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 March 31, 2007
--------------
[ ] 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
of incorporation or organization) Identification No)
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 May 21, 2007.
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........21
ITEM 3. CONTROLS AND PROCEDURES..........................................30
PART II - OTHER INFORMATION................................................32
ITEM 1. LEGAL PROCEEDINGS................................................32
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS......32
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............32
ITEM 5. OTHER INFORMATION................................................32
ITEM 6. EXHIBITS.........................................................33
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
MARCH 31, 2007
ASSETS
------
CURRENT ASSETS:
Cash $ 1,662
Accounts receivable 9,590
Inventories 168,195
Prepaid expenses and other current assets 93,345
------------
Total current assets 272,792
Property and equipment, net 34,508
License agreement, net 437,500
Deferred financing costs, net 17,500
Deposits 28,158
------------
$ 790,458
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 436,746
Accrued professional fees 110,336
Payroll taxes payable 118,659
Accrued interest payable 309,971
Payable to shareholders 110,000
Other accrued expenses 52,181
Current portion of accrued judgment payable 33,400
Notes payable - related parties 3,494,914
Current portion of notes payable 297,350
------------
Total current liabilities 4,963,557
Accrued judgment payable, net of current portion 12,100
Notes payable, net of current portion and debt discount 411,055
Derivative and warrant liabilities 5,689,309
------------
Total liabilities 11,076,021
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 150,000,000 authorized,
49,066,358 shares issued and outstanding 490,664
Committed shares 176,400
Additional paid-in-capital 14,689,807
Treasury stock (1,500,000 shares), at cost (15,000)
Accumulated deficit (25,627,434)
------------
Total stockholders' deficit (10,285,563)
------------
$ 790,458
============
See the accompanying notes to unaudited condensed financial statements.
1
RECLAMATION CONSULTING AND APPLICATION, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net revenue $ 38,412 $ 3,580 $ 139,801 $ 64,814
Cost of revenue 32,748 22,110 108,138 84,606
------------ ------------ ------------ ------------
Gross profit (loss) 5,664 (18,530) 31,663 (19,792)
Selling, general and administrative expenses 587,856 895,394 1,614,490 2,413,671
------------ ------------ ------------ ------------
Loss from operations (582,192) (913,924) (1,582,827) (2,433,463)
Other income (expense)
Interest expense (224,761) (504,600) (863,852) (817,089)
Change in fair value of derivative and warrant (4,079,104) (1,435,856) (1,149,537) (145,412)
------------ ------------ ------------ ------------
(4,303,865) (1,940,456) (2,013,389) (962,501)
------------ ------------ ------------ ------------
Loss before income taxes (4,886,057) (2,854,380) (3,596,216) (3,395,964)
Provision for income taxes -- -- 800 800
------------ ------------ ------------ ------------
Net loss $ (4,886,057) $ (2,854,380) $ (3,597,016) $ (3,396,764)
============ ============ ============ ============
Net loss per common share:
Basic and diluted $ (0.10) $ (0.07) $ (0.07) $ (0.10)
============ ============ ============ ============
Weighted-average common shares outstanding
Basic and diluted 49,066,358 42,813,527 49,066,358 33,978,600
============ ============ ============ ============
See the accompanying notes to unaudited condensed financial statements.
2
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2007 AND 2006
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,597,016) $(3,396,764)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock-based compensation 140,000 756,531
Amortization of prepaid consulting services 9,590 67,400
Excess fair value of stock granted in connection with consulting services 60,000 --
Change in fair value of derivative and warrant liabilities 1,149,537 145,412
Amortization of discount on notes payable 620,431 600,755
Depreciation and amortization 58,202 32,504
(Increase) decrease in operating assets:
Accounts receivable 7,518 21,111
Inventories (103,675) (51,331)
Prepaid expenses and other current assets 2,519 72,437
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 277,612 78,070
----------- -----------
Net cash used in operating activities (1,375,282) (1,673,875)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment -- (12,078)
----------- -----------
Net cash used in investing activities -- (12,078)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and convertible debentures 2,045,170 2,296,769
Payments on notes payable and convertible debentures (668,226) (610,816)
----------- -----------
Net cash provided by financing activities 1,376,944 1,685,953
----------- -----------
Net change in cash 1,662 --
CASH, BEGINNING OF PERIOD -- --
----------- -----------
CASH, END OF PERIOD $ 1,662 $ --
=========== ===========
See the accompanying notes to unaudited condensed financial statements.
3
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2007 AND 2006
(Continued)
2007 2006
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR: Interest $ 85,621 $ 131,617
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable and accrued interest to common stock $ -- $ 482,770
========== ==========
Debt discount on convertible debt $ -- $1,900,000
========== ==========
Issuance of notes payable for cancellation of shares to be issued $ -- $ 25,000
========== ==========
Issuance of shares and note payable in exchange for a license $ -- $ 500,000
========== ==========
Committed shares for consulting services $ 144,000 $ --
========== ==========
See the accompanying notes to unaudited condensed financial statements.
4
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
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 ASA 12(R), DCR(TM),
Alderox KR7(R), PaverBlend(TM), Alderox TSR(TM), and ASA Cleaners. These
products are made from our patented formula relating specifically to an improved
release agent for mitigating the sticking of asphalt, concrete and other similar
products to various surfaces. Release agents are commonly applied to containers,
mixers, truck beds and forms prior to pouring asphalt or concrete into them, and
act as a barrier to mitigate adhesion of the, asphalt, concrete or other
material to the relevant surfaces.
Basis of Presentation
- ---------------------
The accompanying unaudited condensed financial statements have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America for interim financial information. These principles are
consistent in all material respects with those applied in the Company's
financial statements contained in the Company's annual report on Form 10-KSB for
the fiscal year ended June 30, 2006, and pursuant to the instructions to Form
10-QSB and Item 310(b) of Regulation S-B promulgated by the Securities and
Exchange Commission (the "SEC"). Interim financial statements do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America ("GAAP") for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (all of which are of a normal
recurring nature) necessary to present fairly the financial position, results of
operations and cash flows of the Company for the periods indicated. Interim
results of operations are not necessarily indicative of the results to be
expected for the full year or any other interim periods. These unaudited
condensed financial statements should be read in conjunction with the financial
statements and footnotes thereto contained in the Company's annual report on
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 $25,627,434 including net losses of $3,597,016 and
$3,396,764 for the nine months ended March 31, 2007 and 2006, respectively, and
has a working capital deficit of $4,690,765 at March 31, 2007.
