EXHIBIT 4.1
SECURED CONVERTIBLE DEBENTURE
THIS SECURED CONVERTIBLE DEBENTURE, dated as of December 12, 2007 (the
"Effective Date") is made
BETWEEN:
NAME: PALA INVESTMENTS HOLDINGS LIMITED
ADDRESS: 00 Xxxxxx Xxxxxx
Xx Xxxxxx
Xxxxxx
XX0 0XX
(the "Lender");
AND:
RECLAMATION CONSULTING AND APPLICATIONS, INC., a company
organized under the laws of the State of Colorado, of 000
Xxxxx Xxxxxxxx, Xxxxx X, Xxx Xxxxxxxx, XX 00000 (the
"Borrower").
WHEREAS, the Lender is willing to lend to the Borrower Five Million Dollars
($5,000,000) to be paid in two tranches (the "Principal"), one tranche of Three
Million Dollars ($3,000,000) which shall be extended to the Borrower on the
Effective Date following the mutual execution of this Agreement and pursuant to
the terms of this Agreement (the "First Tranche"), and one tranche of Two
Million Dollars ($2,000,000) to be extended in the future subject to the
Borrower complying with the conditions required herein (the "Second Tranche").
NOW, THEREFORE, THIS AGREEMENT WITNESSES that in consideration of the premises
and the mutual covenants and agreements hereinafter set forth, the parties
hereto agree as follows:
1. DEFINITIONS
Where used in this Agreement, the following words and phrases shall have the
following meanings:
1.1 "Accredited Investor" has the meaning assigned in Subsection
5.2.6;
1.2 "Act" has the meaning assigned in Subsection 5.2.4;
1.3 "Additional Warrants" has the meaning assigned in Subsection
9.1;
1.4 "Agreement" means this Secured Convertible Debenture and the
schedules hereto, as at any time amended or modified and in
effect;
1.5 "Benchmarks" has the meaning assigned in Subsection 9.1;
1.6 "Borrower" has the meaning assigned to it in the Recitals to
this Agreement;
1.7 "Collateral" has the meaning assigned in Schedule D, attached
hereto;
1.8 "Conversion Amount" has the meaning assigned in Subsection
4.1;
1.9 "Conversion Date" has the meaning assigned in Subsection 4.1;
1.10 "Conversion Notice" has the meaning assigned in Subsection
4.1;
1.11 "Conversion Price" means Fourteen Cents ($0.14) per share,
provided that if Borrower, at any time while the Principal is
outstanding, (i) pays a stock dividend on its common stock,
(ii) subdivides outstanding shares of common stock into a
larger number of shares, or (iii) combines outstanding shares
of common stock into a smaller number of shares, then in each
such case the Conversion Price shall be adjusted by
multiplying (a) the Conversion Price in effect immediately
prior to such event, by (b) a fraction of which the numerator
shall be the number of shares of common stock outstanding
immediately before such event and of which the denominator
shall be the number of shares of common stock outstanding
immediately after such event;
1.12 "Conversion Right Commencement Date" has the meaning assigned
in Subsection 4.1;
1.13 "Conversion Shares" means shares of Borrower's common stock to
be received by Lender pursuant to a conversion under Section 4
of the outstanding Principal;
1.14 "Drawdown Certificate" has the meaning assigned in Subsection
9.1;
1.15 "Environmental Law" means any federal, state, local or other
governmental statute, regulation, law or ordinance dealing
with the protection of human health and the environment;
1.16 "Event of Default" means any event specified in Subsection
7.1;
1.17 "Exchange Act" has the meaning assigned in Subsection 5.1.31;
1.18 "Existing Line of Credit" has the meaning assigned to it in
Subsection 6.2.1;
1.19 "First Tranche" has the meaning assigned to it in the Recitals
to this Agreement;
1.20 "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and
fractions thereof, and all other chemicals, wastes, substances
and materials listed in, regulated by or identified in any
Environmental Law;
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1.21 "Indemnities" has the meaning assigned in Section 11;
1.22 "Indemnified Liabilities" has the meaning assigned in Section
11;
1.23 "Intellectual Property" has the meaning assigned in Subsection
5.1.19;
1.24 "Lender" has the meaning assigned to it in the Recitals to
this Agreement;
1.25 "Lender's Security" means the Collateral referenced on
Schedule D, attached hereto;
1.26 "Loan" means the loan by the Lender to the Borrower
established pursuant to Subsection 3.1;
1.27 "Maturity Date" means three (3) years from the Effective Date;
1.28 "Note" means a promissory note to be made by the Borrower to
the Lender as evidence of the Loan which shall substantially
be in the form of Schedule A, attached hereto, and "Notes"
means the plural thereof;
1.29 "Option Period" has the meaning assigned in Subsection 6.1.9;
1.30 "Other Secured Agreement" has the meaning assigned in
Subsection 7.1.2;
1.31 "Permitted Financing" has the meaning assigned in Subsection
6.1.9;
1.32 "Permitted Indebtedness" has the meaning assigned in
Subsection 6.2.1;
1.33 "Principal" means the principal amount of the Loan set forth
in the Recitals plus any compounded interest, and any and all
advances, debts, obligations and liabilities of the Borrower
to the Lender, heretofore, now or hereafter made, incurred or
created, whether voluntary or involuntary and however arising,
whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, and whether the
Borrower may be liable individually or jointly with others, or
whether recovery upon such indebtedness may be or hereafter
becomes unenforceable;
1.34 "Public Record" means the public filings of the Borrower with
the U.S. Securities and Exchange Commission;
1.35 "Regulation S" has the meaning assigned in Subsection 5.2.7;
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1.36 "Registration Rights Agreement" shall mean that certain
Registration Rights Agreement, of even date herewith, between
the Company and the Lender.
1.37 "Rights Notice" has the meaning assigned in Subsection 6.1.9;
1.38 "Rights Option" has the meaning assigned in Subsection 6.1.9;
1.39 "Sarbanes Oxley Act" has the meaning assigned in Subsection
5.2.5
1.40 "SEC" has the meaning assigned in Subsection 5.2.5;
1.41 "SEC Report" and "SEC Reports" have the meaning of Subsection
5.1.32;
1.42 "Second Tranche" has the meaning assigned to it in the
Recitals to this Agreement;
1.43 "Securities" has the meaning assigned in Subsection 4.3;
1.44 "Share Reorganization" has the meaning assigned in Subsection
6.1.17;
1.45 "Subsidiary" means any entity of which more than fifty percent
(50%) of the outstanding ownership interests having general
voting power under ordinary circumstances to elect a majority
of the board of directors or the equivalent of such entity,
regardless of whether or not at the time ownership interests
of any other class or classes shall have or might have voting
power by reason of the happening of any contingency, is at the
time directly or indirectly owned by the Borrower, by the
Borrower and one or more other Subsidiaries, or by one or more
other Subsidiaries;
1.46 "Subsequent Financing" has the meaning assigned in Subsection
6.1.9;
1.47 "Subordination Agreement" has the meaning assigned in
Subsection 10.9
1.48 "U.S. Person" has the meaning assigned in Subsection 5.2.7;
1.49 "Voting Agreement" shall mean that certain Voting and Right of
First Refusal Agreement, of even date herewith, among the
Borrower, the Lender and certain shareholders of the Borrower
named therein and
1.50 "Warrants" has the meaning assigned in Subsection 4.7.
2. INTERPRETATION
2.1 Governing Law and Venue
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of California applicable to the performance and
enforcement of contracts made within such state, without giving effect to the
law of conflicts of laws applied thereby. In the event that any dispute shall
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occur between the parties arising out of or resulting from the construction,
interpretation, enforcement or any other aspect of this Agreement, the parties
hereby agree to accept the exclusive jurisdiction of the Courts of the State of
California sitting in and for the County of Orange.
2.2 Severability
If any one or more of the provisions contained in this Agreement is found to be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein will not in any way
be affected or impaired thereby.
2.3 Parties In Interest
This Agreement inures to the benefit of and is binding on the parties hereto and
their respective successors and permitted assigns.
2.4 Headings and Marginal References
The division of this Agreement into sections, subsections, paragraphs and
subparagraphs and the insertion of headings are for convenience of reference
only and do not affect the construction or interpretation of this Agreement.
2.5 Currency
All statements of, and references to, dollar amounts in this Agreement mean the
lawful currency of the United States.
3. THE LOAN
3.1 Establishment of the Loan
The Lender agrees, on the terms and conditions set forth in this Agreement, to
lend to the Borrower the Principal as the "Loan."
3.2 Evidence of Indebtedness
Indebtedness of the Borrower to the Lender in respect of the Loan will be
evidenced by one or more Notes, which will be provided by the Borrower to the
Lender upon the Lender's execution of this Agreement.
3.3 Interest
Interest of Twelve Percent (12%) per annum, compounded on the last day of each
fiscal quarter of the Borrower, will accrue on the unpaid Principal from the
Effective Date until the date the Loan is repaid in full by Borrower (other then
through a conversion of the Loan pursuant to Section 4). In the event that such
interest shall exceed at any time the highest rate which may lawfully be paid
under applicable law, then such interest rate shall, immediately and without
further action by either party, be reduced to the highest rate which may
lawfully be paid under applicable law.
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3.4 Repayment of the Loan
Subject to conversion pursuant to Section 4, the Borrower will repay all of the
Principal and any accrued but unpaid interest on the earlier of (a) the Maturity
Date or (b) the date the Lender demands payment of the Principal and interest,
following an Event of Default, pursuant to Section 7.
4. CONVERSION OF THE LOAN
4.1 Conversion
At any time, and from time to time, subsequent to the "Conversion Right
Commencement Date" (as defined below) through and including the Maturity Date,
the Lender may elect, by providing to Borrower a written notice in the form of
Schedule C, attached hereto (the "Conversion Notice"), to convert all or any
portion of the then outstanding Principal; together with all accrued but unpaid
interest on such amount (collectively the "Conversion Amount") as of the date of
such Conversion Notice (the "Conversion Date"). The "Conversion Right
Commencement Date" shall be the date on which the Borrower effects the Share
Reorganization.
4.2 Issuance of Conversion Shares
Within ten (10) business days following the receipt of a properly completed
Conversion Notice, the Borrower will issue Conversion Shares to the Lender in an
amount equal to the Conversion Amount divided by the Conversion Price. All
Conversion Shares so issued shall be deemed to have been validly issued, fully
paid and non-assessable at a price per share equal to the Conversion Price.
4.3 Legend
This Agreement, and any Conversion Shares, Warrants and shares received on the
exercise of Warrants (collectively, the "Securities") shall bear such form of
restrictive legends as may be necessary, as determined by the Borrower in the
Borrower's reasonable discretion, to comply with applicable laws or regulations
of any stock exchange or other applicable authority, including but not limited
to the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"). THESE SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED ONLY (A) TO THE ISSUER, (B) OUTSIDE THE UNITED
STATES IN COMPLIANCE WITH REGULATION S UNDER THE ACT, (C) IN COMPLIANCE
WITH THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE ACT
PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS, OR (D) IN A TRANSACTION THAT DOES NOT
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REQUIRE REGISTRATION UNDER THE ACT OR ANY APPLICABLE STATE LAWS, AND
THE HOLDER HAS, PRIOR TO SUCH SALE, FURNISHED TO THE ISSUER AN OPINION
OF COUNSEL OR OTHER EVIDENCE OF EXEMPTION, IN EITHER CASE REASONABLY
SATISFACTORY TO THE ISSUER. THE HOLDER HEREOF WILL NOT, DIRECTLY OR
INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THIS
SECURITY, EXCEPT AS PERMITTED BY THE ACT.
4.4 Conversion Discharges the Borrower
Conversion of Principal and interest in accordance herewith shall operate to
discharge the Borrower's obligations with respect to repayment of the Principal
and interest so converted, provided that delivery of the appropriate number of
Conversion Shares issued upon such conversion is made by the Borrower. The
Borrower shall not be bound to enquire into the title of the Lender, save as
ordered by a court of competent jurisdiction or as required by statute. The
Borrower shall not be bound to see to the execution of any trust affecting the
ownership of the Note(s) surrendered in connection with any conversion of
Principal nor be charged with notice of any equity that may be subsisting in
respect thereof, unless the Borrower has actual notice thereof.
4.5 No Requirement to Issue Fractional Securities
The Borrower shall not be required to issue fractions of securities upon any
conversion of Principal and interest pursuant to this Section 4. If any
fractional interest in securities would be issuable upon the conversion of any
Conversion Amount, the Borrower shall be required to make payment in lieu of
delivering any certificates representing such fractional interest.
4.6 Cancellation of Notes
Upon conversion of all outstanding Principal and accrued interest pursuant to
the provisions of this Section 4, each Note representing the Principal converted
shall be forthwith delivered to the Borrower marked "cancelled".
4.7 Warrants
Upon the Lender's execution of this Agreement, the Borrower shall issue to the
Lender three million (3,000,000) warrants for the purchase of an aggregate of
Three Million (3,000,000) shares of Borrower's common stock (the "Warrants"),
representing one (1) warrant for every One Dollar ($1.00) of Principal provided
to Borrower pursuant to this Agreement. The Warrants shall be exercisable until
5:00 PM Pacific Time three (3) years from the Effective Date. The Warrants shall
be evidenced by one or more warrant certificates substantially in the form of
Schedule B, attached hereto, with an exercise price of Twenty-One Cents ($0.21)
per share.
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5. REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS OF THE BORROWER
The Borrower represents and warrants to the Lender that:
5.1.1 The Borrower is a valid and subsisting corporation
duly incorporated and in good standing under the laws
of the State of Colorado, and the Borrower has no
Subsidiaries. The Borrower is duly licensed or
qualified to transact business in all jurisdictions
where the character of the property owned or leased
or the nature of the business transacted by it makes
such licensing or qualification necessary. The
Borrower has all requisite power and authority to
conduct its business, to own its properties and to
execute and deliver, and to perform all of its
obligations under, this Agreement and all related
agreements, documents and instruments. During its
existence, the Borrower has done business solely
under the names set forth in Section 8, except as
disclosed in the Public Record at the date hereof.
The Borrower's chief executive office and principal
place of business is located at the address set forth
in Section 8, and all of the Borrower's records
relating to its business or the Collateral are kept
at that location. All of the Borrower's inventory and
equipment is located at that location. The Borrower's
federal employer identification number and
organization identification number are correctly set
forth in Section 8;
5.1.2 The Borrower has full power and capacity to enter
into, execute and perform this Agreement and each
agreement, instrument and document related hereto,
which agreements, instruments and documents, once
executed by the Borrower, shall be the valid and
binding obligation of such party, enforceable against
such party by any court of competent jurisdiction in
accordance with its terms;
5.1.3 The Borrower is not bound by or subject to any
contract, agreement, law, court order or judgment,
administrative ruling, regulation or any other item
which prohibits or restricts such party from entering
into and performing this Agreement, or any agreement,
instrument or document related hereto, in accordance
with its terms, or requiring the consent of any third
party prior to the entry into or performance of this
Agreement, or any agreement, instrument or document
related hereto, in accordance with its terms by such
party;
5.1.4 The Borrower has complied, or will comply, with all
applicable corporate and securities laws and
regulations in connection with the offer, sale and
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issuance of the Securities, and in connection
therewith has not engaged in any "direct selling
efforts," as such term is defined in Regulation S, or
any "general solicitation or general advertising" as
described in Regulation D;
5.1.5 The Borrower and its Subsidiaries are the beneficial
owners of the properties, business and assets or the
interests in the properties, business or assets
referred to in its Public Record at the date hereof
and except as disclosed therein, all agreements by
which the Borrower holds an interest in a property,
business or asset are in good standing according to
their terms, and the properties are in good standing
under the applicable laws of the jurisdictions in
which they are situated;
5.1.6 No offering memorandum has been or will be provided
to the Lender;
5.1.7 As set forth in Schedule G, attached hereto, the
audited consolidated balance sheet of the Borrower
and the Subsidiaries as of June 30, 2007, and the
related consolidated income statement and cash flows
and changes of stockholders' equity of the Borrower
and its Subsidiaries' for the fiscal periods then
ended, together with the audit report thereon of KMJ
Xxxxxx & Company LLP, independent certified public
accountants, are complete and correct in all material
respects and fairly present the financial condition
of the Borrower and the Subsidiaries at such dates
and the results of the operations of the Borrower and
Subsidiaries for the period covered by such
statements, all in accordance with GAAP consistently
applied;
5.1.8 The execution of this Agreement and all other related
agreements, documents, instruments, and the creation,
issuance and sale of the Securities by the Borrower
do not and will not conflict with and do not and will
not result in a breach of any of the terms,
conditions or provisions of its Articles of
Incorporation, Bylaws, or any agreement or instrument
to which the Borrower is a party;
5.1.9 The Securities will, at the time of issue, be duly
allotted, validly issued, fully paid and
non-assessable and will be free of all liens, charges
and encumbrances;
5.1.10 This Agreement when accepted has been duly authorized
by all necessary corporate action on the part of the
Borrower and, subject to acceptance by the Borrower,
constitutes a valid obligation of the Borrower
legally binding upon it and enforceable in accordance
with its terms;
5.1.11 Except as set out in the Public Record at the date
hereof, neither the Borrower nor any of its
Subsidiaries is a party to any actions, suits or
proceedings which could materially affect its
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business or financial condition, and to the best of
the Borrower's knowledge, no such actions, suits or
proceedings have been threatened, except as disclosed
in the Public Record at the date hereof;
5.1.12 No order ceasing or suspending trading in the
securities of the Borrower nor prohibiting sale of
such securities has been issued to the Borrower or
its directors, officers or promoters, and to the best
of the Borrower's knowledge, no investigations or
proceedings for such purposes are pending or
threatened;
5.1.13 Except as set out in the Public Record at the date
hereof or herein, no person or entity has any right,
agreement or option, present or future, contingent or
absolute, or any right capable of becoming a right,
agreement or option for the issue or allotment of any
unissued common shares of the Borrower or any other
security convertible or exchangeable for any such
shares or to require the Borrower to purchase, redeem
or otherwise acquire any of the issued or outstanding
shares of the Borrower;
5.1.14 The authorized capital stock of the Borrower together
with all convertible securities, rights, options and
warrants is set out in Schedule E, attached hereto;
5.1.15 Schedule F, attached hereto, sets forth each
Subsidiary, showing jurisdiction of the incorporation
or ownership of the outstanding stock or other
interests of each Subsidiary. All of the outstanding
shares of capital stock of each Subsidiary have been
duly authorized and validly issued, and fully paid
and non-assessable. There are no outstanding
preemptive, conversion or other rights, options,
warrants or agreements granted issued by or binding
upon any Subsidiary or the Borrower with respect to
any Subsidiary for the purchase or acquisition of any
shares of capital stock of any Subsidiary. Neither
the Borrower nor any Subsidiary is subject to any
obligation to repurchase or otherwise acquire or
retire any shares of capital stock or any convertible
securities, rights, options or warrants of any
Subsidiary. Neither the Borrower nor any Subsidiary
is a party to, nor has any knowledge of, any
agreement restricting the voting transfer of any
shares of the capital stock of any Subsidiary.
5.1.16 There is no action, suit, claim, investigation or
proceeding pending or, threatened against the
Borrower or any Subsidiary which questions the
validity of this Agreement;
5.1.17 The business of the Borrower and the Subsidiaries has
been and is presently being conducted as to comply
with all applicable federal, state, and local
governmental laws, rules, regulations and ordinances.
Each of the Borrower and Subsidiaries has all
franchise, permits, licenses, consents and other
governmental or regulatory authorizations and
approvals necessary for the conduct of its business
as now being conducted by it;
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5.1.18 Since June 30, 2007, there has been no material
adverse change in the business, assets, operations,
affairs, prospects or financial condition of the
Borrower or Subsidiaries not disclosed in the Public
Record at the date hereof or otherwise disclosed in
writing to the Lender at the date hereof, and neither
the business, financial condition, operation,
prospects or affairs of the Borrower or Subsidiaries
have been affected in any material respect not
disclosed in the Public Record at the date hereof or
otherwise disclosed in writing to the Lender at the
date hereof as the result of any legislative or
regulatory change, any revocation or change in any
franchise, permit, license or right to do business,
or any other event or occurrence, whether or not
insured against;
5.1.19 Schedule J is a complete list of all patents,
applications for patents, trademarks, applications to
register trademarks, service marks, applications to
register service marks, mask works, trade dress and
registered copyrights for which the Borrower is the
owner of record (the "Intellectual Property"). Except
as disclosed on Schedule J, (i) the Borrower owns the
Intellectual Property free and clear of all
restrictions (including covenants not to xxx a third
party), court orders, injunctions, decrees, writs,
security interests, liens or other encumbrances,
whether by written agreement or otherwise, (ii) no
person or entity other than the Borrower owns or has
been granted any right in the Intellectual Property,
(iii) all Intellectual Property is valid, subsisting
and enforceable and (iv) the Borrower has taken all
commercially reasonable action necessary to maintain
and protect the Intellectual Property.
5.1.20 The Borrower has entered into a legally enforceable
agreement with each of its employees and
subcontractors obligating each such person or entity
to assign to the Borrower, without any additional
compensation, any rights in intellectual property
created, discovered or invented by such person or
entity in the course of such person's or entity's
employment or engagement with the Borrower (except to
the extent prohibited by law), and further requiring
such person or entity to cooperate with the Borrower,
without any additional compensation, in connection
with securing and enforcing any rights in
intellectual property; PROVIDED, HOWEVER, that the
foregoing shall not apply with respect to employees
and subcontractors whose job descriptions are of the
type such that no such assignments are reasonably
foreseeable.
