Attached files
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ______________
Commission file number: 000-22855
AMERICAN SOIL TECHNOLOGIES, INC.
(Name of Small Business Issuer as specific in its Charter)
Nevada 95-4780218
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9018 Balboa Blvd, #558, Northridge, California 91304
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (818) 899-4686
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
As of January 12, 2015, the number of shares of common stock outstanding was
68,090,590.
As of January 12, 2015, the aggregate market value of our common stock held by
non-affiliates was approximately $159,689 (based upon 24,951,469 shares at
$0.0064 per share).
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference: (i)
RegistrationStatement on Form SB-2, filed on July 2, 1997, as amended
(Registration No.333-30583); Form 8-K disclosing a change in Registered
Certifying Accounts, filed on May 15, 2007; Form 10K for the fiscal year ended
September 30, 2011 filed on December 29, 2011; Form 10Q for the quarterly period
ended December 31, 2011 filed on February 8,2012; Form 10Q for the quarterly
period ended March 30, 2012 filed on May 7,2012; Form 10Q for the quarterly
period ended June 30, 2012 filed on August 8,2012; Form 10K for the fiscal year
ended September 30, 2012 filed on January 7, 2013; Form 10Q for the quarterly
period ended December 31, 2012 filed on February 14, 2013 and as amended and
filed on February 15, 2013; Form 10Q for the quarterly period ended March 31,
2013 filed on May 15, 2013; Form 10Q for the quarterly period ended June 30,
2013 filed on August 12, 2013; Form 10-K for fiscal year ended September 30,
2013 filed on January 14, 2014; Form 10Q for the quarterly period ended December
31, 2013 filed on February 18, 2014; Form 10Q for the quarterly period ended
March 30, 2014 filed on May 19, 2014; Form 10Q for the quarterly period ended
June 30, 2014 filed on August 11, 2014.
TABLE OF CONTENTS
Page
----
ITEM 1 DESCRIPTION OF BUSINESS.......................................... 3
ITEM 2 DESCRIPTION OF PROPERTY.......................................... 5
ITEM 3 LEGAL PROCEEDINGS................................................ 5
ITEM 4 MINE SAFETY DISCLOSURES.......................................... 6
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 6
ITEM 6 SELECTED FINANCIAL DATA.......................................... 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 7
ITEM 8 FINANCIAL STATEMENTS............................................. 11
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................... 11
ITEM 9A CONTROLS AND PROCEDURES.......................................... 11
ITEM 9B OTHER INFORMATION................................................ 11
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT................ 12
ITEM 11 EXECUTIVE COMPENSATION........................................... 13
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.................................. 16
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 17
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES........................... 17
ITEM 15 EXHIBITS ........................................................ 18
SIGNATURES................................................................. 20
2
PART I
ITEM 1. BUSINESS
DEVELOPMENT OF BUSINESS
American Soil Technologies, Inc., formerly Soil Wash Technologies, Inc., was
incorporated in California on September 22, 1993 in the soil remediation
business. In May 2002, we discontinued the soil remediation business.
BUSINESS OF ISSUER
The Company is primarily engaged in the marketing of polymer and other soil
amendments to the agricultural turf and horticulture industries. The Company's
products are used to decrease water usage, increase nutrient retention in soil,
enhance seed germination and sprout emergence, clarify ponds and increase the
effectiveness of chemical fertilizers and biological additives. In 2006, the
Company acquired the patent to a slow release fertilizer. The Company also has
exclusive license rights to the use of patented polymer application techniques,
as well as numerous patents on a unique machine designed to inject polymer and
other liquid products into existing turf and some crops. The Company has a
wholly owned subsidiary, Smart World Organics, Inc. (Smart World) which has
insignificant operations. The Company has several debt obligations that are past
the contractual maturity date or are due and payable due to non payment of
interest.
We manufacture on an outsourced basis Agriblend(R), a patented soil amendment
developed for agriculture; and Nutrimoist L(R) a slow release liquid soil
enhancer developed for homes, parks, golf courses and other turf related
applications. We have the rights to a product known as the Agro Tower used for
vertical farming. The patent on our slow release fertilizer Soil Medic, used in
the golf course and agriculture industry expired in fiscal year ended September
14, 2014.
We market our products primarily in the United States.
COMPETITION
To the best knowledge of our management, there is no direct competition for our
Agriblend(R) product, however, earlier polymer based technology was very
expensive and the remembrance of its cost has a negative effect on marketing
Agriblend(R). Accordingly, educating the end user regarding the benefits of
using Agriblend(R) and gaining general acceptance of the new "micro grain"
technology are obstacles to marketing the product. There are alternative
technologies that yield similar results when compared to our products but they
do not involve our patented technology.
There is some competition to our straight polymer products by companies that
have been in business for a number of years.
We are not aware of any competition to Nutrimoist L(R) other than from our
manufacturer(s) who would have to use our polymer to manufacture the product
pursuant to our agreement.
The slow release fertilizer Soil Medic does not seem to have competition at this
time however, the patent which relates to the technology expired in fiscal 2014.
3
There is some competition for the organic products that have been previously
distributed that stem from Smart World.
SOURCES AND AVAILABILITY OF RAW MATERIAL AND PRINCIPAL SUPPLIERS
Our products are proprietary blends that include cross-linked micro grain
polymer in the blend. Cross-linked polymer is manufactured by several chemical
companies that include Stockhausen; BASF; Ciba Specialties; and Floerger. All
other components of our products are readily available commercially throughout
the world. Agriblend(R) products are custom blended in accordance with our
specifications at a blending facility located near Truth or Consequences, New
Mexico. Our warehouse facilities are located in Phoenix, Arizona and Northridge,
California. Nutrimoist L(R) is blended by us through contract blenders and is a
combination of different formulations, which include our polymer products. Our
organic products were manufactured at our former Smart World plant in Hudson,
Florida. These organic products are no longer produced. The Agro Tower is
manufactured for us by Make-It Manufacturing in Paso Robles, California.
DEPENDENCE ON MAJOR CUSTOMERS
We are now dependent on two customers for a substantial portion of our sales of
any product. During fiscal 2014, revenues from one of these customers ceased, as
the related patent which they paid a royalty on expired.
INTELLECTUAL PROPERTY
We have six patents on the M-216 Polymer Injector machine designed to install
our Nutrimoist L(R) product into mature turf.
We have exclusive worldwide manufacturing/marketing rights to patented super
absorbent cross-linked polymer application technology. The underlying patents
include United States Patent number 5,649,495 and 5,868,087, commonly known and
described as "Agricultural Retention Mixture and Application Technique."
We own registered trademarks on the names, Agriblend(R), Nutrimoist(R),
Hydroganic(R)and Prosper(R)
We have world-wide marketing rights to a patented product known as the
AgroTower.
We own the right to numerous formulas used to manufacture organic and
sustainable soil amendments, fertilizers and insecticides.
GOVERNMENT APPROVAL
Agriblend(R) and our other polymers are subject to regulatory standards
developed by the Environmental Protection Agency ("EPA") that are applicable to
maximum monomer concentrations in polymers. Polymer products cannot exceed
monomer concentrations of 200 mg/kg. All of the polymers we use are well below
the maximum monomer standard.
Many of our products are organically approved through the National Organic
Program ("NOP") and registered under EPA section 25B.
4
RESEARCH AND DEVELOPMENT COSTS
We have not spent material amounts for research and development during the years
ended September 30, 2014 and September 30, 2013.
COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS
We provide Material Safety Data Sheets on all components of our product line and
comply with labeling requirement for our products. In addition, we comply with
EPA regulations applicable to monomer content in its polymer additives (no
greater than five-hundredths percent (0.05%)). We believe that our operations
currently comply in all material respects with applicable federal, state and
local laws, rules, regulations and ordinances regarding the discharge of
materials into the environment. We do not believe that such compliance will have
a material impact on our capital expenditures, future earnings and competitive
position. No material capital expenditures for environmental control equipment
presently are planned.
EMPLOYEES
As of the date hereof, we have three full-time employees. We hire independent
contractors on an "as needed" basis only. We have no collective bargaining
agreements with our employees. We believe that our employee relationships are
satisfactory.
ITEM 1A. NON APPLICABLE
ITEM 1B. NON APPLICABLE
ITEM 2. DESCRIPTION OF PROPERTY
In December of 2013, we moved our offices to a location in Northridge, CA from a
related party and does not require lease payments as our presence in the
facility nominal. We also rent storage space in Northridge and Phoenix, AZ for
approximately $200 per month.
