FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 19345
For the quarterly period ended SEPTEMBER 30, 2006.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission file number: 000-26017
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(Exact name of Small Business Issuer as specified in its charter)
Colorado 58-2222646
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
940 Calle Amanecer, Suite E
San Clemente, California 92673
----------------------------------------------------
(Address of principal executive offices)..............................(Zip Code)
Issuer's telephone number, including
area code: 949-609-0590
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X .
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes __________ No __________
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 49,066,358 shares as of November 14,
2006.
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
RECLAMATION CONSULTING AND APPLICATIONS, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION.................................................1
ITEM 1. FINANCIAL STATEMENTS................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........22
PART II - OTHER INFORMATION..................................................30
ITEM 1. LEGAL PROCEEDINGS..................................................30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.....30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............30
ITEM 5. OTHER INFORMATION...............................................30
ITEM 6. EXHIBITS...........................................................31
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 2006
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ --
Accounts receivable 46,562
Inventories 70,884
Prepaid expenses and other current assets 24,067
------------
Total current assets 141,513
Property and equipment, net 41,632
License agreement, net 462,500
Deferred financing costs, net 24,167
Deposits 25,658
------------
$ 695,470
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable and bank overdraft $ 252,588
Accrued professional fees 122,510
Payroll taxes payable 149,574
Accrued interest payable 177,259
Payable to shareholder 110,000
Other accrued expenses 49,681
Current portion of accrued judgment payable 48,600
Notes payable - related parties 2,212,895
Current portion of notes payable 303,350
------------
Total current liabilities 3,426,457
Accrued judgment payable, net of current portion 27,600
Notes payable, net of current portion and debt discount 447,099
Derivative and warrant liabilities 2,224,629
------------
Total liabilities 6,125,785
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 150,000,000 authorized,
49,066,358 shares issued and outstanding 490,714
Committed shares 32,400
Additional paid-in-capital 14,549,757
Treasury stock (1,500,000 shares), at cost (15,000)
Accumulated deficit (20,488,186)
------------
Total stockholders' deficit (5,430,315)
------------
$ 695,470
============
See the accompanying notes to unaudited condensed financial statements.
1
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
2006 2005
------------ ------------
Net revenue $ 68,387 $ 48,177
Cost of revenue 50,485 36,180
------------ ------------
Gross profit 17,902 11,997
Selling, general and administrative expenses 426,069 834,772
------------ ------------
Loss from operations (408,167) (822,775)
------------ ------------
Other income (expense):
Interest expense (363,944) (162,231)
Change in fair value of derivative liabilities 2,315,143 940,276
------------ ------------
1,951,199 778,045
------------ ------------
Income (loss) before provision for income taxes 1,543,032 (44,730)
Provision for income taxes 800 800
------------ ------------
Net income (loss) $ 1,542,232 $ (45,530)
============ ============
Net income (loss) per common share:
Basic $ 0.03 $ (0.00)
============ ============
Diluted $ 0.02 $ (0.00)
============ ============
Weighted-average common shares outstanding:
Basic 49,066,358 29,620,813
============ ============
Diluted 85,248,204 29,620,813
============ ============
See the accompanying notes to unaudited condensed financial statements.
2
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For The Three Months Ended
September 30,
2006 2005
----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,542,232 $ (45,530)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Issuance of stock options and warrants for services rendered -- 265,231
Change in fair value of derivative and warrant liabilities (2,315,143) (940,276)
Amortization of discount on notes payable 261,016 110,766
Depreciation and amortization 19,411 6,039
(Increase) decrease in operating assets:
Accounts receivable (29,454) (7,975)
Inventories (6,364) (7,796)
Prepaid expenses and other current assets (113) 1,528
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 32,032 53,315
----------- -----------
Total adjustments (2,038,615) (519,168)
----------- -----------
Net cash used in operating activities (496,383) (564,698)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment -- (5,627)
----------- -----------
Net cash used in investing activities -- (5,627)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and convertible debentures 712,050 789,850
Payments on notes payable and convertible debentures (215,667) (219,525)
----------- -----------
Net cash provided by financing activities 496,383 570,325
----------- -----------
Net decrease in cash and cash equivalents -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- --
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ --
=========== ===========
See the accompanying notes to unaudited condensed financial statements.
3
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
2006 2005
------- -------
CASH PAID FOR: Interest $57,947 $ 1,838
======= =======
Income taxes $ -- $ --
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable and accrued interest to common stock $ -- $30,000
======= =======
Cancellation of 62,500 shares of common stock $ -- $26,275
======= =======
See the accompanying notes to unaudited condensed financial statements.
4
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
=======================================================================
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(R) products,
including Alderox(R), ASA-12(R), DCR(R), KR-7(R), PaverBlend(TM),
TSR(R), 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 condensed 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 condensed 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, 2006 are not necessarily
indicative of the results that may be expected for the year ending June
30, 2007 or for any other interim period during such year. Certain
information and footnote disclosures normally included in condensed
financial statements prepared in accordance with GAAP have been omitted
in accordance with the rules and regulations of the SEC. These interim
condensed 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, 2006.
Going Concern
-------------
The Company's condensed 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 $20,488,186
including net income (loss) of $1,542,232 and ($45,530) for the three
months ended September 30, 2006 and 2005, respectively, and has a
working capital deficit of $3,284,944 at September 30, 2006.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown
in the accompanying condensed 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
condensed 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) controlling of salaries and general and
administrative expenses; (ii) managing accounts payable; and (iii)
evaluating its distribution and marketing methods.
5
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
=======================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Use of Estimates
----------------
The preparation of condensed 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 condensed
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.
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
6
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
=======================================================================
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, 2006, 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.
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 those assets will
not be realized through future operations.
Convertible Debentures
----------------------
In certain instances, the convertible feature of the Company's
conventional 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 conventional 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 three months
ended September 30, 2006 and 2005, the Company recorded $0 and $12,500
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.
7
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
=======================================================================
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 condensed financial
statements to approximate their fair values.
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 ($1,352,928 as of September 30, 2006). 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, 2006 totaled $871,701. 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 166%; and risk free interest rate of 5.16% 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).
For the three months ended September 30, 2006 and 2005, the net
decrease in the derivative and warrant liability was $2,315,143 and
$940,276, respectively, which was recorded as a component of other
income in the accompanying condensed 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.
8
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
=======================================================================
Net Income (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, 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 "in-the-money" options and warrants
(see Note 10).
