Attached files
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ______________
Commission file number: 000-22855
AMERICAN SOIL TECHNOLOGIES, INC.
(Name of Small Business Issuer as specific in its Charter)
Nevada 95-4780218
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7745 Alabama Ave, # 9, Canoga Park, California 91304
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (818) 899-4686
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
For the fiscal year ended September 30, 2011, our revenue was $139,025.
As of December 29, 2011, the number of shares of common stock outstanding was
68,090,590. As of December 29, 2011, the aggregate market value of our common
stock held by non-affiliates was approximately $391,738 (based upon 24,951,469
shares at $0.0157 per share).
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference: (i) Registration
Statement on Form SB-2, filed on July 2, 1997, as amended (Registration No.
333-30583); Form 8-K disclosing a change in Registered Certifying Accounts,
filed on May 15, 2007; Form 10Q for the quarterly period ended December 31, 2009
filed on February 23, 2009; and Form 10Q for the quarterly period ended March
31, 2009 filed on June 22, 2009; Form 10Q for the quarterly period ended June
30, 2009 filed on August 14, 2009, Form 10K for the fiscal year ended September
30, 2009 filed on January 13, 2010; Form 10Q for the quarterly period ended
December 31, 2009 filed on March 23, 2010; Form 10Q for the quarterly period
ended March 30, 2010 filed on May 17, 2010; Form 10Q for the quarterly period
ended June 30, 2010 filed on August 23, 2010; Form 10K for the fiscal year ended
September 30, 2010 filed on January 13, 2011; Form 10Q for the quarterly period
ended December 31, 2010 filed on February 22, 2011; Form 10Q for the quarterly
period ended March 30, 2011 filed on May 16, 2011; Form 10Q for the quarterly
period ended June 30, 2011 filed on August 15, 2011 and as amended and filed on
August 28, 2011.
Page
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ITEM 1 DESCRIPTION OF BUSINESS.......................................... 3
ITEM 2 DESCRIPTION OF PROPERTY.......................................... 7
ITEM 3 LEGAL PROCEEDINGS................................................ 7
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 8
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 8
ITEM 6 SELECTED FINANCIAL DATA.......................................... 9
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 10
ITEM 8 FINANCIAL STATEMENTS............................................. 17
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................... 17
ITEM 9A CONTROLS AND PROCEDURES.......................................... 17
ITEM 9B OTHER INFORMATION................................................ 17
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT................ 18
ITEM 11 EXECUTIVE COMPENSATION........................................... 19
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.................................. 24
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 25
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES........................... 25
ITEM 15 EXHIBITS ........................................................ 26
SIGNATURES................................................................. 27
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PART I
ITEM 1. BUSINESS.
DEVELOPMENT OF BUSINESS
American Soil Technologies, Inc., formerly Soil Wash Technologies, Inc., was
incorporated in California on September 22, 1993 in the soil remediation
business. In May 2002, we discontinued the soil remediation business.
BUSINESS OF ISSUER
We develop, manufacture on an outsourced basis and market cutting-edge
technology that decreases the need for water and improves the soil in the "Green
Industry" consisting of agriculture, turf and horticulture. Our products enhance
growing environments and reduce the environmental damage caused by common
growing practices.
We manufacture on an outsourced basis three primary products: Agriblend(R), a
patented soil amendment developed for agriculture; Soil Medic, a patented slow
release liquid fertilizer; and NutrimoistL(R), developed for homes, parks, golf
courses and other turf related applications.
We market our products primarily in the United States. We are continually
attempting to add sales representatives and distributors in both the agriculture
and turf industries. The following table shows the current distributors and
sales representatives of our products and products we license from others:
Distributor/Sales
Representative Product Territory
-------------- ------- ---------
Gigot Aqua Services Agriblend(R) Kansas, Oklahoma, Nebraska,
Nutrimoist(R) Colorado, northern Texas,
Extend(TM) northern New Mexico
Sircle Saver Sacks(R)
The Pacific Tree Company Agriblend(R) Exclusive distributor of our
Soil Medic products for the Paulownia
Nutrimoist(R) Megafolia Tree in the United
States
Turf Masters Soil Medic(TM) San Diego and Orange Counties
Soil Therapy(TM) California and Northern Mexico
Reinke Pasco, Inc. Agriblend(R) Washington
Nutrimoist(R)
Extend(TM)
Dust Contain
Sircle Saver Sack(R)
The Kern Company Agriblend(R) Washington
Nutrimoist(R)
Extend(TM)
Canal Seal
Dust Contain
Anchor MP
Sircle Saver Sack(R)
Hydromulch
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We also act as a distributor for products manufactured by others as follows:
Manufacturer Product Territory
------------ ------- ---------
JT Water Management LLC Extend(TM), a liquid Western United States
linear polymer, and
Contain, a dust
control technology
Richard Roos Sircle Saver Sack(R) Exclusive Worldwide
Soil Saver Sack(TM)
Midwest Industrial Soil-Sement(R)and Those areas where the
Supply, Inc. Envirokleen(R), manufacturer does not
environmentally already have an exclusive
certified dust and dealer or distributor
erosion control products
On July 7, 2006, we acquired Smart World Organics, Inc. ("Smart World") as a
wholly-owned subsidiary. Smart World is a "C" corporation located in Hudson,
Florida. Smart World has developed organic and sustainable products through a
unique research approach both in the field and with Universities and
agricultural schools in Florida. The products are sold directly to the end user
and through distributors in the United States
Smart World provides next-generation organic and sustainable fertilizers to
commercial and residential customers worldwide. Smart World also provides
advanced, custom-formulated products built to suit unusual growing conditions
and environments. The product line includes homogenized fertilizers, non-toxic
insect controls, plant protectants, seed, soil and silage inoculants.
We issued 2,300,000 shares of common stock to the shareholders of Smart World in
exchange for 100% of the shares of common stock of Smart World and assumed
approximately $400,000 in notes and trade payables.
On December 20, 2006, we entered into an Intellectual Property Purchase
Agreement with Ray Nielsen whereby we purchased from Mr. Nielsen any and all
intellectual property of Mr. Nielsen, including all formulas developed by Mr.
Nielsen over the past 30 years, including but not limited to all formulas and
intellectual property used in the business of Smart World, including all
graphics and logos; all domain names and URL's; any proprietary software and its
source code; all existing content and HTML files; all branding and trademarks;
all trade names; all services marks; all copywritten material; all patents; and
all products and proceeds of the foregoing, in any form whatsoever and
wheresoever located (collectively the "Intellectual Property"), in exchange for
a convertible debenture in the amount of $1,500,000, bearing an interest rate of
8% per annum (the "Convertible Debenture"). The Convertible Debenture was
convertible at the option of Mr. Nielsen at any time prior to the maturity date
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into shares of our common stock at a conversion price equal to the closing price
of our common stock for the day immediately preceding the date of conversion.
The Debenture is deemed no longer convertible due to the expiration of the
conversion rights.
The Debenture is secured by the Intellectual Property. The principal of the
Debenture and any unpaid accrued interest thereon was due and payable on January
19, 2008. We were to make quarterly interest payments until the maturity date. A
dispute has arisen between Mr. Nielsen and us regarding the Convertible
Debenture and the uniqueness and value of the Intellectual Property. See "Legal
Proceedings."
COMPETITION
To the best knowledge of our management, there is no direct competition for our
Agriblend(R) product, however, earlier polymer based technology was very
expensive and the remembrance of its cost has a negative effect on marketing
Agriblend(R). Accordingly, educating the end user regarding the benefits of
using Agriblend(R) and gaining general acceptance of the new "micro grain"
technology are obstacles to marketing the product.
There is some competition to our straight polymer products by companies that
have been in business for a number of years.
There is some competition for Extend(TM), however, we have not as yet found a
higher quality liquid linear polymer product.
We are not aware of any competition to Nutrimoist(R) L other than from our
manufacturer(s) who would have to use our polymer to manufacture the product
pursuant to our agreement.
The newly acquired slow release fertilizer Soil Medic does not seem to have
competition at this time.
There is some competition for the organic products that we distribute and
manufacture through Smart World.
SOURCES AND AVAILABILITY OF RAW MATERIAL AND PRINCIPAL SUPPLIERS
Our products are proprietary blends that include cross-linked micro grain
polymer in the blend. Cross-linked polymer is manufactured by several chemical
companies that include Stockhausen; BASF; Ciba Specialties; and Floerger. All
other components of our products are readily available commercially throughout
the world. Agriblend(R) products are custom blended in accordance with our
specifications at a blending facility located near Truth or Consequences, New
Mexico. Our warehouse facilities are located in Phoenix, Arizona and Canoga
Park, California. Nutrimoist(R) is blended by us through contract blenders and
is a combination of different formulations, which include our polymer products.
Two licensees under our patent manufacture our liquid slow release fertilizer.
Custom blending of Soil Medic, as needed, is performed by us through independent
blenders. Our organic products were manufactured at our former Smart World plant
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in Hudson, Florida which is now dormant until funding can be secured. The Agro
Tower is manufactured for us by Make-It Manufacturing in Paso Robles,
California.
DEPENDENCE ON MAJOR CUSTOMERS
We are not dependent on any one customer for a substantial portion of our sales
of any product.
INTELLECTUAL PROPERTY
We have six patents on the M-216 Polymer Injector machine designed to install
our Nutrimoist(R) product into mature turf.
On March 21, 2006, we acquired the U.S. patent on a slow release liquid
fertilizer through our acquisition of Advanced Fertilizer Technologies, Inc.
We have exclusive worldwide manufacturing/marketing rights to patented super
absorbent cross-linked polymer application technology. The underlying patents
include United States Patent number 5,649,495 and 5,868,087, commonly known and
described as "Agricultural Retention Mixture and Application Technique."
We have exclusive worldwide marketing rights to the patent pending linear
polymer product known as the Sircle Saver Sack(TM).
We own registered trademarks on the names, Agriblend(R), Nutrimoist(R),
Hydroganic(R) and Prosper(R).
We have world wide marketing rights to a patented product known as the Agro
Tower.
We own the right to numerous formulas used to manufacture organic and
sustainable soil amendments, fertilizers and insecticides.
GOVERNMENT APPROVAL
Agriblend(R) and our other polymers are subject to regulatory standards
developed by the Environmental Protection Agency ("EPA") that are applicable to
maximum monomer concentrations in polymers. Polymer products cannot exceed
monomer concentrations of 200 mg/kg. All of the polymers we use are well below
the maximum monomer standard.
Many of our products are organically approved through the National Organic
Program ("NOP") and registered under EPA section 25B.
RESEARCH AND DEVELOPMENT COSTS
We have not spent material amounts for research and development during the years
ended September 30, 2011 and September 30, 2010.
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COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS
We provide Material Safety Data Sheets on all components of our product line and
comply with labeling requirement for our products. In addition, we comply with
EPA regulations applicable to monomer content in its polymer additives (no
greater than five-hundredths percent (0.05%)). We believe that our operations
currently comply in all material respects with applicable federal, state and
local laws, rules, regulations and ordinances regarding the discharge of
materials into the environment. We do not believe that such compliance will have
a material impact on our capital expenditures, future earnings and competitive
position. No material capital expenditures for environmental control equipment
presently are planned.
EMPLOYEES
As of the date hereof, we have three full-time employees. We hire independent
contractors on an "as needed" basis only. We have no collective bargaining
agreements with our employees. We believe that our employee relationships are
satisfactory.
