<page>
Amendment No. 1 to
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 19345
For the quarterly period ended March 31, 2008
[ ] 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
ALDEROX, 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: 65,131,130 shares as of June 10,
2008.
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
<page>
EXPLANATORY NOTE
- ----------------
This Form 10-QSB/A of Alderox, Inc. (the "Company") constitutes Amendment No. 1
(the "Amendment") to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2008, originally filed with the Securities and Exchange
Commission (the "Commission") on May 20, 2008 (the "Original Report").
The main purposes of this Amendment is to:
1. Amend and restate Item 1 of Part 1 (Financial Statements) of the Original
Report to include financial statements reviewed by our independent auditor
using professional standards and procedures for conducting such reviews,
as established by generally accepted auditing standards, as may be
modified or supplemented by the Commission; and
2. Amend and restate the document to correct for the above revisions, as well
as to correct typographical, grammatical and other errors.
The revisions to Item 1 of Part 1 (Financial Statements) of the Original Report
include changes to the accounting of interest expense, the accounting of loss of
extinguishment of debt, and certain disclosures regarding the amount of debt
incurred during the three and nine month periods ending March 31, 2008.
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 Acting 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.
2
<page>
Independent Accountant's Report
We have reviewed the accompanying condensed financial statements of Alderox,
Inc. as of March 31, 2008, and for the three-month and nine-month periods then
ended. These interim financial statements are the responsibility of the
company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Stonefield Josephson
June 9, 2008
3
<page>
PART 1 CONDENSED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALDEROX, INC.
CONDENSED BALANCE SHEET
March 31, 2008
ASSETS
CURRENT ASSETS:
Cash $ 1,103,366
Accounts receivable 79,022
Inventories 53,809
Prepaid expenses and other current assets 14,858
------------
Total current assets 1,251,055
Property and equipment, net 37,685
License agreement, net 387,500
Debt issuance costs, net 257,904
Deposits 32,908
------------
$ 1,967,052
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable (includes $28,454 of related party balances) $ 170,210
Accrued expenses 111,469
Accrued interest payable 268,988
Accrued settlement payable 162,512
Notes payable - related parties - current maturities
and debt discount 685,412
Notes payable - unrelated parties - current maturities
and debt discount 68,180
------------
Total current liabilities 1,466,771
Notes payable-related parties, less current maturities and debt
discount 1,574,541
Notes payable-unrelated parties, less current maturities
and debt discount 5,347,833
------------
Total liabilities 8,389,145
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 150,000,000 authorized,
122,082,048 shares issued and outstanding 1,220,820
Additional paid-in-capital 25,040,853
Treasury stock (1,500,000 shares), at cost (15,000)
Accumulated deficit (32,668,766)
------------
Total stockholders' deficit (6,422,093)
------------
$ 1,967,052
============
See the accompanying notes to unaudited condensed financial statements.
4
<page>
ALDEROX, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
-------------------------------- --------------------------------
2008 2007 2008 2007
------------- ------------- ------------- -------------
Net revenues $ 154,255 $ 38,412 $ 372,344 $ 139,801
Cost of revenues 242,033 32,748 498,086 108,138
------------- ------------- ------------- -------------
Gross profit (loss) (87,778) 5,664 (125,742) 31,663
Selling, general and administrative expenses 891,949 587,856 2,469,232 1,614,490
------------- ------------- ------------- -------------
Loss from operations (979,727) (582,192) (2,594,974) (1,582,827)
Other income (expense)
Interest income 4,299 -- 6,241 --
Interest expense (506,558) (224,761) (2,611,583) (863,852)
Loss on extinguishment debt (305,858) -- (324,359) --
Gain on extinguishment of debt 10,967 -- 10,967 --
Change in fair value of derivative liability -- (4,079,104) -- (1,149,537)
------------- ------------- ------------- -------------
(797,150) (4,303,865) (2,918,734) (2,013,389)
------------- ------------- ------------- -------------
Loss before income taxes (1,776,877) (4,886,057) (5,513,708) (3,596,216)
Provision for income taxes -- -- 800 800
------------- ------------- ------------- -------------
Net loss $ (1,776,877) $ (4,886,057) $ (5,514,508) $ (3,597,016)
============= ============= ============= =============
Net loss per common share:
Basic and diluted $ (0.01) $ (0.10) $ (0.05) $ (0.07)
============= ============= ============= =============
Weighted-average common shares outstanding
Basic and diluted 122,059,641 49,066,358 116,619,649 49,066,358
============= ============= ============= =============
See the accompanying notes to unaudited condensed financial statements
5
<page>
ALDEROX, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
Nine Months Ended March 31,
------------------------------
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,514,508) $(3,597,016)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Stock-based compensation 65,485 140,000
Inssuance of shares for services rendered 12,500 --
Issuance of shares for interest on notes payable 69,600 --
Amortization of prepaid consulting services -- 9,590
Excess fair value of stock granted in connection with consulting services -- 60,000
Change in fair value of derivative liabilities -- 1,149,537
Amortization of debt discount on convertible debt 1,890,512 --
Amortization of discount on notes payable -- 620,431
Amortization of debt issuance costs 270,591 --
Depreciation and amortization 48,283 58,202
Loss on extinguishment of debt 324,359 --
Gain on extinguishment of debt (10,967) --
Cancellation of committed shares (32,400) --
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (51,272) 7,518
Inventories (8,588) (103,675)
Prepaid expenses and other current assets 45,542 2,519
Deposits (4,750) --
Accounts payable and accrued expenses (359,634) 277,612
----------- -----------
Net cash used in operating activities (3,255,247) (1,375,282)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,641) --
----------- -----------
Net cash used in investing activities (3,641) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on notes payable and convertible debentures 7,323,172 2,045,170
Payments on notes payable and convertible debentures (2,969,700) (668,226)
Proceeds from warrant exercise 5,041 --
----------- -----------
Net cash provided by financing activities 4,358,513 1,376,944
----------- -----------
----------- -----------
Net increase in cash and cash equivalents 1,099,625 1,662
----------- -----------
Cash and cash equivalents at beginning of period 3,741 --
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,103,366 $ 1,662
=========== ===========
SUPPLEMENTAL DISCLOSURES
CASH OPERATING ACTIVITIES:
Interest paid $ 185,677 $ 85,621
=========== ===========
Income taxes paid
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable and accrued interest to common stock $ 1,857,400
=========== ===========
Debt discount on debt $ 1,168,333
=========== ===========
Committed shares for consulting services $ 144,000
=========== ===========
Issuance of shares for consulting services $ 12,500
=========== ===========
Extinguishment of debt to third party by issuance of debt to shareholders $ 505,005
=========== ===========
Issuance of committed shares for debt issuance costs $ 275,000
=========== ===========
Issuance of shares for interest on notes payable $ 69,600
=========== ===========
Accrued interest converted to notes payable $ 5,030
=========== ===========
See the accompanying notes to unaudited condensed financial statements.