ITEM 3. LEGAL PROCEEDINGS
On or about September 21, 2007, Stockhausen, Inc. ("Stockhausen") filed a
Complaint in the United States District Court, for the Middle District of North
Carolina, against us seeking damages. The parties entered into a settlement
agreement on June 2, 2010. Under the settlement agreement, we agreed to pay
Stockhausen $250,000 on or before June 23, 2010 as a compromise to Stockhausen's
claims that currently total $603,921. We further agreed that we would consent to
the entry of a Judgment against us in favor of Stockhausen in the amount of
$603,921 if we failed to make complete and timely payment as agreed. The company
was unable to make the agreed upon payment, and on July 8, 2010, Stockhausen
entered a judgment for the above stated amount against the company.
5
On or about October 4, 2007, Raymond J. Nielsen and Cheryl K. Nielsen
(collectively, "Plaintiffs"), filed a Complaint in the Circuit Court in the
Sixth Judicial District of Pasco County, Florida, against us and Smart World
(collectively "Defendants") seeking damages, declaratory, and injunctive relief.
Plaintiffs allege that Defendants failed to pay interest when due on the
Convertible Debenture from Defendants to Plaintiffs, and, thus, the entire
amount of the Convertible Debenture is accelerated and Plaintiffs are seeking a
judgment in the amount of $1,500,000 plus interest. On December 29, 2009, the
matter was settled for $400,000 and the Company had 60 days in which to remit
the amount or a judgment in the entire amount claimed will be entered against
us. The Company was not able to meet the terms of the settlement and have been
actively communicating with the Plaintiffs to extend the terms of the
settlement.
To the best knowledge of our management, there are no other legal proceedings
pending against us.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON EQUITY
Our common stock is currently quoted on the Over-The-Counter Bulletin Board
under the Symbol "SOYL." Set forth below is the trading history of our common
stock without retail mark-up, mark-down or commissions:
High Low
---- ---
2013
First Quarter 0.005 0.004
Second Quarter 0.015 0.003
Third Quarter 0.017 0.004
Fourth Quarter 0.08 0.003
2014
First Quarter 0.024 0.006
Second Quarter 0.02 0.011
Third Quarter 0.019 0.015
Fourth Quarter 0.017 0.012
On January 12, 2015 the closing stock price was $0.0064.
The above quotations are inter-dealer quotations from market makers of our
common stock. At certain times the actual closing or opening quotations may not
represent actual trades that took place.
HOLDERS
As of December 31, 2014, there were 283 shareholders holding certificated
securities and approximately 545 shareholders currently listed in the Depository
Trust Company as holding shares in brokerage accounts. Our transfer agent is
Standard Registrar & Transfer Company 1528 South 1840 East, Draper, Utah 84020.
6
DIVIDENDS
We have paid no dividends on our common stock since inception and do not
anticipate or contemplate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, our selected
financial information:
Fiscal Year Ended Fiscal Year Ended
September 30, 2014 September 30, 2013
------------------ ------------------
STATEMENT OF OPERATIONS DATA:
Revenue $ 29,568 $ 63,656
Loss From Operations (476,580) (498,776)
Net Income (Loss) 80,819 (462,241)
Net Income (Loss) Per Share
Basic and Diluted $ 0.00 $ (0.01)
BALANCE SHEET DATA:
Current Assets $ 5,236 $ 10,379
Property and Equipment, net 0 75
Intangible Assets; net 0 10,362
Total Assets 5,236 20,816
Total Current Liabilities 7,780,111 7,876,510
Accumulated Deficit (29,056,615) (29,137,434)
Stockholders' Deficit $ (7,774,875) $ (7,855,694)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Report.
The following information CONTAINS certain forward-looking statements of our
management. Forward-looking statements are statements that estimate the
happening of future events and are not based on historical fact. Forward-looking
statements may be identified by the use of forward-looking terminology, such as
"may," "could," "expect," "estimate," "anticipate," "PLAN," "predict,"
"probable," "possible," "should," "continue," or similar terms, variations of
those terms or the negative of those terms. The forward-looking statements
specified in the following information have been compiled by our management
onthe basis of assumptions made by management and considered by management to be
reasonable. Our future operating results, however, are impossible to predict and
no representation, guaranty, or warranty is to be inferred from those
forward-looking statements.
7
OVERVIEW
We develop, manufacture and market cutting-edge technology that decreases the
need for water and improves the soil in the "Green Industry" consisting of
agriculture, turf and horticulture.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2014 COMPARED TO SEPTEMBER 30, 2013
REVENUES
Revenues for the fiscal year-ended September 30, 2014 were $29,568 compared to
$63,656 for the fiscal year ended September 30, 2013, a decrease of 53.6%. This
decrease in revenue is directly related to our inability to properly market and
sell our products caused by a lack of operating capital as well as the
expiration of our Soil Medic Patent in April 2014, after which royalties ceased.
COST OF SALES
Cost of goods sold decreased to $9,442 for the fiscal year ended September 30,
2014 from $23,574 for the fiscal year ended September 30, 2013. The decrease in
the cost of sales directly relates to the reduction in revenue producing
activity not related to royalty revenue, net of additional reserve on our
remaining inventory. Our gross margins were 68% and 63% for the years ended
September 30, 2014 and 2013, respectively. The increase in our gross margins was
caused by a higher percentage of royalty revenue compared to traditional sale of
goods.
OPERATING EXPENSES
General and administrative expenses decreased approximately 2.0% for the fiscal
year ended September 30, 2014 due to a reduction in general operational
expenses.
Sales and marketing expenses decreased approximately 89% because of a lack of
operating capital.
In fiscal 2014, the amortization expense of intangible assets was $10,362 as the
Soil Medic patent it related to expired and no additional amortization was
necessary as the patent was fully amortized.
INTEREST EXPENSE
Interest expense decreased 26% for the fiscal year ended September 30, 2014 from
the period ended September 30, 2013. This decrease resulted from our debt
mitigation in which certain debt was extinguished during the first quarter of
fiscal 2014.
NET INCOME (LOSS)
The net income realized during the year ended September 30, 2014 was directly
the result of the gain realized in the amount of $635,903 by the extinguishment
of debt. As part of our debt mitigation program, we reviewed our long
outstanding liabilities for among other things, the expiration of the statute of
limitations for creditors to make claims on amounts owed. The analysis was based
on applicable law in the states where the liability originated. The Company will
continue to analyze past due liabilities in future periods.
8
For the reasons detailed above, we experienced net income in the year ended
September 30, 2014 compared to net loss in the year ended September 30, 2013 of
$462,241. Absent these debt extinguishment gains, net losses would be in excess
of $555,000 for fiscal 2014 and $604,000 for fiscal 2014.
SEASONALITY
Our efforts in the United States have focused on the southern states and
therefore generally experience year round growing cycles, with the sale of the
agricultural products preceding the growing cycle of various crops.
International sales have not been significant during recent years. If the
Company is able to expand into the residential and commercial segments
nationally, we will experience some seasonal declines in sales during the fall
and winter quarters in less temperate climates.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3,157 and $3,070 at September 30, 2014 and
September 30, 2013, respectively. Net cash used by operations was $45,913 for
the year ended September 30, 2014 as compared to $79,776 for the year ended
September 30, 2013.
We have historically relied upon one of our officers and significant
shareholders to provide cash to meet short term operating cash requirements.
During the year ended September 30, 2014 the Company borrowed an additional
$46,000 from this officer and shareholder which makes up the total amounts
received from financing activities. The officer's previous note was amended with
a new principal balance of $959,842. Subsequent to September 30, 2014, the
officer loaned an additional $10,000.
As of September 30, 2014 we had a working capital deficit of $7,774,875 (current
assets less current liabilities) compared to a deficit of $7,866,130 as of
September 30, 2013. The increase in the working capital deficit has been caused
by an increase in our current liabilities, mostly related to accrued and unpaid
wages.
As shown in the accompanying financial statements, we have incurred an
accumulated deficit of $29,056,615 and a working capital deficit of $7,774,875
as of September 30, 2014. Our ability to continue as a going concern is
dependent on obtaining additional capital and financing and operating at a
profitable level. We intend to seek additional capital either through debt or
equity offerings and to increase sales volume and operating margins to achieve
profitability. Our working capital and other capital requirements during the
next fiscal year and thereafter will vary based on the sales revenue generated
by our internal workforce and the ability of our distribution and sales network
to grow.
We will consider both the public and private sale of securities and debt
instruments for expansion of our operations if such expansion would benefit our
overall growth and income objectives. Should sales growth not materialize, we
may look to these public and private sources of financing. There can be no
assurance, however, that we can obtain sufficient capital on acceptable terms,
if at all. Under such conditions, failure to obtain such capital likely would,
at a minimum, negatively impact our ability to timely meet our business
objectives.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements require the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
9
the reported amount of revenues and expenses during the reporting period. Our
management periodically evaluates the estimates and judgments made. Management
bases its estimates and judgments on historical experience and on various
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates as a result of different assumptions or
conditions.
