FORM 10-QSB/A
(AMENDMENT NO. 1)
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 December 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____.
Commission file number: 000-26017
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(Exact name of Small Business Issuer as specified in its charter)
Colorado 58-2222646
--------------------------------- -----------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
940 Calle Amanecer, Suite E, San Clemente, California, 92673
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 949-542 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: 122,082,048 shares as of January 31,
2008.
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
EXPLANATORY NOTE
- ----------------
This Form 10-QSB/A of Reclamation Consulting and Applications, Inc. (the
"Company") constitutes Amendment No. 1 (the "Amendment") to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2007,
originally filed with the Securities and Exchange Commission on February 19,
2008 (the "Original Report").
The purposes of this Amendment are to:
1. Amend Item 1 of Part 1 (Financial Statements) to restate our financial
statements for the three and six months ended December 31, 2007;
2. Amend Item 2 of Part 1 (Management's Discussion and Analysis or Plan of
Operation) to correct for the above restatements; and
3. Amend Item 3 of Part 1 (Controls and Procedures) as a result of the
restatements.
Other than these changes, and the correction of minor typographical and
grammatical errors, the remainder of the document is unchanged from the original
filing. This Amendment has been signed as of a current date, and also includes
as exhibits currently dated certifications of the Company's Chief Executive
Officer and Chief Financial Officer, as required by Sections 302 and 906 of the
Sarbanes Oxley Act of 2002.
This Amendment does not reflect events occurring after the Original Report.
Except for the foregoing amended or added information, this Amendment continues
to speak as of the date of filing of the Original Report and the Company has not
otherwise updated disclosures contained therein or herein to reflect events that
occurred at a later date. For the convenience of the reader, this Amendment sets
forth the Original Report in its entirety as amended.
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED BALANCE SHEET
DECEMBER 31, 2007
ASSETS
(RESTATED -
SEE NOTE 12)
------------
CURRENT ASSETS:
Cash $ 902,540
Accounts receivable 47,180
Inventories 45,760
Prepaid expenses and other current assets 16,140
------------
Total current assets 1,011,620
Property and equipment, net 38,550
License agreement, net 400,000
Debt issuance costs, net 348,101
Deposits 28,160
------------
$ 1,826,431
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 143,000
Accrued professional fees 20,000
Accrued interest payable 193,110
Other accrued expenses 230,133
Accrued judgment payable 5,600
Notes payable - related parties 468,236
Current portion of notes payable 591,700
------------
Total current liabilities 1,651,779
============
Notes payable-related parties, net of current portion and debt discount 2,042,560
Notes payable, net of current portion and debt discount 2,975,355
------------
Total liabilities 6,669,694
============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 150,000,000 authorized,
121,998,023 shares issued and outstanding 1,219,980
Additional paid-in-capital 24,843,645
Treasury stock (1,500,000 shares), at cost (15,000)
Accumulated deficit (30,891,888)
------------
Total stockholders' deficit (4,843,263)
------------
$ 1,826,431
============
See the accompanying notes to unaudited condensed financial statements.
1
RECLAMATION CONSULTING AND APPLICATION, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
(RESTATED - SEE NOTE 12) (RESTATED - SEE NOTE 12)
Net revenue $ 98,912 $ 34,369 $ 218,090 $ 101,389
Cost of revenue 108,905 26,271 256,052 75,390
------------ ------------ ------------ ------------
Gross profit (loss) (9,993) 8,098 (37,962) 25,999
Selling, general and administrative expenses 930,752 600,568 1,577,285 1,026,634
------------ ------------ ------------ ------------
Loss from operations (940,745) (592,470) (1,615,247) (1,000,635)
Other income (expense)
Interest income 1,942 - 1,942 -
Interest expense (404,258) (275,147) (2,105,025) (639,091)
Loss on extinguishment of debt - - (18,500) -
Change in fair value of derivative liability - 614,424 - 2,929,567
------------ ------------ ------------ ------------
(402,316) 339,277 (2,121,583) 2,290,476
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,343,061) (253,193) (3,736,830) 1,289,841
Provision for income taxes - - 800 800
------------ ------------ ------------ ------------
Net income (loss) $ (1,343,061) $ (253,193) $ (3,737,630) $ 1,289,041
============ ============ ============ ============
Net income (loss) per common share:
Basic $ (0.01) $ (0.01) $ (0.03) $ 0.03
============ ============ ============ ============
Diluted (0.01) (0.01) (0.03) (0.02)
============ ============ ============ ============
Weighted-average common shares outstanding
Basic 121,833,583 49,066,358 113,597,925 49,066,358
============ ============ ============ ============
Diluted 121,833,583 49,066,358 113,597,925 85,113,523
============ ============ ============ ============
See the accompanying notes to unaudited condensed financial statements.
2
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
(RESTATED - SEE NOTE 12)
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,737,630) $ 1,289,041
Adjustments to reconcile net loss to net cash used in
operating activities:
Issuance of shares for services rendered 12,500 -
Issuance of stock options for services rendered 56,129 140,000
Issuance of shares for interest on notes payable 69,600 -
Change in fair value of derivative liabilities - (2,929,567)
Amortization of discount on notes payable 1,673,807 476,302
Depreciation and amortization 255,929 38,819
Loss on extinguishment of debt 18,500 -
Gain on cancellation of committed shares (32,400) -
(Increase) decrease in operating assets:
Accounts receivable (19,430) 10,782
Inventories (539) (33,775)
Prepaid expenses and other current assets - 6,004
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (535,974) 83,782
------------ ------------
Total adjustments 1,498,122 (2,207,653)
------------ ------------
Net cash used in operating activities (2,239,508) (918,612)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities - -
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable and convertible debentures,
net of cash issuance costs 4,373,172 1,383,571
Payments on notes payable and convertible debentures (1,234,865) (462,259)
------------ ------------
Net cash provided by financing activities 3,138,307 921,312
------------ ------------
Net change in cash 898,799 -
CASH, BEGINNING OF PERIOD 3,741 -
------------ ------------
CASH, END OF PERIOD $ 902,540 $ -
============ ============
See the accompanying notes to unaudited condensed financial statements.
3
RECLAMATION CONSULTING AND APPLICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
(Continued)
(RESTATED - SEE NOTE 12)
2007 2006
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR: Interest $ 185,677 $ 85,621
============ ============
Income taxes $ - $ -
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable and accrued interest to common stock $ 1,857,400 $ -
============ ============
Debt discount on debt $ 984,681 $ -
============ ============
Issuance of shares and warrants for extinguishment of debt $ 12,500 $ -
============ ============
Issuance of committed shares for debt issuance costs $ 275,000 $ -
============ ============
Accrued interest converted to notes payable $ 5,030 $ -
============ ============
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.
Restatement of Financial Statements
- -----------------------------------
The condensed financial statements have been restated (see Note 12) primarily to
correct the accounting for debt discount cost and the debt discount expense
amortization and other miscellaneous typographical and grammatical errors.
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 and six months ended December 31, 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 (Restated)
- ------------------------
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 $30,891,888 (restated) including a net loss of $3,737,630
for the six months ended December 31, 2007 (restated) and has a working capital
deficit of $640,159 at December 31, 2007 (restated).
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.
5
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 7); (ii) controlling of general
and administrative expenses; (iii) managing accounts payable; and (iv)
evaluating its distribution and marketing methods to increase revenues.
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 valuation allowance on deferred income taxes, and the
fair value of common shares/options/warrants 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.
6
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 December 31, 2007, the Company does not believe
there has been any impairment of its long-lived assets. There can be no
assurance, however, that market conditions will not change or demand for the
Company's products and services will continue, which could result in impairment
of long-lived assets in the future.
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences attributable
to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not those assets will not be
realized through future operations.
The Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109, Accounting for Income Taxes" (FIN 48) as of July
1, 2007. FIN 48 creates a single model to address accounting for uncertainty in
tax positions. It clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. As of the adoption date and at
December 31, 2007, the Company had no unrecognized tax benefits and does not
expect a material change in the next 12 months. Because of the Company's
historical losses, FIN 48 did not have an effect on the accounting and
disclosure for income taxes. Interest and penalties (if any) related to
uncertain tax positions will be recorded in income tax expense.
7
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 December 31,
2007 and 2006 was $90,197 and $3,333, respectively, and for the six months ended
December 31, 2007 and 2006 was $180,393 and $6,667, respectively. At December
31, 2007, accumulated amortization totaled $201,227.
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 three and six months ended December 31, 2006, the Company
recorded other income of $614,424 and $2,929,567 related to the reduction in the
estimated value of the derivatives.
8
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.
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 $230,229 and $78,506
for the six months ended December 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 (Restated)
- --------------------------------------
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 and six months ended December 31, 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).
9
The following represents a reconciliation of basic and diluted net income (loss)
per share for the three and six months ended December 31, 2007 and 2006:
Three Months Ended Six Months Ended
December 31, December 31,
2007 2006 2007 2006
------------ ------------ ------------ ------------
(RESTATED - SEE NOTE 12) (RESTATED - SEE NOTE 12)
Basic income (loss) per share:
Net income (loss) $ (1,343,061) $ (253,193) $ (3,737,630) $ 1,289,041
------------ ------------ ------------ ------------
Weighted-average common shares outstanding,
basic 121,833,583 49,066,358 113,597,925 49,066,358
============ ============ ============ ============
Basic income (loss) per share $ (0.01) $ (0.01) $ (0.03) $ 0.03
============ ============ ============ ============
Diluted income (loss) per share:
Net income (loss) $ (1,343,061) $ (253,193) $ (3,737,630) $ 1,289,041
Additional debt discount amortization - - - (485,759)
Change in fair value of derivative liabilities - - - (2,929,567)
Convertible notes interest expense (net of taxes) - - - 55,000
------------ ------------ ------------ ------------
Adjusted net income (loss) available to common
stockholders $ (1,343,061) $ (253,193) $ (3,737,630) $ (2,071,285)
============ ============ ============ ============
Weighted-average common shares outstanding, basic 121,833,583 49,066,358 113,597,925 49,066,358
Effect of dilutive securities:
Stock options and warrants - - - 1,818,182
Convertible notes payable - - - 34,228,983
------------ ------------ ------------ ------------
Weighted-average common shares outstanding,
diluted 121,833,583 49,066,358 113,597,925 85,113,523
============ ============ ============ ============
Diluted net income (loss) per share $ (0.01) $ (0.01) $ (0.03) $ (0.02)
============ ============ ============ ============
Stock-Based Compensation (Restated)
- -----------------------------------
At December 31, 2007, the Company has no stock-based compensation plans.