ITEM 1A NON APPLICABLE
ITEM 1B NON APPLICABLE
ITEM 2. DESCRIPTION OF PROPERTY
In January 2011, we moved offices to a location in Canoga Park and sublease the
space from a related party. All of our operations are conducted from this
facility. The new lease is rent free. We also rent storage space in Tucson and
Phoenix, Arizona for approximately $200 per month.
ITEM 3. LEGAL PROCEEDINGS
On or about September 21, 2007, Stockhausen, Inc. ("Stockhausen") filed a
Complaint in the United States District Court, for the Middle District of North
Carolina, against us seeking damages. The parties entered into a settlement
agreement on June 2, 2010. Under the settlement agreement, we agreed to pay
Stockhausen $250,000 on or before June 23, 2010 as a compromise to Stockhausen's
claims that currently total $603,921. We further agreed that we would consent to
the entry of a Judgment against us in favor of Stockhausen in the amount of
$603,921 if we failed to make complete and timely payment as agreed. The company
was unable to make the agreed upon payment, and on July 8, 2010, Stockhausen
entered a judgment for the above stated amount against the company.
On or about October 4, 2007, Raymond J. Nielsen and Cheryl K. Nielsen
(collectively, "Plaintiffs"), filed a Complaint in the Circuit Court in the
Sixth Judicial District of Pasco County, Florida, against us and Smart World
(collectively "Defendants") seeking damages, declaratory, and injunctive relief.
Plaintiffs allege that Defendants failed to pay interest when due on the
Convertible Debenture from Defendants to Plaintiffs, and, thus, the entire
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amount of the Convertible Debenture is accelerated and Plaintiffs are seeking a
judgment in the amount of $1,500,000 plus interest. On December 29, 2009, the
matter was settled for $400,000 and the Company had 60 days in which to remit
the amount or a judgment in the entire amount claimed will be entered against
us. The Company was not able to meet the terms of the settlement and have been
actively communicating with the Plaintiffs to extend the terms of the
settlement.
To the best knowledge of our management, there are no other legal proceedings
pending against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITES
MARKET FOR COMMON EQUITY
Our common stock is currently quoted on the Over-The-Counter Bulletin Board
under the Symbol "SOYL." Set forth below is the trading history of our common
stock without retail mark-up, mark-down or commissions:
High Low
---- ---
2010
First Quarter ...................... 0.03 0.01
Second Quarter ..................... 0.01 0.01
Third Quarter ...................... 0.01 0.01
Fourth Quarter ..................... 0.05 0.01
2011
First Quarter ...................... 0.07 0.01
Second Quarter ..................... 0.02 0.01
Third Quarter ...................... 0.02 0.01
Fourth Quarter ..................... 0.02 0.01
On December 20, 2011, the closing stock price was $0.0157.
The above quotations are inter-dealer quotations from market makers of our
common stock. At certain times the actual closing or opening quotations may not
represent actual trades that took place.
HOLDERS
As of December, 2011, there were 283 shareholders holding certificated
securities and approximately 545 shareholders currently listed in the Depository
Trust Company as holding shares in brokerage accounts. Our transfer agent is
Standard Registrar & Transfer Company 1528 South 1840 East, Draper, Utah 84020.
8
DIVIDENDS
We have paid no dividends on our common stock since inception and do not
anticipate or contemplate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On September 2, 2009, Valerie Sarofim purchased a Convertible Debenture for
$125,000 , which on October 8, 2009, she converted into 3,125,000 shares of
common stock at the conversion price of $0.04 per share. We believe that Ms
Sarofim is an "accredited investor" under Rule 501 Regulation D of the Act and
had adequate access to information about us.
On October 8, 2009, the Board of Directors granted 1,000,000 shares of common
stock to each of its Directors Carl Ranno, Neil Kitchen, Scott Baker and to
Diana Visco. The grant was made because of each respective recipients
contribution to the Company. We believe that these individuals are "accredited
investor" under Rule 501 Regulation D of the Act and had adequate access to
information about us.
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, our selected
financial information:
Fiscal Year Ended Fiscal Year Ended
September 30, 2011 September 30, 2010
------------------ ------------------
(Audited) (Audited)
STATEMENT OF OPERATIONS DATA:
Revenue $ 139,025 $ 117,052
Loss From Continuing Operations (609,266) (963,620)
(Net Loss) (721,369) (1,488,300)
(Continuing Operations) Loss Per Share $ (0.01) $ (0.02)
(Net Loss) Per Share $ (0.01) $ (0.02)
BALANCE SHEET DATA:
Current Assets $ 37,584 $ 36,218
Property & Equipment, net 760 15,014
Intangible Assets; net 93,256 162,147
Total Assets 131,600 213,379
Total Current Liabilities (6,881,234) (6,277,388)
Accumulated Deficit (28,031,374) (27,310,005)
Stockholders' Deficit $ (6,749,634) $ (6,064,009)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
financial statements, including the notes thereto, appearing elsewhere in this
Report.
ThE following information CONTAINS certain forward-looking statements of OUR
management. Forward-looking statements are statements that estimate the
happening of future events and are not based on historical fact. Forward-looking
statements may be identified by the use of forward-looking terminology, such as
"may," "could," "expect," "estimate," "anticipate," "PLAN," "predict,"
"probable," "possible," "should," "continue," or similar terms, variations of
those terms or the negative of those terms. The forward-looking statements
specified in the following information have been compiled by our management on
the basis of assumptions made by management and considered by management to be
reasonable. Our future operating results, however, are impossible to predict and
no representation, guaranty, or warranty is to be inferred from those
forward-looking statements.
OVERVIEW
We develop, manufacture and market cutting-edge technology that decreases the
need for water and improves the soil in the "Green Industry" consisting of
agriculture, turf and horticulture.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2011 COMPARED TO SEPTEMBER 30, 2010
REVENUES
Revenues for the fiscal year-ended September 30, 2011 were $139,025 compared to
$117,052 for the fiscal year ended September 30, 2010, an increase of 18.8 %.
This increase in revenue is directly related to a slight improvement in economic
conditions in agriculture.
COST OF SALES
Cost of goods sold decreased to $56,728 for the fiscal year ended September 30,
2011 from $90,654 for the fiscal year ended September 30, 2010. The decrease in
the cost of sales has been caused by the elimination of an impairment of
inventory during this period. Our gross margins were 59 % and 23% for the years
ended September 30, 2011 and September 30, 2010, respectively. The increase in
our gross margins was caused by a decrease in our cost of sales as described
above.
OPERATING EXPENSES
Operating expenses decreased approximately 30 % for the fiscal year ended
September 30, 2011. This decrease in operating expenses is a result of many
factors.
10
General and administrative expenses decreased approximately 31 % for the fiscal
year ended September 30, 2011 due to a reduction in general operational
expenses.
Sales and marketing expenses decreased approximately 52% as we eliminated all
marketing and sale efforts.
Research and development costs have been eliminated because we have basically
completed our research and development on our existing products.
The amortization expense of intangible assets was unchanged.
INTEREST EXPENSE
Interest expense increased 3% for the fiscal year ended September 30, 2011 from
the period ended September 30, 2010. The increase resulted from the additional
borrowing from officers during this audited period.
NET LOSS
For the reasons detailed above, we experienced reduced losses in the year ended
September 30, 2011 compared to the year ended September 30, 2009. We expect that
as a result of our efforts during the last three years to develop strategic
alliances, marketing agreements, and distribution networks, sales volume in
subsequent periods should increase. However, since these arrangements are new
and untested and we do not have the funds to promote these programs, it is
uncertain whether these actions will be sufficient to produce net operating
income for the fiscal year ending September 30, 2012. Given the gross margins of
our turf products as well as a renewed interest in consumer organic products for
the retail market, future operating results should improve.
SEASONALITY
Our efforts in the United States have focused on the southern states and
therefore generally experience year round growing cycles, with the sale of the
agricultural products preceding the growing cycle of various crops.
International sales have not been sufficient enough or the geographic
distribution of sales concentrated enough to determine if a seasonal trend
exists although the initial indication is that our markets will become diverse
and therefore not indicate significant seasonal variations. As we expand into
the residential and commercial segments nationally, we will experience some
seasonal declines in sales during the fall and winter quarters in less temperate
climates.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $4,356 and $2,045 at September 30, 2011 and
September 30, 2010, respectively. Net cash used by operations was $162 for the
year ended September 30, 2011 as compared to $89,442 for the year ended
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September 30, 2010. We have historically relied upon one of our officers and
significant shareholders to provide cash to meet short term operating cash
requirements.
In March 2000, we authorized the issuance of an aggregate of $1,325,000 of
convertible debentures with interest payable quarterly at 10% per annum. The
convertible debentures were convertible to our common stock at a rate of one
share for each three dollars converted. The debentures matured in the first
calendar quarter of 2002. All of the debentures were subscribed, and at
September 30, 2011, the outstanding balance of all convertible notes payable
totaled $1,892,024. At September 30, 2011, debentures consisted of one
$1,500,000 of 8% debenture which is currently in default and in dispute among
the parties, $50,000 of 8% per annum debentures at a rate of $0.50 per share,
$60,000 of 8% debenture convertible at $0.10 per share, $30,000 of 8% per annum
debentures at a rate of $0.25 per share, $75,000 of 8% per annum debentures at a
rate of $0.19 per share, and $177,024 of 10% per annum convertible at a rate of
$3.00 per share All of the above mentioned convertible debentures are beyond
their due dates and as such are no longer convertible unless the company and the
holders agree on each debenture.
As of September 30, 2011 we had a working capital deficit of $6,843,650 (current
assets less current liabilities) as compared to a deficit of $6,241,170 as of
September 30, 2010. The increase in the working capital deficit has been caused
by an increase in our current liabilities.
As shown in the accompanying financial statements, we have incurred an
accumulated deficit of $28,031,374 and a working capital deficit of $6,843,650
as of September 30, 2011. Our ability to continue as a going concern is
dependent on obtaining additional capital and financing and operating at a
profitable level. We intend to seek additional capital either through debt or
equity offerings and to increase sales volume and operating margins to achieve
profitability. Our working capital and other capital requirements during the
next fiscal year and thereafter will vary based on the sales revenue generated
by the recent accumulation of additional products and the distribution and sales
network we have created and will continue to grow.
We will consider both the public and private sale of securities and debt
instruments for expansion of our operations if such expansion would benefit our
overall growth and income objectives. Should sales growth not materialize, we
may look to these public and private sources of financing. There can be no
assurance, however, that we can obtain sufficient capital on acceptable terms,
if at all. Under such conditions, failure to obtain such capital likely would,
at a minimum, negatively impact our ability to timely meet our business
objectives.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the U.S., which requires us to make estimates
and assumptions in certain circumstances that affect amounts reported. In
preparing these financial statements, management has made its best estimates and
judgments of certain amounts, giving due consideration to materiality. We
believe that of our significant accounting policies (more fully described in
notes to the consolidated financial statements), the following are particularly
important to the portrayal of our results of operations and financial position
and may require the application of a higher level of judgment by our management,
and as a result are subject to an inherent degree of uncertainty.
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ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. By their nature, these estimates and judgments are subject
to an inherent degree of uncertainty. We review our estimates on an on-going
basis, including those related to the allowance for doubtful accounts,
inventories and related reserves, long-lived assets, income taxes, litigation
and stock-based compensation. We base our estimates on our historical
experience, knowledge of current conditions and our beliefs of what could occur
in the future considering available information. Actual results may differ from
these estimates, and material effects on our operating results and financial
position may result. We believe the following critical accounting policies
involve our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
REVENUE RECOGNITION
We generate our revenues from the sale of products and services and recognize
revenue when the following fundamental criteria are met:
* persuasive evidence that an arrangement exists;
* the products and services have been delivered;
* selling prices are fixed and determinable and not subject to refund or
adjustment; and
* collection of amounts due is reasonably assured.