The methods, estimates, and judgment we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The SEC has defined "critical accounting policies" as
those accounting policies that are most important to the portrayal of our
financial condition and results, and require us to make our most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based upon this definition, our most critical
estimates are: allowance for doubtful accounts, inventories and related
reserves, and litigation. Our most critical accounting policies applicable to
the periods presented are noted below. For additional information see Note 2,
"Summary of Significant Accounting Policies" in the notes to our reviewed
financial statements appearing elsewhere in this report. Although we believe
that our estimates and assumptions are reasonable, they are based upon
information presently available, and actual results may differ significantly
from these estimates.
REVENUE RECOGNITION
We generate our revenues from the sale of products and services and recognize
revenue when the following fundamental criteria are met:
* persuasive evidence that an arrangement exists;
* the products and services have been delivered;
* selling prices are fixed and determinable and not subject to refund or
adjustment; and
* collection of amounts due is reasonably assured.
Delivery occurs when goods are shipped and title and risk of loss transfer to
the customer, in accordance with the terms specified in the arrangement with the
customer. Revenue recognition is deferred in all instances where the earnings
process is incomplete. We provide for sales returns and allowances in the same
period as the related revenues are recognized. We base these estimates on our
historical experience or the specific identification of an event necessitating a
reserve. To the extent actual sales returns differ from our estimates, our
future results of operations may be affected. Should changes in conditions cause
management to determine that these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
affected.
ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain an allowance
for doubtful accounts based upon our historical experience and any specific
customer collection issues that we have identified. While our credit losses have
historically been within our expectations and the allowance established, we may
not continue to experience the same credit loss rates as we have in the past.
Our accounts receivable are concentrated in a relatively few number of
customers. Therefore, a significant change in the liquidity or financial
position of any one customer could make it more difficult for us to collect our
accounts receivable and require us to increase our allowance for doubtful
accounts, which could have a material adverse impact on our consolidated
financial position, results of operations and cash flows.
10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT FINANCIAL RISKS
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 begin on
page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation
of our chief executive officer and chief financial officer ("Certifying
Officers"), the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report pursuant to Rule 13a-15(b) under
the Securities Exchange Act of 1934 (the "Exchange Act"). Based on that
evaluation, our Certifying Officers have concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures are
effective in ensuring that information required to be disclosed in our Exchange
Act reports is (1) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and (2) accumulated and communicated to our management, including Certifying
Officers, as appropriate to allow timely decisions regarding required
disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our Certifying Officers, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of September
30, 2014, based on the criteria set forth in "Internal Control - Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under such criteria, our management
concluded that our internal control over financial reporting was effective as of
the fiscal year ended September 30, 2014.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable and not absolute assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of certain
events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.
Changes in internal control over financial reporting
During the most recently completed year, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9A(T). CONTROLS AND PROCEDURES
Not Applicable
ITEM 9B. OTHER INFORMATION
None.
11
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
Our directors and executive officers are as follows:
Name Age Position
---- --- --------
Carl P. Ranno 75 Director, Chief Executive Officer, President,
Chief Financial Officer
Neil C. Kitchen 66 Director, Vice President
Diana Visco 57 Secretary
Scott Baker 57 Director
MR. CARL P. RANNO, DIRECTOR, CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL
OFFICER, received a degree in Economics from Xavier University in Cincinnati,
Ohio and his Juris Doctor from the University of Detroit School of Law. Mr.
Ranno became a Director in September 2001 and Chief Executive Officer and
President in May 2002. For the five years prior to becoming the President/CEO of
the Company, he had acted as an advisor in strategic planning, mergers and
acquisitions and as a securities attorney to numerous public companies. He has
served as president and CEO of public and private companies. He is also a member
of the board of directors of Central Utilities Production Company.
MR. NEIL C. KITCHEN, DIRECTOR, VICE PRESIDENT, has over 20 years experience in
business management in the environmental sector including management of
companies involved in general engineering, toxicology, and environmental
cleanup. Prior to joining us in 1994, he was Vice President of a publicly-held
environmental cleanup company. He holds a B.S. in Business Management from San
Diego State University and a class "A" General Engineering license with
Hazardous Material Certification from the State of California.
MS. DIANA VISCO, SECRETARY, Diana Visco, Secretary, has worked with us since
January 1999. Prior to that, she worked for 21 years with the Americana
Leadership College, Inc., traveling to all of its offices and conferences across
the USA and Caribbean in addition to Australia, New Zealand, Canada and Europe.
Ms Visco spent several years as a traveling administrator and as International
Administrator handling all aspects of finance, administration as wellas
marketing and promotion in addition to being assistant to the President of that
company. She is the daughter of Mr. Louie Visco, a former director who passed
away on January 3, 2008
MR. SCOTT BAKER, DIRECTOR, has practiced law in Arizona for the past 19 years.
He graduated from the University of Arizona with a B.S. in business in 1978 and
obtained his J.D. from the University of Arizona in 1981. As a general
practitioner, he has appeared before the U.S. District Tax Court and the U.S.
District Court.
Directors serve until the next annual meeting or until their successors are
qualified and elected. Officers serve at the discretion of the Board of
Directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors and certain officers, as well as persons who own more than 10% of a
registered class of our equity securities, ("Reporting Persons") to file reports
of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities
and Exchange Commission.
Based solely upon a review of the copies of such forms, we believe that all
Reporting Persons have complied on a timely basis with all filing requirements
applicable to them, except that Louie Visco filed one late report on Form 4
disclosing his conversion of debt to equity.
12
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Set forth below is a summary of compensation for our principal executive officer
and our two most highly compensated officers other than our principal executive
officer (collectively, the "named executive officers") for our last two fiscal
years. There have been no annuity, pension or retirement benefits ever paid to
our officers, directors or employees.
With the exception of reimbursement of expenses incurred by our named executive
officers during the scope of their employment and unless expressly stated
otherwise in a footnote below, none of the named executive officers received
other compensation, perquisites and/or personal benefits in excess of $10,000.
Name and Non-Equity
Principal Stock Option Incentive Plan All Other
Position Year Salary ($)(1) Bonus($) Awards($) Awards($) Compensation($) Compensation($) Total($)
-------- ---- ------------- -------- --------- --------- --------------- --------------- --------
Carl P. Ranno, 2014 $200,000 $0 $0 $0 $0 $0 $200,000
CEO, President, CFO 2013 $200,000 $0 $0 $0 $0 $0 $200,000
(Principal Executive
Officer)
Neil C. Kitchen, 2014 $134,500 $0 $0 $0 $0 $0 $134,500
Vice President 2013 $134,500 $0 $0 $0 $0 $0 $134,500
Diana Visco 2014 $ 85,000 $0 $0 $0 $0 $0 $ 85,000
Secretary 2013 $ 85,000 $0 $0 $0 $0 $0 $ 85,000
----------
(1) All salaries for 2014 and 2013 were accrued in the Company's balance sheet,
but not paid. No salaries and wages have been paid to the above named
officers during the years ended September 30, 2014, 2013, or through the
date of this report.
GRANTS OF PLAN-BASED AWARDS
We did not grant any plan-based awards during this fiscal year ended September
30, 2014.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
There are no outstanding equity awards as of September 30, 2014
EMPLOYMENT AGREEMENTS
We have an employment agreement Carl P. Ranno as our Chief Executive Officer and
President. The Agreement is for a term of five years, commencing on May 23, 2008
and expiring on May 22, 2013 with automatic one-year extensions unless either
the Company or Mr. Ranno provides written notice of their intention not to renew
the Agreement at least 30 days prior to the expiration of the then current term.
The Agreement provides that, in addition to receiving paid vacation in
accordance with the Company's policies as well as other customary benefits and
provisions, Mr. Ranno shall receive an annual base salary of $200,000. If, at
any time during the term of the Agreement, Mr. Ranno is terminated "without
cause," he will be entitled to receive a cash payment equal to the aggregate
compensation payable to Mr. Ranno during the remaining term of the Agreement.
The compensation is being accrued.
On May 23, 2008 the Company entered into an Employment Agreement with Neil C.
Kitchen to act as the Company's Vice President and Chief Technical Officer (the
"Agreement"). The Agreement is for a term of five years, commencing on May 23,
2008 and expiring on May 22, 2013 with automatic one-year extensions unless
either the Company or Mr. Kitchen provides written notice of their intention not
13
to renew the Agreement at least 30 days prior to the expiration of the then
current term. The Agreement provides that, in addition to receiving paid
vacation in accordance with the Company's policies as well as other customary
benefits and provisions, Mr. Kitchen shall receive an annual base salary of
$134,500. If, at any time during the term of the Agreement, Mr. Kitchen is
terminated "without cause," he will be entitled to receive a cash payment equal
to the aggregate compensation payable to Mr. Kitchen during the remaining term
of the Agreement. The compensation is being accrued.