6
<page>
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
- ------------
Alderox, Inc. (the "Company") formerly known as Reclamation Consulting and
Applications, Inc. is a Colorado corporation, originally formed in 1976. The
Company's primary business is the production and sale of its Alderox(R) line of
products and applicator systems. The Alderox(R) line of products is a line of
release agent that was developed by the Company in response to industries' need
for an economical and environmentally friendly product that eliminates or
reduces build up of materials on equipment. The Company's customers are located
throughout the United States.
Basis of Presentation
- ---------------------
The accompanying unaudited 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 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 nine months ended March 31, 2008
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 unaudited condensed
financial statements should be read in conjunction with the audited financial
statements and notes thereto contained in the Company's Form 10-KSB for the year
ended June 30, 2007.
Going Concern
- -------------
The Company's condensed financial statements 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 $32,668,766 including a net loss of $5,514,508 for the nine
months ended March 31, 2008 and has a working capital deficit of $215,716 at
March 31, 2008.
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.
7
<page>
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 are 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.
8
<page>
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 March 31, 2008, 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
March 31, 2008, 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.
9
<page>
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 March 31, 2008
and 2007 was $90,197 and $0, respectively, and for the Nine months ended March
31, 2008 and 2007 was $270,591 and $0, respectively. At March 31 2008,
accumulated amortization totaled $291,424.
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 nine months ended March 31, 2007, the Company
recorded other income of $4,079,104 and $1,149,537 related to the reduction in
the estimated value of the derivatives.
10
<page>
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, delivery has occurred, the price is fixed or readily
determinable and collectability is reasonably assured. 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 $0 and $46,960 for
the nine months ended March 31, 2008 and 2007, respectively, on research and
development efforts, which costs have been expensed as a part of selling,
general and administrative expenses.
Net Income (Loss) Per Share
- ---------------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted earnings
per share. Basic EPS includes no dilution and is computed by dividing income or
loss available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings or losses of the entity.
Dilution is computed by applying the treasury stock method for options and
warrants. Under this method, options and warrants are assumed to be exercised at
the beginning of the period (or at the time of issuance, if later) as if funds
obtained thereby were used to purchase common stock at the average market price
during the period.
For the three and nine months ended March 31, 2008, 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).
11
<page>
The following represents a reconciliation of basic and diluted net (loss) per
share for the three and nine months ended March 31, 2008 and 2007:
Three Months Ended March 31, Nine Months Ended March 31,
-------------------------------- --------------------------------
2008 2007 2008 2007
------------- ------------- ------------- -------------
Basic loss per share:
Net loss $ (1,776,877) $ (4,886,057) $ (5,514,508) $ (3,597,016)
------------- ------------- ------------- -------------
Weighted-average common shares outstanding, basic 122,059,641 49,066,358 116,619,649 49,066,358
============= ============= ============= =============
Basic loss per share $ (0.01) $ (0.10) $ (0.05) $ (0.07)
============= ============= ============= =============
Diluted loss per share:
Net loss $ (1,776,877) $ (4,886,057) $ (5,514,508) $ (3,597,016)
Additional debt discount amortization -- -- -- --
Change in fair value of derivative liabilities -- -- -- --
Convertible notes interest expense (net of taxes) -- -- -- --
------------- ------------- ------------- -------------
Adjusted net loss available to common
stockholders $ (1,776,877) $ (4,886,057) $ (5,514,508) $ (3,597,016)
============= ============= ============= =============
Weighted-average common shares outstanding, basic 122,059,641 49,066,358 116,619,649 49,066,358
Effect of dilutive securities:
Stock options and warrants -- -- -- --
Convertible notes payable -- -- -- --
------------- ------------- ------------- -------------
Weighted-average common shares outstanding,
diluted 122,059,641 49,066,358 116,619,649 49,066,358
============= ============= ============= =============
Diluted net loss per share $ (0.01) $ (0.10) $ (0.05) $ (0.07)
============= ============= ============= =============
Stock-Based Compensation
- ------------------------
At March 31, 2008, 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 nine months ended March 31, 2008 and 2007 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. The estimated average forfeiture rate for the three and nine months
ended March 31, 2008 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
nine months ended March 31, 2008 and 2007. Prior to the adoption of SFAS
123(R) those benefits would have been reported as operating cash flows had the
Company received any tax benefits related to stock option exercises.
12
<page>
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 nine months ended March 31, 2008
were as follows: risk-free interest rate 4.81%, dividend yield 0%, volatility
factor of 171% and a weighted - average expected term of three years.
A summary of option activity as of March 31, 2008 and changes during the nine
months then ended, is presented below:
Remaining Aggregate
Exercise Contractuial Intrinsic
Shares Price Term (Years) Value
----------- ------- ----------- ---------
Options outstanding at July 1, 2007 14,990,000 $ 0.23 --
Options granted 4,500,000 0.09 --
Options forfeited -- -- --
Options exercised -- -- --
----------- ------- ----------- ---------
Options outstanding at March 31, 2008 19,490,000 $ 0.19 3.28 $ 306,000
=== ==== ========== ======= ========== =========
Options exercisable at March 31, 2008 15,365,000 $ 0.23 1.55 $ 306,000
=== ==== ========== ======= ========== =========
Upon the exercise of options, the Company issues new shares from its authorized
shares. The Company granted 4,000,000 and 4,500,000 options during the three and
nine months ended March 31, 2008, respectively. The weighted average exercise
price of options granted during the nine months ended March 31, 2008 was $0.09
per share.
As of March 31, 2008 there was approximately $45,600 of unrecognized
compensation costs related to employee stock options. That cost is expected to
be recognized on a straight-line basis over the next thirty months. The fair
value of shares vested during the three and nine months ended March 31, 2008
related to employee options was $9,355 and $65,485, respectively, which was
recorded to selling, general and administrative expenses. The fair value of
shares vested during the three and nine months ended March 31, 2008 related to
employee options was $140,000.
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
March 31, 2008, the Company's cash balances exceed the amount insured by the
FDIC by approximately $1,000,000. Management believes the risk of loss of cash
balances in excess of the insured limit to be low.