9
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
=======================================================================
The following table sets forth for all periods presented the
computation of basic and diluted net income (loss) per share, including
the reconciliation of the numerator and denominator used in the
calculation of basic and diluted net income (loss) per share:
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2006 2005
------------ ------------
(UNAUDITED)
Basic income (loss) per share:
Net income (loss) $ 1,542,232 $ (45,530)
------------ ------------
Weighted-average common shares outstanding, basic 49,066,358 29,620,813
============ ============
Basic income (loss) per share $ 0.03 $ (0.00)
============ ============
Diluted income (loss) per share:
Net income (loss) $ 1,542,232 $ (45,530)
Convertible notes interest expense (net of tax) 30,000 --
Adjusted net income (loss) available to common
stockholders $ 1,572,232 $ (45,530)
============ ============
Weighted-average common shares outstanding, basic 49,066,358 29,620,813
Effect of dilutive securities:
Stock options and warrants 1,818,182 --
Convertible notes payable 34,363,664 --
------------ ------------
Weighted-average common shares outstanding, diluted 85,248,204 29,620,813
============ ============
Diluted net income (loss) per share $ 0.02 $ (0.00)
============ ============
Stock-Based Compensation
------------------------
At September 30, 2006, the Company has no stock-based compensation
plans.
On July 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment", ("SFAS 123(R)") which establishes standards for
the accounting of transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on accounting for
transactions where an entity obtains employee services in share-based
payment transactions. SFAS 123(R) requires a public entity to measure
the cost of employee services received in exchange for an award of
equity instruments, including stock options, based on the grant-date
fair value of the award and to recognize it as compensation expense
over the period the employee is required to provide service in exchange
10
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
=======================================================================
for the award, usually the vesting period. SFAS 123(R) supersedes the
Company's previous accounting under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", ("APB 25") for
periods beginning in fiscal 2007. In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB
107") relating to SFAS 123(R). The Company has applied the provisions
of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the accounting
standard as of July 1, 2006, the first day of the Company's fiscal year
2007. The Company's condensed financial statements as of and for the
three months ended September 30, 2006 reflect the impact of SFAS
123(R). In accordance with the modified prospective transition method,
the Company's condensed financial statements for prior periods have not
been restated to reflect, and do not include, the impact of SFAS
123(R).
SFAS 123(R) requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service
periods in the Company's condensed statement of operations. Prior to
the adoption of SFAS 123(R), the Company accounted for stock-based
awards to employees and directors using the intrinsic value method in
accordance with APB 25 as allowed under SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). Under the intrinsic value
method, stock-based compensation expense was recognized in the
Company's condensed statements of operations, other than for option
grants to employees below the fair market value of the underlying stock
at the date of grant. No stock-based employee compensation cost was
recognized in the condensed statements of operations for the three
months ended September 30, 2005, as all options granted had an exercise
price equal to or greater than the fair market value of the underlying
common stock on the date of grant.
Stock-based compensation expense recognized during the period is based
on the value of the portion of share-based payment awards that is
ultimately expected to vest during the period. Stock-based compensation
expense recognized in the Company's condensed statement of operations
for the three months ended September 30, 2006 included compensation
expense for share-based payment awards granted prior to, but not yet
vested as of June 30, 2006 based on the grant date fair value estimated
in accordance with the pro forma provisions of SFAS 123 and
compensation expense for the share-based payment awards granted
subsequent to June 30, 2006 based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). As
stock-based compensation expense recognized in the condensed statement
of operations for the three months ended September 30, 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The estimated average
forfeiture rate for the three months ended September 30, 2006, of
approximately 10% was based on historical forfeiture experience. There
is no estimated pricing term of option grants for the three months of
2006 as there were no grants during the three months ended September
30, 2006. In the Company's pro forma information required under SFAS
123 for the periods prior to fiscal 2006, the Company accounted for
forfeitures as they occurred.
SFAS 123(R) requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost
recognized for those options to be classified as financing cash flows.
Due to the Company's accumulated loss position, there were no such tax
benefits during the three months ended September 30, 2006. Prior to the
adoption of SFAS 123(R) those benefits would have been reported as
operating cash flows had the Company received any tax benefits related
to stock option exercises.
11
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
=======================================================================
SUMMARY OF ASSUMPTIONS AND ACTIVITY
The fair value of stock-based awards to employees and directors is
calculated using the Black-Scholes option pricing models. The
Black-Scholes model also requires subjective assumptions, including
future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of options
granted is derived from historical data on employee exercises and
post-vesting employment termination behavior. The risk-free rate
selected to value any particular grant is based on the U.S. Treasury
rate that corresponds to the pricing term of the grant effective as of
the date of the grant. The expected volatility is based on the
historical volatility of the Company's stock price. These factors could
change in the future, affecting the determination of stock-based
compensation expense in future periods. There were no grants of stock
options during the three months ended September 30, 2006 and 2005.
There is no effect on net loss and net loss per share for the three
months ended September 30, 2005 if the Company had applied the fair
value recognition provisions of SFAS 123 to options granted under the
Company's stock option plans as there were no grants or vesting of
options during the period.
A summary of option activity as of September 30, 2006 and changes
during the three months then ended, is presented below:
SEPTEMBER 30, 2006
WEIGHTED-AVERAGE
REMAINING AGGREGATE
EXERCISE CONTRACTUAL INTRINSIC
SHARES PRICE TERM (YEARS) VALUE
Options outstanding at July 1, 2006 10,180,000 $ 0.24
Options granted - -
Options forfeited - -
Options exercised - -
---------- --------
Options outstanding at September 30, 2006 10,180,000 $ 0.24 3.52 $400,000
========== ======== =========== ========
Options exercisable at September 30, 2006 10,180,000 $ 0.24 3.52 $400,000
---------- -------- ----------- --------
Upon the exercise of options, the Company issues new shares from its
authorized shares.
There are no non-vested stock options at June 30, 2006 and no options
granted during the three months ended September 30, 2006. There is no
unrecognized compensation cost at September 30, 2006.
As a result of adopting SFAS 123(R) on July 1, 2006, there was no
change to the Company's income before provision for income taxes and
net income for the three months ended September 30, 2006 than if it had
continued to account for share-based compensation under APB 25. Basic
and diluted net income per share for the three months ended September
30, 2006 was not affected by the adoption of SFAS 123(R).
12
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
========================================================================
There was no stock-based compensation expense related to stock options
under SFAS 123(R) for the three months ended September 30, 2006.
