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, 2006.
---------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____ to _____.
Commission file number: 000-26017
RECLAMATION CONSULTING AND APPLICATIONS, INC.
(Exact name of Small Business Issuer as specified in its charter)
Colorado 58-2222646
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
23832 Rockfield Boulevard, Suite 275
Lake Forest, California 92630
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 949-609-0590
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $0.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. |X| Yes |_| No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 43,786,360 shares as of May 22, 2006.
Transitional Small Business Disclosure Format (check one); Yes |_| No |X|
RECLAMATION CONSULTING AND APPLICATIONS, INC.
Form 10-QSB
Table of Contents
PART I - FINANCIAL INFORMATION................................................1
ITEM 1. FINANCIAL STATEMENTS........................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION...............................................19
ITEM 3. CONTROLS AND PROCEDURES....................................28
PART II - OTHER INFORMATION.................................................29
ITEM 1. LEGAL PROCEEDINGS.............................................29
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS................................................29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........30
ITEM 5. OTHER INFORMATION..........................................30
ITEM 6. EXHIBITS......................................................31
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RECLAMATION CONSULTING AND APPLICATIONS, INC.
BALANCE SHEET
(UNAUDITED)
MARCH 31, 2006
ASSETS
CURRENT ASSETS:
Accounts receivable $ 10,104
Inventories 97,023
Prepaid expenses 6,650
Other current assets 27,241
------------
Total current assets 141,018
Property and equipment, net 52,807
License, net 487,500
Deferred financing costs, net 32,667
------------
$ 713,992
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and bank overdraft $ 302,036
Accrued payroll and related expenses 212,917
Accrued interest payable 102,793
Current portion of accrued judgment payable 37,200
Notes payable - related parties 842,845
Current portion of notes payable 293,350
------------
Total current liabilities 1,791,141
Accrued judgment payable, net of current portion 37,200
Notes payable, net of discount of $1,336,745 403,144
Derivative and warrant liabilities 3,811,024
------------
Total liabilities 6,042,509
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 75,000,000 shares authorized,
43,786,360 shares issued and outstanding 437,914
Committed shares 32,400
Additional paid-in-capital 12,428,061
Treasury stock (1,500,000 shares), at cost (15,000)
Accumulated deficit (18,211,892)
------------
Total stockholders' deficit (5,328,517)
------------
$ 713,992
============
The accompanying notes are an integral part of the financial statements
1
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
--------------------------------- ---------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net revenue $ 3,580 $ 11,413 $ 64,814 $ 173,581
Cost of revenue 22,110 15,254 84,606 92,240
------------ ------------ ------------ ------------
Gross (loss) profit (18,530) (3,841) (19,792) 81,341
Operating expenses
Bad debt -- 958,968 -- 1,067,678
Selling, general and administrative
expenses 895,394 807,927 2,413,671 1,378,125
------------ ------------ ------------ ------------
Total operating expenses 895,394 1,766,895 2,413,671 2,445,803
------------ ------------ ------------ ------------
Loss from operations (913,924) (1,770,736) (2,433,463) (2,364,462)
------------ ------------ ------------ ------------
Other income (expense):
Interest income -- 20,365 -- 60,491
Interest expense (504,600) (21,759) (817,089) (71,681)
Loss on settlement of debts -- (21,975) -- (21,975)
Change in fair value of
derivative liabilities (1,435,856) -- (145,412) --
------------ ------------ ------------ ------------
Net other income (1,940,456) (23,369) (962,501) (33,165)
------------ ------------ ------------ ------------
Loss before provision for
income taxes (2,854,380) (1,794,105) (3,395,964) (2,397,627)
Provision for income taxes -- -- 800 800
------------ ------------ ------------ ------------
Net loss $ (2,854,380) $ (1,794,105) $ (3,396,764) $ (2,398,427)
============ ============ ============ ============
Net loss per share - basic and diluted $ (0.07) $ (0.06) $ (0.10) $ (0.09)
============ ============ ============ ============
Weighted-average common shares
outstanding - basic and diluted 42,813,527 28,232,118 33,978,000 26,926,496
------------ ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements
2
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2006 AND 2005
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,396,764) $(2,398,427)
Adjustments to reconcile net loss to net cash used in
operating activities:
Change in fair value of derivative and warrant
liabilities 145,412 --
Issuance of stock options and warrants for services
rendered 756,531 --
Issuance of shares for services rendered 67,400 686,432
Issuance of shares for interest expense -- 1,900
Amortization of discount on notes payable 600,755 --
Bad debts -- 1,067,678
Loss on conversion of bad debts -- 21,975
Depreciation and amortization 32,504 4,276
(Increase) decrease in operating assets:
Accounts receivable 21,111 (51,014)
Note receivable -- (159,064)
Inventories (51,331) (44,096)
Prepaid expenses and other current assets 72,437 (81,845)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 78,070 44,482
Customer deposits -- (2,052)
----------- -----------
Total adjustments 1,722,889 1,488,672
----------- -----------
Net cash used in operating activities (1,673,875) (909,755)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (12,078) (2,600)
----------- -----------
Net cash used in investing activities (12,078) (2,600)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,296,769 235,500
Payments on notes payable (610,816) (32,445)
Proceeds from loan -- 354,501
Payment of loans -- (132,500)
Receipt of cash for shares to be issued -- 110,156
Issuance of common shares for cash -- 376,100
----------- -----------
Net cash provided by financing activities 1,685,953 911,312
----------- -----------
Net change in cash and cash equivalents -- (1,043)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- 1,043
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ --
----------- -----------
The accompanying notes are an integral part of the financial statements
3
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2006 AND 2005
(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
2006 2005
----------- -----------
Cash paid for: Interest $ 131,617 $ 76,702
=========== ===========
Income taxes $ -- $ --
=========== ===========
Non-cash investing and financing activities:
Conversion of notes payable and accrued interest to common stock $ 482,770 $ 148,400
=========== ===========
Debt discount on convertible debt $ 1,900,000 $ --
=========== ===========
Issuance of notes payable for cancellation of shares to be issued $ 25,000 $ --
=========== ===========
Cancellation of 62,500 shares of common stock $ -- $ 26,275
=========== ===========
Issuance of shares and note payable in exchange for a license $ 500,000 $ --
----------- -----------
The accompanying notes are an integral part of the financial statements
4
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
Reclamation Consulting and Applications, Inc., ("us", "we", the "Company" or the
"Registrant") is a Colorado corporation that currently specializes in the
production and sale of its Alderox(TM) products, including Alderox(TM),
ASA-12(TM), DCR(TM), KR-7(TM), PaverBlend(TM), TSR(TM), and ASA Cleaners. These
products are made from our patented formula relating specifically to an improved
release agent for mitigating the sticking of asphalt, concrete and other similar
products to various surfaces Release agents are commonly applied to containers,
mixers, truck beds and forms prior to pouring asphalt or concrete into them, and
act as a barrier to mitigate adhesion of the asphalt, concrete or other material
to the relevant surfaces.
Basis of Presentation
The accompanying interim financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") for interim financial reporting. These interim financial statements are
unaudited and, in the opinion of management, include all adjustments (consisting
of normal recurring adjustments and accruals) necessary to present fairly the
balance sheet, operating results and cash flows for the periods presented in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). Operating results for the three and nine months ended March
31, 2006 are not necessarily indicative of the results that may be expected for
the year ending June 30, 2006 or for any other interim period during such year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been omitted in accordance with
the rules and regulations of the SEC. These interim 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, 2005.
Going Concern
The Company's financial statements are prepared using the accrual method of
accounting in accordance with GAAP and have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. The Company has incurred
cumulative losses of $18,211,892, including net losses of $3,396,764 and
$2,398,427 for the nine months ended March 31, 2006 and 2005, respectively, and
has a working capital deficit of $1,650,123 at March 31, 2006.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying 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
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Management has taken the following steps, which it believes are sufficient to
provide the Company with the ability to continue as a going concern: (i)
obtaining additional equity and debt financing (see Notes 8 and 10); (ii)
controlling of salaries and general and administrative expenses; (iii) managing
accounts payable; and (iv) evaluating its distribution and marketing methods.
5
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
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
recoverability of long-lived assets, the fair value of derivative and warrant
liabilities, and the fair value of common shares/options granted for services.
Actual results could differ from those estimates.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash
equivalents to include highly liquid investments with original maturities of
three months or less.
Accounts Receivable
The Company performs periodic evaluations of its customers and maintains
allowances for potential credit losses as deemed necessary. The Company
generally does not require collateral to secure its accounts receivable. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. Although the Company expects
to collect amounts due, actual collections may differ from the estimated
amounts.
Inventories
Inventories consist of raw materials and finished goods and are stated at the
lower of cost (determined using the average cost method) or market. The Company
regularly monitors potential excess or obsolete inventories by comparing the
market value to cost. When necessary, the Company reduces the carrying amount of
inventories to their market value.
Property and Equipment
Property and equipment are stated at cost. Major renewals and improvements are
charged to the asset accounts while replacements, maintenance and repairs that
do not improve or extend the lives of the respective assets are expensed. At the
time property and equipment are retired or otherwise disposed of, the asset and
related accumulated depreciation accounts are relieved of the applicable amounts
Gains or losses from retirements or sales are credited or charged to income.