The majority of revenues in the periods ended March 31, 2008 were generated from
five major customers, Applied Industrial Technologies, C.W. Roberts Contracting,
LoJac, Iron Ore of Canada and Brenntag Pacific. The majority of receivables at
March 31, 2008 were from Applied Industrial Technologies, LoJac, Iron Ore of
Canada and C.W. Roberts Contracting. For the three and nine months ended March
31, 2008, total sales to the five customers amounted to $110,811 and $259,278
respectively, or approximately 65.6% and 64.6%, respectively, of our sales and
as of March 31, 2008, accounts receivable from the five customers accounted for
approximately 73.8% 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
13
<page>
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.
In December 2007, the FASB issued SFAS No. 160, NONCONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS--AN AMENDMENT TO ARB NO. 51 ("SFAS 160"). SFAS
160 requires all entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements, but separate
from the equity of the parent company. The statement further requires that
consolidated net income be reported at amounts attributable to the parent and
the noncontrolling interest, rather than expensing the income attributable to
the minority interest holder. This statement also requires that companies
provide sufficient disclosures to clearly identify and distinguish between the
interests of the parent company and the interests of the noncontrolling owners,
including a disclosure on the face of the consolidated statements for income
attributable to the noncontrolling interest holder. This statement is effective
for fiscal years beginning on or after December 15, 2008. Early adoption is
prohibited. We are currently evaluating the effect, if any, that the adoption of
SFAS 160 will have on our results of operations, financial position and cash
flows.
In December 2007, the FASB issued SFAS No. 141--revised 2007, "BUSINESS
COMBINATIONS" ("SFAS 141R"). SFAS 141R establishes principles and requirements
for how an acquirer in a business combination recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest; recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase; and determines
what information to disclose to enable financial statement users to evaluate the
nature and financial effects of the business combination. SFAS 141R applies to
business combinations for which the acquisition date is on or after December 15,
2008. Early adoption is prohibited. We are currently evaluating the effect, if
any, that the adoption of SFAS 141R will have on our results of operations,
financial position and cash flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities," or SFAS 161, which is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance and cash flows.
It is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early adoption encouraged. The
Company is currently evaluating the impact that the adoption of SFAS 161 will
have, if any, 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 March 31, 2008:
Raw materials $ 3,713
Finished goods 50,096
--------
$ 53,809
========
14
<page>
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at March 31, 2008:
Computers and office equipment $ 12,210
Test equipment 55,075
Vehicles 17,410
--------
84,695
Less accumulated depreciation (47,010)
--------
$ 37,685
========
Depreciation expense was $3,622 and $3,550 for the three months ended March 31,
2008 and 2007, respectively. Depreciation expense was $10,782 and $10,702 for
the nine months ended March 31, 2008 and 2007, respectively.
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consist of the following at March 31, 2008
Unsecured convertible debt to stockholders, bearing interest at 10 percent per annum, $ 1,305,936
due on July 18, 2009 (see below)
Unsecured note payable to stockholders, bearing interest at 12 percent per annum, 505,300
due on demand
Unsecured note payable to stockholders, bearing interest at 10 percent per annum, 160,112
due on demand
Notes payable bearing interest at 12 percent per annum, convertible to common 268,605
shares at $0.12 per share, due March 10, 2009, secured by substantially all
assets of the Company, net of debt discount of $186,425 (see below)
Unsecured note payable to stockholder, bearing interest at 12 percent per annum,
due on demand 20,000
-----------
Subtotal 2,259,953
Less current maturities (685,412)
-----------
$ 1,574,541
===========
Interest expense on notes payable - related parties (including amortization of
debt discount) for the three months ended March 31, 2008 and 2007 was $295,814
and $43,494, respectively. Interest expense on notes payable- related parties
(including amortization of debt discount) for the nine months ended March 31,
2008 and 2007 was $2,065,814 and $133,514, respectively.
15
<page>
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.
16
<page>
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. The principal and accrued interest will be payable on July 17,
2009.
17
<page>
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.
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 nine months ended March 31,
2008, the Company amortized $5,187 and $63,446, respectively, 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.
On March 2008, Canvasback, the Company, and three shareholders of the Company
entered into an arrangement pursuant to which Canvasback released the Company
from further responsibility for the then outstanding principal balance of
$450,000 and $55,447 of accrued interest under the revolving line of credit. In
return for Canvasback releasing the Company from further liability for this
$450,000 of principal balance and $55,447 of accrued interest, the three
shareholders personally assumed responsibility for this debt. Accordingly, all
of the Company's obligations as repayment of the $450,000 principal balance and
accordingly, $55,447 of accrued interest were deemed to have been extinguished,
and the corresponding liability was de-recognized on our books. There was no
gain or loss on the extinguishment and re-recognition of liability.
In consideration for the shareholder's personal assumption for the then
outstanding principal balance of $450,000 and accrued interest of $55,447 the
Company owed to Canvasback, the Company and the three shareholders entered into
and executed an agreement whereby the Company issued notes to the shareholders
evidencing principal aggregate borrowings of $450,000 that is due upon demand
and carries an interest rate of 12%. The amount is included in the current
portion of the notes payable due to related parties.
18
<page>
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.
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 and will amortize it to interest
expense over the life of the debenture. For the three and nine months ended
March 31, 2008, the amortization was $12,839 and $21,809, respectively.
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 and will amortize it to interest expense over the life of
the debenture. For the three and nine months ended March 31, 2008, the
amortization was $30,122 and $64,798, respectively.
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 and will amortize it to interest expense over the life of the
debenture. For the three and nine months ended March 31, 2008, the amortization
was $6,499 and $11,498, respectively.
19
<page>
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.
NOTE 7 - NOTES PAYABLE - UNRELATED PARTIES
Notes payable consist of the following at March 31, 2008
Unsecured notes payable, bearing interest at 12 percent per annum, due on demand, $ 65,180
net of discount of $4,820 (see below)
Note payable bearing interest at 12 percent per annum, convertible to common 2,721,618
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 $278,382 (see below)
Note payable bearing interest at 12 percent per annum, convertible to common 2,317,092
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 $182,908 (see below)
Note payable bearing interest at 12 percent per annum, convertible to common 309,123
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 $190,877 (see below)
Note payable bearing interest at 12 percent per annum and paid semi-annually, 3,000
convertible to common to common shares at $0.40 and $0.45 per share, due
on demand, secured by substantially all assets of the Company
----------
Subtotal 5,416,013
Less current maturities (68,180)
----------
$ 5,347,833
===========
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.
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 $76,430 and $230,970 of interest expense during the three and
nine months ended March 31, 2008, 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.
20
<page>
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.
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 and nine months ended March 31, 2008 was $10,902 and
$16,652, respectively.
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 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 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 common
stock to him which were issued in July 2007. The Company also committed to issue
500,000 shares of common stock to Fred Davies, the father of its President and
CEO, for granting a mortgage and providing a personal guaranty of 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.