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)
increasing sales through the marketing of service contracts which include the
supply of specialized application equipment to the asphalt, concrete and mining
industries; (ii) marketing a Private Placement Memorandum to raise $3,000,000
through convertible debentures; (iii) controlling of salaries and general and
administrative expenses; (iv) managing accounts payable; and (v) increasing
marketing activities within the mining industry and increasing international
distribution capabilities through additional distributors.
5
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
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 realizability of
accounts receivable, inventories and deferred tax 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.
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 AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
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 March 31, 2007 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 that these 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 March 31, 2007 and 2006, the Company
recorded $0 of amortization related to BCF. For the nine months ended March 31,
2007 and 2006, the Company recorded $0 and $37,500 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.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments consist of cash, 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.
7
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
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 ($2,808,664 as of March 31, 2007). 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 March 31, 2007 totaled $2,880,645. 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
214%; and risk free interest rate of 4.82% 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 and nine months ended March 31, 2007, the net increase in the
derivative and warrant liability was $4,079,104 and $1,149,537, respectively,
which is recorded as a component of other expenses 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.
Net Loss Per Share
- ------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted EPS.
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 and nine months ended March 31, 2007 and 2006, 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). For the three and nine months
ended March 31, 2007, the outstanding potentially dilutive common shares totaled
approximately 6,325,000. For the three and nine months ended March 31, 2006, the
outstanding potentially dilutive common shares totaled approximately 11,836,000.
8
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
Stock-Based Compensation
- ------------------------
At March 31, 2007, 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
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 and nine months ended March 31,
2007 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 and nine months ended March 31, 2006, 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 and nine months ended
March 31, 2007 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 statements of operations for the three and nine months ended March
31, 2007 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 and nine months ended March 31, 2007, of approximately 0% was
based on the Company usually granting immediately exercisable options. The
estimated average term of option grants for the three and nine months ended 2006
is 3 years. In the Company's pro forma information required under SFAS 123 for
the periods prior to fiscal 2007, 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 and
nine months ended March 31, 2007. 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.
9
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
SUMMARY OF ASSUMPTIONS AND ACTIVITY
The fair value of stock-based awards to employees and directors is calculated
using the Black-Scholes option pricing model even though the model was developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which differ significantly from the Company's
stock options. 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.
The following presents the Black-Scholes assumptions used for the granting of
options in fiscal 2007:
2007
Stock options:
Expected term 2-5 years
Expected volatility 227%
Risk-free interest rate 4.83%
Expected dividends --
There is no effect on net loss and net loss per share for the three and nine
months ended March 31, 2006 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 to employees during
the three and nine months ended March 31, 2006.
A summary of employee option activity as of March 31, 2007 and changes during
the nine months then ended, is presented below:
MARCH 31, 2007
Weighted-Average
Remaining Aggregate
Exercise Contractual Instrinsic
Shares Price Term (Years) Value
----------------- ------------- ----------------- ---------------
Options outstanding at July 1, 2006 11,480,000 $ 0.25
Options granted 1,000,000 0.15
Options forfeited (490,000) 0.33
Options exercised - -
----------------- ------------- ----------------- ---------------
Options outstanding at March 31, 2007 11,990,000 $ 0.24 2.16 $ 1,062,000
================= ============= ================= ===============
Options exercisable at March 31, 2007 11,990,000 $ 0.24 2.16 $ 1,062,000
================= ============= ================= ===============
Upon the exercise of options, the Company issues new shares from its authorized
shares. The weighted average grant date fair value of options granted during the
nine months ended March 31, 2007 was $0.14 per option.
There are no non-vested stock options at June 30, 2006 and at March 31, 2007.
There is no unrecognized compensation cost at March 31, 2007. The total fair
value of shares vested during the nine months ended March 31, 2007 was $140,000.
As a result of adopting SFAS No. 123(R) on July 1, 2006, the Company's net loss
for the three and nine months ended March 31, 2007 was approximately $140,000
higher than if it had continued to account for share-based compensation under
APB 25. There was no net change in the loss per share for the period ended March
31, 2007. The Company allocated all the stock-based compensation expense related
to employee and director stock options to selling, general and administrative
expenses.
10
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 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 period ended March 31, 2007 were generated from
one major distributor, Applied Industrial Technologies. The majority of
receivables at March 31, 2007 were from the same distributor. For the three and
nine months ended March 31, 2007, total sales to two major customers amounted to
$32,561 and $109,748, respectively, or approximately 85% and 79%, respectively,
of our sales.
Reclassifications
- -----------------
Certain amounts in the March 31, 2006 financial statements have been
reclassified to conform to the March 31, 2007 presentation. Such
reclassifications 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.
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN 48"). FIN 48 clarifies the
application of SFAS No. 109, "ACCOUNTING FOR INCOME TAXES", by defining criteria
that an individual tax position must meet for any part of the benefit of that
position to be recognized in a company's financial statements and also provides
guidance on measurement, derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company expects to adopt
FIN 48 on July 1, 2007. The Company is currently assessing the impact the
adoption of FIN 48 will have on its financial position and results of
operations.
In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES --
INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115 ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparison between entities that choose different measurement attributes for
similar types of assets and liabilities. The Company will adopt SFAS No. 159 in
the first quarter of fiscal 2008, is still evaluating the effect, if any, on its
financial position and results of operations and has not yet determined its
impact.
NOTE 3 - ACCOUNTS RECEIVABLE
- ----------------------------
All accounts receivable are trade related. These receivables are current and no
reserve for uncollectible accounts is deemed necessary.
11
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
NOTE 4 - INVENTORIES
Inventories consist of the following as of March 31, 2007:
Raw materials $ 16,440
Work in process 58,338
Finished goods 93,417
--------
$168,195
========
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at March 31, 2007:
Computers and office equipment $ 23,333
Test equipment 38,103
Vehicles 17,409
--------
78,845
Less accumulated depreciation (44,337)
--------
$ 34,508
========
Depreciation expense was $3,550 and $4,258 for the three months ended March 31,
2007 and 2006, respectively. Depreciation expense was $10,702 and $12,671 for
the nine months ended March 31, 2007 and 2006, respectively.