The Company depreciates its property and equipment using the straight-line
method over the following estimated useful lives:
Computers and office equipment 3-5 years
Test equipment 5 years
Vehicles 5 years
6
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
Long-Lived Assets
The Company accounts for its long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the historical cost carrying value of an asset may no longer be
appropriate. The Company assesses recoverability of the carrying value of an
asset by estimating the future undiscounted net cash flows expected to result
from the asset, including eventual disposition. If the future undiscounted net
cash flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset's carrying value and fair
value or disposable value. As of March 31, 2006, the Company does not believe
there has been any impairment of its long-lived assets. There can be no
assurance, however, that market conditions will not change or demand for the
Company's products and services will continue, which could result in impairment
of long-lived assets in the future.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences attributable
to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not that such assets will not be
realized through future operations.
Convertible Debentures
In certain instances, the convertible feature of the Company's conventional
notes payable provides for a rate of conversion that is below market value (see
Note 8). This feature is characterized as a beneficial conversion feature
("BCF"), which is recorded by the Company pursuant to Emerging Issues Task Force
("EITF") Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," and EITF
Issue No. 00-27, "Application of EITF Issue No. 98-5 to Certain Convertible
Instruments."
The Company's conventional convertible debt is recorded net of the debt discount
related to the BCF. The Company amortizes the discount to interest expense over
the life of the debt on a straight-line basis, which approximates the effective
interest method.
Deferred Financing Costs
The Company records direct costs of obtaining debt as deferred financing costs
and amortizes these costs to interest expense over the life of the debentures on
a straight-line basis, which approximates the effective interest method.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, related-party notes
payable and notes payable. Pursuant to SFAS No. 107, "Disclosures about the Fair
Value of Financial Instruments," the Company is required to estimate the fair
value of all financial instruments at the balance sheet date. The Company cannot
determine the estimated fair value of related-party notes payable as the
transactions originated with related parties, nor the fair value of the
convertible notes payable as instruments similar to its convertible notes
payable could not be located. Other than these items, the Company considers the
carrying values of its financial instruments in the financial statements to
approximate their fair values.
7
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
Derivative Financial Instruments
The Company's derivative financial instruments consist of embedded derivatives
related to the Callable Secured Convertible Term Notes (the "Notes") entered
into on June 23, 2005 (see Note 8). These embedded derivatives include certain
conversion features, variable interest features, call options and default
provisions. The accounting treatment of derivative financial instruments
requires that the Company record the derivatives and related warrants at their
fair values as of the inception date of the agreement and at fair value as of
each subsequent balance sheet date ($2,773,057 as of March 31, 2006). In
addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the Notes, the Company is
required to classify all other non-employee stock options and warrants as
derivative liabilities and mark them to market at each reporting date. The fair
value of such options and warrants at March 31, 2006 totaled $1,037,967. Any
change in fair value will be recorded as non-operating, non-cash income or
expense at each reporting date. If the fair value of the derivatives is higher
at the subsequent balance sheet date, the Company will record a non-operating,
non-cash charge. If the fair value of the derivatives is lower at the subsequent
balance sheet date, the Company will record non-operating, non-cash income.
Conversion-related derivatives were valued using the Binomial Option Pricing
Model with the following assumptions: dividend yield of 0%; annual volatility of
140%; and risk free interest rate of 4.18% as well as probability analysis
related to trading volume restrictions. The remaining derivatives were valued
using discounted cash flows and probability analysis. The derivatives are
classified as long-term liabilities (see Note 8).
For the three and nine months ended March 31, 2006, the net increase in the
derivative and warrant liabilities was $1,435,856 and $145,412, respectively,
which was recorded as a component of other expense in the accompanying
statements of operations.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," as revised by
SAB No. 104. As such, the Company recognizes revenue when persuasive evidence of
an arrangement exists, title transfer has occurred, the price is fixed or
readily determinable and collectibility is probable. Sales are recorded net of
sales discounts.
Revenues from sales to distributors and agents are recognized upon shipment when
there is evidence that an arrangement exists, delivery has occurred under the
Company's standard FOB shipping point terms, the sales price is fixed or
determinable and the ability to collect sales proceeds is reasonably assured.
The contracts regarding these sales do not include any rights of return or price
protection clauses.
Net Loss Per Share
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted 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 and the "as-if converted" method for convertible debentures. 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.
8
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
For the three and nine months ended March 31 , 2006 and 2005, basic and diluted
loss per share are the same since the calculation of diluted per share amounts
would result in an anti-dilutive calculation that is not permitted and therefore
not included. Such dilutive amounts would have included shares potentially
issuable pursuant to convertible debentures (see Notes 7 and 8) and outstanding
"in-the-money" options and warrants (see Note 10).
Issuance of Stock for Non-Cash Consideration
All issuances of the Company's stock for non-cash consideration have been
assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily
determinable. The majority of the non-cash consideration received pertains to
services rendered by consultants and others and has been valued at the market
value of the shares on the dates issued. In certain instances, the Company has
discounted the values assigned to the issued shares for illiquidity and/or
restrictions on resale (see Note 10).
Stock-Based Compensation
Stock-based awards to non-employees are accounted for using the fair value
method in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," and EITF Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date used to determine the fair value of the equity instrument issued is the
earlier of the date on which the third-party performance is complete or the date
on which it is probable that performance will occur.
Stock-based compensation for employees is accounted for in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." The Company has elected to adopt the disclosure only
provisions of SFAS No. 123, which requires pro forma disclosures in the
financial statements as if the measurement provisions of SFAS No. 123 had been
adopted. In addition, the Company has made the appropriate disclosures as
required under SFAS No. 148, "Accounting for Stock-Based Compensation
- -Transition and Disclosure."
The Company's net loss and net loss per share determined under SFAS No. 123 were
the same as reported in the accompanying statements of operations for the three
and nine months ended March 31, 2006 as no options were issued to employees
during these periods.
9
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
During the period ended March 31, 2005, the Company granted 2,740,000 stock
options to employees with an exercise price of $0.25 per share. These options
are vested immediately.
The following table illustrates the effect on net loss per share if the Company
had applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation.
Net loss:
As reported $(2,398,427)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards 526,761
-----------
Pro forma $(2,925,188)
===========
Basic and diluted net loss per share:
As reported $ (0.09)
===========
Pro forma $ (0.10)
===========
The above pro forma effects of applying SFAS 123 are not necessarily
representative of the impact on reported net loss for future years. Pro forma
information using the Black-Scholes method at the date of grant was based on the
following assumptions for the three and nine months ended March 31, 2005:
2005
------------
Expected life 1-5 years
Risk-free interest rate 3.67%
Dividend yield 0%
Volatility 169%
10
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
Concentrations
The Company maintains its cash balances at financial institutions that are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
From time-to-time, the Company's cash balances exceed the amount insured by the
FDIC. Management believes the risk of loss of cash balances in excess of the
insured limit to be low.
The majority of revenues in the periods ended March 31, 2006 and 2005 were
generated from two major customers. The majority of receivables at March 31,
2006 were from the same customers.
Reclassifications
Certain amounts in March 31, 2005 financial statements have been reclassified to
conform with the March 31, 2006 presentation. Such reclassification had no
effect on net loss as previously reported.
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, 2006:
Raw materials $ 13,969
Finished goods 83,054
----------------
$ 97,023
================
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at March 31, 2006:
Computers and office equipment $ 33,028
Test equipment 32,358
Vehicles 17,409
----------------
82,795
Less accumulated depreciation (29,988)
----------------
$ 52,807
================
Depreciation expense was $4,258 and $1,474 for the three months ended March 31,
2006 and 2005, respectively, and $12,671 and $4,276 for the nine months ended
March 31, 2006 and 2005, respectively.
11
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
NOTE 6 - DEFERRED FINANCING COSTS
Deferred financing costs consist of the following as of March 31, 2006:
Cost $ 40,000
Less accumulated amortization (7,333)
---------------
$ 32,667
===============
Amortization expense was $3,333 and $7,333 for the three and nine months ended
March 31, 2006 and is included in interest expense in the accompanying
statements of operations.
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consist of the following at March 31, 2006:
Unsecured notes payable to stockholders, bearing interest
at 10 percent per annum, due on demand $ 197,263
Unsecured notes payable to stockholder, bearing interest
at 15 percent per annum, due on demand 20,140
Unsecured note payable to stockholders, bearing interest
at 10 percent per annum, convertible to common stock at
$0.25 per share, due on demand 26,000
Unsecured note payable to stockholder, bearing interest at
15 percent per annum, monthly principal and interest
payments of $1,917, due October 2006 15,000
Unsecured note payable to stockholder, bearing interest
at 15 percent per annum, convertible to common shares
at $0.75 per share, monthly principal payments of $1,833,
due June 30, 2006 9,167
Unsecured note payable to stockholder, bearing interest
at 10 percent per annum, due November 10, 2006 405,000
Unsecured note payable to stockholder, bearing interest
at 15 percent per annum, due November 25, 2006 145,275
Unsecured note payable to stockholder, $2,500 interest
payable on maturity, due August 27, 2006 25,000
-------------
$ 842,845
=============
During the nine months ended March 31, 2006, the Company issued 5,171,897 shares
of its common stock for the conversion of $273,262 of principal and interest in
connection with notes payable - related parties. The notes and accrued interest
were converted at the fair market value on the date of conversion.