5.1.21 Except for readily available, non-negotiated licenses
of computer software and other intellectual property
used solely for performing accounting, word
processing and similar administrative tasks and as
disclosed on Schedule J, the Intellectual Property
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constitutes all rights in intellectual property used
or necessary to conduct the Borrower's business as it
is presently conducted or as the Borrower reasonably
foresees conducting it, to the best of the Borrower's
knowledge;
5.1.22 Except as disclosed on Schedule J, the Borrower has
no knowledge of, and has not received any written
claim or notice alleging, any infringement of another
person's or entity's rights in intellectual property
(including any written claim that the Borrower must
license or refrain from using the intellectual
property of any third party) nor, to the Borrower's
knowledge, is there any threatened claim or any
reasonable basis for any such claim.5.1.23Except as
set forth in Schedule H, attached hereto, there are
no outstanding options, licenses, or agreements of
any kind that grant rights to any other person or
entity to manufacture, license, assemble, market, or
sell the Borrower's products, nor is the Borrower
bound by or a party to any options, licenses, or
agreements of any kind with respect to the
intellectual property of any other entity or person;
5.1.24 The Borrower has not received any communication
alleging that the Borrower or its employees has
violated or infringed or, by conducting its business
as proposed, would violate or infringe the
intellectual property of any other person or entity;
5.1.25 To the knowledge of the Borrower after reasonable
enquiry, no employee is obligated under any
applicable law or under any contract or other
agreement, or subject to any judgment, decree or
order of any court or administrative agency, that
would interfere with the use of such employee's best
efforts to promote the interests of the Borrower or
that would conflict with the Borrower's business as
contemplated at the Effective Date;
5.1.26 Neither the execution of this Agreement, nor the
carrying on of the Borrower's business by the
employees of the Borrower, nor the conduct of the
Borrower's business as contemplated at the Effective
Date, will, to the Borrower's knowledge, conflict or
result in a breach of the terms, conditions or
provisions of, or constitute a default under, any
contract, covenant, or instrument under which any of
such employees is now obliged. The Borrower does not
believe it is or will be necessary to utilize any
inventions of any of its employees made prior to
their employment by the Borrower where the Borrower
does not otherwise have good title or valid license
to such inventions;
5.1.27 The Borrower has filed all tax returns and reports as
required by law. These returns and reports are true
and correct in all material respects. The Borrower
has paid all taxes and other assessments due;
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5.1.28 The Borrower has provided the Lender with all the
information that the Lender has requested for
deciding whether to purchase the Note(s) and all
information that the Borrower believes is reasonably
necessary to enable the Lender to make such a
decision, including certain of the Borrower's
projections describing its proposed business. The
representations of the Borrower contained in this
Agreement and the Schedules attached hereto, when
considered together with those in the Public Record
at the date hereof and any agreement, instrument,
document or certificate furnished or to be furnished
to the Lender, or the Borrower's projections, do not
contain any untrue statement of material fact or
omits to state a material fact necessary in order to
make the statements contained herein and therein not
misleading in light of the circumstances under which
they were made. To the extent the Borrower's
projections were prepared by management of the
Borrower, the projections were prepared in good
faith, however, the Borrower does not warrant that it
will achieve such projections. The parties further
agree that any agreement, event, condition or other
item which is disclosed on a particular Schedule
hereto shall be deemed to be disclosed for the
purposes of all other Schedules to which it is
relevant, provided that all of the terms or effects
of any such item which are relevant to any Schedule
hereto are adequately disclosed;;
5.1.29 The Borrower has good and absolute title to all
Collateral free and clear of all security interests,
liens and other encumbrances. No financing statement
naming the Borrower as debtor is on file in any
office other than the financing statement naming the
Lender as secured party, other then any creditors
that who have signed Subordination Agreements
pursuant to Subsection 10.9;
5.1.30 To the best of the Borrower's knowledge after
reasonable enquiry, the Borrower is in compliance
with all provisions of all agreements, instruments,
decrees and orders to which it is a party or by which
it or its property is bound or affected, the breach
or default of which could have a material adverse
effect on the Borrower's financial condition,
properties or operations. To the best of the
Borrower's knowledge after reasonable enquiry, there
are not present in, on or under any premises occupied
by the Borrower any Hazardous Substances in such form
or quantity as to create any material liability or
obligation for either the Borrower or the Lender
under the common law of any jurisdiction or under any
Environmental Law, and no Hazardous Substances have
ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under such
premises in such a way as to create any such material
liability. The Borrower has not disposed of Hazardous
Substances in such a manner as to create any material
liability under any Environmental Law. Except as
disclosed on Schedule L, there have not existed in
the past, nor are there any threatened or impending
requests, claims, notices, investigations, demands,
administrative proceedings, hearings or litigation
-13-
relating in any way to such premises or the Borrower,
alleging material liability under, violation of, or
noncompliance with any Environmental Law or any
license, permit or other authorization issued
pursuant thereto. The Borrower's businesses are and
have in the past always been conducted in accordance
with all Environmental Laws and all licenses, permits
and other authorizations required pursuant to any
Environmental Law and necessary for the lawful and
efficient operation of such businesses are in the
Borrower's possession and are in full force and
effect, nor has the Borrower been denied insurance on
grounds related to potential environmental liability.
No permit required under any Environmental Law is
scheduled to expire within twelve (12) months and
there is no threat that any such permit will be
withdrawn, terminated, limited or materially changed.
no premises occupied by the Borrower are nor have
ever been listed on the National Priorities List, the
Comprehensive Environmental Response, Compensation
and Liability Information System or any similar
federal, state or local list, schedule, log,
inventory or database. The Borrower has delivered to
the Lender all environmental assessments, audits,
reports, permits, licenses and other documents
describing or relating in any way to such premises or
the Borrower's businesses; and
5.1.31 The Borrower is a "reporting issuer" under section 12
of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and to Borrower's knowledge is
not in default of any of the requirements of the
Exchange Act other then as the Borrower may have
disclosed in writing to the Lender prior to the
Effective Date; As of their respective filing dates,
each report, schedule, registration statement and
proxy filed by the Borrower with the SEC (each, an
"SEC Report" and collectively, the "SEC Reports")(and
if any SEC Report filed prior to the date of this
Agreement was amended or superseded by a filing prior
to the date of this Agreement, then also on the date
of filing of such amendment or superseding filing),
(i) to the Borrower's knowledge where required, were
prepared in all material respects in accordance with
the requirements of the 1933 Act, or the 1934 Act, as
the case may be, and the rules and regulations
promulgated under such Acts applicable to such SEC
Reports, (ii) did not contain any untrue statements
of a material fact and did not omit to state a
material fact necessary to make the statements
therein, in light of the circumstances under which
they were made, not misleading and (iii) to the
Borrower's knowledge are all the forms, reports and
documents required to be filed by the Borrower with
the SEC since that time. Each set of audited
consolidated financial statements and unaudited
interim financial statements of the Borrower
(including any notes thereto) included in the SEC
-14-
Reports (i) to the Borrower's knowledge, complies as
to form in all material respects with the published
rules and regulations of the SEC with respect
thereto, and (ii) have been prepared in accordance
with United States generally accepted accounting
principles applied on a consistent basis (except as
may be indicated therein or in the notes thereto) and
fairly present, in all material respects, the
financial position of the Borrower as of the dates
thereof and the results of its operations and cash
flows for the periods then ended subject, in the case
of the unaudited interim financial statements, to
normal year-end adjustments which were not or are not
expected to be material in amount. To the Borrower's
knowledge, no events or other factual matters exist
which would require the Borrower to file any
amendments or modifications to any SEC Reports which
have not yet been filed with the SEC but which are
required to be filed with the SEC pursuant to the
1933 Act or the 1934 Act, other then those which may
have been disclosed in writing to the Lender prior to
the Effective Date; Each SEC Report containing
financial statements that has been filed with or
submitted to the SEC since July 31, 2002, was
accompanied by the certifications required to be
filed or submitted by Borrower's chief executive
officer and chief financial officer pursuant to the
Xxxxxxxx-Xxxxx Act of 2002 (the "Xxxxxxxx-Xxxxx
Act"); to Borrower's knowledge at the time of filing
or submission of each such certification, such
certification was true and accurate and complied with
the Xxxxxxxx-Xxxxx Act and the rules and regulations
promulgated thereunder; such certifications contain
no qualifications or exceptions to the matters
certified therein and have not been modified or
withdrawn; and neither Borrower nor any of its
officers has received notice from any governmental
entity questioning or challenging the accuracy,
completeness, form or manner of filing or submission
of such certification;
5.1.32 There is no fact known to Borrower which Borrower has
not publicly disclosed which materially adversely
affects, or so far as Borrower can reasonably
foresee, will materially adversely affect, the
assets, liabilities (contingent or otherwise),
capital, affairs, business, prospects, operations or
condition (financial or otherwise) of Borrower or the
ability of Borrower to perform its obligations under
this Agreement;
5.1.33 Borrower is not an "investment company" within the
meaning of the Investment Company Act of 1940, and
all securities previously issued by Borrower were
issued pursuant to registration under the 1933 Act or
an available exemption thereunder;
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5.2 REPRESENTATIONS OF THE LENDER
The Lender hereby represents and warrants to the Borrower, as of the date
hereof, the following:
5.2.1 The Lender has full power and capacity to enter into,
execute and perform this Agreement, which Agreement,
once executed by the Lender, shall be the valid and
binding obligation of such party, enforceable against
such party by any court of competent jurisdiction in
accordance with its terms;
5.2.2 The Lender is not bound by or subject to any
contract, agreement, law, court order or judgment,
administrative ruling, regulation or any other item
which prohibits or restricts such party from entering
into and performing this Agreement in accordance with
its terms, or requiring the consent of any third
party prior to the entry into or performance of this
Agreement in accordance with its terms by such party;
5.2.3 The Lender acknowledges that it is acquiring the
Securities for its own account, and not with a view
toward the subdivision, resale, distribution, or
fractionalization thereof; the Lender has no
contract, undertaking, or arrangement with any person
to sell, transfer, or otherwise dispose of the
Securities (or any portion thereof hereby subscribed
for), and has no present intention to enter into any
such contract, undertaking, agreement or arrangement;
5.2.4 The execution of this Agreement by the Lender is not
the result of any form of General Solicitation or
General Advertising (as such terms are used in Rule
502(c) promulgated under the Securities Act of 1933,
as amended (the "Act"));
5.2.5 The Lender hereby acknowledges that: (A) the offering
of the Securities was made only through direct,
personal communication between the Lender and the
Borrower; (B) the Lender has had full access to
material concerning the Borrower's planned business
and operations, which material was furnished or made
available to the Lender by officers or
representatives of the Borrower, including the
Borrower's filings with the U.S. Securities and
Exchange Commission ("SEC") available on the SEC web
site at xxx.xxx.xxx; (C) the Borrower has given the
Lender the opportunity to ask any questions and
obtain all additional information desired in order to
verify or supplement the material so furnished; and
(D) the Lender understands and acknowledges that
purchasers of the Securities must be prepared to bear
the economic risk of such investment for an
indefinite period because of: (I) the heightened
nature of the risks associated with an investment in
-16-
the Borrower due to its status as a development stage
company; (II) illiquidity of the Securities due to
the fact that (1) the Securities have not been
registered or qualified under the Act or any state
securities act (nor passed upon by the SEC or any
state securities commission), and (2) the Securities
may not be registered or qualified by the Lender
under federal or state securities laws solely in
reliance upon an available exemption from such
registration or qualification, and hence such
Securities cannot be sold unless they are
subsequently so registered or qualified, or are
otherwise subject to any applicable exemption from
such registration requirements; and (3) substantial
restrictions on transfer of the Securities, as may
set forth by legend on the face or reverse side of
every certificate evidencing the ownership of the
Securities;
5.2.6 The Lender is an "Accredited Investor" as such term
is defined in Rule 501 of Regulation D promulgated by
the SEC under the Act;
5.2.7 The Lender is not a "U.S. Person" as such term is
defined in Rule 902 of Regulation S promulgated by
the SEC ("Regulation S");
5.2.8 The Lender understands that the Borrower is the
seller of the Securities and that, for purposes of
Regulation S, a "distributor" is any underwriter,
dealer or other person who participates, pursuant to
a contractual arrangement in the distribution of
securities sold in reliance on Regulation S, and that
an "affiliate" is any partner, officer, director or
any person directly or indirectly controlling,
controlled by or under common control with any
persons in question;
5.2.9 The Lender agrees that it will not, during the one
(1) year distribution compliance period for the
Securities, act as a distributor, either directly or
through any affiliate, or sell, transfer, hypothecate
or otherwise convey the Securities other than to a
non-U.S. Person;
5.2.10 The Lender acknowledges and understands that in the
event the Securities are offered, sold or otherwise
transferred by the Lender to a non-U.S. Person prior
to the expiration of the applicable distribution
compliance period, the purchaser or transferee must
agree not to resell such securities except in
accordance with the provisions of Regulation S,
pursuant to registration under the Act, or pursuant
to an available exemption from registration; and must
further agree not to engage in hedging transactions
with regard to such securities unless in compliance
with the Act;
5.2.11 The Lender shall not offer, sell or otherwise dispose
of the Securities in the United States or to a U.S.
Person unless (A) the Borrower has consented to such
offer, sale or disposition and such offer, sale or
disposition is made in accordance with an exemption
from the registration requirements under the Act and
the securities laws of all applicable states of the
-17-
United States or (B) such Securities have been
registered with the SEC; and
5.2.12 The Lender has been advised to consult with an
attorney regarding legal matters concerning the
purchase and ownership of the Securities, and with a
tax advisor regarding the tax consequences of
purchasing such Securities.
6. COVENANTS OF THE BORROWER
6.1 AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with the Lender that, so long as any Principal
and unpaid interest shall remain outstanding, it will:
6.1.1 Pay the principal sum, interest and all other monies
required to be paid to the Lender pursuant to this
Agreement in the manner set forth herein;
6.1.2 Duly observe and perform each and every of its
covenants and agreements set forth in this Agreement;
6.1.3 Provide the Lender with immediate notice of any Event
of Default;
6.1.4 Offer, sell, issue and deliver the Securities
pursuant to an exemption from registration under U.S.
securities laws (subject to and in reliance upon the
Holder's representations and warranties concerning
its status as an investor in the Securities);
6.1.5 Provide the Lender with the Borrower's monthly sales
reports and financial statements, which shall be
delivered to the Lender, in form and substance
acceptable to the Lender in its reasonable
discretion, no later than fifteen (15) days following
the end of each month;
6.1.6 Provide the Lender thirty (30) days prior written
notice of its intent to dispose of material rights in
intellectual property; and upon request, provide the
Lender with copies of all proposed documents and
agreements concerning such rights;
6.1.7 Promptly upon knowledge thereof, provide the Lender
with notice of (A) any infringement of any
Intellectual Property by others, (B) claims that the
Borrower is infringing another person's or entity's
intellectual property rights and (C) any threatened
cancellation, termination or material limitation of
its Intellectual Property;
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6.1.8 Promptly upon receipt, provide to the Lender copies
of all registrations and filings with respect to its
Intellectual Property;
6.1.9 During the period commencing on the Effective Date
and continuing for so long as any Principal remains
outstanding, the Borrower covenants and agrees to
promptly notify (in no event later than five (5)
trading days after making or receiving an applicable
offer) in writing (a "Rights Notice") the Lender of
the terms and conditions of any proposed Subsequent
Financing (as defined below). The Rights Notice shall
describe, in reasonable detail, the proposed
Subsequent Financing and include, the proposed
closing date of the Subsequent Financing. The Rights
Notice shall provide the Lender an option (the
"Rights Option") during the fifteen (15) trading days
following delivery of the Rights Notice (the "Option
Period") to inform the Borrower whether the Lender
will purchase the securities being offered in such
Subsequent Financing on substantially the same terms
and conditions as contemplated by such Subsequent
Financing. If the Borrower does not receive notice of
exercise of the Rights Option from the purchasers
within the Option Period, the Borrower shall have the
right to proceed with the Subsequent Financing on
substantially the terms described in the Rights
Notice. For purposes of this Agreement, a "Subsequent
Financing" shall be defined as any subsequent offer
or sale to, or exchange with (or other type of
distribution to), any third party by the Borrower of
its common stock, preferred stock or any securities
convertible, exercisable or exchangeable into common
stock or preferred stock, including convertible and
non-convertible debt securities other than a
Permitted Financing (as defined below) or any
Permitted Indebtedness (as defined in Subsection
6.2.1). For purposes of this Agreement, "Permitted
Financing" shall mean any transaction involving (i)
the Borrower's issuance of any securities (other than
for cash) in connection with a merger, acquisition or
consolidation of the Borrower, (ii) the Borrower's
issuance of securities in connection with license
agreements, joint ventures and other similar
strategic partnering arrangements, so long as such
issuances are not for the primary purpose of raising
capital, (iii) the Borrower's issuance of common
stock or the issuance or grants of options to
purchase common stock pursuant to stock option plans
and employee stock purchase plans, (iv) as a result
of the exercise of options or warrants or conversion
of convertible notes which are granted or issued as
of the date of this Agreement, (v) any Warrants
issued to the Lender pursuant to or otherwise for the
transactions contemplated by this Agreement and (vi)
any financing by Borrower which by its terms is to
fund at or following the Maturity Date, or which is
entered into for the purpose of repaying the Loan;
-19-
6.1.10 Comply, and cause each Subsidiary to comply, with the
requirements of applicable laws and regulations, the
non-compliance with which would materially and
adversely affect its business or its financial
condition;
6.1.11 Pay or discharge, when due, (a) all taxes,
assessments and governmental charges levied or
imposed upon it or upon its income or profits, upon
any properties belonging to it (including the
Collateral) or upon or against the creation,
perfection or continuance of the security interest
granted hereunder, prior to the date on which
penalties attach thereto, (b) all federal, state and
local taxes required to be withheld by it, and (c)
all lawful claims for labor, materials and supplies
which, if unpaid, might by law become a lien or
encumbrance upon any properties of the Borrower;
provided, that the Borrower shall not be required to
pay any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested
in good faith by appropriate proceedings and for
which proper reserves have been made;
6.1.12 Keep and maintain the Collateral and all of its other
properties necessary or useful in its business in
good condition, repair and working order (normal wear
and tear excepted) and will from time to time replace
or repair any worn, defective or broken parts;
PROVIDED, HOWEVER, that nothing in this covenant
shall prevent the Borrower from discontinuing the
operation and maintenance of any of its properties if
such discontinuance is, in the Borrower's judgment,
desirable in the conduct of the Borrower's business
and not disadvantageous in any material respect to
the Lender;
6.1.13 Defend the Collateral against all security interests,
liens and other encumbrances, claims or demands of
all persons and entities (other than the Lender)
claiming the Collateral or any interest therein and
keep all Collateral free and clear of all security
interests, liens and other encumbrances;
6.1.14 Take all commercially reasonable steps necessary to
protect and maintain its Intellectual Property and
take all commercially reasonable steps necessary to
prosecute any person or entity infringing its
Intellectual Property and to defend itself against
any person or entity accusing it of infringing any
person's or entity's rights in intellectual property;
6.1.15 Preserve and maintain its existence and all of its
rights, privileges and franchises necessary or
desirable in the normal conduct of its business and
conduct its business in an orderly, efficient and
regular manner;
6.1.16 Promptly upon request by the Lender deliver to the
Lender in pledge all instruments, documents and
chattel paper constituting Collateral, duly endorsed
or assigned by the Borrower; and
-20-
6.1.17 Use best efforts to complete within sixty (60) days
after the Effective Date a share reorganization such
that the capital structure of the Borrower is
substantially as detailed in Schedule K (the "Share
Reorganization"), and that if not completed within
sixty (60) days, the Share Reorganization shall be
completed no later then one-hundred twenty (120) days
after the Effective Date;
6.1.18 For the term of the Warrants, the Borrower shall
reserve sufficient authorized and unissued shares of
common stock to enable it to issue the shares
issuable on any exercise of the Warrants;
6.1.19 Commencing on the Conversion Right Commencement Date
and continuing until the Principal and interest is
repaid or converted in full, the Borrower shall
reserve sufficient authorized and unissued shares of
common stock to enable it to issue the shares
issuable on the conversion of the outstanding balance
of the Principal and interest;
6.1.20 The payment of the principal of, premium, if any, and
interest on all loans, mortgages, indentures,
security agreements and creditor agreements or
arrangements, whether outstanding at the date of this
Agreement or thereafter incurred, will be
subordinated and junior in right of payment to the
prior payment in full of all amounts due under the
Loan. No right of the Lender to enforce subordination
as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act
on the part of the Borrower, or by any noncompliance
by the Borrower with the terms, provisions and
covenants of this Agreement, regardless of any
knowledge thereof which the Lender may have or
otherwise be charged with;
6.1.21 Use the proceeds of the Loan to repay the
indebtedness of Borrower as described on Schedule M
hereto and shall use the remainder for capital
expenditures and for general working capital
purposes; and
6.1.22 The Borrower shall serve notice of the termination of
the distribution agreement with Xxxxxx Technologies
no later than January 11, 2008.
6.2 NEGATIVE COVENANTS
The Borrower covenants and agrees with the Lender that, so long as the Principal
and unpaid interest shall remain outstanding, it will not, without the Lender's
prior written approval:
6.2.1 Enter into further indebtedness other than
(collectively, the "Permitted Indebtedness") the
following items together with all interest and
expenses accruing thereto: (i) all indebtedness
existing at the date of this Agreement as listed in
Schedule M, attached hereto; (ii) all accounts
payable generated in the normal course of business;
(iii) additional advances on Borrower's existing line
-21-
of credit from Canvasback Company Limited (the
"Existing Line of Credit"), provided that the
aggregate amount of indebtedness outstanding under
the Existing Line of Credit at any time shall not
exceed $500,000; (iv) the indebtedness of Borrower to
the Lender pursuant to this Agreement or otherwise;
(v) indebtedness with respect to capital lease
obligations (including leases of real property) or
other obligations for equipment purchases not to
exceed $100,000; (vi) loans or advances on a credit
facility or facilities, provided the terms thereof
are not substantially more burdensome than those of
the Existing Line of Credit and the aggregate balance
of such loans or advances together with that of the
outstanding balance of Existing Line of Credit is not
more then the maximum balance of the Existing Line of
Credit; (vii) extensions, renewals, refundings,
refinancings, modifications, amendments and
restatements of any of the items included in
subclauses (i) through (vi) above, provided that (a)
the principal amount thereof is not increased and (b)
the terms thereof are not modified to impose
substantially more burdensome terms upon the
Borrower, as determined by the Lender in its
reasonable discretion;
6.2.2 Cause its shares to be listed on the TSX Venture
Exchange or any other stock exchange, other than the
OTC Bulletin Board or the Pink Sheets, or any
successor thereto;
6.2.3 Create, incur or suffer to exist any security
interest, lien or other encumbrance upon any of the
Collateral, now owned or hereafter acquired, to
secure any indebtedness other than the Notes, if such
security interest lien or other encumbrance has
priority over the Lender's security interest,
PROVIDED, HOWEVER, that purchase money security
interests, liens or encumbrances issued in connection
with Permitted Indebtedness shall be permitted;
6.2.4 Amend any financing statements in favor of the Lender
except as permitted by law;
6.2.5 Assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with
any obligations of any other person or entity, except
the endorsement of negotiable instruments by the
Borrower for deposit or collection or similar
transactions in the ordinary course of business;
6.2.6 Sell, lease, assign, transfer or otherwise dispose of
(i) the stock of any Subsidiary, (ii) all or a
substantial part of its assets, or (iii) any
Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any
other person or entity other than the sale of
inventory in the ordinary course of business nor
liquidate, dissolve or suspend business operations;
-22-
6.2.7 Transfer any part of its ownership interest in any
Intellectual Property nor permit any agreement under
which it has licensed intellectual property to lapse,
except that the Borrower may transfer such rights or
permit such agreements to lapse if it shall have
reasonably determined that the applicable right in
such intellectual property are no longer useful in
its business. The Borrower will not license any other
person or entity to use any of the Borrower's
Intellectual Property, except that the Borrower may
grant licenses in the ordinary course of its business
in connection with sales of inventory or provision of
services to its customers, including but not limited
to the entry of the Borrower into distribution
agreements;6.2.8 Consolidate with or merge into any
entity, nor permit any other entity to merge into it,
nor acquire (in a transaction analogous in purpose or
effect to a consolidation or merger) all or
substantially all the assets of any other person or
entity;6.2.9 Engage in any line of business
materially different from that presently engaged in
by the Borrower nor purchase, lease or otherwise
acquire assets not related to its business;
6.2.10 Adopt any material change in accounting principles
other than as required by U.S. Generally Accepted
Accounting Principles nor adopt, permit or consent to
any change in its fiscal year;
6.2.11 Transfer its chief executive office or principal
place of business, nor move, relocate, close or sell
any business location, nor permit any tangible
Collateral or any records pertaining to the
Collateral to be located in any state or area in
which, in the event of such location, a financing
statement covering such Collateral would be required
to be, but has not in fact been, filed in order to
perfect the security interest granted hereunder;
6.2.12 Enter into any exclusive distribution agreement or
similar agreement providing for the sale of any
product manufactured or sold by the Borrower), or any
agreement that commits a minimum volume of supply to
a distributor, unless any such agreement can be
terminated without cause by Borrower within a maximum
of 90 days notice; and
6.2.13 Amend its Articles of Incorporation or By-Laws,
except as otherwise provided herein.