21
<page>
On March 31, 2008 the Company repaid all outstanding principal and interest to
Paul Hughes representing $400,000 of principal and $16,309 in accumulated
interest through the payment date, Eat-Me Foods, Ltd representing $359,985 of
principal and $14,734 in accumulated interest through the payment date and
0761291 B.C. Ltd. representing $400,000 of principal and $16,504 in accumulated
interest through the payment date. These payments totaling $1,207,532 relieved
the Company from all of the terms of the Convertible Debenture Agreement and
represented prepayment of the Convertible Debentures.
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 and will amortize it to interest expense over the life of the
debenture. For the three and nine months ended March 31, 2008, the amortization
was $29,641 and $42,326, respectively.
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 amortized over
the life of the Debenture.
CONVERSION RIGHTS - TRANCHE 1
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.)"
Pala's conversion rights commenced on the effective date of the Share
Reorganization which was May 5, 2008 and continue until the Maturity Date.
Therefore, the BCF associated with this conversion right of $523,205 was not
recorded by the Company as of March 31, 2008.
22
<page>
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 and will amortize it to interest expense
over the life of the debenture. For the three and nine months ended March 31,
2008, the amortization was $25,745 and $30,537, respectively.
In the 1 for 2 reverse split which was effected on May 5, 2008 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;
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)
23
<page>
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.
24
<page>
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 which
was effective on May 5, 2008. Following any such demand by Pala, we must file a
registration statement within 60 days from receipt of the demand from Pala 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;
25
<page>
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 not 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.
26
<page>
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 for an aggregate of 333,332 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 1 for 2
reverse split effective May 5, 2008. The value of these warrants using the
Black-Scholes pricing model was $49,112. 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 and nine months ended
March 31, 2008 was $4,934.
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.
27
<page>
Omnibus Amendment
On March 2008, the Company entered into and executed an Omnibus Amendment
(Amendment) with Pala Investments Holdings Limited. The Amendment extended to
the Company additional funding of $2,500,000 (the "Third Tranche") pursuant to
the terms of the Debenture Agreement, in each case as amended by this Amendment.
The following represents material amendments made to the Debenture.
1. Modified the Conversion Price for the Second Tranche from $0.14 to $0.07.
2. Defined the Conversion Price for the Third Tranche as $0.07.
3. Agreed to complete the Share Reorganization by no later than May 25,
2008.
4. Reduced the allowable aggregate amount of indebtedness outstanding under
the Canvasback Line of Credit to $230,000 from $500,000.
5. The Benchmarks for the contingent funding of the Second Tranche were
amended to (1) the Company generates positive net cash provided from
operating activities (as defined under U.S. GAAP) for the 2nd quarter of
its 2009 fiscal year; and (2) the company has signed orders or contracts
for the sale of at least one million (1,000,000) gallons of Alderox during
the 2009 calendar year.
6. Added provisions for cashless exercise of warrants, in which the number Of
warrant shares to issue upon conversion shall be computed using the
following formula:
X = ((P)(Y)(A-B)) / A
X = the number of warrant shares to be issued to the holder for
the portion of the warrants being converted;
P = the portion of the warrants being converted expressed in
decimal fraction;
Y = the total number of warrant shares issuable upon exercise of
the warrants in full;
A = the market price of a share of the Company's common stock for
the date of exercise (market price defined as the average of
the closing prices of the Company's common stock for the five
preceding trading days);
B = the then current exercise price.
Conversion Rights - Tranche 3
Consistent with the terms agreed to under the Debenture, Pala has the option to
convert the outstanding balance of principal and unpaid interest into shares of
the Company's common stock (the "Shares)at a conversion price of $0.07 per
share. Also, as noted above under the Debenture's Conversion Rights discussion,
the Company is required to effect a Share Reorganization as defined above.
Pala's conversion rights commence of the effective date of the Share
Reorganization which was May 5, 2008 and continue until the maturity Date.
Therefore, the BCF associated with this conversion right of $1,255,081 has not
yet been recorded by the Company, but will be once the Share Reorganization
occurs.
Warrants
In exchange for the additional $2,500,000 provided to the Company under the
Amendment, Pala received 2,500,000 warrants on March 27, 2008 for the purchase
of up to an aggregate of 2,500,000 shares of the Company's common stock at a
price of $0.21 per share. The warrants expire on March 27, 2011. The Company
recorded a debt discount of $183,652 related to the issuance of these warrants
which will be amortized over the life of the Amendment. For the three and nine
months ended March 31, 2008, the amortization was $744.
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.
28
<page>
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. 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 in full 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 has indemnified
its lessors for certain claims arising from the use of the facilities. The
Company is also required to indemnify the Debenture Holders under the terms of
the Debentures. The duration of the guarantees and indemnities varies, and is
generally tied to the life of the agreement. These guarantees and indemnities do
not provide for any limitation of the maximum potential future payments the
Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying condensed balance sheet.
NOTE 9 - STOCKHOLDERS' DEFICIT
Common Stock
- ------------
During the nine months ended March 31, 2008 the Company issued a total of
66,512,025 shares of common stock, as follows: 84,025 shares for the exercise of
warrants having a cash value of $5,042, 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 totaling
$7,500. 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 nine months ended March 31, 2008, the Company recorded a reversal of
previously recorded committed shares totaling $32,400 as part of selling,
29
<page>
general and administrative expenses for consultant shares that will never be
issued due to non-performance by the consultant.
STOCK OPTIONS AND WARRANTS
- --------------------------
Stock Options
During the nine months ended March 31, 2008, the Company granted to its
employees a total of 4,500,000 stock options. 4,000,000 shares of the options
granted during the nine months ended March 31, 2008 were provided to Mr. Norman
Gish at an exercise price of $0.075 per share. The vesting commencement
provisions on these granted options are contingent upon the effective date of
Share Reorganization, and as such, none of these granted shares were vested as
of March 31, 2008. Subsequent to the Share Reorganization effective date which
occurred on May 5, 2008, the options granted to Mr. Norman Gish shall vest pro
rata over the following 18 months, provided Mr. Norman Gish continues to serve
as the Company's Chairman of its Board of Directors. The options have a
contractual term of ten years. The number of shares shall be proportionately
adjusted subsequent to the Share Reorganization.
The Company also granted an unrelated employee 500,000 shares of stock options
during the nine months ended March 31, 2008. This grant vests on a pro-rata
basis over 12 months. As of March 31, 2008, 375,000 of the granted shares were
vested with the remaining 125,000 shares expected to vest by June 30, 2008.
None of the stock options had either expired or was cancelled during the nine
months ended March 31, 2008. The total outstanding stock options at March 31,
2008 were 19,490,000.
