FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 19345
For the quarterly period ended September 30, 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 Identification No.)
of incorporation or organization)
940 Calle Amanecer, Suite E, San Clemente, California, 92673
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 949-542 7440
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[X]
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: 121,650,023 shares as of November 19,
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.....................................29
ITEM 3A(T). CONTROLS AND PROCEDURES.....................................30
PART II - OTHER INFORMATION..................................................31
ITEM 1. LEGAL PROCEEDINGS...........................................31
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS..................................................31
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
SEPTEMBER 30, 2007
ASSETS
CURRENT ASSETS:
Cash $ --
Accounts receivable 39,047
Inventories 51,643
Prepaid expenses and other current assets 30,271
------------
Total current assets 120,961
Property and equipment, net 41,123
License agreement, net 412,500
Debt issuance costs, net 413,971
Deposits 28,158
------------
$ 1,016,713
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 449,697
Accrued professional fees 148,540
Accrued interest payable 299,620
Payable to shareholders 110,000
Other accrued expenses 66,144
Accrued judgment payable 17,900
Notes payable - related parties 794,678
Current portion of notes payable 341,673
------------
Total current liabilities 2,228,252
Notes payable-related parties, net of current portion and debt discount 2,484,434
Notes payable, net of current portion and debt discount 525,571
------------
Total liabilities 5,238,257
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 150,000,000 authorized,
121,650,023 shares issued and outstanding 1,216,500
Additional paid-in-capital 24,125,783
Treasury stock (1,500,000 shares), at cost (15,000)
Accumulated deficit (29,548,827)
------------
Total stockholders' deficit (4,221,544)
------------
$ 1,016,713
============
See the accompanying notes to unaudited condensed financial statements.
1
RECLAMATION CONSULTING AND APPLICATION, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
2007 2006
------------- -------------
Net revenue $ 119,178 $ 68,387
Cost of revenue 147,147 50,486
------------- -------------
Gross loss (27,969) 17,901
Selling, general and administrative expenses 646,533 426,068
------------- -------------
Loss from operations (674,502) (408,167)
Other income (expense)
Interest expense (1,700,767) (363,944)
Change in fair value of derivative liabilities -- 2,315,143
Loss on extinguishment of debt (18,500) --
------------- -------------
(1,719,267) 1,951,199
------------- -------------
Loss before income taxes (2,393,769) 1,543,032
Provision for income taxes 800 800
------------- -------------
Net loss $ (2,394,569) $ 1,542,232
============= =============
Net loss per common share:
Basic $ (0.02) $ 0.03
============= =============
Diluted $ (0.02) $ 0.02
============= =============
Weighted-average common shares outstanding
Basic 106,071,653 49,066,358
============= =============
Diluted 106,071,653 85,248,204
============= =============
See the accompanying notes to unaudited condensed financial statements.
2
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,394,569) $ 1,542,232
Adjustments to reconcile net loss to net cash used in
operating activities:
Issuance of stock options for services rendered 28,067 --
Issuance of shares for services rendered 12,500 --
Change in fair value of derivative liabilities -- (2,315,143)
Amortization of discount on notes payable 1,522,523 261,016
Depreciation and amortization 143,235 19,411
Loss on extinguishment of debt 18,500 --
Gain on cancellation of committed shares (32,400) --
(Increase) decrease in operating assets:
Accounts receivable (11,297) (29,454)
Inventories (6,422) (6,364)
Prepaid expenses and other current assets (6,706) (113)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (40,947) 32,032
----------- -----------
Total adjustments 1,627,053 (2,038,615)
----------- -----------
Net cash used in operating activities (767,516) (496,383)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities -- --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable and convertible debentures 792,500 712,050
Payments on notes payable and convertible debentures (28,725) (215,667)
----------- -----------
Net cash provided by financing activities 763,775 496,383
----------- -----------
Net change in cash (3,741) --
CASH, BEGINNING OF PERIOD 3,741 --
----------- -----------
CASH, END OF PERIOD $ -- $ --
=========== ===========
See the accompanying notes to unaudited condensed financial statements.
3
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
(Continued)
2007 2006
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 5,194 $ 57,947
========== ==========
Non-cash investing and financing activities:
Conversion of notes payable and accrued interest to common stock $1,787,800 $ --
========== ==========
Debt discount on debt $ 109,498 $ --
========== ==========
Issuance of shares for consulting services $ 12,500 $ --
========== ==========
Issuance of shares and warrants for extinguishment of debt $ 12,500 $ --
========== ==========
Issuance of committed shares for debt issuance costs $ 275,000 $ --
========== ==========
See the accompanying notes to unaudited condensed financial statements.
4
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
- -----------------------------------------------
Organization
- ------------
Reclamation Consulting and Applications, Inc. (the "Company") is a Colorado
corporation, originally formed in 1976. The Company's primary business is the
production and sale of its Alderox(R) line of products and applicator systems.
The Alderox(R) line of products is a line of release agent that was developed by
the Company in response to industries' need for an economical and
environmentally friendly product that eliminates or reduces build up of
materials on equipment. The Company's customers are located throughout the
United States.
Basis of Presentation
- ---------------------
The accompanying interim condensed financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") for interim financial reporting. These interim condensed
financial statements are unaudited and, in the opinion of management, include
all adjustments (consisting of normal recurring adjustments and accruals)
necessary to present fairly the balance sheet, operating results and cash flows
for the periods presented in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). Operating results for the
three months ended September 30, 2007 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2008 or for any other
interim period during such year. Certain information and footnote disclosures
normally included in condensed financial statements prepared in accordance with
GAAP have been omitted in accordance with the rules and regulations of the SEC.
These interim condensed financial statements should be read in conjunction with
the audited financial statements and notes thereto contained in the Company's
Form 10-KSB for the year ended June 30, 2007.
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 $29,548,827 including net income (loss) of ($2,394,569) and
$1,542,232 for the three months ended September 30, 2007 and 2006, respectively,
and has a working capital deficit of $2,107,291 at September 30, 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)
obtaining additional debt financing (see Note 11); (ii) controlling of general
and administrative expenses; (iii) managing accounts payable; and (iv)
evaluating its distribution and marketing methods to increase revenues.
5
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Use of Estimates
- ----------------
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include the
realizability of accounts receivable and inventories, the recoverability of
long-lived assets, the fair value of derivative and warrant liabilities, and the
fair value of common shares/options granted for services. Actual results could
differ from those estimates.
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
operations.
The Company depreciates its property and equipment using the straight-line
method over the following estimated useful lives:
Computers and office equipment 3-5 years
Test equipment 5 years
Vehicles 5 years
Long-Lived Assets
- -----------------
The Company accounts for its long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the historical cost carrying value of an asset may no longer be
appropriate. The Company assesses recoverability of the carrying value of an
asset by estimating the future undiscounted net cash flows expected to result
from the asset, including eventual disposition. If the future undiscounted net
cash flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset's carrying value and fair
value or disposable value. As of September 30, 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.
6
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences attributable
to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not those assets will not be
realized through future operations.
Convertible Debentures
- ----------------------
In certain instances, the convertible feature of the Company's notes payable
provides for a rate of conversion that is below market value (see Notes 6 and
7). This feature is characterized as a beneficial conversion feature ("BCF"),
which is recorded by the Company pursuant to Emerging Issues Task Force ("EITF")
Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," and EITF No.
00-27, "Application of EITF Issue No. 98-5 to Certain Convertible Instruments."
Debt Issuance Costs
- -------------------
The Company records direct costs of obtaining debt as debt issuance costs and
amortizes these costs to interest expense over the life of the related
notes/debentures on a straight-line basis, which approximates the effective
interest method. Amortization expense for the three months ended September 30,
2007 and 2006 was $90,196 and $3,333, respectively. At September 30, 2006,
accumulated amortization totaled $111,029.
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 considers the
carrying values of its financial instruments in the condensed financial
statements to approximate their fair values.
Derivative Financial Instruments
- --------------------------------
The Company had derivative financial instruments which consisted of embedded
derivatives related to 2005 notes. These embedded derivatives included certain
conversion features, variable interest features, call options and default
provisions. The accounting treatment of derivative financial instruments
required 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. 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 2005 notes, the Company was required to classify all other non-employee
stock options and warrants as derivative liabilities and mark them to market at
each reporting date. Any change in fair value was recorded as non-operating,
non-cash income or expense at each reporting date. If the fair value of the
derivatives was higher at the subsequent balance sheet date, the Company
recorded a non-operating, non-cash charge. If the fair value of the derivatives
was lower at the subsequent balance sheet date, the Company recorded
non-operating, non-cash income. As a result of the Company repaying the 2005
notes in full on June 1, 2007, the Company no longer has any derivative
instruments. For the quarter ended September 30, 2006, the Company recorded
other income of $2,315,143 related to the reduction in the estimated value of
the derivatives.
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 collectability is probable. Sales are recorded net of
sales discounts.
7
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.
Research and Development
- ------------------------
The Company's products and the technology underlying its products are in the
early stages of market acceptance. The Company has incurred $103,385 and $38,957
for the three months ended September 30, 2007 and 2006, respectively, on
research and development efforts, which costs have been expensed as a part of
selling, general and administrative expenses.
Net Income (Loss) Per Share
- ---------------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted earnings
per share. Basic EPS includes no dilution and is computed by dividing income or
loss available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings or losses of the entity.
Dilution is computed by applying the treasury stock method for options and
warrants. Under this method, options and warrants are assumed to be exercised at
the beginning of the period (or at the time of issuance, if later) as if funds
obtained thereby were used to purchase common stock at the average market price
during the period.
For the three months ended September 30, 2007, basic and diluted loss per share
are the same since the calculation of diluted per share amounts would result in
an anti-dilutive calculation that is not permitted and therefore not included.
Such dilutive amounts would have included shares potentially issuable pursuant
to convertible debentures (see Notes 6 and 7) and outstanding "in-the-money"
options and warrants (see Note 9).