On May 23, 2008, and effective the same date, the Company entered into an
Employment Agreement with Diana Visco to act as the Company's Secretary and
Administrative Assistant to the President (the "Agreement").The Agreement is for
a term of five years, commencing on May 23, 2008 and expiring on May 22, 2013
with automatic one-year extensions unless either the Company or Ms. Visco
provides written notice of their intention not to renew the Agreement at least
30 days prior to the expiration of the then current term. The Agreement provides
that, in addition to receiving paid vacation in accordance with the Company's
policies as well as other customary benefits and provisions, Ms. Visco shall
receive an annual base salary of $85,000. If, at any time during the term of the
Agreement, Ms. Visco is terminated "without cause," she will be entitled to
receive a cash payment equal to the aggregate compensation payable to Ms. Visco
during the remaining term of the Agreement. The compensation is being accrued.
2002 STOCK OPTION PLAN
Our shareholders adopted a Stock Option Plan on November 8, 2002 (the "2002
Plan"). Under the 2002 Plan, 2,000,000 shares of common stock have been
authorized for issuance as Incentive Stock Options or Nonstatutory Stock
Options. Under the 2002 Plan, options may be granted to our key employees,
officers, directors or consultants. The purchase price of the common stock
subject to each Incentive Stock Option shall not be less than the fair market
value (as determined in the 2002 Plan), or in the case of the grant of an
Incentive Stock Option to a principal stockholder, not less that 110% of fair
market value of such common stock at the time such option is granted. The
purchase price of the common stock subject to each Nonstatutory Stock Option
shall be determined at the time such option is granted, but in no case less than
100% of the fair market value of such shares of common stock at the time such
option is granted.
The 2002 Plan shall terminate ten years from the date of its adoption by our
shareholders, and no option shall be granted after termination of the 2002 Plan.
Subject to certain restrictions, the 2002 Plan may at any time be terminated and
from time to time be modified or amended by the affirmative vote of the holders
of a majority of the outstanding shares of our capital stock present, or
represented, and entitled to vote at a meeting duly held in accordance with the
applicable laws of the State of Nevada.
As of September 30, 2014, 1,310,000 options were issued pursuant to the 2002
Plan. As of September 30, 2014, all remaining options have expired.
2005 STOCK OPTION/STOCK ISSUANCE PLAN
GENERAL
On January 31, 2005, our Board of Directors adopted our 2005 Stock Option/Stock
Issuance Plan (the "2005 Plan") and directed that it be presented to the
stockholders for their approval and adoption.
The 2005 Plan provides for the issuance of up to 10,000,000 shares of common
stock to our directors, officers, employees and consultants in the form of stock
options and shares of common stock.
Our Board of Directors will initially administer the 2005 Plan, except that the
Board may, at its discretion, establish a committee comprised of two or more
members of the Board or two or more other persons to administer the 2005 Plan
(the "Plan Administrator").
14
The 2005 Plan has two separate components: the option grant program and the
stock issuance program. To date, 498,240 shares of common stock have been issued
pursuant to the stock issuance component of the 2005 Plan,
There are no options that remain outstanding from the 2005 Plan as of September
30, 2014.
OPTION GRANT PROGRAM
Incentive stock options (those stock options that qualify under Section 422 of
the Internal Revenue Code of 1986 ("the "Code")) may be granted to any
individual who is, at the time of the grant, our employee. Non-qualified stock
options (those options that do not qualify under Section 422 of the Code) may be
granted to employees and other people, including our directors and officers.
Grants under the option grant program may be structured as installment options
which become exercisable for vested shares over the optionee's period of service
or as immediately exercisable options for unvested shares which will be subject
to repurchase by us, at the option exercise price paid per share, upon the
optionee's termination of service prior to vesting in those shares. All option
grants must have an exercise price not less than 100% of the fair market value
of the option shares on the grant date.
Each option is to have a maximum term of ten years, subject to earlier
termination in the event the optionee leaves our service. The optionee will have
up to a three month period following termination of service (for reasons other
than death or disability) in which to exercise the option. This period will be
extended to 12 months if the optionee's service terminates by reason of
disability, and in the event of the optionee's death, the personal
representative of the optionee's estate (or the person inheriting the option)
will have up to a 12 month period following the optionee's death in which to
exercise the option.
To exercise the option, the optionee must execute a stock purchase agreement and
pay the exercise price for the purchased shares. Payment is to be made in cash;
however, the Plan Administrator may also permit the optionee to deliver a
full-recourse interest-bearing promissory note for the purchased shares payable
in one or more installments. Provided that our shares remain publicly traded,
the exercise price may be paid in shares of common stock or, alternatively,
through the optionee's participation in a same-day sale program. Under such
program, the option shares are sold immediately following the exercise of the
option, and a portion of the sale proceeds is applied to the payment of the
exercise price and all applicable withholding taxes.
In the event we are acquired by merger or asset sale, the option shares will
immediately vest, and the option may be exercised for any or all of those vested
shares prior to the effective date of such acquisition. However, such
accelerated vesting will not occur if our repurchase rights with respect to the
unvested option shares are assigned to the acquiring entity. The Plan
Administrator will have the discretion to structure one or more option grants
under the Plan so that the shares subject to those options will immediately vest
in the event the optionee's service is involuntarily terminated within 18 months
following an acquisition in which our repurchase rights are so assigned, and the
optionee would then have a one-year period to exercise the accelerated options
for fully-vested shares. It is anticipated that this special vesting
acceleration provision would be made available only on a limited case-by-case
basis.
15
The stock purchase agreement will provide us with the right to repurchase, at
the original exercise price paid per share, any unvested shares held by the
optionee at the time of his or her termination of service. The applicable
vesting schedule will be set forth in the Notice of Grant. Full and immediate
vesting of all the option shares will occur upon an acquisition by merger or
asset sale, unless the repurchase right applicable to those shares is assigned
to the successor company. One or more repurchase rights outstanding under the
Plan may be structured so that those rights will subsequently lapse (and the
option shares will immediately vest) upon an involuntary termination of the
optionee's service within 18 months following the effective date of an
acquisition in which the repurchase rights are assigned to the successor
company.
STOCK ISSUANCE PROGRAM
Shares of common stock may be issued to employees and other people, including
our directors and officers.
The stock issuance program allows eligible persons to purchase shares of common
stock at fair market value or at a discount of up to 15% of fair market value.
The shares may be fully vested when issued or may vest over time as the
recipient provides services or as specified performance objectives are attained.
In addition, shares of common stock may be issued as bonus awards in recognition
of services rendered, without any cash outlay required of the recipient.
The stock issuance component is structured as a stock purchase transaction, with
the purchase price for the shares to be paid in cash or by promissory note at
the time of issuance of the shares. The same repurchase rights summarized above
for the "Stock Purchase Agreement" under the option grant program will apply to
the purchased shares, namely, our right to repurchase, at the original purchase
price, any unvested shares held by the participant at the time of his or her
termination of service.
It is anticipated that any issued shares will vest either immediately or in a
series of installments over the participant's period of service. Full and
immediate vesting of all the shares will occur upon an acquisition by merger or
asset sale, unless the repurchase right applicable to those shares is assigned
to the successor company. The assigned repurchase rights may be structured so
that they will subsequently lapse (and the shares will immediately vest) upon an
involuntary termination of the participant's service within 18 months following
the effective date of the acquisition.
COMPENSATION OF DIRECTORS
Our Directors do not receive any cash compensation, but are entitled to
reimbursement of their reasonable expenses incurred in attending directors'
meetings.
We do not have any audit, nominating, compensation or other committee of our
Board of Directors.
Scott Baker is our only independent director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding our shares of
outstanding common stock beneficially owned as of the date hereof by (i) each of
our directors and executive officers, (ii) all directors and executive officers
as a group, and (iii) each other person who is known by us to own beneficially
more than 5% of our common stock based upon 68,090,590 issued shares of common
stock.
16
Name and Address Amount and Nature of Percent
of Beneficial Owners (1) Beneficial Ownership Ownership (2)
------------------------ -------------------- -------------
Carl P. Ranno, CEO, President, CFO, Director 2,452,900 3.6%
Neil C. Kitchen, Vice President, Director 2,401,455 3.5%
Diana Visco, Secretary 3,131,328 4.6%
Scott Baker, Director 1,354,818 2.0%
All executive officers and directors
as a group (4 persons) 9,340,501 13.7%
FLD Corporation 17,907,003 26.3%
----------
* Less than 1%.
1. C/o our address, 9018 Balboa Blvd. #558, Northridge, CA 91325, unless
otherwise noted.
2. Except as otherwise indicated, we believe that the beneficial owners of
common stock listed above, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject
to community property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Shares of common
stock subject to options or warrants currently exercisable, or exercisable
within 60 days, are deemed outstanding for purposes of computing the
percentage of the person holding such options or warrants, but are not
deemed outstanding for purposes of computing the percentage of any other
person.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Visco Family are the owners and directors of FLD Corporation, and own
17,907,003 shares of our common stock.