Delivery occurs when goods are shipped and title and risk of loss transfer to
the customer, in accordance with the terms specified in the arrangement with the
customer. Revenue recognition is deferred in all instances where the earnings
process is incomplete. We provide for sales returns and allowances in the same
period as the related revenues are recognized. We base these estimates on our
historical experience or the specific identification of an event necessitating a
reserve. To the extent actual sales returns differ from our estimates, our
future results of operations may be affected. Should changes in conditions cause
management to determine that these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
affected.
ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain an allowance
13
for doubtful accounts based upon our historical experience and any specific
customer collection issues that we have identified. While our credit losses have
historically been within our expectations and the allowance established, we may
not continue to experience the same credit loss rates as we have in the past.
Our accounts receivable are concentrated in a relatively few number of
customers. Therefore, a significant change in the liquidity or financial
position of any one customer could make it more difficult for us to collect our
accounts receivable and require us to increase our allowance for doubtful
accounts, which could have a material adverse impact on our consolidated
financial position, results of operations and cash flows.
INVENTORIES
We seek to purchase and maintain raw materials at sufficient levels to meet lead
times based on forecasted demand. If forecasted demand exceeds actual demand, we
may need to provide an allowance for excess or obsolete quantities on hand. We
also review our inventories for changes in the market prices of our products and
provide reserves as deemed necessary. If actual market conditions are less
favorable than those projected by management, additional inventory reserves may
be required. We state our inventories at the lower of cost, using the first-in,
first-out method on an average costs basis, or market.
We account of inventory costs in accordance with Accounting Standards
Condification ("ASC") No. 310, "Current Assets". Abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage) are
recognized as current-period charges. Fixed production overhead is allocated to
the costs of conversion into inventories based on the normal capacity of the
production facilities. We utilize an expected normal level of production units,
based on our plant capacity. To the extent we do not achieve a normal expected
production levels, we charge such under-absorption of fixed overhead to
operations.
LONG-LIVED ASSETS
The Company reviews its fixed assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less costs to sell.
Based on analysis of the carrying value of goodwill as of September 30, 2009
relating to Smart World Organics, the fair value did not exceed the carrying
amount. As a result we fully impaired goodwill in the amount of $364,600, which
was reflected in the statement of operations.
We evaluated the Soil Medic and as of September 30, 2011 partially impaired the
intangible asset in the amount of $19,000, which is reflected in the statement
of operations resulting in a remaining value of approximately $93,000 for the
14
year ended September 30, 2011. The impairment was based on the anticipated
reduction in royalties to be received from Dune & Co., the primary user of
materials generated from this patent.
During the year ended September 30, 2009, we evaluated the Smart World
intangible assets, consisting of the formulas, trade secrets and goodwill,
aggregating $1,036,984, net of accumulated amortization. We evaluated
undiscounted cash flows for definite lived intangible assets and fair value
related to goodwill. Based on the lack of capital to implement our business plan
we have been unable to enter the retail market with a major retailer, we fully
impaired the Smart World intangible assets and goodwill in the amount of
$1,036,984, based on future expected cash flows, which is reflected in the
statement of operations.
ACCOUNTING FOR INCOME TAXES
We account for income taxes under the provisions of ASC NO. 740, "Income Taxes".
Under this method, we determine deferred tax assets and liabilities based upon
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. The tax consequences of most
events recognized in the current year's financial statements are included in
determining income taxes currently payable. However, because tax laws and
financial accounting standards differ in their recognition and measurement of
assets, liabilities, equity, revenues, expenses, gains and losses, differences
arise between the amount of taxable income and pre-tax financial income for a
year and between the tax bases of assets or liabilities and their reported
amounts in the financial statements. Because it is assumed that the reported
amounts of assets and liabilities will be recovered and settled, respectively, a
difference between the tax basis of an asset or a liability and its reported
amount on the consolidated balance sheet will result in a taxable or a
deductible amount in some future years when the related liabilities are settled
or the reported amounts of the assets are recovered. We then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and unless we believe that recovery is more likely than not, we must
establish a valuation allowance.
Effective September 30, 2007, the Company adopted ASC No. 740 Topic 10, Income
Taxes, General ("ASC 740.10"). ASC 740.10 prescribes, among other things, a
recognition threshold and measurement attributes for the financial statement
recognition and measurement of uncertain tax positions taken or expected to be
taken in a company's income tax return. The Company utilizes a two-step approach
for evaluating uncertain tax positions. Step one or recognition, requires a
company to determine if the weight of available evidence indicates a tax
position is more likely than not to be sustained upon audit, including
resolution of related appeals or litigation processes, if any. Step two or
measurement, is based on the largest amount of benefit, which is more likely
than not to be realized on settlement with the taxing authority.
We have provided a full valuation allowance against our U.S federal and state
deferred tax assets. If sufficient evidence of our ability to generate future
U.S federal and/or state taxable income becomes apparent, we may be required to
reduce our valuation allowance, resulting in income tax benefits in our
statement of operations. We evaluate the realizability of our deferred tax
assets and assess the need for a valuation allowance quarterly.
15
STOCK-BASED COMPENSATION
We account for stock-based compensation in accordance with ASC No. 718,
Compensation, Stock Compensation ("ASC 718"). ASC 718 requires that we account
for all stock-based compensation transactions using a fair-value method and
recognize the fair value of each award as an expense, generally over the service
period. The fair value of stock options is based upon the market price of our
common stock at the grant date. We estimate the fair value of stock option
awards, as of the grant date, using the Black-Scholes option-pricing model. The
use of the Black-Scholes model requires that we make a number of estimates,
including the expected option term, the expected volatility in the price of our
common stock, the risk-free rate of interest and the dividend yield on our
common stock. If our expected option term and stock-price volatility assumptions
were different, the resulting determination of the fair value of stock option
awards could be materially different and our results of operations could be
materially impacted.
ACCOUNTING FOR NON-EMPLOYEE STOCK-BASED COMPENSATION
We measure compensation expense for its non-employee stock-based compensation
under ASC No. 505 Topic 50, "Equity-Based Payments to Non-Employees". The fair
value of the option issued or expected to be issued is used to measure the
transaction, as this is more reliable than the fair value of the services
received. The fair value is measured at the value of our common stock on the
date that the commitment for performance by the counterparty has been reached or
the counterparty's performance is complete. In the case of the issuance of stock
options, we determine the fair value using the Black-Scholes option pricing
model. The fair value of the equity instrument is charged directly to
stock-based compensation expense and credited to additional paid-in capital.
ACCOUNTING FOR CONVERSION FEATURES AND WARRANTS ISSUED WITH CONVERTIBLE DEBT
Our derivative financial instruments consisted of embedded derivatives related
to the issuance of our $1.5 million convertible note payable to Ray Nielsen.
These embedded derivatives included the conversion feature that was not
considered conventional as defined in ASC No. 815, "Derivatives and Hedging".
The accounting treatment of derivative financial instruments require that we
record the derivative at its fair value and record it at fair value as of each
subsequent balance sheet date. Changes in fair value are recorded as
non-operating, non-cash income or expense at each reporting date. The
derivatives were valued using the Black-Scholes Option Pricing Model.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB amended authoritative guidance for improving
disclosures about fair-value measurements. The updated guidance requires new
disclosures about recurring or nonrecurring fair-value measurements including
significant transfers into and out of Level 1 and Level 2 fair-value
measurements and information on purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of Level 3 fair-value measurements. The
guidance also clarified existing fair-value measurement disclosure guidance
about the level of disaggregation, inputs, and valuation techniques. The
16
guidance became effective for interim and annual reporting periods beginning on
or after December 15, 2009, with an exception for the disclosures of purchases,
sales, issuances and settlements on the roll-forward of activity in Level 3
fair-value measurements. Those disclosures will be effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. The Company does not expect that the adoption of this guidance will have
a material impact on the financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT FINANCIAL RISKS
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 begin on
page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our President and Chief Financial Officer (the "Certifying Officers") is
responsible for establishing and maintaining our disclosure controls and
procedures. The Certifying Officer have designed such disclosure controls and
procedures to ensure that material information is made known to him,
particularly during the period in which this report was prepared. The Certifying
Officer has evaluated the effectiveness of our disclosure controls and
procedures and has determined that they are adequate.
ITEM 9A(T). CONTROLS AND PROCEDURES
Not Applicable
ITEM 9B. OTHER INFORMATION
None.
17
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
Our directors and executive officers are as follows:
Name Age Position
---- --- --------
Carl P. Ranno 71 Director, Chief Executive Officer, President,
Chief Financial Officer
Neil C. Kitchen 63 Director, Vice President
Diana Visco 53 Secretary
Scott Baker 53 Director
MR. CARL P. RANNO, DIRECTOR, CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL
OFFICER, received a degree in Economics from Xavier University in Cincinnati,
Ohio and his Juris Doctor from the University of Detroit School of Law. Mr.
Ranno became a Director in September 2001 and Chief Executive Officer and
President in May 2002. For the five years prior to becoming the President/CEO of
the Company, he had acted as an advisor in strategic planning, mergers and
acquisitions and as a securities attorney to numerous public companies. He has
served as president and CEO of public and private companies. He is also a member
of the board of directors of Central Utilities Production Company.
MR. NEIL C. KITCHEN, DIRECTOR, VICE PRESIDENT, has over 20 years experience in
business management in the environmental sector including management of
companies involved in general engineering, toxicology, and environmental
cleanup. Prior to joining us in 1994, he was Vice President of a publicly-held
environmental cleanup company. He holds a B.S. in Business Management from San
Diego State University and a class "A" General Engineering license with
Hazardous Material Certification from the State of California.
MS. DIANA VISCO, SECRETARY, Diana Visco, Secretary, has worked with us since
January 1999. Prior to that, she worked for 21 years with the Americana
Leadership College, Inc., traveling to all of its offices and conferences across
the USA and Caribbean in addition to Australia, New Zealand, Canada and Europe.
Ms Visco spent several years as a traveling administrator and as International
Administrator handling all aspects of finance, administration as well as
marketing and promotion in addition to being assistant to the President of that
company. She is the daughter of Mr. Louie Visco, a former director who passed
away on January 3, 2008
MR. SCOTT BAKER, DIRECTOR, has practiced law in Arizona for the past 19 years.
He graduated from the University of Arizona with a B.S. in business in 1978 and
obtained his J.D. from the University of Arizona in 1981. As a general
practitioner, he has appeared before the U.S. District Tax Court and the U.S.
District Court.
18
Directors serve until the next annual meeting or until their successors are
qualified and elected. Officers serve at the discretion of the Board of
Directors.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors and certain officers, as well as persons who own more than 10% of a
registered class of our equity securities, ("Reporting Persons") to file reports
of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities
and Exchange Commission.
Based solely upon a review of the copies of such forms, we believe that all
Reporting Persons have complied on a timely basis with all filing requirements
applicable to them, except that Louie Visco filed one late report on Form 4
disclosing his conversion of debt to equity.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
Set forth below is a summary of compensation for our principal executive officer
and our two most highly compensated officers other than our principal executive
officer (collectively, the "named executive officers") for our last two fiscal
years. There have been no annuity, pension or retirement benefits ever paid to
our officers, directors or employees.
With the exception of reimbursement of expenses incurred by our named executive
officers during the scope of their employment and unless expressly stated
otherwise in a footnote below, none of the named executive officers received
other compensation, perquisites and/or personal benefits in excess of $10,000.
All compensation is being accrued.