The following represents a reconciliation of basic and diluted net income (loss)
per share for the three months ended September 30, 2007 and 2006:
Three Months Ended September 30,
-------------------------------
2007 2006
------------- -------------
(unaudited)
Basic income (loss) per share:
Net income (loss) $ (2,394,569) $ 1,542,232
------------- -------------
Weighted-average common shares outstanding, basic 106,071,653 49,066,358
============= =============
Basic income (loss) per share $ (0.02) $ 0.03
============= =============
Diluted income (loss) per share:
Net income (loss) $ (2,394,569) $ 1,542,232
Convertible notes interest expense (net of taxes) -- 30,000
------------- -------------
Adjusted net income (loss) available to common
stockholders $ (2,394,569) $ 1,572,232
============= =============
Weighted-average common shares outstanding, basic 106,071,653 49,066,358
Effect of dilutive securities:
Stock options and warrants -- 1,818,182
Convertible notes payable -- 34,363,664
------------- -------------
Weighted-average common shares outstanding, diluted 106,071,653 85,248,204
============= =============
Diluted net income (loss) per share $ (0.02) $ 0.02
============= =============
8
Stock-Based Compensation
- ------------------------
At September 30, 2006, the Company has no stock-based compensation plans.
On July 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share-Based
Payment", ("SFAS 123(R)") which establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods or
services, primarily focusing on accounting for transactions where an entity
obtains employee services in share-based payment transactions. SFAS 123(R)
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments, including stock options, based on
the grant-date fair value of the award and to recognize it as compensation
expense over the period the employee is required to provide service in exchange
for the award, usually the vesting period. 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.
As stock-based compensation expense recognized in the statement of operations
for the three months ended September 30, 2007 and 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. The estimated average forfeiture rate for the three months ended
September 30, 2007, of 0% was based on historical forfeiture experience.
SFAS 123(R) requires the cash flows resulting from the tax benefits resulting
from tax deductions in excess of the compensation cost recognized for those
options to be classified as financing cash flows. Due to the Company's
accumulated loss position, there were no such tax benefits during the three
months ended September 30, 2007 and 2006. Prior to the adoption of SFAS 123(R)
those benefits would have been reported as operating cash flows had the Company
received any tax benefits related to stock option exercises.
SUMMARY OF ASSUMPTIONS AND ACTIVITY
The fair value of stock-based awards to employees and directors is calculated
using the Black-Scholes option pricing models. The Black-Scholes model also
requires subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
expected term of options granted is derived from historical data on employee
exercises and post-vesting employment termination behavior. The risk-free rate
selected to value any particular grant is based on the U.S. Treasury rate that
corresponds to the pricing term of the grant effective as of the date of the
grant. The expected volatility is based on the historical volatility of the
Company's stock price. These factors could change in the future, affecting the
determination of stock-based compensation expense in future periods.
Assumptions for the three months ended September 30, 2007 were as follows:
risk-free interest rate 4.81%, dividend yield 0%, volatility factor of 173% and
a weighted - average expected term of three years.
A summary of option activity as of September 30, 2007 and changes during the
three months then ended, is presented below:
SEPTEMBER 30, 2007
WEIGHTED-AVERAGE
WEIGHTED REMAINING
AVERAGE AGGREGATE AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC
SHARES PRICE TERM (YEARS) VALUE
Options outstanding at July 1, 2006 14,990,000 $ 0.23
Options granted 500,000 0.17
Options forfeited. -- --
Options exercised. -- --
---------- ---------
Options outstanding at September 30, 2007 15,490,000 $ 0.23 1.99 $292,000
========== ========= =========== ========
Options exercisable at September 30, 2007 15,115,000 $ 0.23 1.90 $284,500
---------- --------- ----------- --------
9
Upon the exercise of options, the Company issues new shares from its authorized
shares. 500,000 options were granted during the three months ended September 30,
2007. No options were granted during the three months ended September 30, 2006.
The weighted average grant date fair value of options granted during the three
months ended September 30, 2007 was $0.22 per share.
As of September 30, 2007 there was $84,206 of unrecognized compensation costs
related to employee stock options. That cost is expected to be recognized on a
straight-line basis over the next six months. The fair value of shares vested
during the three months ended September 30, 2007 related to employee options was
$28,067.
There was no stock-based compensation expense related to stock options under
SFAS 123(R) for the three months ended September 30, 2006.
Concentrations
- --------------
The Company maintains its cash balances at financial institutions that are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
From time-to-time, the Company's cash balances exceed the amount insured by the
FDIC. Management believes the risk of loss of cash balances in excess of the
insured limit to be low.
The majority of revenues in the periods ended September 30, 2007 and 2006 were
generated from one major distributor, Applied Industrial Technologies. The
majority of receivables at September 30, 2007 were from the same distributor.
For the three months ended September 30, 2007 and 2006, total sales to Applied
Industrial Technologies amounted to $62,827 and $17,772 respectively, or
approximately 53% and 18%, respectively, of our sales and as of September 30,
2007, accounts receivable from this customer accounted for approximately 15% of
our total accounts receivable.
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. SFAS No. 157 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. SFAS No. 157 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 FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48") 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 adopted FIN 48 on July 1, 2007 with no material impact to its
financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 permits entities to
choose to measure at fair value many financial instruments and certain other
instruments and certain other items that are not currently required to be
measured 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
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 does not affect any
existing accounting literature that requires certain assets and liabilities to
be carried at fair value and does not establish requirements for recognizing and
measuring dividend income, interest income, or interest expense. It does not
eliminate disclosure requirements included in other accounting standards. SFAS
No. 159 is effective in fiscal years beginning after November 15, 2007. The
Company expects to adopt SFAS No. 159 on July 1, 2008. The Company is in the
process of evaluation the provisions of the statement, but does not anticipate
that the adoption of this standard will have material impact on its financial
statements.
10
NOTE 3 - ACCOUNTS RECEIVABLE
- ----------------------------
All accounts receivable are trade related. These receivables are current and no
reserve for uncollectible accounts is deemed necessary.
NOTE 4 - INVENTORIES
- --------------------
Inventories consist of the following as of September 30, 2007:
Raw materials $ 25,601
Finished goods 26,042
-----------
$ 51,643
===========
NOTE 5 - PROPERTY AND EQUIPMENT
- -------------------------------
The following is a summary of property and equipment at September 30, 2007:
Computers and office equipment $ 12,210
Test equipment 51,435
Vehicles 17,409
-----------
81,054
Less accumulated depreciation (39,931)
-----------
$ 41,123
===========
Depreciation expense was $3,704 and $3,578 for the three months ended September
30, 2007 and 2006, respectively.
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
- ----------------------------------------
Notes payable - related parties consist of the following at September 30, 2007:
Unsecured convertible debt to stockholders, bearing interest at
10 percent per annum, due on July 18, 2009 (see below) $ 1,416,090
Unsecured revolving line of credit to stockholders, bearing
interest at 12 percent per annum, due on July 18, 2009, net
of discount of $37,610 (see below) 783,390
Note payable to Paul Hughes, bearing interest at 12 percent per
annum, convertible to common shares at $0.20 per share, interest
payable monthly, principal due on November 29, 2008, secured by
substantially all assets of the Company, net of debt discount of
$123,380 (see Note 7) 276,620
Unsecured notes payable to stockholders, bearing interest at
8.25 percent per annum, due on demand 267,300
Unsecured note payable to stockholder, bearing interest at
10 percent per annum, due on demand 283,812
Unsecured note payable to stockholder, bearing interest at
12 percent per annum, due March 19, 2009 100,000
Notes payable bearing interest at 12 percent per annum,
convertible to common shares at $0.12 per share, due March
10, 2009, secured by substantially all assets of the
Company, net of debt discount of $291,667 (see below) 8,333
Unsecured note payable to stockholder, bearing interest at
15 percent per annum, due on demand 60,400
Unsecured notes payable to stockholders, bearing interest at
10 percent per annum convertible to common stock at $0.25
per share, due on demand 26,000
11
Unsecured note payable debt to stockholder, $2,500 interest
payable on maturity, due on demand 25,000
Unsecured note payable to stockholder, bearing interest
at 12 percent per annum, due on demand 30,000
Unsecured note payable to stockholder, bearing interest at
15 percent per annum convertible to common shares at
$0.75 per share, due on demand 2,167
-------------
Subtotal 3,279,112
Less current portion (794,678)
-------------
2,484,434
=============
Interest expense on notes payable - related parties (including amortization of
debt discount) for the three months ended September 30, 2007 and 2006 was
approximately $1,500,000 and $38,000, respectively.
UNSECURED CONVERTIBLE DEBT TO STOCKHOLDERS
- ------------------------------------------
On October 17, 2006, the Company entered into a Note Purchase Agreement (the
"Agreement") with a group of investors led by Canvasback Company Limited
("Canvasback"), 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 (subsequently amended in July 2009 -
see below). Pursuant to the Agreement, the Lender agreed to purchase additional
Unsecured Notes up to an aggregate of $620,000. Through June 30, 2007,
Canvasback had loaned the Company an additional $1,414,980 leaving a total
principal amount due of $2,944,047 under the Unsecured Notes and $550,000 under
Interim Loans (see below). 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 proceeds
received from Canvasback were used for business development purposes, working
capital needs, pre-payment of interest, repayment of other debt, 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 one
of three events occurred, as defined (each, a "Conversion Event"). In June 2007,
a Conversion Event occurred.
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.
As a result of the Conversion Event, the Unsecured Notes became convertible at
$0.025 per share. However, Canvasback and the Company agreed that such
conversion above the 65,000,000 shares that were converted after June 30 may
only be made if the Company effects an increase in its authorized shares of
common stock or a reverse split of its common stock, such that the Company has
sufficient authorized shares of stock available to allow the conversion. As a
result, the occurrence of the Conversion Event triggered the Company's recording
a partial BCF equal to the balance of the note that is immediately convertible
to 65,000,000 shares ($1,787,800). The partial BCF was to be amortized to
interest expense over the remaining life of the Unsecured Notes. The Company
recorded $357,800 of interest expense during the year ended June 30, 2007
related to the amortization of the BCF on the Unsecured Notes.
12
On July 18, 2007, the Company entered into Amendment No. 2 to its Note Purchase
Agreement ("Amendment No. 2") with Canvasback. Amendment No. 2 amended the Note
Purchase Agreement to provide for the cancellation of all notes previously
issued or issuable under the Agreement and for a portion of the outstanding
balance of such notes to be converted into Company common stock with the
remainder reflected by a new, consolidated convertible promissory note. All
previously issued notes under the Agreement were cancelled.