Concentrations
--------------
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 periods ended September 30, 2006 were
generated from one major distributor, Applied Industrial Technologies.
The majority of receivables at September 30, 2006 were from the same
distributor. For the three months ended September 30, 2005, total sales
to two major customers amounted to $34,126, or approximately 71% of our
sales and as of September 30, 2005, accounts receivable from these two
customers accounted for approximately 87% of our total accounts
receivable.
Reclassifications
-----------------
Certain amounts in the September 30, 2005 financial statements have
been reclassified to conform to the September 30, 2006 presentation.
Such reclassification had no effect on net loss as previously reported.
Recent Accounting Pronouncements
--------------------------------
In September 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 157 that establishes how companies should measure fair
value when they are required to use a fair value measure for
recognition or disclosure purposes under GAAP. This statement addresses
the need for increased consistency and comparability in fair value
measurements and for expanded disclosures about fair value
measurements. The key changes to current practice are: (1) the
definition of fair value which focuses on an exit price rather than
entry price; (2) the methods used to measure fair value such as
emphasis that fair value is a market-based measurement, not an
entity-specific measurement, as well as the inclusion of an adjustment
for risk, restrictions and credit standing; and (3) the expanded
disclosures about fair value measurements. This statement is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those years. The Company
is currently evaluating the impact of this statement on its condensed
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 - INVENTORIES
--------------------
Inventories consist of the following as of September 30, 2006:
Raw materials $ 11,702
Finished goods 59,182
-----------
$ 70,884
===========
13
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
========================================================================
NOTE 5 - PROPERTY AND EQUIPMENT
-------------------------------
The following is a summary of property and equipment at September 30,
2006:
Computers and office equipment $ 23,333
Test equipment 38,103
Vehicles 17,408
--------
78,844
Less (accumulated depreciation) 37,212
--------
$ 41,632
========
Depreciation expense was $3,578 and $4,206 for the three months ended
September 30, 2006 and 2005 respectively.
NOTE 6 - DEFERRED FINANCING COSTS
---------------------------------
Deferred financing costs consist of the following as of September 30,
2006:
Cost $ 40,000
Less (accumulated amortization) 15,833
---------
$ 24,167
=========
Amortization expense was $3,333 and $1,833 for the three months ended
September 30, 2006 and 2005 respectively, and is included in interest
expense in the accompanying condensed statements of operations.
14
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
========================================================================
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
----------------------------------------
Notes payable - related parties consist of the following at September
30, 2006:
Unsecured notes payable to stockholders, bearing interest at 10 percent
per annum, due on demand $ 2,114,038
Unsecured notes payable to stockholder, bearing interest at 15 percent
per annum, due on demand 29,690
Unsecured notes payable to stockholders, bearing interest at 10 percent
per annum, convertible to common stock at $0.25 per share, due
on demand 26,000
Unsecured note payable to stockholder, bearing interest at 15 percent
per annum, monthly principal and interest payments of $1,917,
due on demand 15,000
Unsecured note payable to stockholder, bearing interest at
15 percent per annum, convertible to common shares at $0.75 per share,
monthly principal payments of $1,833, due on demand 3,167
Unsecured note payable to stockholder, $2,500 interest payable on
maturity, due on demand 25,000
------------
$ 2,212,895
============
Interest expense on notes payable - related parties for the three
months ended September 30, 2006 and 2005 was approximately $38,000 and
$13,000, respectively. All related-party notes payable are reflected as
current liabilities as they are either due on demand or mature by
November 25, 2006.
NOTE 8 - NOTES PAYABLE
----------------------
Notes payable consist of the following at September 30, 2006:
Callable, secured convertible notes payable, net of unamortized
discount of $698,345 (see below) $ 447,099
Notes payable, bearing interest at 10 percent per annum, convertible to
common shares at $0.40 per share, due on demand, secured by
substantially all assets of the Company 125,000
Notes 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 55,850
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
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
Unsecured note payable, non-interest bearing, due on demand 10,000
Unsecured note payable, bearing interest at 15 percent per annum, due
on demand 15,000
-----------
750,449
Less current portion (303,350)
-----------
$ 447,099
===========
15
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 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 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. 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 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 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;
16
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
========================================================================
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 and/or maintain 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, 2006; 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 fair value of the embedded derivatives was $509,345 as of September
30, 2006.
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, which totaled $843,583 at September 30, 2006.
The Company recorded the first $1,900,000 of fair value of the
derivatives and warrants to debt discount, which will be amortized to
interest expense over the term of the Notes. During the three months
ended September 30, 2006 the Company repaid $166,667 of the principal
balance of the Notes. Amortization expense on this debt discount for
the three months ended September 30, 2006 and 2005 was $261,016 and
$98,226, respectively.
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 (excluding the debt discount) at
September 30, 2006 are as follows under notes payable for the year
ending June 30:
2007 (nine months) $ 303,350
2008 700,000
2009 445,444
------------
$ 1,448,794
============
17
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
========================================================================
NOTE 9 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
Litigation
----------
On April 15, 2005 a complaint was filed by Jamestown, L.C. against us
in the matter entitled Jamestown L.C. vs. Reclamation Consulting and
Applications, Inc. Case No. 050907049, filed with the Third Judicial
District Court, County of Salt Lake, State of Utah. The complaint
alleges unjust enrichment and seeks past due rent in the amount of
$54,272 plus interest and attorney fees. On September 22, 2005, this
matter was mediated in Salt Lake City, Utah, and the parties entered
into a Memorandum of Understanding. Pursuant to the Memorandum of
Understanding, we have agreed to pay the plaintiff the sum of $30,000
on March 1, 2006, and $3,100 per month for 24 months commencing on
April 1, 2006, subject to our option to pay the entire settlement
amount at a 20% discount. At September 30, 2006, we owed the plaintiff
approximately $63,200, including $3,100 in back payments due under the
Memorandum of Understanding.
