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, 2009
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.)
12224 Montague Street, Pacoima, California 91331
(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 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 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]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
For the fiscal year ended September 30, 2009, our revenue was $236,954.
As of January 13, 2010, the number of shares of common stock outstanding was
68,090,590. As of January 13, 2010, the aggregate market value of our common
stock held by non-affiliates was approximately $249,515 (based upon 24,951,469
shares at $0.01 per share).
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference: (i) Registration
Statement on Form SB-2, filed on July 2, 1997, as amended (Registration No.
333-30583); (ii) Form 10-KSB for the fiscal year ended June 30, 1998, filed on
September 16, 1998; (iii) Form 10-QSB for the quarterly period ended March 31,
2000, filed on May 15, 2000; (iv) Form 10-KSB for the fiscal year ended June 30,
2000, filed on September 27, 2000 (File No. 000-22855); (v) Form 10-QSB for the
quarterly period ended March 31, 2004, filed on May 5, 2004; (vi) Form 10-QSB
for the quarterly period ended September 30, 2005, filed on November 14, 2005;
(vii) Form 10-KSB for the fiscal year ended September 30, 2006, filed on April
3, 2006; (viii) Form 10-QSB for the quarterly period ended March 30, 2006, filed
on May 17, 2006 ; (ix) Form 10-QSB for the quarterly period ended June 30, 2006,
filed on August 14, 2006; (x) Form 10-QSB for the quarterly period ended
September 30, 2006, filed on November 14, 2006; and (xi) Form 10-KSB for the
fiscal year ended December 31, 2006, filed on April 18, 2007; and (xii) Form 8-K
disclosing a change in Registered Certifying Accounts, filed on May 15, 2007;
and (xiii) Form 10-QSB for the quarterly period ended March 31, 2007 filed on
May 21, 2007 and filed as amended on June 8, 2007; and (xiv) Form 10-QSB for the
quarterly period ended June 30, 2007 and filed on August 20, 2007; and (xv) Form
10KT a Transition Report for the period January 1, 2007 to September 30, 2007
and filed on February 15, 2008 and amended and filed on February 25, 2008; and
(xvi) an S-8 Registration Statement filed on February 29, 2008; and (xvii) Form
10-QSB for the quarterly period ended March 31, 2008 filed on May 20, 2008; and
(xviii) Form 10-QSB for the quarterly period ended June 30, 2008 are
incorporated in Part III, Item 13; Form 10Q for the quarterly period ended
December 31, 2009 filed on February 23, 2009; and (xviv;) Form 10Q for the
quarterly period ended March 31, 2009 filed on June 22, 2009; and (xvv) Form 10Q
for the quarterly period ended June 30, 2009 filed on August 14, 2009.
TABLE OF CONTENTS
Page
----
ITEM 1 DESCRIPTION OF BUSINESS.......................................... 1
ITEM 2 DESCRIPTION OF PROPERTY.......................................... 5
ITEM 3 LEGAL PROCEEDINGS................................................ 6
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 6
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 6
ITEM 6 SELECTED FINANCIAL DATA.......................................... 8
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 8
ITEM 8 FINANCIAL STATEMENTS............................................. 18
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................... 18
ITEM 9A CONTROLS AND PROCEDURES.......................................... 19
ITEM 9B OTHER INFORMATION................................................ 19
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT................ 19
ITEM 11 EXECUTIVE COMPENSATION........................................... 21
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.................................. 26
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 27
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES........................... 28
ITEM 15 EXHIBITS ........................................................ 28
SIGNATURES................................................................. 30
PART I
ITEM 1. BUSINESS
DEVELOPMENT OF BUSINESS
American Soil Technologies, Inc., formerly Soil Wash Technologies, Inc., was
incorporated in California on September 22, 1993 in the soil remediation
business. In May 2002, we discontinued the soil remediation business.
BUSINESS OF ISSUER
We develop, manufacture and market cutting-edge technology that decreases the
need for water and improves the soil in the "Green Industry" consisting of
agriculture, turf and horticulture. Our products enhance growing environments
and reduce the environmental damage caused by common growing practices.
We manufacture three primary products: Agriblend(R), a patented soil amendment
developed for agriculture; Soil Medic, a patented slow release liquid
fertilizer; and NutrimoistL(R), developed for homes, parks, golf courses and
other turf related applications.