Name and Non-Equity
Principal Stock Option Incentive Plan All Other
Position Year Salary ($) Bonus($) Awards($) Awards($) Compensation($) Compensation($) Total($)
-------- ---- ---------- -------- --------- --------- --------------- --------------- --------
Carl P. Ranno, 2011 $200,000 $0 $ 0 $0 $0 $0 $200,000
CEO, President, CFO 2010 $200,000 $0 $32,000 $0 $0 $0 $232,000
(Principal Executive
Officer)
Neil C. Kitchen, 2011 $134,500 $0 $ 0 $0 $0 $0 $134,500
Vice President 2010 $134,500 $0 $32,000 $0 $0 $0 $166,500
Diana Visco 2011 $ 85,000 $0 $ 0 $0 $0 $0 $ 85,000
Secretary 2010 $ 85,000 $0 $32,000 $0 $0 $0 $117,000
19
GRANTS OF PLAN-BASED AWARDS
We did not grant any plan-based awards during this fiscal year ended September
30, 2011:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END SEPTEMBER 30,2011
The following table sets forth information for the named executive officers
regarding the number of shares and underlying shares both exercisable and
unexercisable stock options, as well as the exercise prices and expiration dates
thereof, as of September 30, 2011.
Option Awards Stock Awards
------------------------------------------------------------------------- -----------------------------------
Equity
Incentive
Plan
Equity Awards
Incentive Market
Plan or
Awards: Payout
Equity Number of Value of
Incentive Market Unearned Unearned
Plan Awards: Number of Value of Shares, Shares,
Number of Number of Number of Shares of Shares Units or Units of
securities securities Securities Units of or Units other other
Underlying Underlying Underlying Stock of Stock rights rights
Unexercised Unexercised Unexercised Option Option that have that that have that
Options(#) Options(#) Unearned Exercise Expiration not have not not have not
Name Exercisable Unexercisable Options(#) Price($) Date vested(#) vested($) vested(#) vested($)
---- ----------- ------------- ---------- -------- ---- --------- --------- --------- ---------
Carl P. Ranno, 150,000 0 0 $0.50 6/30/12 0 0 0 0
CEO, President, 470,000 0 0 $0.11 9/27/12 0 0 0 0
CEO (Principal
Executive
Officer)
Neil C. Kitchen, 150,000 0 0 $0.50 6/30/12 0 0 0 0
Vice President 430,000 0 0 $0.11 9/27/12 0 0 0 0
EMPLOYMENT AGREEMENTS
We have an employment agreement Carl P. Ranno as our Chief Executive Officer and
President. The Agreement is for a term of five years, commencing on May 23, 2008
and expiring on May 22, 2013 with automatic one-year extensions unless either
the Company or Mr. Ranno provides written notice of their intention not to renew
the Agreement at least 30 days prior to the expiration of the then current term.
The Agreement provides that, in addition to receiving paid vacation in
accordance with the Company's policies as well as other customary benefits and
provisions, Mr. Ranno shall receive an annual base salary of $200,000. If, at
any time during the term of the Agreement, Mr. Ranno is terminated "without
cause," he will be entitled to receive a cash payment equal to the aggregate
compensation payable to Mr. Ranno during the remaining term of the Agreement.
The compensation is being accrued.
20
On May 23, 2008 the Company entered into an Employment Agreement with Neil C.
Kitchen to act as the Company's Vice President and Chief Technical Officer (the
"Agreement"). The Agreement is for a term of five years, commencing on May 23,
2008 and expiring on May 22, 2013 with automatic one-year extensions unless
either the Company or Mr. Kitchen provides written notice of their intention not
to renew the Agreement at least 30 days prior to the expiration of the then
current term. The Agreement provides that, in addition to receiving paid
vacation in accordance with the Company's policies as well as other customary
benefits and provisions, Mr. Kitchen shall receive an annual base salary of
$130,000. If, at any time during the term of the Agreement, Mr. Kitchen is
terminated "without cause," he will be entitled to receive a cash payment equal
to the aggregate compensation payable to Mr. Kitchen during the remaining term
of the Agreement. The compensation is being accrued.
On May 23, 2008, and effective the same date, the Company entered into an
Employment Agreement with Diana Visco to act as the Company's Secretary and
Administrative Assistant to the President (the "Agreement").The Agreement is for
a term of five years, commencing on May 23, 2008 and expiring on May 22, 2013
with automatic one-year extensions unless either the Company or Ms. Visco
provides written notice of their intention not to renew the Agreement at least
30 days prior to the expiration of the then current term. The Agreement provides
that, in addition to receiving paid vacation in accordance with the Company's
policies as well as other customary benefits and provisions, Ms. Visco shall
receive an annual base salary of $85,000. If, at any time during the term of the
Agreement, Ms. Visco is terminated "without cause," she will be entitled to
receive a cash payment equal to the aggregate compensation payable to Ms. Visco
during the remaining term of the Agreement. The compensation is being accrued.
2002 STOCK OPTION PLAN
Our shareholders adopted a Stock Option Plan on November 8, 2002 (the "2002
Plan"). Under the 2002 Plan, 2,000,000 shares of common stock have been
authorized for issuance as Incentive Stock Options or Nonstatutory Stock
Options. Under the 2002 Plan, options may be granted to our key employees,
officers, directors or consultants. The purchase price of the common stock
subject to each Incentive Stock Option shall not be less than the fair market
value (as determined in the 2002 Plan), or in the case of the grant of an
Incentive Stock Option to a principal stockholder, not less that 110% of fair
market value of such common stock at the time such option is granted. The
purchase price of the common stock subject to each Nonstatutory Stock Option
shall be determined at the time such option is granted, but in no case less than
100% of the fair market value of such shares of common stock at the time such
option is granted.
The 2002 Plan shall terminate ten years from the date of its adoption by our
shareholders, and no option shall be granted after termination of the 2002 Plan.
Subject to certain restrictions, the 2002 Plan may at any time be terminated and
from time to time be modified or amended by the affirmative vote of the holders
of a majority of the outstanding shares of our capital stock present, or
represented, and entitled to vote at a meeting duly held in accordance with the
applicable laws of the State of Nevada.
As of the date hereof, 1,310,000 options have been issued pursuant to the 2002
Plan.
21
2005 STOCK OPTION/STOCK ISSUANCE PLAN
GENERAL
On January 31, 2005, our Board of Directors adopted our 2005 Stock Option/Stock
Issuance Plan (the "2005 Plan") and directed that it be presented to the
stockholders for their approval and adoption.
The 2005 Plan provides for the issuance of up to 10,000,000 shares of common
stock to our directors, officers, employees and consultants in the form of stock
options and shares of common stock.
Our Board of Directors will initially administer the 2005 Plan, except that the
Board may, at its discretion, establish a committee comprised of two or more
members of the Board or two or more other persons to administer the 2005 Plan
(the "Plan Administrator").
The 2005 Plan has two separate components: the option grant program and the
stock issuance program. To date, 498,240 shares of common stock have been issued
pursuant to the 2005 Plan.
OPTION GRANT PROGRAM
Incentive stock options (those stock options that qualify under Section 422 of
the Internal Revenue Code of 1986 ("the "Code")) may be granted to any
individual who is, at the time of the grant, our employee. Non-qualified stock
options (those options that do not qualify under Section 422 of the Code) may be
granted to employees and other people, including our directors and officers.
Grants under the option grant program may be structured as installment options
which become exercisable for vested shares over the optionee's period of service
or as immediately exercisable options for unvested shares which will be subject
to repurchase by us, at the option exercise price paid per share, upon the
optionee's termination of service prior to vesting in those shares. All option
grants must have an exercise price not less than 100% of the fair market value
of the option shares on the grant date.
Each option is to have a maximum term of ten years, subject to earlier
termination in the event the optionee leaves our service. The optionee will have
up to a three month period following termination of service (for reasons other
than death or disability) in which to exercise the option. This period will be
extended to 12 months if the optionee's service terminates by reason of
disability, and in the event of the optionee's death, the personal
representative of the optionee's estate (or the person inheriting the option)
will have up to a 12 month period following the optionee's death in which to
exercise the option.
To exercise the option, the optionee must execute a stock purchase agreement and
pay the exercise price for the purchased shares. Payment is to be made in cash;
however, the Plan Administrator may also permit the optionee to deliver a
full-recourse interest-bearing promissory note for the purchased shares payable
22
in one or more installments. Provided that our shares remain publicly traded,
the exercise price may be paid in shares of common stock or, alternatively,
through the optionee's participation in a same-day sale program. Under such
program, the option shares are sold immediately following the exercise of the
option, and a portion of the sale proceeds is applied to the payment of the
exercise price and all applicable withholding taxes.
In the event we are acquired by merger or asset sale, the option shares will
immediately vest, and the option may be exercised for any or all of those vested
shares prior to the effective date of such acquisition. However, such
accelerated vesting will not occur if our repurchase rights with respect to the
unvested option shares are assigned to the acquiring entity. The Plan
Administrator will have the discretion to structure one or more option grants
under the Plan so that the shares subject to those options will immediately vest
in the event the optionee's service is involuntarily terminated within 18 months
following an acquisition in which our repurchase rights are so assigned, and the
optionee would then have a one-year period to exercise the accelerated options
for fully-vested shares. It is anticipated that this special vesting
acceleration provision would be made available only on a limited case-by-case
basis.
The stock purchase agreement will provide us with the right to repurchase, at
the original exercise price paid per share, any unvested shares held by the
optionee at the time of his or her termination of service. The applicable
vesting schedule will be set forth in the Notice of Grant. Full and immediate
vesting of all the option shares will occur upon an acquisition by merger or
asset sale, unless the repurchase right applicable to those shares is assigned
to the successor company. One or more repurchase rights outstanding under the
Plan may be structured so that those rights will subsequently lapse (and the
option shares will immediately vest) upon an involuntary termination of the
optionee's service within 18 months following the effective date of an
acquisition in which the repurchase rights are assigned to the successor
company.
STOCK ISSUANCE PROGRAM
Shares of common stock may be issued to employees and other people, including
our directors and officers.
The stock issuance program allows eligible persons to purchase shares of common
stock at fair market value or at a discount of up to 15% of fair market value.
The shares may be fully vested when issued or may vest over time as the
recipient provides services or as specified performance objectives are attained.
In addition, shares of common stock may be issued as bonus awards in recognition
of services rendered, without any cash outlay required of the recipient.
The stock issuance component is structured as a stock purchase transaction, with
the purchase price for the shares to be paid in cash or by promissory note at
the time of issuance of the shares. The same repurchase rights summarized above
for the "Stock Purchase Agreement" under the option grant program will apply to
the purchased shares, namely, our right to repurchase, at the original purchase
price, any unvested shares held by the participant at the time of his or her
termination of service.
23
It is anticipated that any issued shares will vest either immediately or in a
series of installments over the participant's period of service. Full and
immediate vesting of all the shares will occur upon an acquisition by merger or
asset sale, unless the repurchase right applicable to those shares is assigned
to the successor company. The assigned repurchase rights may be structured so
that they will subsequently lapse (and the shares will immediately vest) upon an
involuntary termination of the participant's service within 18 months following
the effective date of the acquisition.
COMPENSATION OF DIRECTORS
Our Directors do not receive any cash compensation, but are entitled to
reimbursement of their reasonable expenses incurred in attending directors'
meetings.
We do not have any audit, nominating, compensation or other committee of our
Board of Directors.
Scott Baker is our only independent director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding our shares of
outstanding common stock beneficially owned as of the date hereof by (i) each of
our directors and executive officers, (ii) all directors and executive officers
as a group, and (iii) each other person who is known by us to own beneficially
more than 5% of our common stock based upon 68,090,590 issued shares of common
stock.