Future minimum payments under the Memorandum of Understanding for the
years ending June 30 are:
2007 (nine months) $ 35,600
2008 27,600
---------
$ 63,200
=========
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 September 5, 2006,
the parties reached an oral settlement agreement under which we agreed
to pay PBCC a total of $21,000 over the course of 11 months. Pursuant
to the settlement agreement, at September 30, 2006, we paid a total of
$5,000, and we are to pay the plaintiffs an additional $1,500 per
month beginning October 1, 2006 and ending July 1, 2007; and $1,000 on
August 1, 2007. In the event that the principal amount is paid in full
by January 2, 2007 there will be a $2,000 discount to the payoff
amount. There is a 10-day grace period for each scheduled payment and
there is a deed as security on property owned by our CEO, Mr. Michael
Davies. No interest is due under the settlement agreement if we comply
with the terms thereof. In the event that we are in default of the
settlement agreement, a 10% simple interest per annum will be added,
and the entire amount shall immediately become due upon our default. An
Order to Show Cause hearing regarding dismissal is currently scheduled
for December 17, 2007. As of the date of filing of our Quarterly Report
for the period ended September 30, 2006, we have paid the plaintiffs a
total of $8,000.
18
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
========================================================================
On September 25, 2006, a Complaint was filed by AID Equipment, LLC
against us in the matter entitled AID Equipment vs. Reclamation
Consulting And Application, Inc., Case No: 060700802, filed in the
Seventh Judicial District Court in and for Carbon County, State Of
Utah. Plaintiffs generally allege in their complaint that we engaged
the plaintiffs to supply and fabricate equipment and that our president
endorsed a credit application in return for plaintiff's services to be
performed valued at approximately $20,342. Plaintiffs are requesting
damages in the amount of $17,286 and for attorneys' fees, costs and
expenses. Our management denies that the plaintiffs are owed the
amounts sought, and we intend to vigorously defend this action on the
basis brought by the plaintiffs. On October 25, 2006, we filed an
Answer to the Complaint generally denying all plaintiffs allegations
and setting forth certain affirmative defenses.
Loss on Collateralized Shares
-----------------------------
In April 2006 the Company entered into an agreement to borrow $300,000
from a third party and collateralized 1,500,000 shares of the Company's
common shares in order to consummate the loan. The collateralized
shares were the property of one of the Company's shareholders. The loan
never funded and the agreement was voided. During the return of the
collateralized shares to the shareholder a total of 500,000 shares were
mishandled and could not be located. The Company is still working to
recover the missing shares but has set up an accrual for the loss to
the shareholder for $110,000, which has been included in accrued
expenses as of September 30, 2006 in the accompanying condensed balance
sheet.
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 h as 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, 2006 and 2005, the Company
did not issue any common shares.
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.
19
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
========================================================================
Stock Options and Warrants
--------------------------
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, 750,000 warrants vested on August 17, 2005 and the
remainder 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.
There were no stock options granted or warrants issued during the three
months ended September 30, 2006.
The following assumptions were used under the Black-Scholes method at
the date of grant to estimate the fair value of the option and warrant
grants to non-employees during the three months ended September 30,
2005:
Expected Life 1-5 Years
Risk-free interest rate 4.18%
Dividend yield 0%
Volatility 140%
NOTE 11 - LICENSE
-----------------
Effective January 4, 2006, the Company entered into a license agreement
with Billfighter Investments, Limited ("Billfighter"), in which the
Company agreed to grant 4,000,000 shares of common stock and a note
payable in the amount of $180,000 for the ability to utilize certain
technology owned by Billfighter. The shares were valued at $320,000
based on the fair market value on the date of grant of $0.08 per share,
resulting in a total value of $500,000. The principal of $180,000 and
interest of $557 was converted the following day, January 5, 2006, into
3,611,150 shares of common stock based on the fair market value on that
date of $0.05 per share. The license grants the Company the sole and
exclusive right and license to use, produce, manufacture, market, sell
and distribute the licensed product within a defined territory. The
Company also agrees to pay cash royalties in the amount of 10% of net
revenues generated by the license. The license has no defined term and
is subject to termination by either party. The Company believes the
license has a useful life of 10 years and is amortizing on a
straight-line basis over this term. Amortization expense of $12,500 was
recognized during the three months ended September 30, 2006 and is
included in selling, general and administrative expenses in the
accompanying condensed statement of operations.
NOTE 12 - SUBSEQUENT EVENTS
---------------------------
UNSECURED CONVERTIBLE DEBT
On October 17, 2006, the Company entered into a Note Purchase Agreement
(the "Agreement") with Canvasback Company Limited, a company organized
under the laws of the country of Anguilla (the "Lender"), pursuant to
which the Company issued the Lender an Unsecured Convertible Promissory
Note (the "Note") for the aggregate principal amount of Two Million,
Seventy-Nine Thousand, Sixty-Seven
20
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
========================================================================
Dollars ($2,079,067) (the "Loan"), accruing interest at the annual rate
of ten percent (10%) per annum and maturing on October 17, 2007.
Pursuant to the Agreement, the Lender has agreed to purchase additional
Unsecured Convertible Promissory Notes up to an aggregate of One
Hundred Twenty Thousand Dollars ($120,000). Subsequently, on November
7, 2006, the Company issued another Note in the amount of $108,000
pursuant to this Agreement and having the same terms and conditions as
the original Note issued thereunder. At any time after a Conversion
Event (as defined below), the Loan is convertible, at the election of
the Lender, into a number of shares of the Company's common stock (the
"Conversion Shares") obtained by dividing the aggregate amount of
principal and accrued but unpaid interest due under the Note as of the
date of conversion, by Two and One-Half Cents ($.025). As of November
7, 2006, if a Conversion Event had occurred on this date, the
amount of common stock shares issuable upon full conversion of the Note
would be 90,970,080 shares or approximately 65% of the Company's
outstanding common stock.
The proceeds received from the sale of the unsecured convertible notes
were used for business development purposes, working capital needs,
pre-payment of interest, payment of consulting and legal fees and
purchasing inventory.
As discussed below, due to substantial restrictions on the Company's
ability to raise capital through the issuance of its equity securities,
it has been difficult for the Company to raise capital to fund its
working capital needs. Since April 6, 2006, the Lender has periodically
infused capital into the Company in the form of unsecured debt to allow
it to meet its obligations and continue operations. Accordingly, the
Note reflects the memorialization of all such unsecured debt. In
exchange for the right to convert the Loan, the Lender has agreed to
provide the Company with an additional One Hundred Twenty Thousand
Dollars ($120,000) of unsecured debt (the "Subsequent Loan" and,
together with the Loan, the "Unsecured Debt"), which Subsequent Loan
will likewise be subject to the same terms and conditions and have the
same conversion rights as set forth in the Agreement and the Note.
