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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-K

 

S Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended: December 31, 2011

 

¨ Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number: 000-03125

 

MEDCLEAN TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   21-0661726

(State or Other Jurisdiction of

Incorporation or Organization)

  (I.R.S. Employer Identification No.)

 

310 Stoke Park Road

Bethlehem, PA

  18017
(Address of principal executive offices)   (Zip Code)

 

(203) 798-1080

(Registrants telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.0001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of 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 registrant (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 period 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants 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.  ¨  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨   Non-accelerated filer ¨
         
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 Exchange Act). Yes ¨ No x

 

The aggregate market value of registrants voting and non-voting common equity held by non-affiliates (as defined by Rule 12b-2 of the Exchange Act) computed by reference to the average bid and asked price of such common equity on June 30, 2011 was $4,578,298. As of May 10, 2012, the issuer has one class of common equity, and the number of shares outstanding of such common equity was 2,318,811,187.

 

 
 

 

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

Statements contained in this Annual Report on Form 10-K which are not historical facts are forward-looking statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as “anticipate that,” “believes,” “continue to,” “estimates,” “expects to,” “hopes,” “intends,” “plans,” “to be,” “will be,” “will continue to be,” or similar words. These forward-looking statements include the statements in this Report regarding: our expected financial position and operating results; our business strategy; future developments in our markets and the markets in which we expect to compete; our future ability to fund our operations; our development of new products and relationships; our ability to increase our customer base; the impact of entering new markets; our future cost of revenue, gross margins and net losses; our future restructuring, research and development, sales and marketing, general and administrative, and depreciation and amortization expenses; our future interest expenses; the value of our goodwill and other intangible assets; our future capital expenditures and capital requirements; our financing plans; the outcome of any contingencies and the anticipated impact of changes in applicable accounting rules.

 

The accuracy of these forward-looking statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. These risks include the risks described in “Item 1A — Risk Factors” below. We do not undertake any obligation to update this forward-looking information, except as required under applicable law.

 

 
 

 

TABLE OF CONTENTS

 

  PAGE
 PART I    
Item 1. Business. 2
Item1A. Risk Factors. 11
Item1B. Unresolved Staff Comments. 14
Item 2. Properties. 14
Item 3. Legal Proceedings. 14
Item 4. (Removed and Reserved). 14
     
PART II  
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 15
Item 6. Selected Financial Data. 15
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. 15
Item7A. Quantitative and Qualitative Disclosures about Market Risk. 19
Item 8. Financial Statements and Supplementary Data. 19
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. 19
Item9A. Controls and Procedures. 20
Item9B. Other Information. 20
   
PART III  
Item10. Directors, Executive Officers and Corporate Governance. 21
Item11. Executive Compensation. 23
Item12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 26
Item13. Certain Relationships and Related Transactions and Director Independence. 29
     
PART IV    
Item14. Principal Accountant Fees and Services. 29
Item15. Exhibits, Financial Statement Schedules. 29
   
SIGNATURES  

 

1
 

 

PART I

 

Item 1. Business.

 

Background

 

MedClean Technologies, Inc. (“MCLN,” “MedClean” or the “Company”) is in the business of providing medical waste treatment solutions. MedClean designs, sells, and installs turnkey regulated medical waste solutions that are flexible enough to be installed as a custom configuration at a customer location, delivered as a self-contained portable solution for specific applications, and can also scale in size to support the needs of independent waste processing facilities serving a wide variety of customer’s needs. MedClean also provides services through its extensive distributor and transport partner program that enables the Company the flexibility to service most, if not all, regulated medical waste streams as well as support HIPAA document destruction.

 

The principal business offices of MedClean are located at 310 Stoke Park Road Bethlehem, Pennsylvania 18017, and their telephone number is (203) 798-1080. On August 24, 2011, the Company began leasing 13,000 sq. ft. out of approximately 20,000 sq. ft. of space at the location. The Company is contemplating moving its location in 2012 at the request and expense of the current landlord in order to accommodate an opportunity for the landlord to lease the entire warehouse space available to a single customer.

 

History

 

Effective January 2, 2009, the Company changed its corporate name from Aduromed Industries, Inc. to MedClean Technologies, Inc. Also, effective January 2, 2009, the Company merged its former wholly-owned subsidiary, Aduromed Corporation (“Aduromed”), with and into the Company.

 

On July 10, 2008, Aduromed entered into a Master Restructuring Agreement (“MRA”) with Pequot Capital Management, Inc. (“Pequot”), on behalf of various funds managed by Pequot (the “Pequot Funds”), Sherleigh Associates Inc. Defined Benefit Pension Plan (“Sherleigh”), holders of $1,225,000 in principal amount of the Company’s 12% Secured Promissory Notes due July 31, 2008 (the “Bridge Loan Holders”), and Mr. Joseph Esposito, corporate and business development advisor to the Company (“Esposito”) regarding their respective investments in the Company (the “MRA”).

 

Existing investments in the Company were restructured pursuant to the terms of the MRA and certain other changes were implemented and all transactions were deemed to occur contemporaneously as of August 4, 2008 (the “Effective Time”). The major terms of the MRA are as follows:

 

·Sherleigh (i) exchanged its shares of Series A and Series B Preferred Stock into 20,000,081 shares of common stock of the Company, par value $0.0001 per share (“Common Stock”), (ii) exchanged accumulated dividends payable on its Series A and Series B Preferred Stock as of June 30, 2008 in the amount of $383,576 into 15,343,040 shares of Common Stock and received additional common stock purchase warrants for 15,343,040 shares of Common Stock at an exercise price of $0.025 per share, and (iii) exchanged liquidated damages in the amount of $215,000 payable to Sherleigh by the Company into 8,600,000 shares of Common Stock and received additional common stock purchase warrants for 8,600,000 shares of Common Stock at an exercise price of $0.025 per share.

 

·The Pequot Funds surrendered their shares of Series A and Series B Preferred Stock to the Company, which shares were cancelled, and the Pequot Funds forfeited their right to receive accumulated dividends payable on their Preferred Stock as of June 30, 2008 in the amount of $690,436 and liquidated damages in the amount of $387,000 payable to the Pequot Funds by the Company.

 

·The Series A and B Preferred warrants were amended such that they collectively represent the right to purchase 55,999,998 shares of Common Stock at an exercise price of $0.025 per share, of which Pequot Funds hold warrants for the purchase of 36,000,001 shares of Common Stock and Sherleigh holds warrants for the purchase of 19,999,997 shares of Common Stock. Further, the weighted average anti-dilution rights were terminated.

 

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·The Amended and Restated Stockholders Agreement, dated as of January 23, 2006, by and among the Company, Aduromed, the Pequot Funds and Sherleigh was terminated.

 

·The Bridge Loan Holders collectively exchanged a deemed principal amount of $1,275,000 of their notes into 93,750,000 shares of Common Stock and all such Bridge Loan Holders’ outstanding common stock warrants were collectively exchanged into warrants for the purchase of 93,750,000 shares of Common Stock at an exercise price of $0.025 per share and anti-dilution rights were terminated.

 

·All documents entered into in connection with the bridge loan were terminated.

 

·Esposito and his new management associates invested $1,046,000 into the Company in return for 83,680,000 shares of Common Stock and common stock purchase warrants representing an equal amount of shares of Common Stock at an exercise price of $0.025 per share.

 

·The Pequot Funds invested an additional $1,300,000 into the Company, with post restructuring holdings of 131,097,456 shares of Common Stock and warrants to purchase 131,097,456 shares of Common Stock at $0.025 per share.

 

·Sherleigh invested an additional $700,000 into the Company, with post restructuring holdings of 71,943,023 shares of Common Stock and warrants to purchase 71,943,023 shares of Common Stock at $0.025 per share.

 

·The parties to the MRA agreed to vote their shares of Common Stock from and after the Effective Time such that Pequot and Sherleigh each have the right to designate two additional persons to the Company’s board of directors and Heller Capital Management has the right to designate one additional person to the Company’s board of directors and the Company’s board of directors will consist of nine (9) members.

 

·The employment agreements of Damien R. Tanaka, former Chief Executive Officer and Kevin T. Dunphy, former Chief Financial Officer were terminated and new employment agreements were entered into with such individuals.

 

Pursuant to the terms of the MRA, (i) $350,000 of new money was invested into the Company as of July 11, 2008, (ii) $250,000 of new money was invested into the Company as of July 25, 2008, (ii) $3,205,000 of new money was invested into the Company as of August 4, 2008, (iii) $600,000 of new money was invested into the Company as of August 7, 2008, (iv) $250,000 of new money was invested into the Company as of August 12, 2008, (v) $210,000 of new money was invested into the Company as of August 22, 2008, (vi) $25,000 of new money was invested into the Company as of August 28, 2008, and (vii) $56,000 of new money was invested into the Company as of August 29, 2008, for a total gross proceeds to the Company of $4,946,000. The total net proceeds after placement fees were $4,868,000. These investors received a total of 347,147,890 shares of Common Stock and common stock purchase warrants to purchase a total of 64,777,455 shares of Common Stock at a purchase price of $0.025 per share, exercisable for a period of five years. Existing securities holders of the Company including the Pequot Funds, Sherleigh and the Bridge Loan Holders converted their derivative securities into 179,053,415 shares of Common Stock and common stock purchase warrants to purchase a total of 124,060,769 shares of Common Stock at a purchase price of $0.025 per share, exercisable for a period of five years.

 

Effective January 30, 2007, the Company changed its corporate name from General Devices, Inc. to Aduromed Industries, Inc. Effective January 23, 2006, the Company merged (the “Merger”) with Aduromed, whereby Aduromed became the wholly-owned subsidiary of the Company and the former holders of the equity in Aduromed became holders of equity in MedClean. Aduromed was the Company’s sole operating entity before it merged with and into the Company effective January 2, 2009.

 

During the past three years prior to the consummation of the Merger, the Company had no material assets.

 

3
 

 

Aduromed was formed in 1997, as a Connecticut limited liability company by Mr. Damien R. Tanaka and two investors/members under the name “Automated Process LLC.”  In September, 2002, (i) the two investors/members withdrew as members, (ii) Aduromed was reorganized as a Delaware corporation, changing its name to “Aduromed Corporation” and (iii) several third parties invested funds in Aduromed to become minority shareholders, warrant holders and creditors.

 

MedClean’s Business

 

The principal product of MedClean is providing medical waste treatment solutions. The Company designs, sells, and installs turnkey regulated medical waste solutions that are flexible enough to be installed as a custom configuration at a customer location, delivered as a self-contained portable solution for specific applications, and can also scale in size to support the needs of independent waste processing facilities serving a wide variety of customer’s needs. The Company also provides services, through its extensive distributor and transport partner program that enables the Company the flexibility to service most, if not all, regulated medical waste streams as well as support HIPAA document destruction.

 

All MedClean products and services are focused on the conversion of Regulated Medical Waste (RMW) into municipal solid waste (MSW). The disposal of both RMW and MSW is generally regulated on the state and local levels. RMW is solid non-hazardous waste generated in connection with the diagnosis, treatment or immunization of human beings or animals, in research pertaining thereto, or in the production of testing of biologicals, and includes bandages and other materials containing potentially infectious bodily fluids, culture dishes and other glassware, discarded surgical gloves and surgical instruments, “sharps” (e.g. needles), cultures, stocks, swabs and lancets.

 

The MedClean System is comprised of integrated equipment installed at a generator’s medical facility or a processor’s treatment facility and is comprised of (i) an autoclave vessel to sterilize the material, (ii) a shredding device to convert the material into unrecognizable confetti-like material, (iii) its Auto-Touch® proprietary control panel, (iv) and related services as required. Ancillary equipment includes Quiet Carts® with disposable plastic liners used for intramural collection of the RMW at points of generation within the medical facility, the containerization of the waste during the autoclave sterilization process and the mechanical dumping of the waste into the shredding device. The System is automated to minimize personnel contact with the material and to assure regulatory compliance in the conversion process (See “Business of the Company - Products” below).

 

MedClean’s consumable supplies, sold periodically to customers, include the liners for the Quiet Carts®, cutting blades for the shredder and supplies such as deodorizers and paper print rolls for use with the autoclaves and control panels. (See “Business of the Company - Products” below).

 

Products

 

The Company’s principal products are the MedClean® series systems and related services. The MedClean® system includes the following equipment, machinery, and services:

 

·An autoclave vessel to sterilize the medical waste;

 

·A shredding device, the MedClean® Shredder, to convert sterilized waste material into a harmless, non-recognizable confetti-like material qualifying the end product as safe municipal solid waste;

 

·A unique AutoTouch® control station with software and hardware components that integrate and bundle all operating and data recording functions into a system complying with regulatory requirements for conversion and disposal of medical waste, including real time centralized monitoring of the system’s functions;

 

·A material transporter to mechanically transport the processed waste from shredder to the municipal solid waste compacting dumpster;

 

4
 

 

·A QuietCart® transport cart system to facilitate a single source containerization of the infectious waste from generation, sterilization, processing and return for refill without need for human interaction for ultimate operator safety.

 

·Services to transport the waste from the point of generation through the point of treatment. Services include waste transportation at the waste generation facility, equipment operation on-site, waste transportation to a processing facility, and operation of equipment at the processing facility.

 

·Waste streams addressed through the combination of products and services (collectively labeled as Technology enabled Services (TeS). TeS provided by the Company include:

 

Waste Stream   Today   Future
Regulated Medical Waste   Current Product   Product, Partnership
Sharps   Current Product   Product, Partnership
Confidential Documents (HIPAA)   Current Product, Partnership   Product, Partnership
Chemo / Path   Partnership   Product, Partnership
Pharmaceutical Waste   Partnership   Product, Partnership
Hazardous Waste   Partnership   Partnership
Organics   Partnership   Partnership
Universal Waste   Partnership   Partnership

 

Key advantages of the MedClean Equipment:

 

The control panel of the AutoTouch® Control Station assures regulatory compliance by means of patent pending proprietary software. The software prevents any deviation from the step-by-step processing of the waste, requires insertion of codes by operators to access the system and monitors and records on a real time basis. It governs the various aspects of the system’s processes, including the load weight during each cycle and the calculation and employment of the proper sterilization parameters of weight, pressure, temperature and time. The ability to shortcut or over-ride any of the steps in the waste conversion process is circumscribed by the features of the control panel and its software.

 

Operation of the system through the control panel is simple, since it dictates each step to be taken. Once the operator enters the appropriate codes into the control screen, the system prohibits the operator from taking a “short cut” to circumvent the required steps and procedures. Relatively little instruction is required of the operator. However, a tutorial is offered via the software through the control panel, and an operator can be fully trained within a few hours. The AutoTouch® control system can be configured in multiple languages, including English and Spanish.

 

The AutoTouch® software permits real time centralized monitoring of all the functions and uses of each system by the Company. Additionally, the centralized monitors track proper operation of a particular system. They also alert the Company to the need to provide clients with supplies and preventative maintenance visits.

 

The AutoTouch® control panel and software are proprietary properties of the Company are unique within the industry.

 

The MedClean Series System equipment is offered in three configurations:

 

5
 

 

·Container (modified 40/45/53’ x 9’ metal shipping container);

 

·Portable (container as trailer); and

 

·Fixed (traditional installation within the facility)

 

As a standard product, a containerized System can now be delivered within 12-16 weeks after receipt of an order and installed in a “plug and play” mode whereby all utilities required to operate the system are connected via a utility umbilical cord.  The container can either be rigged to a position at grade level or installed on a simple steel support framework level with the facility’s loading dock.

 

The portable system can be operated as a true tractor-trailer portable unit servicing the needs of several facilities within a prescribed geographic area and also features the same utility umbilical cord design.  This system configuration expands MedClean’s key target market, affording it the opportunity to service smaller hospitals that produce lower volumes of regulated medical waste on an individual basis but in the aggregate have sufficient volume to support the investment.