Name and Address Amount and Nature of Percent
of Beneficial Owners (1) Beneficial Ownership Ownership (2)
------------------------ -------------------- -------------
Carl P. Ranno, CEO, President, CFO, Director 4,072,900 (3) 6.0%
Neil C. Kitchen, Vice President, Director 3,981,455 (4) 5.9%
Diana Visco, Secretary 4,383,428 (6) 6.4%
Scott Baker, Director 1,504,818 (5) 2.2%
All executive officers and directors
as a group (4 persons) 13,942,601 20.5%
The Benz Group 2,819,061 (6) 4.1%
FLD Corporation 17,907,003 (7) 26.2%
----------
* Less than 1%.
1. C/o our address, 7745 Alabama Ave, #9, Canoga Park, CA 91304, unless
otherwise noted.
2. Except as otherwise indicated, we believe that the beneficial owners of
common stock listed above, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject
to community property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Shares of common
stock subject to options or warrants currently exercisable, or exercisable
within 60 days, are deemed outstanding for purposes of computing the
percentage of the person holding such options or warrants, but are not
deemed outstanding for purposes of computing the percentage of any other
person.
3. Includes options to purchase 150,000 shares of common stock at an exercise
price of $0.50 expiring June 30, 2012 and 470,000 shares of common stock at
an exercise price of $0.11 expiring September 27, 2012
4. Includes options to purchase 150,000 shares of common stock at an exercise
price of $0.50 expiring June 30, 2012 and 430,000 shares of common stock at
an exercise price of $0.11 expiring September 27, 2012
5. Includes options to purchase 150,000 shares of common stock at an exercise
price of $0.50 expiring June 30, 2012 and 150,000 shares of common stock at
an exercise price of $0.11 expiring September 27, 2012
6. The Visco family which includes the Secretary of the Company Diana Visco
owns the controlling shares of FLD.
7. The Visco family which includes the Secretary of the Company Diana Visco
owns the controlling shares of Benz Group
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Visco Family is an owner and director of FLD Corporation, owns 17,907,003
shares of common stock.
The Visco Family is an owner and director of Benz Group, the holder of 2,819,061
shares of common stock and 2,763,699 shares of Preferred Stock.
Note payable to Diana Visco $789,842 for bearing interest at the prime rate of
3.25% at September 30, 2011 and 2010, respectively with interest payable
monthly. The note is unsecured and was due in January 2011.
On April 1, 2004, we entered into a Sublease Agreement to sublet 923.50 square
feet located at a facility in Pacoima, California. The majority shareholder of
the sublessor is a related party to us. All of our operations were conducted
from this facility, which required monthly rental payments of approximately
$554. In January 2011, the Company moved corporate offices to Canoga Park, which
it shares with the same related party. The lease is month to month.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
dbbmckennon
dbbmckennon, a registered public accounting firm, was our independent auditor
and examined our financial statements to September 30, 2011 and performed the
services listed below.
AUDIT FEES
dbbmckennon fees for professional services rendered for the audit of our annual
financial statements included in this Form 10-K and for the reviews of the
financial statements included in our quarterly reports on Form 10-Q during the
years ended September 30, 2011 and 2010 was $37,000 and $42,000, respectively.
AUDIT RELATED FEES
dbbmckennon was not paid additional fees during that period for assurance and
related services reasonably related to the performance of the audit or review of
our financial statements.
TAX FEES
Tax filings have not been completed for the 2011 or 2010 fiscal year, thus no
fees were paid.
ALL OTHER FEES
None
AUDIT COMMITTEE
We do not have an audit committee.
25
ITEM 15. EXHIBITS
3.1 Articles of Incorporation of New Directions Manufacturing, Inc., a
Nevada corporation, dated January 9, 1997 (1)
3.2 Amendment to Articles of Incorporation of New Directions Manufacturing,
Inc., a Nevada corporation, dated May 29, 1997 (1)
3.3 Amendment to Articles of Incorporation of New Directions Manufacturing,
Inc., dated January 4, 2000 (2)
3.4 Amendment to Articles of Incorporation of American Soil Technologies,
Inc., dated August 4, 2003 (3)
3.4 Bylaws of New Directions Manufacturing, Inc., dated May 29, 1997 (1)
3.5 Amended and Restated Bylaws of New Directions Manufacturing, Inc.,
dated July 20, 1998 (4)
3.6 Amendment to Articles of Incorporation, dated November 30, 2006
4.1 Convertible Debenture - Lump Sum Contribution (Form) (5)
4.2 Convertible Debenture - Incremental (Form) (5)
10.1 License Agreement between Ron Salestrom, American Soil Technologies,
Inc., and Polymers Plus, L.L.C., dated January 4, 2000 (2)
10.2 Sublease Agreement with The Customized Box Company, dated April 1, 2004
(6)
10.8 Employment Contract with Donette Lamson, dated January 18, 2006 (7)
10.12 Acquisition Agreement for Smart World Organics, dated July 7, 2006 (8)
10.14 Intellectual Property Purchase Agreement with Ray Nielsen, dated
December 20, 2006 (9)
10.15 Security Agreement with Ray Nielsen, dated December 22, 2006 (9)
10.16 Purchase and Sale Agreement and Joint Escrow Instructions for Silver
Terrace Nurseries, dated November 27, 2007 (12)
10.17 Employment Contract with Carl Ranno, dated May 23, 2008 (13)
10.18 Employment Contract with Neil Kitchen, dated May 23, 2008 (13)
10.19 Employment Contract with Diana Visco, dated May 23, 2008 (13)
10.21 Subsidiaries: Smart World Organics Inc. a Florida corporation
31.1 Certification of Chief Executive Officer Pursuant to the Securities
Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to the Securities
Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
----------
1. Incorporated by reference from our Registration Statement on Form SB-2,
filed on July 2, 1997, as amended (Registration No. 333-30583).
2. Incorporated by reference from our Form 10-KSB for the fiscal year ended
June 30, 2000, filed on September 27, 2000 (File No. 000-22855).
3. Incorporated by reference from our Form 10-KSB for the fiscal year ended
December 31, 2005, filed on April 3, 2006.
4. Incorporated by reference from our Form 10-KSB for the fiscal year ended
June 30, 1998, filed on September 16, 1998.
5. Incorporated by reference from our Form 10-QSB for the quarterly period
ended March 31, 2000, filed on May 15, 2000.
6. Incorporated by reference from our Form 10-QSB for the quarterly period
ended March 31, 2004, filed on May 5, 2004.
7. Incorporated by reference from our Form 10-QSB for the quarterly period
ended March 31, 2006, filed on May 17, 2006.
8. Incorporated by reference from our Form 10-QSB for the quarterly period
ended June 30, 2006, filed on August 14, 2006.
9. Incorporated by reference from our Form 10-KSB for the fiscal year ended
December 31, 2006, filed on April 18, 2007.
10. Incorporated by reference from our Form 10-KSB for the fiscal year ended
December 31, 2006, filed on April 18, 2007.
11. Incorporated by reference from our Form 10-KSB for the fiscal year ended
December 31, 2006, filed on April 18, 2007.
12. Incorporated by reference from our Form 10-KSB for the transition period
ended September 30, 2007, filed on February 15, 2008.
13. Incorporated by reference from our Form 10-K for the period ended September
30, 2008, filed on January 13, 2009
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, duly
authorized.
AMERICAN SOIL TECHNOLOGIES, INC.
DATED: December 29, 2011 By: /s/ Carl P. Ranno
-------------------------------------------------
Carl P. Ranno
Director, Chief Executive Officer, President,
and Chief Financial Officer
(Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer)
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
American Soil Technologies, Inc.
We have audited the accompanying consolidated balance sheets of American Soil
Technologies, Inc. and subsidiary (collectively the "Company") as of September
30, 2011 and 2010, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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
consolidated 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 also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Soil
Technologies, Inc. and subsidiary as of September 30, 2011 and 2010, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 of the
consolidated financial statements, the Company has generated minimal operating
revenues, losses from operations, significant cash used in operating activities
and its viability is dependent upon its ability to obtain future financing and
successful operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with respect to these
matters are also discussed in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ dbbmckennon
------------------------------
Newport Beach, California
December 29, 2011
F-1
American Soil Technologies, Inc.
Consolidated Balance Sheets
September 30, September 30,
2011 2010
------------ ------------
Assets:
Current assets
Cash and cash equivalents $ 4,356 $ 2,045
Accounts receivable, net of allowance of $38,538
at September 30, 2011 and 2010 25,922 6,010
Inventories 6,286 13,622
Prepaid expenses and other current assets 1,020 14,541
------------ ------------
Total current assets 37,584 36,218
Property and equipment, net 760 15,014
Intangible assets 93,256 162,147
------------ ------------
Total assets $ 131,600 $ 213,379
============ ============
Liabilities and Stockholders' Deficit:
Current liabilities
Accounts payable $ 1,697,987 $ 1,625,758
Accrued liabilities 2,158,796 1,626,652
Notes payable 1,919,585 1,919,585
Capital lease obligations -- 3,527
Notes payable to related parties 1,104,866 1,101,866
------------ ------------
Total current liabilities 6,881,234 6,277,388
Capital lease obligations -- --
Notes payable -- --
------------ ------------
Total liabilities 6,881,234 6,277,388
------------ ------------
Stockholders' deficit:
Series A preferred stock, $0.50 stated value,
25,000,000 shares authorized, 2,763,699 shares
issued and outstanding at September 30, 2011 and 2010 1,381,849 1,381,849
Common stock, $0.001 par value, 100,000,000 shares authorized,
68,090,590 shares issued and outstanding at
September 30 2011 and 2010, respectively 68,091 68,091
Additional paid-in capital 19,831,800 19,796,056
Accumulated deficit (28,031,374) (27,310,005)
------------ ------------
Total stockholders' deficit (6,749,634) (6,064,009)
------------ ------------
Total liabilities and stockholders' deficit $ 131,600 $ 213,379
============ ============
See Notes to Consolidated Financial Statements.
F-2
American Soil Technologies, Inc.
Consolidated Statements of Operations
Year Ended Year Ended
September 30, September 30,
2011 2010
------------ ------------
Revenue $ 139,025 $ 117,052
Cost of goods sold (excluding amortization of intangible assets) 56,728 90,654
------------ ------------
Gross profit 82,297 26,398
------------ ------------
Operating expenses:
General and administrative 621,988 905,765
Sales and marketing 684 1,411
Impairment of property and equipment -- 32,951
Amortization of intangible assets 49,891 49,891
Impairment of intangible assets 19,000 --
------------ ------------
Total operating expenses 691,563 990,018
------------ ------------
Loss from operations (609,266) (963,620)
Other (income) expense:
Interest expense 114,968 111,345
Litigation loss provision -- 415,741
Gain on sale/disposal of equipment (3,665) (3,206)
------------ ------------
Loss before provision for income taxes (720,569) (1,487,500)
Provision for income taxes 800 800
------------ ------------
Net loss $ (721,369) $ (1,488,300)
============ ============
Net loss per share basic and diluted $ (0.01) $ (0.02)
============ ============
Weighted average common shares outstanding used
in per share calculations 68,090,590 67,923,467
============ ============
See Notes to Consolidated Financial Statements.
F-3
American Soil Technologies, Inc.