Warrants
During the nine months ended March 31, 2008, the Company granted a total of
7,466,332 warrants in connection with various financing arrangements. All of the
warranted granted during the nine months ended which were fully vested as of
March 31, 2008. During this period, 200,000 shares of warrants had expired. The
total outstanding warrants at March 31, 2008 were 18,061,332.
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 nine months ended March 31, 2008:
Expected Life 1-5 Years
Risk-free interest rate 2.80 - 4.88%
Dividend yield 0%
Volatility 107 - 171%
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.
30
<page>
Amortization expense of $12,500 and $12,500 was recognized during the three
months ended March 31, 2008 and 2007, respectively, and is included in selling,
general and administrative expenses in the accompanying condensed statements of
operations. Amortization expense of $37,500 and $37,500 was recognized during
the nine months ended March 31, 2008 and 2007, respectively, and is included in
selling, general and administrative expenses in the accompanying condensed
statements of operations.
NOTE 11 - CONSULTING AGREEMENT
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 upon the
occurrence of 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 $0.55 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. As of March
31, 2008, the proposed 1:2 reverse split has not occurred and as such, the
deferred Compensation amount associated with the restricted shares and warrants
for $40,000 and $63,359, respectively, have not been recorded by the Company but
will be immediately after the occurrence of the proposed reverse split.
NOTE 12 - SUBSEQUENT EVENTS
On May 5, 2008 at the Company Annual General Meeting, the Company received
shareholder approval to adopt the following amendments to the Articles of
Incorporation:
o Amend the Articles of Incorporation, hereafter referred to as the
Articles, to permit stockholders to approve corporate actions by written
consent.
o Amend the Articles to change the corporate name from Reclamation
Consulting and Application, Inc. to Alderox, Inc.
o Amend the Articles to increase the authorized number of shares of common
stock from 150,000,000 to 200,000,000.
o Amend the Articles to effect a 1-for-2 reverse stock split of our common
stock.
On May 16, 2008, the Company filed Articles of Amendment with the Colorado
Secretary of State. Other items that were approved by the shareholders include
the election of Norman Gish, Gordon Davies and Michael Davies as the Company's
2008 Board of Directors and the adoption of an incentive stock option plan.
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, as well as the financial statements and notes thereto and
Management's Discussion and Analysis of our Annual Report for the year ended
June 30, 2007 and our quarterly reports for the quarters ended September 30,
2007, December 31, 2007 and March 31, 2008. 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
31
<page>
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.
Alderox, Inc., ("us", "we", the "Company" or the "Registrant"), formerly named
Reclamation Consulting and Applications, Inc., 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 release agent 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 release agent used to keep
truck beds and 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 product. 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 PaverblendTM sprayed onto the beds
of asphalt haul trucks. The pump system draws from a tank that stores the
Alderox(R) product and automatically applies a predetermined amount of product
onto the truck bed. The Reliant 2 is a manual hand held spray system which
controls the amount of Alderox PaverblendTM sprayed onto the beds of asphalt
haul trucks and also draws from a storage tank. This system is also modified for
use with Alderox ASA-12(R) in other areas of the mining industry such as on
skips, loaders, 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 industry to drag or transport asphalt to distribution containers.
The Company also custom builds specialized custom application equipment for the
mining industry on a case by case basis.
As reflected in our Financial Statements included in Item 1 of Part I of this
Report, we have incurred cumulative losses of $32,668,766, including
net loss of $5,514,508 for the nine-month period ended March 31, 2008. At
March 31, 2008, we have a working capital deficit of $215,716.
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.
On May 16, 2008, we amended our Articles of Incorporation to effect a 1 for 2
reverse split of our common stock and to increase our authorized shares of
common stock from 150,000,000 to 200,000,000, (collectively, the "Share
Reorganization."). This amendment to our Articles of Incorporation was approved
by a majority of our shareholders at our annual shareholders' meeting on May 5,
2008. As certain of our options, warrants and convertible instruments were,
32
<page>
pursuant to their terms, not subject to proportional adjustment for the reverse
split, the Share Reorganization has resulted in dilution to our holders of our
common stock. Additionally, the issuance of shares on the exercise of
outstanding options, warrants and convertible instruments will likely result in
substantial additional dilution to the holdings of our existing shareholders.
The Company is in the process of adjusting its books and records for the Share
Reorganization. With the exception of the number of outstanding shares on the
cover page of this amendment, all share numbers and share prices in this
quarterly report are provided on a pre-split basis.
REDUCTION OF REVOLVING LINE OF CREDIT BALANCE
Pursuant to a Secured Revolving Line of Credit Agreement, Canvasback Company
Ltd. provides us with a $3,000,000 line of credit 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 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. Additionally, our ability to utilize the line of credit is
dependent on Canvasback having funds available for such use. 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.
By paying down the balance and by entering into an arrangement with three
shareholders for the assumption of the remainder of the balance, the Company
reduced the balance of its revolving line of credit to zero during the quarter
ended March 31, 2008.
On February 1, 2008 the Company made payment against the revolving line of
credit extended by Canvasback Company Ltd., totaling $100,000.
On March 2008, Canvasback, the Company, and three shareholders of the
Company,(two officers, Michael Davies and Gordon Davies, and a third individual,
Anthony Wilson) entered into an arrangement pursuant to which Canvasback
released the Company from further responsibility for the then outstanding
principal balance of $450,000 and $55,447 of accrued interest under the
revolving line of credit. In return for Canvasback releasing the Company from
further liability for this $450,000 of principal balance and $55,447 of accrued
interest, the three shareholders personally assumed responsibility for this
debt. Accordingly, all of the Company's obligations as repayment of the $450,000
principal balance and $55,447 of accrued interest were deemed to have been
extinguished, and accordingly, the corresponding liability was de-recognized on
our books. There was no gain or loss on the extinguishment and re-recognition of
liability.
In consideration for the three shareholders' personal assumption for the
$450,000 principal balance and $55,447 of accrued interest the Company agreed to
issue notes to the shareholders evidencing principal aggregate debt of $505,447
due upon demand and carries annual interest of 12%. This debt is included in the
current portion of the notes payable due to related parties.
OMNIBUS AMENDMENT
On March 28, 2008, we entered into an Omnibus Amendment (the "Omnibus
Amendment") with Pala Investments Holdings Limited ("Pala") that amended the
terms of a Secured Convertible Debenture (the "Debenture") and related
agreements entered into on December 12, 2007 and which were previously disclosed
on a Current Report on Form 8-K dated December 12, 2007 and filed with the
Securities and Exchange Commission on December 18, 2007.