On July 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share-Based
Payment", ("SFAS 123(R)") which establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods or
services, primarily focusing on accounting for transactions where an entity
obtains employee services in share-based payment transactions. SFAS 123(R)
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments, including stock options, based on
the grant-date fair value of the award and to recognize it as compensation
expense over the period the employee is required to provide service in exchange
for the award, usually the vesting period. 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 and six months ended December 31, 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 and six months
ended December 31, 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 and
six months ended December 31, 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.
10
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 options granted during the six months ended December 31,
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 December 31, 2007 and changes during the six
months then ended, is presented below (restated):
DECEMBER 31, 2007
Weighted-Average
Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (Years) Value
---------- -------- ------------ ----------
Options outstanding at July 1, 2007 14,990,000 $ 0.23
Options granted 500,000 0.17
Options forfeited - -
Options exercised - -
---------- -------- ------------ ----------
Options outstanding at December 31, 2007 15,490,000 $ 0.23 1.74 $ 126,000
========== ======== ============ ==========
Options exercisable at December 31, 2007 15,240,000 $ 0.23 1.65 $ 126,000
========== ======== ============ ==========
Upon the exercise of options, the Company issues new shares from its authorized
shares. 500,000 options were granted during the six months ended December 31,
2007. No options were granted during the three months ended December 31, 2007.
The weighted average fair value of options granted during the six months ended
December 31, 2007 was $0.22 per share (restated).
As of December 31, 2007 there was approximately $56,000 (restated) 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 and six months ended December 31,
2007 related to employee options was $28,062 and $56,129, respectively
(restated), which was recorded to selling, general and administrative expenses.
The fair value of shares vested during the three and six months ended December
31, 2006 related to employee options was $140,000.
At December 31, 2007, 11,000,000 of these options have been temporarily
relinquished (see Note 9), but are still reflected as outstanding as the Company
anticipates their reinstatement in the near future.
Concentrations
- --------------
The Company maintains its cash balances at financial institutions that are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At
December 31, 2007, the Company's cash balances exceed the amount insured by the
FDIC by approximately $900,000. Management believes the risk of loss of cash
balances in excess of the insured limit to be low.
11
The majority of revenues in the periods ended December 31, 2007 and 2006 were
generated from one major distributor, Applied Industrial Technologies. The
majority of receivables at December 31, 2007 were from the Applied Industrial
Technologies and Iron Ore of Canada. For the three and six months ended December
31, 2007, total sales to Applied Industrial Technologies amounted to $43,668 and
$62,827 respectively, or approximately 47.5% and 43.6%, respectively, of our
sales and as of December 31, 2007, accounts receivable from Applied Industrial
Technologies and Iron Ore of Canada accounted for approximately 37.9% and 30.9%
respectively 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 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.
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 December 31, 2007:
Raw materials $ 18,770
Finished goods 26,990
--------
$ 45,760
========
12
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 2007:
Computers and office equipment $ 12,200
Test equipment 51,430
Vehicles 17,410
--------
81,040
Less accumulated depreciation (42,490)
--------
$ 38,550
========
Depreciation expense was $2,570 and $3,576 for the three months ended December
31, 2007 and 2006, respectively. Depreciation expense was $6,274 and $7,152 for
the six months ended December 31, 2007 and 2006, respectively.
NOTE 6 - NOTES PAYABLE - RELATED PARTIES (RESTATED)
Notes payable - related parties consist of the following at December 31, 2007
(Restated):
Unsecured convertible debt to stockholders, bearing interest
at 10 percent per annum, due on July 18, 2009 (see below) $1,305,936
Unsecured revolving line of credit to stockholders, bearing
interest at 12 percent per annum, due on July 18, 2009, net
of debt discount of $32,371 (see below) 517,479
Note payable to Paul Hughes, bearing interest at 12 percent
per annum, interest payable monthly, principal due on
November 29, 2008, secured by substantially all assets of
the Company, net of debt discount of $137,171 (see Note 7) 262,829
Unsecured note payable to stockholder, bearing interest at 10
percent per annum, due on demand 135,112
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 $235,885 (see below) 219,145
Unsecured note payable to stockholder, bearing interest at 12
percent per annum, due on demand 295
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 45,000
----------
Subtotal 2,510,796
Less current portion (468,236)
----------
2,042,560
==========
Interest expense on notes payable - related parties (including amortization of
debt discount) for the three months ended December 31, 2007 and 2006 was
approximately $170,000 (restated) and $54,275, respectively. Interest expense on
notes payable- related parties (including amortization of debt discount) for the
six months ended December 31, 2007 and 2006 was approximately $1,770,000
(restated) and $90,020, respectively.
13
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 to 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.
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.
14
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.
15
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.
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 December 31, 2007 the balance of principal
on the line of credit was $549,850.
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 and six months ended December 31,
2007, the Company amortized $5,239 and $9,541, respectively (restated), 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.
Gish Notes
- ----------
In May 2007, Norman R. Gish 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 the loan. Mr. Gish is a member of the Company's advisory board.
16
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 $0.20 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. Since the October
2007 amendment resulted in terms that, pursuant to EITF No. 96-19, were
substantially different from the terms of the original notes, the modification
was treated as an extinguishment of debt for the three months ended December 31,
2007, with no resulting gain or loss. As a result of the BCF and warrants, the
Company recorded a debt discount of $70,201 (restated) and will amortize it to
interest expense over the life of the debenture. For the three months ended
December 31, 2007, the amortization was $8,970 (restated).
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.
In September 2007, the Company entered into an oral agreement with Joan Gish,
(the wife of Norman 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 $178,336 (restated) and will amortize it to interest expense over
the life of the debenture. For the three and six months ended December 31, 2007,
the amortization was $26,343 and $34,676, respectively (restated).
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 above), including a conversion
feature of $0.12 per share and warrants of 50,000 shares at an exercise price of
$0.20. As a result of the BCF and warrants, the Company recorded a debt discount
of $35,993 (restated) and will amortize it to interest expense over the life of
the debenture. For the three and six months ended December 31, 2007, the
amortization was $4,999 (restated).
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. This loan had no conversion terms or
detachable warrants.
17
NOTE 7 - NOTES PAYABLE (RESTATED)
Notes payable consist of the following at December 31, 2007 (Restated):
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 $232,916 (see below) $ 527,069
Unsecured notes payable, bearing interest at 12 percent per
annum, due on demand, net of discount of $8,369 (see below) 61,631
Note payable bearing interest at 12 percent per annum,
convertible to common shares at $0.14 per share, interest
payable monthly, principal due on December 11, 2010,
secured by substantially all assets of the Company, net of
debt discount of $304,127 (see below) 2,695,873
Note payable bearing interest at 12 percent per annum,
convertible to common shares at $0.22 per share, interest
payable monthly, principal due on November 7, 2010, secured
by substantially all assets of the Company, net of debt
discount of $220,518 (see below) 279,482
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 3,000
----------
Subtotal 3,567,055
Less current portion (591,700)
----------
$2,975,355
==========
Convertible Debentures
- ----------------------
On May 30, 2007, the Company issued Secured Convertible Debentures (each, a "May
Debenture" and collectively, "May 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 "May Debenture Holder" and
collectively, "May Debenture Holders"). The May 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 May 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 $76,850 and $154,540 of interest expense during the three and
six months ended December 31, 2007 (restated), respectively, related to this
BCF. On November 13, 2007 the Company issued a total of 348,000 shares of common
stock representing the conversion of $69,600 of interest. As the stock price on
the date of conversion was lower than the conversion price, there was no
additional interest charge recorded as a result of the May Debenture Holder's
exercise of the interest conversion option.
The May Debenture Holder will receive differing amounts of warrants to purchase
shares of our common stock upon any conversion of their May Debentures. If they
convert their May 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 May 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 May Debenture Holders
with 45 days' prior written notice.
18
As a result of the November 13, 2007 conversion, the Company issued 333,000
warrants, 166,500 of which are exercisable at $0.22 per share and 166,500 of
which are exercisable at $0.24 per share, all expiring in November 2010. The
value of these warrants using the Black-Scholes pricing model was $47,916
(restated). Pursuant to EITF 96-19, this modification was not considered a debt
modification, but rather the value of the warrants was recorded an additional
debt discount and is being amortized over the remaining life of the debt.
Amortization for the three months ended December 31, 2007 was $5,750 (restated).
As of December 31, 2007, Mr. Paul Hughes agreed to temporarily relinquish his
conversion rights, including the related warrants issuable upon the conversion,
until the Company completes a reverse split and an increase of its authorized
shares. The Company determined that the impact of this debt modification under
EITF 96-19 to be immaterial. As of December 31, 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 May
Debentures and accrued interest, plus six months of future interest, is
4,148,791 shares. With the issuance of these shares, the May Debenture Holders
would also receive warrants for the purchase of 1,158,753 shares of common
stock, which would have been valued at approximately $170,000 (restated) and
would have been recognized as interest expense over the remaining life of the
May Debentures if they had been granted. In the event Mr. Paul Hughes had not
temporarily relinquished his conversion rights, the amount of common stock which
would have been issuable upon full conversion of the aggregate outstanding
balance of the May Debentures and accrued interest, plus six months of future
interest as of December 31, 2007, would have been 6,210,886 shares, and with the
issuance of these shares, the May Debenture Holders would also have been
entitled to receive warrants for the purchase of 6,210,886 shares of common
stock, which would have been valued at approximately $894,000 (restated) and
would have been recognized as interest expense over the remaining life of the
May Debentures if they had been granted.