Note payable to Diana Visco in the amount of $959,842 bearing interest at the
prime rate of 3.25% at September 30, 2014 with interest payable monthly. The
note is unsecured and is due in December 2015.
In December of 2013, we moved our offices to a location in Northridge, CA from a
related party and does not require lease payments as our presence in the
facility nominal. We also rent storage space in Northridge and Phoenix, AZ for
approximately $200 per month.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our accountants dbbmckennon, a registered public accounting firm, was our
independent auditor and examined our financial statements to September 30, 2014
and performed the services listed below.
AUDIT FEES
The fees from dbbmckennon for professional services rendered for the audit of
our annual financial statements included in this Form 10-K and for the reviews
of the financial statements included in our quarterly reports on Form 10-Q
during the years ended September 30, 2014 and 2013 was $20,000 and $27,000,
respectively.
17
AUDIT RELATED FEES
The accounting firm of dbbmckennon was not paid additional fees during that
period for assurance and related services reasonably related to the performance
of the audit or review of our financial statements.
TAX FEES
Tax filings have not been completed for the 2014 or 2013 fiscal year, thus no
fees were paid.
ALL OTHER FEES
None
AUDIT COMMITTEE
We do not have an audit committee.
ITEM 15. EXHIBITS
3.1 Articles of Incorporation of New Directions Manufacturing, Inc., a
Nevada corporation, dated January 9, 1997 (1)
3.2 Amendment to Articles of Incorporation of New Directions Manufacturing,
Inc., a Nevada corporation, dated May 29, 1997 (1)
3.3 Amendment to Articles of Incorporation of New Directions Manufacturing,
Inc., dated January 4, 2000 (2)
3.4 Amendment to Articles of Incorporation of American Soil Technologies,
Inc., dated August 4, 2003 (3)
3.4 Bylaws of New Directions Manufacturing, Inc., dated May 29, 1997 (1)
3.5 Amended and Restated Bylaws of New Directions Manufacturing, Inc.,
dated July 20, 1998 (4)
3.6 Amendment to Articles of Incorporation, dated November 30, 2006
4.1 Convertible Debenture - Lump Sum Contribution (Form) (5)
4.2 Convertible Debenture - Incremental (Form) (5)
10.1 License Agreement between Ron Salestrom, American Soil Technologies,
Inc., and Polymers Plus, L.L.C., dated January 4, 2000 (2)
10.2 Sublease Agreement with The Customized Box Company, dated April 1, 2004
(6)
10.8 Employment Contract with Donette Lamson, dated January 18, 2006 (7)
10.12 Acquisition Agreement for Smart World Organics, dated July 7, 2006 (8)
10.14 Intellectual Property Purchase Agreement with Ray Nielsen, dated
December 20, 2006 (9)
10.15 Security Agreement with Ray Nielsen, dated December 22, 2006 (9)
10.16 Purchase and Sale Agreement and Joint Escrow Instructions for Silver
Terrace Nurseries, dated November 27, 2007 (12)
10.17 Employment Contract with Carl Ranno, dated May 23, 2008 (13)
10.18 Employment Contract with Neil Kitchen, dated May 23, 2008 (13)
10.19 Employment Contract with Diana Visco, dated May 23, 2008 (13)
21 Subsidiaries: Smart World Organics Inc. a Florida corporation
31.1 Certification of Chief Executive Officer Pursuant to the Securities
Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to the Securities
Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
101 Interactive data files pursuant to Rule 405 of Regulation S-T
18
----------
1. Incorporated by reference from our Registration Statement on Form SB-2,
filed on July 2, 1997, as amended (Registration No. 333-30583).
2. Incorporated by reference from our Form 10-KSB for the fiscal year ended
June 30, 2000, filed on September 27, 2000 (File No. 000-22855).
3. Incorporated by reference from our Form 10-KSB for the fiscal year ended
December 31, 2005, filed on April 3, 2006.
4. Incorporated by reference from our Form 10-KSB for the fiscal year ended
June 30, 1998, filed on September 16, 1998.
5. Incorporated by reference from our Form 10-QSB for the quarterly period
ended March 31, 2000, filed on May 15, 2000.
6. Incorporated by reference from our Form 10-QSB for the quarterly period
ended March 31, 2004, filed on May 5, 2004.
7. Incorporated by reference from our Form 10-QSB for the quarterly period
ended March 31, 2006, filed on May 17, 2006.
8. Incorporated by reference from our Form 10-QSB for the quarterly period
ended June 30, 2006, filed on August 14, 2006.
9. Incorporated by reference from our Form 10-KSB for the fiscal year ended
December 31, 2006, filed on April 18, 2007.
10. Incorporated by reference from our Form 10-KSB for the fiscal year ended
December 31, 2006, filed on April 18, 2007.
11. Incorporated by reference from our Form 10-KSB for the fiscal year ended
December 31, 2006, filed on April 18, 2007.
12. Incorporated by reference from our Form 10-KSB for the transition period
ended September 30, 2007, filed on February 15, 2008.
13. Incorporated by reference from our Form 10-K for the period ended September
30, 2008, filed on January 13, 2009
19
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, duly
authorized.
AMERICAN SOIL TECHNOLOGIES, INC.
DATED: January 13, 2015 By: /s/ Carl P. Ranno
---------------------------------------------
Carl P. Ranno
Director, Chief Executive Officer, President,
and Chief Financial Officer
(Principal Executive Officer, Principal
Financial Officer and Principal Accounting
Officer)
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
American Soil Technologies, Inc.
We have audited the accompanying consolidated balance sheets of American Soil
Technologies, Inc. and subsidiary, (collectively the "Company") as of September
30, 2014 and 2013 and the related statements of operations, stockholders'
deficit, and cash flows for the years then ended. The Company's management is
responsible for these consolidated financial statements. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in consolidated the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Soil
Technologies, Inc. and subsidiary as of September 30, 2014 and 2013, and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 of the
consolidated financial statements, the Company has sustained significant losses
and its viability is dependent upon its ability to obtain future financing and
successful operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with respect to these
matters are also discussed in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
dbbmckennon
---------------------------------------
Newport Beach, California
January 13, 2015
F-1
American Soil Technologies, Inc.
Consolidated Balance Sheets
September 30, 2014 September 30, 2013
------------------ ------------------
Assets:
Current assets
Cash and cash equivalents $ 3,157 $ 3,070
Accounts receivable, net of allowance of $35,088 at
September 30, 2014 and 2013, respectively 1,403 2,107
Inventories -- 4,526
Prepaid expenses and other current assets 676 676
------------ ------------
Total current assets 5,236 10,379
Property and equipment, net -- 75
Intangible assets -- 10,362
------------ ------------
Total assets $ 5,236 $ 20,816
============ ============
Liabilities and Stockholders' Deficit:
Current liabilities
Accounts payable $ 1,401,376 $ 1,468,203
Accrued liabilities 3,533,308 3,259,856
Notes payable 1,747,585 1,919,585
Notes payable to related parties 1,097,842 1,228,866
------------ ------------
Total liabilities 7,780,111 7,876,510
------------ ------------
Stockholders' deficit:
Series A preferred stock, $0.50 stated value, 25,000,000 shares
authorized, 2,763,699 shares issued and outstanding at
September 30, 2014 and 2013, respectively 1,381,849 1,381,849
Common stock, $0.001 par value, 100,000,000 shares authorized,
68,090,590 shares issued and outstanding at September 30, 2014
and 2013, respectively 68,091 68,091
Additional paid-in capital 19,831,800 19,831,800
Accumulated deficit (29,056,615) (29,137,434)
------------ ------------
Total stockholders' deficit (7,774,875) (7,855,694)
------------ ------------
Total liabilities and stockholders' deficit $ 5,236 $ 20,816
============ ============
See Notes to Consolidated Financial Statements.
F-2
American Soil Technologies, Inc.
Consolidated Statements of Operations
Year Ended Year Ended
September 30, 2014 September 30, 2013
------------------ ------------------
Revenue $ 29,568 $ 63,656
Cost of goods sold (excluding amortization
of intangible assets) 9,442 23,574
------------ ------------
Gross profit 20,126 40,082
------------ ------------
Operating expenses:
General and administrative 486,219 496,308
Sales and marketing 125 1,103
Amortization of intangible assets 10,362 41,447
------------ ------------
Total operating expenses 496,706 538,858
------------ ------------
Loss from operations (476,580) (498,776)
Other (income) expense
Interest expense 77,704 104,725
Gain on Extinguishment of debt (635,903) (142,060)
------------ ------------
Income (Loss) before income taxes 81,619 (461,441)
Provision for income taxes 800 800
------------ ------------
Net income (loss) $ 80,819 $ (462,241)
============ ============
Net income (loss) per share basic and diluted $ 0.00 $ (0.01)
============ ============
Weighted average shares basic 68,090,590 68,090,590
============ ============
Weighted average shares diluted 70,854,429 68,090,590
============ ============
See Notes to Consolidated Financial Statements
F-3
American Soil Technologies, Inc.