NOTE 6 - DEFERRED FINANCING COSTS
Deferred financing costs consist of the following as of March 31, 2007:
Cost $ 40,000
Less accumulated amortization (22,500)
--------
$ 17,500
========
Amortization expense was $3,333 and $3,333 for the three months ended March 31,
2007 and 2006, respectively, and is included in interest expense in the
accompanying condensed statement of operations. Amortization expense was $10,000
and $7,333 for the nine months ended March 31, 2007 and 2006 respectively, and
is included in interest expense in the accompanying condensed statements of
operations.
12
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consist of the following at March 31, 2007:
Unsecured convertible debt to stockholders, bearing interest at 10 percent per annum (see below) $ 2,954,946
Unsecured notes payable to stockholders, bearing interest at 8.25 percent per annum, due on demand 232,500
Unsecured note payable to stockholder, bearing interest at 10 percent per annum, due n demand 183,812
Unsecured notes payable to stockholder, bearing interest at 15 percent per annum, due on demand 50,490
Unsecured note payable to stockholders, bearing interest at 10 percent per annum, convertible to common 26,000
stock at $0.25 per share, due on demand
Unsecured note payable to stockholder, $2,500 interest payable on maturity, due on demand 25,000
Unsecured notes payable to stockholder, bearing interest at 12 percent per annum, due on demand 20,000
Unsecured note payable to stockholder, bearing interest at 15 percent per annum, convertible to common 2,166
shares at $0.75 per share
---------------
$ 3,494,914
===============
Interest expense on notes payable - related parties for the three months ended
March 31, 2007 and 2006 was approximately $43,494 and $19,000, respectively.
Interest expense on the notes payable - related parties for the nine months
ended March 31, 2007 and 2006 was $133,514 and $42,000, respectively. All
related-party notes payable are reflected as current liabilities as they are
either in default or due on demand.
Unsecured Convertible Debt
- --------------------------
On October 17, 2006, the Company entered into a Note Purchase Agreement (the
"Agreement") with a group of investors led by 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 "Unsecured Note") for the aggregate principal amount of
$2,079,067 (the "Loan"), accruing interest at the annual rate of 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 $620,000. 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
Unsecured Note as of the date of conversion, by $0.025. The Company has also
borrowed from time to time, additional amounts from Canvasback under the terms
of the Unsecured Note.
13
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
At March 31, 2007 the total principal amount due to Canvasback Company Limited,
is $2,954,946. As of March 31, 2007, and if a Conversion Event had occurred by
this date, the amount of common stock shares issuable upon full conversion of
the Unsecured Note would be 124,557,840 shares or approximately 71.7% of the
Company's outstanding common stock. Since the conversion feature of the
Unsecured Notes is contingent, no amounts are recorded related to the value of
the conversion feature. Upon the occurrence of the Conversion Event, the value
of the embedded conversion feature will be determined and recorded as a
derivative liability. The estimated value of the derivative liability is
approximately $34,253,000 at March 31, 2007. The proceeds received from the sale
of the unsecured convertible notes were used for business development purposes,
working capital needs, pre-payment of interest, repayment of the Notes, payment
of consulting and legal fees and purchasing inventory.
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 Note will not become operative unless and until
either (i) the Company obtains the prior written consent of the Investors (see
Note 8) 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 SPA
(see Note 8) 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").
In addition, the Company has agreed that, within 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 180 days, the
Company will file a registration statement with the SEC seeking to have such
Conversion Shares registered for public sale on Form SB-2 or other applicable
form of registration statement, and naming the lenders as selling stockholders
(unless any lender 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 Lender
may desire to engage in connection with the filing of such registration
statement apart from the Company's counsel, will be borne by the Lenders of the
Conversion Shares participating in such registration, pro rata on the basis of
the number of their shares so registered.
14
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2006 AND 2005
- --------------------------------------------------------------------------------
NOTE 8 - NOTES PAYABLE
- ----------------------
Notes payable consist of the following at March 31, 2007:
Callable, secured convertible notes payable, bearing interest at 10 percent per unit per annum, net of
unamortized discount of $338,930 (see below) $ 411,055
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 45,500
Unsecured notes payable, bearing interest at 8.25 percent per annum, due on demand 6,000
--------------
Unsecured note payable, bearing interest at 15 percent per annum, due on demand 15,000
--------------
708,405
Less current portion (297,350)
--------------
$ 411,055
==============
Secured Convertible Debt
- ------------------------
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.
15
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
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 not yet matured, 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;
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 March 31, 2007; 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 $718,620 as of March 31, 2007.
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 $2,090,044 at March 31, 2007.
16
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 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 and nine months ended March 31, 2007 the
Company repaid $166,667 and $562,126, respectively of the principal balance of
the Notes. The Company paid $2,870 and $10,366 of prepayment penalties for the
three and nine months ended March 31, 2007. Amortization expense on this debt
discount for the three months ended March 31, 2007 and 2006 was $146,829 and
$355,864, respectively. Amortization expense on this debt discount for the nine
months ended March 31, 2007 and 2006 was $620,431 and $563,254, 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) are as follows
under notes payable for the year ending June 30:
2007 (three months) $ 464,017
2008 583,318
----------------
$ 1,047,335
================
On February 1, 2007, the Company entered into a Securities Repurchase Agreement
(the "Repurchase Agreement") to repurchase the Notes with an original aggregate
principal amount of $2,000,000 and warrants to purchase 8,000,000 shares of the
Company's common stock from the Investors.
On February 26, 2007 and April 20, 2007 the Company entered into amendments to
the February 1, 2007 agreement.
Under the terms of the Repurchase Agreement, as amended, the Company has until
May 31, 2007 to repurchase the Notes by paying the Investors a purchase price
consisting of (i) cash equal to the outstanding balance of accrued principal and
interest due under the Notes plus a 30% prepayment penalty, and (ii) 3,250,000
restricted shares of the Company's common stock. Should the Company repurchase
the Notes on the last possible day under the Repurchase Agreement, May 31, 2007,
the aggregate cash portion of the purchase price will be $902,759, including
prepayment penalties.
The Agreements further provide that the Company has until May 31, 2007 to
repurchase the warrants for an aggregate cash purchase price of $258,338.