Consolidated Statements of Stockholders' Deficit
Series A Preferred Common Stock
----------------------- -------------------
Shares Amount Shares Amount
------ ------ ------ ------
Balance at September 30, 2009 2,763,699 $ 1,381,849 60,965,590 $ 60,966
Conversion of debt into common stock -- -- 3,125,000 3,125
Stock issued employee expense -- -- 4,000,000 4,000
Stock compensation expense -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ---------
Balance at September 30, 2010 2,763,699 $ 1,381,849 68,090,590 $ 68,091
Stock compensation expense -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ---------
Balance at September 30, 2011 2,763,699 $ 1,381,849 68,090,590 $ 68,091
============ ============ ============ =========
Paid-in Accumulated
Capital Deficit Total
------- ------- -----
Balance at September 30, 2009 $ 19,514,437 $(25,821,705) $ (4,864,453)
Conversion of debt into common stock 121,875 -- 125,000
Stock issued employee expense 124,000 -- 128,000
Stock compensation expense 35,744 -- 35,744
Net loss -- (1,488,300) (1,488,300)
------------ ------------ ------------
Balance at September 30, 2010 $ 19,796,056 $(27,310,005) $ (6,064,009)
Stock compensation expense 35,744 -- 35,744
Net loss -- (721,369) (721,369)
------------ ------------ ------------
Balance at September 30, 2011 $ 19,831,800 $(28,031,374) $ (6,749,634)
============ ============ ============
See Notes to Consolidated Financial Statements.
F-4
American Soil Technologies, Inc.
Consolidated Statements of Cash Flows
Year Ended Year Ended
September 30, September 30,
2011 2010
------------ ------------
Cash flows from operating activities:
Net loss $ (721,369) $ (1,488,300)
Adjustments to reconcile net loss to net cash
Gain on disposal of assets (3,665) (3,206)
Impairment of intangible assets 19,000 --
Impairment of property and equipment -- 32,951
Reserve for inventory -- 40,000
Depreciation and amortization 57,146 80,750
Stock-based compensation 35,744 163,744
Changes in operating assets and liabilities:
Accounts receivable (19,912) 10,638
Inventory 15,000 16,605
Prepaid expenses and other assets 13,521 5,304
Accounts payable 72,229 505,451
Accrued expenses 532,144 546,621
------------ ------------
Net cash used in operating activities (162) (89,442)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets 3,000 3,206
------------ ------------
Net cash provided by investing activities 3,000 3,206
------------ ------------
Cash flows from financing activities:
Proceeds from related party notes 3,000 98,392
Payments on capital lease obligations (3,527) (19,261)
Repayments on notes payable -- (4,454)
------------ ------------
Net cash provided by (used in) financing activities (527) 74,677
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,311 (11,559)
Cash and cash equivalents at beginning of year 2,045 13,604
------------ ------------
Cash and cash equivalents at end of year $ 4,356 $ 2,045
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 19,850 $ 19,012
============ ============
Cash paid during the year for income taxes $ -- $ --
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Conversion of debt and accrued interest into common stock $ -- $ 125,000
============ ============
See Notes to Consolidated Financial Statements.
F-5
American Soil Technologies, Inc.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
American Soil Technologies, Inc. (the "Company" or "American Soil"), formerly
Soil Wash Technologies, Inc., was incorporated in the state of California on
September 22, 1993. On November 24, 1999, the Company entered into an exchange
agreement for the reverse acquisition of New Directions Manufacturing, Inc., a
publicly traded Nevada corporation incorporated on January 9, 1997 ("New
Directions"), wherein New Directions would acquire the assets of the Company and
change its name to American Soil Technologies, Inc. This exchange agreement was
effective as of the close of business on December 31, 1999.
The Company is primarily engaged in the marketing of polymer and other soil
amendments to the agricultural turf and horticulture industries. The Company's
products are used to decrease water usage, increase nutrient retention in soil,
enhance seed germination and sprout emergence, clarify ponds and increase the
effectiveness of chemical fertilizers and biological additives. In 2006, the
Company acquired the patent to a slow release fertilizer. The Company also has
exclusive license rights to the use of patented polymer application techniques,
as well as numerous patents on a unique machine designed to inject polymer and
other liquid products into existing turf and some crops.
The Company also expanded to provide next-generation and sustainable fertilizers
thru the acquisition of Smart World Organics, Inc. ("Smart World") on December
20, 2006. Simultaneously, the Company entered into an Intellectual Property
Purchase Agreement with the founder of Smart World, Ray Nielsen ("Nielsen") that
included certain formulas originally believed to be proprietary and intellectual
properties used in the business of Smart World. The formulas acquired from
Nielsen were deemed not to be proprietary and subsequently deemed to have little
or no value (see Note 5). Smart World sells homogenized fertilizers, non-toxic
insect controls, plant protectants, seed, and soil and silage inoculants. Smart
World also provides advanced, custom-formulated products built to suit unusual
growing conditions and environments. Due to losses incurred in 2008, management
terminated Smart World employees and seeks to operate through commission-based
sales representatives. Additionally, the Company has several debt obligations
that are past the contractual maturity date or are due and payable due to non
payment of interest.
GOING CONCERN AND MANAGEMENT'S PLANS
The Company has sustained significant losses and has an accumulated deficit of
$28,031,374 and negative working capital of $6,843,650 as of September 30, 2011.
The ability of the Company to continue as a going concern is dependent upon
obtaining additional capital and financing, and generating positive cash flows
from operations. The Company intends to seek additional capital either through
debt or equity offerings and is attempting to increase sales volume and
operating margins to achieve profitability. Due to the current economic
environment and the Company's current financial condition, management cannot be
assured there will be adequate capital available when needed and on acceptable
terms. These factors 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 asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of American Soil
Technologies, Inc, and its wholly-owned subsidiary, Smart World Organics, Inc.
All intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of consolidated 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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. The Company's significant estimates made in connection
F-6
with the preparation of the accompanying financial statements include the
valuation of inventories, impairment of property and equipment, carrying value
of the intangible assets, and valuation of stock options.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes all short-term highly liquid investments that
are readily convertible to known amounts of cash and have original maturities of
three months or less.
ACCOUNTS AND NOTES RECEIVABLE
The Company utilizes the allowance method to provide a reserve for uncollectible
accounts. The Company determines any required allowance by considering a number
of factors including length of time trade accounts receivable are past due and
the Company's previous loss history. The Company records a reserve account
foraccounts receivable when they become uncollectible, and payments subsequently
received on such receivables are credited to the allowance for doubtful
accounts.
The Company performs ongoing credit evaluations and continually monitors its
collection of amounts due from its customers. The Company adjusts credit limits
and payment terms granted to its customers based upon payment history and the
customer's current creditworthiness. The Company does not require collateral
from its customers to secure amounts due from them. Reserves for uncollectible
amounts are provided based on past experience and a specific analysis of the
accounts which management believes is sufficient.
INVENTORIES
Inventories consist primarily of purchased polymer soil amendments. Inventories
are stated at the lower of cost (on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over the estimated useful
lives of the assets ranging from three to 15 years. Betterments, renewals and
extraordinary repairs that extend the lives of the assets are capitalized.
Repairs and maintenance costs are expensed as incurred. The cost and related
accumulated depreciation applicable to assets disposed or retired are removed
from the accounts, and the gain or loss on disposition is recognized in the
respective period.
LONG-LIVED ASSETS
The Company reviews its fixed assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less costs to sell.
GOODWILL AND INTANGIBLE ASSETS WITH INDEFINITE LIVES
ASC No. 805, "Business Combinations", requires that all business combinations be
accounted for under the purchase method. The statement further requires separate
recognition of intangible assets that meet certain criteria. ASC No. 350,
"Intangible, Goodwill and Other", requires that an acquired intangible asset
meeting certain criteria shall be initially recognized, and measured based on
its fair value. The statement also provides that goodwill and other
indefinite-lived assets should not be amortized, but shall be tested for
impairment annually or more frequently, if circumstances indicate potential
impairment, through a comparison of fair value to their carrying amount.
In accordance with ASC No. 350, "Intangible, Goodwill and Other", the goodwill
impairment test has two steps. The first step of the impairment test identifies
potential impairment by comparing the fair value with the carrying amount of the
reporting unit, including goodwill. If the carrying amount of the reporting unit
exceeds its fair value, the second step of the impairment test shall be
performed to measure the amount of the impairment loss, if any. Intangibles with
indefinite useful lives are measured for impairment by the amount that the
carrying value exceeds the estimated fair value of the intangible. The fair
value is calculated using the income approach. Intangible assets with definite
useful lives will continue to be amortized over their estimated useful lives.
Any impairment is recorded at the date of determination.
F-7
ACCOUNTING FOR CONVERTIBLE DEBT
Convertible debt is accounted for under the guidelines established by ASC No.
470 Topic 20, "Debt with Conversion and Other Options" and ASC No. 740, "Income
Tax". The Company records a beneficial conversion feature ("BCF") related to the
issuance of convertible debt that have conversion features at fixed or
adjustable rates that are in-the-money when issued and records the fair value of
warrants issued with those instruments. The BCF for the convertible instruments
is recognized and measured by allocating a portion of the proceeds to warrants
and as a reduction to the carrying amount of the convertible instrument equal to
the intrinsic value of the conversion features, both of which are credited to
paid-in-capital. The Company calculates the fair value of warrants issued with
the convertible instruments using the Black-Scholes valuation method, using the
same assumptions used for valuing employee options for purposes of ASC No.718,
"Compensation, Stock Compensation", except that the contractual life of the
warrant is used. Under these guidelines, the Company allocates the value of the
proceeds received from a convertible debt transaction between the conversion
feature and any other detachable instruments (such as warrants) on a relative
fair value basis. The allocated fair value is recorded as a debt discount or
premium and is amortized over the expected term of the convertible debt to
interest expense.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments, as defined in ASC No. 815, "Derivatives and
Hedging", consist of financial instruments or other contracts that contain a
notional amount and one or more underlying (e.g. interest rate, security price
or other variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.
The Company does not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, the Company has issued
financial instruments including convertible debt that are either (i) not
afforded equity classification, (ii) embody risks not clearly and closely
related to host contracts, or (iii) may be net-cash settled by the counterparty.
As required by ASC No. 815, in certain instances, these instruments are required
to be carried as derivative liabilities, at fair value, in the Company's
consolidated financial statements.
The Company estimates the fair values of its derivative financial instrument
using the Black-Scholes option valuation technique because it embodies all of
the requisite assumptions (including trading volatility, estimated terms and
risk free rates) necessary to fair value these instruments. Estimating fair
values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, option-based techniques are highly volatile and
sensitive to changes in the trading market price of our common stock, which has
a high-historical volatility. Since derivative financial instruments are
initially and subsequently carried at fair values, the Company's operating
results reflect the volatility in these estimate and assumption changes in each
reporting period.
INTELLECTUAL PROPERTY
Intellectual property includes the exclusive licenses to the patented polymer
application techniques and certain acquired intellectual property which are
being amortized using the straight-line method over the respective estimated
useful lives.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense was $254
and $309, for year ended September 30, 2011 and 2010, respectively.
REVENUE RECOGNITION
In accordance with ASC No. 605, "Revenue Recognition", revenue is recognized
when products are shipped to a customer and the risks and rewards of ownership
have passed based on the terms of the sale. Royalty revenues are recognized
monthly based on customer usage as defined by individual agreements.
F-8
SHIPPING AND HANDLING COST
Shipping and handling fees charged to customers are included in revenue in
accordance with ASC No. 605, "Revenue Recognition". The shipping and handling
costs incurred by the Company are included in cost of sales.
