related party by paying cash of $25,000 in lieu of 100,000 shares of common
stock that were committed to be issued at June 30, 2005. No gain or loss was
recorded on this transaction.
There were no issuances of common stock during the three months ended September
30, 2005.
STOCK OPTIONS AND WARRANTS
The Company has no stock option plans.
During the three months ended September 30, 2005, the Company granted fully
vested options to various consultants for services rendered which were accounted
for using the fair value of the options granted based on the Black-Scholes
option-pricing model. The Company recorded $128,731 as consulting expense during
the three months ended September 30, 2005.
In addition, the Company issued 2,250,000 warrants to a consultant in fiscal
2005, the unvested portion of which, vests at the rate of 750,000 warrants each
on November 17, 2005 and February 17, 2006. The fair value of each group of
750,000 warrants is $136,500 and will be recognized as compensation expense in
the accompanying financial statements upon vesting. For the three months ended
September 30, 2005, the Company recognized $136,500 as consulting expense for
the vesting of warrants on August 17, 2005.
The Company accounts for stock-based compensation to employees under APB 25
using the intrinsic value method. Pro forma information of the effect on
operations as required by SFAS No. 123 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 was based on the following assumptions for the three months ended
September 30, 2005 and 2004:
2005 2004
---- ----
Expected life 1-5 years 1-5 years
Risk-free interest rate 4.18% 5%
Dividend yield 0% 0%
Volatility 140% 50%
F-42
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 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 related to a private placement
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.
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.
II-2
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.
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.
II-3
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. The four accredited investors, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC subscribed for 50.1%, 33.8%, 14.4% and 1.7%,
respectively, of the total offering. Each accredited investor purchased, or will
purchase, such percentage of each closing under the Securities Purchase
Agreement.
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 was disbursed on July 28, 2005; and
o $700,000 will be disbursed within two days of the effectiveness of
this registration statement.
Accordingly, we have received a total of $1,300,000 pursuant to the
Securities Purchase Agreement. Pursuant to the Securities Purchase Agreement, we
have issued 5,200,000 warrants to purchase shares of common stock and we are
obligated to issue 2,800,000 additional warrants together with $700,000 in
secured convertible notes within two days from the effective date of this
registration statement.
II-4
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
Registration Statement on Form SB-2 filed with the Commission on
November 1, 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.
4.14 Callable Secured Convertible Note issued to AJW Offshore, Ltd.,
dated July 28, 2005, filed as an exhibit to the Registration
Statement on Form SB-2 filed with the Commission on November 1,
2005 and incorporated herein by reference.
4.15 Callable Secured Convertible Note issued to AJW Qualified
Partners, LLC, dated July 28, 2005, filed as an exhibit to the
Registration Statement on Form SB-2 filed with the Commission on
November 1, 2005 and incorporated herein by reference.
4.16 Callable Secured Convertible Note issued to AJW Partners, LLC,
dated July 28, 2005, filed as an exhibit to the Registration
Statement on Form SB-2 filed with the Commission on November 1,
2005 and incorporated herein by reference.
4.17 Callable Secured Convertible Note issued to New Millennium
Capital Partners II, LLC, dated July 28, 2005, filed as an
exhibit to the Registration Statement on Form SB-2 filed with the
Commission on November 1, 2005 and incorporated herein by
reference.
4.18 Stock Purchase Warrant issued to AJW Offshore, Ltd., dated July
28, 2005, filed as an exhibit to the Registration Statement on
Form SB-2 filed with the Commission on November 1, 2005 and
incorporated herein by reference.
4.19 Stock Purchase Warrant issued to AJW Qualified Partners, LLC,
dated July 28, 2005, filed as an exhibit to the Registration
Statement on Form SB-2 filed with the Commission on November 1,
2005 and incorporated herein by reference.
4.20 Stock Purchase Warrant issued to AJW Partners, LLC, dated July
28, 2005 (filed herewith).
4.21 Stock Purchase Warrant issued to New Millennium Capital Partners
II, LLC, dated July 28, 2005, filed as an exhibit to the
Registration Statement on Form SB-2 filed with the Commission on
November 1, 2005 and incorporated herein by reference.
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5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent, filed as
an exhibit to the Registration Statement on Form SB-2 filed with
the Commission on July 27, 2005 and incorporated herein by
reference.
10.1 Employment Agreement for Gordon Davies, dated as of January 6,
2005, filed as an exhibit to the Registration Statement on Form
SB-2 filed with the Commission on July 27, 2005 and incorporated
herein by reference.