The 3,250,000 shares to be issued to the Investors under the Repurchase
Agreement have a value of $325,000, based on the fair market value of the shares
of $0.10 on February 1, 2007, and will be recorded as additional interest
expense along with the prepayment penalty if the Notes are repurchased. The
shares will bear a legend stating that the shares are "restricted securities"
pursuant to Rule 144; and are entitled to "piggyback registration rights"
requiring the Company to register the shares for sale on the next qualifying
registration statement that the Company may file with the Securities and
Exchange Commission.
Under the terms of the Repurchase Agreement, as long as the Company makes all
payments required by the Repurchase Agreement and does not otherwise breach the
Repurchase Agreement, the Investors shall have no further rights under the
agreements and other documents the Company entered into with the Investors on
June 23, 2005 (the "Initial Purchase Documents"), pursuant to which the
Investors purchased the Notes and warrants. If the Company should fail to
repurchase the Notes by May 31, 2007, the Repurchase Agreement shall become null
and void and the Initial Purchase Documents shall remain in effect. If the
Company repurchases the Notes but does not repurchase the warrants, the
provisions of the Repurchase Agreement relating to the repurchase of the
warrants shall be null and void and the Initial Purchase Documents will continue
in full force and effect.
17
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Litigation
- ----------
On May 2, 2005, a complaint was filed by Pacific Business Capital Corporation
("PBCC") against the Company, its President, Gordon Davies, and its then Vice
President, Michael Davies. On September 5, 2006, the parties reached an oral
settlement agreement under which the Company agreed to pay PBCC a total of
$21,000 over the course of 11 months. Pursuant to the settlement agreement, at
September 30, 2006, the Company paid a total of $5,000, the Company agreed 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. There is a 10-day grace
period for each scheduled payment and there is a deed as security on property
owned by Michael Davies. No interest is due under the settlement agreement if
the Company complies with the terms thereof. In the event that the Company is 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. At
March 31, 2007 the Company had recorded the balance due of $7,000 in accrued
judgment payable in the accompanying condensed balance sheet.
On September 22, 2005 the Company entered into a Memorandum of Understanding
with a third party related to a litigation matter. Pursuant to the Memorandum of
Understanding, the Company has 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 its option to pay the entire settlement amount at a 20% discount At
March 31, 2007, the Company owed the plaintiff approximately $38,500 in payments
due under the Memorandum of Understanding.
On September 25, 2006, a Complaint was filed by AID Equipment, LLC against the
Company. Plaintiffs generally allege in their complaint that the Company engaged
the plaintiffs to supply and fabricate equipment and that Gordon Davies 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. The Company's management
denies that the plaintiffs are owed the amounts sought, and the Company intends
to vigorously defend this action on the basis brought by the plaintiffs. On
October 25, 2006, the Company filed an Answer to the Complaint generally denying
all plaintiffs allegations and setting forth certain affirmative defenses. As of
March 31, 2007 the parties are in the discovery process, and no trial date has
been set for this case.
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, based on the fair market value of the
shares of $0.22 on the date the shares were loaned to the Company, which has
been included in accrued expenses as of March 31, 2007 in the accompanying
condensed balance sheet.
18
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
Indemnities and Guarantees
- --------------------------
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Colorado. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. The
Company is also required to indemnify the Investors for certain matters as
defined under the terms of the Notes. The duration of the guarantees and
indemnities varies, and is generally tied to the life of the agreement. These
guarantees and indemnities do not provide for any limitation of the maximum
potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying condensed balance sheet.
NOTE 10 - STOCKHOLDERS' EQUITY
- ------------------------------
Common Stock
- ------------
2007
- ----
In March 2007, the Company entered into two separate public relations
agreements. The agreements were entered into on March 1 and March 9 and call for
the Company to pay the public relations firms a fixed amount of approximately
$7,300 per month for a total of six months and 12 months, respectively. As part
of each agreement, the public relations firms each agreed to purchase 600,000
shares of the Company's common stock at a price of $0.07 per share. Instead of
paying cash for the shares, the amount due will be netted against the fees due
from the Company. The fair market price of the stock on the dates of the
agreements was $0.12. The Company has not issued the shares as of March 31, 2007
and has recorded the fair valueof the shares on the dates of the agreements in
equity as committed shares. For the value of the fair market price of the shares
greater than the agreed upon purchase price, the Company recorded general and
administrative expense of $60,000 included in the accompanying statements of
operations. The Company capitalized the purchase price value of the shares of
$84,000 in prepaid expenses and other current assets in the accompanying balance
sheet and is amortizing it over the terms of the agreements. The Company
recorded consulting expense of approximately $10,000 related to the amortization
of the value for the three and nine months ended March 31, 2007, which is
included in selling, general and administrative expenses in the accompanying
statements of operations.
2006
- ----
During the nine months ended March 31, 2006, the Company issued 725,000 shares
of its common stock for the conversion of $29,000 of Notes.
During the nine months ended March 31, 2006, the Company issued 5,171,897 shares
of its common stock for the conversion of $273,262 of principal and interest in
connection with notes payable - related parties.
During the nine months ended March 31, 2006, the Company issued 3,611,150 shares
of its common stock for the conversion of $180,508 of principal and interest in
connection with the note payable issued as part of the License transaction (see
Note 11). As part of the same transaction, the Company issued 4,000,000 shares,
valued at the fair market value on the date of grant, in the amount of $320,000.
During the nine months ended March 31, 2006, the Company issued 662,500 shares
of its common stock for services provided in the amount of $35,000. The Company
also has committed to issue shares for services provided in the amount of
$32,400.
19
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
- --------------------------------------------------------------------------------
STOCK OPTIONS AND WARRANTS
- --------------------------
2007
During the three months ended March 31, 2007, the Company issued options to
purchase 1,000,000 shares of its common stock to a consultant with an estimated
fair value of approximately $268,000. The options have an exercise price of
$0.15 per share and expire on June 30, 2009. The estimated fair value of the
options was included in derivative and warrant liabilities as they were to
non-employees.
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 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 to purchase up to 500,000
shares of its restricted common stock, at a price of $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
warrants and the shares issuable thereunder are subject to adjustment as set
forth in the warrant certificate. The estimated value of the warrants using the
Black-Scholes option-pricing model was approximately $70,000 and is included in
the employee option expense (see Note 2).
2006
During the nine months ended March 31, 2006, the Company granted 6,288,444 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 $218,300 and $347,031 as consulting
expense and warrant liabilities during the three and nine months ended March 31,
2006.