During the nine months ended March 31, 2006, the Company issued 3,611,150 shares
of its common stock for the conversion of $180,508 of principal and interest in
connection with the note payable issued as part of the License transaction (see
Note 11).
12
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
Interest expense on notes payable - related parties for the three months ended
March 31, 2006 and 2005 was approximately $19,000 and $5,000, respectively.
Interest expense on notes payable - related parties for the nine months ended
March 31, 2006 and 2005 was approximately $42,000 and $13,000, respectively. All
related-party notes payable are reflected as current liabilities as they are
either due on demand or mature by November 25, 2006.
NOTE 8 - NOTES PAYABLE
Notes payable consist of the following at June 30, 2006:
Callable, secured convertible notes payable, net of unamortized discount of
$1,336,745 (see below) $ 403,144
Notes payable, bearing interest at 10 percent per annum, convertible to common
shares at $0.40 per share, due on demand, secured by substantially all
assets of the Company 125,000
Notes payable, bearing interest at 15 percent per annum, convertible to common
shares at $0.40 per share, due on demand, secured by substantially
all assets of the Company 55,850
Note payable, bearing interest at 15 percent per annum, convertible to common
shares at $0.75 per share, due on demand, secured by substantially all
assets of the Company 50,000
Notes payable, bearing interest at 10 percent per annum and paid
semi-annually, convertible to common shares at $0.40 or $0.45 per share,
due on demand, secured by substantially all assets of the Company 47,500
Unsecured note payable, bearing interest at 15 percent per annum, due on demand 15,000
--------------
696,494
Less current portion (293,350)
--------------
$ 403,144
==============
During the year ended June 30, 2005, the Company borrowed $50,001, originally
due in March 2006. The loan was repaid during the period ended December 31,
2005. Since the debt-holder had an option to convert up to the full loan amount
into restricted shares of the Company's common stock at a discounted rate of
$0.25 per share, the Company recorded a discount on the debt of $50,000 related
to BCF. The Company amortized the remaining discount of $25,000 during the three
months ended December 31, 2005 as the related debt was no longer outstanding.
Amortization of the debt discount for the three and nine months ended March 31,
2006 was $0 and $37,500, respectively.
On June 23, 2005, the Company entered into a Securities Purchase Agreement (the
"SPA") with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC
and New Millennium Capital Partners II, LLC (collectively, the "Investors") for
the sale of (i) $2,000,000 in Notes and (ii) warrants to purchase 8,000,000
shares of the Company's common stock.
The Investors are obligated to provide the Company with the funds as follows:
o $700,000 was disbursed on June 23, 2005;
o $600,000 was disbursed on July 28, 2005; and
o $700,000 was disbursed on December 29, 2005, after the related
registration statement became effective.
13
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
The Notes bear interest at 10%, mature three years from the date of issuance and
are convertible into the Company's common stock, at the investors' option, at
the lower of $0.21 per share or 50% of the average of the three lowest intraday
trading prices for the common stock on the Over-The-Counter Bulletin Board for
the 20 trading days before, but not including, the conversion date.
The full principal amount of the Notes is due upon a default under the terms of
the SPA. In addition, the Company granted the Investors a security interest in
substantially all of its assets and intellectual property. In the event the
Company breaches any representation or warranty in the SPA, the Company is
required to pay a penalty in shares or cash, at the election of the Investors,
in an amount equal to three percent of the outstanding principal amount of the
Notes per month plus accrued and unpaid interest.
The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.28 per share. The Investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the Investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds. In addition, the exercise price of the warrants will be
adjusted in the event the Company issues common stock at a price below market,
with the exception of any securities issued as of the date of the warrants or
issued in connection with the Notes issued pursuant to the SPA.
The Investors have agreed to restrict their ability to convert their Notes or
exercise their warrants and receive shares of the Company's common stock such
that the number of shares of common stock held by them in the aggregate and
their affiliates after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of common stock.
Under a Guaranty and Pledge Agreement, Mr. Gordon Davies, the Company's
president, agreed (i) to unconditionally guarantee the timely and full
satisfaction of all obligations, whether matured or unmatured, now or hereafter
existing or created and becoming due and payable to the Investors, their
successors, endorsees, transferees or assigns under the SPA and other
transaction documents to the extent of 517,400 shares of the Company's common
stock owned by Mr. Davies, and (ii) to grant to the Investors, their successors,
endorsees, transferees or assigns a security interest in the 517,400 shares, as
collateral for such obligations.
The Notes include certain features that are considered embedded derivative
financial instruments, such as a variety of conversion options, a variable
interest rate feature, events of default and a variable liquidated damages
clause. These features are described below, as follows:
o The Notes' conversion features are identified as an embedded
derivative and have been bifurcated and recorded on the Company's
balance sheet at their fair value;
o The Company has a partial call option to allow the Company to
pre-empt the conversion of the Notes in a given month and partially
offset the BCF, which is identified as an embedded derivative and
has been bifurcated and recorded on the Company's balance sheet at
its fair value;
o Annual interest on the Notes is equal to 10% provided that no
interest shall be due and payable for any month in which the
Company's trading price is greater than $0.3125 for each trading day
of the month, which potential interest rate reduction is identified
as an embedded derivative and has been bifurcated and recorded on
the Company's balance sheet at its fair value;
o The SPA includes a penalty provision based on any failure to meet
and/or maintain registration requirements for shares issuable under
the conversion of the note or exercise of the warrants, which
represents an embedded derivative, but such derivative has a de
minimus value and has not been included in this analysis at March
31, 2006; and
14
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
o The SPA contains certain events of default including not having
adequate shares registered to effectuate allowable conversions. In
that event, the Company is required to pay a conversion default
payment at 24% interest, which is identified as an embedded
derivative and has been bifurcated and recorded on the Company's
balance sheet at its fair value.
In December 2005, the Company registered the Shares in connection with the
Notes. The holders of the Notes have not demanded payment of any liquidated
damages and have informally agreed to waive all liquidated damages due and owing
to them pursuant to their registration rights. As a result, no accrual has been
made as of March 31, 2006.
The fair value of the embedded derivatives was $1,515,642 as of March 31, 2006.
In conjunction with the Notes, the Company issued warrants to purchase 8,000,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values, which
totaled $1,257,415 at March 31, 2006.
The Company recorded the first $1,900,000 of fair value of the derivatives and
warrants to debt discount, which will be amortized to interest expense over the
term of the Notes. During the nine months ended March 31, 2006, $29,000 of the
Notes was converted into 725,000 shares of common stock (see Note 10) and the
Company repaid $231,111 of the principal balance of the Notes. Amortization
expense on this debt discount for the three and nine months ended March 31, 2006
was $355,864 and $563,254, respectively.
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the
unrestricted and restricted portions of the Notes into shares of the Company's
common stock. The lower the market price of the Company's common stock at the
respective times of conversion, the more shares the Company will need to issue
to convert the principal and interest payments then due on the Notes. If the
market price of the Company's common stock falls below certain thresholds, the
Company will be unable to convert any such repayments of principal and interest
into equity, and the Company will be forced to make such repayments in cash. The
Company's operations could be materially adversely impacted if the Company is
forced to make repeated cash payments on the Notes.
Future minimum principal payments (excluding the debt discount) are as follows
under notes payable for the years ending June 30:
2006 (3 months) $ 293,350
2007 --
2008 439,889
2009 1,300,000
---------------
$ 2,033,239
===============
15
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Litigation
On May 2, 2005, a complaint was filed against the Company, our president, Gordon
Davies, and our vice president, Michael Davies. The complaint alleges, among
other things, a cause of action for breach of contract and seeks the return of
approximately $55,000, which the plaintiff alleges was loaned to the Company
under a "partly written, partly oral" agreement, pursuant to which a total of
$80,000 was loaned. Company management has denied that the plaintiff is owed the
amounts sought and intends to vigorously defend this action. Specifically,
Company management denies that any such agreement ever existed, and that the
Company never received any loans from the plaintiff. Counsel has advised Company
management that it is premature to attempt to estimate any potential outcome or
loss at this time.
In September 2005, litigation between the Company and a former lessor was
settled through arbitration. The complaint alleged 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 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, the additional $40,000 due under the terms of the original
lease will become due and payable. The $40,000 amount has not been accrued as
the Company believes the possibility of default under the agreement is remote.
The payment of the settlement is personally guaranteed by Mr. Gordon Davies.
Future minimum payments under the former lessor settlement agreement for the
years ending June 30 are:
2006 (3 months) $ 9,300
2007 37,200
2008 27,900
--------------
$ 74,400
==============
Indemnities and Guarantees
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Colorado. In connection with its facility leases, the Company h as indemnified
its lessors for certain claims arising from the use of the facilities. The
Company is also required to indemnify the Investors for certain matters as
defined under the terms of the Notes. The duration of the guarantees and
indemnities varies, and is generally tied to the life of the agreement. These
guarantees and indemnities do not provide for any limitation of the maximum
potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying balance sheet.
16
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
NOTE 10 -STOCKHOLDERS' EQUITY
Common Stock
During the nine months ended March 31, 2006 and 2005, the Company issued common
shares at various times, as described per the following. The shares issued in
fiscal 2006 for conversion of the Notes were valued at the conversion price as
defined in the Notes (see Note 8). The shares issued in fiscal 2005 were valued
at the average fair market value of the freely trading shares of the Company as
quoted on OTCBB on the date of issuance. Restricted shares were discounted for
illiquidity and restrictions on trading.