 

The fixed System, MedClean’s “traditional” installed technology, is available for those prospective clients who wish not to choose a containerized system.

 

Both the container and portable systems can be configured with on-board steam and/or electrical generators to further simplify installation and access to utilities.

 

The Company also sells consumable items including custom manufactured high temperature cart liners, deodorizers and autoclave validation test kits.  These items, along with a long list of other components such as printer paper, printer ribbon, autoclave gaskets, and replacement cart wheels are ordered on a monthly or quarterly basis by our clients to ensure proper operation.  Annual revenue generated from consumable items and services typically represents 5% to 10% of the original capital cost.

 

Services

 

The Company has developed a network of distributor and transport partners whose service offerings complement our traditional equipment offerings. These partners can be categorized as follows:

 

·Certified Transport Partner (CSP) – A CSP is a waste transporter or hauler that has also established a commercial relationship with MedClean. The commercial relationship is in the form of a mutually beneficial contractual arrangement, whereby MedClean will be compensated for business leads that are provided by MedClean to the CSP which result in new business to the CSP and/or the CSP will be awarded a discount on equipment purchased from MedClean should they choose to purchase equipment in order to create their own independent processing center.

 

·Certified Distributor Partner (CDP) – An original equipment manufacturer representative company that sells MedClean’s products and services within a defined regional basis. Each CDP meets the following criteria: (i) the company has a history of selling products and services into the hospital market; (ii) the company will field sales representatives to actively sell two to four systems on an annual basis within their region; (iii) the company will provide field personnel for Certified Equipment Training in order to provide local services for items such as Preventive Maintenance (PM) and Corrective Maintenance (CM) as required.

 

·Other – MedClean has also established a network of transporters and haulers that are not bound by commercial terms at this time but who do offer services such as personnel to operate the equipment or transport waste within a facility or facility affiliate.

 

6
 

 

·eCommerce – MedClean has engaged in a program to provide group purchasing power to certified and other partners. MedClean is offering products commonly used by medical facilities to partners as an extended service to enhance business relationships and recurring revenue opportunities. Products offered for resale will change from time to time based upon demands in the market we are serving.

 

The combination of MedClean’s products with partner services is labeled Technology enabled Services (TeS) by the Company.

 

The Medical Waste Treatment Market

 

The market for medical waste treatment is segmented by customer size: Large Quantity Generators (“LQGs”), those who generate large volumes of medical waste (in excess of 100,000 pounds per year), and Small Quantity Generators (“SQGs”), those who generate less than that. LQGs are predominantly hospitals. SQGs are primarily nursing homes, clinics, medical groups, county or city health departments, laboratories, physicians, dentists and veterinarians in private practice. Of these SQGs, physicians comprise the highest percentage of sites.

 

On-Site Medical Waste Treatment Equipment Market

 

   Small Quantity
Generators
   Large Quantity
Generators
 
Number of Sites   476,199    6,604 
Percentage Using Haulers   100%   87%
Number specifically suited for MedClean Systems   200,000*   6,604 

 

*MedClean “appliance” or Service for a fee alternative.

 

The Company traditionally addressed the LQG segment – Very Large Hospitals >400 beds.  The Company’s new medical waste solutions platform based upon TeS will enable the Company to address opportunities across the entire regulated medical waste market. Additionally, the Company is considering product line extensions through technology licensing and/or reseller agreements to provide its Certified Distributor Partner sales force and direct and agent sales network with solutions to further penetrate this target rich environment.

 

For SQGs there has been no realistic alternative to hauling, and any on-site solutions have been too expensive or inefficient.  Because of this, the SQG segment represents an excellent opportunity for the Company’s TeS platform as well as a potential target for a future MedClean Appliance product and / or for the Company to license or co-develop new products.

 

The current U.S. medical waste market is estimated to be $1.5 to $2.0 billion (3.1 billion pounds) annually.  Additionally, there exists an estimated $2.0 billion in confidential document destruction annually in this same market segment.

 

The Company’s current and pending installations, both domestically and internationally, total 40 locations, including one domestic installation slated for installation in the first half of 2012.

 

Governmental Regulations-Federal

 

Prior to 2002, the principal method of disposing of most regulated medical waste (“RMW”) was through on-site incineration. Because of the promulgation of regulations by the Environmental Protection Agency (“EPA”) that came into effect on September 15, 2002, setting minimum emission limits for RMW incinerators for such pollutants as dioxins, nitrogen oxides, lead, cadmium and mercury, the use of on-site incinerators in the U.S. has drastically diminished. As a consequence, the methods of on-site disposal of RMW have been limited to steam sterilization, chemical treatment and microwave.

 

Federal agencies, which regulate RMW, are the EPA, the Occupational Safety and Health Administration (“OSHA”), the U.S. Department of Transportation (the “U.S. DOT”), and the U.S. Postal Service. These agencies regulate RMW under a variety of statutes and regulations, including the following:

 

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·MEDICAL WASTE TRACKING ACT OF 1988 (“MWTA”). The primary objective of the MWTA was to ensure that RMW generated in a covered state that posed environmental problems, including an unsightly appearance, was delivered to disposal or treatment facilities with minimum exposure to waste management workers and the public. The MWTA’s tracking requirements included accounting for all waste transported and imposed civil and criminal sanctions for violations. The MWTA demonstration program expired in 1991, but the MWTA established a model followed by many states in developing their specific medical waste regulatory frameworks.

 

·CLEAN AIR ACT REGULATIONS. In August 1997, the EPA adopted regulations under the Clean Air Act Amendments of 1990 that limit the discharge into the atmosphere of pollutants released by medical waste incineration. These regulations required every state to submit to the EPA for approval a plan to meet minimum emission standards for these pollutants.

 

·OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970. The Occupational Safety and Health Act of 1970 authorizes OSHA to issue occupational safety and health standards. OSHA regulations are designed to minimize the exposure of employees to hazardous work environments, including RMW.

 

·RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 (“RCRA”). RCRA required the EPA to promulgate regulations identifying hazardous wastes. RCRA also created standards for the generation, transportation, treatment, storage and disposal of solid and hazardous wastes. These standards included a documentation program for the transportation of hazardous wastes and a permit system for solid and hazardous waste disposal facilities. RMW is currently considered non-hazardous solid wastes under RCRA. However, some substances collected by some of MedClean’s customers, including photographic fixer developer solutions, lead foils and dental amalgam, are considered hazardous wastes.

 

·DOT REGULATIONS. The U.S. DOT has put regulations into effect under the Hazardous Materials Transportation Authorization Act of 1994 which requires customers to package and label RMW in compliance with designated standards, and which incorporate blood-borne pathogens standards issued by OSHA. Under these standards, customers must, among other things, identify packaging with a “biohazard” marking on the outer packaging, and medical waste containers must be sufficiently rigid and strong to prevent tearing or bursting and must be puncture-resistant, leak-resistant, properly sealed and impervious to moisture. DOT regulations also require that a transporter be capable of responding on a 24-hour-a-day basis in the event of an accident, spill, or release to the environment of a hazardous material.

 

·COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980 (“CERCLA”). CERCLA established a regulatory and remedial program to provide for the investigation and cleanup of facilities that have released or threaten to release hazardous substances into the environment. CERCLA and state laws similar to it may impose strict, joint and several liabilities on the current and former owners and operators of facilities from which releases of hazardous substances have occurred and on the generators and transporters of the hazardous substances that come to be located at these facilities. Responsible parties may be liable for substantial site investigation and cleanup costs and natural resource damages, regardless of whether they exercised due care and complied with applicable laws and regulations. If a customer were found to be a responsible party for a particular site, it could be required to pay the entire cost of the site investigation and cleanup, even though other parties also may be liable.

 

·UNITED STATES POSTAL SERVICE. Customers must obtain permits from the U.S. Postal Service to conduct programs, pursuant to which they mail approved “sharps” (needles, knives, broken glass and the like) containers directly to treatment facilities.

 

Governmental Regulations-State and Local

 

Each state has its own regulations related to the handling, treatment and storage of medical waste. Although there are many differences among the various state laws and regulations, many states have followed the medical waste model under the MWTA and have implemented programs under RCRA. State agencies involved in regulating the medical waste industry are frequently the departments of health and environmental protection agencies. In addition, many local governments have ordinances, local laws and regulations, such as zoning and health regulations, including ordinances relating to the disposition of sterilized effluents into sewage systems and municipal disposal sites that affect our customers’ operations.

 

8
 

 

Most states require segregation of different types of medical waste at the hospital or other location where they were created. A majority of states require that the universal biohazard symbol or a label appear on medical waste containers. Storage regulations may apply to the party generating the waste, the treatment facility, the transport vehicle, or all three. Storage rules seek to identify and secure the storage area for public safety as well as set standards for the manner and length of storage. Many states require employee training for safe environmental cleanup through emergency spill and decontamination plans. Many states also require that transporters carry spill equipment in their vehicles. Those states whose regulatory framework relies on the MWTA model have tracking document systems in place.

 

Pursuant to medical waste incinerator regulations adopted by the EPA in 1997, every state was required by September 1998 to adopt a plan to comply with federal guidelines which, among other things, limit the release of some airborne pollutants from medical waste incinerators to levels prescribed by the EPA. Each state’s implementation plan must be at least as restrictive as the federal emissions standards.

 

Effect of Regulations on the Company’s Business

 

The Company manufactures and sells its MedClean® systems that sterilize RMW by sterilization in an autoclave chamber and subsequent shredding of the material enabling the customer to dispose of the residue as municipal solid waste. The operation of the MedClean® system and the disposal of the waste are the responsibility of the customer. As a result, the Company is not subject to the multitude of governmental regulations that typify the handling and disposition of solid waste. Virtually all of the Company’s competitors are subject to one or more of the various regulatory regimes associated with the medical waste disposal business as the systems and services offered by these competitors involve incineration, chemical treatment or transportation of medical waste.

 

The Company’s customers use landfills operated by parties unrelated to the Company to dispose of treated medical waste from medical facilities. The Company does not own or operate any landfills. Waste is not regulated as hazardous under RCRA unless it contains hazardous substances exceeding certain quantities or concentration levels, meets specified descriptions, or exhibits specific hazardous characteristics. Following treatment, waste from the Company’s MedClean® systems is disposed of as non-hazardous waste.

 

The Clean Air Act Standards for boilers and incinerators was passed by the EPA in 2009 and subsequently modified in February 2011 to relax proposed standards and to extend the implementation timeline from 2014 to 2016. Some of the Company’s competition depends on incineration technology. The increased costs to meet Federal requirements, even at the relaxed standards, will pose a challenge to the remaining 88 incineration facilities across the country and will have an impact on the processing fees charged to customers of these facilities. The impact on processing fees may result in beneficial conditions for the Company.

 

Competition

 

RMW has historically been disposed of mainly through the use of off-site hauling contractors and by incineration. Presently, in the U.S. many different types of technologies have been introduced to meet the new regulatory requirements for disposal of RMW. Some of these technologies include:

 

·DISINFECTANT. This process involves the simultaneous shredding and disinfecting of the infectious medical waste. The process can only handle small batches in each cycle and has a capacity of approximately 70 to 400 pounds a day, which is not sufficient to handle the overall requirements of most hospitals ranging from 500 to 9,000 pounds per day.

 

·CHEMICAL REAGENTS. The use of chemical reagents is subject to federal laws and regulations of the EPA that classify the chemicals involved as “pesticides.” Also, there is considerable limitation on the volumes that can be treated by this method. It is not suitable for disposal of infectious medical waste generated by hospitals and other large medical facilities since it does not have the capacity to handle such volumes.

 

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·MICROWAVE TECHNOLOGY. Microwave technology is a process of disinfection that exposes material to moist heat generated by microwave energy. Use of this technology requires that proper precautions be taken to exclude the treatment of hazardous material so that toxic emissions do not occur. The complete unit must also be operated under negative pressure as infectious waste is normally shredded prior to disinfection and may create conditions where infection can be transformed into an aerosol prior to treatment. Also, offensive odors may be generated around the unit. The capital cost and space requirement for this type of system is relatively high.

 

·THERMAL PROCESSES. Thermal processes are dry heat processes and do not use water or steam, but forced convection, circulating heated air around the waste or using radiant heaters. Companies have developed both large and small dry-heat systems, operating at temperatures between 350° F-700° F. Use of dry heat requires longer treatment times with precautions required to prevent potential combustion of the waste material during each cycle.

 

·HIGH HEAT THERMAL PROCESSES (PYROLYSIS). A pyrolysis system would involve chemical decomposition of organic medical waste by intense heat (at least 800 degrees F) in an anaerobic atmosphere that produces combustible gases, including carbon monoxide, hydrogen and methane. These gases must be flared off or treated in a secondary combustion chamber. Particulate removal equipment such as fabric filters or wet scrubbers would also be required. The use of a pyrolysis system has not been commercialized as a method for converting infectious medical waste.

 

·RADIATION. Electron beam technology creates ionized radiation, damaging cells of microorganisms. Workers must be protected with shields and remain in areas secured from the radiation.

 

·CHEMICAL TECHNOLOGIES. Disinfecting chemical agents that integrate shredding and mixing to ensure adequate exposure are used by a variety of competitors. Chlorine based chemicals, using sodium hypochlorite and chlorine dioxide, are somewhat controversial as to their environmental effects and their impact on wastewater. Non-chloride technologies are varied and include parasitic acid, ozone gas, lime based dry powder, acid and metal catalysts as well as alkaline hydrolysis technology used for tissue and animal waste.

 

Among the Company’s competitors are Stericycle, Inc., San-I-Pak, Bondtech Corporation, and Red Bag Solutions, Inc.

 

Sources and Availability of Raw Materials and Names of Principal Suppliers

 

Generally, access to raw materials and third party fabricators for the MedClean® Systems is available from multiple sources that allow the Company flexibility of choice.

 

Company Partnerships

 

The Company has focused significant time and effort on developing partnerships with organizations that provide outsourced, non-clinical managed services to hospitals.  These organizations often have long-term relationships with hospitals being targeted by the Company.  

 

Backlog

 

Backlog represents anticipated revenue from work not yet completed or performed under a signed contract or work order. Once work commences, revenue is generally recognized upon delivery of the system or completion of the work. Backlog at December 31, 2011 was $1,047,100 compared to $2,116,045 at December 31, 2010 representing a decrease of $1,068,945 or 50.5%.

 

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Employees

 

As of May 10, 2012, the Company had 4 full time and 1 part time employees and one part time consultant.  The Company utilizes third party contractors and Certified Partners for certain services and for sales representation. Through formal and informal agreements the Company is well positioned to manage and meet future business requirements.

 

Item 1A.  Risk Factors.

 

Risks Related To Our Business

 

We have a history of losses.

 

To date, we have been unable to generate revenue sufficient to be profitable. The Company had a net loss of $(4,376,105), or $(0.00) per share, for the fiscal year ended December 31, 2011, compared to a net loss of $(4,417,550), or $(0.00) per share, for the fiscal year ended December 31, 2010. The Company might not achieve the level of revenues needed to be profitable in the future or, if profitability is achieved, might not sustain such profitability.

 

The Company lacks an operating history making evaluation of its business difficult.

 

While the Company’s revenues during the past eight years have been exclusively derived from sales and servicing of its MedClean Systems, its business is at an early stage of commercialization, and there is no meaningful historical financial or other information available upon which to base an evaluation of the Company’s ability to increase its revenues in accordance with its projections or to compete effectively with those persons with similar or alternate systems.

  

The Company is dependent on third party component suppliers.

 

The Company is dependent on third party suppliers for the supply of components of its MedClean units. Although the Company believes that the required components are available and can be provided by other suppliers, delays may be incurred in establishing relationships or in waiting for quality control assurance with other manufacturers for substitute components.

 

The Company may not be able to effectively protect its proprietary technology, which could have a material adverse effect on its business and make it easier for its competitors to duplicate its products.