The obligations under the May Debentures are secured by a security interest in
all of the Company's assets. On the occurrence of any of the following events,
each May 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 May 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 May
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 May
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 May 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 May 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 May Debentures to 0761291 B.C. Ltd. and Eat-Me Foods, Ltd., pursuant to an
arrangement between the May 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 May 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 is being
amortized to interest expense over the life of the May Debentures.
To the extent the May Debenture Holders do not convert their May Debentures, the
Company will need additional capital to make the interest and principal payments
due under the May 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.
19
November Debentures
- -------------------
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.
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.
As a result of the BCF and warrants, the Company recorded a debt discount of
$233,203 (restated) and will amortize it to interest expense over the life of
the debenture. For the three months ended December 31, 2007, the amortization
was $12,685 (restated).
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.
Pala Debenture
- --------------
On December 12, 2007, we issued a Secured Convertible Debenture (the
"Debenture") to Pala Investments Holdings Limited ("Pala"). The Debenture
provides for us to receive $5,000,000 in two tranches: a first tranche of
$3,000,000 which funded immediately on closing (the "First Tranche"), and a
second tranche of $2,000,000 which we will be entitled to if we meet certain
performance benchmarks by December 31, 2008, or which may otherwise be provided
at Pala's discretion (the "Second Tranche"). The Debenture carries interest of
12% per annum, compounding quarterly, and matures on December 11, 2010 (the
"Maturity Date"). The Company incurred $24,328 of costs (restated) in connection
with the Debenture, which is recorded to debt issuance costs and will be
amortized over the life of the Debenture.
CONVERSION RIGHTS
Prior to the Maturity Date, Pala will have the option to convert the outstanding
balance of principal and unpaid interest into shares of our common stock (the
"Shares") at a conversion price of $0.14 per share. The Debenture requires us to
effect a 1 for 2 reverse split of our outstanding common stock and to increase
our authorized shares of common stock from 150,000,000 to 200,000,000 (the
"Share Reorganization.)" We are required to use best efforts to effect the Share
Reorganization by February 10, 2008, and must complete the Share Reorganization
no later then April 10, 2008. Pala's conversion rights commence on the effective
date of the Share Reorganization and continue until the Maturity Date. As the
Share Reorganization has not yet occurred, the BCF associated with this
conversion right of $523,205 (restated) has not yet been recorded by the
Company, but will be once the Share Reorganization occurs.
20
WARRANTS
For every dollar of principal advanced under the Debenture, Pala is entitled to
a warrant (a "Warrant" and collectively the "Warrants") to purchase one share of
our common stock at $0.21 per share (the "Warrants"). The Warrants expire on
December 11, 2010. Pala has received 3,000,000 Warrants in connection with the
first tranche and will be entitled to an additional 2,000,000 Warrants in the
event the Second Tranche funds. As a result of the Warrants, the Company
recorded a debt discount of $308,919 (restated) and will amortize it to interest
expense over the life of the debenture. For the three months ended December 31,
2007, the amortization was $4,792 (restated).
In the 1 for 2 reverse split to be effected as part of the Share Reorganization
and in any future reverse split, the number of Warrants is not subject to
adjustment, but the Warrant exercise price will be adjusted upwards. As adjusted
for Share Reorganization, the 3,000,000 Warrants with an exercise price of $0.21
per share already received by Pala will be 3,000,000 Warrants with an exercise
price of $0.42 per share. Upon the Share Reorganization, the effective repricing
of the Warrants will be evaluated as a debt modification under EITF 96-19.
SECOND TRANCHE
As long as we are not in default under the Debenture and the representations and
warranties we made in the Debenture as of December 12, 2007 remain true and
accurate, we are entitled to receive the $2,000,000 Second Tranche if we meet
all of the following benchmarks by December 31, 2008 (the "Benchmarks"):
o We have sold at least one million (1,000,000) gallons of our Alderox
product during calendar year 2008;
o We have signed orders or contracts for the sale of at least
1,000,000 gallons of Alderox during calendar year 2009, or we have
the reasonable expectation of selling at least 1,000,000 gallons of
Alderox during calendar year 2009 based on signed orders for the
sale of Alderox in calendar year 2009 and/or existing customer
accounts; and
o We have reached a gross profit margin of Five Dollars ($5.00) per
gallon on our total sales of Alderox as calculated according to U.S.
Generally Accepted Accounting Procedures in effect at the time in
calendar year 2008.
Even if we do not meet the Benchmarks, Pala may fund the Second Tranche at its
sole discretion. However, we can offer no assurances that we will meet the
Benchmarks and qualify for the Second Tranche.
RIGHT OF FIRST REFUSAL
During the term of the Debenture, Pala has a right of first refusal on
financings by the Company with the exception of transactions involving the
following:
o Our issuance of any securities (other than for cash) in connection
with a merger, acquisition or consolidation;
o Our issuance of securities in connection with license agreements,
joint ventures and other similar strategic partnering arrangements,
so long as such issuances are not for the primary purpose of raising
capital;
21
o Our issuance of common stock or the issuance or grants of options to
purchase common stock pursuant to stock option plans and employee
stock purchase plans;
o Any issuances of stock as a result of the exercise of options or
warrants or conversion of convertible notes which are granted or
issued prior to the Debenture;
o Any warrants issued to Pala pursuant to or otherwise for the
transactions contemplated by this Agreement;
o Any financing which by its terms is to fund at or following the
Maturity Date, or which is entered into for the purpose of repaying
the Debenture; and
o Permitted Indebtedness (as defined below)
The right of first refusal provisions require us to give Pala written notice of
any proposed non-exempt financings, prior to proceeding with such financing. On
receiving such notice, Pala has 15 trading days to elect to provide the
financing on the proposed terms before we can proceed with obtaining such
financing from a third party.
OTHER REQUIREMENTS AND RESTRICTIONS
Without Pala's approval, we may not enter into any further indebtedness other
then the following (the "Permitted Indebtedness"):
o All accounts payable generated in the normal course of business;
o Additional advances on Borrower's existing line of credit from
Canvasback Company Limited (the "Canvasback Line of Credit"),
provided that the aggregate outstanding balance shall not exceed
$500,000;
o Indebtedness with respect to capital lease obligations (including
leases of real property) or other obligations for equipment
purchases not to exceed $100,000;
o Loans or advances on a credit facility or facilities, provided the
terms thereof are not substantially more burdensome than those of
the Canvasback Line of Credit and the aggregate balance of such
loans or advances together with that of the outstanding balance of
Canvasback Line of Credit is not more then the maximum balance of
the Canvasback Line of Credit; and
o Extensions, renewals, refundings, refinancings, modifications,
amendments and restatements of the above items or any indebtedness
existing as of the date of the Debenture, provided that (i) the
principal amount thereof is not increased and (ii) the terms are not
modified to impose substantially more burdensome terms upon us.
The Debenture imposes a number of other restrictions and requirements on the
Company. Without Pala's approval we may not:
o Allow ourselves to be listed on the TSX Venture Exchange or on any
other exchange, provided however that we may allow our shares to be
traded on the Over-the-Counter Bulletin Board or the Pink Sheets.
o Amend our Articles or Bylaws except as allowed by the Debenture.
22
o Sell, or otherwise dispose of our assets (other than the sale of
inventory in the ordinary course of business nor liquidate, dissolve
or suspend business operations;
o Transfer any of our intellectual property nor permit any agreement
under which we have licensed intellectual property to lapse. We may
only license our intellectual property in the ordinary course of our
business in connection with sales of inventory or provision of
services to its customers, including but not limited to our entering
into distribution agreements;
o Participate in a consolidation or merger, or similar reorganization
with another company;
o Engage in any line of business materially different from our present
line of business, nor purchase, lease or otherwise acquire assets
not related to our business;
o Adopt any material change in accounting principles other than as
required by U.S. Generally Accepted Accounting Principles nor adopt,
permit or consent to any change in its fiscal year;
o Transfer our chief executive office or principal place of business,
nor move, relocate, close or sell any business location,
o Enter into any exclusive distribution agreement, or any agreement
that commits a minimum volume of supply to a distributor, unless we
can terminate such notice by providing a maximum of 90 days notice.
The Debenture also requires us to provide Pala with monthly sales reports and
financial statements.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement we entered into with Pala concurrent
with the issuance of the Debenture, we are required to register the shares
underlying the Warrants and the shares receivable on conversion of the Debenture
with the SEC for resale by Pala. Pala's right to demand the registration of
these shares commences on the date we accomplish our Share Reorganization.
Following any such demand by Pala, we must file a registration statement within
60 days and use reasonable best efforts to cause it to be declared effective as
soon as possible and to keep such statement effective until June 11, 2011,
unless the shares are sooner sold or sooner qualify for sale pursuant to Rule
144(k).
SECURITY INTEREST IN COMPANY ASSETS
The obligations under the Debenture are secured by a security interest in all of
our assets. On the occurrence of any of the following events, Pala may
accelerate the Maturity Date, commence legal action against us, and foreclose on
our assets:
o Our failure to make payments under the Debenture when due;
o Our default under any other agreement or instrument evidencing
indebtedness, the effect of which is to cause such indebtedness to
become due and payable before its stated maturity date or its
scheduled dates of repayment, and such default continues for longer
then any applicable grace period or cure period specified by such
document;
23
o If any representation or warranty made by us or on behalf of us in
writing in any document furnished in connection with the Debenture
shall prove to have been false or incorrect in any material respect
on the date as of which was made; provided, however, that if such
false or incorrect representation or warranty is curable, we have 14
days to cure it;
o If we default in observing or performing any covenant or agreement
under the Debenture or note, other then a failure to make a payment
when due, provided that is such default is curable, we have 14 days
to cure it;
o If we become insolvent or admit in writing an inability to pay debts
as they mature; or we make a general assignment for the benefit of
our creditors; or a compromise or arrangement is proposed by us to
our creditors; or if any order is made or an effective resolution is
passed for our winding-up; or if a custodian, trustee, receiver or
other officer with like powers is appointed for us under applicable
bankruptcy or insolvency legislation; or if bankruptcy proceedings
are instituted by or against us, provided that in the case of an
involuntary petition, such petition is not dismissed within 60 days;
o If any subordinated creditor defaults in observing or performing any
covenant or agreement under any subordination agreement in favor of
Pala, provided that if such default is curable, we have 14 days to
cure it, or if we take or participate in any action which would be
prohibited under the provisions of any such subordination agreement
or makes any payment with respect to indebtedness that has been
subordinated pursuant to any such subordination agreement;
o If a final judgment which, with other outstanding final judgments
against us, exceeds $50,000 is entered against us and if, within 60
days after entry thereof, such judgment shall not have been
discharged or execution thereof stayed pending appeal, or if, within
60 days after the expiration of any such stay, such judgment shall
not have been discharged; or
o If we default in the performance or compliance of any obligation or
undertaking of the Company in the Voting Agreement or the
Registration Rights Agreement provided such default has continued
for a period of 14 days after we become aware of it.