2006
During the nine months ended March 31, 2006, the Company issued 725,000 shares
of its common stock for the conversion of $29,000 of Notes.
During the nine months ended March 31, 2006, the Company issued 5,171,897 shares
of its common stock for the conversion of $273,262 of principal and interest in
connection with notes payable - related parties.
During the nine months ended March 31, 2006, the Company issued 3,611,150 shares
of its common stock for the conversion of $180,508 of principal and interest in
connection with the note payable issued as part of the License transaction (see
Note 11). As part of the same transaction, the Company issued 4,000,000 shares,
valued at the fair market value on the date of grant, in the amount of $320,000.
During the nine months ended March 31, 2006, the Company issued 662,500 shares
of its common stock for services provided in the amount of $35,000. The Company
also has committed to issue shares for services provided in the amount of
$32,400.
2005
During the nine months ended March 31, 2005, the Company issued 1,497,163 shares
of common stock for cash amounting $376,100.
During the nine months ended March 31, 2005, the Company issued 1,158,968 shares
of common stock for services amounting $271,753. The Company recorded $83,375
prepaid consulting for this issuance.
During the nine months ended March 31, 2005, the Company cancelled 62,500 shares
amounting to $26,275.
During the nine months ended March 31, 2005, the Company issued 5,000 shares of
common stock towards payment of interest expense on the notes amounting to $
1,900.
During the nine months ended March 31, 2005, the Company issued 732,500 shares
of common stock in settlement of debts amounting to $146,500. A loss on
conversion of $21,975 was incurred in this conversion of debts to equity.
Shares to be issued:
During the nine months ended March 31, 2005, the Company received $110,156 for
492,267 shares to be issued.
17
RECLAMATION CONSULTING AND APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three and Nine Months Ended March 31, 2006 and 2005
During the nine months ended March 31, 2005, the Company commits to issue 70,000
shares of common stock for services and compensation amounting to $17,000.
Stock Options and Warrants
The Company has no stock option plans.
During the nine months ended March 31, 2006, the Company granted 6,288,444 fully
vested options to various consultants for services rendered which were accounted
for using the fair value of the options granted based on the Black-Scholes
option-pricing model. The Company recorded $218,300 and $347,031 as consulting
expense and warrant liabilities during the three and nine months ended March 31,
2006.
In addition, the Company has issued 3,000,000 warrants to a consultant in fiscal
2005, 750,000 of which vested in 2005. The remainder vest at the rate of 750,000
in each of the first three quarters of 2006. The Company recorded $136,500 and
$409,500 as consulting expense and warrant liabilities for the three and nine
months ended March 31, 2006, respectively.
NOTE 11 -LICENSE
Effective January 4, 2006, the Company entered into a license agreement with
Billfighter Investments, Limited ("Billfighter"), in which the Company agreed to
grant 4,000,000 shares of common stock and a note payable in the amount of
$180,000 for the ability to utilize certain technology owned by Billfighter. The
shares were valued at $320,000 based on the fair market value on the date of
grant of $0.08 per share, resulting in a total value of $500,000. The principal
of $180,000 and interest of $508 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 the cost on a straight-line basis over this term. Amortization
expense of $12,500 was recognized during the three and nine months ended March
31, 2006 and is included in selling, general and administrative expenses in the
accompanying statements of operations.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following presentation of Management's Discussion and Analysis has been
prepared by internal management and should be read in conjunction with the
financial statements and notes thereto included in Item 1 of this Quarterly
Report on Form 10-QSB. Except for the historical information contained herein,
the discussion in this report contains certain forward-looking statements that
involve risks and uncertainties, such as statements of our business plans,
objectives, expectations and intentions as of the date of this filing. The
cautionary statements about reliance on forward-looking statements made earlier
in this document should be given serious consideration with respect to all
forward-looking statements wherever they appear in this report, notwithstanding
that the "safe harbor" protections available to some publicly reporting
companies under applicable federal securities law do not apply to us as an
issuer of penny stocks. Our actual results could differ materially from those
discussed here.
Reclamation Consulting and Applications, Inc., ("us", "we", the "Company" or the
"Registrant") is a Colorado corporation that currently specializes in the
production and sale of its Alderox(TM) products, including AlderoxTM ASA-12TM,
DCRTM, KR-7TM, PaverBlendTM, TSRTM, and ASA Cleaners. We were originally formed
in 1976, under the name "Vac-Tec Systems, Inc." and operated primarily in the
glass vaccum coating business. Subsequently, in early 1977, we were reorganized
as a public shell corporation with no significant assets.
Presently, we are engaged primarily in the production, sale and distribution of
our Alderox(TM) line of products which are made from our patented formula
relating specifically to an improved release agent for mitigating the sticking
of asphalt, concrete and other similar products to various surfaces. Release
agents are commonly applied to containers, mixers, truck beds and forms prior to
pouring asphalt or concrete into them, and act as a barrier to mitigate adhesion
of the asphalt, concrete or other material to the relevant surfaces. The release
agents included in our Alderox(TM) line of products are comprised mostly of
oils, especially a 100% biodegradable and otherwise environmentally friendly oil
such as soybean oils. Our Alderox(TM) 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(TM) line of products includes ASA-12TM, DCRTM, KR-7TM, PaverBlendTM,
TSRTM, and ASA Cleaners. ASA-12(TM) is an asphalt release agent and DCR TM is a
drag chain lubricant, each of which was developed by us in response to the need
for effective, economical and environmentally-friendly products in the asphalt
industry. PaverBlendTM is also an asphalt related product used to keep paving
equipment free from debris. KR7TM is a concrete release agent also developed by
us in response to the concrete industry's need for effective, economical and
environmentally-friendly product. TSRTM is an environmentally friendly product
for the oil sands industry to reduce the build-up of clay, lime and mud on the
undercarriages and sides of transport vehicles and equipment. Our application
equipment includes the Reliant 1 and Reliant 2 control spray systems. Reliant 1
was specifically designed to control the amount and temperature of Alderox
ASA-12TM sprayed onto the bed of asphalt haul trucks. The pump system draws from
a tank that stores the AlderoxTM product. Reliant 2 was designed as a
specialized spray system for drag chain lubrication for use within the asphalt
production and mining industries. Drag chains are large industrial chains used
in the asphalt industry to drag or transport asphalt from production to
distribution containers.
As reflected in our Financial Statements included in Item 1 of Part I of this
Report, we have incurred cumulative losses of $18,211,892, including net losses
of $3,396,764 and $2,398,427 for the nine-month periods ended March 31, 2006 and
2005, respectively. At March 31, 2006, we have a working capital deficit of
$1,650,123. As a result, recoverabiltiy of a major portion of the recorded
assets reflected in our balance sheet included with our Financial Statements is
dependent upon future sustainable profitable operation of our Company, which, in
turn, is dependent upon our ability to raise additional capital, obtain
financing, increase our customer base and manage our costs. Our management has
taken the following steps, which it believes are sufficient to provide our
Company with the ability to continue as a going concern: (a) obtaining
additional equity and debt financing (see Notes 8 and 10 to our Financial
Statements included herewith); (b) controlling of salaries and general and
administrative expenses; (c) managing accounts payable, and (d) evaluating our
distribution and marketing methods.
19
Exclusive License for the Reliant III Automated Spray Application
As disclosed on a current report on Form 8-K, filed with the Securities and
Exchange Commission (the "Commission") on January 9, 2006, we entered into an
Exclusive License Agreement, effective January 4, 2006, with Billfighter
Investments, Limited, an Anguilla limited liability company (the "Licensor")
pursuant to which we were granted the sole and exclusive, worldwide right and
license to use, produce, manufacture, market, sell and distribute the Reliant
III automated spray application system solely within mining and aggregate
industries, including the exclusive, worldwide right to modify, at our expense,
the Reliant III for application of our Alderox(TM) line of products, including
our Alderox(TM) ASA-12 release agent to rail cars. The Reliant III is a fully
automated robotic system used for the application of release agents such as our
Alderox(R) release agent products. The license granted pursuant to this
Exclusive License Agreement will continue until terminated by either party due
to a breach of the other's representations, warranties or covenants as contained
in the Exclusive License Agreement, or by us upon six months prior written
notice to Licensor.
As consideration for the license to the Reliant III, we have agreed to (i) issue
4,000,000 restricted shares of our common stock with piggyback registration
rights pursuant to a Subscription Agreement, dated as of January 4, 2006, by and
between us and Licensor (the "Subscription Agreement"); (ii) pay Licensor the
aggregate principal sum of One Hundred Eighty Thousand Dollars ($180,000)
accruing interest on the balance outstanding at the rate of 10% per annum
pursuant to a Promissory Note (the "Note"), dated as of January 4, 2006; and
(iii) pay cash royalties equal to ten percent (10%) of the net revenues
generated by us from the sale and distribution of our Alderox(TM) products for
application to rail cars using the Reliant III. Any failure to repay Licensor
all amounts due under the Note when due constitutes an "Event of Default" and
allows Licensor to declare such amounts immediately due and payable without
presentment, demand, protest or other notice of any kind. We believe the
issuance of the restricted shares of our common stock to Licensor pursuant to
the Subscription Agreement is exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) and/or Regulation D promulgated
thereunder.