 

The Company regards certain aspects of its products, processes, services and technology as proprietary. The Company has registered four of its trademarks with the United States Patent and Trademark Office: Aduromed®, MedClean®, AutoTouch® and QuietCart®. On November 24, 2008, the Company filed a patent application, entitled “Containerized Medical Waste Treatment System and Related Method,” which focuses on the design and configuration of the Company’s new standard, containerized MedClean Systems. The Company also intends to file a patent application with respect to its smaller “appliance” system at some point in the future. Other than these patent filings, the Company does not have nor does it intend to apply for patent protection with respect to the processes and technology encompassed by its present Systems. The Company requires all of its employees to sign Confidentiality and Non-Disclosure Agreements that prohibit the dissemination or use of the Company’s know-how and technology other than in the legitimate performance of the employee’s duties. Our ability to compete successfully will depend in part on our ability to protect our proprietary rights and to operate without infringing on the proprietary rights of others, both in the United States and abroad. The Company may apply in the future for patent protection for uses, processes, products and systems that it develops. Any future patent for which the Company applies may not be issued; any existing contractual non-disclosures obligations may be challenged, invalidated or circumvented; third parties might infringe or misappropriate our proprietary rights; and third parties might independently develop similar products, services and technology. The Company may incur substantial costs in asserting or defending any breach of contract or infringement suits or in asserting any license rights, including those granted by third parties, the expenditure of which the Company might not be able to afford. An adverse determination could subject the Company to significant liabilities to third parties, require it to seek licenses from or pay royalties to third parties or require it to develop appropriate alternative technology. Such licenses might not be available on acceptable terms or at all, and the Company might not develop alternate technology at an acceptable price or at all. Any of these events could have a material adverse effect on the Company’s business and profitability.

 

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The Company may have to resort to litigation to enforce its intellectual property rights, protect its trade secrets, determine the validity and scope of the proprietary rights of others, or defend itself from claims of infringement, invalidity or unenforceability. Litigation may be expensive and divert resources even if the Company wins. This could adversely affect its business, financial condition and operating results such that it could cause the Company to reduce or cease operations.

 

The Company’s existing products may not be able in the future to meet changes in environmental laws and regulations regarding regulated medical waste.

 

The future of our business will depend on our ability to respond to any future changes in the federal, state and local regulatory environment. Since the Company does not itself generate medical waste and is not itself in control of, nor does it handle, the medical waste but sells its equipment to meet its contractual obligations to its customers, it is not itself currently subject to regulations with respect to the disposal of RMW; however, any change in this regulatory regime in the future could have a material adverse effect on the Company’s operations.

 

The nature of our business exposes us to professional and product liability claims, which could materially adversely impact our business and profitability.

 

The malfunction or misuse of our MedClean Systems may result in damage or injury to property or persons, as well as violation of various health and safety regulations, thereby subjecting us to possible liability. The Company carries insurance coverage in amounts and deductibles that are believed to be prudent in this business, and the Company has not experienced any claims made or lawsuits with regard to any such damage or violations, such insurance might not be sufficient to cover potential liability. Further, in the event of either adverse claim experience or insurance industry trends, the Company could experience difficulty in obtaining product liability insurance or may be forced to pay excessive premiums, resulting in a change to present coverage.

 

Other parties may assert that our technology infringes on their intellectual property rights, which could divert management time and resources and possibly force us to redesign our products.

 

Developing products based upon new technologies can result in litigation based on allegations of patent and other intellectual property infringement. While no infringement claims have been made or threatened against the Company, third parties might assert infringement claims in the future, and such assertions by such parties might result in litigation in which they might prevail. In addition, the Company might not be able to license any valid and infringed patents from third parties on commercially reasonable terms or, alternatively, be able to redesign products on a cost-effective basis to avoid infringement. An infringement claim or other litigation against the Company could have a material adverse effect, and could cause the Company to reduce or cease operations.

 

The loss of certain members of our management team could adversely affect our business.

 

The Company’s success is highly dependent on the continued efforts of the members of the executive management team. If our executive management team should retire or leave the Company may not be successful in attracting and/or retaining key personnel in the future. Failure to do so could adversely affect the business and financial condition of the Company. Employment agreements with management personnel are in place but the Company does not carry any “key-man” insurance on the lives of our officers or employees.

 

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Market Risks

 

There is only a volatile limited market for our Common Stock.

 

Recent history relating to the market prices of public companies indicates that, from time to time, there may be periods of extreme volatility in the market price of the Company’s securities due to factors unrelated to the operating performance of the Company, or announcements concerning the condition of the Company, especially for stock traded on the OTC Bulletin Board.  In the last 52 week period, the Common Stock traded on the OTC Bulletin Board from a high closing price of $.0035 to a low of $.0001 per share. See “Market for our Common Stock.” General market price declines, market volatility, especially for low priced securities, or factors related to the general economy or specifically to the Company in the future could adversely affect the price of the common stock. With the low price of the Common Stock, securities placement by MedClean could be very dilutive to existing stockholders, thereby limiting the nature of future equity placements.

 

We have never paid dividends and we do not anticipate paying dividends in the future.

 

We do not believe that we will pay any cash dividends on our Common Stock in the future. We have never declared any cash dividends on our common stock, and if we were to become profitable, it would be expected that all of such earnings would be retained to support our business. Since we have no plan to pay cash dividends, an investor would only realize income from his investment in our shares if there is a rise in the market price of our Common Stock, which is uncertain and unpredictable.

 

We are subject to penny stock regulations and restrictions.

 

The U.S. Securities and Exchange Commission (the “Commission”) has adopted regulations that generally define Penny Stocks to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. As of March 10, 2011, the closing price for our Common Stock was $.005 per share and therefore, it is designated a “Penny Stock.” As a Penny Stock, our Common Stock may become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

 

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is required to be made regarding sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be provided disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

Our Common Stock might not qualify for exemption from the penny stock restrictions. In any event, even if our Common Stock were exempt from the Penny Stock restrictions, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to restrict any person from participating in a distribution of penny stock, if the Commission finds that such a restriction would be in the public interest.

 

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Additional shares of our authorized capital stock which are issued in the future will decrease equity ownership percentages of existing shareholders, could also be dilutive to existing shareholders, and could delay or prevent a change of control of our company.

 

We are authorized to issue up to 3,500,000,000 shares of Common Stock, and our board of directors has the sole authority to issue unissued authorized stock without further shareholder approval. To the extent that additional common shares are issued in the future, they will decrease existing shareholders’ percentage equity ownership and, depending upon the prices at which they are issued, could be dilutive to existing shareholders.

 

Your ownership interest may be diluted and the value of our common stock may decline by exercising the put right pursuant to our Equity Credit Agreement.

 

Effective August 5, 2010, we entered into a $15,000,000 Equity Credit Agreement with Southridge Partners II, LP (“Southridge”). Pursuant to the Equity Credit Agreement, when we deem it necessary, we may raise capital through the private sale of our common stock to Southridge at a price equal to 95% of the average of the lowest closing bid price of our common stock of any two trading days, consecutive or inconsecutive, during the five (5) trading day period immediately following the date our put notice is delivered.  Because the put price is lower than the prevailing market price of our common stock, to the extent that the put right is exercised, your ownership interest may be diluted.

 

Certain provisions of our charter could discourage potential acquisition proposals or change in control.

 

Our board of directors, without further stockholder approval, may issue preferred stock that would contain provisions that could have the effect of delaying or preventing a change in control or which may prevent or frustrate any attempt by stockholders to replace or remove the current management. The issuance of additional shares of preferred stock could also adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others.

 

Item 1B.  Unresolved Staff Comments.

 

Not applicable.

 

Item 2. Properties.

 

The Company currently leases approximately 13,000 square feet of warehouse space at 310 Stoke Park Road, Bethlehem, PA 18017 for a term of two (2) years under a lease agreement, dated August 24, 2011. At our option, the term of lease may be renewed for an additional three (3) years. Base rent is set at the rate of $5,500 per month.

 

Item 3. Legal Proceedings.

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 4. (Removed and Reserved).

 

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PART II

 

Item 5.  Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The Company’s Common Stock is listed on the OTC Bulletin Board market and trades under the symbol MCLN.OB.

 

The following table sets forth the range of the high and low bid quotations of the Common Stock for the past two years in the over-the-counter market, as reported by the OTC Bulletin Board and in the Pink Sheets. The quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

Calendar Quarter Ended: 

   High   Low 
2011        
March 31  $0.0059   $0.0050 
June 30   0.0037    0.0025 
September 30   0.0012   0.001
December 31   0.0006   0.0005
           
2010          
March 31  $0.0295   $0.0181 
June 30   0.0200    0.0091 
September 30   0.0166    0.0072 
December 31   0.0080    0.0031 

 

As of May 10, 2012, the Company had 1,404 stockholders of record.

 

Recent Issuances Involving Unregistered Securities

 

During 2011, we issued 50,000 shares of common stock as a result of warrant and option conversions.

 

Item 6.  Selected Financial Data.

 

Not applicable.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

The Company is including the following cautionary statement in this Annual Report on Form 10-K for any forward-looking statements made by, or on behalf of, the Company including its former wholly owned subsidiary Aduromed Corporation. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical facts. Certain statements contained herein are forward-looking statements and accordingly involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that management’s expectation, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements: technological advances by our competitors, changes in health care reform, including reimbursement programs, changes to regulatory requirements relating to environmental approvals for the treatment of infectious medical waste, capital needs to fund any delays or extensions of development programs, delays in the manufacture of new and existing products by us or third party contractors, market acceptance of our products, the loss of any key employees, delays in obtaining federal, state or local regulatory clearance for new installations and operations, changes in governmental regulations, availability of capital on terms satisfactory to us. We are subject to numerous Risk Factors relating to manufacturing, regulatory, financial resources, and personnel as described in this Annual Report. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.

 

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Results of Operations

 

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

 

Net Revenue

 

Total revenue for 2011 was $1,717,721 compared with $896,993 for 2010. A revenue increase of $820,728 or 92%, $1,010,200 was attributable to increase revenues derived from sales of our MedClean system, and $(189,472) was attributable to the decrease of the sale of consumables, component parts, and service contracts.

 

Revenues from our MedClean system for 2011 were $1,010,200 compared to $-0- in 2010, an increase of $1,010,200.

 

Revenues derived from the sale of consumables, component parts and service contracts decreased to $707,521 compared to $896,993 in the prior year. The revenue was attributable to orders for goods and services from a consistent install base of hospitals that have previously purchased our MedClean system. Service revenues declined due to a lack of corrective maintenance services work.

 

Historically, orders for the MedClean System are contracted by purchase order and are billed in two increments. Typically, clients are invoiced on contract signing and delivery of components and/or completion of installation.

 

Revenues derived from the sale of units may continue to fluctuate dramatically from period to period due to several factors including; the length of the sales cycle with any given customer, current and future market conditions with regard to financing programs available to customers, and our ability to focus and execute new acquisition options.  The Company expects to add rental and per pound usage acquisition options to our currently available one-time purchase and leasing programs.  These new programs will be focused on generating recurring revenue in an effort to add predictability to our future revenue generation.

 

Gross Profit

 

The gross profit for 2011 was $725,752 (42.3% of total revenue) compared with a gross profit in 2010 of $470,295 (52.5% of total revenue). Our gross profit margins decreased from 52.5% to 42.3%.  The decrease in our gross profit as compared to the prior year can be attributed to lower profit margins on system sales.

 

The components of costs of revenues for products include direct materials, depreciation, shipping and rigging costs and contract labor primarily used to install, repair and maintain our equipment.

 

Operating Expenses

 

Total operating expenses for 2011 was $3,579,315 compared with $4,787,192 for 2010, a decrease of $1,207,877 or 25.3%. 

 

In 2011, we incurred a $1,204,799 non cash charge to operations for the fair value of vesting options and warrants as compared to $2,060,985 in 2010 and $-0- in 2011 for stock based compensation as compared to $227,640 in 2010; a net decrease of $1,083,826 with other operating costs decreasing by $124,051.

 

Interest (Income) Expense

 

Interest and other income for 2011 was $280 compared with $350 of interest and other income in 2010 on reduced cash balances available for investment.  The Company invests its excess cash in a money market account.  

 

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Interest expense and amortization for 2011 was $1,376,702 compared with $496,477 in 2010. The increase in interest expense was a result of the Company amortizing the debt discount on the Convertible Notes.

 

Net loss

 

Net loss for 2011 was $(4,376,105) compared to a net loss in 2010 of $(4,417,550).

 

Financial Condition

 

Liquidity and Capital Resources 

 

The Company’s cash on hand and working capital as of December 31, 2011 and 2010 are as follows:

 

   2011   2010 
Cash on hand  $26,009   $182,046 
Working capital (deficit)  $(1,317,482)  $(1,107,848)

 

During 2011, the Company purchased $9,694 in fixed assets. The Company anticipates purchasing approximately $5,000 in additional fixed assets in 2012.

 

Net cash used in operating activities totaled $1,067,913 in 2011.

 

Our accounts receivable balance may have dramatic swings from one period to another depending upon the timing and the amount of milestone billings included in the balance at the end of any accounting period. There are two milestone billings representing a percentage of the contract value for each installment and our payment terms are “upon receipt.” Receivable balances are typically paid within 15 days of the invoice date. Billings for maintenance contracts and consumables are due within 45 days and are more numerous but much smaller in value than milestone billings. We review our outstanding receivable balances on a regular basis to ensure that the allowance for bad debt is adequate.   Due to the varying nature in the timing and amounts of the receivable balances as noted above, the change in the allowance for doubtful account will not necessarily correlate with the increase or decrease in the accounts receivable balance. The accounts receivable balance as of December 31, 2011, was $170,585 net of an allowance of $24,098.  

 

Our inventory balance may have dramatic swings from one period to another depending upon the expected installation date of our MedClean systems and our accounts payable balances can have similar swings depending on payment terms and any volume purchases or discounts we may take advantage of from time to time. During 2011, the Company decreased its total inventory on hand by $393,999 to $402,678.  The accounts payable and accrued liabilities balance as of December 31, 2011 was $432,000. The related party accrued liabilities balance as of December 31, 2011 was $517,342 primarily relating to consulting services and severance due to prior officers.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. A summary of the critical accounting policies and the judgments that we make in the application of those policies is presented in Note 1 to our financial statements.

 

Our financial statements are based on the selection of accounting policies and the application of accounting estimates, some of which require management to make significant assumptions. Actual results could differ materially from the estimated amounts. The following accounting policy is critical to understanding and evaluating our reported financial results:

 

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Accounting for Stock-Based Compensation

 

We account for our stock options and warrants using the fair value method promulgated by Accounting Standards Codification subtopic 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Therefore, our results include non-cash compensation expense as a result of the issuance of stock options and warrants and we expect to record additional non-cash compensation expense in the future.

 

Revenue recognition

 

The Company’s revenue recognition policy is in accordance with the requirements of Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition,  (“SAB 104”), ASC Topic 605,  Accounting  for  Consideration  Given by a Vendor to a Customer (Including a Reseller of the Vendor’s  Products)  and other  applicable  revenue recognition  guidance and  interpretations.  System revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed  or  determinable,   the  delivery  is  completed,  no  other  significant obligations of the Company  exist and  collectability  is  reasonably  assured.

 

Unearned Revenues consist of cash received in advance for goods to be delivered at a future date. The Company records the payments received from customers as a liability until the products are delivered. Sales are recorded when the products are delivered.

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.

 

The Company provides a one-year warranty on the systems it installs. The Company also obtains a one-year warranty on the system components from the component manufacturer, thereby mitigating potential warranty costs. Accordingly, the Company has accrued no reserve for warranty. On the installed base after the warranty term has expired, the Company offers a maintenance agreement of one or more years to the customer. The Customer is billed for, and pays for the maintenance agreement in advance. Revenues from such maintenance agreements are recognized ratably over the lives of the maintenance agreements, with the excess of the amount collected over the amount recognized as deferred revenue. At December 31, 2011 and 2010 the Company had $505,189 and $550,472 in deferred revenue from maintenance agreements.