INCOME TAXES
Deferred income taxes are determined using the liability method in accordance
with ASC No. 740, Income Taxes. The Company records a valuation allowance to
reduce its deferred tax assets to the amount it expects is more likely than not
to be realized. While the Company has considered future taxable income and its
ongoing tax planning strategies in assessing the need for the valuation
allowance, if it were to determine that it would be able to realize its deferred
tax assets in the future in excess of its net recorded amount, an adjustment to
the deferred tax asset would increase income in the period such determination
was made. Likewise, should the Company determine it would not be able to realize
all or part of its net deferred tax assets in the future, an adjustment to the
deferred tax asset would decrease income inthe period such determination was
made.
Effective September 30, 2007, the Company adopted ASC No. 740 Topic 10, "Income
Taxes", General ("ASC 740.10"). ASC 740.10 prescribes, among other things, a
recognition threshold and measurement attributes for the financial statement
recognition and measurement of uncertain tax positions taken or expected to be
taken in a company's income tax return. The Company utilizes a two-step approach
for evaluating uncertain tax positions. Step one or recognition, requires a
company to determine if the weight of available evidence indicates a tax
position is more likely than not to be sustained upon audit, including
resolution of related appeals or litigation processes, if any. Step two or
measurement, is based on the largest amount of benefit, which is more likely
than not to be realized on settlement with the taxing authority.
FAIR VALUE OF FINANCIAL INSTRUMENTS
On October 1, 2009, the Company adopted ASC 820 ("ASC 820") Fair Value
Measurements and Disclosures. The Company did not record an adjustment to
retained earnings as a result of the adoption of the guidance for fair value
measurements, and the adoption did not have a material effect on the Company's
results of operations.
Fair value is defined as the exit price, or the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date. The guidance also establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability and are
developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company's assumptions about the
factors market participants would use in valuing the asset or liability. The
guidance establishes three levels of inputs that may be used to measure fair
value:
Level 1. Observable inputs such as quoted prices in active markets; Level 2.
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly; and Level 3. Unobservable inputs in which there
is little or no market data, which require the reporting entity to develop its
own assumptions.
As of September 30, 2011 and 2010, the Company had no material level 1,2, or 3
assets or liabilities.
RESEARCH AND DEVELOPMENT EXPENSES
The Company expenses research and development costs as incurred.
CONCENTRATION OF CREDIT RISK
Accounts receivable from individual customers representing 10% or more of the
net accounts receivable balance consists of the following as of September 30:
2011 2010
---- ----
Percent of accounts receivable 83% 46%
Number of customers 3 1
F-9
Sales from individual customers representing 10% or more of sales consist of the
following customers for the years ended September 30:
2011 2010
---- ----
Percent of sales 82% 67%
Number of customers 4 3
As a result of the Company's concentration of its customer base, the loss or
cancellation of business from, or significant changes in scheduled deliveries of
product sold to the above customers or a change in their financial position
could materially and adversely affect the Company's consolidated financial
position, results of operations and cash flows.
STOCK-BASED COMPENSATION
The Company accounts for equity based compensation under the provisions of ASC
No. 718, "Compensation, Stock Compensation" ("ASC 718"). ASC 718 requires
therecognition of the fair value of equity-based compensation in net income. The
fair value of the Company's stock option awards are estimated using a
Black-Scholes option valuation model. This model requires the input of highly
subjective assumptions and elections including expected stock price volatility
and the estimated life of each award. In addition, the calculation of
equity-based compensation costs requires that the Company estimate the number of
awards that will be forfeited during the vesting period. The fair value of
equity-based awards is amortized over the vesting period of the award and the
Company elected to usethe straight-line method for awards granted after the
adoption of ASC 718.
ACCOUNTING FOR STOCK OPTIONS ISSUED TO CONSULTANTS
The Company measures compensation expense for its non-employee stock-based
compensation under ASC No. 505 Topic 50, "Equity-Based Payments to
Non-Employees". The fair value of the option issued or committed to be issued is
used to measure the transaction, as this is more reliable than the fair value of
the services received. The fair value is measured at the value of the Company's
common stock on the date that the commitment for performance by the counterparty
has been reached or the counterparty's performance is complete. The fair value
of the equity instrument is charged directly to stock-based compensation expense
and credited to additional paid-in capital.
NET LOSS PER SHARE
Basic loss per share is calculated by dividing net loss by the weighted average
common shares outstanding during the period. Diluted net loss per share reflects
the potential dilution to basic EPS that could occur upon conversion or exercise
of securities, options or other such items to common shares using the treasury
stock method, based upon the weighted average fair value of our common shares
during the period. For each period presented, basic and diluted loss per share
amounts are identical as the effect of potential common shares is antidilutive.
The following is a summary of outstanding securities which have been excluded
from the calculation of diluted net loss per share because the effect would have
been antidilutive for the following periods:
2011 2010
---------- ----------
Series A convertible preferred stock 2,763,699 2,763,699
---------- ----------
2,763,699 2,763,699
========== ==========
LEGAL COSTS ASSOCIATED WITH LOSS CONTINGENCIES
The Company expenses legal costs in connection with loss contingencies as
incurred and included in accounts payable.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB amended authoritative guidance for improving
disclosures about fair-value measurements. The updated guidance requires new
disclosures about recurring or nonrecurring fair-value measurements including
significant transfers into and out of Level 1 and Level 2 fair-value
measurements and information on purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of Level 3 fair-value measurements. The
guidance also clarified existing fair-value measurement disclosure guidance
about the level of disaggregation, inputs, and valuation techniques. The
F-10
guidance became effective for interim and annual reporting periods beginning on
or after December 15, 2009, with an exception for the disclosures of purchases,
sales, issuances and settlements on the roll-forward of activity in Level 3
fair-value measurements. Those disclosures will be effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. The Company does not expect that the adoption of this guidance will have
a material impact on the financial statements.
3. INVENTORIES
Inventories consist of the following at September 30:
2011 2010
-------- --------
Raw materials $ -- $ 9,167
Finished goods 6,286 4,455
-------- -------
$ 6,286 $13,622
======== =======
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at September 30:
Estimated
useful life
(in years) 2011 2010
---------- --------- ---------
Machinery 10 $ 543,793 $ 583,323
Vehicles 5 -- --
Office furnishings, fixtures
and equipment 3-5 25,068 28,962
--------- ---------
568,861 612,285
Less accumulated depreciation (568,101) (597,271)
--------- ---------
$ 760 $ 15,014
========= =========
Depreciation expense for the year ended September 30, 2011 and 2010 was $7,255
and $30,859, respectively.
Management assessed property and equipment for impairment due to the decreased
revenue streams from operations and specifically the lack of revenues being
generated from the Smart World subsidiary and Northern California business
segment. The majority of property and equipment with remaining book value
consists of machinery and equipment and furniture and fixtures. In determining
if impairment was necessary, Management estimated the fair value of property and
equipment by comparing other similar used assets being sold, less estimated
costs to sell. Based on Management's assessment, impairment was necessary for
property and equipment as the fair value, was less than the carrying value.
Impairment of property and equipment for the year ended September 30, 2011 and
2010 was zero and $32,951, respectively. Of the total impairment for the year
ended September 30, 2010, $21,218 related to Smart World and $11,733 to the
Northern California segment of American Soil.
5. INTANGIBLE ASSETS AND GOODWILL
The following table summarizes the components of intangible assets as of
September 30:
Soil Medic
patent
-------
Balance at September 30, 2009 $ 212,038
Additions --
Amortization (49,891)
Impairment --
---------
Balance at September 30, 2010 $ 162,147
Additions --
Amortization (49,891)
Impairment (19,000)
---------
Balance at September 30, 2011 $ 93,256
=========
F-11
Weighted average remaining life at:
September 30, 2011 2.2
September 30, 2010 3.2
As of September 30, 2010, management evaluated the value of the remaining
intangible asset and determined that the associated expected cash flow of future
revenues exceeded the carrying value of the asset. Accordingly, there was no
impairment necessary in fiscal 2010.
As of September 30, 2011, management evaluated the value of the remaining
intangible asset. It was determined that the associated expected cash flow of
future revenues required an impairment charge of $19,000.
The amortization expense was $49,891 and $49,891 for the years ended September
30, 2011 and 2010, respectively. Amortization is expected to be $41,447 for
fiscal years 2012, and 2013 and $10,362 for fiscal 2014.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable consisted of the following at September 30:
2011 2010
-------- --------
Accounts payable $ 716,086 $ 653,519
Accounts payable - related party 377,980 368,318
Accrued litigation 603,921 603,921
---------- ----------
$1,697,987 $1,625,758
========== ==========
Accrued expenses consisted of the following at September 30:
2011 2010
-------- --------
Interest $ 370,335 $ 325,434
Interest to related parties 200,892 150,675
Compensation and related 1,587,569 1,150,543
---------- ----------
$2,158,796 $1,626,652
========== ==========
7. NOTES PAYABLE
Notes payable consists of the following at September 30:
2011 2010
----------- -----------
Convertible debenture payable to a related party. 25,000 25,000
Original balance of $25,000 bearing interest at 8% per
annum with interest payable quarterly. The principal was
convertible into common stock at a conversion price of
$0.50 per share.
Convertible debenture payable to a related party 25,000 25,000
bearing interest at 8% per annum with interest payable
quarterly. The principal was convertible into common
stock at a conversion price of $0.50 per share. The
principal was due February 1, 2008.
Note payable to a related party, original balance of 88,000 85,000
$85,000 bearing interest at prime rate payable monthly.
Note is unsecured and was due August 31, 2011.
F-12
Note payable to Diana Visco bearing interest at the 789,842 789,842
prime rate of 3.25% with interest payable monthly.
The note is unsecured and was due in January 2011.
Convertible debenture payable to a related party. 177,024 177,024
Original balance of $250,000 bearing interest at a rate
of 10% per annum. Monthly principal and interest
payments of $3,000 are due through 2014. The note is
in default for non-payment. Principal was convertible
into common stock at a conversion price of $3.00 per
share. The note is unsecured.
Convertible debenture payable to Ray Nielsen bearing 1,500,000 1,500,000
interest at a rate of 8% per annum with interest
payable quarterly. The principal balance was convertible
at the proceeding day's rate for one share of common
stock. The note is secured by the intellectual property
acquired from the note holder. The principal was due on
January 19, 2008.
Convertible debenture payable to an unrelated party 30,000 30,000
bearing interest at a rate of 8% per annum with
interest payable quarterly. The principal balance was
convertible into common stock at a rate of $0.25 per
share. The note is unsecured. The principal was due on
October 1, 2008.
Convertible debenture payable to an unrelated party 30,000 30,000
bearing interest at a rate of 8% per annum with
interest payable quarterly. The principal was
convertible into common stock at a rate of $0.10 per
share. The note is unsecured and was due on October 1,
2008.
Convertible debenture payable to an unrelated party 30,000 30,000
bearing interest at a rate of 8% per annum with
interest payable quarterly. The principal was
convertible into common stock at a rate of $0.10 per
share. Note is unsecured and was due October 1, 2008.
Notes payable to various individuals with interest 254,585 254,585
rates ranging from 6% to 20%. The notes are currently
in default.
Convertible debenture to an unrelated party bearing 75,000 75,000
interest at a rate of 10% per annum with interest
payable quarterly. The principal was convertible into
common stock at a conversion price of $0.19 per share.
Note is unsecured and was due on July 18, 2009.
----------- -----------
3,024,451 3,021,451
Less: debt discounts -- --
----------- -----------
3,024,451 3,021,451
Current portion (3,024,451) (3,021,451)
----------- -----------
Long-term portion $ -- $ --
=========== ===========
All notes are currently in default and are no longer convertible.