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6.3 LENDER PERFORMANCE
If the Borrower at any time fails to perform or observe any of the foregoing
covenants contained in Section 6 or elsewhere herein, and if such failure shall
continue for a period of fourteen (14) days after the Lender gives the Borrower
written notice thereof (or in the case of the agreements contained in Section
6.1.11 immediately upon the occurrence of such failure, without notice or lapse
of time), the Lender may, but need not, perform or observe such covenant on
behalf and in the name, place and stead of the Borrower (or, at the Lender's
option, in the Lender's name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct such
failure (including the payment of taxes, the satisfaction of security interests,
liens or other encumbrances, the performance of obligations owed to account
debtors or other obligors, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments); and the Borrower
shall thereupon pay to the Lender on demand the amount of all monies expended
and all costs and expenses (including reasonable attorneys' fees and legal
expenses) incurred by the Lender in connection with or as a result of the
performance or observance of such agreements or the taking of such action by the
Lender, together with interest thereon from the date expended or incurred at the
interest rate set forth in Section 7.2.3. To facilitate the Lender's performance
or observance of such covenants of the Borrower, the Borrower hereby irrevocably
appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements
and other agreements and writings required to be obtained, executed, delivered
or endorsed by the Borrower hereunder.
7. EVENT OF DEFAULT
7.1 DEFINITION OF EVENT OF DEFAULT
The Principal and any accrued interest will immediately become due and payable
upon written demand by the Lender upon the occurrence of any of the following
events, unless otherwise waived in writing by the Lender:
7.1.1 If the Borrower or any Subsidiary defaults in any
payment when due under this Agreement or any Note;
7.1.2 If the Borrower or any Subsidiary defaults in the
performance of or compliance with any term of any
Other Debt Obligation (as defined below), the effect
of which is to cause the indebtedness evidenced
thereby to become due and payable before its stated
maturity date or before its regularly scheduled dates
of payment, and such default shall continue for more
than the grace period or cure period, if any,
specified therein and shall not have been waived
pursuant thereto. "Other Debt Obligation means any
agreement, instrument or document evidencing
indebtedness of the Borrower or a Subsidiary to a
third party";
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7.1.3 If any representation or warranty made in writing by
or on behalf of the Borrower herein or in any
instrument, agreement or document furnished in
compliance with or in reference hereto or otherwise
in connection with the transactions contemplated
hereby shall prove to have been false or incorrect in
any material respect on the date as of which was
made; PROVIDED, HOWEVER, that if such false or
incorrect representation or warranty is reasonably
curable by the Borrower within fourteen (14) days
such default will be an "Event of Default" only if
such default has continued for a period of fourteen
(14) days after the Borrower receives written notice
of such default from the Lender, or otherwise becomes
aware of such default;
7.1.4 If the Borrower defaults in observing or performing
any covenant or agreement under this Agreement or any
Note (other than as set forth in Section 7.1.1) on
its part to be observed or performed, after the
Borrower receives written notice of such default from
the Lender, or otherwise becomes aware of such
default, or if capable of cure, where such default
shall continue for a period of fourteen (14) days
after the Borrower receives written notice of such
default from the Lender, or otherwise becomes aware
of such default;
7.1.5 If the Borrower becomes insolvent or admits in
writing its inability to pay debts as they mature; or
the Borrower makes a general assignment for the
benefit of its creditors; or a compromise or
arrangement is proposed by the Borrower to its
creditors or any class of its creditors; or if any
order is made or an effective resolution is passed
for the winding-up of the Borrower; or if a
custodian, trustee, receiver or other officer with
like powers is appointed for the Borrower under
applicable bankruptcy or insolvency legislation; or
if bankruptcy proceedings are instituted by or
against the Borrower, provided that in the case of an
involuntary petition, such petition is not dismissed
within sixty (60) days;
7.1.6 If any subordinated creditor defaults in observing or
performing any covenant or agreement under any
subordination agreement in favor of the Lender on its
part to be observed or performed, after the Borrower
receives written notice of such default from the
Lender, or otherwise becomes aware of such default,
or if capable of cure, where such default shall
continue for a period of fourteen (14) days after the
Borrower receives written notice of such default from
the Lender, or otherwise becomes aware of such
default, or if the Borrower takes or participates in
any action which would be prohibited under the
provisions of any such subordination agreement or
makes any payment with respect to indebtedness that
has been subordinated pursuant to any such
subordination agreement; or
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7.1.7 If a final judgment which, with other outstanding
final judgments against the Borrower and its
Subsidiaries, exceeds Fifty Thousand Dollars
($50,000) shall be entered against the Borrower or
any Subsidiary and if, within sixty (60) days after
entry thereof, such judgment shall not have been
discharged or execution thereof stayed pending
appeal, or if, within sixty (60) days after the
expiration of any such stay, such judgment shall not
have been discharged; or
7.1.8 If the Borrower defaults in the performance or
compliance of any obligation or undertaking of the
Borrower in the Voting Agreement or the Registration
Rights Agreement provided such default has continued
for a period of fourteen (14) days after the Borrower
receives written notice of such default from the
Lender, or otherwise becomes aware of such default.
7.2 RIGHTS AND REMEDIES OF THE LENDER
Upon the occurrence of an Event of Default and at any time thereafter:
7.2.1 The Lender may proceed to protect and enforce its
rights by suit in equity, action at law and/or other
appropriate proceeding either for specific
performance of any covenant, provision or condition
contained in this Agreement, or in aid of the
exercise of any power granted in this Agreement, and
may at its option by notice to the Borrower declare
all or any part of the unpaid Principal then
outstanding to be forthwith due and payable, and
thereupon such unpaid principal amount or part
thereof, together with interest accrued thereon and
all others sums, if any, payable under this
Agreement, the Loan shall become so due and payable
without any presentation, presentment, protest or
further demand or notice of any kind, all of which
are hereby expressly waived, and such holder or
holders may proceed to enforce payment of such amount
or part thereof in such manner as it or they may
elect. Notwithstanding the foregoing, upon the
occurrence of an Event of Default described in
Section 7.1.4, the Indebtedness shall be immediately
due and payable automatically without presentment,
demand, protest or notice of any kind;
7.2.2 The Lender will have the right, but not the
obligation, to inform any creditor of the Borrower of
any Event of Default by the Borrower;
7.2.3 Interest will accrue quarterly in arrears on the
outstanding Principal at a penalty rate of Sixteen
Percent (16%) per annum, compounding quarterly on the
last day of each fiscal quarter of the Borrower,
commencing on the occurrence of such Event of Default
and terminating on the earlier of (i) the date such
Event of Default is cured, or (ii) the conversion or
repayment of the outstanding Principal and accrued
interest;
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7.2.4 The Borrower hereby waives to the extent not
prohibited by applicable law which cannot be waived,
(a) all presentments, demands for performance, notice
of non-performance, (b) any requirement of diligence
or promptness on the part of any holder of the Loan
or the Conversion Shares in the enforcement of its
rights under this Agreement or the Loan, (c) except
to the extent required by any other provision of this
Agreement, any and all notices of every kind and
description which may be required to be given by any
statute or rule of law, and (d) any defense of any
kind which it may now or hereafter have with respect
to its liability under this Agreement;
7.2.5 The Lender may, without notice to the Borrower and
without further action, apply any and all money owing
by the Lender to the Borrower to the payment of the
indebtedness owed to the Lender;
7.2.6 The Lender may exercise and enforce any and all
rights and remedies available upon default to a
secured party under the UCC, and, in connection
therewith, the Borrower will on demand assemble the
Collateral and make it available to the Lender at a
place to be designated by the Lender which is
reasonably convenient to both parties;
7.2.7 The Lender may exercise and enforce its rights and
remedies under any other agreement, document or
instrument by and between the Borrower and the Lender
or by the Borrower in favor of the Lender;
7.2.8 The Lender may without regard to any waste, adequacy
of the security or solvency of the Borrower, apply
for the appointment of a receiver of the Collateral,
to which appointment the Borrower hereby consents,
whether or not foreclosure proceedings have been
commenced and whether or not a foreclosure sale has
occurred; or
7.2.9 If the Lender sells any of the Collateral on credit,
the Indebtedness will be reduced only to the extent
of payments actually received. If the purchaser fails
to pay for the Collateral, the Lender may resell the
Collateral and shall apply any proceeds actually
received to the Indebtedness.
8. SECURITY FOR THE LOAN
8.1 GRANT OF SECURITY INTEREST
The Borrower hereby pledges, assigns and grants to the Lender, a first priority
lien on and security interest in the Collateral, as defined in Schedule D,
attached hereto, to secure the payment of all of the indebtedness under the
Notes. Upon request by the Lender, the Borrower will grant to the Lender a
security interest in all commercial tort claims that the Borrower may have
against any person or entity. The Borrower agrees to take all actions requested
by the Lender and reasonably necessary to perfect, to continue the perfection
of, and to otherwise give notice of, the lien and security interest granted
hereunder.
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8.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS
Upon the occurrence of an Event of Default and at any time thereafter as long as
such Event of Default continues, the Lender may at any time notify any account
debtor or other person or entity obligated to pay the amount due that such right
to payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender. The Borrower will join in giving such notice if
the Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, demand, xxx for, collect or receive
any money or property at any time payable or receivable on account of, or
securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor.
8.3 ASSIGNMENT OF INSURANCE
As additional security for the payment and performance of the indebtedness under
the Notes, the Borrower hereby assigns to the Lender any and all monies
(including proceeds of insurance and refunds of unearned premiums) due or to
become due under, and all other rights of the Borrower with respect to, any and
all policies of insurance now or at any time hereafter covering the Collateral
or any evidence thereof or any business records or valuable papers pertaining
thereto, and the Borrower hereby directs the issuer of any such policy to pay
all such monies directly to the Lender. At any time, the Lender may (but need
not), in the Lender's name or in the Borrower's name, execute and deliver proofs
of claim, receive all such monies, endorse checks and other instruments
representing payment of such monies, and adjust, litigate, compromise or release
any claim against the issuer of any such policy. Any monies received as payment
for any loss under any insurance policy mentioned above (other than liability
insurance policies) or as payment of any award or compensation for condemnation
or taking by eminent domain, shall be paid over to the Lender to be applied, at
the option of the Lender, either to the prepayment of the Principal and any
accrued interest or shall be disbursed to the Borrower under staged payment
terms reasonably satisfactory to the Lender for application to the cost of
repairs, replacements, or restorations. Any such repairs, replacements, or
restorations shall be effected with reasonable promptness and shall be of a
value at least equal to the value of the items or property destroyed prior to
such damage or destruction.
8.4 OCCUPANCY
The Borrower hereby irrevocably grants to the Lender the right to take exclusive
possession of any premises occupied by the Borrower at any time as long as an
Event of Default continues without notice or consent. The Lender may use such
premises only to hold, process, manufacture, sell, use, store, liquidate,
realize upon or otherwise dispose of items that are Collateral and for other
purposes that the Lender may in good xxxxx xxxx to be related or incidental
purposes. The Lender's right to hold such premises shall cease and terminate
upon the earlier of (i) payment in full and discharge of all Principal and any
accrued interest and termination of this Agreement and (ii) final sale or
disposition of all items constituting Collateral and delivery of all such items
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to purchasers. The Lender shall not be obligated to pay or account for any rent
or other compensation for the possession, occupancy or use of any such premises;
PROVIDED, HOWEVER, that if the Lender does pay or account for any rent or other
compensation for the possession, occupancy or use of any such premises, the
Borrower shall reimburse the Lender promptly for the full amount thereof. In
addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees,
duties, imposts, charges and expenses at any time incurred by or imposed upon
the Lender by reason of the execution, delivery, existence, recordation,
performance or enforcement of this Agreement or the provisions of this Section
8.4.
8.5 LICENSE
Without limiting the generality of any agreement or document, the Borrower
hereby grants to the Lender a non-exclusive, worldwide and royalty-free license
to use or otherwise exploit all intellectual property rights owned by or
licensed to the Borrower for the purpose of: (a) completing the manufacture of
any in-process materials during the continuance of any Event of Default so that
such materials become saleable inventory, all in accordance with the same
quality standards previously adopted by the Borrower for its own manufacturing
and subject to the Borrower's reasonable exercise of quality control; and (b)
selling, leasing or otherwise disposing of any or all Collateral during the
continuance of any Event of Default.
8.6 FINANCING STATEMENT
The Borrower authorizes the Lender to file from time to time, such financing
statements against collateral described as "all personal property" or "all
assets" or describing specific items of collateral including commercial tort
claims as the Lender deems necessary or useful to perfect the security interest
granted herein. All financing statements filed before the date hereof to perfect
such security interest were authorized by the Borrower and are hereby
re-authorized. A carbon, photographic or other reproduction of this Agreement or
of any financing statements signed by the Borrower is sufficient as a financing
statement and may be filed as a financing statement in any state to perfect the
security interests granted hereby. For this purpose, the Borrower represents and
warrants that the following information is true and correct:
Name and address of Borrower:
Reclamation Consulting and Applications, Inc.
000 Xxxxx Xxxxxxxx, Xxxxx X
Xxx Xxxxxxxx, XX 00000
Federal Employer Identification No. 00-0000000
Organizational Identification No. CO 19871299893
Name and address of Lender:
Pala Investments Holdings Limited
00 Xxxxxx Xxxxxx, Xxx Xxxxxx, Xxxxxx, XX0 0XX, Channel Islands
The Borrower has authorized the filing of financing statements sufficient when
filed to perfect the security interest granted herein and in any other
agreement, instrument or document by the Borrower in favor of the Lender. When
such financing statements are filed in the offices noted therein, the Lender
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will have a valid and perfected security interest in all Collateral which is
capable of being perfected by filing financing statements. None of the
Collateral is or will become a fixture on real estate, unless a sufficient
fixture filing is in effect with respect thereto.
8.7 SETOFF
The Lender may at any time or from time to time, at its sole discretion and
without demand and without notice to anyone, setoff any liability owed to the
Borrower by the Lender, whether or not due, against any Principal and any
accrued interest, whether or not due.
8.8 COLLATERAL
This Agreement does not contemplate a sale of accounts, contract rights or
chattel paper, and, as provided by law, the Borrower is entitled to any surplus
and shall remain liable for any deficiency. The Lender's duty of care with
respect to Collateral in its possession (as imposed by law) shall be deemed
fulfilled if it exercises reasonable care in physically keeping such Collateral,
or in the case of Collateral in the custody or possession of a bailee or other
third person or entity, exercises reasonable care in the selection of the bailee
or other third person, and the Lender need not otherwise preserve, protect,
insure or care for any Collateral. The Lender shall not be obligated to preserve
any rights the Borrower may have against prior parties, to realize on the
Collateral at all or in any particular manner or order or to apply any cash
proceeds of the Collateral in any particular order of application. The Lender
has no obligation to clean-up or otherwise prepare the Collateral for sale. The
Borrower waives any right it may have to require the Lender to pursue any third
person or entity for any of the Principal and any accrued interest.
9. OTHER PROVISIONS.
9.1 SECOND TRANCHE
(a) Subject to Section 9.1(b), at the Lender's sole discretion, the
Lender may increase the amount of outstanding Principal under this Loan
by an additional Two Million Dollars ($2,000,000), which additional
amount shall comprise the Second Tranche, by providing this amount to
the Borrower in cash or readily available funds, and the Borrower shall
issue to the Lender two million (2,000,000) warrants for the purchase
of an aggregate Two Million (2,000,000) shares of the Borrower's common
stock (the "Additional Warrants"). The Additional Warrants shall be
exercisable until 5:00 PM Pacific Time three (3) years from the
Effective Date and shall be evidenced by one or more warrant
certificates substantially in the form of Schedule B, attached hereto,
with an exercise price of Twenty-One Cents ($0.21) per share. The
Borrower expressly agrees that the Loan may be increased by the Second
Tranche at the sole discretion of the Lender, and Borrower agrees to
accept the additional principal amount of the Second Tranche on the
terms and conditions set forth herein, provided that the Loan shall
also be increased by the Second Tranche pursuant to the terms of
Subsection 9.1(b).
(b) Subject to Section 10 hereof, in the event that the Borrower
achieves the Benchmarks (defined below) on or before December 31, 2008,
and the full amount of the Second Tranche shall not have already been
provided to Borrower by Lender, then the Lender shall increase the
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amount of outstanding Principal under the Loan by the amount of the
Second Tranche. The Second Tranche shall be subject to all of the terms
and conditions contained in this Agreement with respect to the First
Tranche. For the purpose of this Section 9.1, the Borrower shall have
achieved the "Benchmarks" if all of the following have been
accomplished (as determined by the Lender in its reasonable
discretion):
9.1.1 The Borrower has sold at least one million
(1,000,000) gallons of its Alderox product during
calendar year 2008;
9.1.2 The Borrower has signed orders or contracts for the
sale of at least one million (1,000,000) gallons of
Alderox during calendar year 2009, or the Borrower
has the reasonable expectation of selling at least
one million (1,000,000) gallons of Alderox during
calendar year 2009 based on signed orders for the
sale of Alderox in calendar year 2009 and/or existing
customer accounts; and
9.1.3 The Borrower has reached a gross profit margin of
Five Dollars ($5.00) per gallon on its total sales of
Alderox as calculated according to U.S. Generally
Accepted Accounting Procedures in effect at the time
in calendar year 2008.
At the time of the drawdown of the Second Tranche the Borrower shall complete a
"Drawdown Certificate" in the form of Schedule I, attached hereto, and return to
the Lender. The Drawdown Certificate shall confirm that all of the conditions
precedent in Section 10 have been satisfied at the time of the drawdown.
10. CONDITIONS PRECEDENT
The Lender's obligation to advance the First Tranche and the Second Tranche
shall be subject to the following conditions precedent, provided that the event
described in Subsection 10.8 (Share Reorganization), shall be a condition
precedent to the advancement of the Second Tranche only:
10.1 DEBENTURE DOCUMENTS
The Lender shall have received each of the following, each properly executed by
the appropriate party and in form and substance satisfactory to the Lender:
10.1.1 This Agreement;
10.1.2 The Note;
10.1.3 The Patent and Trademark Security Agreement;
10.1.4 The Voting Agreement; and
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10.1.5 The Registration Rights Agreement.
10.2 REPRESENTATIONS AND WARRANTIES
Each of the representations and warranties set forth in Section 5 hereof are
true, accurate and correct as of the date of such advance, except to the extent
that such representations and warranties relate solely to an earlier date.
10.3 SECRETARY'S CERTIFICATE
The Lender shall have received a certificate of the Secretary of the Borrower,
dated at the Effective Date, (a) attesting to the corporate action taken by the
Borrower, including resolutions of the Board of Directors authorizing (i) the
execution of the Agreement, (ii) the issuance of the Note to be issued to the
Borrower, (iii) the execution of, delivery, and performance by the Borrower of
all other agreements or matters contemplated hereby or executed in connection
herewith, (b) certifying the names and true signatories of the officers of the
Borrower authorized to sign this Agreement, the Note, and other documents,
instruments or certificates to be delivered pursuant hereto and thereto,
together with the true signatures of such officers and (c) verifying that the
Articles of Incorporation and the By-Laws are true, correct and complete as of
the Effective Date.
10.4 OFFICER'S CERTIFICATE
The Lender shall have received a certificate of the President and Chief
Financial Officer of the Borrower, dated at the Effective Date, which shall
certify that the representations and warranties contained in Section 5 hereof
are true and correct as of the Effective Date and that all conditions required
to be performed prior to the Effective Date have been performed as of the
Effective Date.
10.5 GOOD STANDING CERTIFICATES
The Lender shall have received a certificate of the appropriate public official
in the jurisdiction of incorporation of the Borrower and each Subsidiary
certifying the due incorporation and good standing of the Borrower and such
Subsidiary together with, in the case of the Borrower, a certified copy of the
Articles of Incorporation of the Borrower.
10.6 NO PROCEEDINGS OF LITIGATION
No action, suit or proceeding before any arbitrator or any governmental
authority shall have been commenced, and no investigation by any governmental
authority shall have been threatened, against the Borrower or any Subsidiary, or
any of the officers or directors of the Borrower or any Subsidiary seeking to
restrain, prevent or change the transactions contemplated by this Agreement, or
seeking damages in connection with such transactions.
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10.7 NO EVENT OF DEFAULT
No event has occurred and is continuing, or would result from the advance of the
First Tranche or the Second Tranche, as the case may be, which constitutes an
Event of Default.
10.8 SHARE REORGANIZATION
By the Conversion Right Commencement Date, which shall fall within sixty (60)
days of the Effective Date, the Borrower shall have amended its Articles of
Incorporation to the extent necessary to complete a share reorganization such
that the capital structure of the Borrower is as detailed in Schedule K, as
determined by the Lender in its reasonable discretion, and such that such that
the Borrower has sufficient shares of common stock available to effect the
conversion of the Loan.
10.9 SUBORDINATION OF EXISTING AGREEMENTS
The Borrower shall have provided executed Subordination Agreements, in the form
attached hereto as Schedule N, with respect to all loans, mortgages, indentures,
security agreements and creditor agreements or arrangements secured by assets of
the Borrower which are outstanding at the date of this Agreement.