 

Recent accounting pronouncements

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which clarifies the wording and disclosures required in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), to converge with those used (to be used) in International Financial Reporting Standards (“IFRS”). The update explains how to measure and disclose fair value under ASC 820. However, the FASB does not expect the changes in this standards update to alter the current application of the requirements in ASC 820. The provisions of ASU 2011-04 are effective for public entities prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. Therefore, ASU 2011-04 is effective for the Company during effective January 1, 2012. The Company does not expect ASU 2011-04 to have a material effect on the Company’s results of operations, financial condition, and cash flows.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 changes the presentation of comprehensive income in the financial statements for all periods reported and eliminates the option under the current guidance that allows for presentation of other comprehensive income as part of the Statement of Stockholders’ Equity. The update proposes two options for the proper presentation of comprehensive income: 1) a single Statement of Comprehensive Income, which includes all components of net income and other comprehensive income; or 2) a Statement of Income followed immediately by a Statement of Comprehensive Income, which includes the summarized net income and all components of other comprehensive income. The provisions of ASU 2011-05 are effective for public entities retrospectively for annual periods, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. Therefore, ASU 2011-05 is effective for the Company on January 1, 2012. Although the provisions of this update could change the presentation of the financial statements of the Company, no material impact is expected on the Company’s results of operations, financial condition, and cash flows.

 

18
 

 

Inflation

 

Our opinion is that inflation has not had, and is not expected to have, a material effect on our operation.

 

Climate Change

 

Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.

 

Not Applicable.

 

Item 8. Financial Statements and Supplementary Data.

 

Our financial statements are contained in pages F-1 through F-22 which appear at the end of this Annual Report.

 

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

Not applicable.

 

19
 

 

Item 9A.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of December 31, 2011. Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31 2011, our disclosure controls and procedures were effective.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a – 15(f).  Management conducted an assessment as of December 31, 2011 of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2011, based on criteria in Internal Control – Integrated Framework issued by the COSO.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the control procedure may deteriorate.

 

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.  Other Information.

 

On March 2, 2012, Mr. Robert Hockett resigned as Director of the Company’s board of directors. 

20
 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors and Executive Officers

 

The following table and text sets forth the names and ages of all our directors and executive officers and our key management personnel as of March 31, 2012.  All of our directors serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. Executive officers serve at the discretion of the board of directors, and are elected or appointed to serve until the next board of directors meeting following the annual meeting of stockholders.  Also provided is a brief description of the business experience of each director and executive officer and the key management personnel during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws.

 

Name Age Position
     
David J. Laky 47 President and CEO
     
Cheryl Kaine Sadowski 44 Chief Financial Officer and Treasurer
     
Jay S. Bendis 65 Director, Chairman
     
Scott Grisanti 49 Director
     
Constance A. Nelson 63 Director
     
Elan Gandsman 70 Director

 

Following is a brief summary of the background and experience of each director and executive officer of MedClean:

 

David J. Laky

 

Mr. Laky was elected as a director of the board of directors effective May 10, 2010. Mr. Laky was appointed to the positions of President and Chief Executive Officer of the Company effective November 9, 2009. Prior to such appointment Mr. Laky was the Company’s Senior Vice President of Client Services and Technology since September 2008. Mr. Laky joined the Company from eResearchTechnology, Inc.(“eRT”) where from 2005 to 2008 he was General Manager & Senior Vice President of eClinical Group. He served eRT as VP of Professional Services from 1999 to 2005.

 

By the terms of his employment agreement, Mr. Laky serves in an at will capacity. Mr. Laky’s employment agreement contains covenants of confidentiality and assignments of proprietary intellectual property rights.

 

Mr. Laky owns, beneficially and of record, 60,000 shares of Common Stock with options to purchase currently 56,000,000 shares of Common Stock at $0.004 per share and 26,961,178 shares of Common Stock at $0.00844 per share.

 

Cheryl Kaine Sadowski

 

Ms. Sadowski was appointed to the position of Chief Financial Officer of the Company effective August 4, 2009. Prior to such appointment Ms. Sadowski was the Company’s Vice-President and Controller since October 2008. From February 1994 until October 2008 she held several positions at eResearchTechnology, Inc. in Bridgewater, New Jersey, including Vice President, Business Management and Senior Director, Business Management, where she was responsible for budgeting, forecasting, financial systems and analysis for the Professional Services, Project Management, Customer Care, Research & Development, IT and Cardiac Safety Divisions.  She also handled the facilities management and administration for the Bridgewater office.

 

21
 

 

By the terms of her employment agreement, Ms. Sadowski serves in an at will capacity. Ms. Sadowski’s employment agreement contains covenants of confidentiality and assignments of proprietary intellectual property rights.

 

Ms. Sadowski owns, beneficially and of record, options to purchase currently 54,000,000 shares of Common Stock at $0.004 per share and 26,961,178 shares of Common Stock at $0.00844 per share.

 

Jay S. Bendis

 

Effective March 31, 2011 Mr. Bendis was appointed as Chairman of the Company. Mr. Bendis has been President of Transfer Technology Consultants during the past 15 years specializing in transferring new biotech product concepts from design to commercialization. From 2005 to 2008 he was President and CEO of Clinical Analysis Corp., which has developed a hand-held diagnostic system for patient point-of-care testing.  He was Managing Partner in the Crystal Corridor Group that worked with Kent State University’s Liquid Crystal Institute in facilitating liquid crystal technology from 2000 to 2005. He was Executive Vice President of American BioMedica Corp that develops and markets on-site drugs of abuse diagnostic kits from 1995 to 2000. He was President and Co-founder of Emerging Technology Systems that is a Research and Development Company in the diabetic markets from 1993 to 1999. His prior management positions had been with XANAR Laser Corp, a division of Johnson & Johnson as the National Sales Manager and IVAC Corp a division of Eli Lilly as Sales and Marketing Manager.  He has also served as a member of the Edison BioTechnology Center Advisory Council for the State of Ohio and serves on the Boards of several private companies.

 

Mr. Bendis owns 269,250 shares held of record and options to purchase 4,950,000 shares at an exercise price of $0.004 per share, 7,500,000 shares at an exercise price of $0.028 and 7,500,000 shares at an exercise price of .003480.

 

Scott Grisanti

 

Mr. Grisanti was elected as a director and as President and Chief Executive Officer of MedClean on September 2, 2008. Effective as of November 9, 2009, Mr. Grisanti’s employment agreement was terminated without cause by mutual consent of the Company and Mr. Grisanti. Also effective November 9, 2009, Mr. Grisanti was appointed as Chairman of the Company. Effective March 31, 2011, Mr. Grisanti resigned as Chairman of the Company but remains as a director of the Company. Prior to joining the Company, Mr. Grisanti was the Executive Vice President of Sales, Marketing and Services at Primavera Systems, Inc. (“Primavera”), a leading provider of program and portfolio management application software and services solutions used to manage large capital projects in targeted market segments. Prior to joining Primavera, Mr. Grisanti served as Executive Vice President and Chief Marketing Officer for eResearchTechnology, Inc., a leading provider of technology and services for the new drug development industry. Previously, Mr. Grisanti served in an executive sales management capacity at supply chain execution application solution providers ClearCross, Inc. and Optum, Inc. He received his bachelor degree in English and Journalism from Rutgers University, where he was elected to Phi Beta Kappa.

 

Mr. Grisanti owns, beneficially and of record, 20,000,000 shares with options and warrants to purchase currently an additional 142,000,000 shares of Common Stock at $0.004 per share and additional 10,000,000 shares of Common Stock at $0.0075 per share.

 

Dr. Elan Gandsman

 

Dr. Gandsman has since 1993 been Director of Environmental Health and Safety at Yale University in New Haven, Connecticut. He holds a BS degree in physics and math from the University of Buenos Aires, and MSc and PhD degrees in physics from Tel Aviv University.

 

22
 

 

Dr. Gandsman owns options to purchase currently 4,950,000 shares of the Company’s Common Stock at an exercise price of $0.004 per share, 5,000,000 shares at an exercise price of $0.028 and 5,000,000 shares at an exercise price of .003480.

 

Constance A. Nelson

 

Ms. Nelson, combines over 30 years of experience in accounting, internal audit, and management in Manufacturing, Government and Higher Education.  From 2000 through 2011, she has held positions including Controller, Accounting Manager, Director of Financial Accounting, and Director of Finance for a global manufacturing company.  From 1996 through 1999 she was Finance Director for the city of Pinecrest, Florida.  From 1981 to 1996 she held positions with the State of Tennessee including Assistant Commissioner for the Department of Commerce and Insurance, Vice President of Business and Finance for Tennessee State University, and Director of Internal Audit for the Department of General Services.

 

Ms. Nelson holds an undergraduate degree from David Lipscomb University and an MBA from Tennessee State University. Ms. Nelson owns options to purchase currently 2,083,333 shares of the Company’s Common Stock at an exercise price of $0.00232 per share..

 

Code of Ethics

 

The Company has adopted a Code of Ethics applicable to its directors and officers (including its principal executive officer and principal financial officer). Stockholders may write to Ms. Cheryl Sadowski at the Company’s executive office, 3 Trowbridge Drive, Bethel, Connecticut 06801 to request a copy of the Code of Ethics, and the Company will provide a copy without charge. The Company’s Code of Ethics is also available on the Company’s website at www.medcleantechnologies.com.

 

Audit Committee Financial Expert

 

The Company has a standing audit committee comprised of two members of its board of directors, Ms. Nelson and Mr. Gandsman. Ms. Nelson serves as a member of the committee and acts as its “audit committee financial expert” as that term is used in Item 407 of Regulation S-K (17 CFR 229.407) and is “independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.

 

Item 11.  Executive Compensation.

 

Director Compensation

 

The following table sets forth the aggregate cash and other compensation paid by the Company to its independent directors for the year ended December 31, 2011.

Name  Fees earned or paid in cash
($)
   Stock Awards
($)
   Option Awards
($) (1)
 
Jay Bendis   0    -   $25,950 
Elan Gandsman   0    -   $17,300 
Ronald LaMorte (2)   0    -   $4,325 
Constance A. Nelson   0    -   $4,833 
Robert Hockett(3)   0    -   $11,600 

 

Directors also receive customary reimbursement for out-of-pocket expenses. Payments are made on quarterly basis.

 

(1)In 2011, we issued 7,500,000 options to purchase our common stock at $0.0346 to Bendis; 5,000,000 options to purchase our common stock at $0.003460 to Gandsman and, LaMorte; 3,333,333 options to purchase our common stock at $0.003480 to Hockett and 2,083,333 options to purchase our common stock at $0.00232 to Nelson.
(2)Mr. LaMorte resigned from his position as a director of the Company on March 31, 2011
(3)Mr. Hockett resigned from his position as a director of the Company on March 2, 2012.

 

23
 

 

Executive Compensation

 

The following table sets forth all compensation we awarded or paid to all individuals serving as our chief executive officer and those individuals who received compensation in excess of $100,000 per year for the fiscal year ended December 31, 2011 (collectively, the “Named Executives”). Summary compensation is for the three fiscal years ended December 31, 2011:

 

                  Other     Option        
Name and Principal     Salary     Bonus     Compensation     Awards     Total  
Position Year   ($)     ($)     ($)     ($)     ($)  
Scott Grisanti (1) 2011   $ -     $ -     $ -     $ -     $ -  
former President, Chief 2010   $       $ -     $       $       $    
Executive Officer 2009   $ 108,462     $ -     $ 6,252     $ 345,728     $ 460,442  
                                           
Damien Tanaka (2) 2011   $ -     $ -     $ -     $ -     $ -  
former Chief Development 2010   $       $ -     $       $       $    
Officer 2009   $ 138,000     $ -     $ 10,571     $ 104,510     $ 253,081  
                                           
Kevin Dunphy (3) 2011   $ -     $ -     $ -     $ -     $ -  
former Chief Financial Officer 2010   $       $ -     $       $       $    
  2009   $ 63,269     $ -     $ 6,547     $ 35,832     $ 105,648  
                                           
David J. Laky (4) 2011   $ 200,000     $ -     $ 7,200     $ -     $ 207,200  
President/Chief Executive 2010   $ 180,962     $ -     $ 7,200     $ -     $ 188,162  
Officer 2009   $ 94,399     $ -     $ 5,003     $ 297,586     $ 396,928  
                                           
Cheryl Sadowski (5) 2011   $ 160,000     $ -     $ 7,200     $ -     $ 167,200  
Chief Financial Officer 2010   $ 145,808     $ -     $ 7,200     $ -     $ 153,808  
  2009   $ 78,216     $ -     $ 5,003     $ 297,586     $ 380,805  

 

(1) Effective September 2, 2008 the Company and Mr. Grisanti entered into a three-year employment agreement, which provided that he would act as President and Chief Executive Officer of the Company and Aduromed at a minimum annual base salary of $300,000, to be reviewed each year by the board of directors, plus a cash bonus based upon the Company’s attaining financial objectives determined annually by the board, not to exceed 60% of his base salary.  Effective as of November 9, 2009, Mr. Grisanti’s employment agreement was terminated without cause by mutual consent of the Company and Mr. Grisanti.

 

In 2008, Mr. Grisanti was awarded 16,000,000 options to purchase the Company’s common stock at $0.025 per share for five years, subsequently repriced to $0.004 in 2009.  In 2009 Mr. Grisanti was awarded 110,000,000 options to purchase the Company’s common stock at $0.004 for five years.

 

For the year 2009 compensation, includes perquisites for the use of a motor vehicle amounting to $7,000 and $6,252 respectively. 

 

(2) The Company had a five-year employment agreement with Mr. Tanaka, dated September 30, 2005, which provided that he would act as President and Chief Executive Officer of the Company and Aduromed at a minimum annual base salary of $250,000, to be reviewed each year by the board of directors, plus a cash bonus based upon the Company’s attaining financial objectives determined annually by the board, not to exceed 100% of his base salary. Effective September 2, 2008 the Company and Mr. Tanaka entered into a three-year employment agreement, which provided that he would act as Chief Development Officer of the Company and Aduromed at a minimum annual base salary of $260,000, to be reviewed each year by the board of directors, plus a cash bonus based upon the Company’s attaining financial objectives determined annually by the board, not to exceed 25% of his base salary. Mr. Tanaka retired as Chief Development Officer of the Company and Aduromed and as a director of the Company and Aduromed effective December 31, 2008. The Company agreed to pay Mr. Tanaka his base salary and certain benefits through December 31, 2009.

 

24
 

 

In 2008, Mr. Tanaka was awarded 10,000,000 options to purchase the Company’s common stock at $0.025 per share for five years, subsequently repriced to $0.004 in 2009.  In 2009 Mr. Tanaka was awarded 35,000,000 options to purchase the Company’s common stock at $0.004 for five years.

 

For the years 2009 and 2008 compensation, includes perquisites covering supplemental term life insurance amounting to $2,070 and $8,279, use of a motor vehicle $3,044.52 and $2,872, disability benefits amounting to $5,457 and $20,701 and club membership amounting to $0 and $8,146 respectively. Mr. Tanaka did not receive any separate compensation for acting as a director of the Company or Aduromed.

 

(3) The Company had a five-year employment agreement with Mr. Dunphy, dated September 30, 2005, which provided that he would act as Chief Financial Officer of the Company and Aduromed at a minimum annual base salary of $150,000, to be reviewed each year by the board of directors, plus a cash bonus based upon the Company’s attaining financial objectives determined annually by the board, not to exceed 100% of his base salary. Effective August 4, 2008, the Company and Mr. Dunphy entered into a one-year employment agreement, which provided that he would act as Chief Financial Officer of the Company and Aduromed at a minimum annual base salary of $175,000, to be reviewed each year by the board of directors, plus a cash bonus based upon the Company’s attaining financial objectives determined annually by the board, not to exceed 25% of his base salary. Effective as of August 4, 2009 Mr. Dunphy’s employment agreement was not renewed.