In addition, the Company issued 3,000,000 warrants to a consultant in fiscal
2005, 750,000 of which vested in 2005. The remainder vest at the rate of 750,000
in each of the first three quarters of 2006. The Company recorded $136,500 and
$409,500 as consulting expense and warrant liabilities for the three and nine
months ended March 31, 2006, respectively.
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 in the rail car industry only. 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 March 31, 2007 and is included in selling, general and administrative
expenses in the accompanying condensed statement of operations. Amortization
expense of $37,500 was recognized during the nine months ended March 31, 2007
and is included in selling, general and administrative expenses in the
accompanying condensed statement of operations.
20
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 ASA 12(R), DCR(TM),
Alderox KR7(R), PaverBlendTM, Alderox TSR(TM), 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.
Our Alderox(R) line of products includes ASA 12(R), DCR(TM), Alderox KR7(R),
PaverBlendTM, Alderox TSR(TM), 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. Alderox 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 ASA 12(R) sprayed onto the beds of asphalt haul trucks. The pump
system draws from a tank that stores the Alderox(R) product and automatically
applies a predetremined amount of product onto the truck bed. The Reliant 2 is a
manual hand held spray system which controls the amount of 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.
In March of 2007, we entered into a Products and Services Agreement with Climax
Molybdenum (Henderson Mine), a subsidiary of Phelps Dodge Mining Company for a
60-day performance trial of our product, ASA 12(R). Pursuant to this agreement,
we will install and provide support for our Reliant IV automated spray
applicator system at Phelps Dodge's Henderson mine. The agreement provides for
us to set up the applicator system and to provide user training, customer suport
and equipment servicing for the 60-day trial at no charge. However, we will
receive reimbursement for the use of our ASA 12(R) product and for providing any
repair or service not covered by warranty. The total payment we may receive
under the agreement is capped at $4,950.
21
Although the agreement does not explicitly require Phelps Dodge or its
subsidiaries to make any further use of ASA 12(R) following the trial, it states
that "implementation of the automated application system and use of Alderox(R)
ASA-12 is contingent upon the successful completion of a 60 day performance
trial" and goes on to state that "[s]hould the product pass the trial, the
equipment and product(s) will remain on the site." It is our expectation of that
a successful completion of the trial will result in the continued use of our
Reliant IV automated spray applicator system and ASA 12(R) with the possibility
of expanding its use to other mine sites. However, we can provide no assurance
that the trial will be successful, or that a successful trial will lead to
further orders from Phelps Dodge or its subsidiaries.
As reflected in our Financial Statements included in Item 1 of Part I of this
Report, we have incurred cumulative losses of $25,627,434, including net losses
of $3,597,016 and $3,396,764 for the nine-month periods ended March 31, 2007 and
2006, respectively. At March 31, 2007, we have a working capital deficit of
$4,690,765. As a result, recoverabiltiy 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: (i) increasing sales through the marketing of service contracts which
include the supply of specialized application equipment to the asphalt, concrete
and mining industries; (ii) marketing a Private Placement Memorandum to raise
$3,000,000 through convertible debentures; (iii) controlling of salaries and
general and administrative expenses; (iv) managing accounts payable; and (v)
increasing marketing activities within the mining industry and increasing
international distribution capabilities through additional distributors.
As previously disclosed in our SEC filings, on June 23, 2005, we entered into a
Securities Purchase Agreement with AJW Offshore, Ltd., AJW Qualified Partners,
LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC
(collectively, the "Note Holders") pursuant to which we issued to the Note
Holders convertible notes in the aggregate principal amount of $2,000,000 and
warrants to purchase an aggregate of 8,000,000 shares of our common stock. The
Securities Purchase Agreement also requires that we obtain the written consent
of a majority of the Note Holders 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. Due to this substantial restriction 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.
On February 1, 2007, we entered into a Securities Repurchase Agreement (the
"Repurchase Agreement") with the Note Holders to repurchase the convertible
notes and warrants discussed above. Under the terms of the Repurchase Agreement,
as amended, we have until May 31, 2007 to repurchase both the convertible notes
and the warrants. For the convertible notes, we must pay the Note Holders an
aggregate purchase price consisting of (i) cash equal to the outstanding balance
of accrued principal and interest due under the convertible notes plus a 30%
prepayment penalty, and (ii) 3,250,000 restricted shares of our common stock.
Should we repurchase the convertible notes on the last possible day under the
Repurchase Agreement, May 31, 2007, the aggregate cash portion of the purchase
price will be $902,681 including prepayment penalties. Additionally, since we
have not repurchased the convertible notes by April 30, 2007, we are required to
make routine monthly payments beginning on that date pursuant to the convertible
notes in the aggregate amount of $62,553. The aggregate cash price we must pay
the Note Holders for the warrants is $258,338.
The 3,250,000 shares to be issued to the Note Holders under the Repurchase
Agreement will be recorded as additional interest expense along with the
prepayment penalty if the convertible notes are repurchased. The shares will
bear a legend stating that the shares are "restricted securities" pursuant to
Rule 144; and are entitled to "piggyback registration rights" requiring us to
register the shares for sale on the next qualifying registration statement that
we may file with the Securities and Exchange Commission.
Under the terms of the Repurchase Agreement, as amended, as long as we make all
payments required by the Repurchase Agreement and do not otherwise breach the
Repurchase Agreement, the Note Holders shall have no further rights under the
agreements and other documents we entered into with the Note Holders on June 23,
2005 (the "Initial Purchase Documents"), pursuant to which the Note Holders
purchased the convertible and warrants. If we should fail to repurchase the
convertible notes by May 31, 2007, the Repurchase Agreement shall become null
and void and the Initial Purchase Documents shall remain in effect. If we
repurchase the convertible notes but do not repurchase the warrants, the
provisions of the Repurchase Agreement relating to the repurchase of the
warrants shall be null and void and the Initial Purchase Documents will continue
in full force and effect.
22
We currently do not have the funds necessary to repurchase the convertible notes
and warrants and plan to raise these funds though the private placement of debt
or equity. However, we can offer no assurance that we will be able to raise all
or any portion of the funds necessary to repurchase the convertible notes and
warrants on terms favorable to us or at all. The terms of the private placement
have yet to be determined. In the event we successfully complete the repurchase
of the convertible notes and warrants, we plan to cancel them on receipt.