As of July 18, 2007, the outstanding balance of principal and interest of loans
received by the Company from Canvasback pursuant to the framework of the
Agreement was $3,203,890. Pursuant to Amendment No. 2, on July 18, 2007,
Canvasback converted $1,787,800 of this balance into 65,000,000 shares of
Company common stock (the "Initial Conversion Shares") and the remaining balance
of $1,416,090 was consolidated into a single new convertible note (the "New
Convertible Note"). This New Convertible Note bears simple interest at the rate
of 10% per annum and matures on July 18, 2009 at which time all outstanding
principal and interest is due. The Company does not have any rights to pre-pay
principal to Canvasback prior to the maturity date and may make interest
payments prior to the maturity date only with Canvasback's prior written
approval. Because the $1,787,800 converted included the principal and accrued
interest of the loans which had a conversion price of $0.05, the average
conversion price for the Initial Conversion Shares was approximately $0.0275.
Since the 2007 amendment resulted in terms that, pursuant to EITF No. 96-19,
"Debtor's Accounting for a Modification or Exchange of Debt Instruments," were
substantially different from the terms of the original notes, the modification
was treated as an extinguishment of debt for the three months ended September
30, 2007, with no resulting gain or loss. In addition, the Company accelerated
the amortization of the debt discount related to the $1,787,800 that was
converted, totaling $1,246,143. The amortization of the discount recognized
through July 18 (up to the date of the modification) was $183,857.
The New Convertible Note may be converted in whole or part, at the option of
Canvasback, into Company common stock (the "Subsequent Conversion Shares") at a
conversion price of $0.025 per share, but such conversion may only be made if
the Company effects an increase in its authorized shares of common stock or a
reverse split of its common stock, such that the Company has sufficient
authorized shares of stock available to allow the conversion of the new note.
Since the New Convertible Note contains an contingent conversion clause, the
Company calculated but did not record a BCF of $1,416,090, which will only be
recorded as a debt discount as shares become convertible. Once recorded, the
discount will be amortized to interest expense over the remaining life of the
New Convertible Note or until converted.
Amendment No. 2 prohibits Canvasback from transferring the New Convertible Note
to any third party without the Company's prior written approval.
The Initial Conversion Shares and any Subsequent Conversion Shares Canvasback
may receive are "restricted securities" as defined by Rule 144 and may only be
sold pursuant to registration with the SEC or an exemption from registration.
Additionally, contractual "trickle-out" provisions in Amendment No. 2 prevent
Canvasback from selling in any one month any amount of Initial Conversion Shares
or Subsequent Conversion Shares in excess of 5% of the Company's outstanding
shares for the next three years. In the event the Company were to become listed
on the TSX Venture Exchange in Toronto, Canada, any share escrow agreement that
may be requested and entered into by Canvasback and the Company by such exchange
would supersede the terms of the trickle-out provisions in Amendment No. 2.
SECURED REVOLVING LINE OF CREDIT AGREEMENT
- ------------------------------------------
On July 18, 2007, the Company also entered into a Secured Revolving Line of
Credit Agreement (the "Credit Agreement") and Security Agreement with
Canvasback. Pursuant to the Security Agreement, the Company has also issued a
Secured Promissory Note to Canvasback for the $3,000,000 line of credit. The
Company collectively refers to the Credit Agreement, the Security Agreement and
the Secured Promissory Note as the "Loan Documents." The Loan Documents provide
the Company with a $3,000,000 line of credit for two years, secured by all of
the Company's assets. The line of credit accrues simple interest at the rate of
12% per annum. All accrued interest as of July 18, 2008 will be payable on July
31, 2008. The principal and the remaining accrued interest will be payable on
July 17, 2009.
The Company may utilize the line of credit by requesting advances from time to
time during the term of the Credit Agreement. However, Canvasback has no
obligation to make such advances and the decision to lend such money lies in
their sole and complete discretion. Accordingly, the Company can provide no
assurance that it will have access to funds under the line of credit.
13
Commencing on April 26, 2007 and continuing through July 16, 2007, Canvasback
advanced funds to the Company from time to time carrying interest at 12% per
annum pursuant (the "Interim Loans") pursuant to an oral arrangement to make the
Interim Loans advances under a line of credit agreement to be negotiated and
signed in the future. As of July 18, 2007, the outstanding balance of principal
and accrued interest of the Interim Loans was $598,193. Pursuant to the Credit
Agreement, this balance of $598,193 was converted into an advance under the line
of credit effective July 18, 2007 and will be due and payable in accordance with
the terms of the Loan Documents.
The Company requests advances under line of credit from time to time to fund its
operating and compliance costs. As of September 30, 2007 the balance of
principal and accrued interest on the line of credit was $847,934, consisting of
$820,936 in principal and $26,998 in interest.
In connection with additional borrowings made during the three months ended
September 30, 2007, the Company issued a 3-year detachable warrant to Canvasback
allowing for a purchase for cash of up to 300,000 shares of common stock at an
exercise price of $0.19 per share. The fair value of the warrant was estimated
to be $41,912 which was determined by the Company using the Black-Scholes
pricing model. The Company is amortizing the debt discount over the terms of the
related debt instruments using the straight-line method (which approximates the
effective interest method). During the three months ended September 30, 2007,
the Company amortized $4,302 related to the debt discount which is recorded as
interest expense in the accompanying statement of operations.
On the occurrence of any of the following events not cured by us within ten days
after receiving written notice of such event from Canvasback, the Loan Documents
allow Canvasback to suspend the making of further advances, accelerate the
maturity date, commence legal action against the Company, and foreclose on all
of the Company's assets:
o The Company's failure to fulfill any of its obligations under the
Loan Documents, including any failure to pay principal or interest
on the line of credit when due;
o the breach of any warranty or representation made by the Company
in the Credit Agreement or Security Agreement;
o any dissolution or termination of the Company's existence;
o the Company's filing of a voluntary petition in bankruptcy seeking
reorganization, arrangement or readjustment of debts; or
o any filing of an involuntary petition against the Company in
bankruptcy seeking reorganization, arrangement or readjustment of
debts that is not dismissed or discharged within 60 days.
OTHER LOANS
- -----------
In September 2007, the Company entered into an oral agreement with Joan Gish,
pursuant to which she agreed to lend the Company $300,000. The Company
memorialized its oral agreement with Ms. Gish through a convertible debenture
dated September 11, 2007 in the amount of $300,000. This debenture carries
simple interest of 12% per annum and matures on March 10, 2009. Interest is
payable monthly, with the principal due on the maturity date. At any time prior
to the maturity date, Ms. Gish has the option to convert the outstanding balance
of principal, unpaid interest, and/or up to six months of future interest into
shares of our common stock at a conversion price of $0.12 per share.
In connection with the issuance of the debenture, the Company also issued Ms.
Gish warrants to purchase up to 300,000 shares of our common stock. The warrants
have an exercise price of $0.20 per share and expire September 10, 2010. The
warrant exercise price shall be adjusted downwards to reflect forward stock
splits, but may not be adjusted upwards for reverse stock splits or stock
dividends. As a result of the BCF and warrants, the Company recorded a debt
discount of $300,000 and will amortize it to interest expense over the life of
the debenture. For the three months ended September 30, 2007, the amortization
was $8,333.
14
NOTE 7 - NOTES PAYABLE
- ----------------------
Notes payable consist of the following at September 30, 2007:
Note payable bearing interest at 12 percent per annum, convertible
to common shares at $0.20 per share, interest payable monthly,
principal due on November 29, 2008, secured by substantially all
assets of the Company, net of debt discount of $234,414 (see below) $ 525,571
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 of the assets of the Company 50,815
Unsecured notes payable, bearing interest at 12 percent per annum,
due on demand, net of discount of $11,892 (see below) 58,108
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 and $0.45 per
share, due on demand, secured by substantially all assets of the
Company 42,750
Unsecured notes payable, bearing interest at 8.25 percent per
annum, due on demand 5,000
Unsecured note payable, bearing interest at 15 percent per annum,
due on demand 10,000
------------
Subtotal 867,244
Less current portion (341,673)
------------
$ 525,571
============
Convertible Debentures
- ----------------------
On May 30, 2007, the Company issued Secured Convertible Debentures (each, a
"Debenture" and collectively, "Debentures") in the aggregate amount of
$1,159,985 to three accredited investors, Paul Hughes, whom the Company later
engaged as its Chief Operating Officer and Chief Financial Officer, Eat-Me
Foods, Ltd. and 0761291 B.C. Ltd. (each, a "Debenture Holder" and collectively,
"Debenture Holders"). The Debentures carry simple interest of 12% per annum and
mature on November 29, 2008. Interest is payable monthly, with the principal due
on the maturity date. The debenture with Paul Hughes was $400,000 and is
included in Notes Payable - Related Parties (see Note 6).
At any time prior to the maturity date, each Debenture Holder has the option to
convert the outstanding balance of principal, unpaid interest, and/or up to six
months of future interest into shares of the Company's common stock at a price
of $0.20 per share. This BCF was estimated to be $461,100 and will be amortized
to interest expense over 18 months, the term of the debentures. The Company
recognized $77,690 of interest expense during the three months ended September
30, 2007 related to this BCF.
The Debenture Holder will receive differing amounts of warrants to purchase
shares of our common stock upon any conversion of their Debentures. If they
convert their Debentures, Mr. Hughes and Eat-Me Foods, Ltd. will receive
warrants in a number equal to 245% and 45%, respectively, of the shares received
by each in any such conversion. 0761291 B.C. Ltd. is not entitled to any
warrants on conversion of its Debenture.
Fifty percent of the warrants to be issued in any conversion have an exercise
price of $0.22 per share while the remaining warrants have an exercise price of
$0.24 per share. The warrants are to expire three years after issuance. In the
event that the closing price of the Company's common stock equals or exceeds
$0.80 per share for twenty consecutive trading days, the Company has the option
to cancel the unexercised warrants after providing the Debenture Holders with 45
days' prior written notice.
15
As of September 30, 2007 and based on a conversion price of $0.20 per share, the
amount of common stock which would have been issuable upon full conversion of
the aggregate outstanding balance of the Debentures, plus six months of future
interest is 6,383,553 shares or approximately 5% of our outstanding common
stock. With the issuance of these shares, the Debenture Holders would also
receive warrants for the purchase of 6,383,553 shares of common stock, or
approximately 5% of the Company's outstanding common stock, which would have
been valued at approximately $1,366,000 and would have been recognized as
interest expense over the remaining life of the Debentures if they had been
granted.