Subsequent Event
Exclusive Distribution Agreement with Applied Industrial Technologies, Inc.
As disclosed on a current report on Form 8-K, filed with the Commission on April
6, 2006, we entered into an exclusive Distributor Agreement, effective April 4,
2006 (the "Agreement") with Applied Industrial Technologies, Inc., an Ohio
corporation (the "Distributor"). Pursuant to the Agreement, we appointed the
Distributor the exclusive distributor of our `Alderox(R)', ASA-12(R), KR7(R),
DCR(R), Paver Blend(TM) and TSR(R) products (the "Products") in the United
States, Puerto Rico, Canada and Mexico (the "Territory"), except for any
relationships that we may have with distributors of our Products existing at the
time we entered into the Agreement and set forth on Schedule A to the Agreement.
The term of the distributorship engagement is two years from April 4, 2006,
although the parties, by mutual written agreement, may renew the Agreement for
additional terms (as may be extended, the "Term").
Under the terms of the Agreement, the Distributor has agreed to purchase our
Products from us, freight-on-board ("FOB") our production facilities. Payment
terms are net 30 days or net 10 days with a 2% discount..
Distributor has agreed to do the following:
a. use its best efforts to professionally and actively promote and sell
our Products in the Territory;
b. only sell our Products under the trademarks for the Products owned
by us;
c. maintain sufficient inventories of our Products, at Distributor's
discretion, to enable Distributor to effectively satisfy demand for
our Products in the Territory;
d. in distributing our Products in the Territory, comply with all
provisions of applicable laws, rules and regulations;
20
e. cooperatively work with us in matters relating to the marketing,
sales, forecasting, training, servicing, and corresponding with
customers;
f. market, through its marketing department, only the asphalt and
cement product release agents, form oils, curing agents, lubricants
and cleaners, which are used in the construction, paving and similar
industries and which are sold under the our trademarks `Alderox(R)',
ASA-12(R), KR7(R), DCR(R), Paver Blend(TM) and TSR(R) in its
industry marketing programs during the Term;
g. not sell the Products through sub-distributors without our prior
written consent; and
h. not export our Products outside the Territory without our prior
written consent.
Pursuant to the Agreement, we have agreed to (a) supply the Distributor with our
Products as requested; (b) supply the Distributor with sales and technical
assistance regarding our Products to support the Distributor's sales effort; and
(3) supply the Distributor with sales and promotional materials from time to
time.
The Agreement can be terminated by either party upon sixty (60) days' prior
written notice in the event of a breach of the Agreement by the other party
after allowing for a reasonable cure period, or upon ninety (90) days' prior
written notice to the other party. Upon termination of the Agreement, we have
agreed to accept a one time stock return of salable standard merchandise without
charging the Distributor a restocking fee and to credit the Distributor's
account the greater of Distributor's actual purchase price of the returned stock
or the current price then in effect at the time of the return.
Critical Accounting Policies
There were no changes to our critical accounting policies as described in our
June 30, 2005 10-KSB.
21
Results of Operations for the Three Months Ended March 31, 2006 and 2005.
For the Three Months Ended
- --------------------------------------------------------------------------------------------------------------------------------
March 31, 2006 March 31, 2005 Change Change
-------------- -------------- ------ ------
% of % of
$ Revenue $ Revenue $ %
----------- ------------ ----------- ---------- ---------- ----------
Net Revenues $ 3,580 100.00% $ 11,413 100.00% (7,833) (68.63)%
Cost of Revenues 22,110 617.60% 15,254 133.65% 6,856 44.95%
----------- ----------- ----------- ----------
Gross Profit
(Loss) (18,530) (517.60)% (3,841) (33.65)% (14,689) 382.43%
Operating Expenses
Bad Debt -- --% 958,968 8,402.42% (958,968) (100.00)%
Selling, General
and
Administrative
Expenses 895,394 25,011.01% 807,927 7,079.01% 87,467 10.83%
----------- ----------- ----------- ----------
Total Operating
Expenses $ 895,394 25,011.01% $ 1,766,895 15,481.42% (871,501) (49.32)%
----------- -----------
Income (Loss)
from Operations $ (913,924) (25,528.60)% $(1,770,736) (15,515.08)% 856,812 (48.39)%
----------- ----------- ----------- ----------
Other Income
(Expense)
Interest Income -- --% 20,365 178.44% (20,365) (100.00)%
Interest Expense (504,600) (14,094.97)% (21,759) (190.65)% (482,841) 2,219.04%
Loss on
settlement of
Debts -- --% (21,975) (192.54)% 21,975 100.00%
Change in fair
value of
derivative
liabilities (1,435,856) (40,107.71)% -- --% (1,435,856)
----------- ----------- ----------- ----------
Net Other Income
(Expense) $(1,940,456) (54,202.68)% $ (23,369) (204.76)% (1,917,087) 8,203.55%
----------- ----------- ----------- ----------
Loss before
provision for
income tax (2,854,380) (79,731.28)% (1,794,105) (15,719.84)% (1,060,275) 59.10%
Provision for
Income Taxes 0 0 0
----------- ----------- ----------- ----------
Net Income (Loss) $(2,854,380) (79731.28)% $(1,794,105) (15,719.84)% (1,060,275) 59.10%
=========== =========== =========== ==========
22
Net Revenues
Net revenues for the three-month period ended March 31, 2006 decreased to $3,580
from $11,413 for the three month period ended March 31, 2005. This decrease in
net revenues of $7,833, or approximately 68.63% over the prior period is due
primarily to the reorganization of our sales representative infrastructure and
the seasonality of the trade that we market.
Cost of Revenues
Cost of revenues for the three-month period ended March 31, 2006 increased to
$22,110 from $15,254 for the three-month period ended March 31, 2005. This
increase in cost of revenues of $6,856, or approximately 44.95% over the prior
period is due primarily to the amount of our fixed costs that are incurred
regardless of the level of sales.
Gross Loss
For the three-month period ended March 31, 2006, we had a gross loss of $18,530,
compared to a gross loss of $3,841 for the three-month period ended March 31,
2005. This increase in our gross losses of approximately $14,689 or
approximately 382.43% over the prior period is due primarily to the
reorganization of our production and distribution systems and sales
representative infrastructure along with the seasonality of the trade we market,
along with the fixed costs discussed above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three-month period ended
March 31, 2006 increased to $895,394 from $807,927 for the three-month period
ended March 31, 2005. This increase in selling, general and administrative
expenses of $87,467, or approximately 10.83% over the prior period is due
primarily to the issuance of options and warrants to consultants in 2006 valued
at $354,800.
Interest Income
We did not have any interest income for the three-month period ended March 31,
2006. We had interest income of $20,365 during the three-month period ended
March 31, 2005, which was due to interest we earned on our revolving loan
agreement with North American Systems, Inc., which was terminated in fiscal
2005.
Interest Expense
Interest expense for the three-month period ended March 31, 2006 increased to
$504,600 from $21,759 for the three-month period ended March 31, 2005. This
increase in interest expense of $482,841, or approximately 2,219.04% over the
prior period is due primarily to the amount of debt discounts amortized of
$355,864 with no similar amounts in the prior year.
Change in Fair Value of Derivative and Warrant Liabilities
Change in fair value of derivative and warrant liabilities for the three-month
period ended March 31, 2006 was $1,435,856 and we had no change in the fair
value of derivative liabilities for the three-month period ended March 31, 2005.
The 2006 amount was primarily a result of an increase in the estimated stock
volatility along with an increase in our stock price, which caused an increase
to the computed liability value at March 31, 2006.
Net Loss
Net loss for the three-month period ended March 31, 2006 increased to $2,854,379
from $1,794,105 for the three-month period ended March 31, 2005. This increase
in net loss of $1,060,275 or approximately 59.10% over the prior period is due
primarily to the factors described above.
23
Results of Operations for the Nine Months Ended March 31, 2006 and 2005.
For the Nine Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 2006 March 31, 2005 Change Change
-------------- -------------- ------ ------
% of % of
$ Revenue $ Revenue $ %
----------- ---------- ----------- ----------- ---------- ---------
Net Revenues $ 64,814 100.00 % $ 173,581 100.00 % (108,767) (62.66)%
Cost of Revenues 84,606 130.54 % 92,240 53.14 % (7,634) (8.28)%
----------- ---------- ----------- ----------
Gross Profit
(Loss) (19,792) (30.54)% 81,341 46.86 % (101,133) 124.33%
Operating Expenses
Bad Debt -- -- 1,067,678 615.09 % (1,067,678) (100.00)%
Selling,
General and
Administrative
Expenses 2,413,671 3,724.00 % 1,378,125 793.94 % 1,035,546 75.14 %
----------- ---------- ----------- ----------
Total Operating
Expenses $ 2,413,671 3,724.00 % $ 2,445,803 1409.03 % (32,132) (1.31)%
----------- -----------
Income (Loss)
from Operations $(2,433,463) (3,754.53)% $(2,364,462) (1,362.17)% (69,001) 2.92 %
----------- ---------- ----------- ----------
Other Income
(Expense)
Interest Income -- -- 60,491 34.85 % (60,491) (100.00)%
Interest
Expense (817,089) (1,260.67)% (71,681) (41.30)% (745,408) 1,039.9 %
Loss on
settlement of
Debts -- -- (21,975) (12.66)% 21,975 100.00 %
Change in fair
value of
derivative
liabilities (145,412) (2,24.35)% -- -- (145,412)
----------- ---------- -----------
Net Other Income
(Expense) $ (962,501) (1,485.02)% $ (33,165) (19.11)% (929,336) 2,802.16 %
----------- ---------- ----------- ----------
Loss before
provision for
income tax (3,395,964) (5,239.55)% (2,397,627) (1,381.27)% (998,337) 41.64 %
Provision for
Income Taxes 800 800 -- --
----------- ---------- ----------- ----------
Net Income (Loss) $(3,396,764) (5,240.79)% $(2,398,427) (1,381.73)% (998,337) 41.62 %
=========== ========== =========== ==========
24
Net Revenues
Net Revenues for the nine-month period ended March 31, 2006 decreased to $64,814
from $173,581 for the nine-month period ended March 31, 2005. This decrease in
net revenues of $108,767, or approximately 62.66% over the prior period is due
primarily to the reorganization of our production and distribution systems, the
seasonality of the products we market, the further development of product
application equipment and financing activities.