11. INDEMNIFICATION
The Borrower shall indemnify, defend and hold harmless the Lender, and any of
its participants, parent corporations, subsidiary corporations, affiliated
corporations, successor corporations, assigns, and all present and future
officers, directors, employees, attorneys and agents of the foregoing (the
"Indemnitees") from and against any of the following (collectively, "Indemnified
Liabilities"):
11.1 Any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the
execution and delivery of this Agreement or any of the
agreements, instruments or documents related hereto or the
making of the Loan;
11.2 Any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in
Subsection 5.1 proves to be incorrect in any respect or as a
result of any violation of the covenants contained in Section
6; and
11.3 Any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or
nature whatsoever (including the reasonable fees and
disbursements of counsel) in connection with the foregoing and
any other investigative, administrative or judicial
proceedings, whether or not such Indemnitee shall be
designated a party thereto, which may be imposed on, incurred
by or asserted against any such Indemnitee, in any manner
related to or arising out of or in connection with the making
of the Loan.
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If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its reasonable efforts to cooperate in the
defense of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's
obligations under this Section 11 shall survive the termination of this
Agreement and the discharge of the Borrower's other obligations hereunder.
12. REGISTRATION, TRANSFER AND SUBSTITUTION
12.1 OWNERSHIP OF NOTES
The Borrower will keep at its principal office a register in which the Borrower
will provide for the registration of Notes and the registration of transfers of
Notes. The Borrower may treat the person or entity in whose name the Note is
registered on such register as the owner thereof for the purpose of receiving
payment of the Principal and interest on such Note and for all other purposes,
whether or not such Note shall be overdue.
12.2 TRANSFER AND EXCHANGE OF NOTE
Upon surrender of the Note to the Borrower at its principal office for
registration of transfer or for exchange, the Borrower at its expense will
execute and deliver in exchange therefor a new Note or Notes of the same class
as such surrendered Note in denominations as requested by the holder or
transferee, which aggregate shall equal the unpaid Principal amount of such
surrendered Note. Each such new Note shall be registered in the name of such
person or entity as such holder or transferee may request, shall be dated so
that there will be no loss of interest on such surrendered Note and shall be
likewise in tenor.
12.3 REPLACEMENT OF NOTES
Upon receipt of evidence reasonably satisfactory to the Borrower of the loss,
theft, destruction or mutilation of any Note and, in the case of any such loss,
theft destruction, upon delivery of an indemnity in form and substance
acceptable to the Borrower in its reasonable discretion, or in the case of any
such mutilation, upon the surrender of such Note for cancellation to the
Borrower at its principal office, the Borrower at its expense will execute and
deliver, in lieu thereof, a new Note of the same class and of like tenor, dated
so that there will be no loss of interest on such lost, stolen, destroyed or
mutilated Note. Any Note in lieu of which any such new Note has been executed
and delivered by the Borrower shall not be deemed to be an outstanding Note for
any purpose hereof.
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13. GENERAL
13.1 WAIVER OR MODIFICATION
No failure on the part of the Lender in exercising any power or right hereunder
will operate as a waiver of the power or right nor will any single or partial
exercise of such right or power preclude exercise of any other right or power
hereunder. No amendment, modification or waiver of any condition of this
Agreement or consent to any departure by the Borrower therefrom will be
effective unless it is in writing signed by the Lender. No notice to or demand
on the Borrower will entitle the Borrower to any other further notice or demand
in similar or other circumstances unless specifically provided for in this
Agreement.
13.2 TIME
Time is of the essence in the performance of this Agreement.
13.3 FURTHER ASSURANCES
The parties to this Agreement will do, execute and deliver or will cause to be
done, executed and delivered all such further acts, documents and things as may
be reasonably required for the purpose of giving effect to this Agreement.
13.4 ASSIGNMENT
The Borrower may not assign this Agreement or its interest herein or any part
hereof except with the prior written consent of the Lender. The Lender may
assign the Loan or this Agreement, or its interest in the Loan or this Agreement
or any part thereof upon ten (10) days' written notice to the Borrower and
provided that (i) the assignee is an affiliated or associated company of the
Lender, or a successor company to the Lender following any re-domestication,
asset sale, merger, consolidation or other reorganization, and (ii) agrees to be
bound by the terms of this Agreement to the extent of such assignment.
13.5 SURVIVAL
All representations and warranties contained in this Agreement or in any other
agreement between the Borrower and the Lender shall survive the execution,
delivery and performance of this Agreement and the creation and payment of the
Principal.
13.6 CUMULATIVE REMEDIES
All rights and remedies of the Lender shall be cumulative and may be exercised
singularly or concurrently, at the Lender's option, and the exercise or
enforcement of any one such right or remedy shall neither be a condition to nor
bar the exercise or enforcement of any other.
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13.7 CONFIDENTIALITY
The Lender will hold and will cause its auditors, attorneys, financial advisors,
bankers and other consultants, affiliates and advisors to hold in strict
confidence, unless compelled to disclose by judicial or administrative process
or, in the reasonable opinion of its counsel, by other requirements of law, all
documents and information concerning the Borrower furnished it by the Borrower
or its representatives in connection with the transactions contemplated by this
Agreement (except to the extent that such information can be shown to have been
(i) previously known by the Lender, (ii) in the public domain through no fault
of the Lender, or (iii) later lawfully acquired from other sources by the
Lender), and the Lender will not release or disclose such information to any
other person, except its auditors, attorneys, financial advisors, bankers and
other consultants, affiliates and advisors in connection with this Agreement.
The Lender acknowledges that it has received and may continue to receive
non-public material information regarding the Company, and Lender shall not, and
shall take reasonable steps to assure that its auditors, attorneys, financial
advisors, bankers and other consultants, affiliates and advisors do not, use any
such non-public material information in contravention of applicable securities
laws or for any other purpose other then protecting the rights of Lender under
this Agreement.
14. NOTICES
All notices, requests, demands and other communications to be given hereunder
shall be in writing and shall be deemed to have been duly given on the date of
personal service or transmission by fax if such transmission is received during
the normal business hours of the addressee, or on the first business day after
sending the same by overnight courier service or by telegram, or on the third
business day after mailing the same by first class mail, or on the day of
receipt if sent by certified or registered mail, addressed as set forth below,
or at such other address as any party may hereafter indicate by notice delivered
as set forth in this Section 14:
If to Borrower: Reclamation Consulting and
Applications, Inc.
000 Xxxxx Xxxxxxxx, Xxxxx X
Xxx Xxxxxxxx, XX 00000
Attn: Xx. Xxxxxx X. Xxxxxx
President
With a copy (which shall
not constitute notice) to: August Law Group, P.C.
00000 Xxx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxxxx 00000
Attn: Xxxxxxx X. August, Esquire
President
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If to Lender: Pala Investments Holdings Limited
00 Xxxxxx Xxxxxx
Xx Xxxxxx
Xxxxxx
XX0 0XX
Channel Islands
Attn: Xx. Xxxxx Xxxxxx, Director
With a copy to: Pala Investment AG
Xxxxxxxxxxx 00
0000 Xxx
Xxxxxxxxxxx
Attn: Xx Xxx Xxxxxx, Managing Director
15. AMENDMENTS
This Agreement may be amended, waived, discharged or terminated only with the
agreement of the party against whom enforcement of the amendment, waiver,
discharge or termination is sought and only in writing signed by both parties to
this Agreement and subject to the same governing law and venue as stated in
Section 2.1 hereof.
16. COUNTERPART AND FAX EXECUTION
This Agreement may be executed in two or more counterparts and by fax
transmission, each of which will be deemed to be an original and all of which
will constitute one agreement, effective as of the date given above.
17. ENTIRE AGREEMENT
This Agreement, together with the Schedules and Exhibits referred to herein
which are incorporated herein by this reference, and the agreements referred to
herein, supersedes all prior agreements and understandings and shall constitute
the entire agreement between the parties hereto with respect to the transactions
contemplated hereby.
SIGNATURES ON NEXT PAGE
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IN WITNESS WHEREOF, the parties hereto have executed this Secured Convertible
Debenture as of the date first written above.
LENDER
PALA INVESTMENTS HOLDINGS LIMITED
/s/ Xxxxx Xxxxxx
---------------------------------
Xxxxx Xxxxxx
Executive Director
BORROWER
RECLAMATION CONSULTING AND APPLICATIONS, INC.,
a Colorado corporation
/s/ Xxxxxxx Xxxxxx
-------------------------------------
By: Xxxxxxx X. Xxxxxx
Its: Chief Executive Officer
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SCHEDULE A
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to Secured Convertible Debenture.
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE
SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO
THE ISSUER, (B) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH REGULATION S UNDER
THE ACT, (C) IN COMPLIANCE WITH THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
UNDER THE ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS, OR (D) IN A TRANSACTION THAT DOES NOT
REQUIRE REGISTRATION UNDER THE ACT OR ANY APPLICABLE STATE LAWS, AND THE HOLDER
HAS, PRIOR TO SUCH SALE, FURNISHED TO THE ISSUER AN OPINION OF COUNSEL OR OTHER
EVIDENCE OF EXEMPTION, IN EITHER CASE REASONABLY SATISFACTORY TO THE ISSUER. THE
HOLDER HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING
TRANSACTION WITH REGARD TO THIS SECURITY, EXCEPT AS PERMITTED BY THE ACT.
PROMISSORY NOTE
$5,000,000 December 12, 2007
This Promissory Note is being issued pursuant to a Secured Convertible Debenture
dated for reference as of December 12, 2007 between Pala Investments Holdings
Limited and Reclamation Consulting and Applications, Inc. (the "Convertible
Debenture"). Capitalized terms used in this Promissory Note are defined in the
Convertible Debenture shall have the same meanings as defined therein, unless
otherwise defined herein.
FOR VALUE RECEIVED, Reclamation Consulting and Applications, Inc. (the
"Borrower"), of 000 Xxxxx Xxxxxxxx, Xxxxx X, Xxx Xxxxxxxx, XX 00000, PROMISES TO
PAY on December 11, 2010 or on demand in accordance with the terms of the
Convertible Debenture, to the order of Pala Investments Holdings Limited (the
"Lender"), at 00 Xxxxxxxxxx, Xx. Xxxxxx, Xxxxxx, XX0 0XX, Channel Islands, the
sum of Five Million Dollars ($5,000,000) or the aggregate unpaid principal
amount of the First Tranche and the Second Tranche, if any, together with any
accrued unpaid interest and costs and expenses outstanding as of such date (the
"Indebtedness"). Interest on the Indebtedness at the rate of Twelve Percent
(12%) per annum (or the highest interest rate permissible by applicable law,
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whichever is lower) (the "Interest Rate"), compounded on the last day of each
fiscal quarter of the Borrower, will accrue until the earlier of (i) the
Maturity Date, (ii) the date the Loan is repaid in full, or (iii) the date that
the Indebtedness is converted to Borrower's common stock pursuant to the terms
of the Convertible Debenture. Notwithstanding the foregoing, following the
occurrence of an Event of Default and pursuant to Subsection 7.2.3 of the
Convertible Debenture, the Interest Rate shall be Sixteen Percent (16%) per
annum (or the highest interest rate permissible by applicable law, whichever is
lower), until the earlier of (i) the date such Event of Default is cured, (ii)
the date the Indebtedness is repaid in full, or (iii) the date that the
Indebtedness is converted to Borrower's common stock pursuant to the terms of
the Convertible Debenture.
The obligations of the Borrower to pay the Indebtedness to the Lender will
terminate if and to the extent that the Indebtedness is converted in accordance
with Section 4 of the Convertible Debenture.
The Borrower waives presentment or other demand for payment, notice of dishonor,
protest and non-payment.
The Borrower may prepay all or any portion of the Indebtedness at any time or
from time to time without penalty, bonus or charges.
The Borrower shall pay all costs of collection, including reasonable attorneys'
fees and legal expenses if this Promissory Note is not paid when due, whether or
not legal proceedings are commenced.
Reclamation Consulting and Applications,
Inc., a Colorado corporation
______________________________________
By: Xxxxxxx X. Xxxxxx
Its: Chief Executive Officer
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SCHEDULE B
to Secured Convertible Debenture
WARRANT CERTIFICATE
No. _____________ 3,000,000 Warrants
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE
SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO
THE ISSUER, (B) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH REGULATION S UNDER
THE ACT, (C) IN COMPLIANCE WITH THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
UNDER THE ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS, OR (D) IN A TRANSACTION THAT DOES NOT
REQUIRE REGISTRATION UNDER THE ACT OR ANY APPLICABLE STATE LAWS, AND THE HOLDER
HAS, PRIOR TO SUCH SALE, FURNISHED TO THE ISSUER AN OPINION OF COUNSEL OR OTHER
EVIDENCE OF EXEMPTION, IN EITHER CASE REASONABLY SATISFACTORY TO THE ISSUER. THE
HOLDER HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING
TRANSACTION WITH REGARD TO THIS SECURITY, EXCEPT AS PERMITTED BY THE ACT.
WARRANTS FOR THE
PURCHASE OF COMMON STOCK
THIS CERTIFIES THAT, FOR VALUE RECEIVED, PALA INVESTMENTS HOLDINGS LIMITED, (the
"Holder"), is the owner of warrants (the "Warrants") for the purchase of up to
an aggregate of 3,000,000 shares of validly-issued, fully-paid and
non-assessable common stock of RECLAMATION CONSULTING AND APPLICATIONS, INC., a
corporation organized and existing under the laws of the State of Colorado (the
"Corporation"). Such purchase may be made at any time, and from time to time,
prior to 5:00 p.m. Pacific Time on the Expiration Date (as hereinafter defined)
upon the presentation and surrender of this Warrant Certificate with a written
notice in the form of Attachment 1, attached hereto, signed by the Holder
stating the number of shares of Common Stock with respect to which such exercise
is being made, at the principal corporate address of the Corporation,
accompanied by payment of the Exercise Price (as hereinafter defined) for each
Warrant exercised (the "Purchase Price") in lawful money of the United States of
America in cash or by official bank or certified check made payable to
RECLAMATION CONSULTING AND APPLICATIONS, INC. The Purchase Price is subject to
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modification or adjustment as set forth herein. The Warrants represented by this
Warrant Certificate have been issued by the Corporation in connection with the
Secured Convertible Debenture, dated as of December 12, 2007, by and between the
Corporation and the Holder.
SECTION 1. DEFINITIONS. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "CORPORATE OFFICE" shall mean the office of the Corporation at
which, at any particular time, its principal business shall be
administered, which office is currently located at 000 Xxxxx Xxxxxxxx,
Xxxxx X, Xxx Xxxxxxxx, XX 00000.
(b) "EXERCISE DATE" shall mean, as to any Warrant, the date on which
the Corporation shall have received both (i) this Warrant Certificate,
together with a written notice of exercise in accordance herewith, duly
executed by the Holder hereof, or his attorney duly authorized in
writing, and indicating that the Holder is thereby exercising such
Warrant(s), and (ii) payment by wire transfer, or by official bank or
certified check made payable to the Corporation, of an amount in lawful
money of the United States of America equal to the applicable Purchase
Price for such Warrant(s).
(c) "EXERCISE PERIOD" shall mean the period commencing as of December
12, 2007 and expiring at 5:00 P.M. (Pacific Time), on December 11,
2010.
(d) "EXERCISE PRICE" shall mean, as to any Warrant, the price at which
a Warrant may be exercised for the purchase of Warrant Shares, which
shall be $0.21.
(e) "Expiration Date" shall mean 5:00 P.M. (Pacific Time) on last day
of the Exercise Period. If such date shall be a holiday or a day on
which banks are authorized to be closed in the State of California,
then the Expiration Date shall mean 5:00 P.M. (Pacific Time) of the
next consecutive day which does not fall on a holiday or a day on which
banks are authorized to be closed in the State of California.
(f) "HOLDER" shall mean, as to any Warrant and as of any particular
date, the person in whose name the Warrant Certificate representing
such Warrant is registered as of that date on the Warrant Register
maintained by the Corporation.
(g) "COMMON STOCK" shall mean the common stock of the Corporation,
which has the right to participate in the distribution of earnings and
assets of the Corporation without limit as to amount or percentage.
(h) "PURCHASE PRICE" shall mean the purchase price to be paid upon
exercise of each Warrant hereunder in accordance with the terms hereof,
which price shall be the Exercise Price, subject to adjustment from
time to time pursuant to the provisions of Section 5 hereof.
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(i) "SECURITIES ACT" shall mean the Securities Act of 1933, and any
amendments or modifications, or successor legislation, thereto adopted,
and all regulations, rules or other laws enacted or adopted pursuant
thereto.
(j) "WARRANTS" shall mean the Warrants represented by this Warrant
Certificate.
(k) "WARRANT CERTIFICATE" shall mean any certificate representing
Warrants, and "this Certificate" shall mean the Warrant Certificate
issued to the Holder identified on the first page hereof.
(l) "WARRANT REGISTRY" means the official record maintained by the
Corporation in which are recorded, with respect to each Warrant
Certificate issued by the Corporation, the date of issuance, the name
and address of the original Holder, the name and address of each
subsequent transferee of such original Holder, and the identifying
number, of such Warrant Certificate.
(m) "WARRANT SHARES" shall have the meaning given to it in Section 2 of
this Certificate.
SECTION 2. EXERCISE OF WARRANTS.
(a) Each Warrant evidenced hereby may be exercised by the Holder upon
the terms and subject to the conditions set forth herein prior 5:00
p.m. Pacific Time on the Expiration Date (as hereinafter defined). A
Warrant shall be deemed to have been exercised immediately prior to the
close of business on the Exercise Date and the person entitled to
receive shares of restricted common stock of the Corporation
deliverable upon such exercise ("Warrant Shares") shall be treated for
all purposes as the Holder of a Warrant Share upon the exercise of the
applicable Warrant as of the close of business on the Exercise Date.
Promptly following, and in any event within ten (10) business days
after, the date on which the Corporation first receives clearance of
all funds received in payment of the Purchase Price pursuant to this
Warrant Certificate, the Corporation shall cause to be issued and
delivered to the person or persons entitled to receive the same, a
certificate or certificates evidencing the issuance to such Holder of
the applicable number of Warrant Shares (plus a Warrant Certificate for
any remaining issued but unexercised Warrants of the Holder).
Notwithstanding the foregoing sentence, in the event that any
registration or qualification (or filing for exemption from any such
requirements) is required prior to the issuance of such Warrant Shares
by the Corporation in accordance with Section 3(b) below, then the
obligation to deliver any such certificates shall arise only upon
completion of such requirements and at such time as the Corporation may
lawfully do so.
(b) Upon the exercise of the Warrants represented hereby, if the
Corporation so requests, the Holder shall certify to the Corporation
that it is not exercising such Warrants with a view to distribute the
Warrant Shares in violation of the Securities Act, and shall provide
such other investor representations as the Corporation may require to
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confirm the ability of the Corporation to rely upon the exemption from
registration under the Securities Act which applies to the distribution
of Warrant Shares at the time of such distribution.
SECTION 3. RESERVATION OF SHARES; TAXES; ETC.
(a) The Corporation covenants that it will at all times reserve and
keep available out of its authorized Common Stock, solely for the
purpose of issue upon the valid exercise of Warrants, such number of
Warrant Shares as shall then be issuable upon the exercise of all
Warrants then outstanding. The Corporation covenants that all shares of
Common Stock which shall be issuable upon exercise of the Warrants
shall, at the time of delivery, be duly and validly issued, fully-paid,
non-assessable and free from all taxes, liens and charges with respect
to the issuance thereof (other than those which the Corporation shall
promptly pay or discharge, or any liens created thereon by the Holder
thereof and/or any predecessor of such Holder).
(b) The Corporation shall not be obligated to deliver any Warrant
Shares pursuant to the exercise of the Warrants represented hereby
unless and until a registration statement under the Securities Act
and/or under any applicable state securities laws and regulations, with
respect to such securities is effective, or an exemption from such
registration is available to the Corporation at the time of such
exercise. The Corporation covenants that if any Warrant Shares reserved
for the purpose of exercise of Warrants hereunder require registration
with, or approval of, any governmental authority under any federal or
state securities law before such securities may be validly issued or
delivered upon such exercise, then the Corporation will in good faith
and as expeditiously as reasonably possible, endeavor to secure such
registration or approval. However, in the event that this Warrant
Certificate represents Warrants which have been transferred by an
initial holder thereof, the Warrants represented hereby may not be
exercised by, nor shares of Common Stock issued to, the Holder hereof
in any state in which such exercise and issuance would be unlawful.
(c) The Corporation shall pay all documentary, stamp or similar taxes
and other governmental charges that may be imposed with respect to the
issuance of the Warrants, or the issuance or delivery of any shares of
Common Stock upon exercise of the Warrants; provided, however, that if
the shares of Common Stock are to be delivered in a name other than the
name of the Holder hereof, then no such delivery shall be made unless
the person requesting the same has paid to the Corporation the amount
of transfer taxes or charges incident thereto, if any.
SECTION 4. LOSS OR MUTILATION. Upon receipt by the Corporation of evidence
satisfactory to it of the ownership of, and loss, theft, destruction or
mutilation of, this Warrant Certificate and (in case of loss, theft or
destruction) of indemnity satisfactory to the Corporation, and (in the case of
mutilation) upon surrender and cancellation thereof, the Corporation shall
execute and deliver to the Holder in lieu thereof a new Warrant Certificate of
like tenor representing an equal aggregate number of Warrants as was indicated
to be outstanding on the prior lost or mutilated Warrant Certificate (provided,
however, that to the extent that any discrepancy may exist between the number of
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Warrants purported to be outstanding in respect of any Holder as evidenced by a
Warrant Certificate that has been lost or mutilated and the number attributable
to such Holder in the Warrant Registry, then the Warrant Registry shall control
for all purposes, absent a showing of manifest error. Each Holder requesting a
substitute Warrant Certificate due to loss, theft or destruction shall, prior to
receiving such substitute certificate, provide an affidavit to the Corporation
in the form prescribed thereby and signed by (and notarized on behalf of) such
Holder. Applicants for a substitute Warrant Certificate shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Corporation may prescribe.
SECTION 5. ADJUSTMENT OF PURCHASE PRICE. Subject to the provisions of this
Warrant Certificate and applicable law, in the event the Corporation, at any
time or from time to time after the date hereof while the Warrants are
outstanding, (i) pays a stock dividend on its common stock, (ii) subdivides
outstanding shares of common stock into a larger number of shares, or (iii)
combines outstanding shares of common stock into a smaller number of shares,
then in each such case the Purchase Price shall be adjusted to be equal to $0.21
multiplied by a fraction of which the numerator shall be the number of shares of
common stock outstanding immediately before such event and of which the
denominator shall be the number of shares of common stock outstanding
immediately after such event.
SECTION 6. RESTRICTIVE LEGEND.