The obligations under the Debentures are secured by a security interest in all
of the Company's assets. On the occurrence of any of the following events, each
Debenture Holder may accelerate the maturity date, commence legal action against
the Company and foreclose on its assets:
o the Company's failure to make payments under the Debentures when
due;
o the Company becomes insolvent or make a general assignment for the
benefit of its creditors;
o any dissolution or termination of the Company's existence; or
o the Company's failure to fulfill its obligations under the
Debenture for at least 14 days after written notice of such
failure by the Debenture Holder.
Both the Company's CEO, Michael C. Davies, and President, Gordon W. Davies,
provided personal guaranties of the Company's obligations under the Debenture to
0761291 B.C. Ltd. The guaranties make the Company's CEO and President personally
responsible to 0761291 B.C. Ltd. for satisfaction of the Company's obligations
under the Debenture issued to 0761291 B.C. Ltd. Bandit Yacht Investments, Ltd.,
a company controlled by Fred Davies, who is the father of the Company's CEO and
President and a shareholder of the Company, also granted a mortgage and provided
a guaranty of the Company's obligations under the Debenture to 0761291 B.C. Ltd.
In addition, it is the Company's understanding that Mr. Hughes has provided a
guaranty of its obligations under the Debentures to 0761291 B.C. Ltd. and Eat-Me
Foods, Ltd., pursuant to an arrangement between the Debenture Holders.
In consideration of the personal guaranty provided by Mr. Hughes of our
obligations under the secured convertible debentures to 0761291 B.C. Ltd. and
Eat-Me Foods, Ltd., the Company committed to issue 500,000 shares of our common
stock to him which were issued in July 2007. The Company also committed to issue
500,000 shares of our common stock to Fred Davies, the father of its President
and CEO, for granting a mortgage and providing a personal guaranty of our
obligations under the secured convertible debentures to the Investors, which
were issued in July 2007. Valued at $0.275 per share, the fair market price of
our stock on the measurement date, the 1,000,000 shares that the Company
committed to issue had a value of $275,000. This has been recorded as a debt
issuance cost and will be amortized to interest expense over the life of the
Debentures.
To the extent the Debenture Holders do not convert their Debentures, the Company
will need additional capital to make the interest and principal payments due
under the Debentures. If needed, the Company plans to raise such funds through
the private placement of debt or equity but can offer no assurance that it will
be able to raise all or any portion of the funds necessary to repay the
Investors on terms favorable to the Company or at all.
OTHER NOTES
- -----------
In July and August of 2007, the Company received $70,000 from three investors
pursuant to note purchase agreements and promissory notes. The promissory notes
are for a term of one year and carry interest at the rate of 12% per annum.
Pursuant to the note purchase agreements entered into with each investor, the
Company committed to issue warrants to purchase an aggregate of 70,000 shares of
common stock. The warrants have a term of one year and an exercise price of
$0.25 per share.
The Company has estimated the fair value of the warrant to be $14,091, which was
determined by the Company using the Black-Scholes pricing model and recorded as
a debt discount. The Company is amortizing the debt discount over the terms of
the related debt instruments using the straight-line method (which approximates
the effective interest method). During the three months ended September 30,
2007, the Company amortized $2,199 related to the debt discount, which is
recorded as interest expense in the accompanying condensed statement of
operations.
16
NOTE 8 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Litigation
- ----------
On or about August 24, 2007, the Company was served with a complaint filed by
Monarch Bay Capital Group, L.L.C. ("MBCG") to recover a redemption fee under the
terms of a consulting agreement between MBCG and the Company dated October 27,
2007. MBCG is claiming a fee of $279,993. On September 17, 2007 we filed an
answer to the complaint denying all allegations of MBCG, and pleading various
affirmative defenses as to conflict of interest, lack of performance and
non-disclosure going to the issues to be raised by the Company in the action.
Discovery was served to MBCG on September 24, 2007. At this time the Company
cannot determine the outcome of this matter and the Company has not recorded any
accrual at September 30, 2007.
On or about May 23, 2007, we were served with a complaint filed by Shaub &
Williams, LLP seeking damages against us in amount not less than $26,740 plus
interest at the rate of 1.5% per month from December 1, 2006, reasonable
attorneys' fees and costs of suit for alleged services. At this time the Company
cannot determine the outcome of this matter and the Company has not recorded any
accrual at September 30, 2007.
On May 2, 2005, a complaint was filed by Pacific Business Capital Corporation
("PBCC") against the Company, its President, Gordon Davies, and its Vice
President, Michael Davies. On September 5, 2006, a settlement was reached
whereas the Company agreed to pay PBCC a total of $21,000 over the course of 11
months. The Company is obligated to pay PBCC $5,000 by September 29, 2006;
$1,500 per month beginning October 1, 2006 and ending July 1, 2007; and $1,000
on August 1, 2007, the total of which is recorded under judgment payable. 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 default. As of the date of filing this report, the Company has paid
PBCC the amount required by the settlement agreement and believes it has no
further obligation to PBCC. An Order to Show Cause hearing regarding dismissal
is currently scheduled for December 17, 2007.
On September 25, 2006, a Complaint was filed by AID Equipment, LLC. alleging
that the Company engaged the services of AID Equipment to supply and fabricate
equipment for a project and that the Company's president endorsed a credit
application in return for the services to be performed valued at $20,343.
Plaintiffs are requesting damages in the amount of $17,286 and for attorneys'
fees, cost of court and expenses of litigation. 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. Specifically,
management denies that any such credit application existed and that the Company
issued a purchase order for such services. Discovery was served to AID Equipment
on May 24, 2007. At this time the Company can not determine the outcome of this
matter and the Company has not recorded any accrual at September 30, 2007.
In September 2005, litigation between the Company and a former lessor was
settled through arbitration. The complaint alleged a breach of contract by the
Company for not paying amounts due as per the lease terms. The terms of the
settlement require the Company to pay $30,000 on March 1, 2006. Beginning April
1, 2006, the Company is required to pay monthly installments of $3,100 for
twenty-four months. These amounts are recorded as an accrued judgment payable on
the accompanying balance sheet. The Company may prepay the remaining balance at
a twenty percent discount at any time. If the Company defaults on any of the
required payments, an additional $40,000 due under the terms of the original
lease will become due and payable. The payment of the settlement is personally
guaranteed by Mr. Gordon Davies. The balance of the payable is $17,900 at
September 30, 2007.
Loss on Collateralized Shares
- -----------------------------
In April 2006 the Company entered into an agreement to borrow $300,000 from a
third party and collateralized 1,500,000 shares of the Company's common shares
in order to consummate the loan. The collateralized shares were the property of
one of the Company's shareholders. The loan never funded and the agreement was
voided. During the return of the collateralized shares to the shareholder a
total of 500,000 shares were mishandled and could not be located. The Company is
still working to recover the missing shares but has set up an accrual for the
loss to the shareholder for $110,000, which has been included in accrued
expenses as of September 30, 2007 in the accompanying condensed balance sheet.
17
Indemnities and Guarantees
- --------------------------
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Colorado. In connection with its facility leases, the Company h as indemnified
its lessors for certain claims arising from the use of the facilities. The
Company is also required to indemnify the Debenture Holders under the terms of
the Debentures. 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.
Convertible Debentures in Default
- ---------------------------------
The Company is currently in default of the terms of convertible debentures
issued to approximately 13 investors in private placements conducted in March
2000 through September 2001. These debentures carry interest at the rate of 10%
per annum and as of September 30, 2007 the aggregate balance of unpaid principal
and accrued interest was approximately $151,492. The Company committed to the
Nebraska Department of Banking and Finance to repay the unpaid principal and
accrued interest owed to Nebraska purchasers of the debentures by November 15,
2007, which amount totaled $101,407 as of such date. The Company was not able to
meet this commitment; as such, it may face regulatory action resulting in a
liability to the Company and/or litigation. Any regulatory action or lawsuits
would make it more difficult for the Company to raise funds and result in the
insolvency of the Company. As of November 19, 2007 that Company has not met its
obligations to repay the unpaid principal and accrued interest.
NOTE 9 - STOCKHOLDERS' EQUITY
- -----------------------------
Common Stock
- ------------
During the three months ended September 30, 2007 the Company issued a total of
66,080,000 shares of common stock, as follows: 65,000,000 shares for the
conversion of $1,787,800 of convertible notes (see Note 6), 1,000,000 shares
committed in fiscal 2007 to compensate two individuals for making personal
guaranties and a mortgage for Company obligations (see Note 6), 50,000 shares
for professional services rendered valued at $12,500 and 30,000 shares as part
of an agreement in July 2007 whereby the Company issued the shares to an
investor pursuant to the terms of an amendment to a promissory note. The terms
of the amendment are that the Company agreed to pay the principal amount owing
of $10,000 on or before December 30, 2007, to issue 30,000 shares of common
stock and issue 80,000 warrants having an exercise price of $0.20 per share and
expiring September 28, 2010 in return for the release of all accrued and future
interest and penalty under the note. The Company recorded a loss on
extinguishment of debt of $18,500 pursuant to the terms of this settlement. As
of November 19, 2007, the Company has not paid the $10,000.
In addition, during the three months ended September 30, 2007, the Company
recorded a reversal of previously recorded committed shares totaling $32,400 as
part of selling, general and administrative expenses for consultant shares that
will never be issued due to non-performance by the consultant.
During the three months ended September 30, 2006, the Company did not issue any
shares.
Stock Options and Warrants
- --------------------------
During the three months ended September 30, 2007 the Company issued a total of
750,000 warrants, all of which were vested as of September 30, 2007, and 500,000
options of which 125,000 was vested as of September 30, 2007. Total outstanding
options and warrants at September 30, 2007 were 27,119,025.