Consolidated Statements of Stockholders' Deficit
Series A Preferred Common Stock
------------------- ------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
Balance at September 30, 2012 2,763,699 $1,381,849 68,090,590 $ 68,091 $19,831,800 $(28,675,193) $ (7,393,453)
Net loss -- -- -- -- -- (462,241) (462,241)
--------- ---------- ---------- -------- ----------- ------------ ------------
Balance at September 30, 2013 2,763,699 1,381,849 68,090,590 68,091 19,831,800 (29,137,434) (7,855,694)
Net income -- -- -- -- -- 80,819 80,819
--------- ---------- ---------- -------- ----------- ------------ ------------
Balance at September 30, 2014 2,763,699 $1,381,849 68,090,590 $ 68,091 $19,831,800 $(29,056,615) $ (7,774,875)
========= ========== ========== ======== =========== ============ ============
See Notes to Consolidated Financial Statements.
F-4
American Soil Technologies, Inc.
Consolidated Statements of Cash Flows
Year Ended Year Ended
September 30, 2014 September 30, 2013
------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 80,819 $(462,241)
Adjustments to reconcile net income (loss) to net cash:
Gain on Extinguishment of Debt (635,903) (142,060)
Impairment of inventory 4,526 --
Depreciation and amortization 10,437 41,591
Changes in operating assets and liabilities:
Accounts receivable 704 (1,720)
Inventory -- 618
Prepaid expenses and other assets -- 559
Accounts payable (29,453) (67,803)
Accrued expenses 522,957 551,280
--------- ---------
Net cash used in operating activities (45,913) (79,776)
--------- ---------
Cash flows from financing activities:
Proceeds from related party notes 46,000 79,000
--------- ---------
Net cash provided by financing activities 46,000 79,000
--------- ---------
Net increase (decrease) in cash and cash equivalents 87 (776)
Cash and cash equivalents at beginning of period 3,070 3,846
--------- ---------
Cash and cash equivalents at end of period $ 3,157 $ 3,070
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,308 $ 6,505
Cash paid during the period for taxes $ -- $ --
See Notes to Consolidated Financial Statements.
F-5
American Soil Technologies, Inc.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
American Soil Technologies, Inc. (the "Company" or "American Soil"), formerly
Soil Wash Technologies, Inc., was incorporated in the state of California on
September 22, 1993. On November 24, 1999, the Company entered into an exchange
agreement for the reverse acquisition of New Directions Manufacturing, Inc., a
publicly traded Nevada corporation incorporated on January 9, 1997 ("New
Directions"), wherein New Directions would acquire the assets of the Company and
change its name to American Soil Technologies, Inc. This exchange agreement was
effective as of the close of business on December 31, 1999.
The Company is primarily engaged in the marketing and selling of polymer and
other soil amendments to the agricultural turf and horticulture industries. The
Company's products are used to decrease water usage, increase nutrient retention
in soil, enhance seed germination and sprout emergence, clarify ponds and
increase the effectiveness of chemical fertilizers and biological additives. In
2006, the Company acquired the patent to a slow release fertilizer. The Company
also has exclusive license rights to the use of patented polymer application
techniques, as well as numerous patents on a unique machine designed to inject
polymer and other liquid products into existing turf and some crops.
The Company expanded to provide next-generation and sustainable fertilizers
through the acquisition of Smart World Organics, Inc. ("Smart World") on
December 20, 2006. Simultaneously, the Company entered into an Intellectual
Property Purchase Agreement with the founder of Smart World, Ray Nielsen
("Nielsen") that included certain formulas originally believed to be proprietary
and intellectual properties used in the business of Smart World. The formulas
acquired from Nielsen were later deemed not to be proprietary and subsequently
deemed to have little or no value. Smart World sold homogenized fertilizers,
non-toxic insect controls, plant protectants, seed, soil and silage inoculants
and also provided advanced, custom-formulated products built to suit unusual
growing conditions and environments. Due to losses incurred, in 2008, management
terminated Smart World employees, consolidated Smart World operations with those
of American Soil, and continues to seek sales of certain of its products.
Additionally, the Company has several debt obligations related to Smart World
that are past the contractual maturity date or are due and payable due to non
payment of interest. Operations related to Smart World have been limited
subsequent to fiscal 2008 due to insufficient working capital.
GOING CONCERN AND MANAGEMENT'S PLANS
The Company has sustained significant losses and has an accumulated deficit of
$29,056,615 and negative working capital of $7,774,875 as of September 30, 2014.
The ability of the Company to continue as a going concern is dependent upon
obtaining additional capital and financing, and generating positive cash flows
from operations. The Company intends to seek additional capital either through
debt or equity offerings and is attempting to increase sales volume and
operating margins to achieve profitability. Due to the current economic
environment and the Company's current financial condition, management cannot be
assured there will be adequate capital available when needed and on acceptable
terms. These factors raise substantial doubt about the Company's ability to
continue as a going concern. If the Company is unable to raise capital or
sustain profitable operations, the Company may have to curtail or discontinue
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of American Soil
Technologies, Inc, and its wholly-owned subsidiary, Smart World Organics, Inc.
All intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. The Company's significant estimates made in connection
with the preparation of the accompanying financial statements include the
assessment of statute of limitations for certain of our creditors to enforce
collection of any amounts they may be owed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes all short-term highly liquid investments that
are readily convertible to known amounts of cash and have original maturities of
three months or less.
ACCOUNTS AND NOTES RECEIVABLE
The Company utilizes the allowance method to provide a reserve for uncollectible
accounts. The Company determines any required allowance by considering a number
of factors including length of time trade accounts receivable are past due and
the Company's previous loss history. The Company records a reserve for accounts
receivable when they become uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful accounts.
The Company performs ongoing credit evaluations and continually monitors its
collection of amounts due from its customers. The Company adjusts credit limits
and payment terms granted to its customers based upon payment history and the
customer's current creditworthiness. The Company does not require collateral
from its customers to secure amounts due from them. Reserves for uncollectible
amounts are provided based on past experience and a specific analysis of the
accounts which management believes is sufficient.
INVENTORIES
Inventories consist primarily of purchased polymer soil amendments. Inventories
are stated at the lower of cost (on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over the estimated useful
lives of the assets ranging from three to 10 years. Betterments, renewals and
extraordinary repairs that extend the lives of the assets are capitalized.
Repairs and maintenance costs are expensed as incurred. The cost and related
accumulated depreciation applicable to assets disposed or retired are removed
from the accounts, and the gain or loss on disposition is recognized in the
respective period.
F-7
LONG-LIVED ASSETS
The Company reviews its fixed assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less costs to sell. No
impairments were deemed necessary during fiscal 2014 and 2013.
INTELLECTUAL PROPERTY
Intellectual property (intangible assets) include the exclusive licenses to the
patented polymer application techniques and certain acquired intellectual
property which are being amortized using the straight-line method over the
respective estimated useful lives.
REVENUE RECOGNITION
In accordance with ASC No. 605, "Revenue Recognition", revenue is recognized
when products are shipped to a customer and the risks and rewards of ownership
have passed based on the terms of the sale. Royalty revenues are recognized
monthly based on customer usage as defined by individual agreements.
SHIPPING AND HANDLING COST
Shipping and handling fees charged to customers are included in revenue in
accordance with ASC No. 605, "Revenue Recognition". The shipping and handling
costs incurred by the Company are included in cost of sales.
INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740 "Income Taxes"
("ASC 740") which requires the Company to provide a net deferred tax
asset/liability equal to the expected future tax benefit/expense of temporary
reporting differences between book and tax accounting methods and any available
operating loss or tax credit carry forwards. If available evidence suggests that
it is more likely than not that some portion or all of the deferred tax assets
will not be realized, a valuation allowance is required to reduce the deferred
tax assets to the amount that is more likely than not to be realized. Future
changes in such valuation allowance are included in the provision for deferred
income taxes in the period of change.
ASC 740 also prescribes, among other things, a recognition threshold and
measurement attributes for the financial statement recognition and measurement
of uncertain tax positions taken or expected to be taken in a company's income
tax return. The Company utilizes a two-step approach for evaluating uncertain
tax positions. Step one or recognition, requires a company to determine if the
weight of available evidence indicates a tax position is more likely than not to
be sustained upon audit, including resolution of related appeals or litigation
processes, if any. Step two or measurement, is based on the largest amount of
benefit, which is more likely than not to be realized on settlement with the
taxing authority.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the exit price, or the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date. The guidance also establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of
F-8
observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability and are
developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company's assumptions about the
factors market participants would use in valuing the asset or liability. The
guidance establishes three levels of inputs that may be used to measure fair
value:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own assumptions.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash,
prepaids and other current assets, accounts receivable, accounts payable,
accrued liabilities, and notes payable. Fair values for these items were assumed
to approximate carrying values because of their short term in nature or they are
payable on demand.