(a) Except as otherwise provided in this Section 6, each Warrant
Certificate and each certificate evidencing the issuance of Warrant
Shares (whether issued in the name of the original Holder of this
Certificate or of any subsequent transferee thereof), shall be stamped
or otherwise imprinted with a legend in substantially the following
form:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT
BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"). THESE SECURITIES MAY BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO THE ISSUER, (B)
OUTSIDE THE UNITED STATES IN COMPLIANCE WITH REGULATION S
UNDER THE ACT, (C) IN COMPLIANCE WITH THE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE ACT PROVIDED BY RULE 144
THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE
STATE SECURITIES LAWS, OR (D) IN A TRANSACTION THAT DOES NOT
REQUIRE REGISTRATION UNDER THE ACT OR ANY APPLICABLE STATE
LAWS, AND THE HOLDER HAS, PRIOR TO SUCH SALE, FURNISHED TO THE
ISSUER AN OPINION OF COUNSEL OR OTHER EVIDENCE OF EXEMPTION,
IN EITHER CASE REASONABLY SATISFACTORY TO THE ISSUER. THE
HOLDER HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY
HEDGING TRANSACTION WITH REGARD TO THIS SECURITY, EXCEPT AS
PERMITTED BY THE ACT."
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(b) Each certificate evidencing the issuance of Warrant Shares and each
Warrant Certificate may also bear such other restrictive legends as may
be necessary to comply with applicable law in the Corporation's
reasonable discretion. The legend requirements of Section 6(a) above
shall terminate as to any particular Warrant or Warrant Share: (i) if
and so long as such security shall have been effectively registered
under the Securities Act and is disposed of pursuant thereto; or (ii)
when the Corporation shall have received an opinion of counsel
reasonably satisfactory to it that such shares may be sold to the
public without registration thereof under the Securities Act. Whenever
the legend requirements imposed by this Section 6 shall terminate as to
any Warrant Share, as hereinabove provided, the Holder hereof shall be
entitled to receive from the Corporation, at the Corporation's expense,
a new certificate representing such Warrant Shares and not bearing the
restrictive legend set forth in Section 6(a).
SECTION 7. RIGHTS OF ACTION. All rights of action with respect to the Warrants
are vested in the Holders of the Warrants, and any Holder of a Warrant, without
consent of the holder of any other Warrant, may, in such Holder's own behalf and
for his own benefit, enforce against the Corporation his right to exercise his
Warrants for the purchase of Warrant Shares in the manner provided in this
Warrant Certificate.
SECTION 8. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his or
her acceptance thereof, consents and agrees with the Corporation and every other
holder of a Warrant that:
(a) the Warrant Registry shall be maintained by the Corporation's
Secretary, and shall be the official register of all Warrants issued to
any person pursuant to the Convertible Debenture. The Warrant Registry
shall be dispositive as to the issuance, ownership, transfer and other
aspects of each Warrant issued by the Corporation which are recorded
therein and, absent manifest error, such records shall control for all
purposes;
(b) the Warrants are transferable only on the Warrant Registry by the
Holder thereof in person or by his attorney duly authorized in writing
and only if the Warrant Certificates representing such Warrants are
surrendered at the Corporate Office of the Corporation, duly endorsed
or accompanied by a proper instrument of transfer satisfactory to the
Corporation in its sole discretion, together with payment of the amount
of any applicable transfer taxes; and
(c) the Corporation may deem and treat the person in whose name the
Warrant Certificate is registered on the Warrant Registry as the Holder
and as the absolute, true and lawful owner of the Warrants represented
thereby for all purposes, and the Corporation shall not be affected by
any notice or knowledge to the contrary, except as otherwise expressly
provided in this Certificate.
SECTION 9. MODIFICATION OF WARRANTS. Other than with respect to any adjustment
made by the Corporation in accordance with the provisions of Section 5 hereof,
this Certificate may only be modified, supplemented or altered by the
Corporation, and only with the consent in writing of the Holder.
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SECTION 10. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first class registered or certified mail, postage prepaid as
follows: if to the Holder of a Warrant Certificate, at the address of such
Holder as shown on the Warrant Registry maintained by the Corporation; and if to
the Corporation, addressed as set forth below, or at such other address as may
be designated by the Corporation from time to time in accordance with this
Section 10:
If to the Corporation: Reclamation Consulting and
Applications, Inc.
000 Xxxxx Xxxxxxxx, Xxxxx X
Xxx Xxxxxxxx, XX 00000
Attn: Xx. Xxxxxx X. Xxxxxx
President
With a copy (which shall
not constitute notice) to: August Law Group, P.C.
00000 Xxx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxxxx 00000
Attn: Xxxxxxx X. August, Esquire
President
SECTION 11. GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of California
applicable to the performance and enforcement of contracts made within such
State, without giving effect to the law of conflicts of laws applied thereby. In
the event that any dispute shall occur between the parties arising out of or
resulting from the construction, interpretation, enforcement or any other aspect
of this Agreement, the parties hereby agree to accept the exclusive jurisdiction
of the Courts of the State of California sitting in and for the County of
Orange.
SECTION 12. ENTIRE UNDERSTANDING. This Certificate contains the entire
understanding among the Corporation and the Holder relating to the subject
matter covered herein, and merges all prior discussions, negotiations and
agreements, if any between them. Neither of the parties to this agreement shall
be bound by any representations, warranties, covenants, or other understandings
relating to such subject matter, other than as expressly provided for or
referred to herein.
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IN WITNESS WHEREOF, the Corporation has caused this Warrant Certificate
to be duly executed, manually or in facsimile, by an officer thereunto duly
authorized, as of the date set forth below.
Date: December 12, 2007
RECLAMATION CONSULTING AND APPLICATIONS, INC.,
a Colorado corporation
____________________________________
By: Xxxxxxx X. Xxxxxx
Its: Chief Executive Officer
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ATTACHMENT 1
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TO WARRANTS FOR THE
PURCHASE OF COMMON STOCK
NOTICE OF EXERCISE
TO: RECLAMATION CONSULTING AND APPLICATIONS, INC. (THE "COMPANY")
1. The undersigned hereby elects to purchase ____________ shares of
Company common stock, pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price in full, together
with all applicable transfer taxes, if any.
2. The undersigned hereby certifies that it is not a U.S. Person (as
defined by Rule 902 of the Securities Act of 1933, as amended) and that
the warrant is not being exercised for the account or benefit of or on
behalf of a U.S. Person.
3. Please issue a certificate or certificates representing said shares of
Company common stock in the name of the undersigned or in such other
name as is specified below:
__________________________________
(Name)
__________________________________
(Address)
_____________________ ___________________________________
(Date) (Name of Warrant Holder)
By: __________________________
Title:__________________________
(Name of purchaser, and
title and signature of
authorized person)
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SCHEDULE C
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to Secured Convertible Debenture
NOTICE OF CONVERSION
TO: RECLAMATION CONSULTING AND APPLICATIONS, INC. (the "Company")
1. The undersigned hereby elects to convert to Company common stock the
amount of outstanding Principal under the attached Convertible
Debenture and the attached Promissory Note(s), all pursuant to the
terms of the Convertible Debenture, in the amounts designated below:
Principal: $____________
Interest accrued on such amount of Principal: $____________
Total (the "Conversion Amount"): $____________
2. The undersigned hereby certifies that (a) it is not a U.S. Person (as
defined by Rule 902 of the Securities Act of 1933, as amended) and that
this conversion is not being effected for the account or benefit of or
on behalf of a U.S. Person; and (b) all representations and warranties
contained in the Convertible Debenture as to the undersigned's status
as an investor in the Company remain true and correct as of the date of
this Notice of Conversion.
3. Please issue a certificate or certificates representing said shares of
Company common stock in the name of the undersigned or in such other
name as is specified below:
__________________________________
(Name)
__________________________________
(Address)
________________________ ___________________________________
(Date) (Name of Lender)
By: ______________________________
Title: ______________________________
(Name of Lender, and title and
signature of authorized person)
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SCHEDULE D
to Secured Convertible Debenture
COLLATERAL
"Collateral" means all of the Borrower's accounts, chattel paper and electronic
chattel paper, deposit accounts, documents, equipment, general intangibles,
goods, instruments, inventory, investment property, real property,
letter-of-credit rights, letters of credit; together with (i) all substitutions
and replacements for and products of any of the foregoing; (ii) in the case of
all goods, all accessions; (iii) all accessories, attachments, parts, equipment
and repairs now or hereafter attached or affixed to or used in connection with
any goods; (iv) all warehouse receipts, bills of lading and other documents of
title now or hereafter covering such goods; (v) all other collateral pledged to
the Lender under any other agreement, instrument or document; (vi) any money, or
other assets of the Borrower that now or hereafter come into the possession,
custody, or control of the Lender; (vii) proceeds of any and all of the
foregoing; (ix) books and records of the Borrower, including all mail or
electronic mail addressed to the Borrower; and (x) all of the foregoing, whether
now owned or existing or hereafter acquired or arising or in which the Borrower
now has or hereafter acquires any rights. As used in the definition of
Collateral, each of the following terms shall have the meaning given it under
the Uniform Commercial Code as in effect in the state designated in this
Agreement as the state whose laws shall govern this Agreement, or in any other
state whose laws are held to govern this Agreement or any portion of this
Agreement: accounts, chattel paper, electronic chattel paper, deposit accounts,
documents, equipment, general intangibles, goods, instruments, inventory,
investment property and letter-of-credit rights.
For the avoidance of doubt, the Lender shall have the first lien over all
Collateral, which will rank higher than any other creditor of the Borrower, to
the extent permitted by law.
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SCHEDULE E
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AUTHORIZED CAPITAL STOCK
As of the Effective Date, the authorized and issued capital stock of
the Borrower is as follows:
1. Authorized Shares of Common Stock: 150,000,000 shares, of which
121,650,023 issued and outstanding.
2. Authorized Shares of Preferred Stock: 5,000,000 shares, none of
which are issued and outstanding.
The following table represents the approximate capitalization of the Borrower as
of December 5, 2007, without giving effect to the Share Reorganization:
WARRANTS
ASSOCIATED
WITH
OUTSTANDING CONVERSION OF CONVERSION CONVERTIBLE OPTIONS &
NOTES COMMON STOCK PRINCIPAL OF INTEREST DEBENTURES WARRANTS FULLY DILUTED
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Outstanding Shares
of Common Stock 1 121,650,023 121,650,023
Convertible Note 2 45,843,840 15,836,634 61,680,474
Secured Convertible
Debentures 3 5,800,000 1,044,000 6,844,000 13,688,000
Unsecured Convertible
Debentures 4 6,583,333 450,000 950,000 7,983,333
Outstanding Stock Options
& Warants 5 26,531,500 26,531,500
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Total 121,650,023 58,227,173 17,330,634 7,794,000 26,531,500 231,533,330
Notes to Table
1. Outstanding shares of common stock as of December 5, 2007.
2. Convertible Note dated July 18, 2007 issued to Canvasback Company
Limited pursuant to the Note Purchase Agreement dated October 17, 2006,
as amended, bearing interest at the rate of 10% per annum and maturing
on July 18, 2009. Assumes full conversion of all principal and interest
to shares of common stock, as of December 5, 2007, at a conversion
price of share of $0.025 per share.
3. Secured convertible debentures dated May 30, 2007 maturing on November
29, 2008 and carrying interest at 12% per annum. The outstanding
balance of principal, interest and up to six months of future interest
is convertible at $0.20 per share. Warrants issuable on conversion have
exercise prices of $0.22 and $0.24. Assumes full conversion of all
principal and interest to shares of common stock and the exercise of
all associated warrants as of December 5, 2007.
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4. Convertible Debentures issued to Xxxx Xxxx in September 2007 (the Xxxx
Xxxx CD"), Xxxx Xxxx in October 2007 (the "Xxxx Xxxx CD") and to nine
Canadian investors in November 2007 (the "November CD's") together with
associated warrants.
The Xxxx Xxxx CD carries interest at 12% per annum and matures on March
10, 2009, with interest payable monthly. The principal amount of the
Xxxx Xxxx is $350,000 including $50,000 advanced in October 2007 which
the parties have orally agreed to add to the Xxxx Xxxx CD. The
principal is convertible by Xxxx Xxxx into shares of the Borrower's
common stock at $0.12 per share In connection with the Xxxx Xxxx CD,
Xxxx Xxxx is entitled to warrants for the purchase of 350,000 shares of
Borrower's common stock at an exercise price of $0.20 per share for a
term of three (3) years from issuance.
The Xxxx Xxxx CD carries interest at 12% per annum and matures on April
21, 2009, with interest payable monthly. The principal amount of the
Xxxx Xxxx CD is $105,030. The principal is convertible by Xxxx Xxxx
into shares of the Borrower's common stock at $0.15 per share. Xxxx
Xxxx also received warrants to purchase 100,000 shares of our common
stock. Half of the warrants have an exercise price of $0.22 per share
and the other half have an exercise price of $0.24 per share. The
warrants expire on May 22, 2010.
The November CD's carry interest of 12% per annum and mature two (2)
years following issuance, with interest payable monthly. The principal
amount of the November Debentures is $500,000. The principal is
convertible by the investors into shares of the Borrower's common stock
at $0.15 per share. The investor also received warrants to purchase up
to 500,000 shares of the Borrower's common stock at an exercise price
of $0.22 per share for a term of three (3) years.
Assumes full conversion of all principal and interest, and applicable
future interest on the Xxxx Xxxx CD, Xxxx Xxxx CD and the November CD's
to shares of common stock and the exercise of all associated warrants
as of December 5, 2007.
5. Consists of all outstanding options for the purchase of common stock
and any other warrants not included above.
E-2
SCHEDULE F
----------
SUBSIDIARIES
At the Effective Date, the Borrower has no subsidiaries.
F-1
SCHEDULE G
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
RECLAMATION CONSULTING AND APPLICATIONS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
WITH
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
================================================================================
RECLAMATION CONSULTING AND APPLICATIONS, INC.
TABLE OF CONTENTS
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM......................F-1
FINANCIAL STATEMENTS:
Balance Sheet.............................................................F-2
Statements of Operations..................................................F-3
Statements of Stockholders' Deficit.......................................F-4
Statements of Cash Flows..................................................F-5
Notes to Financial Statements.............................................F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Reclamation Consulting and Applications, Inc.
We have audited the accompanying balance sheet of Reclamation Consulting and
Applications, Inc. (the "Company") as of June 30, 2007, and the related
statements of operations, stockholders' deficit, and cash flows for each of the
years in the two-year period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reclamation Consulting and
Applications, Inc. at June 30, 2007 and the results of its operations and its
cash flows for each of the years in the two-year period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the financial statements, the Company has incurred
recurring losses and has negative working capital of $2,116,047 at June 30,
2007, which indicates that the Company may lack sufficient working capital to
service its debts and to fund its operations through the fiscal year ending June
30, 2008. These matters, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 1. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
As discussed in Note 2 to the financial statements, effective July 1, 2006, the
Company changed its method of accounting for share-based compensation to adopt
Statement of Financial Accounting Standards No. 123(R), SHARE-BASED PAYMENT.
/S/ KMJ XXXXXX & COMPANY LLP
Irvine, California
October 15, 2007
F-1
RECLAMATION CONSULTING AND APPLICATIONS, INC.
BALANCE SHEET
JUNE 30, 2007
ASSETS
------
CURRENT ASSETS:
Cash $ 3,741
Accounts receivable 27,750
Inventories 45,221
Prepaid expenses and other current assets 60,400
------------
Total current assets 137,112
Property and equipment, net 44,827
License agreement, net 425,000
Debt issuance costs, net 504,167
Deposits 28,158
------------
$ 1,139,264
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 415,741
Accrued professional fees 200,189
Payroll taxes payable 98,075
Accrued interest payable 488,124
Payable to shareholders 110,000
Other accrued expenses 60,862
Accrued judgment payable 29,700
Current portion of notes payable - related parties,
net of debt discount 554,118
Current portion of notes payable, net of debt discount 296,350
------------
Total current liabilities 2,253,159
Notes payable-related parties, net of current portion and debt discount 1,051,936
Notes payable, net of current portion and debt discount 472,566
------------
Total liabilities 3,777,661
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 150,000,000 shares authorized,
55,570,023 shares issued and outstanding 555,700
Committed shares 307,400
Additional paid-in-capital 23,667,761
Treasury stock (1,500,000 shares), at cost (15,000)
Accumulated deficit (27,154,258)
------------
Total stockholders' deficit (2,638,397)
------------
$ 1,139,264
============
See report of independent registered public accounting firm and accompanying
notes to the financial statements.
F-2
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
------------ ------------
Net revenue $ 214,912 $ 96,122
Cost of revenue 371,281 150,670
------------ ------------
Gross loss (156,369) (54,548)
Selling, general and administrative expenses 3,139,508 3,229,011
------------ ------------
Loss from operations (3,295,877) (3,283,559)
Other income (expense)
Interest expense (2,164,960) (1,280,668)
Loss on disposal of asset (540) --
Loss on uncolletible notes receivable -- (10,608)
Gain on extinguishment of debt 1,159,164 --
Litigation settlement -- (21,000)
Change in fair value of derivative liabilities (820,826) (2,508,656)
Loss on collateralized shares -- (110,000)
------------ ------------
(1,827,162) (3,930,932)
------------ ------------
Loss before income taxes (5,123,039) (7,214,491)
Provision for income taxes 800 800
------------ ------------
Net loss $ (5,123,839) $ (7,215,291)
============ ============
Net loss per common share:
Basic and diluted $ (0.10) $ (0.19)
============ ============
Weighted-average common shares outstanding
Basic and diluted 49,558,022 37,069,761
============ ============
See report of independent registered public accounting firm and accompanying notes
to the financial statements.
F-3
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
Common Stock
--------------------------- Additional Total
Number of Paid-in Treasury Committed Accumulated Stockholders'
Shares Amount Capital Stock Shares Deficit Deficit
------------ ------------ ------------ ------------ ----------- ------------ ------------
Balance at June 30, 2005 29,620,813 $ 296,208 $ 11,731,997 $ (15,000) $ 25,000 $(14,815,128) $ (2,776,923)
Cancellation of share to
be issued (25,000) (25,000)
Issuance of shares for
services rendered 662,500 6,625 28,375 35,000
Conversion of notes payable
and accrued interest 7,896,897 78,969 763,293 842,262
Common shares to be issued
for services rendered 32,400 32,400
Cashless exercise of warrants 3,274,998 32,750 (32,750) --
Issuance of shares for
intangible asset 7,611,150 76,112 424,396 500,508
Reclass of derivative
liabity to APIC in connection
with warrants exercised and
notes converted 1,634,496 1,634,496
Net loss (7,215,291) (7,215,291)
------------ ------------ ------------ ------------ ----------- ------------ ------------
Balance at June 30, 2006 49,066,358 490,664 14,549,807 (15,000) 32,400 (22,030,419) (6,972,548)
Issuance of common shares
for cash 1,000,000 10,000 140,000 150,000
Issuance of shares for
services to be rendered 1,200,000 12,000 132,000 144,000
Common shares to be issued
for guarantees of debt 275,000 275,000
Issuance of stock options
to employees 949,058 949,058
Beneficial conversion
feature of debt 3,955,147 3,955,147
Shares issued in connection
with extinguishment of debt 3,250,000 32,500 780,000 812,500
Cashless exercise of warrants 53,665 536 (536) --
Shares issued for debt
finders' fees 1,000,000 10,000 240,000 250,000
Reclass of warrant - related
derivative liabilities to
APIC in connection with
repayment of debt and
warrants 2,922,285 2,922,285
Net loss (5,123,839) (5,123,839)
------------ ------------ ------------ ------------ ----------- ------------ ------------
Balance at June 30, 2007 55,570,023 $ 555,700 $ 23,667,761 $ (15,000) $ 307,400 $(27,154,258) $ (2,638,397)
============ ============ ============ ============ =========== ============ ============
See report of independent registered public accounting firm and accompanying notes to the financial statements.
F-4
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,123,839) $(7,215,291)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on uncollectible notes receivable -- 10,608
Loss on collateralized shares -- 110,000
Issuance of stock options for services rendered 949,058 756,531
Issuance of shares for services rendered 60,000 67,400
Change in fair value of derivative and warrant liabilities 820,826 2,508,656
Amortization of discount on notes payable 1,684,978 914,638
Depreciation and amortization 141,401 53,820
Gain on extinguishment of debt (1,159,164) --
Loss on disposal of asset 540 --
Increase-decrease in operating assets and liabilities:
Accounts receivable (10,643) 3,499
Inventories 19,299 (18,828)
Prepaid expenses and other current assets 17,053 56,716
Accounts payable and accrued expenses 496,911 181,705
----------- -----------
Total adjustments 3,020,259 4,644,745
----------- -----------
Net cash used in operating activities (2,103,580) (2,570,546)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (15,224) (8,130)
----------- -----------
Net cash used in investing activities (15,224) (8,130)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable and convertible debentures 3,879,056 3,744,379
Payments on notes payable and convertible debentures (1,906,511) (1,165,703)
Issuance of common shares for cash 150,000 --
----------- -----------
Net cash provided by financing activities 2,122,545 2,578,676
----------- -----------
Net change in cash 3,741 --
CASH, BEGINNING OF YEAR -- --
----------- -----------
CASH, END OF YEAR $ 3,741 $ --
=========== ===========
See report of independent registered public accounting firm and accompanying notes to the financial statements.
F-5
RECLAMATION CONSULTING AND APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
(Continued)
2007 2006
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 115,288 $ 270,140
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable and accrued interest to common stock $ -- $ 842,262
========== ==========
Debt discount on debt $3,955,147 $1,200,000
========== ==========
Issuance of notes payable for cancellation of shares to be issued $ -- $ 25,000
========== ==========
Issuance of shares and note payable in exchange for a license $ -- $ 500,000
========== ==========
Reclass of derivatives to additional paid in capital for conversions
of convertible notes $2,922,285 $1,634,496
========== ==========
Issuance of shares for consulting services $ 144,000 $ --
========== ==========
Cashless exercise of warrants $ 536 $ --
========== ==========
Issuance of shares for debt finders' fees $ 250,000 $ --
========== ==========
Issuance of shares for personal guarantees of debt $ 275,000 $ --
========== ==========
Issuance of shares in connection with extinguishment of debt $ 812,500 $ --
========== ==========
See report of independent registered public accounting firm and accompanying
notes to the financial statements
F-6
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
------------
Reclamation Consulting and Applications, Inc. (the "Company") is a Colorado
corporation, originally formed in 1976. The Company's primary business is the
production and sale of their Alderox(R) line of products and applicator systems.
The Alderox(R) line of products is a line of release agent that was developed by
the Company in response to industries need for an effective, economical and
environmentally friendly product that eliminated or reduced the build up of
materials on equipment. The Company's customers are located in the United
States.
Basis of Presentation
---------------------
The Company's financial statements are prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the
United States 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 recurring losses, generating
an accumulated deficit of $27,154,258 at June 30, 2007, including net losses of
$5,123,839 and $7,215,291 for the years ended June 30, 2007 and 2006,
respectively. In addition, the Company's negative working capital of $2,116,047
at June 30, 2007 indicates that the Company may lack sufficient working capital
to service its debt and to fund its operations through June 30, 2008.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying 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.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. 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 Note 13); (ii) controlling
of general and administrative expenses; (iii) managing accounts payable; and
(iv) evaluating its distribution and marketing methods to increase revenues.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include the realizability of
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.