The following assumptions were used under the Black-Scholes method at the date
of grant to estimate the fair value of the option and warrant grants to
non-employees during the three months ended September 30, 2007:
Expected Life 1-5 Years
Risk-free interest rate 3.72-4.88%
Dividend yield 0%
Volatility 173%
18
NOTE 10 - LICENSE
- -----------------
Effective January 4, 2006, the Company entered into a license agreement with
Billfighter Investments, Limited ("Billfighter"), in which the Company agreed to
grant 4,000,000 shares of common stock and a note payable in the amount of
$180,000 for the ability to utilize certain technology owned by Billfighter. The
shares were valued at $320,000 based on the fair market value on the date of
grant of $0.08 per share, resulting in a total value of $500,000. The principal
of $180,000 and interest of $557 was converted the following day, January 5,
2006, into 3,611,150 shares of common stock based on the fair market value on
that date of $0.05 per share. The license grants the Company the sole and
exclusive right and license to use, produce, manufacture, market, sell and
distribute the licensed product within a defined territory. The Company also
agrees to pay cash royalties in the amount of 10% of net revenues generated by
the license. The license has no defined term and is subject to termination by
either party. The Company believes the license has a useful life of 10 years and
is amortizing on a straight-line basis over this term. Amortization expense of
$12,500 was recognized during both of the three months ended September 30, 2007
and 2006 and is included in selling, general and administrative expenses in the
accompanying condensed statements of operations.
NOTE 11 - SUBSEQUENT EVENTS
- ---------------------------
In October of 2007, Ms. Gish loaned the Company $50,000 pursuant to an oral
agreement for this loan to receive similar terms to that of the debenture she
received effective September 11, 2007 (see Note 6). On October 11, 2007, Ms.
Gish loaned the Company an additional $25,000 pursuant to an oral agreement for
this loan providing for her to accrue interest at 12% per annum until the loan
is repaid.
In May 2007, Norman R. Gish (the husband of Ms. Gish) had advanced $100,000 to
the Company pursuant to an oral agreement for Mr. Gish to receive 12% interest
and for the parties to later exercise a written agreement with terms similar to
those received by purchasers of the Company's secured convertible debentures
then being offered (see Note 6). As of October 23, 2007, the outstanding balance
of this loan was $105,030 reflecting $100,000 in outstanding principal and
$5,030 in accrued unpaid interest. On October 23, 2007 the Company executed a
convertible debenture in the amount of $105,030 (the "$105K Debenture"), which
was the outstanding balance of a loan. Mr. Gish is a member of the Company's
advisory board.
The $105K Debenture carries simple interest of 12% per annum and matures on
April 21, 2009. Interest is payable monthly, with the principal due on the
maturity date. At any time prior to the maturity date, Mr. Gish has the option
to convert the outstanding balance of principal, unpaid interest, and/or up to
six months of future interest into shares of our common stock at a conversion
price of $0.12 per share.
Pursuant to terms of the $105K Debenture, the Company also issued Mr. Gish
warrants to purchase up to 100,000 shares of common stock. Half of the warrants
have an exercise price of $0.22 per share and the other half have an exercise
price of $0.24 per share. The warrants expire on May 22, 2010.
On the occurrence of any of the following events, Mr. Gish may accelerate the
maturity date of the Debenture and commence legal action against the Company:
o the Company's failure to make payments under the debenture when
due;
o the Company becomes insolvent or makes a general assignment for
the benefit of its creditors;
o any dissolution or termination of the Company's existence; or
o the Company's failure to fulfill its obligations under the
debenture for at least 14 days after written notice of such
failure by Mr. Gish.
On November 8, 2007 and November 9, 2007, the Company raised a total of $500,000
through the sale of convertible debentures to nine Canadian investors (the
"November Debentures"). The November Debentures carry simple interest of 12% per
annum and mature two years following issuance. Interest is payable monthly, with
the principal due on the maturity date. At any time prior to the maturity date,
the investors have the option to convert the outstanding balance of principal
into shares of common stock at a conversion price of $0.15 per share.
19
Pursuant to terms of the November Debentures, the investors received warrants to
purchase up to 500,000 shares of the Company's common stock. The warrants have
an exercise price of $0.22 per share and a term of three years. The warrant
exercise price, but not the number of warrant shares, is subject to downward
adjustment in the event of a reverse split. In the event that the closing price
of our common stock equals or exceeds $0.80 per share for twenty consecutive
trading days, the Company has the option to cancel the unexercised warrants
after providing the investors with 45-days prior written notice.
On the occurrence of any of the following events, an investor may accelerate the
maturity date of his or her debenture and commence legal action against the
Company:
o the Company's failure to make payments under the debenture when
due;
o the Company becomes insolvent or makes a general assignment for
the benefit of its creditors;
o any dissolution or termination of the Company's existence; or
o the Company's failure to fulfill its obligations under the
debenture for at least 14 days after written notice of such
failure by the investor.
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) line of products. Our Alderox(R) products
are made from our patented formula relating specifically to an improved release
agent for mitigating the sticking of ore, asphalt, concrete and other similar
products to various surfaces. Release agents are commonly applied to skips,
loaders, haul trucks, conveyer belts, containers, mixers and forms prior to
hauling oar and asphalt and prior to the pouring of concrete into them and act
as a barrier to mitigate adhesion of the ore or 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(R), KR-7(R),
PaverBlendTM and ASA Cleaners. ASA-12(R) is an ore and 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 mining and asphalt industries. PaverBlendTM is an asphalt
related product used to keep paving equipment free from debris. KR7(R) is a
concrete release agent also developed by us in response to the concrete
industry's need for effective, economical and environmentally-friendly products.
Our application equipment includes the Reliant 1, Reliant 2 and Reliant 3
control spray systems. The Reliant 1 was specifically designed as a robotic
automated spray system to control the amount and temperature of Alderox
ASA-12(R) sprayed onto the beds of mining and asphalt haul trucks. The pump
system draws from a tank that stores the AlderoxTM product and automatically
applies a predetermined amount of product onto the truck bed. The Reliant 2 is a
manual hand held spray system which controls the amount of Alderox ASA-12(R)
sprayed onto the beds of mining and asphalt haul trucks and also draws from a
storage tank. This system is also modified for use in other areas of the mining
industry such as on skips, loader, chutes and crushing stations. 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 and mining industries to drag or transport
ore and asphalt to distribution containers.
As reflected in our Financial Statements included in Item 1 of Part I of this
Report, we have incurred cumulative losses of $29,548,827, including net income
(loss) of ($2,394,569) and $1,542,232 for the three-month periods ended
September 30, 2007 and 2006, respectively. At September 30, 2007, we have a
working capital deficit of $2,107,291. As a result, recoverability of a major
portion of the recorded assets reflected in our condensed balance sheet included
with our condensed financial statements is dependent upon future sustainable
profitable operation of our Company, which, in turn, is dependent upon our
ability to raise additional capital, obtain financing, increase our customer
base and manage our costs. We currently do not have adequate resources to fund
our operations and we will need to raise funds and/or increase our revenues in
order to sustain our operations.
Our management has taken the following steps in an effort to put the Company on
a sounder financial footing : (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) raising funds by selling
convertible debentures; (iii) controlling of 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. However, we can offer no assurance
that our management's efforts will be successful.
21
We have been sustaining our operations largely through the use of funds borrowed
pursuant to our equity line of credit and through the sale of promissory notes
and debentures. We can provide no assurance that we will continue to receive
such funding. Additionally, in the event we are unable to convert our loans to
equity or to generate sufficient profits to repay these loans, we will need to
fund such repayments through additional borrowing. Any inability to timely repay
these loans could result in the failure of our company. The conversion of loans
to equity could result in substantial dilution to the holdings of our existing
shareholders.
We currently lack sufficient authorized shares of common stock to effect the
issuance of all outstanding options, warrants and convertible instruments. In
order for the Company to have sufficient authorized shares for the issuance of
shares underlying such obligations, the Company will need to amend its Articles
of Incorporation to increase the number of authorized shares or to effect a
reverse split of its outstanding shares. Our management expects that the Company
will effect a reverse split in the near future, can provide no assurance that
such event will take place. Our failure to either increase the number of our
authorized shares or effect a reverse split would result in contingent
liabilities to holders of outstanding options, warrants and convertible
instruments and also make it more difficult for us to raise capital.
Additionally, the issuance of shares on the exercise of outstanding options,
warrants and convertible instruments will likely result in substantial dilution
to the holdings of our existing shareholders.
AMENDMENT TO CONVERTIBLE NOTE PURCHASE AGREEMENT
During our first quarter we entered into an Amendment No. 2 to the Convertible
Note Purchase Agreement dated October 17, 2006 with Canvasback Company Limited,
a company organized under the laws of the country of Anguilla ("Canvasback").
Canvasback is currently our largest shareholder and has periodically infused
capital into our company in the form of unsecured debt to allow it to meet its
financial obligations and continue operations. Canvasback is wholly-owned by AGM
International, Ltd., a company organized under the laws of the country of
Anguilla. John Benjamin, a resident of Anguilla, is AGM International's sole
shareholder.
Pursuant to the terms of the original Convertible Note Purchase Agreement (the
"Note Purchase Agreement"), we issued the Canvasback an Unsecured Convertible
Promissory Note (the "Original 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. In consideration for the right to convert all amounts due
under the Original Note, Canvasback had agreed to purchase additional unsecured
convertible notes up to an aggregate principal amount of $120,000 and having the
same terms, conditions and convertible features as the Original Note. In
accordance therewith, on November 7, 2006, we issued Canvasback an additional
Unsecured Convertible Promissory Note (the "Subsequent Note") pursuant to the
Agreement in the aggregate principal amount of $108,000. This Subsequent Note
had the same terms, conditions and convertible features as the Original Note.
Both notes were convertible at the option of Canvasback into shares of our
common stock at a conversion price of $0.025 per share, provided that Canvasback
did not have any rights to convert the shares until we were no longer subject to
contractual provisions prohibiting such conversions under the securities
purchase agreement we had with the four other investors.
On December 15, 2006, we amended the Note Purchase Agreement pursuant to
Amendment No. 1 ("Amendment No. 1") to increase the amount of unsecured notes we
can sell and Canvasback can purchase under the Note Purchase Agreement from
$120,000 to $620,000 as consideration for its right to convert the entirety of
the Original Note, the Subsequent Note, and all notes purchased by or to be
issued to Canvasback pursuant to the Note Purchase Agreement.
Following Amendment No. 1, we received loans from Canvasback from time to time
under the terms of the Note Purchase Agreement. We received the $620,000 in
loans provided for by the Note Purchase Agreement, as amended by Amendment No.