 

In 2008, Mr. Dunphy was awarded 5,000,000 options to purchase the Company’s common stock at $0.025 per share for five years, subsequently repriced to $0.004 in 2009.  In 2009 Mr. Dunphy was awarded 12,000,000 options to purchase the Company’s common stock at $0.004 for five years.

 

 For the years 2009 and 2008 compensation, includes perquisites covering supplemental term life insurance amounting to $735 and $2,858, use of a motor vehicle amounting to $2,603 and $940, disability benefits amounting to $3,208.49 and $11,444 and club membership amounting to $0 and $4,432 respectively. Mr. Dunphy did not receive any separate compensation for acting as a director of the Company or Aduromed.

 

(4) Mr. Laky was appointed to the positions of President and Chief Executive Officer of the Company effective November 9, 2009. Prior to such appointment Mr. Laky was the Company’s Senior Vice President of Client Services and Technology since September 2008.

 

By the terms of his employment agreement, Mr. Laky serves in an at will capacity. Mr. Laky’s employment agreement contains covenants of confidentiality and assignments of proprietary intellectual property rights.

 

In 2008, Mr. Laky was awarded 6,000,000 options to purchase the Company’s common stock at $0.018 per share for five years, subsequently repriced to $0.004 in 2009.  In 2009 Mr. Laky was awarded 50,000,000 options to purchase the Company’s common stock at $0.004 for five years and 26,961,178 options to purchase the Company’s common stock at $.00844 for five years.

 

(5) Ms. Sadowski was appointed to the position of Chief Financial Officer of the Company effective August 4, 2009. Prior to such appointment Ms. Sadowski was the Company’s Vice-President and Controller since October 2008.

 

By the terms of her employment agreement, Ms. Sadowski serves in an at will capacity. Ms. Sadowski’s employment agreement contains covenants of confidentiality and assignments of proprietary intellectual property rights.

 

25
 

 

In 2008, Ms. Sadowski was awarded 4,000,000 options to purchase the Company’s common stock at $0.020 per share for five years, subsequently repriced to $0.004 in 2009.  In 2009 Ms. Sadowski was awarded 50,000,000 options to purchase the Company’s common stock at $0.004 for five years and 26,961,178 options to purchase the Company’s common stock at $.00844 for five years.

 

The dollar amount of the option awards reflects the full fair value of the grant at the date of issuance and is recognized for financial statement reporting purposes with respect to each fiscal year over the vesting terms in accordance with ASC 718-10.

 

We do not have any annuity, retirement, pension or deferred compensation plan or other arrangements under which any executive officers are entitled to participate without similar participation by other employees.

 

 

  Option Awards
A B   C     D   E   F   G
Name Grant Date  

Number of

Securities

Underlying

Unexercised

Options

Exercisable

   

Number of

Securities

Underlying

Unexercised

Options

Unexercisable

 

Equity

Incentive Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options

 

Option Exercise

Price

 

Option

Expiration Date

S. Grisanti 8/4/2008     16,000,000       -       $ 0.004   8/1/2015
  5/1/2009     110,000,000         -       $ 0.004   5/1/2014
Total       126,000,000         -              
D. Tanaka                              
  8/4/2008     10,000,000       -       $ 0.004   12/31/2013
  5/1/2009     35,000,000               $ 0.004   5/1/2014
Total       45,000,000         -              
K. Dunphy                              
  8/4/2008     4,333,334       -       $ 0.004   8/4/2013
  5/1/2009     12,000,000         -       $ 0.004   5/1/2014
Total       16,333,334       -              
David J Laky 8/4/2008     6,000,000               $ 0.004   8/4/2016
  5/1/2009     50,000,000       -       $ 0.004   5/1/2014
  11/11/2009     26,961,178               $ .00844   11/11/2016
Total       82,961,178       ,              
Cheryl Sadowski 10/31/2008     4,000,000               $ 0.004   10/31/2016
  5/1/2009     50,000,000               $ 0.004   5/1/2014
  11/11/2009     26,961,178       ,       $ .00844   11/11/2016
Total       80,961,178       ,              

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following tables and footnotes set forth as of May 10, 2012, the number and percentage of the outstanding shares of Common Stock, on a fully diluted basis, which, according to the information supplied to the Company, were beneficially owned by (i) each person who is currently a director of MedClean, (ii) each executive officer, (iii) all current directors and executive officers of MedClean as a group, and (iv) each person who, to the knowledge of the Company, is the beneficial owner of more than 5% of the outstanding Common Stock.

 

26
 

  

Except as otherwise noted, the persons named in the table have sole voting and dispositive power with respect to all shares beneficially owned, subject to community property laws where applicable.

 

Security Ownership of Beneficial Owners of More than 5% of Each Class of MCLN’s Voting Securities

 

Title of   Name and Address of   Amount and Nature of     Percentage of  
Security   Beneficial Owner   of Beneficial Ownership     Class  
Common Stock  

Joseph Esposito (1)

310 Stoke Park Road

Bethlehem, PA 18017

    147,058,500       5.17 %
                     
Common Stock  

Scott Grisanti (2)

310 Stoke Park Road

Bethlehem, PA 18017

    172,000,000       6.05 %

    

(1)Consists of (i) 8,900,000 shares of record owned by E4 LLC, which is controlled by Mr. Esposito, (ii) 25,538,500 shares of record owned by Mr. Esposito’s IRA account, (iii) 620,000 shares issuable upon exercise of warrants held by E4 LLC at an exercise price of $0.0075 per share, (iv) (v) 112,000,000 shares issuable upon exercise of options held by E4 LLC at an exercise price of $0.004 per share.

 

(2)Consists of (i) 20,000,000 shares owned of record, (ii) 10,000,000 shares issuable upon exercise of warrants at an exercise price of $0.0075 per share, (iii) 16,000,000 shares issuable upon exercise of warrants at an exercise price of $0.004 per share, (iv) 16,000,000 shares issuable upon exercise of options at an exercise price of $0.004 per share, and (v) 110,000,000 shares issuable upon exercise of options held at an exercise price of $0.004 per share.

 

27
 

 

 

Security Ownership of Management (Directors and Executive Officers)

  

Title of   Name and Address of  Amount and Nature of   Percentage of 
Security   Beneficial Owner  of Beneficial Ownership   Class 
Common Stock   Scott Grisanti (1)
310 Stoke Park Road, Bethlehem PA 18017
  172,000,000   6.09%
             
Common Stock   David Laky (2)
310 Stoke Park Road, Bethlehem PA 18017
  83,021,178   2.94%
             
Common Stock   Cheryl Kaine Sadowski (3)
310 Stoke Park Road, Bethlehem PA 18017
  80,961,178   2.87%
             
Common Stock   Jay S. Bendis (4)
554 N Church St, Charlotte, NC 28202
  20,219,250   .72%
             
Common Stock   Elan Gandsman (5)
135 College Street New Haven, CT 06510
  12,033,333   .043%
             
Common Stock   Constance Nelson(6)
310 Stoke Park Road, Bethlehem PA 18017
  2,083,333   .07%
             
Common Stock   All Directors and Executive Officers As a Group  370,318,272   12%

 

(1)Consists of (i) 20,000,000 shares owned of record, (ii) 10,000,000 shares issuable upon exercise of warrants at an exercise price of $0.0075 per share, (iii) 16,000,000 shares issuable upon exercise of warrants at an exercise price of $0.004 per share, (iv) 16,000,000 shares issuable upon exercise of options at an exercise price of $0.004 per share, and (v) 110,000,000 shares issuable upon exercise of options held at an exercise price of $0.004 per share.

 

(2)Consists of (i) 60,000 shares of record, (ii) 56,000,000 shares issuable upon exercise of options held at an exercise price of $0.004 per share, and (iii) 26,961,178 shares issuable upon exercise of options held at an exercise price of $0.00844 per share.

 

(3)Consists of (i) 54,000,000 shares issuable upon exercise of options held at an exercise price of $0.004 per share, and (ii) 26,961,178 shares issuable upon exercise of options held at an exercise price of $0.00844 per share.

 

(4)Consists of (i) 269,250 shares held of record and (ii) 4,950,000 shares issuable upon exercise of options at an exercise price of $0.004 per share (iii) 7,500,000 shares issuable upon exercise of options at an exercise price of $.028 and (iv) 7,500,000 shares issuable upon exercise of options at an exercise price of $.003460.

 

(5)Consists of 4,950,000 shares issuable upon exercise of options at an exercise price of $0.004 per share (ii) 5,000,000 shares issuable upon exercise of options at an exercise price of $.028 and (iii) 5,000,000 shares issuable upon exercise of options at an exercise price of $.003460

 

(6)Consists of 2,083,333 shares issuable upon exercise of options at an exercise price of $0.002320 per share.
28
 

  

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

 

During 2011, the following directors of the Company were “independent” in accordance with standards applied by the NASDAQ: Jay Bendis, Elan Gandsman, Ronald A. LaMorte, Robert Hockett and Constance Nelson. All members of the Compensation Committee and the Nominating Committee are independent in accordance with standards applied by the NASDAQ. NASDAQ further requires that members of the Audit Committee satisfy the standards for independence set forth in the Sarbanes-Oxley Act of 2002 (“SOX”). All members of the Audit Committee were independent pursuant to the standards for independence set forth in SOX during 2011.

 

For each director identified as independent above, there were no transactions, relationships or arrangements not disclosed pursuant to Item 404(a) that were considered by the board of directors under the applicable independence definitions in determining that the director is independent.

 

Item 14.  Principal Accountant Fees and Services.

 

Summary of Principal Accountant Fees for Professional Services Rendered

 

The following table presents the aggregate fees for professional audit services and other services rendered by Child, Van Wagoner & Bradshaw, PLLC, our independent registered public accountants in 2011 and 2010.

 

   Fiscal Year Ended    Fiscal Years
Ended
   December 31, 2011    December 31, 2010  
Audit and          
Audit Related Fees  $4,000   38,700 
Tax Fees  $-   $- 
All Other Fees  3,500(1)  29,500(2)

  

(1)For 2011, all other fees paid to Child Van Wagoner & Bradshaw., PLLC are related to the review of our Form S-1 and post effective Form S-1.

 

(2)For 2010, all other fees paid to Child Van Wagoner & Bradshaw, PLLC are related to the review of our Form S-1 and post effective Form S-1.

 

The following table presents the aggregate fees for professional audit services and other services rendered by Rosenberg Rich Baker Berman & Co, our independent registered public accountants in 2011.

   Fiscal Year Ended   Fiscal Years
Ended
 
   December 31, 2011   December 31, 2010 
Audit and          
Audit Related Fees  $38,500    
Tax Fees  $-   $- 
All Other Fees  $   $ 

 

Item 15. Exhibits, Financial Statement Schedules.

 

All reference to Registrant’s Forms 8-K, 10-KSB, 10-K, 10-QSB, 10-Q include reference to File No. 000-03125.

 

Exhibit No.   Description
     
2.1   Agreement and Plan of Merger, dated as of December 7, 2005 by and among the Registrant, GD MergerSub, Inc. and Aduromed (incorporated by reference to Exhibit 2.1 to Registrant’s Form 8-K, filed December 12, 2005).

 

29
 

 

2.2   Amended and Restated Agreement and Plan of Merger, dated as of January 23, 2006, by and among the Registrant, GD MergerSub, Inc., GD MergerSub II, Inc. and Aduromed (incorporated by reference to Exhibit 2 to Registrant’s Form 8-K/A, filed January 31, 2006).
     
2.3   Certificate of Merger of GD MergerSub II, Inc. with and into Aduromed, filed January 23, 2006 with Delaware Secretary of State (incorporated by reference to Exhibit 2 to Registrant’s Form 8K/A, filed January 31, 2006).
     
3.1   Registrant’s Certificate of Incorporation (incorporated by reference to Exhibit A to Appendix I to Registrant’s Proxy Statement on Schedule 14A, filed July 24, 2000).
     
3.2   Registrant’s Amendment to Certificate of Incorporation dated December 12, 2005 (incorporated by reference to Exhibit 3.2 to Registrant’s Form 10-KSB, filed April 21, 2006).
     
3.3   Registrant’s Amendment to Certificate of Incorporation dated January 29, 2007 (incorporated by reference to Exhibit 3 to Registrant’s Form 8-K, filed January 30, 2007).
     
3.4   Registrant’s Amendment to Certificate of Incorporation dated April 16, 2007 (incorporated by reference to Exhibit 3 to Registrant’s Form 8-K, filed April 16, 2007).
     
3.5   Registrant’s Amendment to Certificate of Incorporation dated September 26, 2007 (incorporated by reference to Exhibit 3 to Registrant’s Form 8-K, filed September 26, 2007).
     
3.6   Registrant’s Amendment to Certificate of Incorporation dated August 4, 2008 (incorporated by reference to Exhibit 3.01 to Registrant’s Form 8-K, filed August 6, 2008).
     
3.7   Registrant’s Certificate of Ownership and Merger dated January 2, 2009 (incorporated by reference to Exhibit 3 to Registrant’s Form 8-K, filed January 6, 2009).
     
3.8   Registrant’s Amendment to Certificate of Incorporation dated April 21, 2009 (incorporated by reference to Exhibit 3 to Registrant’s Form 8-K, filed April 22, 2009).
     
3.9   Certificate of Designation of Series C Preferred Stock (previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on December 4, 2009 and incorporated by reference herein).
     
3.10   Registrant’s Bylaws (incorporated by reference to Registrant’s Proxy Statement on Schedule 14A filed July 14, 2000).
     
4.1   Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.04 to Registrant’s Form 8-K, filed August 6, 2008).
     
4.2   Warrant to Purchase Common Stock (previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on December 4, 2009 and incorporated by reference herein).
     
10.1   Consulting Agreement dated August 4, 2008, by and between Registrant, Aduromed Corporation and Mr. Joseph Esposito (incorporated by reference to Exhibit 10.01 to Registrant’s Form 8-K, filed August 8, 2008).
     
10.2   Amended Employment Agreement dated August 4, 2008, by and between Registrant, Aduromed Corporation and Mr. Kevin T. Dunphy (incorporated by reference to Exhibit 10.03 to Registrant’s Form 8-K, filed September 4, 2008).
     
10.3   Employment Agreement dated September 2, 2008, by and between Registrant, Aduromed Corporation and Mr. Scott Grisanti (incorporated by reference to Exhibit 10.01 to Registrant’s Form 8-K, filed September 4, 2008).
30
 

  

10.4   Employment Agreement dated September 2, 2008, by and between Registrant, Aduromed Corporation and Mr. Damien Tanaka (incorporated by reference to Exhibit 10.01 to Registrant’s Form 8-K, filed September 4, 2008).
     
10.5   Stock Option Agreement dated August 4, 2008, between Registrant and Mr. Joseph Esposito (incorporated by reference to Exhibit 4.01 to Registrant’s Form 8-K, filed August 8, 2008).
     
10.6   Stock Option Agreement dated August 4, 2008, between Registrant and Mr. Damien R. Tanaka (incorporated by reference to Exhibit 4.02 to Registrant’s Form 8-K, filed August 8, 2008).
     
10.7   Stock Option Agreement dated August 4, 2008, between Registrant and Mr. Damien R. Tanaka (incorporated by reference to Exhibit 4.02 to Registrant’s Form 8-K, filed August 8, 2008).
     
10.8   Amended and Restated Stock Option Agreement, dated as of January 23, 2006, among Registrant, Aduromed Corporation and Damien R. Tanaka. (Incorporated by reference to Exhibit 10.6 to Registrant’s Form SB-2/A, filed August 14, 2006).
     