In light of the restrictions on the Company's ability to raise capital
through the issuance of its common stock at a price below the market
value on the date of such issuance, the Lender has agreed that the
conversion provisions applicable to the Unsecured Debt will not become
operative unless and until either (i) the Company obtains the prior
written consent of the Existing Noteholders (as defined below) to
permit the Conversion of the Unsecured Debt, or any portion thereof,
into Conversion Shares pursuant to the terms of the Agreement; or (ii)
the Securities Purchase Agreement (as defined below) is terminated
pursuant to terms and all the Company's obligations under the
Securities Purchase Agreement have been fully satisfied or waived
(each, a "Conversion Event").
As discussed herein, on June 23, 2005, the Company entered into a
Securities Purchase Agreement (the "Securities Purchase Agreement")
with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC
and New Millennium Capital Partners II, LLC (collectively, the
"Existing Noteholders") pursuant to which it issued to each of the
Existing Noteholders a Secured Convertible Note (collectively, the
"Convertible Notes"). The Securities Purchase Agreement requires that
the Company obtain the written consent of a majority of the Existing
Noteholders prior to obtaining additional equity financing through the
issuance of the Company's Common Stock at a discount to the market
price of the Common Stock on the date of issuance.
In addition, the Company has agreed that, within sixty (60) days after
the issuance of any Conversion Shares, or as soon afterward as the
Company may determine in good faith to be commercially reasonable, but
in no event later than one hundred eighty (180) days, the Company will
file a registration statement with the Commission seeking to have such
Conversion Shares registered for public sale on Form SB-2 or other
applicable form of registration statement, and naming the holders (the
"Holders") as selling stockholders (unless any Holder shall notify the
Company in advance that it does not desire to be included in any such
registration statement). The Company shall pay for all
21
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
=======================================================================
registration expenses incurred in connection with any registration,
qualification or compliance pursuant to this Agreement. All individual
selling expenses incurred in connection with any such registration,
qualification or compliance, including without limitation any separate
counsel which any Holder may desire to engage in connection with the
filing of such registration statement apart from the Company's counsel,
will be borne by the Holders of the Conversion Shares participating in
such registration, pro rata on the basis of the number of their shares
so registered.
APPOINTMENT TO ADVISORY BOARD
On October 16, 2006, the Company entered into an Advisory Board
Services Agreement (the "Agreement") with Norman R. Gish (the
"Advisor"), pursuant to which the Company engaged the Advisor to assist
it in its efforts to increase exposure of its Alderox(R) line of
products in the mining, oil sands, and drilling industries in Canada.
The Advisor has a long history and extensive associates within the
aforementioned industries and the Company believes that these
relationships will considerably and immediately increase i exposure in
these industry segments. The period of engagement commences on October
16, 2006 and terminates on October 16, 2007. As compensation for the
Advisor's advisory services, the Company issued the Advisor warrants
(the "Warrants") to purchase five hundred thousand (500,000) shares
(the "Warrant Shares") of its restricted common stock, at a price of
Fifteen Cents ($0.15) per share. The Warrants are immediately
exercisable at the exercise price at any time during the period
commencing on October 16, 2006 and ending October 16, 2011. The Warrant
and the Warrant Shares issuable thereunder are subject to adjustment as
set forth in the Warrant Certificate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following presentation of Management's Discussion and Analysis has been
prepared by internal management and should be read in conjunction with the
financial statements and notes thereto included in Item 1 of this Quarterly
Report on Form 10-QSB. Except for the historical information contained herein,
the discussion in this report contains certain forward-looking statements that
involve risks and uncertainties, such as statements of our business plans,
objectives, expectations and intentions as of the date of this filing. The
cautionary statements about reliance on forward-looking statements made earlier
in this document should be given serious consideration with respect to all
forward-looking statements wherever they appear in this report, notwithstanding
that the "safe harbor" protections available to some publicly reporting
companies under applicable federal securities law do not apply to us as an
issuer of penny stocks. Our actual results could differ materially from those
discussed here.
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(R) products, including Alderox(R) ASA-12(R),
DCR(R), KR-7(R), PaverBlendTM, TSR(R), and ASA Cleaners. We were originally
formed in 1976, under the name "Vac-Tec Systems, Inc." and operated primarily in
the glass vaccum coating business. Subsequently, in early 1977, we were
reorganized as a public shell corporation with no significant assets.
Presently, we are engaged primarily in the production, sale and distribution of
our Alderox(R) line of products which 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. The release
agents included in our Alderox(R) line of products are comprised mostly of oils,
especially a 100% biodegradable and otherwise environmentally friendly oil such
as soybean oils. Our Alderox(R) formulation may be comprised of any desired oil
or combination of oils, filtered or unfiltered, with little or no water, so long
as it meets the ranges of viscosity, specific gravity and other criteria
determined by us to be the most effective for release agents.
22
Our Alderox(TM) line of products includes ASA-12(R), DCR(R), KR-7(R),
PaverBlendTM, TSR(R), and ASA Cleaners. ASA-12(R) is an asphalt release agents
and DCR(R) is a drag chain lubricant, each of which was developed by us in
response to the need for effective, economical and environmentally-friendly
products in the asphalt industry. PaverBlendTM is also an asphalt related
product used to keep paving equipment free from debris. KR7(R) is a concrete
release agent also developed by us in response to the concrete industry's need
for effective, economical and environmentally-friendly products. TSR(R) is an
environmentally friendly 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. Our application equipment includes the Reliant 1,
Reliant 2 and Reliant 3 control spray systems. The Reliant 1 was specifically
designed as a robotic automated spray system to control the amount and
temperature of Alderox ASA-12(R) sprayed onto the beds of asphalt haul trucks.
The pump system draws from a tank that stores the AlderoxTM product and
automatically applies a predetermined amount of product onto the truck bed. The
Reliant 2 is a manual hand held spray system which controls the amount of
Alderox ASA-12(R) sprayed onto the beds of asphalt haul trucks and also draws
from a storage tank. The Reliant 3 was designed as a specialized spray system
for drag chain lubrication for use within the asphalt production and mining
industries. Drag chains are large industrial chains used in the asphalt industry
to drag or transport asphalt from production to distribution containers.