1, as well as an additional $244,829 of loans which the parties agreed would be
subject to the terms of the Note Purchase Agreement, for an aggregate of
$864,829. Of this amount, $325,300 was advanced with the understanding that the
conversion price for the outstanding balance of this portion of the loans would
be $0.05. On July 16, 2007, we paid down $10,000 of principal and $558 of
interest outstanding on the loans.
22
On July 18, 2007, we entered into Amendment No. 2 to the Note Purchase Agreement
("Amendment No. 2") with Canvasback. Amendment No. 2 amended the Note Purchase
Agreement to provide for the cancellation of all notes previously issued or
issuable under the Note Purchase Agreement and for a portion of the outstanding
balance of such notes to be converted into our common stock with the remainder
reflected by a new, consolidated convertible promissory note. All previously
issued notes under the Agreement were cancelled.
As of July 18, 2007, the outstanding balance of principal and interest of loans
received by us from Canvasback pursuant to the framework of the Note Purchase
Agreement was $3,203,890. Pursuant to Amendment No. 2, on July 18, 2007,
Canvasback converted $1,787,800 of this balance into 65,000,000 shares of
Company common stock (the "Initial Conversion Shares") and the remaining balance
of $1,416,090 was consolidated into a single new convertible note (the "New
Convertible Note"). This New Convertible Note bears simple interest at the rate
of 10% per annum and matures on July 18, 2009 on which all outstanding principal
and interest is due. We do not have any rights to pre-pay principal to
Canvasback prior to the maturity date and may make interest payments prior to
the maturity date only with Canvasback's prior written approval.
Because the $1,787,800 converted included the principal and accrued interest of
the loans which had a conversion price of $0.05, the average conversion price
for the Initial Conversion Shares was approximately $0.0275.
The New Convertible Note may be converted in whole or part, at the option of
Canvasback, into our common stock (the "Subsequent Conversion Shares") at a
conversion price of $0.025 per share, but such conversion may only be made if we
effect an increase in its authorized shares of common stock or a reverse split
of its common stock, such that we have sufficient authorized shares of stock
available to allow the conversion of the new note. The conversion price adjusts
proportionately in the event of any reverse or forward stock split.
Amendment No. 2 prohibits Canvasback from transferring the New Convertible Note
to any third party without our prior written approval.
The Initial Conversion Shares and any Subsequent Conversion Shares Canvasback
may receive are "restricted securities" as defined by Rule 144 and may only be
sold pursuant to registration with the SEC or an exemption from registration.
Additionally, contractual "trickle-out" provisions in Amendment No. 2 prevent
Canvasback from selling in any one month any amount of Initial Conversion Shares
or Subsequent Conversion Shares in excess of 5% of our outstanding shares for
the next three years. In the event we were to become listed on the TSX Venture
Exchange in Toronto, Canada, any share escrow agreement that may be requested
and entered into by Canvasback and us by such exchange would supersede the terms
of the trickle-out provisions in Amendment No. 2.
SECURED REVOLVING LINE OF CREDIT AGREEMENT
On July 18, 2007, we entered into a Secured Revolving Line of Credit Agreement
(the "Credit Agreement") and Security Agreement with Canvasback. Pursuant to the
Security Agreement, we have also issued a Secured Promissory Note to Canvasback
for the $3,000,000 line of credit. The line of credit is secured by all of the
assets of the Company. We collectively refer to the Credit Agreement, the
Security Agreement and the Secured Promissory Note as the "Loan Documents" in
this Annual Report. The Loan Documents provide us with a $3,000,000 line of
credit for two years, secured by all of our assets. The line of credit accrues
simple interest at the rate of 12% per annum. All accrued interest as of July
18, 2008 will be payable on July 31, 2008. The principal and the remaining
accrued interest will be payable on July 17, 2009.
We may utilize the line of credit by requesting advances form time to time
during the term of the Credit Agreement. However, Canvasback has no obligation
to make such advances and the decision to lend such money lies in their sole and
complete discretion. Additionally, our ability to utilize the line of credit is
dependent on Canvasback having funds available for such use. Recently Canvasback
has informed us that it currently does not have further funds available for use
under the line of credit. Accordingly, we can provide no assurance that it will
have access to further funds under the line of credit.
Commencing on April 26, 2007 and continuing through July 16, 2007, Canvasback
advanced funds to us from time to time carrying interest at 12% per annum (the
"Interim Loans") pursuant to an oral arrangement to make the Interim Loans
advances under a line of credit agreement to be negotiated and signed in the
future. Of funds advanced to us as Interim Loans, $550,000 was loaned to
Canvasback by five individuals in order for Canvasback to loan these funds to
us. During the last quarter of fiscal 2007 and the first quarter of fiscal 2008,
we issued warrants to purchase 550,000 shares of our common stock to these five
individuals as an incentive for them to loan these funds to Canvasback. The five
individuals were not interested in investing directly into the Company
themselves due to the Company's financial condition but were willing to loan
money to Canvasback for use by the Company with the inducement of the options.
These options were fully vested on issuance, have an exercise price of $0.25 per
share, and have a term of three years from issuance.
23
As of July 18, 2007, the outstanding balance of principal and accrued interest
of the Interim Loans was $598,193. Pursuant to the Credit Agreement, this
balance of $598,193 was converted into an advance under the line of credit
effective July 18, 2007 and will be due and payable in accordance with the terms
of the Loan Documents.
As of November 19, 2007 the principal balance of the line of credit was $821,000
and accrued interest totaled $40,494.
On the occurrence of any of the following events not cured by us within ten days
after receiving written notice of such event from Canvasback, the Loan Documents
allow Canvasback to suspend the making of further advances, accelerate the
maturity date, commence legal action against us, and foreclose on all of our
assets:
o our failure to fulfill any of our obligations under the Loan
Documents, including any failure to pay principal or interest on
the line of credit when due;
o the breach of any warranty or representation made by us in the
Credit Agreement or Security Agreement;
o any dissolution or termination of our existence;
o our filing of a voluntary petition in bankruptcy seeking
reorganization, arrangement or readjustment of debts;
any filing of an involuntary petition against us in bankruptcy seeking
reorganization, arrangement or readjustment of debts that is not dismissed or
discharged within 60 days.
OTHER LOANS
NOTE PURCHASE AGREEMENTS.
In July and August of 2007 we received $70,000 from three investors pursuant to
Note Purchase Agreements and Promissory Notes. The promissory notes are for a
term of one year and carry interest at the rate of 12% per annum. Pursuant to
the Note Purchase Agreements entered into with each investor, the Company
committed to issue warrants to purchase an aggregate of 70,000 shares of common
stock. The warrants have a term of one year and an exercise price of $0.25 per
share. We believe the issuance of these securities was exempt from registration
pursuant to Regulation S, and section 4(2) of the Securities Act of 1933, as
amended. The three investors are non-U.S. persons as defined in Rule 502 of
Regulation S.
JOAN GISH DEBENTURE
$300K DEBENTURE
On September 10, 2007, we entered into an oral agreement with Joan A. Gish, an
accredited investor, pursuant to which Ms. Gish loaned us $300,000 We
memorialized our oral agreement with Ms. Gish through a convertible debenture
dated September 11, 2007 in the amount of $300,000 (the "$300K Debenture). Ms.
Gish is the wife of Norman A. Gish, who serves on our Advisory Board.
The $300K Debenture carries simple interest of 12% per annum and matures on
March 10, 2009. Interest is payable monthly, with the principal due on the
maturity date. At any time prior to the maturity date, Ms. Gish has the option
to convert the outstanding balance of principal, unpaid interest, and/or up to
six months of future interest into shares of our common stock at a conversion
price of $0.12 per share. There is no provision requiring the adjustment of the
conversion price in the event of any reverse or forward stock split.
In connection with the issuance of the debenture, we also issued Ms. Gish
warrants to purchase up to 300,000 shares of our common stock. The warrants have
an exercise price of $0.20 per share and expire September 10, 2010. The warrant
exercise price is subject to be adjusted downwards to reflect forward stock
splits, but may not be adjusted upwards for reverse stock splits or stock
dividends. The warrants have call rights, providing us with the option of
cancelling unexercised warrants in the event that the closing price of our
common stock equaled or exceeded $0.80 per share.
The $300K Debenture and accompanying warrants were sold to Ms. Gish in reliance
upon exemptions from registration pursuant to Regulation S, Regulation D and
section 4(2) of the Securities Act of 1933, as amended. Ms. Gish is a non-U.S.
person as defined in Rule 502 of Regulation S and an accredited investor as
defined by Rule 501 of Regulation D.
24
On the occurrence of any of the following events, Ms. Gish may accelerate the
maturity date of the $300K Debenture and commence legal action against us:
o our failure to make payments under the debenture when due;
o we become insolvent or make a general assignment for the benefit
of our creditors;
o any dissolution or termination of our existence; or
o our failure to fulfill our obligations under the debenture for at
least 14 days after written notice of such failure by Ms. Gish.
OTHER LOANS FROM JOAN GISH
On approximately October 3 2007, Ms. Gish loaned us $50,000 pursuant to an oral
agreement for this loan to receive similar terms to that of the debenture she
received effective September 11, 2007. On approximately October 11, 2007, Ms.
Gish loaned us an additional $25,000 pursuant to an oral agreement for this loan
not receive similar terms to the debenture received by her September 11, 2007
but providing for her to accrue interest at 12% per annum until the loan is
repaid.
NORM GISH DEBENTURE
On October 23, 2007 we executed a convertible debenture with Norman R. Gish in
the amount of $105,030 (the "$105K Debenture"), which was the outstanding
balance of a loan made to us by Mr. Gish pursuant to an oral agreement. Mr. Gish
is a member of our advisory board, and the husband of Joan A. Gish.
In May 2007, Mr. Gish had advanced $100,000 to us pursuant to an oral agreement
for Mr. Gish to receive 12% interest and for the parties to later exercise a
written agreement with terms similar to those received by purchasers of our
secured convertible debentures then being offered. As of October 23, 2007, the
outstanding balance of this loan was $105,030 reflecting $100,000 in outstanding
principal and $5,030 in accrued unpaid interest.