F-7
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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
F-8
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 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 June 30, 2007, the Company does not believe there has
been any impairment of its long-lived assets. There can be no assurance,
however, that market conditions will not change or demand for the Company's
products and services will continue, which could result in impairment of
long-lived assets in the future.
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 notes payable
provides for a rate of conversion that is below market value (see Notes 7 and
8). This feature is characterized as a beneficial conversion feature ("BCF"),
which is recorded by the Company pursuant to Emerging Issues Task Forces
("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 convertible debt is recorded net of the debt discount related to
the BCF. The Company amortizes the discount to interest expense over the life of
the debt on a straight-line basis, which approximates the effective interest
method. For the years ended June 30, 2007 and 2006, the Company recorded
$725,617 and $37,500, respectively, of amortization related to the BCF.
F-9
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 (see
Note 6).
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, payable to
shareholders, related-party notes payable and notes payable. Pursuant to SFAS
No. 107, "DISCLOSURES ABOUT 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 payable to
shareholders and related-party notes payable as the transactions originated with
related parties and 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.
Derivative Financial Instruments
--------------------------------
The Company had derivative financial instruments which consisted 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 included
certain conversion features, variable interest features, call options and
default provisions. The accounting treatment of derivative financial instruments
required that the Company record the derivatives and related warrants at their
fair values as of the inception date of the agreement and at fair value as of
each subsequent balance sheet date. In addition, under the provisions of EITF
Issue No. 00-19, " ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO,
AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK ," as a result of entering
into the Notes, the Company was required to classify all other non-employee
stock options and warrants as derivative liabilities and xxxx them to market at
each reporting date. Any change in fair value was recorded as non-operating,
non-cash income or expense at each reporting date. If the fair value of the
derivatives was higher at the subsequent balance sheet date, the Company
recorded a non-operating, non-cash charge. If the fair value of the derivatives
was lower at the subsequent balance sheet date, the Company recorded
non-operating, non-cash income. Conversion-related derivatives were valued using
the Binomial Option Pricing Model with the following assumptions: dividend yield
of 0%; annual volatility of 212%; and risk free interest rate of 4.99% as well
as probability analysis related to trading volume restrictions. The remaining
derivatives were valued using discounted cash flows and probability analysis. As
a result of the Company repaying the Notes in full on June 1, 2007 (see Note 8),
the Company no longer has any derivative instruments. The notes-related
derivatives, valued at $2,438,313 at the date of the repayment, were netted
against the gain on extinguishment of debt (see Note 8). The warrant-related
derivatives, valued at $2,922,285 at the date of the repayment, were
reclassified to additional paid-in capital.
F-10
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The following is a summary of the changes to the derivative liabilities during
the years ended June 30, 2006 and 2007:
Derivative liability, June 30, 2005 $ 1,709,081
Derivative liability added during 2006 1,956,531
Derivative liability reclassified to APIC during 2006 (1,634,496)
Change in fair value during 2006 2,508,656
------------
Derivative liability, June 30, 2006 4,539,772
Change in fair value through June 1, 2007 820,826
------------
Derivative liability, June 1, 2007 5,360,598
Reclassification of warrant-related derivative to APIC
upon repayment of the Notes (2,922,285)
Elimination of notes-related derivative to gain on
extinguishment of debt upon repayment of the Notes (2,438,313)
------------
Derivative liability, June 30, 2007 $ --
============
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.
Research and Development
------------------------
The Company's products and the technology underlying its products are in the
early stages of market acceptance. The Company has incurred $280,155 and
$143,974 for the years ended June 30, 2007 and 2006, respectively, on research
and development efforts, which costs have been expensed, as a part of selling,
general and administrative expense.
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.
For the years ended June 30, 2007 and 2006, basic and diluted loss per share are
the same since the calculation of diluted per share amounts would result in an
anti-dilutive calculation that is not permitted and therefore not included. Such
dilutive amounts would have included shares potentially issuable pursuant to
convertible debentures (see Notes 7 and 8) and outstanding options and warrants
(see Note 11).
F-11
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 11).
Stock-Based Compensation
------------------------
At June 30, 2007, the Company has no stock-based compensation plans.
On July 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "SHARE-BASED
PAYMENT" ("SFAS 123(R)"), which establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods or
services, primarily focusing on accounting for transactions where an entity
obtains employee services in share-based payment transactions. SFAS 123(R)
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments, including stock options, based on
the grant-date fair value of the award and to recognize it as compensation
expense over the period the employee is required to provide service in exchange
for the award, usually the vesting period. SFAS 123(R) supersedes the Company's
previous accounting under Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25"), for periods beginning in
fiscal 2007. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of July 1,
2006, the first day of the Company's fiscal year 2007. The Company's financial
statements as of and for the year ended June 30, 2007 reflect the impact of SFAS
123(R). In accordance with the modified prospective transition method, the
Company's financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R).
SFAS 123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's statement of
operations. Prior to the adoption of SFAS 123(R), the Company accounted for
stock-based awards to employees and directors using the intrinsic value method
in accordance with APB 25 as allowed under SFAS No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS 123"). Under the intrinsic value method,
stock-based compensation expense was recognized in the Company's statement of
operations, other than for option grants to employees below the fair market
value of the underlying stock at the date of grant. No stock-based employee
compensation cost was recognized in the statement of operations for the year
ended June 30, 2006, as all options granted had an exercise price equal to or
greater than the fair market value of the underlying common stock on the date of
grant.
F-12
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Stock-based compensation expense recognized during the period is based on the
value of the portion of share-based payment awards that is ultimately expected
to vest during the period. Stock-based compensation expense recognized in the
Company's statement of operations for the year ended June 30, 2007 included
compensation expense for share-based payment awards granted prior to June 30,
2007 based on the grant date fair value estimated in accordance with the pro
forma provisions of SFAS 123 and compensation expense for the share-based
payment awards granted subsequent to June 30, 2007 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). As stock-based
compensation expense recognized in the statements of operations for the year
ended June 30, 2007 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. The estimated average
forfeiture rate for the year ended June 30, 2007 of 0% was based on the
Company's generally granting immediately exercisable options. In the Company's
pro forma information required under SFAS 123 for the periods ending fiscal
2006, the Company accounted for forfeitures as they occurred.
SFAS 123(R) requires the cash flows resulting from the tax benefits resulting
from tax deductions in excess of the compensation cost recognized for those
options to be classified as financing cash flows. Due to the Company's
accumulated loss position, there were no such tax benefits during the year ended
June 30, 2007. Prior to the adoption of SFAS 123(R) those benefits would have
been reported as operating cash flows had the Company received any tax benefits
related to stock option exercises.
Summary of Assumptions and Activity
-----------------------------------
The fair value of stock-based awards to employees and directors is calculated
using the Black-Scholes option pricing model even though the model was developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which differ significantly from the Company's
stock options. The Black-Scholes model also requires subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of options granted is
derived from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility is based on
the historical volatility of the Company's stock price. These factors could
change in the future, affecting the determination of stock-based compensation
expense in future periods.
The following presents the Black-Scholes assumptions used for the granting of
options and warrants in fiscal 2007 and 2006:
2007 2006
---- ----
Expected term 2-5 years 1-5 years
Expected volatility 212% 141%
Risk-free interest rate 4.99% 4.00%
Expected dividends -- --
F-13
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Had the Company determined employee stock-based compensation cost based on a
fair value model at the grant date for its stock options under SFAS No. 123, the
Company's net loss and net loss per share for the year ended June 30, 2006 would
have been adjusted to the pro forma amounts, as follows (in thousands, except
per share amounts):
2006
-------------------------------------------------------------------------------
Net loss - as reported $ (7,215)
Stock-based compensation expense determined under
fair-value based method, net of tax (348)
--------------
Pro forma net loss $ (7,563)
==============
Basic and diluted net loss per share:
As reported $ (0.19)
==============
Pro forma $ (0.20)
==============
A summary of employee option activity as of June 30, 2007 and changes during the
year then ended, is presented below:
JUNE 30, 2007
WEIGHTED-AVERAGE
REMAINING AGGREGATE
EXERCISE CONTRACTUAL INTRINSIC
SHARES PRICE TERM (YEARS) VALUE
--------------- --------- ------------ ---------
Options outstanding and exercisable
at July 1, 2006 11,480,000 $ 0.25
Options granted 4,000,000 0.17
Options forfeited (490,000) 0.33
Options exercised -- --
--------------- --------- ------------ ---------
Options outstanding and exercisable
at June 30, 2007 14,990,000 $ 0.23 2.22 $ 840,000
=============== ========= ============ =========
Upon the exercise of options, the Company issues new shares from its authorized
shares. The weighted average grant date fair value of options granted during the
year ended June 30, 2007 was $0.24 per option, resulting in a charge of $949,058
to selling, general and administrative expense in the accompanying statement of
operations.
There are no non-vested stock options at June 30, 2006 and at June 30, 2007.
There is no unrecognized compensation cost at June 30, 2007. The total fair
value of shares vested during the year ended June 30, 2007 was $949,058.
F-14
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
As a result of adopting SFAS No. 123(R) on July 1, 2006, the Company's net loss
for the year ended June 30, 2007 was approximately $634,000 higher than if it
had continued to account for share-based compensation under APB 25. There was no
net change in the basic and diluted loss per share for the year ended June 30,
2007.
Concentrations of Credit Risk
-----------------------------
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 years ended June 30, 2007 and 2006 were
generated from a few customers. For the year ended June 30, 2007, total sales to
two major distributors amounted to $151,997 and as of June 30, 2007, $8,466 was
due from these major distributors. For the year ended June 30, 2006, sales to
the two major distributors amounted to $17,911.
Reclassifications
-----------------
Certain amounts in June 30, 2006 financial statements have been reclassified to
conform with the June 30, 2007 presentation. Such reclassifications had no
effect on net loss as previously reported.
Recently issued accounting pronouncements
-----------------------------------------
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN 48"). This interpretation
clarifies the application of SFAS No. 109, "ACCOUNTING FOR INCOME TAXES" by
defining criteria that an individual tax position must meet for any part of the
benefit of that position to be recognized in a company's financial statements
and also provides guidance on measurement, derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company will adopt FIN 48 on July 1, 2007. The Company is currently
assessing the impact the adoption of FIN 48 will have on its financial position
and results of operations.
In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accounting principals generally accepted in the U.S. and
expands disclosures about fair value measurements. The statement does not
require new fair value measurements, but is applied to the extent that other
accounting pronouncements require or permit fair value measurements. The
statement emphasizes that fair value is a market-based measurement that should
be determined based on the assumptions that market participants would use in
pricing an asset or liability. Companies that have assets and liabilities
measured at fair value will be required to disclose information that enables the
users of its financial statements to access the inputs used to develop those
measurements. The reporting entity is encouraged, but not required, to combine
the fair value information disclosed under this statement with the fair value
information disclosed under other accounting pronouncements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company
expects to adopt SFAS No. 157 on July 1, 2008. The Company is currently
assessing the impact the adoption of SFAS No. 157 will have on its financial
statements.
F-15
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In September 2006, the Securities and Exchange Commission staff issued SAB No.
108, "CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS" ("SAB No. 108"). SAB No. 108
was issued in order to eliminate the diversity in practice surrounding how
public companies quantify financial statement misstatements. SAB No. 108
requires that registrants quantify errors using both a balance sheet and income
statement approach and evaluate whether either approach results in a misstated
amount that, when all relevant quantitative and qualitative factors are
considered, is material. The adoption of this statement did not have a
significant impact on the Company's financial condition or results of
operations.
In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES" ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure at fair value many financial instruments
and certain other items that are not currently required to be measured at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 does not affect any existing accounting literature
that requires certain assets and liabilities to be carried at fair value. SFAS
No. 159 does not establish requirements for recognizing and measuring dividend
income, interest income, or interest expense. This statement does not eliminate
disclosure requirements included in other accounting standards. SFAS No. 159 is
effective in fiscal years beginning after November 15, 2007. The Company expects
to adopt SFAS No. 159 on July 1, 2008. The Company is in the process of
evaluating the provisions of the statement, but does not anticipate that the
adoption of SFAS No. 159 will have a material impact on its financial
statements.
NOTE 3 - ACCOUNTS RECEIVABLE
All accounts receivable are trade related. These receivables are current and no
reserve for uncollectible accounts is deemed necessary.
NOTE 4 - INVENTORIES
Inventories consist of the following as of June 30, 2007:
Raw materials $ 8,270
Finished goods $ 36,951
---------
$ 45,221
=========
F-16
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at June 30, 2007:
Computers and office equipment $ 12,210
Test equipment 51,435
Vehicles 17,409
------------
81,054
Less accumulated depreciation (36,227)
------------
$ 44,827
============
Depreciation and amortization expense on property and equipment was $16,320 and
$15,068 for the years ended June 30, 2007 and 2006, respectively, and is
included in selling, general and administrative expenses in the accompanying
statements of operations.
NOTE 6 - DEFERRED FINANCING COSTS
Deferred financing costs consist of the following as of June 30, 2007:
Cost $ 525,000
Less accumulated amortization ( 20,833)
------------
$ 504,167
============
Amortization expense was $48,333 and $12,500 for the years ended June 30, 2007
and 2006, respectively, and is included in interest expense in the accompanying
statements of operations.
F-17
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consist of the following at June 30, 2007:
Unsecured convertible debt to stockholders, bearing interest
at 10 percent per annum, net of debt discount of $2,794,047,
due July 2009 (as amended - see Note 13)
(see below) $ 700,000
Note payable to Xxxx Xxxxxx, bearing interest at 12 percent per
annum, convertible to common shares at $0.20 per share, interest
payable monthly, principal due on Nov. 29, 2008,
(secured by substantially all assets of the Company, net of
debt discount of $148,064 (see Note 8) 251,936
Unsecured notes payable to stockholders, bearing interest at
8.25 percent per annum, due on demand 232,500
Unsecured note payable to stockholder, bearing interest at 10
percent per annum, due on demand 218,612
Unsecured note payable debt to stockholder, bearing interest at
10 percent per annum, due March 19, 2009 100,000
Unsecured note payable to stockholder, bearing interest at 15
percent per annum, due on demand 29,840
Unsecured notes payable to stockholders, bearing interest at 10
percent per annum convertible to common stock at $0.25 per
share, due on demand 26,000
Unsecured note payable debt to stockholder, $2,500 interest
payable on maturity, due on demand 25,000
Unsecured note payable to stockholder, bearing interest at 12
percent per annum, due on demand 20,000
Unsecured note payable to stockholder, bearing interest at 15
percent per annum convertible to common shares at $0.75 per
share 2,166
-----------
Subtotal 1,606,054
Less current portion (554,118)
-----------
$1,051,936
===========
F-18
NOTE 7 - NOTES PAYABLE - RELATED PARTIES, CONTINUED
During the year ended June 30, 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
year ended June 30, 2007 the Company did not issue any shares of its common
stock for the conversion of principal and interest in connection with notes
payable-related parties. Interest expense (excluding amortization of debt
discount - see below) on notes payable - related parties for the years ended
June 30, 2007 and 2006 was $366,149 and $85,866, respectively. Future minimum
principal payments (excluding the debt discount) are as follows under notes
payable - related parties for the year ending June 30:
2008 $ 554,118
2009 3,994,047
----------
$4,548,165
==========
Unsecured Convertible Debt to Stockholders
------------------------------------------
On October 17, 2006, the Company entered into a Note Purchase Agreement (the
"Agreement") with a group of investors led by Canvasback Company Limited, a
company organized under the laws of the country of Anguilla (the "Lender"),
pursuant to which the Company issued the Lender an Unsecured Convertible
Promissory Note (the "Unsecured Note") for the aggregate principal amount of
$2,079,067 (the "Loan"), accruing interest at the annual rate of 10% per annum
and maturing on October 17, 2007 (amended after year end to July 2009 - see Note
13). Pursuant to the Agreement, the Lender has agreed to purchase additional
Unsecured Convertible Promissory Notes up to an aggregate of $620,000. Through
June 30, 2007, Canvasback has loaned the Company an additional $1,414,980
leaving a total principal amount due of $3,494,047. At any time after a
Conversion Event (as defined below), the Loan is convertible, at the election of
the Lender, into a number of shares of the Company's common stock (the
"Conversion Shares") obtained by dividing the aggregate amount of principal and
accrued but unpaid interest due under the Unsecured Note as of the date of
conversion, by $0.025. The proceeds received from the sale of the unsecured
convertible notes were used for business development purposes, working capital
needs, pre-payment of interest, repayment of the Notes, payment of consulting
and legal fees and purchasing inventory.
In light of the restrictions on the Company's ability to raise capital through
the issuance of its common stock at a price below the market value on the date
of such issuance, the Lender has agreed that the conversion provisions
applicable to the Unsecured Note will not become operative unless and until
either (i) the Company obtains the prior written consent of the Investors (see
Note 8) to permit the Conversion of the Unsecured Debt, or any portion thereof,
into Conversion Shares pursuant to the terms of the Agreement; or (ii) the SPA
(see Note 8) is terminated pursuant to terms and all the Company's obligations
under the Securities Purchase Agreement have been fully satisfied or waived
(each, a "Conversion Event"). In June 2007, the SPA was terminated (see Note 8).
In addition, the Company has agreed that, within 60 days after the issuance of
any Conversion Shares, or as soon afterward as the Company may determine in good
faith to be commercially reasonable, but in no event later than 180 days, the
Company will file a registration statement with the SEC seeking to have such
Conversion Shares registered for public sale on Form SB-2 or other applicable
form of registration statement, and naming the lenders as selling stockholders
(unless any lender shall notify the Company in advance that it does not desire
to be included in any such registration statement). The Company shall pay for
all registration expenses incurred in connection with any registration,
qualification or compliance pursuant to this Agreement. All individual selling
expenses incurred in connection with any such registration, qualification or
compliance, including without limitation any separate counsel which any Lender
may desire to engage in connection with the filing of such registration
statement apart from the Company's counsel, will be borne by the Lenders of the
Conversion Shares participating in such registration, pro rata on the basis of
the number of their shares so registered.
F-19
NOTE 7 - NOTES PAYABLE - RELATED PARTIES, continued
As a result of the Conversion Event, the Unsecured Notes are convertible at
$0.025 per share. Canvasback and the Company further agreed that such conversion
above the 65,000,000 shares that were converted after June 30 (see Note 13) may
only be made if the Company effects an increase in its authorized shares of
common stock or a reverse split of its common stock, such that the Company has
sufficient authorized shares of stock available to allow the conversion. As a
result, the occurrence of the Conversion Event triggered the Company's recording
a BCF. The total amount of the BCF was $3,494,047 (equal to the principal amount
due on the Unsecured Notes at that date), and will be amortized to interest
expense over the remaining life of the Unsecured Notes. The Company recorded
$700,000 of interest expense during the year ended June 30, 2007 related to the
amortization of the BCF on the Unsecured Notes. The Company entered into
amendments of the Agreement subsequent to June 30, 2007 (see Note 13).
In May 2007, the Company received a $100,000 loan from another stockholder to be
used to cover operating expenses pursuant to an oral agreement. The loan carries
interest at 12% per annum and was made with the understanding that the Company
would provide the investor with contingent warrants and conversion rights
similar to those provided to the purchasers of the secured convertible
debentures sold on May 30, 2007 (see Note 8).
NOTE 8 - NOTES PAYABLE
Notes payable consist of the following at June 30, 2007:
Note payable bearing interest at 12 percent per annum, convertible
to common shares at $0.20 per share, interest payable monthly,
principal due on Nov. 29, 2008 the maturity date, secured by
substantially all assets of the Company, net of debt discount of
$287,419 (see below) $ 472,566
Notes payable bearing interest at 10 percent per annum,
convertible to common shares at $0.40 per share, due on demand,
secured by substantially all assets of the Company 125,000
Notes payable bearing interest at 15 percent per annum,
convertible to common shares at $0.40 per share, due on demand,
secured by substantially all of the assets of the Company 54,850
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 and $0.45 per
share, due on demand, secured by substantially all assets of the
Company 45,500
Unsecured notes payable, bearing interest at 8.25 percent per
annum, due on demand 6,000
Unsecured note payable, bearing interest at 15 percent per annum,
due on demand 15,000
-----------
Subtotal 768,916
Less current portion (296,350)
-----------
$ 472,566
===========
F-20
NOTE 8 - NOTES PAYABLE, CONTINUED
Future minimum principal payments (excluding the debt discount) are as follows
under notes payable for the year ending June 30:
2008 $ 296,350
2009 759,985
-----------
$ 1,056,335
===========
During the year ended June 30, 2005, the Company borrowed $50,000 from an
investor which was repaid during the year ended June 30, 2006. The investor had
an option to convert up to the full loan amount into restricted shares of the
Company's common stock at $0.25 per share. The Company recorded a discount on
the debt of $50,000 related to BCF. Amortization of the debt discount for the
years ended June 30, 2007 and 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 Notes bore interest at 10% and matured three years from the date of issuance
and were 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 was 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 breached any representation or warranty in the SPA, the Company was
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 were exercisable until five years from the date of issuance at a
purchase price of $0.28 per share. The Investors were able to 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 exercised the warrants on a cashless
basis, the Company would have not received any proceeds. In addition, the
exercise price of the warrants was to be adjusted in the event the Company
issued 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 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 did not exceed 4.99% of the
then issued and outstanding shares of common stock.
F-21
NOTE 8 - NOTES PAYABLE, CONTINUED
Under a Guaranty and Pledge Agreement, Mr. Xxxxxx Xxxxxx, 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 Xx. Xxxxxx, and (ii) to grant to the Investors, their successors,
endorsees, transferees or assigns a security interest in the 517,400 shares, as
collateral security for such obligations.
The Notes included certain features that were 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 were identified as an embedded
derivative and were bifurcated and recorded on the Company's
balance sheet at their fair value;
o The Company had 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 was identified as an embedded
derivative and was bifurcated and recorded on the Company's
balance sheet at its fair value;
o Annual interest on the Notes was equal to 10% provided that no
interest was due and payable for any month in which the Company's
trading price was greater than $0.3125 for each trading day of the
month, which potential interest rate reduction was identified as
an embedded derivative and was bifurcated and recorded on the
Company's balance sheet at its fair value;
o The SPA included 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 represented an embedded derivative, but such derivative had
a de minimus value and was not included in this analysis.; and
o The SPA contained certain events of default including not having
adequate shares registered to effectuate allowable conversions; in
that event, the Company was required to pay a conversion default
payment at 24% interest, which was identified as an embedded
derivative and was 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 did not demand payment of any liquidated damages
and informally agreed to waive all liquidated damages due and owed to them
pursuant to their registration rights.