As of September 30, 2014 and 2013, the Company had no material level 1,2, or 3
assets or liabilities.
RESEARCH AND DEVELOPMENT EXPENSES
The Company expenses research and development costs as incurred.
LEGAL COSTS ASSOCIATED WITH LOSS CONTINGENCIES
The Company expenses legal costs in connection with loss contingencies as
incurred and included in accounts payable.
CONCENTRATION OF CREDIT RISK
Accounts receivable from individual customers representing 10% or more of the
net accounts receivable balance consists of the following as of September 30:
2014 2013
---- ----
Percent of accounts receivable 100% 100%
Number of customers 1 1
Sales from individual customers representing 10% or more of sales consist of the
following customers for the years ended September 30:
2014 2013
---- ----
Percent of sales 95% 96%
Number of customers 1 3
As a result of the Company's concentration of its customer base, the loss or
cancellation of business from, or significant changes in scheduled deliveries of
product sold to the above customers or a change in their financial position
could materially and adversely affect the Company's consolidated financial
position, results of operations and cash flows.
F-9
STOCK-BASED COMPENSATION
The Company accounts for equity based compensation under the provisions of ASC
No. 718, "Compensation, Stock Compensation" ("ASC 718"). ASC 718 requires the
recognition of the fair value of equity-based compensation in net income. The
fair value of the Company's stock option awards are estimated using a
Black-Scholes option valuation model. This model requires the input of highly
subjective assumptions and elections including expected stock price volatility
and the estimated life of each award. The fair value of equity-based awards is
amortized over the vesting period of the award.
NET LOSS PER SHARE
Basic loss per share is calculated by dividing net loss by the weighted average
common shares outstanding during the period. Diluted net loss per share reflects
the potential dilution to basic EPS that could occur upon conversion or exercise
of securities, options or other such items to common shares using the treasury
stock method, based upon the weighted average fair value of our common shares
during the period. For each period presented, basic and diluted loss per share
amounts are identical as the effect of potential common shares is antidilutive.
The following is a summary of outstanding securities which have been excluded
from the calculation of diluted net loss per share because the effect would have
been antidilutive for the following periods:
2014 2013
---------- ----------
Series A convertible preferred stock -- 2,763,699
---------- ----------
-- 2,763,699
========== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issues ASUs to amend the authoritative literature in ASC. There have
been a number of ASUs to date that amend the original text of ASC. The Company
believes those issued to date either (1) provide supplemental guidance, (ii) are
technical corrections, (iii) are not applicable to the Company or (iv) are not
expected to have a significant impact on the Company.
3. INVENTORIES
Inventories consist of the following at September 30:
2014 2013
-------- --------
Raw materials $ -- $ --
Finished goods -- 4,526
-------- --------
$ -- $ 4,526
======== ========
F-10
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at September 30:
Estimated
useful life
(in years) 2014 2013
----------- ---------- ----------
Machinery 10 $ 543,793 $ 543,793
Office furnishings, fixtures
and equipment 3-5 25,068 25,068
---------- ----------
568,861 568,861
Less accumulated depreciation (568,861) (568,786)
---------- ----------
$ -- $ 75
========== ==========
Depreciation expense for the year ended September 30, 2014 and 2013 was $75 and
$144 respectively.
5. INTANGIBLE ASSETS AND GOODWILL
The following table summarizes the components of intangible assets as of
September 30:
Soil Medic patent
-----------------
Balance at September 30, 2012 $ 51,809
Additions --
Amortization (41,447)
Impairment --
--------
Balance at September 30, 2013 $ 10,362
Additions --
Amortization (10,362)
Impairment --
--------
Balance at September 30, 2014 $ --
========
Weighted average remaining life at:
September 30, 2014 0.0
September 30, 2013 0.2
Amortization expense was $10,362 and $41,447 for the years ended September 30,
2014 and 2013, respectively. The patent related to the intangible asset expired
in fiscal 2014.
F-11
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable consisted of the following at September 30:
2014 2013
---------- ----------
Accounts payable $ 468,713 $ 511,660
Accounts payable - related party 328,742 352,622
Accrued litigation 603,921 603,921
---------- ----------
$1,401,376 $1,468,203
========== ==========
DEBT MITIGATION
The Company has significant liabilities that have been incurred due to continued
operating losses and the acquisition of Smart World in 2006. In order to attract
potential capital, the Company has conducted analysis on past due obligations to
creditors. We determined that the statute of limitations for certain of our
creditors to enforce collection of any amounts they might be owed has now
elapsed. Based on our determinations and findings, during the year ended
September 30, 2013, we have eliminated $142,060 in creditor liabilities which
were all previously included in accounts payable in the accompanying balance
sheet. During the year ended September 30, 2014,we eliminated an additional
$286,879 in creditor liabilities which were previously included in the accounts
payable as well $349,024 in notes payable previously included in the
consolidated balance sheet.
The Company will continue to conduct analysis on creditor obligations to
determine when and if they are no longer enforceable.
Accrued expenses consisted of the following at September 30:
2014 2013
---------- ----------
Interest $ 351,659 $ 460,565
Interest to related parties 238,400 305,602
Compensation and related 2,943,249 2,493,689
---------- ----------
$3,533,308 $3,259,856
========== ==========
7. NOTES PAYABLE
Notes payable consists of the following at September 30:
2014 2013
----------- ------------
Convertible debenture payable to a related party. $ 25,000 $ 25,000
Original balance of $25,000 bearing interest at 8% per
annum with interest payable quarterly. The principal was
convertible into common stock at a conversion price of
$0.50 per share.
Convertible debenture payable to a related party 25,000 25,000
bearing interest at 8% per annum with interest payable
quarterly. The principal was convertible into common
stock at a conversion price of $0.50 per share. The
principal was due February 1, 2008.
F-12
Note payable to a related party, original balance of 88,000 88,000
$85,000 bearing interest at prime rate payable monthly.
Note is unsecured and was due August 31, 2011.
Note payable to Diana Visco bearing interest at the 959,842 913,842
prime rate of 3.25% with interest payable monthly.
The note is unsecured and is due in December 2015.
Convertible debenture payable to a related party. -- 177,024
Original balance of $250,000 bearing interest at a rate
of 10% per annum. Monthly principal and interest
payments of $3,000 are due through 2014. The note is
in default for non-payment. Principal was convertible
into common stock at a conversion price of $3.00 per
share. The note was unsecured and extinguished per our
debt mitigation program in fiscal 2014
Convertible debenture payable to Ray Nielsen bearing 1,500,000 1,500,000
interest at a rate of 8% per annum with interest
payable quarterly. The principal balance was convertible
at the proceeding day's rate for one share of common
stock. The note is secured by the intellectual property
acquired from the note holder. The principal was due on
January 19, 2008.
Convertible debenture payable to an unrelated party 30,000 30,000
bearing interest at a rate of 8% per annum with
interest payable quarterly. The principal balance was
convertible into common stock at a rate of $0.25 per
share. The note is unsecured. The principal was due on
October 1, 2008.
Convertible debenture payable to an unrelated party 30,000 30,000
bearing interest at a rate of 8% per annum with
interest payable quarterly. The principal was
convertible into common stock at a rate of $0.10 per
share. Note is unsecured and was due October 1, 2008.
Convertible debenture payable to an unrelated party -- 30,000
bearing interest at a rate of 8% per annum with
interest payable quarterly. The principal was
convertible into common stock at a rate of $0.10 per
share. Note was unsecured and due October 1, 2008.
The note was extinguished per our debt mitigation
program in fiscal 2014
Notes payable to various individuals with interest 112,585 254,585
rates ranging from 6% to 20%. The notes are currently
in default.
F-13
Convertible debenture to an unrelated party bearing 75,000 75,000
interest at a rate of 10% per annum with interest
payable quarterly. The principal was convertible into
common stock at a conversion price of $0.19 per share.
Note is unsecured and was due on July 18, 2009.
----------- -----------
2,845,427 3,148,451
----------- -----------
Current portion (2,845,427) (3,148,451)
----------- ------------
Long-term portion $ -- $ --
=========== ============
All notes, including the note to Diana Visco due in December 2015 are currently
in default and are no longer convertible based on the terms of each note. Ms.
Visco's note is in default due to non-payment of monthly interest. See Note 13
for the new note issued to Ms. Visco.