10.9   Amended and Restated Stock Option Agreement, dated as of January 23, 2006, between Registrant, Aduromed Corporation and Kevin T. Dunphy (incorporated by reference to Exhibit 10.8 to Registrant’s Form SB-2/A, filed August 14, 2006).
     
10.10   Stock Option Agreement dated August 4, 2008, between Registrant and Mr. Scott Grisanti (incorporated by reference to Exhibit 4.01 to Registrant’s Form 8-K, filed September 4, 2008).
     
10.11   Lease Agreement, dated February 3, 2006, by and between Aduromed Corporation and Cheyenne Company, LLC, relating to premises at 3 Trowbridge Drive, Bethel, CT 06801 (incorporated by reference to Exhibit 10.15 to Registrant’s Form SB-2/A, filed November 9, 2006).
     
10.12   Employment Agreement Amendment, dated as of May 1, 2009, by and between MedClean Technologies, Inc. and Mr. Scott Grisanti (incorporated by reference to Exhibit 10.01 to Registrant’s Form 8-K, filed May 5, 2009).
     
10.13   Consultant Agreement Amendment, dated as of May 1, 2009, by and between MedClean Technologies, Inc. and Mr. Joseph Esposito (incorporated by reference to Exhibit 10.02 to Registrant’s Form 8-K, filed May 5, 2009).
     
10.14   Employment Agreement Amendment, dated as of May 1, 2009, by and between MedClean Technologies, Inc. and Mr. Kevin Dunphy (incorporated by reference to Exhibit 10.03 to Registrant’s Form 8-K, filed May 5, 2009).
     
10.15   Amended and Restated Equity Credit Agreement, dated as of August 5, 2010, by and between MedClean Technologies, Inc. and Southridge Partners II (incorporated by reference to Exhibit 10.15 to Registrant’s Form S-1 Registration Statement, filed August 6, 2010).
     
10.16   Amended and Restated Registration Rights Agreement, dated as of August 5, 2010, by and between MedClean Technologies, Inc. and Southridge Partners II (incorporated by reference to Exhibit 10.16 to Registrant’s Form S-1 Registration Statement, filed August 6, 2010).
     
10.17   Master Restructuring Agreement dated July 10, 2008 (incorporated by reference to Exhibit 10.17 to Registrant’s Form S-1 Registration Statement, filed August 6, 2010).
     
31.1   Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
     
31.2   Certification by the Principal Accounting Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*

 

31
 

 

32.1   Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
     
32.2   Certification by the Principal Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

 

* Filed herewith

 

32
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  MEDCLEAN TECHNOLOGIES, INC.
     
Dated: May 15, 2012 By: /s/ David Laky
  David Laky
  President and CEO

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons of the Registrant and in the capacities and on the dates indicated have signed this report below:

 

Dated: May 15, 2012 /s/ David Laky
  David Laky
  President, CEO and Director
  (Principal Executive Officer)
   
Dated: May 15, 2012 /s/ Cheryl K Sadowski
  Cheryl K. Sadowski
  Treasurer and CFO
  (Principal Accounting Officer)
   
Dated: May 15, 2012 /s/ Jay S. Bendis
  Jay S. Bendis, Chairman
   
Dated: May 15, 2012 /s/ Scott Grisanti
  Scott Grisanti, Director
   
Dated: May 15, 2012 /s/ Elan Gandsman
  Elan Gandsman, Director
   
Dated: May 15, 2012 /s/ Constance Nelson
  Constance Nelson, Director

 

33
 

 

MEDCLEAN TECHNOLOGIES, INC.

FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

INDEX   Page 
      
Report of Independent Registered Public Accounting Firm   F-1~ F2 
      
Balance Sheets as of December 31, 2011 and 2010   F-3 
      
Statements of Operations for the years ended December 31, 2011 and 2010   F-4  
      
Statements of Changes in Stockholders’ Equity (Deficit) for the two years ended December 31, 2011   F-5  
      
Statements of Cash Flows for the years ended December 31, 2011 and 2010   F-6  
      
Notes to the Financial Statements   F-7  

 

 
 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Audit Committee

MedClean Technologies, Inc.

Bethel, Connecticut

   

We have audited the balance sheet of MedClean Technologies, Inc. (the Company) as of December 31, 2010, and the related statements of operations, changes in stockholders’ equity (deficit) and cash flows for the year ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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 audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MedClean Technologies, Inc. as of December 31, 2010, and the results of its operations and its cash flows for the year ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred substantial recurring losses. This raises substantial doubt about the Company’s ability to meet its obligations and to continue as a going concern. Management’s plans in regard to this matter are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Child, Van Wagoner & Bradshaw, PLLC

Salt Lake City, Utah

March 23, 2011, except for Note 5, as to which the date is May 15, 2012.

 

 

 

 

F-1
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of MedClean Technologies, Inc.

 

We have audited the accompanying balance sheet of MedClean Technologies, Inc. as of December 31, 2011 and the related statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended. MedClean’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

  

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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 financial statements referred to above present fairly, in all material respects, the financial position of MedClean Technologies, Inc. as of December 31, 2011 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

  

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company has suffered losses from operations and has a working capital deficiency as of December 31, 2011. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Rosenberg Rich Baker Berman & Company

 

Somerset, New Jersey

May 15, 2012

 

F-2
 

 

MEDCLEAN TECHNOLOGIES, INC.

BALANCE SHEETS

DECEMBER 31, 2011 AND 2010

 

   2011   2010 
       (restated) 
ASSETS          
Current assets          
Cash  $26,009   $182,046 
Accounts receivable, net   170,585    202,646 
Revenues in excess of billings   7,679    7,679 
Inventory   243,685    332,833 
Prepaid expenses   26,627    39,014 
Total current assets   474,585    764,218 
           
Property, plant and equipment, net   15,951    123,339 
           
Other assets:          
Long term inventory   158,993    463,844 
Deposits   6,368    32,808 
           
Total assets  $655,897   $1,384,209 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current liabilities          
Accounts payable and accrued liabilities  $432,000   $299,386 
Payroll liabilities   48,157    30,439 
Accrued liabilities, related party   517,342    714,090 
Deferred revenue   505,189    550,472 
Billings in excess of revenue   51,332    51,332 
Notes payable, including interest   238,047    226,347 
Total current liabilities   1,792,067    1,872,066 
           
Long term debt          
Derivative liability   127,021    121,389 
Convertible notes, net of debt discount of $207,791 and $304,795   54,009    38,250 
Total liabilities   1,973,097    2,031,705 
           
Commitments and contingencies   -    - 
           
Stockholders' deficit          
Preferred stock, $0.0001 par value, 60,000,000 shares authorized, none issued outstanding          
Common stock, $0.0001 par value; 3,500,000,000 shares authorized; 1,640,311,420 and 970,185,420 shares issued and outstanding as of December 31, 2011 and 2010, respectively   164,031    97,019 
Additional paid in capital   32,775,738    29,136,349 
Accumulated deficit   (34,256,969)   (29,880,864)
Total stockholders' deficit:   (1,317,200)   (647,496)
           
Total liabilities and stockholders' deficit  $655,897   $1,384,209 

 

See the accompanying notes to these financial statements

 

F-3
 

 

MEDCLEAN TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS 

 

   Year ended December 31, 
   2011   2010 
       (restated) 
Revenues          
Contract revenue earned  $1,010,200   $- 
Sales and service revenues   707,521    896,993 
Total revenues   1,717,721    896,993 
           
Cost of sales          
Contract cost of sales   617,961    - 
Sales and service cost of sales   374,008    426,698 
Total cost of sales   991,969    426,698 
           
Gross profit   725,752    470,295 
           
Operating expenses          
Salaries and wages   1,970,045    2,860,805 
General and administrative expenses   1,559,213    1,836,735 
Depreciation   50,057    89,652 
Total operating expenses   3,579,315    4,787,192 
           
Loss from operations   (2,853,563)   (4,316,897)
           
Other income and expenses          
Interest and other income   280    350 
Gain (loss) on change in fair value of derivatives   (83,095)   395,474 
Loss on disposal of property and equipment   (63,025)   - 
Interest expense   (1,376,702)   (496,477)
           
Net Loss before income taxes   (4,376,105)   (4,417,550)
           
Provision for income taxes (benefit)   -    - 
           
Net Loss  $(4,376,105)  $(4,417,550)
           
Loss per common share, basic and fully diluted  $(0.00)  $(0.00)
           
Weighted average common shares outstanding, basic and fully diluted   1,375,353,615    985,383,502 

 

See the accompanying notes to these financial statements

 

F-4
 

 

MEDCLEAN TECHNOLOGIES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE TWO YEARS ENDED DECEMBER 31, 2011

 

   Preferred Stock   Common Stock   Additional   Accumulated     
   Shares   Amount   Shares   Amount   Paid in Capital   Deficit   Total 
Balance, December 31, 2009   -   $-    675,478,445   $67,548   $25,411,906   $(25,463,314)  $16,140 
Common stock issued in exchange for exercise of warrants and options   -    -    40,872,585    4,087    216,538    -    220,625 
Common stock issued in exchange for services rendered   -    -    16,000,000    1,600    226,040    -    227,640 
Common stock issued for cash under put agreement   -    -    120,184,390    12,019    602,981    -    615,000 
Common stock issued in settlement of convertible notes   -    -    117,650,000    11,765    345,190    -    356,955 
Fair value of vested options for services rendered   -    -    -    -    2,060,985    -    2,060,985 
Beneficial conversion feature relating to convertible promissory notes   -    -    -    -    553,195    -    553,195 
Reclassification of conversion option relating to notes payable from equity to liability (restated)   -    -    -    -    (280,486)   -    (280,486)
Net loss (restated)   -    -    -    -    -    (4,417,550)   (4,417,550)
Balance, December 31, 2010 (restated)   -    -    970,185,420    97,019    29,136,349    (29,880,864)   (647,496)
Common stock issued in settlement of convertible notes   -    -    604,672,024    60,467    1,624,259    -    1,684,726 
Common stock issued for cash under put agreement             65,404,419    6,540    154,289    -    160,829 
Common stock issued in exchange for exercise of warrants and options   -    -    50,000    5    195    -    200 
Beneficial conversion feature relating to convertible promissory notes   -    -    -    -    240,091    -    240,091 
Net reclassifications of conversion option relating to notes payable from liability to equity   -    -    -    -    415,756    -    415,756 
Fair value of vested options for services rendered   -    -    -    -    1,196,713    -    1,196,713 
Fair value of warrants issued for services rendered   -    -    -    -    8,086    -    8,086 
Net loss   -    -    -    -    -    (4,376,105)   (4,376,105)
Balance, December 31, 2011   -   $-    1,640,311,863   $164,031   $32,775,738   $(34,256,969)  $(1,317,200)

  

See the accompanying notes to these financial statements

 

F-5
 

 

MEDCLEAN TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

  

   Year ended December 31, 
   2011   2010 
       (restated) 
Cash flows from operating activities:          
Net loss  $(4,376,105)  $(4,417,550)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation   54,058    95,031 
Amortization of debt discount   1,012,004    248,400 
Loss on disposal of property and equipment   63,025    - 
Fair value of common stock, options and warrants issued for services rendered   1,204,800    2,288,625 
Non cash interest expense relating to convertible debt   351,864    236,377 
Loss (gain) on change in fair value of derivative liability   83,095    (395,474)
(Increase) decrease in:          
Accounts receivable   32,061    (58,529)
Inventory   393,999    18,957 
Prepaid expenses and other   38,827    (6,368)
Increase (decrease) in:          
Accounts payable   102,025    105,344 
Payroll liabilities   17,718    22,176 
Accounts payable, accrued and payroll liabilities, related party   -    272,945 
Deferred revenue   (45,283)   (64,737)
Billings in excess of revenue   -    (227,632)
Net cash used in operating activities   (1,067,913)   (1,882,435)
           
Cash flows from investing activities:          
Purchase of equipment   (9,694)   (5,569)
Net cash used in investing activities   (9,694)   (5,569)
           
Cash flows from financing activities:          
Payments of related party loans   (154,459)   - 
Proceeds from issuance of put agreements   160,829    615,000 
Proceeds from exercise of options and warrants   200    220,625 
Proceeds from issuance of convertible notes   915,000    700,000 
Net cash provided by financing activities   921,570    1,535,625 
           
Decrease in cash and cash equivalents   (156,037)   (352,379)
           
Cash and cash equivalents, beginning of period   182,046    534,425 
           
Cash and cash equivalents, end of period  $26,009   $182,046 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Interest  $-   $1,198 
Taxes  $-   $- 
           
Non cash financing activities:          
Common stock issued in settlement of convertible notes  $1,684,726   $356,955 

 

See the accompanying notes to these financial statements

 

F-6
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A summary of the significant accounting policies applied in the presentation of the accompanying financial statements are as follows:

 

Basis and business presentation

 

The accompanying financial statements of MedClean Technologies, Inc. (“MCLN”) have been prepared in accordance with accounting principles generally accepted in the United States of America

 

Effective January 30, 2007, the Company changed its corporate name from General Devices, Inc. to Aduromed Industries, Inc. Effective January 23, 2006, the Company merged (the “Merger”) with Aduromed, whereby Aduromed became the wholly-owned subsidiary of the Company and the former holders of the equity in Aduromed became holders of equity in MCLN. Aduromed was the Company’s sole operating entity before it merged with and into the Company effective January 2, 2009.

 

Effective January 2, 2009, the Company changed its corporate name from Aduromed Industries, Inc. to MedClean Technologies, Inc. Also effective January 2, 2009, the Company merged its former wholly-owned subsidiary, Aduromed Corporation, with and into the Company.

 

MedClean is in the business of providing solutions for managing medical waste on-site including designing; selling, installing and servicing on-site (i.e. “ in-situ “) turnkey systems to treat regulated medical waste. The Company provides these systems to hospitals and other medical facilities as efficient, safe, cost effective and legally compliant solutions to incineration, off site hauling of untreated waste and other alternative treatment technologies and methodologies. The MedClean Series System is offered in three configurations: Containerized System, Mobile System and the Fixed System (our traditional fixed installation).

 

Reclassification

 

Certain reclassifications have been made to prior periods’ data to conform to the current year’s presentation.  These reclassifications had no effect on reported income or losses.

 

Estimates

 

The preparation of the accompanying financial statements, in conformity with generally accepted accounting principles, 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 revenue and expenses during the reporting periods. Actual results could differ from those estimates.

 

Revenue recognition

 

The Company’s revenue recognition policy is in accordance with the requirements of Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition,  (“SAB 104”), ASC Topic 605,  Accounting  for  Consideration  Given by a Vendor to a Customer (Including a Reseller of the Vendor’s  Products)  and other  applicable  revenue recognition  guidance and  interpretations.  System revenue is recognized at the date of shipment to customers when a formal  arrangement  exists,  the price is fixed  or  determinable,   the  delivery  is  completed,  no  other  significant obligations of the Company  exist and  collectability  is  reasonably  assured.

 

Deferred Revenues consist of cash received in advance for goods to be delivered at a future date.  The Company records the payments received from customers as a liability until the products are delivered.  Sales are recorded when the products are delivered 

 

Unearned Revenues consist of cash received in advance for goods to be delivered at a future date. The Company records the payments received from customers as a liability until the products are delivered. Sales are recorded when the products are delivered.

 

F-7
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.

 

The Company provides a one-year warranty on the systems it installs.  The Company also obtains a one-year warranty on the system components from the component manufacturer, thereby mitigating potential warranty costs.  Accordingly, the Company has accrued no reserve for warranty.  On the installed base after the warranty term has expired, the Company offers a maintenance agreement of one or more years to the customer.  The customer is billed for and pays for the maintenance agreement in advance.  Revenues from such maintenance agreements are recognized ratably over the lives of the maintenance agreements, with the excess of the amount collected over the amount recognized as deferred revenue.  At December 31, 2011 and 2010, the Company had $505,189 and $550,472, respectively, in deferred revenue from system installs and maintenance agreements.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

 

The Company maintains cash deposits with financial institutions, which from time to time may exceed federally insured limits.  The Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash.  