F-13
8. INCOME TAXES
The provision for income taxes is comprised of the following for the years ended
September 30:
2011 2010
------- -------
Federal $ -- $ --
State (800) (800)
------ ------
Provision for income taxes $ (800) $ (800)
====== ======
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The differences between the federal statutory tax rate of 34% and the effective
tax rates are primarily due to state income tax provisions, net operating loss
("NOL") carry forwards, deferred tax valuation allowance and permanent
differences as follows for the years ended September 30:
2011 2010
------ ------
Statutory rate (34.0%) (34.0%)
Increase (decrease) in taxes resulting from the following:
State income taxes, net of federal benefit 5.28% 5.64%
Amortization of debt discount 0.0% 0.0%
Derivative liability (0.0%) (0.0%)
Change in valuation allowance 28.72% 28.36%
------ ------
--% --%
====== ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
consist of the following at September 30:
2011 2010
------------ ------------
Deferred tax assets (liabilities):
Current:
Reserves and accruals $ 1,104,915 $ 912,509
Non-current:
Intangible assets 597,000 597,000
Net operating losses 7,326,145 7,325,707
Other 62,547 86,960
Valuation allowance (9,090,607) (8,922,176)
------------ ------------
$ -- $ --
============ ============
At September 30, 2011 and 2010, the valuation allowance was increased by a total
of $168,431 and $449,939 respectively. At September 30, 2011, the Company had
federal net operating loss carryforwards of approximately $24,785,759 that
expire from 2011 through 2031 and state net operating carryforwards of
$9,781,637 expiring from 2011 through 2016. These net operating losses may be
suspended or limited due to changes in State and Federal legislation, as well as
a possible change in ownership as defined under Section 382of the IRC.
F-14
The Company has not filed its United States Federal and State tax returns for
the years ended September 30, 2011, 2010, 2009, and 2008. Management intends to
comply with the requirements to file the tax returns upon raising capital.
Failure to file the tax returns could result in penalties assessed against the
Company. The Company has identified the United States Federal tax returns as its
"major" tax jurisdiction. The United States Federal return years 2008 through
2011 are still subject to tax examination by the United States Internal Revenue
Service; however, we do not currently have any ongoing tax examinations. The
Company is subject to examination by the California Franchise Tax Board for the
years ended 2007 through 2010 and currently does not have any ongoing tax
examinations.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
During the year ended September 30, 2011, the Company moved and now shares
office space with an entity owned by a related party and does not pay rent. Rent
expense for the prior lease in Pacoima, California for the years ended September
30, 2011 and 2010 was $1,765 and $7,061, respectively. In January of 2011 the
company abandoned it's Florida operation due to our inability to pay the lease.
PENDING PROPERTY ACQUISITION
On November 27, 2007, the Company entered into a Purchase and Sale Agreement and
Joint Escrow Instructions to acquire real property in Pescadero, California for
a purchase price of $5,400,000. The property has been improved with
approximately 700,000 square feet of greenhouses and the Company plans to
continue to operate the property as a nursery. In connection with the agreement,
the Company deposited $50,000 with the escrow agent of which a $10,000
non-refundable deposit was released to the sellers. In December 2007, per the
terms of the agreement, the Company was to have deposited an additional $100,000
into the escrow account on or before December 14, 2007 if the Company's due
diligence had been completed. Said due diligence has not been completed,
therefore the deposit has not been made. The remaining $5,350,000 was due by
December 28, 2007, the original closing date, and then extended to May 27, 2008
for additional consideration of $50,000. In fiscal 2009, the Company determined
that it was unlikely the advanced funds would be able to be recovered, and
recorded a provision for loss on the deposit in the amount of $50,000.
LITIGATION
On or about September 21, 2007, Stockhausen, Inc. ("Stockhausen") filed a
Complaint in the United States District Court, for the Middle District of North
Carolina, against us seeking damages. The parties entered into a settlement
agreement on June 2, 2010. Under the settlement agreement, we agreed to pay
Stockhausen $250,000 on or before June 23, 2010 as a compromise to Stockhausen's
claims that currently total $603,921. We further agreed that we would consent to
the entry of a Judgment against us in favor of Stockhausen in the amount of
$603,921 if we failed to make complete and timely payment as agreed. The Company
was unable to make the agreed upon payment and on July 8, 2010, Stockhausen
entered a judgment for the above stated amount against the Company. The Company
has accrued $603,921 related to the litigation as of September 30, 2011 and
2010, which is included in accounts payable in the accompanying balance sheets.
On or about October 4, 2007, Raymond J. Nielsen and Cheryl K. Nielsen
(collectively, "Plaintiffs"), filed a Complaint in the Circuit Court in the
Sixth Judicial District of Pasco County, Florida, against us and Smart World
(collectively "Defendants") seeking damages, declaratory, and injunctive relief.
Plaintiffs allege that Defendants failed to pay interest when due on the
Convertible Debenture from Defendants to Plaintiffs and, thus, the entire amount
of the Convertible Debenture is accelerated and Plaintiffs are seeking a
judgment in the amount of $1,500,000 plus interest. On December 29, 2009, the
matter was settled for $400,000 and the Company had 60 days in which to remit
the amount or a judgment in the entire amount claimed will be entered against
us. The Company was not able to meet the terms of the settlement and have been
actively communicating with the Plaintiffs to extend the terms of the
settlement.
F-15
11. PREFERRED STOCK
The Company has 10,000,000 preferred stock authorized of which 2,763,699 shares
of $0.50 stated value Series A convertible preferred stock ("Series A
Preferred") are issued and outstanding as of September 30, 2011 and 2010. The
Series A Preferred have the following characteristics:
DIVIDENDS
Each holder is entitled to receive preferential quarterly dividends equal to the
prime interest rate as quoted in the Wall Street Journal when and if declared by
the Board of Directors, out of any assets that are legally available. If the
Board of Directors declares that such dividends may only be payable in shares of
common stock for any quarter, holders of Series A preferred stock have the
option of accepting the dividend paid in shares of common stock of the Company,
or letting the dividend accrue for a cash payment. No dividends have been
declared, accrued or paid.
CONVERSION
Each holder has the option to convert each share of Series A Preferred into
common stock at a rate of one share of common stock for each share of preferred
stock tendered.
VOTING
The holders have no voting rights.
LIQUIDATION PREFERENCE
Each holder is entitled to be paid the stated value of their holdings out of the
assets of the Company, prior and in preference to any payment or distribution
out of the assets of the Company to the holders common stock or any other class
or series of capital stock.
12. COMMON STOCK
STOCK OPTIONS
In November 2002, the Company enacted a stock option plan (the "2002 Plan") to
provide additional incentives to selected employees, directors and consultants.
Two million shares were authorized for grant. The purchase price of the common
stock subject to each Incentive Stock Option shall not be less than the fair
market value or in the case of a grant of an incentive stock option to a
principal shareholder, not less than 110% of the fair market value of such
common stock at the time each option is granted. The 2002 Plan terminates in
November 2012. The options are fully-vested when granted and are exercisable for
a period of ten years from the date of grant and are subject to cancellation
upon termination of employment. The Company has granted options to purchase
1,010,000 shares and 300,000 shares with exercise prices of $0.50 and $0.25,
respectively. The market price at the date of grant was $0.12. At September 30,
2011 and 2010, 450,000 stock options are available for grant.
On January 6, 2005, the Company enacted the 2005 Stock Option/Stock Issuance
Plan (the "2005 Plan"). The 2005 Plan provides for the issuance of up to
10,000,000 shares of common stock to our directors, officers, employees and
consultants in the form of stock options and shares of common stock. The 2005
Plan has two separate components: the option grant program and the stock
issuance program.
F-16
Grants under the option grant program may be structured as installment options
which become exercisable for vested shares over the optionee's period of service
or as immediately exercisable options for unvested shares which will be subject
to repurchase by the Company, at the option exercise price paid per share, upon
the optionee's termination of service prior to vesting in those shares. All
option grants must have an exercise price not less than 100% of the fair market
value of the option shares on the grant date.
The stock issuance program allows eligible persons to purchase shares of common
stock at fair market value or at a discount of up to 15% of fair market value.
The shares may be fully vested when issued or may vest over time as the
recipient provides services or as specified performance objectives are attained.
In addition, shares of common stock may be issued as bonus awards in recognition
of services rendered, without any cash outlay required of the recipient.
Upon stock option exercise, the Company issues new shares of common stock.
The following table summarizes stock option activity under the above stock
option plans:
Remaining
Number of Weighted-Average Contractual Term
Shares Exercise Price (in years)
------ -------------- ----------
Outstanding at September 30, 2009 1,996,000 $0.19 3.0
Granted --
Exercised --
Cancelled (20,000)
-----------
Outstanding at September 30, 2010 1,976,000 $0.20 2.0
Granted --
Exercised --
Cancelled --
-----------
Outstanding at September 30, 2011 1,976,000 $0.20 1.0
===========
The fair value of stock options awarded were estimated at the date of grant
using the Black-Scholes option-pricing model. The expected option term was
estimated based upon the contractual term of the underlying stock option. The
expected volatility of the Company's stock price was based upon the historical
daily changes in the price of the Company's common stock. The risk-free interest
rate was based upon the current yield on U.S. Treasury securities having a term
similar to the expected option term. Dividend yield is estimated at zero because
the Company does not anticipate paying dividends in the foreseeable future.
There were no options issued during the years ended September 30, 2011 and 2010
that required valuation.
Outstanding Exercisable
---------------------------------------------- -------------------------------------------
Weighted Weighted Average Weighted Weighted Average
Average Remaining Average Remaining
Number of Exercise Contractual Life Number of Exercise Contractual Life
Exercise Prices shares Price (in years) shares Price (in years)
--------------- ------ ----- ---------- ------ ----- ----------
$0.50 450,000 $0.50 1.1 450,000 $0.50 1.1
$0.11 1,526,000 $0.11 1.0 1,526,000 $0.11 1.0
At September 30, 2011, all stock options are vested, and there is no remaining
unrecognized compensation expense. The intrinsic value of options is zero as all
options had an exercise price above the closing price of the stock at September
30, 2011.
F-17
Stock based compensation expense was $35,744 and $163,744 for the years ended
September 30, 2011 and 2010, respectively, which is included in general and
administrative expenses in the accompanying statements of operations.
WARRANTS TO PURCHASE COMMON STOCK
The following tables summarize the issuances of warrants to purchase shares of
the Company's common stock:
Number of
Shares
---------
Outstanding at September 30, 2009 784,000
Granted --
Exercised --
Cancelled (784,000)
---------
Outstanding at September 30, 2010 --
Granted --
Exercised --
Cancelled --
---------
Outstanding at September 30, 2011 --
=========
13. RELATED PARTY TRANSACTIONS
During the year ended September 30, 2010, Ms. Visco loaned the Company an
additional $98,392. The Company entered into a new note for $789,842 with Ms.
Visco which superseded all previous notes. The principal was due on January 12,
2011. Interest is payable monthly based on the current Prime Rate of 3.25%.
During the year ended September 30, 2011, The Louie Visco Estate loaned the
Company an additional $3,000. This note was consolidated with a note issued May
2008 for $85,000 and accordingly the previous note was superseded. The new note
is for a total of $88,000. Principal was due on August 31, 2011. Interest is
payable monthly based on the current Prime Rate of 3.25%.
Rent expense incurred in connection with an entity partially controlled by Ms.
Visco was $1,765 and $7,061 for each of the years ended September 30, 2011 and
2010.
Interest expense incurred in connection with outstanding loans and notes payable
to Ms. Visco or entities partially controlled was $25,670 and $24,781 for the
year ended September 30, 2011 and 2010, respectively.
14. SUBSEQUENT EVENTS
Subsequent to year end, Ms. Visco loaned the Company an additional $10,000.
F-1