We entered into a Note Purchase Agreement on October 17, 2006 with Canvasback
Company Limited, a company organized under the laws of the country of Anguilla
("Canvasback"), pursuant to which we issued Canvasback an unsecured convertible
promissory note for the aggregate principal amount of $2,079,067, accruing
interest at the annual rate of 10% per annum and maturing on October 17, 2007.
Pursuant to the agreement, Canvasback has agreed to purchase additional
unsecured convertible promissory notes up to an aggregate of $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. On December 15, 2006, we amended the
agreement pursuant to an Amendment No. 1 to the Convertible Note Purchase
Agreement to increase the amount of unsecured notes we can sell and Canvasback
can purchase under the agreement from $120,000 to $620,000 as consideration for
its right to convert the entirety of original note, the subsequent note, and all
notes purchased or to be issued by Canvasback pursuant to the agreement. At
March 31, 2007, the principal balance of the Canvasback note was $2,954,946.
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, Canvasback has agreed that the conversion provisions applicable
to the notes will not become operative unless and until the occurrence of any of
the following conversion events: (i) we obtain the prior written consent of the
Note Holders to permit the conversion of the notes, or any portion thereof, into
shares of our common stock pursuant to the terms of the Note Purchase Agreement;
or (ii) the Securities Purchase Agreement is terminated pursuant to terms and
all our obligations under the Securities Purchase Agreement have been fully
satisfied or waived.
At any time after the occurrence of the above conversion event, the amount owed
under the notes is convertible, at the election of Canvasback, into a number of
shares of the our common stock obtained by dividing the aggregate amount of
principal and accrued but unpaid interest due under the note as of the date of
conversion, by $0.025. As of March 31, 2007, 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 124,557,840 shares or approximately 71.7% of our
outstanding common stock.
In addition to the loans discussed above, we have previously borrowed loans from
various lenders aggregating $276,350. The lenders have orally agreed with the
Company that these loans are now due on demand. As of the date of filing of this
report, the lenders have made not made any demands for the repayment of these
loans. At March 31, 2007, the aggregate amount due under these notes is
$366,066.
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.
23
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006.
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 2007 March 31, 2006 Change Change
------------------------ ------------------------ ------------ ----------
% of % of
$ Revenue $ Revenue $ %
----------- ----------- ----------- ----------- ------------ ----------
Net Revenue $ 38,412 100% 3,580 100% $ 34,832 973%
Cost of Revenue 32,748 85% 22,110 618% 10,638 48%
----------- ---------- ----------- ---------- ------------ ----------
Gross Profit (Loss) 5,664 15% (18,530) (518)% 24,194 131%
Operating Expenses
Selling, General and Administrative Expenses 587,856 1,530% 895,394 25,011% (307,538) (34)%
----------- ---------- ----------- ---------- ------------ ----------
Loss from Operations (582,192) (1,516)% (913,924) (25,529)% 331,732 36%
Other Expense:
Interest Expense (224,761) (585)% (504,600) (14,095)% 279,839 (55)%
Change in Fair Value of Derivative Liabilities (4,079,104) (10,619)% (1,435,856) (40,108)% (2,643,248) 184%
----------- ---------- ----------- ---------- ------------ ----------
Net Other Expense (4,303,865) (11,204)% (1,940,456) (54,202)% (2,363,409) 122%
----------- ---------- ----------- ---------- ------------ ----------
Loss Before Provision for Income Taxes (4,886,057) (12,720)% (2,854,380) (79,731)% (2,031,677) (71)%
Provision for Income Taxes - - % - - % - - %
----------- ---------- ----------- ---------- ------------ ----------
Net Loss $(4,886,057) (12,720)% $(2,854,380) (79,731)% (2,031,677) (71)%
=========== ========== =========== ========== ============ ==========
Net Loss Per Share
-Basic and Diluted
Basic and Diluted $ (0.10) $ (0.07)
=========== ===========
Weighted-Average Common Shares Outstanding
-Basic and Diluted
Basic and Diluted 49,066,358 42,813,527 6,252,831 15%
=========== =========== ============ ==========
Net Revenues
- ------------
Net revenues for the three month period ended March 31, 2007 increased to
$38,412 from $3,580 for the three month period ended March 31, 2006. This
increase in net revenues of $34,832 or approximately 973% over the prior period
is due primarily to increase in sale of our products through our distributor
Applied Industrial Technologies and their Canadian division Bearing &
Transmission.
Cost of Revenues
- ----------------
Cost of revenues for the three month period ended March 31, 2007 increased to
$32,748 from $22,110 for the three month period ended March 31, 2006. This
increase in cost of revenues of $10,638, or approximately 48% over the prior
period is due primarily to increased sales, material purchases for the spray
systems and shipping costs to various warehouse locations in the US and Canada.
Gross Profit (Loss)
- -------------------
Gross profit for the three month period ended March 31, 2007 increased to $5,664
from a gross loss of $18,530 for the three month period ended March 31, 2006.
This increase in gross profit of $24,194, or approximately 131% over the prior
period is due primarily to increased sales of our product.
24
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for the three month period ended
March 31, 2007 decreased to $587,856 from $895,394 for the three month period
ended March 31, 2006. This decrease in selling, general and administrative
expenses of $307,538, or approximately 34% over the prior period is due
primarily to reduced costs associated with professional and consulting services
associated with completing the financing.
Loss from operations for the three month period ended March 31, 2007 decreased
to $582,192 from losses of $913,924 for the three month period ended March 31,
2006. This decrease in loss from operations of $331,732, or approximately 36% is
due primarily to increased sales and lower financing activity fees.
Interest Expense
- ----------------
Interest expense for the three month period ended March 31, 2007 decreased to
$224,761 from $504,600 for the three month period ended March 31, 2006. This
decrease in interest expense of $279,839, or approximately 55% over the prior
period is due primarily to reduced interest on the notes issued to AJW Offshore,
Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital
Partners.
Change in Fair Value of Derivative Liabilities
- ----------------------------------------------
Change in fair value of derivative liabilities for the three month period ended
March 31, 2007 was $4,079,104, compared to $1,435,856 for the three month period
ended March 31, 2006. This change in the fair value of derivative liabilities of
$2,643,248 or approximately 184% is due primarily to higher stock prices.
Net Loss
- --------
Net loss for the three month period ended March 31, 2007 was $4,886,057 compared
to a net loss of $2,854,380 for the three month period ended March 31, 2006.