 

 Segment information

 

Accounting Standards Codification (“ASC”) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company applies the management approach to the identification of our reportable operating segment as provided in accordance with ASC. The information disclosed herein materially represents all of the financial information related to the Company’s principal operating segment.

 

Dependence on principal customer

During the year ended December 31, 2011, the Company made significant sales to two customers amounting to 65% of total revenues.

 

For 2012 and going forward, the Company does not anticipate that the loss of any one customer will have a significant adverse impact on the Company’s business.

 

Accounts Receivable

The Company assesses the realization of its receivables by performing ongoing credit evaluations of its customers’ financial condition.  Through these evaluations, the Company may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy.  The Company’s reserve requirements are based on the best facts available to the Company and are reevaluated and adjusted as additional information is received.  The Company’s reserves are also based on amounts determined by using percentages applied to certain aged receivable categories.  These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience.  Allowance for doubtful accounts for accounts and notes receivable was $24,097 as of December 31, 2011 and 2010, respectively.

 

F-8
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair value of financial instruments

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2011 and 2010.  The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and accounts payable.  Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

 

Debt

 

As described in Note 14, items recorded or measured at fair value on a recurring basis in the accompanying financial statements consisted of the debt derivative liabilities.

 

Long-Lived Assets

 

The Company has adopted ASC 360-10. ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

 

Inventory

 

The Company maintains an inventory, which consists primarily of component parts, spare parts and disposable goods. The average cost method is utilized in valuing the inventory, and is stated at the lower of cost or market.

 

Advertising Costs

 

The company expenses advertising costs as incurred.

 

Fixed Assets

 

The Fixed Asset Capitalization Policy consists of capitalizing assets valued at $1,000.00 or greater and having an estimated useful life of greater that one year.

 

Income Taxes

 

The Company has adopted ASC subtopic 740-10, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.

  

Recent accounting pronouncements

 

There were various updates recently issued by the Financial Accounting Standards Board, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which clarifies the wording and disclosures required in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), to converge with those used (to be used) in International Financial Reporting Standards (“IFRS”). The update explains how to measure and disclose fair value under ASC 820. However, the FASB does not expect the changes in this standards update to alter the current application of the requirements in ASC 820. The provisions of ASU 2011-04 are effective for public entities prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. Therefore, ASU 2011-04 is effective for the Company during effective January 1, 2012. The Company does not expect ASU 2011-04 to have a material effect on the Company’s results of operations, financial condition, and cash flows.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 changes the presentation of comprehensive income in the financial statements for all periods reported and eliminates the option under the current guidance that allows for presentation of other comprehensive income as part of the Statement of Stockholders’ Equity. The update proposes two options for the proper presentation of comprehensive income: 1) a single Statement of Comprehensive Income, which includes all components of net income and other comprehensive income; or 2) a Statement of Income followed immediately by a Statement of Comprehensive Income, which includes the summarized net income and all components of other comprehensive income. The provisions of ASU 2011-05 are effective for public entities retrospectively for annual periods, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. Therefore, ASU 2011-05 is effective for the Company on January 1, 2012. Although the provisions of this update could change the presentation of the financial statements of the Company, no material impact is expected on the Company’s results of operations, financial condition, and cash flows.

 

F-9
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 2 - GOING CONCERN MATTERS

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business.  The Company has incurred substantial recurring losses, which raises substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company has available cash and cash equivalents of approximately $26,009 at December 31, 2011, which it intends to utilize for working capital purposes and to continue developing its business.  To supplement its cash resources, the Company has secured alternative financing arrangements with two investment entities.  While the acquisition of cash through these programs is related to company performance, we believe we will have access to the necessary funds for us to execute our business plan.  However, we continue to incur significant operating losses that will result in the reduction of our cash position.  We cannot assure that we will be able to continue to obtain funding through the alternative financing arrangements and the lack thereof would have a material adverse impact on our business.  Moreover, any equity funding could be substantially dilutive to existing stockholders.  The aforementioned factors raise substantial doubt about our ability to continue as a going concern.  In the event the Company is unable to continue as a going concern, it may pursue a number of different substantial options, including, but not limited to, filing for protection under the federal bankruptcy code.

  

NOTE 3 - INVENTORIES

 

The following table summarizes total inventory as of December 31, 2011 and December 31, 2010:

 

   2011   2010 
Component & spare parts  $323,224   $767,425 
Consumables   70,477    29,252 
Advance payments   8,977    - 
Total inventory   402,678    796,677 
Less current portion   243,685    332,833 
Inventory, long term portion  $158,993   $463,844 

 

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at December 31, 2011 and 2010 are as follows:

   2011   2010 
Office Furniture  $15,783   $170,094 
Computers and Accessories   13,307    208,802 
Leasehold Improvements   9,425    135,380 
    38,515    514,276 
Accumulated Depreciation   22,564    390,937 
   $15,951   $123,339 

 

During the years ended December 31, 2011 and 2010, depreciation expense charged to operations was $54,058 and $95,031, respectively, of which $4,001 and $5,379 was included as part of cost of sales, respectively.

 

During the year ended December 31, 2011, the Company was able to terminate the lease on the 1st floor of its facilities in Bethel and as such recorded a loss on disposal of leasehold improvements and office furniture of $63,025 in the current period operations.

 

F-10
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 5 – RESTATEMENTS

 

During 2010, in connection with the issuance of convertible notes, the Company had originally recorded the conversion option embedded feature as an equity (beneficial conversion feature) instrument.  Subsequently, the Company determined that there is a possibility of exceeding their common shares authorized when considering the number of possible shares that may be issuable to satisfy settlement provisions of these agreements after consideration of all existing instruments that could be settled in shares.  As such, these restatements reflect the correction in accounting and to properly record the related derivative liability:

  

Balance sheet

December 31, 2010

 

   Previously            
   Reported   Adjustment      Restated 
Assets (unchanged)  $1,384,209   $-       $1,384,209 
                    
Liabilities and Stockholders’ Deficit                   
Current liabilities (unchanged)  $1,872,066   $-       $1,872,066 
                    
Long term debt:                   
Derivative liability   -    121,389    (a)    121,389 
Convertible notes   38,250    -        38,250 
                    
Stockholders’ deficit                   
Preferred stock   -    -        - 
Common stock   97,019    -        97,019 
Additional paid in capital   29,416,835    (280,486)   (b)    29,136,349 
Accumulated deficit   (30,039,961)   159,097    (c)    (29,880,864)
                    
Total liabilities and stockholders’ deficit  $1,384,209   $-       $1,384,209 

 

(a)   Record the fair value of derivative liability as of December 31, 2010.
   
(b)   Reclassify the initial fair value of the conversion option from equity to liability, and recognize conversions of notes with underlying derivative liability.
   
(c)   Net PL effect from change in derivative liability of $395,472 and interest expense relating to derivative features underlying convertible debt of $(236,376).

 

F-11
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

Statement of Operations

Year ended December 31, 2010

 

   Previously             
   Reported   Adjustment   Ref   Restated 
Revenues  $896,993   $-        $896,993 
Cost of sales   426,698    -         426,698 
  Gross profit   470,295              470,295 
                     
Operating expenses (unchanged)   4,787,192    -         4,787,192 
                     
Net loss from operations   (4,316,897)   -         (4,316,897)
                     
Other income (expense)                    
Interest and other income   350    -         350 
Gain on change in fair value of derivative   -    395,474    (a)    395,474 
Interest expense   (260,100)   (236,377)   (b)    (496,477)
                     
Net Loss  $(4,576,647)  $159,097        $(4,417,550)
                     
Loss per common stock, basic and fully diluted  $(0.00)  $(0.00)       $(0.00)
                     
Weighted average number of shares outstanding, basic and fully diluted   985,383,502    985,383,502         985,383,502 

 

(a)   Mark to market adjustment of the derivative liability
   
(b)   Interest expense relating to derivative features underlying convertible notes

 

NOTE 6 – BACKLOG AND CONTRACTS IN PROCESS

 

Backlog at December 31, 2011, was $1,047,100, compared to $2,116,045 at December 31, 2010.  Once work commences, revenue is recognized upon delivery of the system or completion of the work.  Prior to 2009, revenue was recognized on a percentage of completion basis.  The Company has one remaining contract in which revenue will be recognized in this manner.  The outstanding backlog value of the percentage of completion contracts is $151,255.  The following table summarizes the percentage of completion of the Company's outstanding contracts:

  

 Contract    Revenue        Amounts    Revenues in  Billings in excess  
 Amount    Recognized    Backlog    Billed     excess of Billings  of Revenues  
 Outstanding contracts at December 31, 2011               
$315,194   $163,939   $151,255   $215,271   $7,679 $ 51,332  
                            
$315,194   $163,939   $151,255   $215,271    7,679 $ 51,332  
                            
Outstanding contracts at December 31, 2010                
$231,257   $29,347   $201,910   $21,668   $7,679 $ -  
$287,029   $163,939   $123,090   $215,271   $- $ 51,332  
                            
$518,286   $193,286   $325,000   $236,939   $7,679 $ 51,332  

 

F-12
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 7 – SHORT TERM NOTE PAYABLE

 

The Company’s outstanding unsecured note bears a 12% interest rate and matured on December 15, 2003.  Both parties have entered a verbal agreement to extend the maturity date on this note indefinitely.  No accrued interest has been paid on this note to date.  As of December 31, 2011 and 2010, the balance due was $238,047 and $226,347, respectively, including interest.

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

During 2011 and 2010, the Company had a consulting agreement with a former board member for corporate strategy and finance services.  The current agreement terminated on July 31, 2011.  During the year ended December 31, 2011 and 2010, the Company paid $136,000 and $-0-, respectively.  At December 31, 2011 and 2010, the Company accrued $72,000 and $288,000, respectively. As of December 31, 2011 and 2010, the balance due was $272,617 and 336,000, respectively.

 

In 2009, the Company accrued salary expense and provided a severance package for the former Chief Executive Officer and current board member.  The balance due at December 31, 2011 and 2010 was $244,725 and $378,090, respectively.

 

NOTE 9 – LINE OF CREDIT

 

On August 5, 2010, the Company and Southridge Partners II, LP (“Southridge”) entered into an Equity Credit Agreement (the “Equity Credit Agreement”). Pursuant to the Agreement, Southridge has agreed to provide the Company with up to $15,000,000 of funding during the 36-month period following the date a registration statement of the Company’s common stock is declared effective by the SEC (the “Equity Line”).  During this 36-month period, commencing on the date on which the SEC first declares effective our registration statement, the Company may request a draw down under the Equity Line by which the Company would sell shares of its common stock to Southridge, which is obligated to purchase the shares under the Equity Line Agreement. For each share of our common stock purchased under the Equity Credit Agreement, Southridge will pay ninety-five percent (95%) of the average of two lowest closing bid price of any two applicable trading days, consecutive or inconsecutive, during the five (5) trading day period (the “Valuation Period”) commencing the date a put notice (the “Put Notice”) is delivered to Southridge in a manner provided by the Equity Credit Agreement.  Subject to certain limitations and floor price reductions, the Company may, at its sole discretion, issue a Put Notice to Southridge and Southridge will then be irrevocably bound to acquire such shares.

 

During the year ended December 31, 2011, the Company “put” 65,404,419 shares of common stock for a total of $160,829.

 

NOTE 10 – CONVERTIBLE NOTES

 

On April 1, 2010, the Company issued a $600,000 Convertible Promissory Note (“Convertible Note 1”) that matures March 31, 2013, in exchange for a promissory note receivable.  Convertible Note 1 bears a onetime interest charge at a rate of 6% per annum and will be convertible into Company’s common stock at any time at a conversion rate equal to the higher of (a) 70% of the lowest closing price during the 20 trading days previous to the conversion or (b) par value of the Company’s common stock.

 

For presentation purposes, the Company offset the unpaid promissory note receivable against the carrying value of the Convertible Note 1.

 

The Company analyzed the conversion feature in accordance with Accounting Standards Codification subtopic 815-15 (“ASC 815-15”), Embedded Derivatives, and 815-40, Contracts in Entity’s Own Equity (“ASC 815-40’), and determined that upon issuance of Convertible Note 1, based on the terms of the underlying conversion feature, the Company could be required to issue shares in excess of the authorized share limit and therefore the embedded derivative must be bifurcated from the host contract and measured at fair value the extent that the conversion option would be classified as a liability as a standalone instrument.  The Company had more than one contract that could be subject to this treatment and could result in partial reclassification out of equity, and the Company chose the method of reclassification of contracts with the earliest inception date first.

 

F-13
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 10 – CONVERTIBLE NOTES (continued)

 

On April 1, 2010, the Company received an aggregate net proceeds of $275,000 under the promissory note receivable including interest. Based on the order of reclassification, the conversion option from a portion of the underlying Convertible Note 1 equaling $19,219 would have required reclassification as a standalone instrument. In accordance with Accounting Standards Codification subtopic 470-20, Debt with Conversion and Other Options (“ASC 470-20”), the Company recognized an embedded beneficial conversion feature present in the portion of the carrying value of the Convertible Promissory Note for which the conversion feature was not subject to bifurcation per above.  The Company recognized and measured an aggregate of $100,269 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against Convertible Note 1.  The derivative conversion feature underlying the carrying value of the debenture that required bifurcation of $19,219 was recorded at fair value of $27,926 as a discount against Convertible Note 1. The debt discount attributed to this derivative conversion feature is being charged to income as interest expense ratably over the term of the note.

 

Subsequently, the Company received an additional $361,000 in proceeds under the promissory note receivable.  The derivative conversion feature underlying these advances under Convertible Note 1 was bifurcated and recorded at fair value of $606,005 with a discount against the principal of Convertible Note 1 and the remainder to interest expense. The debt discount attributed to this derivative conversion feature is being charged to income as interest expense ratably over the term of the note.

 

For the year ended December 31, 2011, the Company amortized the debt discount noted above and charged $252,928 to interest expense.

 

On June 14, 2010, the Company issued a $600,000 Convertible Promissory Note (“Convertible Note 2”) that matures June 13, 2013, in exchange for a promissory note receivable.  Convertible Note 2 was issued under the same terms as Convertible Note 1.

 

The Company received aggregate net proceeds of $636,000 from July 1, 2010 through June 30, 2011, including interest under the promissory notes receivable underlying Convertible Note 2. The derivative conversion feature underlying these advances under Convertible Note 2 was bifurcated and recorded at fair value of $645,895 with a discount against the principal of the related Convertible Notes and the remainder to interest expense. The debt discount attributed to this derivative conversion feature is being charged to income as interest expense ratably over the term of the notes.

 

For the year ended December 31, 2011, the Company amortized the debt discount noted above and charged $627,449 to interest expense.

 

The liability for these derivative conversion features was re-measured at fair value each period-end. The changes in fair value resulted in a gain of $395,472 for the year ended December 31, 2010. In addition, during 2010, the liability was reduced $172,441 at fair value with a corresponding credit to paid-in capital for conversions of the underlying notes during the year. The ending value as of December 31, 2010 was $121,389.

 

As of December 31, 2010, $700,000 had been received on the related notes receivable.

 

During 2010, the Company issued an aggregate of 117,650,000 shares of its common stock in payment of $356,955 towards the note.

 

On October 7, 2010, the Company issued a $600,000 Convertible Promissory Note (“Convertible Note 3”) that matures October 6, 2013, in exchange for a promissory note receivable.  Convertible Note 3 was issued under the same terms as the convertible notes above.