Cost of Revenues
Cost of revenues for the nine-month period ended March 31, 2006 decreased to
$84,606 from $92,240 for the nine-month period ended March 31, 2005. This
decrease in cost of revenues of $7,634, or approximately 8.28% over the prior
period is due primarily to the amount of our fixed costs that are incurred
regardless of the level of sales.
Gross Profit/Loss
For the nine-month period ended March 31, 2006, we had a gross loss of $19,792,
compared to a gross profit of $81,341 for the nine-month period ended March 31,
2005. This decline in our profitability of approximately $101,133 or
approximately 124.33% over the prior period is due primarily to the
reorganization of our production and distribution systems and sales
representative infrastructure along with the seasonality of the trade we market,
along with the fixed costs discussed above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine-month period ended
March 31, 2006 increased to $2,413,671 from $1,378,125 for the nine-month period
ended March 31, 2005. This increase in selling, general and administrative
expenses of $1,035,546, or approximately 75.14% over the prior period is due
primarily to the issuance of options and warrants to consultants in 2006 valued
at 756,531.
Interest Income
We did not have any interest income for the nine-month period ended March 31,
2006. We had interest income of $60,491 during the nine-month period ended March
31, 2005, which was due to interest we earned on our the revolving loan
agreement with North American Systems, Inc., which was terminated in fiscal
2005.
Interest Expense
Interest expense for the nine-month period ended March 31, 2006 increased to
$817,089 from $71,681 for the nine-month period ended March 31, 2005. This
increase in interest expense of $745,408, or approximately 1,039.90% over the
prior period is due primarily to the amount of debt discounts amortized of
$600,755 with no similar amounts in the prior year.
Change in Fair Value of Derivative and Warrant Liabilities
Change in fair value of derivative and warrant liabilities for the nine-month
period ended March 31, 2006 was $145,412, and we had no change in the fair value
of derivative liabilities for the nine-month period ended March 31, 2006. The
2006 amount is primarily a result of an increase in the estimated stock
volatility along with an increase in our stock price, which caused an increase
to the computed liability value at March 31, 2006.
Net Loss
Net loss for the nine-month period ended March 31, 2006 decreased to $3,396,764
from $2,398,427 for the nine-month period ended March 31, 2005. This decrease in
net loss of $998,337, or approximately 41.62% over the prior period is due
primarily to the factors described above.
25
Liquidity and Capital Resources
For the nine-months ended March 31, 2006, we used cash of $1,673,875 in our
operating activities, used cash of $12,078 in our investing activities, and
received cash of $1,685,953 in our financing activities.
Cash Flows from Operating Activities
Net cash used in our operating activities of $1,673,875 for the nine months
ended March 31, 2006 was primarily attributable to a net loss of $3,396,764, and
adjustments to reconcile net loss to net cash used in operating activities of
$1,722,889 consisting of: (a) change in fair value of derivative and warrant
liabilities aggregating $145,412, (b) issuance of stock options and warrants for
services rendered in the amount of $756,531, (c) issuance of shares for services
rendered aggregating $67,400, (d) amortization of discount on notes payable
aggregating $600,755, (e) depreciation and amortization $32,504, (f) decrease in
accounts receivable in the amount of $21,111, (g) increase in inventories of
$51,331, (h) decrease in prepaid expenses and other current assets in the amount
of $72,437, and (i) increase in accounts payable and accrued expenses in the
amount of $78,070.
Cash Flows from Investing Activities
Net cash used in our investing activities of $12,078 for the nine months ended
March 31, 2006 was for the acquisition of property and equipment.
Cash Flows from Financing Activities
Net cash provided by our financing activities of $1,685,953 for the nine months
ended March 31, 2006 was proceeds on notes payable of $2,296,769 offset by
payments on notes payable of $610,816.
Internal Sources of Liquidity
For the nine months ended March 31, 2006, the funds generated from our
operations were insufficient to fund our daily operations. For the nine months
ended March 31, 2006, we had a gross loss of $19,792, and we were thus unable to
meet our operating expenses of $2,413,671 for the same period. There is no
assurance that funds from our operations will meet the requirements of our daily
operations in the future. In the event that funds from our operations will be
insufficient to meet our operating requirements, we will need to seek other
sources of financing to maintain liquidity.
External Sources of Liquidity
At March 31, 2006, we have debt owing to related parties aggregating $842,845 as
summarized in Note 7 to the financial statements.
At March 31, 2006, we have debt owing to non-related parties aggregating
$2,033,239 (after adding back unamortized debt discounts) as summarized in Note
8 to the financial statements.
We actively pursue all potential financing options as we look to secure
additional funds to both stabilize and grow our business operations. Our
management will review any financing options at their disposal, and will judge
each potential source of funds on its individual merits. There can be no
assurance that we will be able to secure additional funds from debt or equity
financing, as and when we need to, or if we can, that the terms of such
financing will be favorable to us or our existing stockholders. As a result, our
independent registered public accounting firm has issued a "going concern"
modification to its report on our audited financial statements for the year
ended June 30, 2005.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 23, 2005 for the sale
of (i) $2,000,000 in secured convertible notes and (ii) warrants to buy
8,000,000 shares of our common stock. The four accredited investors, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC subscribed for 50.1%, 33.8%, 14.4% and 1.7%,
respectively, of the total offering. Each accredited investor purchased, or will
purchase, such percentage of each closing under the Securities Purchase
Agreement.
26
Accordingly, we have received a total of $2,000,000 pursuant to the Securities
Purchase Agreement. Pursuant to the Securities Purchase Agreement, we have
issued 8,000,000 warrants to purchase shares of common stock.
The proceeds received from the sale of the secured convertible notes were used
for business development purposes, working capital needs, pre-payment of
interest, payment of consulting and legal fees and purchasing inventory.
The secured convertible notes bear interest at 10%, mature three years from the
date of issuance, and are convertible into our common stock, at the investors'
option, at the lower of (i) $0.21 or (ii) 50% of the average of the three lowest
intraday trading prices for the common stock on a principal market for the 20
trading days before but not including the conversion date. The full principal
amount of the secured convertible notes is due upon default under the terms of
secured convertible notes. The warrants are exercisable until five years from
the date of issuance at a purchase price of $0.28 per share. In addition, the
conversion price of the secured convertible notes and the exercise price of the
warrants will be adjusted in the event that we issue common stock at a price
below the fixed conversion price, below market price, with the exception of any
securities issued in connection with the Securities Purchase Agreement. The
conversion price of the secured convertible notes and the exercise price of the
warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the selling stockholder's position. The selling stockholders have
contractually agreed to restrict their ability to convert or exercise their
warrants and receive shares of our common stock such that the number of shares
of common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock. In addition, we have granted the investors a security interest in
substantially all of our assets and intellectual property and registration
rights.
In connection with the Securities Purchase Agreement dated June 23, 2005, we
granted the investors registration rights. Pursuant to the registration rights
agreement, if we did not file the registration statement by August 7, 2005, or
if we did not have the registration statement declared effective on or before
October 21, 2005, we are obligated to pay liquidated damages in the amount of
2.0% per month of the face amount of the issued and outstanding secured
convertible notes, which equals $26,000, until the registration statement is
declared effective. At our option, these liquidated damages can be paid in cash
or restricted shares of our common stock. If we decide to pay the liquidated
damages in cash, we would be required to use our limited working capital and
potentially raise additional funds. If we decide to pay the liquidated damages
in shares of common stock, the number of shares issued would depend on our stock
price at the time that payment is due. The shares were registered in December
2005, and the Investors have not demanded payment of any liquidated damages and
have informally agreed with us to waive all liquidated damages due and owing to
them pursuant to the registration rights agreement.
We will still need additional investments in order to continue operations to
cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations.
Off Balance Sheet Arrangements
We do not have nor do we maintain any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to our investors.
27
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls as of the end of the period covered by
this report, March 31, 2006. This evaluation was carried out under the
supervision and with the participation of our President, Mr. Michael C. Davies
and our Chief Financial Officer, Mr. Gordon Davies (collectively, the
"Certifying Officers"). Based upon that evaluation, our Certifying Officers
concluded that as of the end of the period covered by this report, March 31,
2006, our disclosure controls and procedures were effective in timely alerting
management to material information relating to us and required to be included in
our periodic filings with the Securities and Exchange Commission (the
"Commission").