USE OF PROCEEDS
We are using proceeds from the Debenture to repay approximately $2,000,000 of
debt as required by the Debenture. We plan to use the remaining funds for the
operation of our business and for the repayment of remaining debt as such debt
comes due.
To the extent Pala does convert its Debenture and we are unable to repay the
Debenture from our revenues, we will need additional capital to make the
interest and principal payments due under the Debenture. We can offer no
assurance that we will be able to raise all or any portion of the funds
necessary to repay Pala on terms favorable to us or at all.
SUBORDINATION AGREEMENTS
As a condition precedent to our receipt of the First Tranche, Canvasback Company
Limited, Paul Hughes, 0761291 B.C. Ltd., and Eat-Me Foods, Ltd, all of whom hold
debt secured by our assets, signed Subordination Agreements, subordinating their
debt to that of Pala's.
24
In order to induce 0761291 B.C. Ltd. and Eat-Me Foods, Ltd. to enter into the
Subordination Agreements, we entered into amendments to their Secured
Convertible Debentures providing for each of them to receive warrants for the
purchase of 166,666 shares of our common stock. These warrants have an exercise
price of $0.17 per share and are exercisable for three years. In the event that
the closing price of our common stock equals or exceeds $0.80 per share for 20
consecutive trading days, we have the option to cancel the unexercised warrants
after 45-days prior written notice. These warrants are subject to proportional
adjustment in the planned 1 for 2 reverse split. The value of these warrants
using the Black-Scholes pricing model was $49,112 (restated). Pursuant to EITF
96-19, this modification was not considered a debt modification, but rather the
value of the warrants was recorded an additional debt discount and is being
amortized over the remaining life of the debt. Amortization for the three months
ended December 31, 2007 was $2,135 (restated).
VOTING AGREEMENT
Concurrent with the issuing of the Debenture, the Company, Pala and six of our
shareholders entered into a Voting and Right of First Refusal Agreement (the
"Voting Agreement"). The six shareholders who are party to the Voting Agreement
are our executive officers and directors, Michael C. Davies, Gordon W. Davies
and Paul Hughes; and our three largest shareholders: Sally Holden, Paul Hazell
and Canvasback Company Limited. The Voting Agreement remains in effect until:
o The date on which the Debenture is repaid in full, if Pala has not
elected to convert the Debenture into Shares; and
o The date on which Pala beneficially owns less then 10% of the
Company's outstanding shares.
Pursuant to the Voting Agreement, Pala and the six shareholders must vote all of
their Company shares as necessary to elect a designee of Pala to our Board of
Directors and to effect the Share Reorganization. To the extent any of the six
shareholders does not vote his or her shares according to the Voting Agreement,
Pala has an irrevocable proxy to vote such person's shares pursuant to the
agreement.
As the six shareholders control a majority of our outstanding stock, the
election of Pala's designee is assured and shareholder approval of the Share
Reorganization is assured. As of the date of this report, Pala has not yet
designated a director.
Additionally, in the event any of the six shareholders proposes to sell or
otherwise dispose of his or her shares, the Voting Agreement provides Pala to
receive a right of first refusal to purchase such shares on the same terms as
those proposed. The right of first refusal does not apply to certain permitted
dispositions such as transfers to certain family members, provided the recipient
agrees to be bound by the restrictions of the Voting Agreement.
The Voting Agreement also provides for the Company to provide the following to
Pala:
o A right of first refusal on future financings, substantially similar
to those of the right of first refusal provision in the Debenture
Agreement discussed above;
o Monthly sales reports and financial statements; and
o An opportunity to enter into a non-exclusive distribution agreement
on terms no less favorable then those provided to any other
distributor of our products.
We are currently negotiating the terms of the non-exclusive distribution
agreement with Pala.
25
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 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. On December 13,
2007 the Company and MBCG finalized a settlement agreement where the Company
paid MBCG $125,000 in return for a release of all liability associated with
their claim. This expense was recorded in selling, general and administrative
expenses.
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 December 31, 2007. On February 8, 2008 the Company entered into a
settlement agreement with Shaub & Williams where the Company has agreed to pay
and has since paid to Shaub & Williams a total of $17,000 in return for a full
release of their claim.
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 required 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. In January 2008, this amount was paid in full.
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
had accrued a total of $110,000 for the loss of the collateralized shares and on
November 14, 2007 the Company made a $110,000 payment to the shareholder. There
are no further obligations outstanding between the Company and shareholder.
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.
26
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying condensed balance sheet.
NOTE 9 - STOCKHOLDERS' EQUITY (RESTATED)
Common Stock
- ------------
During the six months ended December 31, 2007 the Company issued a total of
66,428,000 shares of common stock, as follows: 348,000 shares for the conversion
of $69,600 of interest on a convertible debenture (see Note 7), 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 value of the
shares and warrants was $12,500. On December 14, 2007 the Company made final
payment and all liability has since been released. The Company recognized a loss
on the settlement of debt of $18,500 related to this agreement. In addition,
during the six months ended December 31, 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 and six months ended December 31, 2006, the Company did not
issue any shares.
STOCK OPTIONS AND WARRANTS (RESTATED)
- -------------------------------------
During the six months ended December 31, 2007 the Company issued a total of
4,216,332 warrants, all of which were vested as of December 31, 2007, and
500,000 options of which 250,000 were vested as of December 31, 2007. Total
outstanding options and warrants at December 31, 2007 were 31,335,357.
With letter agreements dated effective December 31, 2007, the Company
memorialized agreements with Michael Davies, Gordon Davies, Paul Hughes
and Canvasback Company, Limited to relinquish certain stock options and or
warrants until such time that the Company completes a reverse split or increases
their authorized shares. The following are the number of stock options and or
warrants that each shareholder has relinquished, in addition to the
relinquishment by Paul Hughes discussed in Note 7:
Michael Davies 4,500,000
Gordon Davies 4,500,000
Paul Hughes 2,000,000
Canvasback Company Limited 5,875,000
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 six months ended December 31, 2007 (restated):
Expected Life 1-5 Years
Risk-free interest rate 2.80 - 4.88%
Dividend yield 0%
Volatility 107 - 171%
27
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 December 31, 2007
and 2006 and is included in selling, general and administrative expenses in the
accompanying condensed statements of operations.
NOTE 11 - SUBSEQUENT EVENTS
On February 7, 2008 the Company entered into a Consulting Agreement with a
consultant to perform such services as corporate planning and the coordination
of marketing efforts. The terms of this agreement allows for monthly
compensation of $15,000 per month for a period of 12 consecutive months, the
term of the consulting agreement. As additional compensation the Company will
issue a total of 1,000,000 shares of restricted capital stock post the proposed
1:2 reverse split and will release these shares in lots of 250,000 shares
beginning on the next business day following the proposed 1:2 reverse split,
250,000 shares on June 30, 2008, 250,000 shares on September 30, 2008 and
250,000 shares on December 31, 2008. The Company has also agreed to issue the
consultant a total of 1,000,000 Warrants to purchase restricted stock following
the proposed 1:2 reverse split. The Warrants will vest proportionately
throughout the term of the 12 month agreement 1/12 per month in lots of 250,000
warrants the first lot exercisable at $0.35, the second lot of 250,000 warrants
exercisable at $0.45, the third lot of 250,000 warrants exercisable at $55 and
the final lot of 250,000 warrants exercisable at $0.65. No adjustment to the
number of shares issuable on exercise of the warrants or the exercise price of
the warrants shall be made on any reverse split of the Company's common stock.
The compensation set forth in this consulting agreement shall adjust
proportionately based upon any termination of this agreement prior to January
31, 2009. In the event the agreement is terminated by either party, with or
without cause, the consultant shall not be entitled to keep more than a number
of shares equal to the number of days of the term multiplied by 2,739 and shall
be required to return the excess number of shares to the Company.
28
NOTE 12 - RESTATEMENT OF FINANCIAL STATEMENTS
As discussed in Note 1, the Company is restating its unaudited financial
statements for the three and six months ended December 31, 2007 because of the
need to correct issues regarding debt discount costs and the amortization of
those costs. The following tables summarize the adjustments made to these
financial statements as originally filed in the Company's Form 10-QSB on
February 19, 2008.
RECLAMATION CONSULTING AND APPLICATIONS, INC.