 

F-14
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 10 – CONVERTIBLE NOTES (continued)

The Company received an aggregate net proceeds of $318,000 from October 14, 2010 through December 31, 2011,  under the promissory notes receivable underlying Convertible Note 3). The derivative conversion feature underlying these advances under Convertible Note 3 was bifurcated and recorded at fair value of $412,721 with a discount against the principal of the related Convertible Notes and the remainder to interest expense. The debt discount attributed to this derivative conversion feature is being charged to income as interest expense ratably over the term of the notes.

 

For the year ended December 31, 2011, the Company amortized the debt discount noted above and charged $125,414 to interest expense.

 

On April 8, 2011, the Company issued a $600,000 Convertible Promissory Note (“Convertible Note 4”) that matures October 8, 2014, in exchange for a promissory note receivable.  Convertible Note 3 was issued under the same terms as the convertible notes above.

 

The Company received an aggregate net proceeds of $25,000 from May 31, 2011 through December 31, 2011,  under the promissory notes receivable underlying Convertible Note 4). The derivative conversion feature underlying these advances under Convertible Note 4 was bifurcated and recorded at fair value of $25,000 with a discount against the principal of the related Convertible Notes.

 

For the year ended December 31, 2011, the Company amortized the debt discount noted above and charged $6,214 to interest expense.

 

During the year ended December 31, 2011, due to certain conversions of notes into common stock, and, conversely, the new proceeds during the period described above, the number of shares issuable under the convertible notes fluctuated, causing several reclassifications of the derivative conversion features between equity and liability classification. The Company recognized an embedded beneficial conversion feature present in the portion of the carrying value of the Convertible Promissory Notes for which the conversion feature was not subject to bifurcation during the period.  The derivative conversion feature underlying the portion of these debentures requiring bifurcation during the period totaled $674,909 and was recorded at fair value of $932,656 with a discount for the bifurcated value against the principal of the Convertible Notes and the remainder to interest expense. The debt discount attributed to this derivative conversion feature is being charged to income as interest expense ratably over the term of the notes.

 

The liability for these derivative conversion features was re-measured at fair value upon each reclassification and each interim period-end. The changes in fair value resulted in a gain (loss) of $(83,095) and $395,474 for the years ended December 31, 2011 and 2010, respectively. In addition, during the year ended December 31, 2011, the liability was reduced $688,480 at fair value with a corresponding credit to paid-in capital for conversions of the underlying notes during the periods. The ending value as of December 31, 2011 was $127,021.

 

During the year ended December 31, 2011, the Company issued an aggregate of 604,672,024 shares of its common stock in payment of $996,246 towards the note.

 

NOTE 11 – DERIVATIVE LIABILITY

 

During 2010, in connection with the issuance of convertible notes, the Company has the possibility of exceeding their common shares authorized when considering the number of possible shares that may be issuable to satisfy settlement provisions of these agreements after consideration of all existing instruments that could be settled in shares.  The accounting treatment of derivative financial instruments required that the Company reclassify the derivative from equity to a liability at their fair values as of the date possible issuable shares exceeded the authorized level and at fair value as of each subsequent balance sheet date.  Any change in fair value was recorded as non-operating, non-cash income or expense at each reporting date.  If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge.  If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income.

 

F-15
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

 NOTE 11 – DERIVATIVE LIABILITY (continued)

The fair value of the derivative at December 31, 2011 was determined using the Black Sholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 207.32%; risk free rate: 0.36%; and expected life: 2.50 years.

 

Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.  

 

At December 31, 2011, the derivative liability valued at $127,021, the Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and has classified the obligation as a long term liability.

 

NOTE 12 – CAPITAL STOCK

 

Preferred stock

The Company is authorized to issue 60,000,000 shares of preferred stock at $0.0001 par value. As of December 31, 2011 and 2010, there was no preferred stock outstanding.

 

Common stock

As of December 31, 2011, the Company had 1,640,311,863 and 970,185,420 shares of common stock issued and outstanding, respectively, and no shares of preferred stock issued and outstanding, respectively

 

NOTE 13 – WARRANTS AND OPTIONS

 

Warrants

 

The following table summarizes the changes in warrants outstanding and related prices for the shares of the Company’s common stock at December 31, 2011: 

 

Exercise Price     Number
Outstanding
    Warrants
Outstanding
Weighted
Average
Remaining
Contractual Life
(years)
    Weighted
Average
Exercise price
    Number
Exercisable
    Warrants
Exercisable
Weighted
Average
Exercise Price
 
$ 0.0040       16,000,000       1.58     $ 0.0040       16,000,000     $ 0.0040  
  0.0041       2,000,000       2.36       0.0041       2,000,000       0.0041  
  0.0075       69,530,574       1.59       0.0075       69,530,574       0.0075  
  0.0250       28,000,000       1.59       0.0250       28,000,000       0.0250  
  0.0900       600,000       1.21       0.0900       600,000       0.0900  
  0.2400       100,000       0.49       0.2400       100,000       0.2400  
Total       116,230,574       1.52     $ 0.0189       116,230,574     $ 0.0119  

 

F-16
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 13 – WARRANTS AND OPTIONS (continued)

 

Transactions involving the Company’s warrant issuance are summarized as follows:

  

   Number of
Shares
   Weighted
Average
Price Per
Share
 
Outstanding at December 31, 2009   156,896,558   $0.0212 
Granted   -      
Exercised   (39,025,598)   (0.0064)
Canceled or expired   (1,436,000)   (0.08)
Outstanding at December 31, 2010   116,434,960    0.0189 
Granted   2,000,000    0.0041 
Exercised   -    - 
Canceled or expired   (2,204,386)   (0.3788)
Outstanding at December 31, 2011   116,230,574   $0.0119 

 

During the year ended December 31, 2010, the Company issued an aggregate of 39,025,598 shares of common stock in exchange for the exercise of 39,869,261 warrants.  The exercise prices ranged from $0.004 to $0.0075, resulting in proceeds of $209,937.  A total of 5,433,966 warrants were exercised on a cashless basis.

 

During the year ended December 31, 2011, the Company issued 2,000,000 warrants for services rendered.  The warrants were valued at $8,087 using the Black Scholes option pricing method with the following assumptions: dividend yield: $-0-; volatility: 304.31%; expected life: 3 years; and risk free rate: 1.03%.

 

Stock options

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees and directors of the Company at December 31, 2011:

 

      Options Outstanding           Options Exercisable  
Exercise Prices     Number
Outstanding
    Weighted Average
Remaining
Contractual Life
(Years)
    Weighted
Average
Exercise Price
    Number
Exercisable
    Weighted
Average
Exercise Price
 
$ 0.00346       13,750,000       4.72     $ 0.00346       10,625,000     $ 0.00346  
$ 0.00348       3,333,333       4.63     $ 0.00348       3,333,333     $ 0.00348  
$ 0.00400       538,868,937       2.88     $ 0.00400       538,868,937     $ 0.00400  
$ 0.00844       80,883,534       4.36     $ 0.00844       53,922,356     $ 0.00844  
$ 0.00232       2,083,000       4.59     $ 0.00232       2,083,000     0.00232  
$ 0.02500       2,000,000       2.08     $ 0.02500       2,000,000     $ 0.02500  
$ 0.02800       22,500,000       3.54     $ 0.02800       22,500,000     $ 0.02800  
Total       663,418,834       3.13     $ 0.00540       633,332,626     $ 0.00528  

 

F-17
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 13 – WARRANTS AND OPTIONS (continued)

 

Transactions involving stock options issued to employees are summarized as follows:

 

       Weighted
Average
 
   Number of   Price 
   Shares   Per Share 
Outstanding at December 31, 2009:   624,726,818   $0.004 
Granted   22,500,000    0.028 
Exercised   (2,690,650)   (0.004)
Canceled or expired   (34,000)   (0.004)
Outstanding at December 31, 2010:   644,502,168   $0.004 
Granted   22,916,666    0.0034 
Exercised   (50,000)   (0.004)
Canceled or expired   (3,950,000)   (0.346)
Outstanding at December 31, 2011:   663,418,834   $0.00540 

 

On January 14, 2010, the Company granted options to purchase 22,500,000 shares of the Company’s common stock to directors valued at $663,720.  The option grants as approved by the Compensation Committee were fully vested when issued and the exercise price is $0.028 per share for five years.

 

The fair value for these awards was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions, assuming no expected dividends:

 

Expected life (years)   5 
Expected volatility   363.22%
Risk-free interest rate   2.51%
Dividend yield   %

  

On January 10, 2011, the Company granted options to purchase 17,500,000 shares of the Company’s common stock to directors valued at $41,672.  The option grants as approved by the Compensation Committee vest at 25% every three months from the date of issuance and the exercise price is $0.00346 per share for five years.

 

The fair value for these awards was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions, assuming no expected dividends:

 

Expected life (years)   5 
Expected volatility   114.24%
Risk-free interest rate   1.93%
Dividend yield   %

 

On May 19, 2011, the Company granted options to purchase 3,333,333 shares of the Company’s common stock to directors valued at $10,992.  The option grants as approved by the Compensation Committee vest at 833,333 on June 30, 2011, 1,250,000 on September 30, 2011 and 1,250,000 on December 31, 2011.  The exercise price is $0.00348 per share for five years.

 

The fair value for these awards was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions, assuming no expected dividends:

 

Expected life (years)   5 
Expected volatility   303.01%
Risk-free interest rate   1.85%
Dividend yield   %
F-18
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

On August 1, 2011, the Company granted options to purchase 2,083,000 shares of the Company’s common stock to directors valued at $5,204.  The option grants as approved by the Compensation Committee vest at 833,333 on September 30, 2011 and 1,250,000 on December 31, 2011.  The exercise price is $0.00232 per share for five years.

 

The fair value for these awards was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions, assuming no expected dividends:

 

Expected life (years)   5 
Expected volatility   297.82%
Risk-free interest rate   1.32%
Dividend yield   %

 

The aggregate fair value of vesting options of $1,196,713 and $2,060,985 was charged to current period operations for the year ended December 31, 2011 and 2010, respectively.

 

As of March 31, 2011, there was $2,480 of total unrecognized compensation cost relating to non-vested stock based compensation arrangements granted.  That cost is expected to be recognized during the remaining portion of 2012.

 

NOTE 14 – FAIR VALUE MEASUREMENT

 

The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008.  ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.  ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

 

£ Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

£ Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

£ Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the consolidated financial statements.

 

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (Including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

 

F-19
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 14 – FAIR VALUE MEASUREMENT (continued)

 

Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the debt derivative liabilities. Convertible notes were determined at market based on their short term historical conversions

 

   Quoted
Prices in
Active
Markets for
Identical
Instruments
Level 1
   Significant
Other
Observable
Inputs
Level 2
   Significant
Unobservable
Inputs
Level 3
   Assets (Liabilities)
At Fair Value
 
Liabilities:                    
Derivative liability  $-   $-   $(54,009)  $(54,009)
                     
Total  $-   $-   $(127,021)  $(127,021)

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December 31, 2011:

 

    Derivative
Liability
 
Balance, December 31, 2010   $ 121,389  
         
Initial fair value of new debt derivatives during the period     561,865  
Mark-to-market at September 30, 2010:        
Embedded debt derivative     83,095  
Reclassifications (to) from equity during the period (net)     49,153  
Reductions from conversions of debt      (688,481 )
         
Balance, December 31, 2011    $ 127,021  

 

NOTE 15 – COMMITMENTS AND CONTINGENCIES

 

Operating leases

 

The Company leases office equipment and vehicles under operating leases with terms ranging from 13 months to 60 months. The annual non-cancelable operating lease payments on these leases are as follows:

 

 2012   $11,690 
 2013    5,667 
 Thereafter    - 
     $17,357 

 

On November 1, 2008, the Company began leasing the remaining 11,834 sq. ft. of space at its existing facility in Bethel, CT. The lease is a triple net lease commencing November 1, 2008 and terminated October 31, 2011. The base rent for the first year is $5.50 per sq. ft. with 3% increases for each of the following two years.

 

F-20
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 15 – COMMITMENTS AND CONTINGENCIES (continued)

 

The Company entered into a lease agreement for 11,856 square feet of office and operations space in Bethel, Connecticut. Rent commenced on May 1, 2006 and terminated on May 31, 2011.

 

On August 24, 2011 the Company commenced leasing 13,000 square feet of warehouse space in Bethlehem, PA $5,500 per month for 24 months. The two year lease commences October 1, 2011 and terminating September 30, 2013.

 

The straight line monthly expense in accordance with ASC 840-20, Leases, operating leases; is $18,431 and the annual non-cancelable lease payments on the one lease is:

 2012    66,000 
 2013    49,500 
 Thereafter      
     $115,500 

Litigation

 

The Company is subject to other legal proceedings and claims, which arise in the ordinary course of its business.  Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.  There was no outstanding litigation as of December 31, 2011.

 

Employee and consulting contracts

 

The Company has consulting agreements with outside contractors to provide certain marketing and financial advisory services. The Agreements are generally for a term of 12 months from inception and renewable automatically from year to year unless either the Company or Consultant terminates such engagement by written notice.

 

NOTE 16 – LOSS PER SHARE

 

The net earnings (loss) per common share are computed by dividing the net loss for the period by the weighted average number of shares outstanding for the period.  Shares issued upon conversion of convertible debt, outstanding warrants and options for the year ended December 31, 2011, amounting to 108,966,897 were not included in the calculation for net loss per common share because their effects would be anti-dilutive.

 

The numerator and denominator used in the basic and diluted earnings (loss) per share of common stock computations are presented in the following table:

   Year ended 
December 31,
 
   2011   2010 
NUMERATOR FOR BASIC AND DILUTED EPS (LPS)          
Net loss per statement of operations  $(4,376,105)  $(4,417,550)
          
DENOMINATOR FOR BASIC AND DILUTED EPS (LPS)          
Weighted average shares of common stock outstanding   1,375,353,615    985,383,502 
           
Basic and diluted EPS (LPS)  $(0.00)  $(0.00)

 

F-21
 

 

MEDCLEAN TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2011

 

NOTE 17 – INCOME TAXES

Income tax expense (benefit) consists of the following:

 

    Year ended December 31,  
    2011     2010  
Current   $       $    
Federal     -       -  
State     -       -  
      -       -  
Deferred                
Federal     (603,520 )     (1,514,887 )
State     (133,637 )     (335,439 )
      (737,157 )     (1,850,326 )
                 
Current and deferred     (737,157 )     (1,850,326 )
Valuation allowance     737,157       1,850,326  
Total   $ -     $ -  

 

A reconciliation of income tax benefit to the amount computed using statutory federal rates is as follows:

 

   Year ended December 31, 
   2011   2010 
Tax at federal statutory rate of 35%  $(1,531,637)  $(1,601,827)
Non-deductible expenses and debt discount   928,117    86,940 
State income tax (benefit)   (133,637)   (335,439)
Change in allowance   737,157    1,850,326 
   $-   $- 

 

The Company has implemented ASC subtopic 740-10, which provides for a liability approach to accounting for income taxes. Total deferred tax assets and liabilities at December 31 are as follows:

 

   2011   2010 
Deferred tax assets-NOL  $(8,488,544)  $(8,173,067)
Deferred tax assets-stock options, warrants, stock for services   (4,984,531)   (4,562,851)
Total deferred tax assets  $(13,473,075)  $(12,735,918)
Valuation allowance   13,473,075    12,735,918 
Net deferred tax assets  $-   $- 

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the statement of operations in the period that includes the enactment date.

 

The Company has available at December 31, 2011 unused federal and state net operating loss carry forwards totaling $20,700,000 that may be applied against future taxable income that expire in the years 2012 through 2026. The tax benefit of these net operating loss carry forwards, based on an effective combined federal and state composite tax rate of 42.75% is approximately $8,489,000. Management believes it is more likely than not that all of the deferred tax asset will not be realized.  A valuation allowance has been provided for the entire deferred tax benefit.

 

NOTE 18 – SUBSEQUENT EVENTS

 

Subsequent events have been evaluated through May 14, 2012, the date the financial statements were issued.

 

F-22