Disclosure controls and procedures are controls and procedures that are designed
to ensure that information required to be disclosed in our periodic reports
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our periodic
reports that we file under the Exchange Act is accumulated and communicated to
our management, including our principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Further, as required by Rule 13a-15(d) of the Exchange Act and under the
supervision and with the participation of our Certifying Officers, we carried
out an evaluation as to whether there has been any change in our internal
control over financial reporting during our fiscal quarter ended March 31, 2006.
Based upon this evaluation, we have concluded that there has not been any change
in our internal control over financial reporting during our fiscal quarter ended
March 31, 2006, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Internal control over financial reporting is a process designed by, or under the
supervision of, our principal executive and principal financial officers, or
persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those policies
and procedures that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings relating to claims
arising out of operations in the normal course of business, as well as claims
arising from our status as an issuer of securities and/or a publicly reporting
company. Below is a summary of the known pending and threatened litigation
involving our Company and/or our officers and directors on matters related to
our Company as of the date of this Report.
o On May 2, 2005, a complaint was filed by Pacific Business Capital
Corporation against us, our President, Gordon Davies, and our Vice
President, Michael Davies, in the matter entitled Pacific Business
Capital vs. Reclamation Consulting and Applications, Inc., et. al.,
Case No. 05CC05777, filed with the Superior Court of State of
California, County of Orange. The complaint alleges, among other
things, a cause of action for breach of contract and seeks the
return of approximately $55,000, which the plaintiffs allege they
loaned us under a "partly written, partly oral" agreement, pursuant
to which a total of $80,000 was loaned to us. Our management has
denied that the plaintiffs are owed the amounts sought and we intend
to vigorously defend this action on the basis brought by the
plaintiffs. Specifically, our management denies that any such
agreement for such loan ever existed, and that we never received any
funds pursuant thereto, if any, from the plaintiffs. On August 2,
2005, a hearing on our Demurrer to the Complaint, filed on May 2,
2005, was held, pursuant to which the court granted our Demurrer on
the grounds set forth therein, but granted plaintiffs leave to amend
their Complaint. On August 29, 2005, plaintiffs again filed an
amended complaint against us, Mr. Gordon Davies, and Mr. Michael
Davies. This matter is currently in the discovery phase and, as
such, our counsel has advised us that it is premature to attempt to
estimate any potential outcome or loss at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2006, we issued and/or sold the
securities set forth below without registration under the Securities Act of 1933
No underwriters were involved in these transactions. Selling prices for the
shares may have been discounted from then prevailing market prices to reflect
the restricted status of the shares or the urgency of our need for capital. When
shares were issued for property or services, in each instance the valuation of
the property or services was based on the board of director's determination of
the value received for the shares, unless otherwise specified below.
In the case of sales of our securities, such securities were sold by our
officers without the use of an underwriter. In effecting the sales, we relied on
the exemption authority provided by Section 4(2) of the Securities Act of 1933,
as amended, relating to sales not involving any public offering, and Regulation
S, relating to securities sold in bona fide offshore transactions. We believe
that all such sales were made by our executive officers in private, negotiated
transactions without any advertising, public announcements or general
solicitation. The purchasers of the shares represented themselves in writing to
be, and we believe them to be, members of one or more of the following classes
of purchaser:
a. Officers, directors, promoters or control persons of the issuer;
b. Accredited investors, as defined in Rule 501 under Regulation D of
the Securities Act;
c. Individuals who:
i. Are knowledgeable and sophisticated in investment matters;
ii. Are able to assess the risks of an investment such as in our
securities;
iii. Are financially able to bear the risk of a loss of their
entire investment; and
iv. Have access to pertinent information regarding the issuer and
its operations.
The shares are subject to the resale provisions of Rule 144 under the Securities
Act of 1933, as amended, and may not be sold or transferred without registration
except in accordance with that rule. Certificates representing the securities
bear a legend to that effect.
29
Issuance of Common Stock
During the nine months ended March 31, 2006, we issued 725,000 shares of our
common stock for the conversion of $29,000 of Notes.
During the nine months ended March 31, 2006, we issued 5,171,897 shares of our
common stock for the conversion of $273,262 of principal and interest in
connection with notes payable to related parties (See Note 7 to the Financial
Statements).
During the nine months ended March 31, 2006, we issued 3,611,150 shares of our
common stock for the conversion of $180,508 of principal and interest in
connection with the note payable issued as part of the License agreement with
Billfighter Investments, Ltd. for the Reliant III automated spray, as discussed
elsewhere in this Report. As part of this transaction, we issued 4,000,000
shares, valued at the fair market value on the date of grant, in the amount of
$320,000.
During the nine months ended March 31, 2006, we issued 662,500 shares of our
common stock for services provided in the amount of $35,000. We also have
committed to issue shares for services provided in the amount of $32,400.
Issuance of Stock Options and Warrants
During the nine months ended March 31, 2006, we granted 6,288,444 fully vested
options to various consultants for services rendered which were accounted for
using the fair value of the options granted based on the Black-Scholes
option-pricing model. We recorded $218,300 and $347,031 as consulting expense
during the three and nine months ended March 31, 2006.
In addition, we has issued 3,000,000 warrants to a consultant in fiscal 2005,
750,000 of which vested in 2005. The remainder vest at the rate of 750,000 in
each of the first three quarters of 2006. We recorded $136,500 and $409,500 as
consulting expense for the three and nine months ended March 31, 2006,
respectively.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the three month period ended March 31, 2006, there have been no material
defaults in the payment of principal, interest, a singking 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, 2006.
ITEM 5. OTHER INFORMATION
None
30
ITEM 6. EXHIBITS
Exhibit No. Description
3.(I) (1) Articles of Incorporation of Vac-Tec Systems, Inc. dated February 27, 1976.
3.(I) (1) Articles of Amendment to the Articles of Incorporation of Val-Tec Systems, Inc. dated March 10, 1976.
3.(I) (1) Articles of Incorporation of Vac-Tec Systems, Inc. dated May 12, 1976.
3.(I) (1) Articles of Amendment to Articles of Incorporation of Vac-Tec Systems, Inc. dated February 15, 1998.
3.3 (4) Articles of Amendment to the Articles of Incorporation of Recycling Centers of America, Inc. dated January 16,
2002.
3(II) (1) By-laws of Val-Tec Systems, Inc.
4.1 (9)(15) Securities Purchase Agreement, dated June 23, 2005, by and among Reclamation Consulting and
Applications, Inc. and AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC.
4.2 (9) Callable Secured Convertible Note issued to AJW Offshore, Ltd., dated June 23, 2005.
4.3 (9) Callable Secured Convertible Note issued to AJW Qualified Partners, LLC, dated June 23, 2005.
4.4 (9) Callable Secured Convertible Note issued to AJW Partners, LLC, dated June 23, 2005.
4.5 (9) Callable Secured Convertible Note issued to New Millennium Capital Partners II, LLC, dated June 23, 2005.
4.6 (9) Stock Purchase Warrant issued to AJW Offshore, Ltd., dated June 23, 2005.
4.7 (9) Stock Purchase Warrant issued to AJW Qualified Partners, LLC, dated June 23, 2005.
4.8 (9) Stock Purchase Warrant issued to AJW Partners, LLC, dated June 23, 2005.
4.9 (9) Stock Purchase Warrant issued to New Millennium Capital Partners II, LLC, dated June 23, 2005.
4.10 (9) Registration Rights Agreement, dated as of June 23, 2005, by and among Reclamation Consulting and
Applications, Inc., AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium
Capital Partners II, LLC.
4.11 (9) Security Agreement, dated as of June 23, 2005, by and among Reclamation Consulting and Applications, Inc., AJW
Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC.
4.12 (9) Intellectual Property Security Agreement, dated June 23, 2005, by and among Reclamation Consulting and
Applications, Inc., AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium
Capital Partners II, LLC.
31
4.13 (9) Guaranty and Pledge Agreement, dated June 23, 2005, by and among Reclamation Consulting and Applications,
Inc., Gordon Davies, AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium
Capital Partners II, LLC.
4.14(15) Callable Secured Convertible Note issued to AJW Offshore, Ltd., dated July 28, 2005.
4.15(15) Callable Secured Convertible Note issued to AJW Qualified Partners, LLC, dated July 28, 2005.
4.16(15) Callable Secured Convertible Note issued to AJW Partners, LLC, dated July 28, 2005.
4.17(15) Callable Secured Convertible Note issued to New Millennium Capital Partners II, LLC, dated July 28, 2005.
4.18(15) Stock Purchase Warrant issued to AJW Offshore, Ltd., dated July 28, 2005.
4.19(15) Stock Purchase Warrant issued to AJW Qualified Partners, LLC, dated July 28, 2005.
4.20(15) Stock Purchase Warrant issued to AJW Partners, LLC, dated July 28, 2005.
4.21(15) Stock Purchase Warrant issued to New Millennium Capital Partners II, LLC, dated July 28, 2005.
10.1 (4) Employment Agreement between Reclamation Consulting and Applications, Inc. and Gordon Davies, dated as of
January 1, 2002.