This change during the 2007 period when compared to the same period in fiscal
2006 was due primarily to the change in fair value of derivative liabilities.
25
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2007 AND 2006.
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 2007 March 31, 2006 Change Change
------------------------ ------------------------- ------------ ----------
% of % of
$ Revenue $ Revenue $ %
------------ ----------- ------------ ----------- ------------ ----------
Net Revenue $ 139,801 100 % $ 64,814 100 % $ 74,987 116 %
Cost of Revenue 108,138 77 % 84,606 131 % 23,532 28 %
------------ ----------- ------------ ----------- ------------ ----------
Gross Profit (Loss) 31,663 23 % (19,792) (31)% 51,455 260 %
Operating Expenses
Selling, General and Administrative Expenses 1,614,490 1,155 % 2,413,671 3,724 % (799,181) (33)%
------------ ----------- ------------ ----------- ------------ ----------
Loss from Operations (1,582,827) (1,132)% (2,433,463) (3,755)% 850,636 35 %
Other Expense:
Interest Expense (863,852) (618)% (817,089) (1,261)% (46,763) 6 %
Change-Value of Derivative Liability (1,149,537) (822)% (145,412) (224)% (1,004,125) 691 %
------------ ----------- ------------ ----------- ------------ ----------
Net Other Expense (2,013,389) (1,440)% (962,501) (1,485)% (1,050,888) (109)%
------------ ----------- ------------ ----------- ------------ ----------
Loss Before Provision for Income Taxes (3,596,216) (2,572)% (3,395,964) (5,240)% (200,252) 6 %
Provision for Income Taxes 800 1 % 800 1 % - - %
------------ ----------- ------------ ----------- ------------ ----------
Net Loss $(3,597,016) (2,573)% $(3,396,764) (5,241)% (200,252) 6 %
============ =========== ============ =========== ============ ==========
Net Loss Per Share
-Basic and Diluted
Basic and Diluted $ (0.07) $ (0.10)
============ ============
Weighted-Average Common Shares Outstanding
-Basic and Diluted
Basic and Diluted 49,066,358 33,978,600 15,087,758 44 %
============ ============ ============ ==========
Net Revenues
- ------------
Net revenues for the nine month period ended March 31, 2007 increased to
$139,801 from $64,814 for the nine month period ended March 31, 2006. This
increase in net revenues of $74,987 or approximately 116% over the prior period
is due primarily to the increase in sale of our products generated by Applied
Industrial Technologies and their Canadian division Bearing & Transmission.
Cost of Revenues
- ----------------
Cost of revenues for the nine month period ended March 31, 2007 increased to
$108,138 from $84,606 for the nine month period ended March 31, 2006. This
increase in cost of revenues of $23,532, or approximately 28% over the prior
period is due primarily to cost of parts purchased for development of the spray
systems and shipping cost to various warehouses throughout the US and Canada.
Gross Profit (Loss)
- -------------------
Gross profit for the nine month period ended March 31, 2007 increased to $31,663
from a gross loss of $19,792 for the nine month period ended March 31, 2006.
This increase in gross profit of $51,455, or approximately 260% over the prior
period is due primarily to increase in sales of our products.
26
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for the nine month period ended
March 31, 2007 decreased to $1,614,490 from $2,413,671 for the nine month period
ended March 31, 2006. This decrease in selling, general and administrative
expenses of $799,181, or approximately 33% over the prior period is due
primarily to the decrease in expenses associated with professional and
consulting services associated with completing the financing from the nine
months ending March 31, 2006.
Loss from Operations
- --------------------
Loss from operations for the nine month period ended March 31, 2007 decreased to
$1,582,827 from $2,433,463 for the nine month period ended March 31, 2006. This
decrease in loss from operations of $850,636, or approximately 35% is due
primarily to the decrease in expenses associated with financial activities and
the nonrecurring nature of expenses associated with financing activities from
the six months ending March 31, 2006.
Interest Expense
- ----------------
Interest expense for the nine month period ended March 31, 2007 increased to
$863,852 from $817,089 for the nine month period ended March 31, 2006. This
increase in interest expense of $46,763, or approximately 6% over the prior
period is due primarily to debt discount amortization totaling $620,431 for the
nine months ended March 31, 2007, compared to $600,755 for the nine months ended
March 31, 2006.
Change in Fair Value of Derivative Liabilities
- ----------------------------------------------
Change in fair value of derivative liabilities for the nine months period ended
March 31, 2007 was $1,149,537, compared to $145,412 for the nine month period
ended March 31, 2006. This change in the fair value of derivative liabilities of
$1,004,125 or approximately 691% is due primarily is due to the change in the
derivative liabilities resulting from the increase in our stock price.
Net Loss
- --------
Net loss for the nine month period ended March 31, 2007 was $3,597,016 compared
to a net loss of $3,396,764 for the nine month period ended March 31, 2006. This
increase in net loss of $200,252, or approximately 6% over the prior period is
due primarily to the change in fair value of derivative liabilities resulting
from an increase in stock price.
LIQUIDITY AND CAPITAL RESOURCES
For the nine-months ended March 31, 2007, we used cash of $1,375,282 in our
operating activities and received cash of $1,376,944 in our financing
activities.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in our operating activities of $1,375,282, for the nine months
ended March 31, 2007 was primarily attributable to a net loss of $3,597,016 and
the following: (a) issuance of stock options and warrants with an aggregate
value of $140,000 for services rendered; (b) excess of fair value of shares for
services rendered of $60,000; (c) depreciation and amortization of $58,202; (d)
change in fair value of derivative and warrant liabilities aggregating
$1,149,537; (e) amortization of discount on notes payable of $620,431; (f)
decrease in accounts receivable of $7,518; (g) increase in inventories of
$103,675; (h) decrease in prepaid expenses of $2,519; and (i) increase in
accounts payable and accrued expenses of $277,612.
CASH FLOWS FROM INVESTING ACTIVITIES
We neither used nor received any cash from our investing activities for the nine
months ended March 31, 2007.
27
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by our financing activities of $1,376,944 for the nine months
ended March 31, 2007 was from proceeds on notes payable of $2,045,170 offset by
payments on notes payable of $668,226.