The Debenture originally provided for us to receive $5,000,000 in two tranches:
a first tranche of $3,000,000 which funded immediately on closing, and a second
tranche of $2,000,000 which we were entitled to receive if we met certain
performance benchmarks by December 31, 2008, or which may otherwise be provided
at Pala's discretion. The Debenture carries interest of 12% per annum,
compounding quarterly, and matures on December 11, 2010 (the "Maturity Date").
In connection with the funding of the first tranche, Pala received warrants for
the purchase of 3,000,000 shares of common stock. Pala is also entitled to
warrants for the purchase of 2,000,000 shares of common stock on the funding of
the second tranche.
33
<page>
THIRD TRANCHE
Under the Omnibus Amendment, the maximum amount to which we are entitled to
receive under the Debenture was raised to $7,500,000 and we immediately received
a third tranche of $2,500,000 in funding pursuant to the Debenture. The
principal and interest of the third tranche are convertible into shares of our
common stock at a conversion price of $0.07 per share. As is the case with the
first and second tranches, the conversion price is subject to proportional
adjustment for any forward or reverse stock splits or for the distribution of
any share dividends. Pala's conversion rights commence on the effective date of
our Share Reorganization (as described below) and continue until the Maturity
Date.
WARRANTS FOR THIRD TRANCHE
In connection with the third tranche, Pala received warrants for the purchase of
2,500,000 shares of our common stock. These warrants have a term of three years
and an exercise price of $0.21 per share. The Company recorded a debt discount
of $183,652 related to the issuance of these warrants which will be amortized
over the life of the Amendment. For the three and nine months ended March 31,
2008, the amortization was $744.
In the 1 for 2 reverse split being effected as part of our Share Reorganization
and in any future reverse split, the number of warrants is not subject to
adjustment, but the warrant exercise price is adjusted upwards. As adjusted for
the Share Reorganization, the 2,500,000 warrants with an exercise price of $0.21
has become 2,500,000 warrants with an exercise price of $0.42 per share.
CHANGES TO SECOND TRANCHE
Pursuant to the Omnibus Amendment, and in consideration of Pala providing us
with the third tranche, the $2,000,000 second tranche, which is to be funded in
the event we reach certain benchmarks, will also be convertible into shares of
our common stock at a conversion price of $0.07 per share, rather than $0.14
share as originally provided in the Debenture.
Additionally, the benchmarks for the funding of the second tranche were amended
to require we meet both of the following requirements before Pala is obligated
to provide the second tranche (although Pala may otherwise provide us with the
second tranche at its discretion):
o We have signed orders or contracts for the sale of at least
1,000,000 gallons of Alderox during calendar year 2009; and
o We have generated positive net cash provided from operating
activities (as defined under U.S. GAAP) for the second quarter of
our 2009 fiscal year.
CONSULTING AGREEMENT
Pursuant to the Omnibus Amendment, we agreed to enter into a consulting
agreement with Melior AG, an indirect wholly-owned subsidiary of Pala, for the
provision of certain management and consultancy services to be described in
detail in the final consulting agreement. The consulting agreement is to have a
term of two years from the date of its execution, which as of March 31, 2008,
was not executed. Melior AG's compensation for the first year of the agreement
is to be $200,000, payable in shares of Company stock. For the second year of
the agreement, Melior AG's compensation is to be $350,000, payable either in
shares of Company stock or cash, at the option of the Company. Payments in stock
would be made using a conversion price of $0.07 per share, as proportionately
adjusted for any forward or reverse stock splits or share dividends.
OTHER PROVISIONS
The Debenture originally required us to effect a 2 for 1 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)" by April 10, 2008.
The Omnibus Agreement formalized a subsequent understanding by Pala and the
Company to allow the Share Reorganization to take place no later than May 25,
2008. An Amendment to our Articles of Incorporation implementing the Share
Reorganization was approved by our shareholders at our annual meeting on May 5,
2008 and filed with the Colorado Secretary of State on May 16, 2008.
The Debenture originally allowed us to obtain additional advances on our
existing line of credit from Canvasback, provided that the outstanding balance
did not exceed $500,000. Pursuant to the Omnibus Amendment, the outstanding
balance of the Canvasback line of credit cannot exceed $230,000
A promissory note was issued for the third tranche.
The Registration Rights Agreement was amended to provide for all shares
underlying the warrants received in connection with the third tranche or
received on the conversion of the third tranche to have the registration rights
provided by this agreement.
34
<page>
The Security Agreement was amended to clarify that the third tranche is secured
by all of our assets.
USE OF PROCEEDS FROM THIRD TRANCHE
We used $1,207,532 of the proceeds from the third tranche to repay three secured
convertible debentures held by Paul Hughes, our Chief Financial Officer, Eat-Me
Foods, Ltd. and 0761291 B.C. Ltd. We plan to use the remaining funds for the
operation of our business.
To the extent Pala does not convert the 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.
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 following the proposed 1:2 reverse split.
The warrants have a term of one year, will vest proportionately over year at the
rate of 1/1 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.
As of March 31, 2008, the 1:2 reverse split had not occurred and as such, the
deferred compensation amount associated with the restricted shares and warrants
for $40,000 and $63,359, respectively, had not been recorded by the Company but
will be recorded following the occurrence of the reverse split.
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.
35
<page>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007.
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 2008 March 31, 2007 Change Change
---------------------- ----------------------- ------------ --------
% of % of
$ Revenue $ Revenue $ %
----------- ------ ----------- ------- ----------- -------
Net Revenue $ 154,255 100 % $ 38,412 100 % $ 115,843 302 %
Cost of Revenue 242,033 157 % 32,748 85 % 209,285 639 %
----------- ------ ----------- ------- ----------- -------
Gross Profit (Loss) (87,778) (57)% 5,664 15 % (93,442) (1,650)%
Operating Expenses
Selling, General and Administrative Expenses 891,949 578 % 587,856 1,530 % 304,093 52 %
----------- ------ ----------- ------- ----------- -------
Loss from Operations (979,727) (635)% (582,192) (1,516)% (397,535) (68)%
Other Expense:
Interest income 4,299 3 % -- -- % 4,299 -- %
Interest Expense (506,558) (328)% (224,761) (585)% (281,797) 125 %
Loss on extinguishment debt (305,858) (198)% -- -- % (305,858) -- %
Gain on extinguishment of debt 10,967 7 % -- -- % 10,967 -- %
Change in Fair Value of Derivative Liabilities -- -- % (4,079,104) (10,619)% 4,079,104 (100)%
----------- ------ ----------- ------- ----------- -------
Net Other Expense (797,150) (517)% (4,303,865) (11,204)% 3,506,715 (81)%
----------- ------ ----------- ------- ----------- -------
Loss Before Provision for Income Taxes (1,776,877) (1,153)% (4,886,057) (12,720)% 3,109,180 64 %
Provision for Income Taxes -- -- % -- -- % -- -- %
----------- ------ ----------- ------- ----------- -------
Net Loss $(1,776,877) (1,153)% $(4,886,057) (12,720)% 3,109,180 64 %
=========== ====== =========== ======= =========== =======
Net Loss Per Share
Basic and diluted $ (0.01) $ (0.10)
=========== ===========
Weighted-Average Common Shares Outstanding
Basic and diluted 122,059,641 49,066,358
=========== ===========
NET REVENUE
Net Revenues for the three month period ended March 31, 2008 increased to
$154,255 from $38,412 for the three month period ended March 31, 2007. This
increase in net revenues of $115,843 or 302% 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 March 31, 2008 increased to
$242,033 from $32,748 for the three month period ended March 31, 2007. This
increase in cost of revenues of $209,285, or 639% over the prior period is due
primarily to the increase in material costs of the goods sold during the period
and the cost of application systems.