As reflected in our Financial Statements included in Item 1 of Part I of this
Report, we have incurred cumulative losses of $20,488,186, including net income
(loss) of $1,542,232 and $(45,530) for the three-month periods ended September
30, 2006 and 2005, respectively. At September 30, 2006, we have a working
capital deficit of $3,284,494. As a result, recoverability of a major portion of
the recorded assets reflected in our condensed balance sheet included with our
condensed financial statements is dependent upon future sustainable profitable
operation of our Company, which, in turn, is dependent upon our ability to raise
additional capital, obtain financing, increase our customer base and manage our
costs. Our management has taken the following steps, which it believes are
sufficient to provide our Company with the ability to continue as a going
concern: (a) controlling of salaries and general and administrative expenses;
(b) managing accounts payable, and (c) evaluating our distribution and marketing
methods.
SUBSEQUENT EVENT
As disclosed on our Current Report on Form 8-K, filed with the Commission on
October 20, 2006, on October 17, 2006, we entered into a Note Purchase Agreement
(the "Agreement") with Canvasback Company Limited, a company organized under the
laws of the country of Anguilla (the "Lender"), pursuant to which we issued the
Lender an Unsecured Convertible Promissory Note (the "Note") for the aggregate
principal amount of Two Million, Seventy-Nine Thousand, Sixty-Seven Dollars
($2,079,067) (the "Loan"), accruing interest at the annual rate of ten percent
(10%) per annum and maturing on October 17, 2007. Pursuant to the Agreement, the
Lender has agreed to purchase additional Unsecured Convertible Promissory Notes
up to an aggregate of One Hundred Twenty Thousand Dollars ($120,000).
Subsequently, on November 7, 2006 we issued another Note in the amount of
$108,000 pursuant to this Agreement and having the same terms and conditions as
the original Note issued thereunder. At any time after a Conversion Event (as
defined below), the Loan is convertible, at the election of the Lender, into a
number of shares of the Company's common stock (the "Conversion Shares")
obtained by dividing the aggregate amount of principal and accrued but unpaid
interest due under the Note as of the date of conversion, by Two and One-Half
Cents ($.025). As of November 7, 2006, and if a Conversion Event had occurred by
this date, the amount of common stock shares issuable upon full conversion of
the Note would be 90,970,080 shares or approximately 65% of our outstanding
common stock.
As discussed below, due to substantial restrictions on our ability to raise
capital through the issuance of our equity securities, it has been difficult to
raise capital to fund our working capital needs. Since April 6, 2006, the Lender
has periodically infused capital into the Company in the form of unsecured debt
to allow us to meet our obligations and continue operations. Accordingly, the
Note reflects the memorialization of all such unsecured debt. In exchange for
the right to convert the Loan, the Lender has agreed to provide us with an
additional One Hundred Twenty Thousand Dollars ($120,000) of unsecured debt (the
"Subsequent Loan" and, together with the Loan, the "Unsecured Debt"), which
Subsequent Loan will likewise be subject to the same terms and conditions and
have the same conversion rights as set forth in the Agreement and the Note.
23
In light of the restrictions on our ability to raise capital through the
issuance of our common stock at a price below the market value on the date of
such issuance, the Lender has agreed that the conversion provisions applicable
to the Unsecured Debt will not become operative unless and until either (i) we
obtain the prior written consent of the Existing Noteholders (as defined below)
to permit the Conversion of the Unsecured Debt, or any portion thereof, into
Conversion Shares pursuant to the terms of the Agreement; or (ii) the Securities
Purchase Agreement (as defined below) is terminated pursuant to terms and all
our obligations under the Securities Purchase Agreement have been fully
satisfied or waived (each, a "Conversion Event").
As previously disclosed in our filings with the Securities and Exchange
Commission (the "Commission"), on June 23, 2005, we entered into a Securities
Purchase Agreement (the "Securities Purchase Agreement") with AJW Offshore,
Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital
Partners II, LLC (collectively, the "Existing Noteholders") pursuant to which we
issued to each of the Existing Noteholders a Secured Convertible Note
(collectively, the "Convertible Notes"). The Securities Purchase Agreement
requires that we obtain the written consent of a majority of the Existing
Noteholders prior to obtaining additional equity financing through the issuance
of our Common Stock at a discount to the market price of the Common Stock on the
date of issuance.
In addition, we have agreed that, within sixty (60) days after the issuance of
any Conversion Shares, or as soon afterward as the Company may determine in good
faith to be commercially reasonable, but in no event later than one hundred
eighty (180) days, we will file a registration statement with the Commission
seeking to have such Conversion Shares registered for public sale on Form SB-2
or other applicable form of registration statement, and naming the holders (the
"Holders") as selling stockholders (unless any Holder shall notify the Company
in advance that it does not desire to be included in any such registration
statement). The Company shall pay for all registration expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Agreement. All individual selling expenses incurred in connection with any such
registration, qualification or compliance, including without limitation any
separate counsel which any Holder may desire to engage in connection with the
filing of such registration statement apart from the Company's counsel, will be
borne by the Holders of the Conversion Shares participating in such
registration, pro rata on the basis of the number of their shares so registered.
CRITICAL ACCOUNTING POLICIES
There were no changes to our critical accounting policies as described in our
Annual Report on Form 10-KSB for the fiscal year ended June 30, 2006.
24
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005.
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 Change Change
------------------------- ------------------------- --------- --------
% of % of
$ Revenue $ Revenue $ %
----------- --------- ----------- -------- --------- --------
Net Revenues $ 68,387 100% $ 48,177 100% 20,210 42%
Cost of Revenues 50,486 74% 36,180 75% 14,306 40%
----------- --------- ----------- -------
Gross Profit 17,901 26% 11,997 25% 5,904 49%
Operating Expenses
Selling, General and Administrative Expenses 426,068 623% 834,772 1,733% (408,704) (49)%
----------- --------- ----------- -------
Loss from Operations $ (408,167) (597)% $ (822,775) (1,708)% 414,608 (50)%
----------- --------- ----------- -------
Other Income (Expense)
Interest Expense (363,944) (532)% (162,231) (337)% (201,713) 124%
Change in fair value of derivative liabilities 2,315,143 3385% 940,276 1,952% 1,374,867 146%
----------- --------- ----------- -------
Net Other Income $ 1,951,199 2853% $ 778,045 1,615% 1,173,154 151%
----------- --------- ----------- -------
Income (Loss) before provision for income tax 1,543,032 2256% (44,730) (93)% 1,587,762 (3,550)%
Provision for Income Taxes 800 1% 800 2% 0 0 %
----------- --------- ----------- -------
Net Income (Loss) $ 1,542,232 2255% $ (45,530) (95)% 1,587,762 (3,487)%
=========== ========= =========== =======
Net Income Per Share
Basic $ 0.01 $ 0
=========== ===========
Diluted $ 0.00 $ 0
=========== ===========
Weighted-Average Common Shares outstanding
- Basic and Diluted
Basic 40,803,834 29,620,813 11,183,021 38%
=========== ===========
Diluted 85,248,204 29,620,813 55,627,391 188%
=========== ===========
NET REVENUES
Net Revenues for the three month period ended September 30, 2006 increased to
$68,387 from $48,177 for the three month period ended September 30, 2005. This
increase in net revenues of $20,210 or approximately 42% over the prior period
is due primarily to the Distributorship agreement with Applied Industrial
Technologies.