The Company recorded $1,900,000 of the original amount of the fair value of the
derivatives and warrants to debt discount, which was amortized to interest
expense over the term of the Notes. During the year ended June 30, 2006,
$299,000 of the Notes and accrued interest were converted into 2,725,000 shares
of common stock. During the years ended June 30, 2007 (prior to the settlement
on June 1, 2007 - see below) and 2006, $617,741 and $388,889 of the principal
balance of the Notes were repaid. Amortization of this debt discount for the
years ended June 30, 2007 (prior to the settlement on June 1, 2007 - see below)
and 2006 were $620,431 and $877,138, respectively.
The market price of the Company's common stock significantly impacted the extent
to which the Company were required or 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 needed to issue to convert the principal
and interest payments then due on the Notes. If the market price of the
Company's common stock fell below certain thresholds, the Company would have
been unable to convert any such repayments of principal and interest into
equity, and the Company was forced to make such repayments in cash. The
Company's operations could have been materially adversely impacted if the
Company was forced to make repeated cash payments on the Notes.
F-22
NOTE 8 - NOTES PAYABLE, continued
On June 1, 2007, the Company used the proceeds from the sale of the Debentures
(see below) to repurchase the remaining balance of the Notes and related
warrants held by the Investors, pursuant to a Securities Repurchase Agreement
entered into between the Company and the Investors dated February 1, 2007. The
Company paid the Investors an aggregate cash purchase price of $1,161,019 and
3,250,000 shares (valued at $812,500 -- see Note 11) of the Company's common
stock for the repurchase of the notes and warrants.
The principal balance of the Notes was $694,370 and the remaining debt discount
balance of $338,930 was immediately recognized as interest expense. In addition,
the embedded derivatives related to the Notes valued at $2,438,313 were
extinguished. As a result of the repayment of the Notes, the Company recognized
a gain on extinguishment of debt of $1,159,164.
On May 30, 2007, the Company issued Secured Convertible Debentures (each, a
"Debenture" and collectively, "Debentures") in the aggregate amount of
$1,159,985 to three accredited investors, Xxxx Xxxxxx, whom the Company later
engaged as its Chief Operating Officer and Chief Financial Officer, Eat-Me
Foods, Ltd. and 0761291 B.C. Ltd. (each, a "Debenture Holder" and collectively,
"Debenture Holders"). The Debentures carry simple interest of 12% per annum and
mature on November 29, 2008. Interest is payable monthly, with the principal due
on the maturity date. The Debenture with Xxxx Xxxxxx was $400,000 and is
included in Notes Payable - Related Parties (see Note 7).
At any time prior to the maturity date, each Debenture Holder has the option to
convert the outstanding balance of principal, unpaid interest, and/or up to six
months of future interest into shares of the Company's common stock at $0.20
per share. This BCF was estimated to be $461,100 and will be amortized to
interest expense over 18 months, the term of the Debentures. The Company
recognized $25,617 of interest expense during the year ended June 30, 2007,
related to the amortization of the BCF on the Debentures.
Under the terms they negotiated, the Debenture Holder will receive differing
amounts of warrants to purchase shares of the Company's common stock upon any
conversion of their Debentures. If they convert their Debentures, Xx. Xxxxxx and
Eat-Me Foods, Ltd. will receive warrants in a number equal to 245% and 45%,
respectively, of the shares received by each in any such conversion. 0761291
B.C. Ltd. is not entitled to any warrants on conversion of its Debenture.
Fifty percent of the warrants to be issued in any conversion have an exercise
price of $0.22 per share while the remaining warrants have an exercise price of
$0.24 per share. The warrants are to expire three years after issuance. In the
event that the closing price of the Company's common stock equals or exceeds
$0.80 per share for twenty consecutive trading days, the Company have the option
to cancel the unexercised warrants after providing the Investors with 45-days
prior written notice.
As of June 30, 2007 and based on a conversion price of $0.20 per share, the
amount of common stock which would have been issuable upon full conversion of
the aggregate principal of the Debentures plus six months of future interest is
6,206,000 shares or approximately 11% of the Company's outstanding common stock.
With the issuance of these Shares, the Debenture Holders would also have
received warrants for the purchase of 6,206,000 shares of common stock, or
approximately 10% of the Company's outstanding common stock, which would have
been valued at approximately $1,366,000 and would have been immediately
recognized as interest expense if they had been granted.
F-23
NOTE 8 - NOTES PAYABLE, continued
The obligations under the Debentures are secured by a security interest in all
of the Company's assets. On the occurrence of any of the following events, each
Debenture Holder may accelerate the maturity date, commence legal action against
us and foreclose on the Company's assets:
o the Company's failure to make payments under the Debentures when
due;
o the Company becomes insolvent or make a general assignment for the
benefit of the Company's creditors;
o any dissolution or termination of the Company's existence; or
o the Company's failure to fulfill its obligations under the
Debenture for at least 14 days after written notice of such
failure by the Debenture Holder.
Both the Company's CEO, Xxxxxxx X. Xxxxxx, and its President, Xxxxxx X. Xxxxxx,
provided personal guaranties of the Company's obligations under the Debenture to
0761291 B.C. Ltd. The guaranties make the Company's CEO and President personally
responsible to the Investors for satisfaction of the Company's obligations under
the Debenture issued to the Debenture Holders. Bandit Yacht Investments, Ltd., a
company controlled by Xxxx Xxxxxx, who is the father of the Company's CEO and
the Company's President and a shareholder of the Company, also granted a
mortgage and provided a guaranty of the Company's obligations under the
Debenture to 0761291 B.C. Ltd. In addition, it is the Company's understanding
that Xx. Xxxxxx has provided a guaranty of the Company's obligations under the
Debentures to 0761291 B.C. Ltd. and Eat-Me Foods, Ltd., pursuant to an
arrangement between the Debenture Holders.
In consideration of the personal guaranty provided by Xx. Xxxxxx of the
Company's obligations under the secured convertible debentures to 0761291 B.C.
Ltd. and Eat-Me Foods, Ltd., the Company committed to issue 500,000 shares of
the Company's common stock to him in July 2007. The Company also committed to
issue 500,000 shares of its common stock to Xxxx Xxxxxx in July 2007 for
granting a mortgage and providing a personal guaranty the Company's obligations
under the secured convertible debentures to the Investors. Valued at $0.275 per
share, the fair market price of the stock on the date of issuance, the 1,000,000
shares that the Company are committed to issue had a value of $275,000. This has
been recorded as a debt issuance cost and will be amortized to interest expense
over the life of the Debentures. No interest expense related to the amortization
was recorded during the year ended June 30, 2007.
To the extent the Debenture Holders do not convert their Debentures, the Company
will need additional capital to make the interest and principal payments due
under the Debentures.
F-24
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company conducts its operations utilizing leased facilities and equipment
under non-cancelable operating lease agreements expiring at various dates
through 2011. Future minimum lease commitments, excluding property taxes and
insurance for the years ending June 30 are:
2008 $ 112,346
2009 68,406
2010 53,045
2011 49,500
-------------
$ 283,297
=============
Rent expense for all leased facilities and equipment was $109,489 and $90,351
for the years ended June 30, 2007 and 2006, respectively.
Litigation
----------
On or about August 24, 2007, the Company was served with a complaint filed by
Monarch Bay Capital Group, L.L.C. against the Company in a matter entitled
Monarch Bay Capital Group, L.L.C. v. Reclamation Consulting And Applications,
Inc., Case No. 00XX00000. The complaint was filed with the Superior Count Of The
State Of California, County of Orange, on August 17, 2007 against the Company to
recover a redemption fee under the terms of a Consulting Agreement between
Monarch Bay Capital Group, L.L.C. and the Company dated October 23, 2006. The
Consulting Agreement provides that the Company will pay Monarch Bay Capital
Group, L.L.C. a "Redemption Fee" equal to 20% of the savings achieved by the
Company in redeeming its obligations to certain of its investors. On February 1,
2007, the Company entered into the Agreement to repurchase secured convertible
notes with an aggregate principal amount of $2,000,000 and warrants to purchase
8,000,000 shares of the Company's common stock from four investors. On February
27, 2007 and April 20, 2007 the Company entered into Amendment 1 and Amendment 2
of the Agreement and on June 4, 2007 the terms of the Amended Repurchase
Agreement were satisfied in full. Monarch Bay Capital Group, L.L.C. is claiming
a redemption fee of $279,993. On September 17, 2007 the Company filed an Answer
To Complaint. The Answer denies all allegations of Monarch Bay Capital Group,
LLC., contests that it is owed any sum under the Consulting Agreement, and
pleads various Affirmative Defenses as to conflict of interest , lack of
performance and non-disclosure going to the issues to be raised by the Company
in the action. Discovery was served to Monarch Bay Capital Group, L.L.C. on
September 24, 2007. At this time the Company can not determine the outcome of
this matter and the Company has not recorded any accrual at June 30, 2007.
On or about May 23, 2007, the Company was served with a complaint filed by Xxxxx
& Xxxxxxxx, LLP against the Company in a matter entitled Xxxxx & Xxxxxxxx LLP v.
Reclamation Consulting & Applications, Inc., Case No. 07C01658. The complaint
was filed with the Superior Court of the State of California, County of Los
Angeles, on May 23, 2007 against the Company to recover fees for legal services
rendered by Xxxxx & Associates in the amount in excess of $25,000 it allegedly
performed on behalf of the Company. Xxxxx & Xxxxxxxx, LLP is seeking damages
against the Company in amount not less than $26,740 plus interest at the rate of
1.5% per month from December 1, 2006, reasonable attorneys' fees and costs of
suit for alleged services. At this time the Company can not determine the
expected outcome of this matter.
F-25
NOTE 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED
On September 25, 2006, a Complaint was filed by AID Equipment, LLC against the
Company in a matter entitled AID Equipment vs. Reclamation Consulting And
Application, Inc., Case No: 060700802, filed in the Seventh Judicial District
Court In And For Carbon County, State Of Utah. The complaint alleges that the
Company engaged the services of AID Equipment to supply and fabricate equipment
for a project for the Company and that the Company's president endorsed a credit
application in return for the services to be performed valued at $20,343
Plaintiffs are requesting damages in the amount of $17,286 and for attorneys'
fees, cost of court and expenses of litigation. The Company's management denies
that the plaintiffs are owed the amounts sought, and the Company intend to
vigorously defend this action on the basis brought by the plaintiffs.
Specifically, the Company denies that any such credit application existed and
that the Company never issued a purchase order for such services. Discovery was
served to AID Equipment, LLC on May 24, 2007. At this time the Company can not
determine the outcome of this matter and the Company has not recorded any
accrual at June 30, 2007.
On May 2, 2005, a complaint was filed by Pacific Business Capital Corporation
("PBCC") against the Company, its President, Xxxxxx Xxxxxx, and its Vice
President, Xxxxxxx Xxxxxx. On September 5, 2006, a settlement was reached
whereas the Company agreed to pay PBCC a total of $21,000 over the course of 11
months. The Company is obligated to pay PBCC $5,000 by September 29, 2006;
$1,500 per month beginning October 1, 2006 and ending July 1, 2007; and $1,000
on August 1, 2007, the total of which is recorded under judgment payable. There
is a 10-day grace period for each scheduled payment and there is a deed as
security on property owned by Xxxxxxx Xxxxxx. No interest is due under the
settlement agreement if the Company complies with the terms thereof. In the
event that the Company is in default of the settlement agreement, a 10% simple
interest per annum will be added, and the entire amount shall immediately become
due upon default. As of the date of filing this Annual Report, the Company has
paid PBCC the amount required by the settlement agreement and believes it has no
further obligation to PBCC. An Order to Show Cause hearing regarding dismissal
is currently scheduled for December 17, 2007.
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 an accrued judgment payable on
the accompanying balance sheet. The Company may prepay the remaining balance at
a twenty percent discount at any time. If the Company defaults on any of the
required payments, an additional $40,000 due under the terms of the original
lease will become due and payable. The payment of the settlement is personally
guaranteed by Mr. Xxxxxx Xxxxxx. The balance of the payable is $29,700 at June
30, 2007.
F-26
NOTE 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED
Loss on Collateralized Shares
-----------------------------
In April 2006 the Company entered into an agreement to borrow $300,000 from a
third party and collateralized 1,500,000 shares of the Company's common shares
in order to consummate the loan. The collateralized shares were the property of
one of the Company's shareholders. The loan never funded and the agreement was
voided. During the return of the collateralized shares to the shareholder a
total of 500,000 shares were mishandled and could not be located. The Company
has set up an accrual for the loss to the shareholder for $110,000, which has
been included in accrued expenses as of June 30, 2007 in the accompanying
balance sheet.
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
California. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. The
Company is also required to indemnify the Debenture Holders under the terms of
the Debentures. The duration of the guarantees and indemnities varies, and is
generally tied to the life of the agreement. These guarantees and indemnities do
not provide for any limitation of the maximum potential future payments the
Company could be obligated to make. Historically, the Company has not been
obligated nor incurred any payments for these obligations and, therefore, no
liabilities have been recorded for these indemnities and guarantees in the
accompanying balance sheet.
CONVERTIBLE DEBENTURES IN DEFAULT
---------------------------------
The Company is currently in default of the terms of convertible debentures
issued to approximately 13 investors in private placements conducted in March
2000 through September 2001. These debentures carry interest at the rate of 10%
per annum and as of June 30, 2007 the aggregate balance of unpaid principal and
accrued interest was approximately $96,474 (see Note 8). The Company has
committed to the Nebraska Department of Banking and Finance to repay the unpaid
principal and accrued interest owed to Nebraska purchasers of the debentures by
November 15, 2007, which amount will be in the principal amount of $96,474 plus
all outstanding interest as of such date. The Company can offer no assurance
that it can successfully meet this commitment, as it needs to raise additional
funds in order to do so. In the event that the Company is not able to meet this
commitment, it may face regulatory action resulting in liability to it. In the
event the Company does not repay the debentures, the debenture holders could
also file suit against the Company for damages. Any regulatory action or
lawsuits would make it more difficult for the Company to raise funds and result
in the insolvency of the Company.
F-27
NOTE 10 - INCOME TAXES
The provision (benefit) for income taxes consists of the following for the years
ended June 30:
2007 2006
----------- -----------
Current:
Federal $ -- $ --
State 800 800
----------- -----------
800 800
----------- -----------
Deferred
Federal (1,465,000) (1,870,000)
State (255,000) (330,000)
----------- -----------
(1,720,000) (2,200,000
Less change in valuation allowance 1,720,000 2,200,000
----------- -----------
$ 800 $ 800
=========== ===========
The components of the net deferred tax asset as of June 30, 2007 is as follows:
Net operating loss carryforwards $ 9,830,000
Valuation allowance $ (9,830,000)
-----------------
$ --
=================
Deferred income taxes are provided for the tax effects of temporary differences
in the reporting of income and deductions for financial statement and income tax
reporting purposes and arise principally from net operating loss carryforwards
and accelerated depreciation methods used for income tax reporting.
The Company's effective tax rate differs from the federal and state statutory
rates due to the valuation allowance recorded for the deferred tax asset due to
unused net operating loss carryforwards. An allowance has been provided for by
the Company which reduced the tax benefits accrued by the Company for its net
operating losses to zero, as it cannot be determined when, or if, the tax
benefits derived from these operating losses will materialize.
As of June 30, 2007, the Company has available net operating loss carryforwards
of approximately $27,000,000 for federal and state purposes which expire in
various years through 2027 and 2017 for federal and California purposes,
respectively. The Company's use of its net operating losses may be restricted in
future years due to the limitations pursuant to IRC Section 382 on changes in
ownership.
The following is a reconciliation of the provision for income taxes at the
expected rates to the income taxes reflected in the statements of operations:
2007 2006
----------- -----------
Tax benefit at federal statutory rate (34)% (34)%
State tax benefit, net of federal tax effect (6) (6)
Permanent differences 6 10
Change in valuation allowance 34 30
----------- -----------
--% --%
=========== ===========
F-28
NOTE 11 - STOCKHOLDERS' EQUITY
On March 3, 2006 the Company amended its Articles of Incorporation increasing
the authorized shares from 75,000,000 to 150,000,000 and creating a new class of
5,000,000 preferred shares which have not been designated as of June 30, 2007.
Common Stock
------------
During the years ended June 30, 2007 and 2006 the Company issued common shares
at various times, as described per the following. The shares 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, unless otherwise noted. Restricted shares were
discounted for illiquidity and restrictions on trading.
2006
----
During the year ended June 30, 2006 the Company cancelled shares to be issued in
exchange for a note payable of $25,000. Also during fiscal 2006 the Company
committed to issue shares for services rendered valued at $32,400.
During the year ended June 30, 2006 the Company issued 7,611,150 shares of its
common stock for the conversion of $500,508 of principal and interest in
connection with the note payable issued as part of the license transaction.
During the year ended June 30, 2006, the Company issued 7,346,006 shares of
common stock for conversion of notes amounting to $818,127. Related to the
conversion of notes payable the Company recorded additional paid in capital of
$687,889 as a reduction to the derivative liability included on the balance
sheet.
During the year ended June 30, 2006, the Company issued 550,891 shares of common
stock for interest amounting to $24,135.
During the year ended June 30, 2006, the Company issued 662,500 shares of common
stock for services rendered amounting to $35,000.
During the year ended June 30, 2006, warrant holders exercised their warrants on
a cashless basis. The holders converted a total of 4,264,000 warrants for
3,279,998 shares of the Company's common stock. Related to these transactions
the Company recorded additional paid in capital of $946,607 as a reduction to
the derivative liability on the balance sheet.
2007
----
During the year ended June 30, 2007, the Company issued 1,000,000 shares of
common stock for a private placement of $150,000 at a price per share of $0.15.
F-29
NOTE 11 - STOCKHOLDERS' EQUITY
In March 2007, the Company entered into two separate public relations
agreements. The agreements were entered into on March 1 and March 9 and call for
the Company to pay the public relations firms a fixed amount of approximately
$7,300 per month for a total of six months and 12 months, respectively. As part
of each agreement, the public relations firms each agreed to purchase 600,000
shares of the Company's common stock at a price of $0.07 per share. Instead of
paying cash for the shares, the amount due will be netted against the fees due
from the Company. The fair market price of the stock on the dates of the
agreements was $0.12. For the value of the fair market price of the shares
greater than the agreed upon purchase price, the Company recorded general and
administrative expense of $60,000 included in the accompanying statement of
operations. The Company capitalized the purchase price value of the shares of
$84,000 in prepaid expenses and other current assets in the accompanying balance
sheet and is amortizing it over the terms of the agreements. The Company
recorded consulting expense of approximately $28,000 related to the amortization
of the value for the year ended June 30, 2007, which is included in selling,
general and administrative expenses in the accompanying statement of
operations.
In connection with the Company entering into the Debentures in May 2007 (see
Note 8), the Company issued 1,000,000 shares of common stock to Canvasback as
finders' fees. The shares were valued at the fair market price on the date of
issuance, which was $0.25 per share, and recorded the value of $250,000 in debt
issuance costs in the accompanying balance sheet. The costs are being amortized
over 18 months, the life of the Debentures (see Note 6).
In connection with the Company entering into the Debentures in May 2007 (see
Note 8), the Company committed to issue 1,000,000 shares to Xxxx Xxxxxx and Xxxx
Xxxxxx for their personal guarantees. The shares were valued at their fair
market price on the date of issuance, which was $0.275 per share, and recorded
the value of $275,000 as debt issuance costs in the accompanying balance sheet
The costs are being amortized over 18 months, the life of the Debentures (see
Note 6).
In June 2007 the Company issued 3,250,000 to the Investors as a portion of the
repayment of the SPA (see Note 8). The shares were valued at $0.25 per share,
their fair market price on the date of issuance, resulting in a value of
$812,500.
In June 2007, Monarch Bay exercised their warrants on a cashless basis. The
holders converted a total of 67,525 warrants for 53,665 shares of the Company's
common stock.
F-30
NOTE 11 - STOCKHOLDERS' EQUITY, continued
STOCK OPTIONS AND WARRANTS
The Company has no stock option plans.
The number and weighted average exercise prices of options and warrants granted
by the Company are as follows for the years ended June 30, 2007 and 2006:
NUMBER OF WEIGHTED-
OPTIONS AVERAGE
AND WARRANTS EXERCISE PRICE
------------ --------------
Outstanding and Exercisable, June 30, 2005 22,441,750 $0.31
Granted 10,288,444 0.13
Exercised (4,264,000) 0.06
Forfeited/expired (862,444) 0.25
------------
Outstanding and Exercisable, June 30, 2006 27,603,750 0.28
Granted 5,250,000 0.17
Exercised (53,665) 0.06
Forfeited/expired (8,550,000) 0.28
------------ ------
Outstanding and Exercisable, June 30, 2007 24,250,085 $0.30
============ =====
Weighted average fair value of
options and warrants granted during the
year ended June 30, 2007 $0.25
Weighted average fair value of
options and warrants granted during the
year ended June 30, 2006 $0.07
F-31
NOTE 11 - STOCKHOLDERS' EQUITY, continued
Following is a summary of the status of options and warrants outstanding at June
30, 2007:
WEIGHTED AVERAGE
REMAINING
EXERCISE PRICE OUTSTANDING AND CONTRACTUAL LIFE
EXERCISABLE (YEARS)
----------------------- --------------------- ---------------------
$0.06 5,484,025 3.5 years
$0.15 -$0.25 13,831,060 4.0 years
$0.40 4,875,000 1.9 years
$0.56 150,000 3.0 years
2007
----
During the year ended June 30, 2007, the Company issued options to purchase
1,000,000 shares of its common stock to a consultant with an estimated fair
value of approximately $268,000. The options have an exercise price of $0.15 per
share and expire on June 30, 2009. The estimated fair value of the options was
included in derivative and warrant liabilities as they were to non-employees and
was reclassified to additional paid in capital upon repayment of the SPA.
On October 16, 2006, the Company entered into an Advisory Board Services
Agreement (the "Advisory Agreement") with Xxxxxx X. Xxxx (the "Advisor"),
pursuant to which the Company engaged the Advisor to assist it in its efforts to
increase exposure of its Alderox(R) line of products in the mining, oil sands,
and drilling industries in Canada. The Advisor has a long history and extensive
associates within the aforementioned industries and the Company believes that
these relationships will considerably and immediately increase exposure in these
industry segments. The period of engagement commences on October 16, 2006 and
terminates on October 16, 2007. As compensation for the Advisor's advisory
services, the Company issued the Advisor warrants to purchase up to 500,000
shares of its restricted common stock, at a price of $0.15 per share. The
warrants are immediately exercisable at the exercise price at any time during
the period commencing on October 16, 2006 and ending October 16, 2011. The
warrants and the shares issuable thereunder are subject to adjustment as set
forth in the warrant certificate. The estimated value of the warrants using the
Black-Scholes option-pricing model was approximately $70,000 and is included in
the employee option expense (see Note 2).