8. INCOME TAXES
The provision for income taxes is comprised of the following for the years ended
September 30:
2014 2013
-------- --------
Federal $ -- $ --
State (800) (800)
-------- --------
Provision for income taxes $ (800) $ (800)
======== ========
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The differences between the federal statutory tax rate of 34% and the effective
tax rates are primarily due to state income tax provisions, net operating loss
("NOL") carry forwards, deferred tax valuation allowance and permanent
differences as follows for the years ended September 30:
2014 2013
-------- --------
Statutory rate (34%) (34%)
Increase (decrease) in taxes resulting
from the following:
Permanent differences --% --%
State income taxes, net of federal benefit 6% 6%
Change in valuation allowance 27% 28%
-------- --------
1% --%
======== ========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-14
Significant components of the Company's deferred tax assets and liabilities
consist of the following at September 30:
2014 2013
------------ ------------
Deferred tax assets (liabilities):
Current:
Reserves and accruals $ 1,698,637 $ 1,547,123
Non-current:
Intangible assets 597,000 597,000
Net operating losses 4,667,473 5,406,460
Other 60,031 60,031
Valuation allowance (7,023,141) (7,610,614)
------------ ------------
$ -- $ --
============ ============
At September 30, 2014 and 2013, the valuation allowance was decreased by a total
of $587,472 and $146,799 respectively. At September 30, 2014, the Company had
federal net operating loss carryforwards of approximately $20,222,279 that
expire from 2014 through 2033 and state net operating carryforwards of $893,413
expiring from 2014 through 2018. These net operating losses may be suspended or
limited due to changes in State and Federal legislation, as well as a possible
change in ownership as defined under Section 382 of the IRC. During the year
ended September 30, 2014, approximately $1,074,000 and $1,021,000 in federal and
state net operating loss carryforwards expired.
The Company has not filed its United States Federal and State tax returns for
the years ended 2008-2013. Management intends to comply with the requirements to
file the tax returns upon raising capital. Failure to file the tax returns could
result in penalties assessed against the Company. The Company has identified the
United States Federal tax returns as its "major" tax jurisdiction. The United
States Federal return years 2008 through 2013 are still subject to tax
examination by the United States Internal Revenue Service, when filed; however,
we do not currently have any ongoing tax examinations. The Company is subject to
examination by the California Franchise Tax Board for the years ended 2008
through 2013 and currently does not have any ongoing tax examinations.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
On or about September 21, 2007, Stockhausen, Inc. ("Stockhausen") filed a
Complaint in the United States District Court, for the Middle District of North
Carolina, against us seeking damages. The parties entered into a settlement
agreement on June 2, 2010. Under the settlement agreement, we agreed to pay
Stockhausen $250,000 on or before June 23, 2010 as a compromise to Stockhausen's
claims that currently total $603,921. We further agreed that we would consent to
the entry of a Judgment against us in favor of Stockhausen in the amount of
$603,921 if we failed to make complete and timely payment as agreed. The Company
was unable to make the agreed upon payment and on July 8, 2010, Stockhausen
entered a judgment for the above stated amount against the Company. The Company
has accrued $603,921 related to the litigation as of September 30, 2014 and
2013, which is included in accounts payable in the accompanying balance sheets.
On or about October 4, 2007, Raymond J. Nielsen and Cheryl K. Nielsen
(collectively, "Plaintiffs"), filed a Complaint in the Circuit Court in the
Sixth Judicial District of Pasco County, Florida, against us and Smart World
(collectively "Defendants") seeking damages, declaratory, and injunctive relief.
Plaintiffs allege that Defendants failed to pay interest when due on the
F-15
Convertible Debenture from Defendants to Plaintiffs and, thus, the entire amount
of the Convertible Debenture is accelerated and Plaintiffs are seeking a
judgment in the amount of $1,500,000 plus interest. On December 29, 2009, the
matter was settled for $400,000 and the company had 60 days in which to remit
the amount or a judgment in the amount claimed would be entered against us. The
Company was not able to meet the terms of the settlement and have been actively
communicating with the Plaintiffs to extend the terms of the settlement.
11. PREFERRED STOCK
The Company has 25,000,000 preferred stock authorized of which 2,763,699 shares
of $0.50 stated value Series A convertible preferred stock ("Series A
Preferred") are issued and outstanding as of September 30, 2014 and 2013. The
Series A Preferred have the following characteristics:
DIVIDENDS
Each holder is entitled to receive preferential quarterly dividends equal to the
prime interest rate as quoted in the Wall Street Journal when and if declared by
the Board of Directors, out of any assets that are legally available. If the
Board of Directors declares that such dividends may only be payable in shares of
common stock for any quarter, holders of Series A preferred stock have the
option of accepting the dividend paid in shares of common stock of the Company,
or letting the dividend accrue for a cash payment. No dividends have been
declared, accrued or paid during the years ended September 30, 2014 and 2013.
CONVERSION
Each holder has the option to convert each share of Series A Preferred into
common stock at a rate of one share of common stock for each share of preferred
stock tendered.
VOTING
The holders have no voting rights.
LIQUIDATION PREFERENCE
Each holder is entitled to be paid the stated value of their holdings out of the
assets of the Company, prior and in preference to any payment or distribution
out of the assets of the Company to the holders of common stock or any other
class or series of capital stock.
12. COMMON STOCK
STOCK OPTIONS
In November 2002, the Company enacted a stock option plan (the "2002 Plan") to
provide additional incentives to selected employees, directors and consultants.
Two million shares were authorized for grant. The purchase price of the common
stock subject to each Incentive Stock Option was not be less than the fair
market value or in the case of a grant of an incentive stock option to a
principal shareholder, not less than 110% of the fair market value of such
common stock at the time each option was granted. The 2002 Plan terminated in
November 2012. The options are fully-vested when granted and are exercisable for
a period of ten years from the date of grant and are subject to cancellation
upon termination of employment.
On January 6, 2005, the Company enacted the 2005 Stock Option/Stock Issuance
Plan (the "2005 Plan"). The 2005 Plan provides for the issuance of up to
10,000,000 shares of common stock to our directors, officers, employees and
consultants in the form of stock options and shares of common stock. The 2005
Plan has two separate components: the option grant program and the stock
issuance program.
F-16
Grants under the option grant program may be structured as installment options
which become exercisable for vested shares over the optionee's period of service
or as immediately exercisable options for unvested shares which will be subject
to repurchase by the Company, at the option exercise price paid per share, upon
the optionee's termination of service prior to vesting in those shares. All
option grants must have an exercise price not less than 100% of the fair market
value of the option shares on the grant date.
The stock issuance program allows eligible persons to purchase shares of common
stock at fair market value or at a discount of up to 15% of fair market value.
The shares may be fully vested when issued or may vest over time as the
recipient provides services or as specified performance objectives are attained.
In addition, shares of common stock may be issued as bonus awards in recognition
of services rendered, without any cash outlay required of the recipient.
Upon stock option exercise, the Company issues new shares of common stock.
The following table summarizes stock option activity under the above stock
option plans:
Remaining
Number of Weighted-Average Contractual Term
Shares Exercise Price (in years)
------ -------------- ----------
Outstanding at September 30, 2012 450,000 $0.50 0.1
Granted --
Exercised --
Cancelled 450,000 $0.50 0.0
-----------
Outstanding at September 30, 2013 -- -- --
Granted --
Exercised --
Cancelled --
-----------
Outstanding at September 30, 2014 -- -- --
===========
The fair value of stock options awarded were estimated at the date of grant
using the Black-Scholes option-pricing model. The expected option term was
estimated based upon the contractual term of the underlying stock option. The
expected volatility of the Company's stock price was based upon the historical
daily changes in the price of the Company's common stock. The risk-free interest
rate was based upon the current yield on U.S. Treasury securities having a term
similar to the expected option term. Dividend yield is estimated at zero because
the Company does not anticipate paying dividends in the foreseeable future.
There were no options issued during the years ended September 30, 2014 and 2013
that required valuation. All options outstanding as of September 30, 2012
expired during fiscal 2013 and were cancelled. The Company does not have any
option exercisable or outstanding as of September 30, 2014.
F-17
At September 30, 2013, all stock options expired, and there is no remaining
unrecognized compensation expense.
Stock based compensation expense was $0 for the years ended September 30, 2014
and 2013, respectively.
13. RELATED PARTY TRANSACTIONS
During the year ended September 30, 2014, Ms. Visco loaned the Company an
additional $46,000. The Company entered into a new note for $959,842 with Ms.
Visco which superseded all previous notes. The principal is due on December 1,
2015. Interest is payable monthly based on the current Prime Rate of 3.25%. The
note is considered to be in default due to non-payment of monthly interest.
See Note 14 for additional loan subsequent to September 30, 2014
Interest expense incurred in connection with outstanding loans and notes payable
to Ms. Visco or entities partially controlled was $30,697 and $28,951 for the
year ended September 30, 2014 and 2013, respectively.
14. SUBSEQUENT EVENTS
Subsequent to year end, Ms. Visco loaned the Company an additional $10,000,
under similar terms as previous notes.
F-1