GROSS PROFIT (LOSS)
Gross profit (loss) for the three month period ended March 31, 2008 decreased to
($87,778) from $5,664 for the three month period ended March 31, 2007. This
decrease in gross profit of $93,442, or 1,650% 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
March 31, 2008 increased to $891,949 from $587,856 for the three month period
ended March 31, 2007. This increase in selling, general and administrative
expenses of $304,093, or 52% over the prior period is due primarily to increased
staffing, consulting services, marketing and advertising all pertaining to the
mining industry.
LOSS FROM OPERATIONS
Loss from operations for the three month period ended March 31, 2008 increased
to $972,727 from $582,192 for the three month period ended March 31, 2007. This
increase in loss from operations of $397,535, or 68% is due primarily to the
increase in selling, general and administrative expenses and costs associated
with the application systems.
36
<page>
INTEREST EXPENSE
Interest expense for the three month period ended March 31, 2008 increased to
$506,558 from $224,761 for the three month period ended March 31, 2007. This
increase in interest expense of $281,797, or 125% over the prior period is due
primarily due to significant additional amounts of debt discounts amortized.
EXTINGUISHMENT OF DEBT
Loss on extinguishment of debt for the three month period ended March 31, 2008
was $305,858 compared to $0 for the three month period ended March 31, 2007.
This increase of $305,858 is due to the write off of unamortized debt discount
associated with two notes that were paid off.
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
Change in fair value of derivative liability for the three months ended March
31, 2008 decreased to $0 from $(4,079,104) for the three months ended March 31,
2007. 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 March 31, 2008 was ($1,776,877)
compared to ($4,886,057) for the three month period ended March 31, 2007. This
change was due primarily to the absence derivative fair value charges in the
current quarter offset by higher amounts of debt discount amortized and increase
in operating expenses.
FOR THE NINE MONTHS ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 2008 March 31, 2007 Change Change
--------------------------- ------------------------ ------------ ------
% of % of
$ Revenue $ Revenue $ %
------------- ----------- ------------- ------- ------------- -----
Net Revenue $ 372,344 100 % $ 139,801 100 % $ 232,543 166 %
Cost of Revenue 498,086 134 % 108,138 77 % 389,948 361 %
------------- ----------- ------------- ------- ------------- -----
Gross Profit (125,742) (34) % 31,663 23 % (157,405) (497)%
Operating expenses
Selling, General and Administrative Expenses 2,469,232 663 % 1,614,490 1,155 % 854,742 53 %
------------- ----------- ------------- ------- ------------- -----
Profit (Loss) from Operations (2,594,974) (697)% (1,582,827) (1,132)% (1,012,147) 64 %
Other Income (Expense):
Interest income 6,241 2 % -- -- % 6,241 -- %
Interest expense (2,611,583) (701)% (863,852) (618)% (1,747,731) 202 %
Loss on extinguishment debt (324,359) (87)% -- -- % (324,359) -- %
Gain on extinguishment of debt 10,967 3 % -- -- % 10,967 -- %
Change in fair value of derivative liabilities -- -- % (1,149,537) (822)% 1,149,537 (100)%
------------- ----------- ------------- ------- ------------- -----
Net Other Income (Expenses) (2,918,734) (784)% (2,013,389) (1,440)% (905,345) 45 %
------------- ----------- ------------- ------- ------------- -----
Income (Loss) before provision for income tax (5,513,708) (1,481)% (3,596,216) (2,572)% (1,917,492) 53 %
Provision for Income Taxes 800 0 % 800 1 % -- -- %
------------- ----------- ------------- ------- ------------- -----
Net Income (Loss) $ (5,514,508) (1,481)% $ (3,597,016) (2,573)% (1,917,492) 53 %
============= =========== ============= ======= ============= =====
Net Income Per Share
Basic and diluted (0.05) (0.07)
============ ============
Weighted-Average Common Shares Outstanding
Basic and diluted 116,619,649 49,066,358
============= ============
37
<page>
NET REVENUE
Net Revenues for the nine month period ended March 31, 2008 increased to
$372,344 from $139,801 for the nine month period ended March 31, 2007. This
increase in net revenues of $232,543 or 166% 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 nine month period ended March 31, 2008 increased to
$498,086 from $108,138 for the nine month period ended March 31, 2007. This
increase in cost of revenues of $389,948, or 361% 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 (LOSS)
Gross profit (loss) for the nine month period ended March 31, 2008 decreased to
($125,742) from $31,663 for the nine month period ended March 31, 2007. This
decrease in gross profit of $157,405, or 497% over the prior period is due
primarily to the costs associated with the development of the application
systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine month period ended
March 31, 2008 increased to $2,469,232 from $1,614,490 for the nine month period
ended March 31, 2007. This increase in selling, general and administrative
expenses of $854,742, or 53% 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 nine month period ended March 31, 2008 increased to
$2,594,974 from $1,582,827 for the nine month period ended March 31, 2007. This
increase in loss from operations of $1,012,147, or 64% is due primarily to the
increase in selling, general and administrative expenses and costs associated
with application systems
INTEREST EXPENSE
Interest expense for the nine month period ended March 31, 2008 increased to
$2,611,583 from $863,852 for the nine month period ended March 31, 2007. This
increase in interest expense of $1,747,731, or 202% over the prior period is due
primarily to a significant increase in amortization related to debt discounts
and debt issuance costs.
LOSS (GAIN) ON EXTINGUISHMENT OF DEBT
Extinguishment of debt for the nine month period ended March 31, 2008 was
$324,359 compared to $0 for the nine month period ended March 31, 2007. This
increase of $324,359 is due to the write off of debt discount associated with
two notes that were paid off.