RESTATED CONDENSED BALANCE SHEET
(UNAUDITED)
December 31, 2007
As previously filed Restatement Restated
December 31, 2007 Adjustments December 31, 2007
----------------- ----------- -----------------
ASSETS
------
CURRENT ASSETS:
Cash $ 902,540 $ - $ 902,540
Accounts receivable 47,180 - 47,180
Inventories 45,760 - 45,760
Prepaid expenses and other current assets 16,140 - 16,140
----------------- ----------- -----------------
Total current assets 1,011,620 - 1,011,620
Property and equipment, net 38,550 - 38,550
License agreement, net 400,000 - 400,000
Debt issuance costs, net 348,101 - 348,101
Deposits 28,160 - 28,160
----------------- ----------- -----------------
$ 1,826,431 $ - $ 1,826,431
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 143,000 - $ 143,000
Accrued professional fees 20,000 - 20,000
Accrued interest payable 193,110 - 193,110
Other accrued expenses 230,130 3 230,133
Accrued judgment payable 5,600 - 5,600
Notes payable - related parties 468,236 - 468,236
Current portion of notes payable 587,189 4,511 591,700
----------------- ----------- -----------------
Total current liabilities 1,647,264 4,515 1,651,779
Notes payable-related parties, net of current portion
and debt discount 1,950,188 92,372 2,042,560
Notes payable, net of current portion and debt discount 2,459,852 515,503 2,975,355
----------------- ----------- -----------------
Total liabilities 6,057,304 612,390 6,669,694
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 150,000,000 authorized,
121,998,023 shares issued and outstanding 1,219,980 - 1,219,980
Additional paid-in-capital 26,499,063 (1,655,418) 24,843,645
Treasury stock (1,500,000 shares), at cost (15,000) - (15,000)
Accumulated deficit (31,934,916) 1,043,028 (30,891,888)
----------------- ----------- -----------------
Total stockholders' deficit (4,230,873) (612,390) (4,843,263)
----------------- -----------------
1,826,431 - $ 1,826,431
================= =========== -----------------
29
RECLAMATION CONSULTING AND APPLICATION, INC.
RESTATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2007 SIX MONTHS ENDED DECEMBER
----------------------------------------- -----------------------------------------
AS PREVIOUSLY RESTATED AS PREVIOUSLY RESTATED
FILED ADJUSTMENTS RESTATED FILED ADJUSTMENTS RESTATED
------------ ----------- ------------ ------------ ----------- ------------
Net revenue $ 98,912 $ - $ 98,912 $ 218,090 $ - $ 218,090
Cost of revenue 108,905 - 108,905 256,052 - 256,052
------------ ----------- ------------ ------------ ----------- ------------
Gross profit (loss) (9,993) - (9,993) (37,962) - (37,962)
Selling, general and administrative expenses 920,782 9,970 930,752 1,567,315 9,970 1,577,285
------------ ----------- ------------ ------------ ----------- ------------
Loss from operations (930,775) (9,970) (940,745) (1,605,277) (9,970) (1,615,247)
Other income (expense)
Interest income 1,942 - 1,942 1,942 - 1,942
Interest expense (339,714) (64,544) (404,258) (2,181,223) 76,198 (2,105,025)
Loss on settlement of debt - - - (995,301) 976,801 (18,500)
------------ ----------- ------------ ------------ ----------- ------------
(337,772) (64,544) (402,316) (3,174,582) 1,052,999 (2,121,583)
------------ ----------- ------------ ------------ ----------- ------------
Income (loss) before income taxes (1,268,547) (74,514) (1,343,061) (4,779,859) 1,043,029 (3,736,830)
Provision for income taxes - - - 800 - 800
------------ ----------- ------------ ------------ ----------- ------------
Net income (loss) $ (1,268,547) $ (74,514) $ (1,343,061) $ (4,780,659) $ 1,043,029 $ (3,737,630)
============ =========== ============ ============ =========== ============
Net income (loss) per common share:
Basic $ (0.01) $ (0.01) $ (0.04) $ (0.03)
============ ============ ============ ============
Diluted (0.01) (0.01) (0.04) (0.03)
============ ============ ============ ============
Weighted-average common shares outstanding
Basic 121,833,583 121,833,583 121,833,583 113,597,925
============ ============ ============ ============
Diluted 121,833,583 121,833,583 121,833,583 113,597,925
============ ============ ============ ============
30
RECLAMATION CONSULTING AND APPLICATIONS, INC.
RESTATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
As previously filed Restatement Restated
December 31, 2007 Adjustments December 31, 2007
----------------- ----------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,780,660) $ 1,043,030 $ (3,737,630)
Adjustments to reconcile net loss to net cash used in
operating activities:
Issuance of shares for services rendered 46,160 (33,660) 12,500
Issuance of stock options for services rendered - 56,129 56,129
Issuance of shares for interest on notes payable 660,800 (591,200) 69,600
Debt discount on convertible debt 290,577 1,383,230 1,673,807
Amortization of discount on notes payable 1,531,909 (1,531,909) -
Depreciation and amortization 318,341 (62,412) 255,929
Loss on extinguishment of debt 18,500 - 18,500
Gain on cancellation of committed shares (32,400) - (32,400)
(Increase) decrease in operating assets:
Accounts receivable (19,430) - (19,430)
Inventories (540) 1 (539)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (810,851) 274,877 (535,974)
----------------- ----------- -----------------
Total adjustments 2,003,066 (504,944) 1,498,122
----------------- ----------- -----------------
Net cash used in operating activities (2,777,594) 538,086 (2,239,508)
----------------- ----------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities - - -
----------------- ----------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable and convertible debentures 5,190,000 (816,828) 4,373,172
Payments on notes payable and convertible debentures (1,509,866) 275,001 (1,234,865)
----------------- ----------- -----------------
Net cash provided by financing activities 3,680,134 (541,827) 3,138,307
----------------- ----------- -----------------
Net change in cash 902,540 (3,741) 898,799
CASH, BEGINNING OF PERIOD 3,741 - 3,741
----------------- ----------- -----------------
CASH, END OF PERIOD $ 902,540 $ - $ 902,540
================= =========== =================
31
RECLAMATION CONSULTING AND APPLICATIONS, INC.
RESTATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
As previously filed Restatement Restated
December 31, 2007 Adjustments December 31, 2007
----------------- ----------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR: Interest $ 185,677 $ - $ 185,677
================= =========== =================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable and accrued interest to common stock $ 1,857,400 $ - $ 1,857,400
================= =========== =================
Debt discount on debt $ 1,609,533 $ (624,852) $ 984,681
================= =========== =================
Issuance of shares for consulting services $ 12,500 $ (12,500) $ -
================= =========== =================
Issuance of shares and warrants for extinguishment of debt $ 12,500 $ - $ 12,500
================= =========== =================
Issuance of committed shares for debt issuance costs $ 275,000 $ - $ 275,000
================= =========== =================
Issuance of shares for interest on notes payable $ 69,600 $ (69,600) $ -
================= =========== =================
Accrued interest converted to notes payable $ - 5,030 $ 5,030
================= =========== =================
32
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.
33
As reflected in our Financial Statements included in Item 1 of Part I of this
Report, we have incurred cumulative losses of $30,891,888 (restated), including
net loss of $3,737,630 (restated) for the six-month period ended December 31,
2007. At December 31, 2007, we have a working capital deficit of $640,159
(restated).
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.
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 has committed to effect
a 1 for 2 reverse split of our common stock and to simultaneously increase our
authorized shares of common stock from 150,000,000 to 200,000,000,
(collectively, the "Share Reorganization."). As certain of our options, warrants
and convertible instruments will, pursuant to their terms, not be subject to
proportional adjustment for the reverse split, the Share Reorganization will
cause dilution to our holders of our common stock. 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.
However, we provide no assurance that such event will take place.
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").
34
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.
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.
35
Because the $1,787,800 converted included the principal and accrued interest of
the loans which had a conversion price of $0.05 and $0.025, 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.
36
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.
On December 13, 2007 the Company made payment against the revolving line of
credit totaling $271,150. As of December 31, 2007 the principal balance of the
line of credit was $549,850.
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 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; or
o 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.
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.
37
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.
38
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.
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.
PALA SECURED CONVERTIBLE DEBENTURE
SECURED CONVERTIBLE DEBENTURE
On December 12, 2007, we issued a Secured Convertible Debenture (the "Pala
Debenture") to Pala Investments Holdings Limited ("Pala"). The Debenture
provides for us to receive $5,000,000 in two tranches: a first tranche of
$3,000,000 which funded immediately on closing (the "First Tranche"), and a
second tranche of $2,000,000 which we will be entitled to if we meet certain
performance benchmarks by December 31, 2008, or which may otherwise be provided
at Pala's discretion (the "Second Tranche'). The Debenture carries interest of
12% per annum, compounding quarterly, and matures on December 11, 2010 (the
"Maturity Date").
Pursuant to the terms of the Secured Convertible Debenture ("Pala Debenture") we
sold Pala Investments Holdings ("Pala") on December 12, 2007 and ancillary
agreements, we are required to effect the Share Reorganization by April 10,
2008. The Pala Debenture provides for us to receive $5,000,000 in two tranches:
a first tranche of $3,000,000 which funded immediately on closing (the "First
Tranche"), and a second tranche of $2,000,000 which we will be entitled to if we
meet certain performance benchmarks by December 31, 2008, or which may otherwise
be provided at Pala's discretion (the "Second Tranche'). The Pala Debenture
carries interest of 12% per annum, compounding quarterly, and matures on
December 11, 2010 (the "Maturity Date").
Pala and its affiliated companies together have over 1.7 billion dollars under
management and focus on investing in the mining and natural resources sector.
Pala is based in Jersey in the United Kingdom. Its exclusive advisor, Pala
Investments AG, is based in Zug, Switzerland.
39
CONVERSION RIGHTS
Prior to the Maturity Date, Pala will have the option to convert the outstanding
balance of principal and unpaid interest into shares of our common stock at a
conversion price of $0.14 per share. The Pala Debenture requires us to effect a
1 for 2 reverse split of our outstanding common stock and to increase our
authorized shares of common stock from 150,000,000 to 200,000,000 (the "Share
Reorganization.)" We are required to use best efforts to effect the Share
Reorganization by February 10, 2008, and must complete the Share Reorganization
no later then April 10, 2008. Pala's conversion rights commence on the effective
date of the Share Reorganization and continue until the Maturity Date.
WARRANTS
For every dollar of principal advanced under the Pala Debenture, Pala is
entitled to a warrant to purchase one share of our common stock at $0.21 per
share. The warrants expire on December 11, 2010. Pala has received 3,000,000
warrants in connection with the first tranche and will be entitled to an
additional 2,000,000 warrants in the event the Second Tranche funds.
In the 1 for 2 reverse split to be effected as part of the Share Reorganization
and in any future reverse split, the number of Pala's warrants will not be
subject to adjustment, but the exercise price will be adjusted upwards. As
adjusted for Share Reorganization, the 3,000,000 warrants with an exercise price
of $0.21 per share already received by will become 3,000,000 warrants with an
exercise price of $0.42 per share.