F-32
NOTE 11 - STOCKHOLDERS' EQUITY, continued
From March through June 2007, the Company issued 250,000 options to purchase
shares of common stock to three individuals as an inducement for them to loan
funds to Canvasback which Canvasback could in turn loan to the Company. The
three individuals were not interested in investing directly into the Company
themselves due to the Company's financial condition but were willing to loan
money to Canvasback for use by the Company with the inducement of the options.
These options were fully vested on issuance, have an exercise price of $0.25 per
share, and have a term of three years from issuance. The value of the options
was approximately $65,000, was included in the change in fair value of
derivative liabilities in the accompanying statement of operations and was
reclassified to additional paid in capital upon the repayment of the SPA.
NOTE 12 - LICENSE
Effective January 4, 2006, the Company entered into a license agreement with
Billfighter Investments Limited ("Billfighter'), a related party, 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 $558 was converted the following day,
January 5, 2006, into 3,611,150 shares of common stock based on 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 when used to apply product to rail cars only. The license has no
defined term and is subject to termination by either party. The Company believes
that the license has a useful life of 10 years and is amortizing the cost on a
straight-line basis over the term. Amortization expenses of $50,000 and $25,000
were recognized for the years ended June 30, 2007 and 2006, and are included in
selling, general and administrative expenses in the accompanying statements of
operations.
NOTE 13 - SUBSEQUENT EVENTS
---------------------------
AMENDMENT NO. 2 TO NOTE PURCHASE AGREEMENT
On July 18, 2007, the Company entered into Amendment No. 2 to its Note Purchase
Agreement ("Amendment No. 2") with Canvasback. Amendment No. 2 amended the Note
Purchase Agreement to provide for the cancellation of all notes previously
issued or issuable under the Note Purchase Agreement and for a portion of the
outstanding balance of such notes to be converted into Company common stock with
the remainder reflected by a new, consolidated convertible promissory note. All
previously issued notes under the Agreement were cancelled.
As of July 18, 2007, the outstanding balance of principal and interest of loans
received by the Company from Canvasback pursuant to the framework of the Note
Purchase Agreement was $3,203,890. Pursuant to Amendment No. 2, on July 18,
2007, Canvasback converted $1,787,800 of this balance into 65,000,000 shares of
Company common stock (the "Initial Conversion Shares") and the remaining balance
of $1,416,090 was consolidated into a single new convertible note (the "New
Convertible Note"). This New Convertible Note bears simple interest at the rate
of 10% per annum and matures on July 18, 2009 on which all outstanding principal
and interest is due. The Company does not have any rights to pre-pay principal
to Canvasback prior to the maturity date and may make interest payments prior to
the maturity date only with Canvasback's prior written approval. Because the
$1,787,800 converted included the principal and accrued interest of the loans
which had a conversion price of $0.05, the average conversion price for the
Initial Conversion Shares was approximately $0.0275.
F-33
NOTE 13 - SUBSEQUENT EVENTS, continued
The New Convertible Note may be converted in whole or part, at the option of
Canvasback, into Company common stock (the "Subsequent Conversion Shares") at a
conversion price of $0.025 per share, but such conversion may only be made if
the Company effects an increase in its authorized shares of common stock or a
reverse split of its common stock, such that the Company has sufficient
authorized shares of stock available to allow the conversion of the new note.
Amendment No. 2 prohibits Canvasback from transferring the New Convertible Note
to any third party without the Company's prior written approval.
The Initial Conversion Shares and any Subsequent Conversion Shares Canvasback
may receive are "restricted securities" as defined by Rule 144 and may only be
sold pursuant to registration with the SEC or an exemption from registration.
Additionally, contractual "trickle-out" provisions in Amendment No. 2 prevent
Canvasback from selling in any one month any amount of Initial Conversion Shares
or Subsequent Conversion Shares in excess of 5% of our outstanding shares for
the next three years. In the event the Company were to become listed on the TSX
Venture Exchange in Toronto, Canada, any share escrow agreement that may be
requested and entered into by Canvasback and the Company by such exchange would
supersede the terms of the trickle-out provisions in Amendment No. 2.
SECURED REVOLVING LINE OF CREDIT AGREEMENT
On July 18, 2007, the Company also entered into a Secured Revolving Line of
Credit Agreement (the "Credit Agreement") and Security Agreement with
Canvasback. Pursuant to the Security Agreement, the Company has also issued a
Secured Promissory Note to Canvasback for the $3,000,000 line of credit. The
Company collectively refers to the Credit Agreement, the Security Agreement and
the Secured Promissory Note as the "Loan Documents" in this Annual Report. The
Loan Documents provide the Company with a $3,000,000 line of credit for two
years, secured by all of the Company's assets. The line of credit accrues simple
interest at the rate of 12% per annum and is secured by all of the Company's
assets. All accrued interest as of July 18, 2008 will be payable on July 31,
2008. The principal and the remaining accrued interest will be payable on July
17, 2009.
The Company may utilize the line of credit by requesting advances from time to
time during the term of the Credit Agreement. However, Canvasback has no
obligation to make such advances and the decision to lend such money lies in
their sole and complete discretion. Accordingly, the Company can provide no
assurance that it will have access to funds under the line of credit.
Commencing on April 26, 2007 and continuing through July 16, 2007, Canvasback
advanced funds to the Company from time to time carrying interest at 12% per
annum pursuant (the "Interim Loans") pursuant to an oral arrangement to make the
Interim Loans advances under a line of credit agreement to be negotiated and
signed in the future. As of July 18, 2007, the outstanding balance of principal
and accrued interest of the Interim Loans was $598,193. Pursuant to the Credit
Agreement, this balance of $598,193 was converted into an advance under the line
of credit effective July 18, 2007 and will be due and payable in accordance with
the terms of the Loan Documents.
The Company requests advances under line of credit from time to time to fund its
operating and compliance costs. As of October 10, 2007, the balance of principal
and accrued interest on the line of credit was $850,697, consisting of $821,000
in principal and $29,697 in interest.
F-34
NOTE 13 - SUBSEQUENT EVENTS, continued
On the occurrence of any of the following events not cured by the Company within
ten days after receiving written notice of such event from Canvasback, the Loan
Documents allow Canvasback to suspend the making of further advances, accelerate
the maturity date, commence legal action against the Company, and foreclose on
all of the Company's assets:
o the Company's failure to fulfill any of our obligations under the
Loan Documents, including any failure to pay principal or interest
on the line of credit when due;
o the breach of any warranty or representation made by the Company
in the Credit Agreement or Security Agreement;
o any dissolution or termination of the Company's existence;
o the Company's filing of a voluntary petition in bankruptcy seeking
reorganization, arrangement or readjustment of debts;
o any filing of an involuntary petition against the Company in
bankruptcy seeking reorganization, arrangement or readjustment of
debts that is not dismissed or discharged within 60 days.
OTHER LOANS
In July and August of 2007, the Company received $70,000 from three investors
pursuant to Note Purchase Agreements and Promissory Notes. The promissory notes
are for a term of one year and carry interest at the rate of 12% per annum.
Pursuant to the Note Purchase Agreements entered into with each investor, the
Company committed to issue warrants to purchase an aggregate of 70,000 shares of
common stock. The warrants have a term of one year and an exercise price of
$0.25 per share.
In September 2007, the Company entered into an oral agreement with Xxxx Xxxx,
pursuant to which she agreed to lend the Company $300,000. The Company
memorialized the oral agreement with Xx. Xxxx through a convertible debenture
dated September 11, 2007 in the amount of $300,000. This debenture carries
simple interest of 12% per annum and matures on March 10, 2009. Interest is
payable monthly, with the principal due on the maturity date. At any time prior
to the maturity date, Xx. Xxxx has the option to convert the outstanding balance
of principal, unpaid interest, and/or up to six months of future interest into
shares of the Company's common stock at a conversion of $0.12 per share.
In connection with the issuance of the debenture, the Company also issued Xx.
Xxxx warrants to purchase up to 300,000 shares of common stock. The warrants
have an exercise price of $0.20 per share and expire September 10, 2010. The
warrant exercise price shall be adjusted downwards to reflect forward stock
splits, but may not be adjusted upwards for reverse stock splits or stock
dividends.
On October 1, 2007, Xx. Xxxx loaned the Company an additional $50,000 pursuant
to an oral agreement for this loan to receive similar terms to that of the
debenture she received effective September 11, 2007.
F-35
NOTE 13 - SUBSEQUENT EVENTS, continued
OTHER SHARE ISSUANCES
In July 2007 the Company issued 30,000 shares of its common stock to an investor
pursuant to the terms of an amendment to a promissory note.
In July 2007 the Company issued a consultant 50,000 shares of its common stock
in exchange for his agreeing to provide professional services from July 2007
through January 2007.
In July 2007 the Company issued 500,000 shares of its common stock to Xxxx
Xxxxxx to compensate him for extending a guaranty and granting a mortgage to
purchasers of the secured convertible debentures sold by the Company on May 30,
2007.
In July 2007 the Company issued 500,000 shares of its common stock to Xxxx
Xxxxxx to compensate him for extending a guaranty to purchasers of the secured
convertible debentures sold by the Company on May 30, 2007.
AMENDMENT TO LEASE AGREEMENT
On October 1, 2007, the Company executed a First Amendment to Lease for its
warehouse facilities located in West Valley City, Utah. The amendment extended
the term of the lease to September 30, 2008 and provides for the Company to pay
$5,566 per month in rent.
F-36
SCHEDULE H
AGREEMENTS
As of the Effective Date, the Borrower does not have any outstanding
options, licenses, or agreements of any kind that grant rights to any other
person or entity to manufacture, license, assemble, market, or sell the
Borrower's products, nor is the Borrower bound by or a party to any options,
licenses, or agreements of any kind with respect to the intellectual property of
any other person or entity, except pursuant to the terms of the following
agreements:
1. Distributor Agreement dated April 4, 2006 between the Borrower and
Applied Industrial Technologies, Inc.
2. Distributorship Agreement dated September 19, 2007 between the Borrower
and Applied Mexico S.A. de C.V.
3. Account Protection & Distributorship Agreement dated October 26, 2007
between the Borrower and Le Groupe GLM, Inc.
4. Account Protection & Distributorship Agreement dated October 10, 2007
between the Borrower and Bearing & Transmission
5. Distributorship Agreement dated July 17, 2007 between the Borrower and
Modern Machine Works, Inc.
6. Distributorship Agreement dated May 30, 2007 between the Borrower and
Xxxxxx Technologies
7. Consulting Services Agreement, dated as of April 10, 2007 by and
between Reclamation Consulting and Applications, Inc. and Protective
Barrier Systems.
8. Exclusive License Agreement, dated as of January 4, 2006, by and
between Reclamation Consulting and Applications, Inc. and Billfighter
Investments, Limited.
H-1
SCHEDULE I
DRAWDOWN CERTIFICATE
_________________ ___, 200__
Pala Investments Holdings Limited
00 Xxxxxxxxxx
Xx. Xxxxxx
Xxxxxx
XX0 0XX
Channel Islands
Ladies and Gentlemen:
The undersigned, Reclamation Consulting and Applications, Inc., a corporation
organized under the laws of the State of Colorado, in its capacity as Borrower
under and pursuant to Section 9 of the Secured Convertible Debenture by and
between Reclamation Consulting and Applications, Inc. and Pala Investments
Holdings Limited dated as of December 12, 2007 (as amended and modified or
supplemented from time to time, the "Debenture") hereby certifies to Pala
Investments Holdings Limited that, on the date hereof and on the date the Second
Tranche is advanced, immediately before and after giving effect to such advance,
the conditions set forth in Section 10 of the Debenture have been satisfied.
Capitalized terms used and not otherwise defined herein shall have the meanings
ascribed to such terms in the Debenture to the extent defined therein.
RECLAMATION CONSULTING AND APPLICATIONS,
INC., as Borrower
By: ________________________________
Name:________________________________
Its: ________________________________
I-1
SCHEDULE J
INTELLECTUAL PROPERTY
PROPERTY
OFFICIAL NO. TITLE CASE STATUS COUNTRY TYPE
------------------------ ------------------------------------------ ----------------------- ---------------------------- -----------
10/25053 ALDEROX KR7 Registered Australia Trademark
003775822 ALDEROX KR7 Registered European Community Trademark
1315205 ALDEROX KR7 Application filed India Trademark
719884 ALDEROX KR7 Registered New Zealand Trademark
3022028 ALDEROX KR7 Registered United States of America Trademark
1025054 ALDEROX TSR Registered Australia Trademark
003778156 ALDEROX TSR Registered European Community Trademark
1315206 ALDEROX TSR Application filed India Trademark
719883 ALDEROX TSR Registered Xxx Xxxxxxx Xxxxxxxxx
0000000 XXXXXXX Xxxxxxxxxx Xxxxxx Xxxxxx of America Trademark
2905208 ASA 12 Registered United States of America Trademark
3109303 B20-POWER Registered United States of America Trademark
1525270 Release Agent Formulas And Methods Abandoned by client European Patent Office Patent
2896/DELNP/2004 Release Agent Formulas And Methods Application filed India Patent
PA/a/2006/007233 Release Agent Formulas And Methods Application filed Mexico Patent
PCT/US04/05953 Release Agent Formulas And Methods Application filed Patent Cooperation Treaty Patent
6902606 Release Agent Formulas And Methods Issued United States of America Patent
To Be Filed Release Agent Formulas And Methods In Process United States of America Patent
J-1
SCHEDULE K
SHARE REORGANIZATION
The Borrower will effect a 1 for 2 reverse split of its outstanding
common stock and simultaneously increase the number of its authorized common
stock from 150,000,0000 shares to 200,000,000 shares (the "Share
Reorganization").
The following table represents the approximate capitalization of the
Borrower as of December 5, 2007, after giving effect to the Share Reorganization
assuming it occurred as of such date:
WARRANTS
ASSOCIATED
WITH
OUTSTANDING CONVERSION OF CONVERSION CONVERTIBLE OPTIONS &
NOTES COMMON STOCK PRINCIPAL OF INTEREST DEBENTURES WARRANTS FULLY DILUTED
-------------------------------------------------------------------------------------------
Outstanding Shares
of Common Stock 1 60,825,012 60,825,012
Convertible Note 2 22,921,920 7,918,317 30,840,237
Secured Convertible
Debentures 3 5,800,000 870,000 6,670,000 13,340,000
Unsecured Convertible
Debentures 4 4,916,667 375,750 725,000 6,017,417
Outstanding Stock Options
& Warants 5 17,074,000 17,074,000
-------------------------------------------------------------------------------------------
Total 60,825,012 33,638,587 9,164,067 7,395,000 17,074,000 128,096,665
Notes to Table
1. Outstanding shares of common stock as of December 5, 2007.
2. Convertible Note dated July 18, 2007 issued to Canvasback Company
Limited pursuant to the Note Purchase Agreement dated October 17, 2006,
as amended, bearing interest at the rate of 10% per annum and maturing
on July 18, 2009. Assumes full conversion of all principal and interest
to shares of common stock, as of December 5, 2007, at a conversion
price of $0.05 per share.
3. Secured convertible debentures dated May 30, 2007 maturing on November
29, 2008 and carrying interest at 12% per annum. The outstanding
balance of principal, interest and up to six months of future interest
is convertible at $0.20 per share. Warrants issuable on conversion have
exercise prices of $0.44 and $0.48, and the number of warrants issuable
is not subject to adjustment for the Share Reorganization. Assumes full
conversion of all principal and interest to shares of common stock and
the exercise of all associated warrants as of December 5, 2007.
4. Convertible Debentures issued to Xxxx Xxxx in September 2007 (the Xxxx
Xxxx CD"), Xxxx Xxxx in October 2007 (the "Xxxx Xxxx CD") and to nine
Canadian investors in November 2007 (the "November CD's") together with
associated warrants.
K-1
The Xxxx Xxxx CD carries interest at 12% per annum and matures on March
10, 2009, with interest payable monthly. The principal amount of the
Xxxx Xxxx is $350,000 including $50,000 advanced in October 2007 which
the parties have orally agreed to add to the Xxxx Xxxx CD. The
principal is convertible by Xxxx Xxxx into shares of the Borrower's
common stock at $0.12 per share. In connection with the Xxxx Xxxx CD,
Xxxx Xxxx is entitled to warrants for the purchase of 175,000 shares of
Borrower's common stock at an exercise price of $0.20 per share for a
term of three (3) years from issuance.
The Xxxx Xxxx CD carries interest at 12% per annum and matures on April
21, 2009, with interest payable monthly. The principal amount of the
Xxxx Xxxx CD is $105,030. The principal is convertible by Xxxx Xxxx
into shares of the Borrower's common stock at $0.15 per share. Xxxx
Xxxx also received warrants to purchase 25,000 shares of our common
stock. Half of the warrants have an exercise price of $0.22 per share
and the other half have an exercise price of $0.24 per share. The
warrants expire on May 22, 2010.
The November CD's carry interest of 12% per annum and mature two (2)
years following issuance, with interest payable monthly. The principal
amount of the November Debentures is $500,000. The principal is
convertible by the investors into shares of the Borrower's common stock
at $0.15 per share. The investors also have warrants to purchase up to
500,000 shares of the Borrower's common stock at an exercise price of
$0.30 per share for a term of three (3) years.
Assumes full conversion of all principal and interest, and applicable
future interest on the Xxxx Xxxx CD, Xxxx Xxxx CD and the November CD's
to shares of common stock and the exercise of all associated warrants
as of December 5, 2007.
5. Consists of all outstanding options for the purchase of common stock
and any other warrants not included above.
K-2
SCHEDULE L
ENVIRONMENTAL ISSUES
None.
L-1
SCHEDULE M
EXISTING INDEBTEDNESS
As of the Effective Date, the Borrower's existing indebtedness consisted, of
accounts payable with an approximate aggregate balance of $352,853.57 excluding
amounts for which the Borrower has not yet been billed, and loans and notes
payable with an approximate aggregate balance of $5,210,190.
The following table describes elements of the Borrower's existing approximate
indebtedness as of the Effective Date and after giving effect to the repayment
of part of the indebtedness from the funds received by the Borrower in the First
Tranche:
NOTES CURRENT ($) POST-FINANCING ($)
-------------------------------------------- --------------- ------------------- ---------------------
Convertible Note 1 1,146,096 1,146,096
Secured Convertible Debentures 2 1,160,000 1,160,000
Unsecured Convertible Debentures 3 950,000 950,000
Canvasback Line of Credit 4 820,936 399,786
Other Loans 5 1,133,158 0
-------------------------------------------- --------------- ------------------- ---------------------
Total 5,210,190 3,655,882
Notes to Table
1. Convertible Note dated July 18, 2007 issued to Canvasback Company
Limited pursuant to the Note Purchase Agreement dated October 17, 2006,
as amended, bearing interest at the rate of 10% per annum and maturing
on July 18, 2009. Assumes full conversion of all principal and interest
to shares of common stock, as of December 5, 2007, at a conversion
price of share of $0.025 per share.
2. Secured convertible debentures dated May 30, 2007 maturing on November
29, 2008 and carrying interest at 12% per annum. The outstanding
balance of principal, interest and up to six months of future interest
is convertible at $0.20 per share. Warrants issuable on conversion have
exercise prices of $0.22 and $0.24. Assumes full conversion of all
principal and interest to shares of common stock and the exercise of
all associated warrants as of December 5, 2007. The secured convertible
debentures are held by Xxxx Xxxxxx, Eat-Me Foods, Ltd., and 0761291
B.C. Ltd.
3. Convertible Debentures issued to Xxxx Xxxx in September 2007 (the Xxxx
Xxxx CD"), Xxxx Xxxx in October 2007 (the "Xxxx Xxxx CD") and to nine
Canadian investors in November 2007 (the "November CD's") together with
associated warrants.
M-1
The Xxxx Xxxx CD carries interest at 12% per annum and matures on March
10, 2009, with interest payable monthly. The principal amount of the
Xxxx Xxxx is $350,000 including $50,000 advanced in October 2007 which
the parties have orally agreed to add to the Xxxx Xxxx CD. The
principal is convertible by Xxxx Xxxx into shares of the Borrower's
common stock at $0.12 per share In connection with the Xxxx Xxxx CD,
Xxxx Xxxx is entitled to warrants for the purchase of 350,000 shares of
Borrower's common stock at an exercise price of $0.20 per share for a
term of three (3) years from issuance.
The Xxxx Xxxx CD carries interest at 12% per annum and matures on April
21, 2009, with interest payable monthly. The principal amount of the
Xxxx Xxxx CD is $105,030. The principal is convertible by Xxxx Xxxx
into shares of the Borrower's common stock at $0.15 per share. Xxxx
Xxxx also received warrants to purchase 100,000 shares of our common
stock. Half of the warrants have an exercise price of $0.22 per share
and the other half have an exercise price of $0.24 per share. The
warrants expire on May 22, 2010.
The November CD's carry interest of 12% per annum and mature two (2)
years following issuance, with interest payable monthly. The principal
amount of the November Debentures is $500,000. The principal is
convertible by the investors into shares of the Borrower's common stock
at $0.15 per share. The investors also received warrant to purchase up
to 500,000 shares of the Borrower's common stock at an exercise price
of $0.22 per share for a term of three (3) years.
Assumes full conversion of all principal and interest, and applicable
future interest on the Xxxx Xxxx CD, Xxxx Xxxx CD and the November CD's
to shares of common stock and the exercise of all associated warrants
as of December 5, 2007.
4. $3,000,000 line of credit secured by all of the Borrower's assets
(subordinate to the Lender's security interest). The line of credit
accrues simple interest at the rate of 12% per annum. All accrued
interest as of July 18, 2008 is be payable on July 31, 2008. The
principal and the remaining accrued interest is payable on July 17,
2009. Proceeds from the First Tranche will be used to repay $421,150.60
of this debt, which if repaid as of December 5, 2007 would leave
$399,785.40 outstanding.
5. Will be repaid in full from proceeds received by the Borrower in the
First Tranche.
M-2
SCHEDULE N
SUBORDINATION AGREEMENTS
1. Subordination Agreement dated December 12, 2007 given by 0761291 B.C.
Ltd. in favor of Pala Investments Holdings Limited.
2. Subordination Agreement dated December 12, 2007 given by Eat-Me Foods
Ltd. in favor of Pala Investments Holdings Limited.
3. Subordination Agreement dated December 12, 2007 given by Xxxx Xxxxxx in
favor of Pala Investments Holdings Limited.
4. Subordination Agreement dated December 12, 2007 given by Canvasback
Company Limited in favor of Pala Investments Holdings Limited.
5. Subordination Agreement dated December 12, 2007 given by Xxxxx Xxxxxxx
in favor of Pala Investments Holdings Limited.
N-1