The $105K Debenture carries simple interest of 12% per annum and matures on
April 21, 2009. Interest is payable monthly, with the principal due on the
maturity date. At any time prior to the maturity date, Mr. Gish has the option
to convert the outstanding balance of principal, unpaid interest, and/or up to
six months of future interest into shares of our common stock at a conversion
price of $0.12 per share. There is no provision requiring the adjustment of the
conversion price in the event of any reverse or forward stock split.
Pursuant to terms of the $105K Debenture, we also issued Mr. Gish warrants to
purchase up to 100,000 shares of our common stock. Half of the warrants have an
exercise price of $0.22 per share and the other half have an exercise price of
$0.24 per share. The warrants expire on May 22, 2010.
On the occurrence of any of the following events, Mr. Gish may accelerate the
maturity date of the Debenture and commence legal action against us:
o our failure to make payments under the debenture when due;
o we become insolvent or make a general assignment for the benefit
of our creditors;
o any dissolution or termination of our existence; or
o our failure to fulfill our obligations under the debenture for at
least 14 days after written notice of such failure by Mr. Gish.
The $105K Debenture has been offered and sold to Mr. Gish in reliance upon
exemptions from registration pursuant to Regulation S, Regulation D and section
4(2) of the Securities Act of 1933, as amended. Mr. Gish is a non-U.S. person as
defined in Rule 502 of Regulation S and an accredited investor as defined by
Rule 501 of Regulation D.
NOVEMBER CONVERTIBLE DEBENTURE PRIVATE PLACEMENT
On November 8, 2007 and November 9, 2007, we raised a total of $500,000 through
the sale of convertible debentures to nine Canadian investors (the "November
Debentures"). The November Debentures carry simple interest of 12% per annum and
mature two years following issuance. Interest is payable monthly, with the
principal due on the maturity date. At any time prior to the maturity date, the
investors have the option to convert the outstanding balance of principal into
shares of our common stock at a conversion price of $0.15 per share. In the
event of a forward or reverse stock split, the adjustment price adjusts
proportionately.
25
Pursuant to terms of the November Debentures, the investors received warrants to
purchase up to 500,000 shares of our common stock. The warrants have an exercise
price of $0.22 per share and a term of three years. In the event of a reverse
split, the number of warrant shares will not be adjusted, but the warrant
exercise price will be adjusted upwards, provided that such adjustment will be
calculated assuming an exercise price of $0.15 per share pre-split. The warrant
exercise price, but not the number of warrant shares, is subject to downward
adjustment in the event of a reverse stock split. In the event that the closing
price of our common stock equals or exceeds $0.80 per share for twenty
consecutive trading days, we have the option to cancel the unexercised warrants
after providing the investors with 45-days prior written notice.
On the occurrence of any of the following events, an investor may accelerate the
maturity date of his or her debenture and commence legal action against us:
o our failure to make payments under the debenture when due;
o we become insolvent or make a general assignment for the benefit
of our creditors;
o any dissolution or termination of our existence; or
o our failure to fulfill our obligations under the debenture for at
least 14 days after written notice of such failure by the
investor.
The November Debentures have been offered and sold in reliance upon exemptions
from registration pursuant to Regulation S, and section 4(2) of the Securities
Act of 1933, as amended. All of the investors are non-U.S. persons as defined in
Rule 502 of Regulation S.
CONVERTIBLE DEBENTURES IN DEFAULT
The Company is currently in default of the terms of convertible debentures
issued to approximately 13 investors in private placements conducted in March
2000 through September 2001. These debentures carry interest at the rate of 10%
per annum and as of September 30, 2007 the aggregate balance of unpaid principal
and accrued interest was approximately $151,492. As of November 19, 2007, the
aggregate balance of unpaid principal and accrued interest was approximately
$151,907. We had committed to the Nebraska Department of Banking and Finance to
repay the unpaid principal and accrued interest owed to Nebraska purchasers of
the debentures by November 15, 2007. As of November 19, 2007 the Company has not
met its obligations to repay the unpaid principal and accrued interest. In the
event we are unable to negotiate an extension from the Nebraska Department of
Banking and Finance, we may face regulatory action resulting in liability to the
company. In the event we do not repay the debentures, the debenture holders
could also file suit against us for damages. Any regulatory action or lawsuits
would make it more difficult for us to raise funds and result in the insolvency
of the Company.
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, 2007.
26
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006.
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 2007 September 30, 2006 Change Change
------------------------ ------------------------ ------------ ----------
$ % of Revenue $ % of Revenue $ %
------------ ---------- ------------ ---------- ------------ ----------
Net Revenue $ 119,178 100 % $ 68,387 100 % $ 50,791 74 %
Cost of Revenue 147,147 123 % 50,486 74 % 96,661 191 %
------------ ---------- ------------ ---------- ------------ ----------
Gross Profit (Loss) (27,969) (23)% 17,901 26 % (45,870) (256)%
Operating Expenses
Selling, General and Administrative Expenses 646,533 542 % 426,068 623 % 220,465 52 %
------------ ---------- ------------ ---------- ------------ ----------
Loss from Operations (674,502) (566)% (408,167) (597)% (266,335) (65)%
Other Expense:
Interest Expense (1,700,767) (1,427)% (363,944) (532)% (1,336,823) 367 %
Change in Fair Value of Derivative Liabilities -- -- % 2,315,143 3,385 % (2,315,143) (100)%
Loss on extinguishment of debt (18,500) (16)% -- -- % (18,500) -- %
------------ ---------- ------------ ---------- ------------ ----------
Net Other Expense (1,719,267) (1,443)% 1,951,199 2,853 % (3,670,466) (188)%
------------ ---------- ------------ ---------- ------------ ----------
Loss Before Provision for Income Taxes (2,393,769) (2,009)% 1,543,032 2,256 % (3,936,801) (255)%
Provision for Income Taxes 800 1 % 800 1 % -- -- %
------------ ---------- ------------ ---------- ------------ ----------
Net Loss $ (2,394,569) (2,009)% $ 1,542,232 2,255 % (3,936,801) (255)%
============ ========== ============ ========== ============ ==========
Net Loss Per Share
-Basic and Diluted
Basic $ (0.02) $ 0.03
============ ===========
Diluted $ (0.02) $ 0.02
============ ===========
Weighted-Average Common Shares Outstanding
-Basic and Diluted
Basic 106,071,653 49,006,358 65,267,819 160 %
============ ============ ============ ==========
Diluted 106,071,653 85,248,207 20,823,446 24 %
============ ============ ============ ==========
NET REVENUE
Net Revenues for the three month period ended September 30, 2007 increased to
$119,178 from $68,387 for the three month period ended September 30, 2006. This
increase in net revenues of $50,791 or approximately 74% over the prior period
is due primarily to the Distributorship agreement with Applied Industrial
Technologies and our in-house activity in the south east.
COST OF REVENUE
Cost of revenues for the three month period ended September 30, 2007 increased
to $147,147 from $50,486 for the three month period ended September 30, 2006.
This increase in cost of revenues of $96,661, or approximately 191% over the
prior period is due primarily to the increase in material input costs of the
goods sold during the period and the cost of application systems.
GROSS PROFIT
Gross profit for the three month period ended September 30, 2007 decreased to
($27,969) from $17,901 for the three month period ended September 30, 2006. This
decrease in gross profit of $45,870, or approximately 256% over the prior period
is due primarily to the costs associated with the development of the application
systems and international shipping expense.
27
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three month period ended
September 30, 2007 increased to $646,533 from $426,068 for the three month
period ended September 30, 2006. This increase in selling, general and
administrative expenses of $220,646, or approximately 52% over the prior period
is due primarily to increased staffing, consulting services, marketing and
advertising all pertaining to the mining industry.
LOSS FROM OPERATIONS
Loss from operations for the three month period ended September 30, 2007
increased to $674,502 from $408,167 for the three month period ended September
30, 2006. This increase in loss from operations of $266,335, or approximately
65% is due primarily to the increase in selling, general and administrative
expenses and costs associated with application systems
INTEREST EXPENSE
Interest expense for the three month period ended September 30, 2007 increased
to $1,700,767 from $363,944 for the three month period ended September 30, 2006.
This increase in interest expense of $1,336,823, or approximately 367% over the
prior period is due primarily to debt discount and debt issuance cost
amortization totaling $1,612,719.
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
Change in fair value of derivative liability for the three months ended
September 30, 2007 decreased to $0 from $2,315,143 for the three months ended
September 30, 2006. The decrease of change in fair value of derivative liability
was due to the payoff of a note payable.
NET INCOME (LOSS)
Net income (loss) for the three month period ended September 30, 2007 was
($2,394,569) compared to a net income of $1,542,232 for the three month period
ended September 30, 2006. This change to profitability during the 2006 period
when compared to the same period in fiscal 2007 was due primarily to debt
discount.
LIQUIDITY AND CAPITAL RESOURCES
For the three-months ended September 30, 2007, we used cash of $767,516 in our
operating activities and received cash of $763,775 in our financing activities.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in our operating activities of 767,516 for the three months ended
September 30, 2007 was primarily attributable to a net loss of $2,394,569, and
adjustments to reconcile net income to net cash used in operating activities of
$767,516 consisting of the following: (a) depreciation and amortization of
$143,235, (b) amortization of discount on notes payable of $1,522,523, (c)
increase in accounts receivable of $11,297, (d) increase in inventories of
$6,422, (e) increase in prepaid expenses of $6,706, and (f) decrease in accounts
payable and accrued expenses of $40,947, (g) loss on extinguishment of debt of
$18,500, (h) stock options for services rendered of $28,067 and (i) shares for
services rendered of $12,500.
CASH FLOWS FROM INVESTING ACTIVITIES
We neither used nor received any cash from our investing activities for the
three months ended September 30, 2007.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by our financing activities of $763,775 for the three months
ended September 30, 2007 was from proceeds on notes payable of $792,500 offset
by payments on notes payable of $28,725.
INTERNAL SOURCES OF LIQUIDITY
For the three months ended September 30, 2007, the funds generated from our
operations were insufficient to fund our daily operations. For the three months
ended September 30, 2007, we had a gross loss of $27,969, and we were thus
unable to meet our operating expenses of $646,533 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.
28
EXTERNAL SOURCES OF LIQUIDITY
We are dependent on receiving debt and equity financing to meet our immediate
capital needs 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, 2007.
At September 30, 2007, we have debt owing to related parties aggregating
$3,279,112 (net of unamortized debt discounts) as summarized in Note 6 to the
financial statements.