SECOND TRANCHE
As long as we are not in default under the Pala Debenture and the
representations and warranties we made in the Pala Debenture as of December 12,
2007 remain true and accurate, we are entitled to receive the $2,000,000 Second
Tranche if we meet all of the following benchmarks by December 31, 2008 (the
"Benchmarks"):
o We have sold at least 1,000,000 gallons of our Alderox product
during calendar year 2008;
o We have signed orders or contracts for the sale of at least
1,000,000 gallons of Alderox during calendar year 2009, or we have
the reasonable expectation of selling at least 1,000,000 gallons of
Alderox during calendar year 2009 based on signed orders for the
sale of Alderox in calendar year 2009 and/or existing customer
accounts; and
o We have reached a gross profit margin of $5.00 per gallon on our
total sales of Alderox as calculated according to U.S. Generally
Accepted Accounting Procedures in effect at the time in calendar
year 2008.
Even if we do not meet the Benchmarks, Pala may fund the Second Tranche at its
sole discretion. However, we can offer no assurances that we will meet the
Benchmarks and qualify for the Second Tranche.
RIGHT OF FIRST REFUSAL
During the term of the Pala Debenture, Pala has a right of first refusal on
financings by the Company with the exception of transactions involving the
following:
o Our issuance of any securities (other than for cash) in connection
with a merger, acquisition or consolidation;
o Our issuance of securities in connection with license agreements,
joint ventures and other similar strategic partnering arrangements,
so long as such issuances are not for the primary purpose of raising
capital;
40
o Our issuance of common stock or the issuance or grants of options to
purchase common stock pursuant to stock option plans and employee
stock purchase plans;
o Any issuances of stock as a result of the exercise of options or
warrants or conversion of convertible notes which are granted or
issued prior to the Pala Debenture;
o Any warrants issued to the Lender pursuant to or otherwise for the
transactions contemplated by the Pala Debenture;
o Any financing which by its terms is to fund at or following the
Maturity Date, or which is entered into for the purpose of repaying
the Pala Debenture; and
o Permitted Indebtedness (as defined below)
The right of first refusal provisions require us to give Pala written notice of
any proposed non-exempt financings, prior to proceeding with such financing. On
receiving such notice, Pala has 15 trading days to elect to provide the
financing on the proposed terms before we can proceed with obtaining such
financing from a third party.
OTHER REQUIREMENTS AND RESTRICTIONS
Without Pala's approval, we may not enter into any further indebtedness other
then the following (the "Permitted Indebtedness"):
o All accounts payable generated in the normal course of business;
o Additional advances on Borrower's existing line of credit from
Canvasback Company Limited (the "Canvasback Line of Credit"),
provided that the aggregate outstanding balance shall not exceed
$500,000;
o Indebtedness with respect to capital lease obligations (including
leases of real property) or other obligations for equipment
purchases not to exceed $100,000;
o Loans or advances on a credit facility or facilities, provided the
terms thereof are not substantially more burdensome than those of
the Canvasback Line of Credit and the aggregate balance of such
loans or advances together with that of the outstanding balance of
Canvasback Line of Credit is not more then the maximum balance of
the Canvasback Line of Credit; and
o Extensions, renewals, refundings, refinancings, modifications,
amendments and restatements of the above items or any indebtedness
existing as of the date of the Pala Debenture, provided that (i) the
principal amount thereof is not increased and (ii) the terms are not
modified to impose substantially more burdensome terms upon us.
The Pala Debenture imposes a number of other restrictions and requirements on
the Company. Without Pala's approval we may not:
o Allow ourselves to be listed on the TSX Venture Exchange or on any
other exchange, provided however that we may allow our shares to be
traded on the Over-the-Counter Bulletin Board or the Pink Sheets.
o Amend our Articles or Bylaws except as allowed by the Pala
Debenture.
o Sell, or otherwise dispose of our assets (other than the sale of
inventory in the ordinary course of business) nor liquidate,
dissolve or suspend business operations;
41
o Transfer any of our intellectual property nor permit any agreement
under which we have licensed intellectual property to lapse. We may
only license our intellectual property in the ordinary course of our
business in connection with sales of inventory or provision of
services to its customers, including but not limited to our entering
into distribution agreements;
o Participate in a consolidation or merger, or similar reorganization
with another company;
o Engage in any line of business materially different from our present
line of business, nor purchase, lease or otherwise acquire assets
not related to our business;
o Adopt any material change in accounting principles other than as
required by U.S. Generally Accepted Accounting Principles nor adopt,
permit or consent to any change in its fiscal year;
o Transfer our chief executive office or principal place of business,
nor move, relocate, close or sell any business location,
o Enter into any exclusive distribution agreement, or any agreement
that commits a minimum volume of supply to a distributor, unless we
can terminate such notice by providing a maximum of 90 days notice.
The Pala Debenture also requires us to provide Pala with monthly sales reports
and financial statements.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement we entered into with Pala concurrent
with the issuance of the Pala Debenture, we are required to register the shares
underlying the Pala Warrants and the shares receivable on conversion of the Pala
Debenture with the SEC for resale by Pala. Pala's right to demand the
registration of these shares commences on the date we accomplish our Share
Reorganization. Following any such demand by Pala, we must file a registration
statement within 60 days and use reasonable best efforts to cause it to be
declared effective as soon as possible and to keep such statement effective
until June 11, 2011, unless the shares are sooner sold or sooner qualify for
sale pursuant to Rule 144(k).
SECURITY INTEREST IN COMPANY ASSETS
The obligations under the Pala Debenture are secured by a security interest in
all of our assets. On the occurrence of any of the following events, Pala may
accelerate the Maturity Date, commence legal action against us, and foreclose on
our assets:
o Our failure to make payments under the Pala Debenture when due;
o Our default under any other agreement or instrument evidencing
indebtedness, the effect of which is to cause such indebtedness to
become due and payable before its stated maturity date or its
scheduled dates of repayment, and such default continues for longer
then any applicable grace period or cure period specified by such
document;
o If any representation or warranty made by us or on behalf of us in
writing in any document furnished in connection with the Pala
Debenture shall prove to have been false or incorrect in any
material respect on the date as of which was made; provided,
however, that if such false or incorrect representation or warranty
is curable, we have 14 days to cure it;
42
o If we default in observing or performing any covenant or agreement
under the Pala Debenture or note, other then a failure to make a
payment when due, provided that is such default is curable, we have
14 days to cure it;
o If we become insolvent or admit in writing an inability to pay debts
as they mature; or we make a general assignment for the benefit of
our creditors; or a compromise or arrangement is proposed by us to
our creditors; or if any order is made or an effective resolution is
passed for our winding-up; or if a custodian, trustee, receiver or
other officer with like powers is appointed for us under applicable
bankruptcy or insolvency legislation; or if bankruptcy proceedings
are instituted by or against us, provided that in the case of an
involuntary petition, such petition is not dismissed within 60 days;
o If any subordinated creditor defaults in observing or performing any
covenant or agreement under any subordination agreement in favor of
Pala, provided that if such default is curable, we have 14 days to
cure it, or if we take or participate in any action which would be
prohibited under the provisions of any such subordination agreement
or makes any payment with respect to indebtedness that has been
subordinated pursuant to any such subordination agreement;
o If a final judgment which, with other outstanding final judgments
against us, exceeds $50,000 is entered against us and if, within 60
days after entry thereof, such judgment shall not have been
discharged or execution thereof stayed pending appeal, or if, within
60 days after the expiration of any such stay, such judgment shall
not have been discharged; or
o If we default in the performance or compliance of any obligation or
undertaking of the Company in the Voting Agreement or the
Registration Rights Agreement provided such default has continued
for a period of 14 days after we become aware of it.
USE OF PROCEEDS
We are using proceeds from the Pala Debenture to repay approximately $2,000,000
of debt as required by the Pala Debenture. We plan to use the remaining funds
for the operation of our business and for the repayment of remaining debt as
such debt comes due.
To the extent Pala does convert its Debenture and we are unable to repay the
Pala Debenture from our revenues, we will need additional capital to make the
interest and principal payments due under the Pala Debenture. We can offer no
assurance that we will be able to raise all or any portion of the funds
necessary to repay Pala on terms favorable to us or at all.
SUBORDINATION AGREEMENTS
As a condition precedent to our receipt of the First Tranche, Canvasback Company
Limited, Paul Hughes, 0761291 B.C. Ltd., and Eat-Me Foods, Ltd, all of whom hold
debt secured by our assets, signed Subordination Agreements, subordinating their
debt to that of Pala's.
In order to induce 0761291 B.C. Ltd. and Eat-Me Foods, Ltd. to enter into the
Subordination Agreements, we entered into amendments to their Secured
Convertible Debentures providing for each of them to receive warrants for the
purchase of 166,666 shares of our common stock. These warrants have an exercise
price of $0.18 per share and are exercisable for three years. In the event that
the closing price of our common stock equals or exceeds $0.80 per share for 20
consecutive trading days, we have the option to cancel the unexercised warrants
after 45-days prior written notice. These warrants are subject to proportional
adjustment in the planned 1 for 2 reverse split.
43
VOTING AGREEMENT
Concurrent with the issuing of the Pala Debenture, the Company, Pala and six of
our stockholders entered into a Voting and Right of First Refusal Agreement (the
"Voting Agreement"). The six stockholders who are party to the Voting Agreement
are our executive officers and directors, Michael C. Davies, Gordon W. Davies
and Paul Hughes; and our three largest stockholders: Sally Holden, Paul Hazell
and Canvasback Company Limited. The Voting Agreement remains in effect until:
o The date on which the Pala Debenture is repaid in full, if Pala has
not elected to convert the Pala Debenture into Shares; and
o The date on which Pala beneficially owns less then 10% of the
Company's outstanding shares.
Pursuant to the Voting Agreement, Pala and the six stockholders must vote all of
their Company shares as necessary to elect a designee of Pala to our Board of
Directors and to effect the Share Reorganization. To the extent any of the six
stockholders does not vote his or her shares according to the Voting Agreement,
Pala has an irrevocable proxy to vote such person's shares pursuant to the
agreement.