INTERNAL SOURCES OF LIQUIDITY
For the nine months ended March 31, 2007, the funds generated from our
operations were insufficient to fund our daily operations. For the nine months
ended March 31, 2007, we had a gross profit of $31,663, and we were thus unable
to meet our operating expenses of $1,614,490 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 March 31, 2007, we have debt owing to related parties aggregating $3,494,914
as summarized in Note 7 to the financial statements.
At March 31, 2007, we have debt owing to non-related parties aggregating
$708,405 (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 DEBT
On June 23, 2005, we entered into a Securities Purchase Agreement (the
"Securities Purchase Agreement") with the Note Holders pursuant to which we
issued to the Note Holders convertible notes in the aggregate principal amount
of $2,000,000 and warrants to purchase an aggregate of 8,000,000 shares of our
common stock. The Securities Purchase Agreement also requires that we obtain the
written consent of a majority of the Note Holders 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.
As discussed above, we entered into the Repurchase Agreement on February 1, 2007
with the Note Holders to repurchase the convertible notes and warrants discussed
above. Under the terms of the Repurchase Agreement, as amended, we have until
May 31, 2007 to repurchase the convertible notes and warrants. For the
convertible notes, we must pay the Note Holders an aggregate purchase price
consisting of (i) cash equal to the outstanding balance of accrued principal and
interest due under the convertible notes plus a 30% prepayment penalty, and (ii)
3,250,000 restricted shares of our common stock. Should we repurchase the
convertible notes on the last possible day under the Repurchase Agreement, May
31, 2007, the aggregate cash portion of the purchase price will be $902,759,
including prepayment penalties. Additionally, since we have not repurchased the
convertible notes by April 30, 2007, we are required to make routine monthly
payments beginning on that date pursuant to the convertible notes in the
aggregate amount of $62,553. The aggregate cash price that we must pay the Note
Holders for the warrants is $258,338.
Under the terms of the Repurchase Agreement, as amended, as long as we make all
payments required by the Repurchase Agreement and does not otherwise breach the
Repurchase Agreement, the Note Holders shall have no further rights under the
agreements and other documents we entered into with the Note Holders on June 23,
2005 (the "Initial Purchase Documents"), pursuant to which the Note Holders
purchased the convertible and warrants. If we should fail to repurchase the
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convertible notes by May 31, 2007, the Repurchase Agreement shall become null
and void and the Initial Purchase Documents shall remain in effect. If we
repurchase the convertible notes but do not repurchase the warrants, the
provisions of the Repurchase Agreement relating to the repurchase of the
warrants shall be null and void and the Initial Purchase Documents will continue
in full force and effect.
On October 17, 2006, we entered into a Note Purchase Agreement with Canvasback,
pursuant to which we issued Canvasback an unsecured convertible promissory note
for the aggregate principal amount of $2,079,067, accruing interest at the
annual rate of 10% per annum and maturing on October 17, 2007. Pursuant to the
agreement, Canvasback has agreed to purchase additional unsecured convertible
promissory notes up to an aggregate of $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.
On December 15, 2006, we amended the agreement pursuant to an Amendment No. 1 to
the Convertible Note Purchase Agreement to increase the amount of unsecured
notes we can sell and Canvasback can purchase under the agreement from $120,000
to $620,000 as consideration for its right to convert the entirety of original
note, the subsequent note, and all notes purchased or to be issued by Canvasback
pursuant to the agreement. At March 31, 2007, the balance of the Canvasback note
was $2,954,946.
As discussed above, 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 is
restricted under the Securities Purchase Agreement. The Securities Purchase
Agreement requires that we obtain the written consent of a majority of the these
investors 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 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, Canvasback has agreed that the conversion provisions applicable
to the notes will not become operative unless and until the occurrence of any of
the following conversion events: (i) we obtain the prior written consent of the
Note Holders to permit the conversion of the notes, or any portion thereof, into
shares of our common stock pursuant to the terms of the Note Purchase Agreement;
or (ii) the Securities Purchase Agreement is terminated pursuant to terms and
all our obligations under the Securities Purchase Agreement have been fully
satisfied or waived. At any time after the occurrence of the above conversion
event, the amount owed under the notes is convertible, at the election of
Canvasback, into a number of shares of the our common stock obtained by dividing
the aggregate amount of principal and accrued but unpaid interest due under the
note as of the date of conversion, by $.025.
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.
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.
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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, March 31, 2007. 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, March 31, 2007, 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 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 March 31, 2007.
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
March 31, 2007, 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.
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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. There were no 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 1, 2007, we entered into a public relations agreement with KCrew
Communications, Inc. ("KCrew") and granted KCrew options to purchase 600,000
shares of our common stock at an exercise price of $0.07 per share. Under the
terms of the public relations agreement, KCrew is to exercise these options
immediately upon the execution of the agreement. As a result, we are committed
to issue KCrew 600,000 shares of our common stock pursuant to the exercise of
these options. Payment for exercise price in the amount of $42,000 is to be
deducted from the fees due from us under the public relations agreement. We
believe our commitment to issue these shares is exempt under Regulation D,
Section 4(2), and/or Regulation S of the Securities Act.
On March 2, 2007, we issued options to purchase up to 1,000,000 shares of our
common stock to a consultant of our Company with an estimated fair value of
approximately $268,000. The options have an exercise price of $0.15 per share
and expire on June 30, 2009. We believe the issuances of these securities are
exempt under Regulation D and/or Section 4(2) of the Securities Act.
On March 1, 2007, we entered into a public relations agreement with Calypto
Holdings International, Inc. ("Calypto") and granted Calypto options to purchase
600,000 shares of our common stock at an exercise price of $0.07 per share.
Under the terms of the public relations agreement, Calypto is to exercise these
options immediately upon the execution of the agreement. As a result, we are
committed to issue Calypto 600,000 shares of our common stock pursuant to the
exercise of these options. Payment for exercise price in the amount of $42,000
is to be deducted from the fees due from us under the public relations
agreement. We believe our commitment to issue these shares is exempt under
Regulation D, Section 4(2), and/or Regulation S of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the three month period ended March 31, 2007, 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 March 31, 2007.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
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 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)
32.2 Certification of 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 requirments of the Exchange Act, we have cause this
report to be signed on our behalf by the undersigned, thereunto duly authorized.
RECLAMATION CONSULTINGAND APPLICATIONS, INC.
/s/ GORDON W. DAVIES
---------------------------------------
Gordon W. Davies, President
and Chairman of the Board of Directors
Date: May 21, 2007
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