At September 30, 2007, we have debt owing to non-related parties aggregating
$867,244 (net of unamortized debt discounts) as summarized in Note 7 to the
financial statements.
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.
ITEM 3. CONTROLS AND PROCEDURES
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 SEC'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.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls as of the end of the period covered by
this report, September 30, 2007. This evaluation was carried out under the
supervision and with the participation of our President, Mr. Gordon W. Davies,
and our Chief Financial Officer, Mr. Paul Hughes (collectively, the "Certifying
Officers"). Based upon that evaluation, our Certifying Officers concluded that
as of the end of the period covered by this report, September 30, 2007, our
disclosure controls and procedures are not effective in meeting our requirements
as to the disclosure of material information relating to us and required to be
included in our periodic filings with the SEC.
The Certifying Officers identified three areas of weakness in the evaluation:
(i) a lack of segregation of duties due to internal understaffing, (ii) an
inability to rely more heavily on accounting consultants and legal counsel in
assisting the Company with compliance needs and (iii) a lack of a more
systematic and formal approach to the conduct of our corporate, financial and
business affairs. These weaknesses, which the Company continues to experience,
are primarily the result of a general lack of capital and human resources
dedicated to make the improvements necessary for timelier reporting and
disclosure with less reliance on internal auditing. In June 2007 we hired a new
Chief Financial Officer and we plan recruit additional officers as well as other
employees experienced with the implementation and evaluation of disclosure
controls and procedures for timely financial reporting. We also plan to make
greater use of accounting consultants and our legal counsel in assisting us in
meeting our compliance needs. However, we can offer no assurance that we will
successfully implement these plans, as our ability to do so is limited by our
available capital resources.
Notwithstanding the weaknesses described above, our management has concluded
that the condensed financial statements presented in this 10-QSB fairly present,
in all material respects, the Company's financial condition, results of
operations and cash flows as of and for the three month periods ended September
30, 2007 and 2006 in conformity with accounting principles generally accepted in
the United States of America.
29
ITEM 3A(T). CONTROLS AND PROCEDURES
SEE ITEM 3.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Further, as required by Rule 13a-15(d) of the Exchange Act and under the
supervision and with the participation of our Certifying Officers, we carried
out an evaluation as to whether there has been any change in our internal
control over financial reporting during our fiscal quarter ended September 30,
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 September 30, 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.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about August 24, 2007, we were served with a complaint filed by Monarch
Bay Capital Group, L.L.C. against us in a matter entitled Monarch Bay Capital
Group, L.L.C. v. Reclamation Consulting And Application, Inc., Case No.
07CC09056. The complaint was filed with the Superior Count of the State of
California, County of Orange, on August 17, 2007 against us to recover a
redemption fee under the terms of a Consulting Agreement between Monarch Bay
Capital Group, L.L.C. and the Company dated October 23, 2006. The Consulting
Agreement provides for us to pay Monarch Bay Capital Group, L.L.C. a fee equal
to 20% of the savings achieved by us in redeeming secured convertible notes and
warrants from four investors. On February 1, 2007, we entered into a Securities
Repurchase Agreement to repurchase secured convertible notes with an aggregate
principal amount of $2,000,000 (and warrants to purchase 8,000,000 shares of the
Company's common stock (the "Warrants") from the four investors. On February 27,
2007 and April 20, 2007 we entered into Amendment 1 and Amendment 2 of the
Securities Repurchase agreement and on June 4, 2007 the terms of the amended
Securities Repurchase Agreement were satisfied in full. Monarch Bay Capital
Group, L.L.C. is claiming a fee of $279,993. We are contesting the allegations
of Monarch Bay Capital Group, LLC. and discovery was served to Monarch Bay
Capital Group, L.L.C. on September 24, 2007. We are unable to predict the
expected outcome or a meaningful estimate of the costs of defending against the
claim at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Set forth below is information regarding the sale of equity securities during
the quarter ended September 30, 2007 that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), and which were not
previously disclosed either in a quarterly report on Form 10-QSB or on a current
report on Form 8-K.
In July 2007 we issued 30,000 shares of our common stock to an investor pursuant
to the terms of an amendment to a promissory note. The terms of the amendment
are that the Company agreed to pay the principal amount owing of $10,000 on or
before December 30, 2007, to issue 30,000 shares of Company common stock and
issue 80,000 warrants having an exercise price of $0.20 per share and expiring
September 28, 2010 in return for the release of all accrued and future interest
and penalty under the note We believe the issuance of the shares was exempt from
registration under Section 4(2) of the Securities Act.
In July 2007 we issued a consultant 50,000 shares of our common stock in
exchange for his agreeing to provide professional services from July 2007
through September 2007. We believe the issuance of the shares was exempt from
registration under Section 4(2) of the Securities Act.
31
In July 2007, we issued options to purchase 300,000 shares of our common stock
to one individual to induce him to loan funds to Canvasback which Canvasback
could then loan to the Company. These options were fully vested on issuance,
have an exercise price of $0.25 per share, and have a term of three years from
issuance. We believe the issuance of these options was exempt from registration
under Section 4(2) of the Securities Act.
In July 2007, we awarded options to purchase 500,000 shares of our common stock
to an employee. 125,000 of these options vest on each of September 30, 2007,
December 31, 207, March 30, 2008 and June 30, 2008. These options have an
exercise price of $0.17 per share. We believe the issuance of these options was
exempt from registration under Section 4(2) of the Securities Act and Rule 701
promulgated under the Securities Act.
In July and August of 2007 we committed to issue warrants to purchase an
aggregate of 70,000 shares of common stock to three Canadian investors in
connection with the investors loaning us an aggregate of $70,000 pursuant to
note purchase agreements and promissory notes. The promissory notes are for a
term of one year and carry interest at the rate of 12% per annum. The warrants
have a term of one year and an exercise price of $0.25 per share. We believe the
issuance of these securities was exempt from registration under Regulation S and
Section 4(2) of the Securities Act. The investors are non-U.S. persons as
defined in Rule 502 of Regulation D.
In September 2007, we re-entered into a Convertible Debenture with Joan A. Gish,
pursuant to which Ms. Gish loaned us $300,000 The $300K Debenture carries simple
interest of 12% per annum and matures on March 10, 2009. Interest is payable
monthly, with the principal due on the maturity date. At any time prior to the
maturity date, Ms. Gish has the option to convert the outstanding balance of
principal, unpaid interest, and/or up to six months of future interest into
shares of our common stock at a conversion price of $0.12 per share. In
connection with the issuance of the debenture, we also issued Ms. Gish warrants
to purchase up to 300,000 shares of our common stock. The warrants have an
exercise price of $0.20 per share and expire September 10, 2010. We believe the
issuance of these securities was exempt from registration under Regulation S,
Regulation D and Section 4(2) of the Securities Act. Ms. Gish is a non-U.S.
person as defined in Rule 502 of Regulation S and an accredited investor as
defined by Rule 501 of Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the three month period ended September 30, 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 other then
the following:
The Company is currently in default of the terms of convertible debentures
issued to approximately 13 investors in private placements conducted in March
2000 through September 2001. These debentures carry interest at the rate of 10%
per annum and as of November 19, 2007, the aggregate balance of unpaid principal
and accrued interest was approximately $151,907. See "Convertible Debentures in
Default" in the Management's Discussion and Analysis or Plan of Operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the three
month period ended September 30, 2007.
ITEM 5. OTHER INFORMATION
In July and August of 2007 we received $70,000 from three investors pursuant to
Note Purchase Agreements and Promissory Notes. See "Other Loans" in the
Management's Discussion and Analysis or Plan of Operation.
In September 2007 we entered into a convertible debenture with Joan Gish for
$300,000 and in connection with this convertible debenture we issued warrants to
purchase 300,000 shares to Ms. Gish. See "Other Loans" in the Management's
Discussion and Analysis or Plan of Operation.
32
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
4.1* Form of Note Purchase Agreement, Promissory Note and Warrant
Certificate used by Reclamation Consulting and Applications,
Inc. for $70,000 financing in July-August 2007 (filed
herewith).
4.2* Convertible Debenture, Promissory Note and Warrant
Certificate for $300,000 for Joan Gish as entered into and
issued by Reclamation Consulting and Applications, Inc. in
September 2007.
4.3* Convertible Debenture, Promissory Note and Warrant
Certificates for $105,030 for Norm Gish as entered into and
issued by Reclamation Consulting and Applications, Inc. in
October 2007.
4.4* Form of Convertible Debenture, Promissory Note and Warrant
Certificate used by Reclamation Consulting and Applications,
Inc. for $500,000 financing in November 2007. 10.1(1)
Secured Revolving Line of Credit Agreement dated July 18,
2007 by and between Reclamation Consulting and Applications,
Inc. and Canvasback Company Limited.
10.2(1) Security Agreement dated July 18, 2007 by and between
Reclamation Consulting and Applications, Inc. and Canvasback
Company Limited.
10.3(1) Promissory Note issued by Reclamation Consulting and
Applications, Inc. for the benefit of Canvasback Company
Limited.
10.4(1) Amendment No. 2 to Convertible Note Purchase Agreement dated
July 18, 2007 by and between Reclamation Consulting and
Applications, Inc. and Canvasback Company Limited.
10.5(1) Convertible Promissory Note dated July 18, 2007 issued by
Reclamation Consulting and Applications, Inc. for the
benefit of Canvasback Company Limited.
10.6* First Amendment to Lease dated October 1, 2007 between
Reclamation Consulting and Applications, Inc. and Boyd
Enterprises Utah, L.L.C. (filed herewith).
31.1* Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Filed herewith).
31.2* Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Filed herewith).
32.1* Certification of Chief Executive Officer and Chief Financial
Officer pursuant to pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Filed herewith).
* Filed herewith
(1) Filed on July 20, 2007 as an exhibit to the Company's Current Report on
Form 8-K dated April 26, 2007 and incorporated herein by reference.
SIGNATURES
In accordance with the requirements of the Exchange Act, we have cause this
report to be signed on our behalf by the undersigned, thereunto duly authorized.
RECLAMATION CONSULTING AND APPLICATIONS, INC.
Date: November 19, 2007
/s/ GORDON W. DAVIES
---------------------------------------
Gordon W. Davies, President and Chairman of
the Board of Directors
Date: November 19, 2007
33