As the six stockholders control a majority of our outstanding stock, the
election of Pala's designee is assured and stockholder approval of the Share
Reorganization is assured. As of the date of this report, Pala has not yet
designated a director.
Additionally, in the event any of the six stockholders proposes to sell or
otherwise dispose of his or her shares, the Voting Agreement provides Pala to
receive a right of first refusal to purchase such shares on the same terms as
those proposed. The right of first refusal does not apply to certain permitted
dispositions such as transfers to certain family members, provided the recipient
agrees to be bound by the restrictions of the Voting Agreement.
The Voting Agreement also provides for the Company to provide the following to
Pala:
o A right of first refusal on future financings, substantially similar
to those of the right of first refusal provision in the Pala
Debenture discussed above;
o Monthly sales reports and financial statements; and
o An opportunity to enter into a non-exclusive distribution agreement
on terms no less favorable then those provided to any other
distributor of our products.
DAN LANDAU CONSULTING AGREEMENT
On February 7, 2008 we entered into a Consulting Agreement with Dan Landau
Corporation ("DLC") to perform general business consulting services such as
corporate planning and the coordination of marketing efforts, for a term of one
year. The agreement provides for DLC to receive monthly compensation of $15,000
per month for a period of 12 consecutive months, the term of the consulting
agreement. As additional compensation DLC is to receive a total of 1,000,000
shares of restricted common stock following, and not subject to adjustment for,
the proposed 1:2 reverse split. DLC is to receive 250,000 shares immediately
following our proposed 1 for 2 reverse split, 250,000 shares on June 30, 2008,
250,000 shares on September 30, 2008 and 250,000 shares on December 31, 2008. We
also agreed to issue the DLC warrants to purchase 1,000,000 shares of our common
stock, to purchase restricted stock following the proposed 1:2 reverse split.
The warrants have a term of one year, will vest proportionately over year at the
rate of 1/12 per month and will be issued on a form of certificate to be
mutually agreed to by the Company and DLC. 250,000 of the warrants shall have an
exercise price of $0.35 per share, 250,000 of the warrants shall have an
exercise price of $0.45 per share, 250,000 of the warrants shall have an
exercise price of $0.55 per share, and 250,000 of the warrants shall have an
exercise price of $0.65 per share. No adjustment to the number of shares
issuable on exercise of the warrants or the exercise price of the warrants shall
be made for any reverse split of the Company's common stock. . The agreement can
be terminated by either party on 30 days prior written notice. The compensation
received by DLC is subject to proportional adjustment in the event of an early
termination. On any early termination, DLC is not be entitled to keep more than
a number of shares equal to the number of days of the term multiplied by 2,739
and must return the excess to the Company.
44
We believe the issuance of the shares and warrants to DLC is exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended,
and Regulation D. Dan Landau, the principal of DLC, has represented that he is
an accredited investor
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006.
These results have been restated due to issues with debt discount cost and the
amortization of those costs.
FOR THE THREE MONTHS ENDED
December 31, 2007 December 31, 2006 Change Change
---------------------- ---------------------- ------------ -------
(Restated)
% of % of
$ Revenue $ Revenue $ %
------------ ------- ------------ ------- ------------ -------
Net Revenue $ 98,912 100 % $ 34,369 100 % $ 64,543 188 %
Cost of Revenue 108,905 110 % 26,271 76 % 82,634 315 %
------------ ------- ------------ ------- ------------ -------
Gross Profit (Loss) (9,993) (10)% 8,098 24 % (18,091) (223)%
Operating Expenses
Selling, General and Administrative Expenses 930,752 941 % 600,568 1,747 % 330,184 55 %
------------ ------- ------------ ------- ------------ -------
Loss from Operations (940,745) (951)% (592,470) (1,724)% (348,275) (59)%
Other Expense:
Interest income 1,942 2 % - - % 1,942 - %
Interest Expense (404,258) (409)% (275,147) (801)% (129,111) 47 %
Change in Fair Value of Derivative
Liabilities - - % 614,424 1,788 % (614,424) (100)%
Net Other Expense (402,316) (407)% 339,277 987 % (741,593) (219)%
Loss Before Provision for Income Taxes (1,343,061) (1,358)% (253,193) (737)% (1,089,868) (430)%
Provision for Income Taxes - - % - - % - - %
------------ ------- ------------ ------- ------------ -------
Net Loss $ (1,343,061) (1,358)% $ (253,193) (737)% (1,089,868) (430)%
============ ======= ============ ======= ============ =======
Net Loss Per Share
-Basic and Diluted
Basic $ (0.01) $ (0.01)
============ ============
Diluted $ (0.01) $ (0.01)
============ ============
Weighted-Average Common Shares Outstanding
-Basic and Diluted
Basic 121,833,583 49,066,358 72,767,225 148 %
============ ============ ============ =======
Diluted 121,833,583 49,066,358 72,767,225 148 %
============ ============ ============ =======
45
NET REVENUE
Net Revenues for the three month period ended December 31, 2007 increased to
$98,912 from $34,369 for the three month period ended December 31, 2006. This
increase in net revenues of $64,543 or approximately 188% over the prior period
is due primarily to the distributorship agreement we entered into with Applied
Industrial Technologies and our in-house activity in the southeast portion of
the U.S.
COST OF REVENUE
Cost of revenues for the three month period ended December 31, 2007 increased to
$108,905 from $26,271 for the three month period ended December 31, 2006. This
increase in cost of revenues of $82,634, or approximately 315% 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 December 31, 2007 decreased to
($9,993) from $8,098 for the three month period ended December 31, 2006. This
decrease in gross profit of $18,091, or approximately 223% over the prior period
is due primarily to the costs associated with the development of the application
systems and international shipping expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three month period ended
December 31, 2007 increased to $930,752 from $600,568 for the three month period
ended December 31, 2006. This increase in selling, general and administrative
expenses of $330,184, or approximately 55% 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 December 31, 2007
increased to $940,745 from $592,470 for the three month period ended December
30, 2006. This increase in loss from operations of 348,275, or approximately 59%
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 December 31, 2007 increased to
$404,258 from $275,147 for the three month period ended December 31, 2006. This
increase in interest expense of 129,111, or approximately 47% over the prior
period is due primarily to debt discount and debt issuance cost amortization
totaling $151,286.
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
Change in fair value of derivative liability for the three months ended December
31, 2007 decreased to $0 from $(614,424) 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 LOSS
Net loss for the three month period ended December 31, 2007 was ($1,343,061)
compared to ($253,193) for the three month period ended December 30, 2006. This
change was due primarily to increased debt discount amortization, no gain on
derivative liabilities, and increased operating expenses.
46
FOR THE SIX MONTHS ENDED
December 31, 2007 December 31, 2006 Change Change
---------------------- ---------------------- ------------ -------
(Restated)
% of % of
$ Revenue $ Revenue $ %
------------ ------- ------------ ------- ------------ -------
Net Revenue $ 218,090 100 % $ 101,389 100 % $ 116,701 115 %
Cost of Revenue 256,052 117 % 75,390 74 % 180,662 240 %
------------ ------- ------------ ------- ------------ -------
Gross Profit (37,962) (17)% 25,999 26 % (63,963) (246)%
Operating expenses
Selling, General and Administrative Expenses 1,577,285 723 % 1,026,634 1,013 % 550,651 54 %
------------ ------- ------------ ------- ------------ -------
Profit (Loss) from Operations (1,615,247) (741)% (1,000,635) (987)% (614,612) 61 %
Other Income (Expense):
Interest income 1,942 1 % - - % 1,942 - %
Interest expense (2,105,025) (965)% (639,091) (630)% (1,465,934) 229 %
Change in fair value of derivative
liabilities - - % 2,929,567 2,889 % (2,929,567) (100)%
Loss on extinguishment debt (18,500) (8)% - - % (18,500) - %
------------ ------- ------------ ------- ------------ -------
Net Other Income (Expenses) (2,121,583) (973)% 2,290,476 2,259 % (4,412,059) (193)%
------------ ------- ------------ ------- ------------ -------
Income (Loss) before provision for income tax (3,736,830) (1,713)% 1,289,841 1,272 % (5,026,671) (390)%
Provision for Income Taxes 800 0 % 800 1 % - - %
------------ ------- ------------ ------- ------------ -------
Net Income (Loss) $ (3,737,630) (1,714)% $ 1,289,041 1,271 % (5,026,671) (390)%
============ ======= ============ ======= ============ =======
Net Income Per Share
-Basic and Diluted
Basic (0.03) 0.03
============ ============
Diluted (0.03) 0.02
============ ============
Weighted-Average Common Shares Outstanding
-Basic and Diluted
Basic 113,597,925 49,066,358 64,531,567 132 %
============ ============ ============ =======
Diluted 113,597,925 85,113,523 28,484,402 33 %
============ ============ ============ =======
NET REVENUE
Net Revenues for the six month period ended December 31, 2007 increased to
$218,090 from $101,389 for the six month period ended December 31, 2006. This
increase in net revenues of $116,701 or approximately 115% over the prior period
is due primarily to the Distributorship agreement with Applied Industrial
Technologies and our in-house activity.
COST OF REVENUE
Cost of revenues for the six month period ended December 31, 2007 increased to
$256,052 from $75,390 for the six month period ended December 31, 2006. This
increase in cost of revenues of $180,662, or approximately 240% 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 six month period ended December 31, 2007 decreased to
($37,962) from $25,999 for the six month period ended December 31, 2006. This
decrease in gross profit of $63,963, or approximately 246% over the prior period
is due primarily to the costs associated with the development of the application
systems and international shipping expense.
47
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six month period ended
December 31, 2007 increased to $1,577,285 from $1,026,134 for the six month
period ended December 31, 2006. This increase in selling, general and
administrative expenses of $550,651, or approximately 54% 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 six month period ended December 31, 2007 increased
to $1,651,247 from $1,000,635 for the six month period ended December 30, 2006.