10.2 (4) Employment Agreement between Reclamation Consulting and Applications, Inc. and Michael Davies, dated as of
January 1, 2002.
10.3 (5) Distribution Agreement between Progear Environmental Solutions, Inc. and Reclamation Consulting and
Applications, Inc. dated June 4, 2003.
10.4 (5) Professional Services Agreement between Paul Petit and Reclamation Consulting and Applications, Inc. dated May
6, 2003.
10.5 (5) Manufacturing Agreement between North American Systems, Inc. and Reclamation Consulting and Applications, Inc.
dated October 14, 2003.
10.6 (5) Revolving Loan Agreement between North American Systems, Inc. and Reclamation Consulting and Applications,
Inc. dated July 30, 2003.
10(A) (1) Employment, Confidentiality and Non-Competition Agreement between Recycling Centers of America, Inc. and Bruce
Selk, dated as of May 26, 1999.
10(B) (1) Employment Agreement between Recycling Centers of America, Inc. and Michael Davies, dated as of June 1, 1999.
10(C) (1) Employment Agreement between Recycling Centers of America, Inc. and Gordon Davies, dated as of June 1, 1999.
10(D) (1) OEM Agreement between Pall Filtron, Inc. and Brody Special Projects Company, dated as of June 30, 1999.
32
10(E) (1) Transfer Agreement by and among Recycling Centers of America, Inc. and Steve Madsen and John D. Ewing, dated
as of November 15, 1999.
10.7 (6) Employment Agreement between Reclamation Consulting and Applications, Inc. and Michael Davies, dated June 30,
2004.
10.8 (6) Employment Agreement between Reclamation Consulting and Applications, Inc. and Gordon Davies, dated June 30,
2004.
10.9 (6) Distributorship Agreement between Reclamation Consulting and Applications, Inc. and North American Marketing,
Inc., dated July 30, 2003.
10.10 (5) Distributorship Agreement between Reclamation Consulting and Applications, Inc. and North American Systems,
Inc.
10.11 (5) Security Agreement between Reclamation Consulting and Applications, Inc. and North American Systems, Inc.,
dated July 30, 2003
10.12 (7) Agreement between Reclamation Consulting and Applications, Inc. and North American Systems, Inc., dated
November 8, 2004
10.13 (13) Employment Agreement between Reclamation Consulting and Applications, Inc. and Gordon Davies, dated as of
January 6, 2005.
10.14 (13) Employment Agreement between Reclamation Consulting and Applications, Inc. and Michael Davies, dated as of
January 6, 2005.
10.15 (13) Contract Sales Representative Agreement, dated as of November 15, 2004, by and between Reclamation Consulting
and Applications, Inc. the Company and Rosiane Jacomini.
10.16 (13) Addendum to Contract Sales Representative Agreement dated as of November 15, 2004, by and between Reclamation
Consulting and Applications, Inc. and Rosiane Jacomini.
10.17 (13) Addendum to Contract Sales Representative Agreement dated as of November 15, 2004, by and between Reclamation
Consulting and Applications, Inc. and Rosiane Jacomini.
10.18 (13) Distributorship Agreement, dated as of August 10, 2004, by and between Reclamation Consulting and
Applications, Inc. and Aurtech Marketing, Pty., Ltd.
10.19 (13) Distribution Agreement, dated as of December 5, 2003, by and between Reclamation Consulting and Applications,
Inc. and Canadian Release Agents, Ltd.
10.20 (13) Distributorship Agreement, dated as of July 12, 2005, by and between Reclamation Consulting and Applications,
Inc. and Mark Lang.
10.21 (13) Sales Representative Agreement, dated as of July 7, 2005, by and between Reclamation Consulting and
Applications, Inc. and Jimmy Watts.
10.22 (13) Distributorship Agreement, dated as of February 3, 2005, by and between Reclamation Consulting and
Applications, Inc. and ITA Asphalt Limited.
33
10.23 (13) Distributorship Agreement, dated as of June 30, 2005, by and between Reclamation Consulting and Applications,
Inc. and Don Pickett.
10.24 (13) Contract Sales Representative Agreement, dated as of October 27, 2004, by and between Reclamation Consulting
and Applications, Inc. and Dennis Jackman.
10.25 (13) Addendum to Contract Sales Representative Agreement by and between Reclamation Consulting and Applications,
Inc. and Dennis Jackman.
10.26 (16) Exclusive License Agreement, dated as of January 4, 2006, by and between Reclamation Consulting and
Applications, Inc. and Billfighter Investments, Limited.
10.27 (16) Subscription Agreement, dated as of January 4, 2006, by and between Reclamation Consulting and Applications,
Inc. and Billfighter Investments, Limited, attached as Exhibit A to the Exclusive License Agreement,
dated as of January 4, 2006, by and between Reclamation Consulting and Applications, Inc. and Billfighter
Investments, Limited.
10.28 (16) Promissory Note, dated as of January 4, 2006, by Reclamation Consulting and Applications, Inc. in favor of
Billfighter Investments, Limited, attached as Exhibit B to the Exclusive License Agreement, dated as of
January 4, 2006, by and between Reclamation Consulting and Applications, Inc. and Billfighter Investments,
Limited
11 (1) Statement of Computation of Earnings Per Share for the years 1998 and 1999.
12 (1) Subsidiaries of Recycling Centers of America, Inc. (as of March 2, 2000).
14.1 (14) Code of Ethics for Reclamation Consulting and Applications, Inc.
16.1 (2) Letter regarding change of accountant from Stuart Rubin, CPA dated July 8, 2002.
16.1 (3) Letter regarding change of accountant from Stuart Rubin, CPA dated July 8, 2002.
16.1 (11) Letter regarding change of accountant from Kabani & Company, Inc., dated July 25, 2005.
16.1 (12) Letter regarding change of accountant from Kabani & Company, Inc., dated July 25, 2005.
16.1 (10) Letter regarding change of accountant from Kabani & Company, Inc., dated July 6, 2005.
17.1 (8) Resignation of Paul Petit as Director of Reclamation Consulting and Applications, Inc., dated June 21, 2005.
99.1 (16) Press Release, dated January 4, 2006 announcing entry into exclusive license agreement for the Reliant III
automated spray application system.
* Filed herewith
(1) Filed on March 8, 2000 as an exhibit to Reclamation Consulting's (formerly
known as Recycling Centers of America, Inc.) registration statement on
Form 10-SB and incorporated herein by reference.
(2) Filed on July 18, 2005 as an exhibit to Reclamation Consulting's Report on
Form 8-K dated June 3, 2002 and incorporated herein by reference.
(3) Filed on July 19, 2005 as an exhibit to Reclamation Consulting's Report on
Form 8-K/A dated July 8, 2002 and incorporated herein by reference.
(4) Filed on October 16, 2002 as an exhibit to Reclamation Consulting's annual
report on Form 10-KSB for the fiscal year ended June 30, 2002 and
incorporated herein by reference.
34
(5) Filed on October 15, 2003 as an exhibit to Reclamation Consulting's annual
report on Form 10-KSB for the fiscal year ended June 30, 2003 and
incorporated herein by reference.
(6) Filed on October 1, 2004 as an exhibit to Reclamation Consulting's annual
report on Form 10-KSB for the fiscal year ended June 30, 2004 and
incorporated herein by reference.
(7) Filed on November 15, 2004 as an exhibit to Reclamation Consulting's
Report on Form 8-K dated November 15, 2004 and incorporated herein by
reference.
(8) Filed on June 21, 2005 as an exhibit to Reclamation Consulting's Report on
Form 8-K dated June 21, 2005 and incorporated herein by reference.
(9) Filed on June 28, 2005 as an exhibit to Reclamation Consulting's Report on
Form 8-K dated June 23, 2005 and incorporated herein by reference.
(10) Filed on July 6, 2005 as an exhibit to Reclamation Consulting's Report on
Form 8-K dated July 6, 2005 and incorporated herein by reference.
(11) Filed on July 26, 2005 as an exhibit to Reclamation Consulting's Report on
Form 8-K/A dated July 6, 2005 and incorporated herein by reference.
(12) Filed on July 26, 2005 as an exhibit to Reclamation Consulting's Report on
Form 8-K/A dated July 25, 2005 and incorporated herein by reference.
(13) Filed on July 27, 2005 as an exhibit to Reclamation Consulting's
registration statement on Form SB-2 and incorporated herein by reference.
(14) Filed on October 17 2005 as an exhibit to Reclamation Consulting's annual
report on Form 10-KSB for the fiscal year ended June 30, 2005 and
incorporated herein by reference.
(15) Filed on November 1, 2005 as an exhibit to Reclamation Consulting's
Amendment No. 1 to a registration statement on Form SB-2 and incorporated
herein by reference.
(16) File on January 9, 2006 as an exhibit to Reclamation Consulting's Current
Report on Form 8-K, dated January 5, 2006 and incorporated herein by
reference.
35
SIGNATURES
In accordance with the requirments of the Exchange Act, we have cause this
report to be signed on our behalf by the undersigned, thereunto duly
authorized.
RECLAMATION CONSULTINGAND APPLICATIONS, INC.
Date: May 22, 2006
/s/ GORDON W. DAVIES
---------------------------------------
Gordon W. Davies, President and Chairman
of the Board of Directors
Date: May 22, 2006
36