COST OF REVENUES
Cost of revenues for the three month period ended September 30, 2006 increased
to $50,486 from $36,180 for the three month period ended September 30, 2005.
This increase in cost of revenues of $14,306, or approximately 40% over the
prior period is due primarily to the increase in material input costs of the
goods sold during the period.
GROSS PROFITS
Gross profits for the three month period ended September 30, 2006 increased to
$17,901 from $11,997 for the three month period ended September 30, 2005. This
increase in gross profits of $5,904, or approximately 49% over the prior period
is due primarily to the Distributorship agreement with Applied Industrial
Technologies
25
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three month period ended
September 30, 2006 decreased to $426,068 from $834,772 for the three month
period ended September 30, 2005. This decrease in selling, general and
administrative expenses of $408,704, or approximately 49% over the prior period
is due primarily to a decrease in professional and consulting fees associated
with the decrease in our financing activities.
LOSS FROM OPERATIONS
Loss from operations for the three month period ended September 30, 2006
decreased to $408,167 from $822,775 for the three month period ended September
30, 2005. This decrease in loss from operations of $414,608, or approximately
50% is due primarily to the decrease in selling, general and administrative
expenses.
INTEREST EXPENSE
Interest expense for the three month period ended September 30, 2006 increased
to $363,944 from $162,231 for the three month period ended September 30, 2005.
This increase in interest expense of $201,713, or approximately 124% over the
prior period is due primarily to debt discount amortization totaling $261,016.
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
Change in fair value of derivative liabilities for the three month period ended
September 30, 2006 was $2,315,143, compared to $940,276 for the three month
period ended September 30, 2005. This change in the fair value of derivative
liabilities of $1,374,867 or approximately 146% is due primarily to the change
in value of our derivative liabilities.
NET INCOME
Net income for the three month period ended September 30, 2006 was $1,542,232
compared to a net loss of $45,530 for the three month period ended September 30,
2005. This change to profitability during the 2006 period when compared to the
same period in fiscal 2005 was due primarily to our ability to increase our
gross profit margins and contain our operating expenses, as well as the change
in the fair value of our derivative liabilities when compared to the first
quarter of our fiscal year 2005 as a result of our declining stock price.
LIQUIDITY AND CAPITAL RESOURCES
For the three-months ended September 30, 2006, we used cash of $496,383 in our
operating activities and received cash of $496,383 in our financing activities.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in our operating activities of $496,383 for the three months ended
September 30, 2006 was primarily attributable to a net income of $1,542,232, and
adjustments to reconcile net income to net cash used in operating activities of
$2,038,615 consisting of the following: (a) depreciation and amortization of
$19,411, (b) change in fair value of derivative and warrant liabilities
aggregating $2,315,143, (c) amortization of discount on notes payable of
$261,016, (d) increase in accounts receivable of $29,454, (e) increase in
inventories of $6,464, (f) increase in prepaid expenses of $113, and (g)
increase in accounts payable and accrued expenses of $32,032.
CASH FLOWS FROM INVESTING ACTIVITIES
We neither used nor received any cash from our investing activities for the
three months ended September 30, 2006.
26
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by our financing activities of $496,383 for the three months
ended September 30, 2006 was from proceeds on notes payable of $712,050 offset
by payments on notes payable of $215,667.
INTERNAL SOURCES OF LIQUIDITY
For the three months ended September 30, 2006, the funds generated from our
operations were insufficient to fund our daily operations. For the three months
ended September 30, 2006, we had a gross profit of $17,902, and we were thus
unable to meet our operating expenses of $426,069 for the same period. There is
no assurance that funds from our operations will meet the requirements of our
daily operations in the future. In the event that funds from our operations will
be insufficient to meet our operating requirements, we will need to seek other
sources of financing to maintain liquidity.
EXTERNAL SOURCES OF LIQUIDITY
At September 30, 2006, we have debt owing to related parties aggregating
$2,212,895 as summarized in Note 7 to the financial statements.
At September 30, 2006, we have debt owing to non-related parties aggregating
$750,449 (net of unamortized debt discounts) as summarized in Note 8 to the
financial statements.
We actively pursue all potential financing options as we look to secure
additional funds to both stabilize and grow our business operations. Our
management will review any financing options at their disposal, and will judge
each potential source of funds on its individual merits. There can be no
assurance that we will be able to secure additional funds from debt or equity
financing, as and when we need to, or if we can, that the terms of such
financing will be favorable to us or our existing stockholders. As a result, our
independent registered public accounting firm has issued a "going concern"
modification to its report on our audited financial statements for the year
ended June 30, 2006.
UNSECURED CONVERTIBLE NOTES
In addition, and as discussed above, on October 17, 2006, we entered into a Note
Purchase Agreement (the "Agreement") with Canvasback Company Limited, a company
organized under the laws of the country of Anguilla (the "Lender"), pursuant to
which we issued the Lender an Unsecured Convertible Promissory Note (the "Note")
for the aggregate principal amount of Two Million, Seventy-Nine Thousand,
Sixty-Seven Dollars ($2,079,067) (the "Loan"), accruing interest at the annual
rate of ten percent (10%) per annum and maturing on October 17, 2007. Pursuant
to the Agreement, the Lender has agreed to purchase additional Unsecured
Convertible Promissory Notes up to an aggregate of One Hundred Twenty Thousand
Dollars ($120,000). Subsequently, on November 7, 2006 we issued another Note in
the amount of $108,000 pursuant to this Agreement and having the same terms and
conditions as the original Note issued thereunder. At any time after a
Conversion Event (as defined below), the Loan is convertible, at the election of
the Lender, into a number of shares of the Company's common stock (the
"Conversion Shares") obtained by dividing the aggregate amount of principal and
accrued but unpaid interest due under the Note as of the date of conversion, by
Two and One-Half Cents ($.025). As of November 7, 2006, and if a Conversion
Event had occurred by this date, the amount of common stock shares issuable upon
full conversion of the Note would be 90,970,080 shares or approximately 65% of
our outstanding common stock.