This increase in loss from operations of $614,612 , or approximately 61% is due
primarily to the increase in selling, general and administrative expenses and
costs associated with application systems
INTEREST EXPENSE
Interest expense for the six month period ended December 31, 2007 increased to
$2,105,025 from $639,091 for the six month period ended December 31, 2006. This
increase in interest expense of $1,465,934, or approximately 229% over the prior
period is due primarily to the increase in debt discount and debt issuance cost
amortization totaling approximately $1,400,000.
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
Change in fair value of derivative liability for the six months ended December
31, 2007 decreased to $0 from $2,929,567 for the six months ended December 31,
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 six month period ended December 31, 2007 was
($3,737,630) compared to a net profit of $1,289,041 for the six month period
ended December 30, 2006. This change from profitability during the 2006 period
when compared to the same period in fiscal 2007 was due primarily to the
increased debt discount amortization and no gain on derivative liability in
2007.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 2007, we used cash of $2,239,508 in our
operating activities and received cash of $3,138,307 in our financing
activities.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in our operating activities of $2,239,508 for the six months ended
December 31, 2007 was primarily attributable to a net loss of $3,737,630, and
adjustments to reconcile net income to net cash used in operating activities of
$1,498,122 consisting of the following: (a) depreciation and amortization of
$255,929, (b) amortization of discount on notes payable of $1,673,807, (c)
increase in accounts receivable of $19,430, (d) increase in inventories of $539,
(e) decrease in accounts payable and accrued expenses of $535,974, (f) loss on
extinguishment of debt of $18,500, (g) stock options for services rendered of
$56,129 (h) gain on cancellation of committed shares of $32,400, (i) issuance of
shares for services rendered of $12,500, and (j) issuance of shares for interest
on notes payable of $69,600.
48
CASH FLOWS FROM INVESTING ACTIVITIES
We neither used or received any cash from our investing activities for the six
months ended December 31, 2007.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by our financing activities of $3,138,307 for the six months
ended December 31, 2007 was from proceeds on notes payable of $4,373,172 offset
by payments on notes payable of $1,234,865.
INTERNAL SOURCES OF LIQUIDITY
For the six months ended December 31, 2007, the funds generated from our
operations were insufficient to fund our daily operations. For the six months
ended December 31, 2007, we had a gross loss of $37,962, and we were thus unable
to meet our operating expenses of $1,577,285 for the same period. There is no
assurance that funds from our operations will meet the requirements of our daily
operations in the future. In the event that funds from our operations will be
insufficient to meet our operating requirements, we will need to seek other
sources of financing to maintain liquidity.
EXTERNAL SOURCES OF LIQUIDITY
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 December 31, 2007, we have debt owing to related parties aggregating
$2,510,796 (net of unamortized debt discounts) as summarized in Note 6 to the
financial statements.
At December 31, 2007, we have debt owing to non-related parties aggregating
$3,567,055 (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
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.
49
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, December 31, 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, December 31, 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 to 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.
On February 19, 2008, our management concluded, after consultation with our
independent registered public accounting firm, and a review of the pertinent
facts, that the previously issued financial statements contained in the Original
Report for the quarter ended December 31, 2007 should not be relied upon due
primarily to an error in those financial statements related to the accounting
for debt discount on our convertible debt and an error in compiling the
statement of operations for the three months ended December 31, 2007. These
errors highlighted the need for us to proceed with our plans to implement better
disclosure controls, and we have made this a top priority.
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 and six month periods ended
December 31, 2007 and 2006 in conformity with accounting principles generally
accepted in the United States of America.
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 December 31,
2007. Based upon this evaluation, we have concluded that there has not been any
change in our internal control over financial reporting during our fiscal
quarter ended December 31, 2007, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Internal control over financial reporting is a process designed by, or under the
supervision of, our principal executive and principal financial officers, or
persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those policies
and procedures that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
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ITEM 3A(T). CONTROLS AND PROCEDURES
Not Applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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. On December 13,
2007 the Company and MBCG finalized a settlement agreement where the Company
paid MBCG $125,000 in return for a release of all liability associated with
their claim.
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 February 8, 2008 the Company entered into a
settlement agreement with Shaub & Williams where the Company has agreed to pay
and has since paid to Shaub & Williams a total of $17,000 in return for a full
release of their claim.
In September 2005, litigation between the Company and a former lessor, Jamestown
LLC, 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. On January 16, 2008 the Company made a final
payment of $2,500, there are no further obligation outstanding between the
Company and Jamestown, LLC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the sale of equity securities during
the quarter ended December 31, 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.
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In November 2007 we issued an aggregate total of 348,000 shares of our common
stock to four persons in connection with the conversion of an aggregate total of
$69,600 in future interest at a conversion price of $0.20 per share. These
conversions were made pursuant to the terms of three secured convertible
debentures issued in May 2007. In connection with these conversions and pursuant
to the terms of the secured convertible debentures, two of these persons
received warrants for the purchase 166,500 shares of our common stock at $0.22
per share and 166,500 shares of our common stock at $0.24 per share. The
warrants have a term of three years. 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. We believe the issuance of the
shares and warrants was exempt from registration under Sections 3(a)(9) and 4(2)
of the Securities Act and pursuant to Regulation D and Regulation S. All of the
persons receiving shares and warrants were accredited investors and non-U.S.
persons.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the three month period ended December 31, 2007, there have been no
material defaults in the payment of principal, interest, a sinking or purchase
fund installment, or any other material default not cured within 30 days, with
respect to any of our indebtedness exceeding 5% of our total assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the three
month period ended December 31, 2007.
ITEM 5. OTHER INFORMATION
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 the Management's Discussion and
Analysis. 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.
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").See the Management's Discussion and Analysis.
On February 7, 2008, we entered into a Consulting Agreement with Dan Landau
Corporation for general business consulting services. See the Management's
Discussion and Analysis.
With letter agreements dated effective December 31, 2007 and March 10, 2008, the
Company memorialized agreements with Michael Davies, Gordon Davies, Paul Hughes
and Canvasback Company, Limited to relinquish certain stock options and or
warrants until such time that the Company completes a reverse split or increases
their authorized shares. The following are the number of stock options and or
warrants that each shareholder has relinquished:
Michael Davies 4,500,000
Gordon Davies 4,500,000
Paul Hughes 9,114,228
Canvasback Company Limited 5,875,000
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ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
4.1(1) 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.
4.2(1) Form of Convertible Debenture, Promissory Note and Warrant
Certificate used by Reclamation Consulting and Applications,
Inc. for $500,000 financing in November 2007.
4.3(2) Secured Convertible Debenture, dated December 12, 2007,
issued to Pala Investments Holdings Limited.
4.4(2) Warrant Certificate, dated December 12, 2007, issued to Pala
Investments Holdings Limited.
4.5(2) Voting and Right of First Refusal Agreement, dated December
12, 2007, by and among Reclamation Consulting and
Applications, Inc., Pala Investments Holdings Limited and
the stockholders set forth on Exhibit A.
4.6(2) Registration Rights Agreement, dated December 12, 2007,
between Reclamation Consulting and Applications, Inc. and
Pala Investments Holdings Limited.
4.7(2) Form of Amendment No. 1, dated December 12, 2007, to Secured
Convertible Debenture dated May 30, 2007.
10.1(2) First Amendment to Lease, dated October 1, 2007, between
Reclamation Consulting and Applications, Inc. and Boyd
Enterprises Utah, L.L.C. (filed herewith).
10.2(2) Promissory Note, dated December 12, 2007, issued to Pala
Investments Holdings Limited.
10.3(2) Patent and Trademark Security Agreement, dated December 12,
2007, between Reclamation Consulting and Applications, Inc.
and Pala Investments Holdings Limited.
10.4(2) Form of Subordination Agreement, dated December 2007, in
favor of Pala Investments Holdings Limited.
10.5(2) Consulting Agreement, dated February 7, 2008 by and between
Reclamation Consulting and Applications, Inc. and Dan Landau
Corporation.
10.6(2) Promissory Note, dated December 12, 2007, issued to Pala
Investments Holdings Limited.
10.7(2) Patent and Trademark Security Agreement, dated December 12,
2007, between Reclamation Consulting and Applications, Inc.
and Pala Investments Holdings Limited.
53
10.8(2) Form of Subordination Agreement, dated December 2007, in
favor of Pala Investments Holdings Limited.
10.9(2) Consulting Agreement, dated February 7, 2008 by and between
Reclamation Consulting and Applications, Inc. and Dan Landau
Corporation.
10.10(2) Promissory Note, dated December 12, 2007, issued to Pala
Investments Holdings Limited.
10.11(2) Patent and Trademark Security Agreement, dated December 12,
2007, between Reclamation Consulting and Applications, Inc.
and Pala Investments Holdings Limited.
10.12(2) Form of Subordination Agreement, dated December 12, 2007, in
favor of Pala Investments Holdings Limited.
10.13(3) Form of Letter Agreement, dated December 31, 2007, executed
by Michael C. Davies, Gordon W. Davies, Paul Hughes, and
Canvasback Company Limited
10.14(3) Consulting Agreement, dated February 7, 2008 by and between
Reclamation Consulting and Applications, Inc. and Dan Landau
Corporation.
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.
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.
32.1* Certification of Chief Executive Officer pursuant to
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial 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
(1) Filed on November 19, 2007 as an exhibit to the Company's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 2007 and incorporated
herein by reference.
(2) Filed on December 18, 2007 as an exhibit to the Company's Current Report
on Form 8-K dated December 12, 2007 and incorporated herein by reference.
(3) Filed on February 19, 2008 as an exhibit to the Company's Quarterly Report
on Form 10-QSB for the quarter ended December 31, 2007 and incorporated
herein by reference.
54
SIGNATURES
In accordance with the requirements of the Exchange Act, we have caused this
report to be signed on our behalf by the undersigned, thereunto duly authorized.
RECLAMATION CONSULTING AND APPLICATIONS, INC.
Date: March 11, 2008
/s/ MICHAEL C. DAVIES
---------------------
Michael C. Davies, Chief Executive Officer
55