10.2 Employment Agreement for Michael Davies, dated as of January 6,
2005, filed as an exhibit to the Registration Statement on Form
SB-2 filed with the Commission on July 27, 2005 and incorporated
herein by reference.
10.3 Distribution Agreement, dated as of February 3, 2005, by and
between the Company and ITA Asphalt Limited, filed as an exhibit
to the Registration Statement on Form SB-2 filed with the
Commission on July 27, 2005 and incorporated herein by reference.
10.4 Distribution Agreement, dated as of July 7, 2005, by and between
the Company and Jimmy Watts, filed as an exhibit to the
Registration Statement on Form SB-2 filed with the Commission on
July 27, 2005 and incorporated herein by reference.
10.5 Distribution Agreement, dated as of July 12, 2005, by and between
the Company and Mark Lang, filed as an exhibit to the
Registration Statement on Form SB-2 filed with the Commission on
July 27, 2005 and incorporated herein by reference.
10.6 Distribution Agreement, dated as of June 30, 2005, by and between
the Company and Don Pickett, filed as an exhibit to the
Registration Statement on Form SB-2 filed with the Commission on
July 27, 2005 and incorporated herein by reference.
10.7 Contract Sales Representative Agreement, dated as of October 27,
2004, by and between the Company and Dennis Jackman, filed as an
exhibit to the Registration Statement on Form SB-2 filed with the
Commission on July 27, 2005 and incorporated herein by reference.
10.8 Amendment to Contract Sales Representative Agreement, dated as of
October 27, 2004, by and between the Company and Dennis Jackman,
filed as an exhibit to the Registration Statement on Form SB-2
filed with the Commission on July 27, 2005 and incorporated
herein by reference.
10.9 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini, filed as
an exhibit to the Registration Statement on Form SB-2 filed with
the Commission on July 27, 2005 and incorporated herein by
reference.
10.10 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini, filed as
an exhibit to the Registration Statement on Form SB-2 filed with
the Commission on July 27, 2005 and incorporated herein by
reference.
10.11 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini, filed as
an exhibit to the Registration Statement on Form SB-2 filed with
the Commission on July 27, 2005 and incorporated herein by
reference.
10.12 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini, filed as
an exhibit to the Registration Statement on Form SB-2 filed with
the Commission on July 27, 2005 and incorporated herein by
reference.
10.13 Contract Sales Representative Agreement, dated as of November 15,
2004, by and between the Company and Rosiane Jacomini, filed as
an exhibit to the Registration Statement on Form SB-2 filed with
the Commission on July 27, 2005 and incorporated herein by
reference.
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10.14 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane
Jacomini, filed as an exhibit to the Registration Statement on
Form SB-2 filed with the Commission on July 27, 2005 and
incorporated herein by reference.
10.15 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane
Jacomini, filed as an exhibit to the Registration Statement on
Form SB-2 filed with the Commission on July 27, 2005 and
incorporated herein by reference.
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10.16 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane
Jacomini, filed as an exhibit to the Registration Statement on
Form SB-2 filed with the Commission on July 27, 2005 and
incorporated herein by reference.
10.17 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane
Jacomini, filed as an exhibit to the Registration Statement on
Form SB-2 filed with the Commission on July 27, 2005 and
incorporated herein by reference.
10.18 Amendment to Contract Sales Representative Agreement, dated as of
November 15, 2004, by and between the Company and Rosiane
Jacomini, filed as an exhibit to the Registration Statement on
Form SB-2 filed with the Commission on July 27, 2005 and
incorporated herein by reference.
10.19 Distribution Agreement, dated as of August 10, 2004, by and
between the Company and Aurtech Marketing, Pty., Ltd., filed as
an exhibit to the Registration Statement on Form SB-2 filed with
the Commission on July 27, 2005 and incorporated herein by
reference.
10.20 Distribution Agreement, dated as of December 5, 2003, by and
between the Company and Canadian Release Agents, Ltd., filed as
an exhibit to the Registration Statement on Form SB-2 filed with
the Commission on July 27, 2005 and incorporated herein by
reference.
14.1 Code of Ethics, filed as an exhibit to the annual report on Form
10-KSB filed with the Commission on October 17, 2005 and
incorporated herein by reference.
23.1 Consent of Kabani & Company, Inc. (filed herewith).
23.2 Consent of Corbin & Company, LLP (filed herewith).
23.3 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
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(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.
(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.
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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 November 23, 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 November 23, 2005
- ------------------ Executive Officer), President and
Gordon Davies Director
/s/ MICHAEL DAVIES Chief Financial Officer (Principal November 23, 2005
- ------------------ Financial Officer and Principal
Michael Davies Accounting Officer) and Director
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