The proceeds received from the sale of the unsecured convertible notes were used
for business development purposes, working capital needs, pre-payment of
interest, payment of consulting and legal fees and purchasing inventory.
As discussed below, due to substantial restrictions on our ability to raise
capital through the issuance of our equity securities, it has been difficult to
raise capital to fund our working capital needs. Since April 6, 2006, the Lender
has periodically infused capital into the Company in the form of unsecured debt
to allow us to meet our obligations and continue operations. Accordingly, the
Note reflects the memorialization of all such unsecured debt. In exchange for
the right to convert the Loan, the Lender has agreed to provide us with an
additional One Hundred Twenty Thousand Dollars ($120,000) of unsecured debt (the
"Subsequent Loan" and, together with the Loan, the "Unsecured Debt"), which
Subsequent Loan will likewise be subject to the same terms and conditions and
have the same conversion rights as set forth in the Agreement and the Note.
27
In light of the restrictions on our ability to raise capital through the
issuance of our common stock at a price below the market value on the date of
such issuance, the Lender has agreed that the conversion provisions applicable
to the Unsecured Debt will not become operative unless and until either (i) we
obtain the prior written consent of the Existing Noteholders (as defined below)
to permit the Conversion of the Unsecured Debt, or any portion thereof, into
Conversion Shares pursuant to the terms of the Agreement; or (ii) the Securities
Purchase Agreement (as defined below) is terminated pursuant to terms and all
our obligations under the Securities Purchase Agreement have been fully
satisfied or waived (each, a "Conversion Event").
As discussed above, on June 23, 2005, we entered into a Securities Purchase
Agreement (the "Securities Purchase Agreement") with AJW Offshore, Ltd., AJW
Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners
II, LLC (collectively, the "Existing Noteholders") pursuant to which we issued
to each of the Existing Noteholders a Secured Convertible Note (collectively,
the "Convertible Notes"). The Securities Purchase Agreement requires that we
obtain the written consent of a majority of the Existing Noteholders prior to
obtaining additional equity financing through the issuance of our Common Stock
at a discount to the market price of the Common Stock on the date of issuance.
In addition, we have agreed that, within sixty (60) days after the issuance of
any Conversion Shares, or as soon afterward as the Company may determine in good
faith to be commercially reasonable, but in no event later than one hundred
eighty (180) days, we will file a registration statement with the Commission
seeking to have such Conversion Shares registered for public sale on Form SB-2
or other applicable form of registration statement, and naming the holders (the
"Holders") as selling stockholders (unless any Holder shall notify the Company
in advance that it does not desire to be included in any such registration
statement). The Company shall pay for all registration expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Agreement. All individual selling expenses incurred in connection with any such
registration, qualification or compliance, including without limitation any
separate counsel which any Holder may desire to engage in connection with the
filing of such registration statement apart from the Company's counsel, will be
borne by the Holders of the Conversion Shares participating in such
registration, pro rata on the basis of the number of their shares so registered.
We may still need additional investments in order to continue operations.
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.
OFF BALANCE SHEET ARRANGEMENTS
We do not have nor do we maintain any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to our investors.
28
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls as of the end of the period covered by
this report, September 30, 2006. This evaluation was carried out under the
supervision and with the participation of our President, Mr. Gordon Davies and
our Chief Financial Officer, Mr. Michael Davies (collectively, the "Certifying
Officers"). Based upon that evaluation, our Certifying Officers concluded that
as of the end of the period covered by this report, September 30, 2006, our
disclosure controls and procedures were effective in timely alerting management
to material information relating to us and required to be included in our
periodic filings with the Securities and Exchange Commission (the "Commission").
Disclosure controls and procedures are controls and procedures that are designed
to ensure that information required to be disclosed in our periodic reports
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our periodic
reports that we file under the Exchange Act is accumulated and communicated to
our management, including our principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Further, as required by Rule 13a-15(d) of the Exchange Act and under the
supervision and with the participation of our Certifying Officers, we carried
out an evaluation as to whether there has been any change in our internal
control over financial reporting during our fiscal quarter ended September 30,
2006. Based upon this evaluation, we have concluded that there has not been any
change in our internal control over financial reporting during our fiscal
quarter ended September 30, 2006, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Internal control over financial reporting is a process designed by, or under the
supervision of, our principal executive and principal financial officers, or
persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those policies
and procedures that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings relating to claims
arising out of operations in the normal course of business, as well as claims
arising from our status as an issuer of securities and/or a publicly reporting
company. Below is a summary of the current developments involving known pending
and threatened litigation involving our Company and/or our officers and
directors on matters related to our Company as of the date of this Report.
On September 25, 2006, a Complaint was filed by AID Equipment, LLC against us in
the matter entitled AID Equipment vs. Reclamation Consulting And Application,
Inc., Case No: 060700802, filed in the Seventh Judicial District Court in and
for Carbon County, State Of Utah. Plaintiffs generally allege in their complaint
that we engaged the plaintiffs to supply and fabricate equipment and that our
president endorsed a credit application in return for plaintiff's services to be
performed valued at approximately $20,342. Plaintiffs are requesting damages in
the amount of $17,286 and for attorneys' fees, costs and expenses. Our
management denies that the plaintiffs are owed the amounts sought, and we intend
to vigorously defend this action on the basis brought by the plaintiffs. On
October 25, 2006, we filed an Answer to the Complaint generally denying all
plaintiffs allegations and setting forth certain affirmative defenses.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the three month period ended September 30, 2006, there have been no
material defaults in the payment of principal, interest, a sinking or purchase
fund installment, or any other material default not cured within 30 days, with
respect to any of our indebtedness exceeding 5% of our total assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the three
month period ended September 30, 2006.
ITEM 5. OTHER INFORMATION
None
30
ITEM 6. EXHIBITS
Exhibit No. Description
Exhibit No. Description
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed herewith)
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed herewith)
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Filed herewith)
SIGNATURES
In accordance with the requirements of the Exchange Act, we have cause
this report to be signed on our behalf by the undersigned, thereunto
duly authorized.
RECLAMATION CONSULTING AND APPLICATIONS, INC.
Date: November 14, 2006
/s/ GORDON W. DAVIES
------------------------------------------------
Gordon W. Davies,
President and Chairman of the Board of Directors
Date: November 14, 2006
31