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
Change in fair value of derivative liability for the nine months ended March 31,
2008 decreased to $0 from $1,149,537 for the nine months ended March 31, 2007.
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 nine month period ended March 31, 2008 was
($5,514,508) compared to a net income (loss) of ($3,597,016) for the nine month
period ended March 31, 2007. The increase in net losses for the nine months
ended March 31, 2008 as compared to the nine months ended March 31, 2007
primarily resulted from increased debt discount amortization and no gain on
derivative liability in 2008.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 2008, we used net cash of $3,255,247 and
$3,641 in our operating and investing activities, respectively, and provided
cash of $4,358,513 from our financing activities.
38
<page>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in our operating activities of $3,255,247 for the nine months
ended March 31, 2008 was primarily attributable to a net loss of $5,514,508. The
net loss was increased by net an adverse change of operating asset and
liabilities of $378,702 but reduced by $2,637,963 related to the adjustments to
reconcile net loss to net cash used in operating activities. The most
significant adjustments to reconcile net loss to net cash are the $1,890,512 for
the amortization of debt discounts on convertible debts and $270,591 related to
amortization of debt issuance cost.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in our investing activities of $3,641 for the nine months ended
March 31, 2008 was cash used in acquisition of property and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by our financing activities of $4,358,513 for the nine months
ended March 31, 2008 was from proceeds on notes payable and exercise of warrants
of $7,323,172 and $5,041, respectively, offset by payments on notes payable of
$2,969,700.
INTERNAL SOURCES OF LIQUIDITY
For the nine months ended March 31, 2008, the funds generated from our
operations were insufficient to fund our daily operations. For the nine months
ended March 31, 2008, we had a net loss of $5,514,508, and we were thus unable
to meet our operating expenses of $2,469,232 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 for our last fiscal year issued a
"going concern" statement its report on our audited financial statements for the
year ended June 30, 2007.
As of March 31, 2008, we had debt owing to related parties aggregating
$2,259,953 (net of unamortized debt discounts) as summarized in Note 6 to the
financial statements.
As of March 31, 2008, we had debt owing to non-related parties aggregating
$5,416,013 (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.
39
<page>
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls as of the end of the period covered by
this report, March 31, 2008. This evaluation was carried out under the
supervision and with the participation of our Chief Executive Officer and Acting
Chief Financial Officer, Mr. Michael Davies, (the "Certifying Officer"). Based
upon that evaluation, our Certifying Officer concluded that as of the end of the
period covered by this report, March 31, 2008, 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 Officer 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.
We plan to recruit a Chief Financial Officer during the 2009 fiscal year and
additional officers as well as other employees experienced with the
implementation and evaluation of disclosure controls and procedures for timely
financial reporting. We also plan to make greater use of accounting consultants
and our legal counsel in assisting us in meeting our compliance needs. However,
we can offer no assurance that we will successfully implement these plans, as
our ability to do so is limited by our available capital resources.
Notwithstanding the weaknesses described above, our management has concluded
that the condensed financial statements presented in this 10-QSB fairly present,
in all material respects, the Company's financial condition, results of
operations and cash flows as of and for the three and nine month periods ended
March 31, 2008 and 2007 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 Officer, we carried out
an evaluation as to whether there has been any change in our internal control
over financial reporting during our fiscal quarter ended March 31, 2008. Based
upon this evaluation, we have concluded that there has not been any change in
our internal control over financial reporting during our fiscal quarter ended
March 31, 2008, 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.
ITEM 3A(T). CONTROLS AND PROCEDURES
Not Applicable.
40
<page>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. 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 March 31, 2008 that were not registered under the Securities
Act of 1933, as amended (the "Securities Act"), previously disclosed either in a
quarterly report on Form 10-QSB or on a current report on Form 8-K.
On March 4, 2008, we issued options to Mr. Norman Gish for the purchase of
4,000,000 shares of our common stock at an exercise price of $0.075 per share.
These options commence vesting on the date we effect our Share Reorganization
and then vest over 18 months at the rate of 222,222 shares per month, so long as
Mr. Gish serves as our Chairman of the Board. The options have a term of ten
years and will be proportionately adjused at the date of the Share
Reorganization which occurred on May 5, 2008. These securities were issued in
reliance upon exemptions from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Act") and Regulation D promulgated
under the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the three month period ended March 31, 2008, there have been no material
defaults in the payment of principal, interest, a sinking or purchase fund
installment, or any other material default not cured within 30 days, with
respect to any of our indebtedness exceeding 5% of our total assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the three
month period ended March 31, 2008.
At our annual shareholders' meeting on May 5, 2008, the following matters were
submitted and approved by our shareholders at our annual meeting:
o The amendment of our Articles of Incorporation to change our
corporate name from Reclamation Consulting & Applications, Inc. to
Alderox, Inc.
o The amendment of our Articles of Incorporation to effect a 1-for-2
reverse stock split of our common stock and to increase the
authorized number of shares of common stock from 150,000,000 to
200,000,000.
o The amendment of our Articles of Incorporation to permit our
stockholders to approve corporate actions through executing majority
written consents in lieu of holding meetings.
o The election of Michael C. Davies, Gordon W. Davies and Norman Gish
as directors.
o The approval of our 2008 Stock Incentive Plan.
41
<page>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
4.1 (3) Omnibus Amendment, dated March 28, 2008, between the Company
and Pala Investments Holdings Limited.
4.2 (3) Warrant Certificate, dated March 28, 2008, issued to Pala
Investments Holdings Limited.
4.3 (3) Promissory Note, dated March 28, 2008, issued to Pala
Investments Holdings Limited.
10.1 (1) Consulting Agreement, dated February 7, 2008 by and between
the Company and Dan Landau Corporation.
10.2 (2) Amendment No. 1 to Employment Agreement, dated March 4, 2008
by and between Paul Hughes and the Company.
10.3 (2) Amendment No. 1 to Employment Agreement, dated March 4, 2008
by and between Mike Davies and the Company.
10.4 (2) Convertible Debenture, dated effective October 1, 2007,
issued to Joan Gish.
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 Acting 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 Acting 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 Acting 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 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.
(2) Filed on March 12, 2008 as an exhibit to the Company's Current Report
on Form 8-K dated March 4, 2008 and incorporated herein by reference.
(3) Filed on April 2, 2008 as an exhibit to the Company's Current Report
on Form 8-K dated March 27, 2008 and incorporated herein by reference.
42
<page>
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.
ALDEROX, INC.
Date: June 10, 2008
/s/ MICHAEL C. DAVIES
---------------------
Michael C. Davies, Chief Executive Officer
43