We market our products primarily in the United States. We will add sales
representatives and distributors in both the agriculture and turf industries
upon receipt of adequate funding. The following table shows the current
distributors and sales representatives of our products and products we license
from others:
Distributor/Sales
Representative Product Territory
-------------- ------- ---------
Gigot Aqua Services Agriblend(R) Kansas, Oklahoma, Nebraska,
Nutrimoist(R) Colorado, northern Texas,
Extend(TM) northern New Mexico
Sircle Saver Sacks(R)
The Pacific Tree Company Agriblend(R) Exclusive distributor of our
Soil Medic products for the Paulownia
Nutrimoist(R) Megafolia Tree in the United
States
Environmental Development Nutrimoist Kuwait and the UAE
Company Agriblend
Turf Masters Soil Medic(TM) San Diego and Orange Counties
Soil Therapy(TM) California and Northern Mexico
Reinke Pasco, Inc. Agriblend(R) Washington
Nutrimoist(R)
Extend(TM)
Stockosorb(R)
Stockopam(R)
Dust Contain
Sircle Saver Sack(R)
1
The Kern Company Agriblend(R) Washington
Nutrimoist(R)
Extend(TM)
Canal Seal
Dust Contain
Anchor MP
Sircle Saver Sack(R)
Hydromulch
Pure Chemicals Nutrimoist and
future products Israel
Echo Trading Company Agriblend Country of Morocco
Nutrimoist
We also act as a distributor for products manufactured by others as follows:
Manufacturer Product Territory
------------ ------- ---------
JT Water Management LLC Extend(TM), a liquid linear polymer, Western United States
and Contain, a dust control
technology
Richard Roos Sircle Saver Sack(R) Exclusive Worldwide
Soil Saver Sack(TM)
Midwest Industrial Supply, Inc. Soil-Sement(R)and Envirokleen(R), Those areas where the
environmentally certified dust and manufacturer does not already
erosion control products have an exclusive dealer or
distributor
On July 7, 2006, we acquired Smart World Organics, Inc. ("Smart World") as a
wholly-owned subsidiary. Smart World is a "C" corporation located in Hudson,
Florida. Smart World has developed organic and sustainable products through a
unique research approach. The products are sold directly to the end user and
through distributors on a worldwide basis.
Smart World provides next-generation organic and sustainable fertilizers to
commercial and residential customers worldwide. Smart World also provides
advanced, custom-formulated products built to suit unusual growing conditions
and environments. The product line includes homogenized fertilizers, non-toxic
insect controls, plant protectants, seed, soil and silage inoculants.
We issued 2,300,000 shares of common stock to the shareholders of Smart World in
exchange for 100% of the shares of common stock of Smart World and assumed
approximately $400,000 in notes and trade payables.
On December 20, 2006, we entered into an Intellectual Property Purchase
Agreement with Ray Nielsen whereby we purchased from Mr. Nielsen any and all
intellectual property of Mr. Nielsen, including all formulas developed by Mr.
Nielsen over the past 30 years, including but not limited to all formulas and
2
intellectual property used in the business of Smart World, including all
graphics and logos; all domain names and URL's; any proprietary software and its
source code; all existing content and HTML files; all branding and trademarks;
all trade names; all services marks; all copywritten material; all patents; and
all products and proceeds of the foregoing, in any form whatsoever and
wheresoever located (collectively the "Intellectual Property"), in exchange for
a convertible debenture in the amount of $1,500,000 and bearing an interest rate
of 8% per annum (the "Convertible Debenture").
The Convertible Debenture is secured by the Intellectual Property. The principal
of the Convertible Debenture and any unpaid accrued interest thereon is due and
payable on January 19, 2008. We were to make quarterly interest payments until
the maturity date. The Convertible Debenture is convertible at the option of Mr.
Nielsen at any time prior to the maturity sate into shares of our common stock
at a conversion price equal to the closing price of our common stock for the day
immediately proceeding the date of conversion. A dispute has arisen between Mr.
Nielsen and us regarding the Convertible Debenture and the uniqueness and value
of the Intellectual Property. See "Legal Proceedings."
COMPETITION
To the best knowledge of our management, there is no direct competition for our
Agriblend(R) product, however, earlier polymer based technology was very
expensive and the remembrance of its cost has a negative effect on marketing
Agriblend(R). Accordingly, educating the end user regarding the benefits of
using Agriblend(R) and gaining general acceptance of the new "micro grain"
technology are obstacles to marketing the product.
There is some competition to our straight polymer products by companies that
have been in business for a number of years.
There is some competition for Extend(TM) however we have not as yet found a
higher quality liquid linear polymer product.
We are not aware of any competition to Nutrimoist(R) L other than from our
manufacturer(s) who would have to use our polymer to manufacture the product
pursuant to our agreement.
The newly acquired slow release fertilizer Soil Medic does not seem to have
competition at this time.
There is more competition for the organic products that we distribute and
manufacture through Smart World in that our former employee is marketing similar
products in a limited market.
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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 Pacoima,
California. Nutrimoist(R) is blended by us through contract blenders and is a
combination of different formulations, which include our polymer products. Two
licensees under our patent manufacture our liquid slow release fertilizer.
Custom blending of Soil Medic, as needed, is performed by us through independent
blenders. Our organic products are manufactured at our Smart World plant in
Hudson, Florida. The Agro Tower is manufactured for us by Make-It Manufacturing
in Paso Robles, California.
DEPENDENCE ON MAJOR CUSTOMERS
We are not dependent on any one customer for a substantial portion of our sales
of any product.
INTELLECTUAL PROPERTY
We have six patents on the M-216 Polymer Injector machine designed to install
our Nutrimoist(R) product into mature turf.
On March 21, 2006, we acquired the U.S. patent on a slow release liquid
fertilizer through our acquisition of Advanced Fertilizer Technologies, Inc.
We have exclusive worldwide manufacturing/marketing rights to patented super
absorbent cross-linked polymer application technology. The underlying patents
include United States Patent number 5,649,495 and 5,868,087, commonly known and
described as "Agricultural Retention Mixture and Application Technique."
We have exclusive worldwide marketing rights to the patent pending linear
polymer product known as the Sircle Saver Sack(TM).
We own registered trademarks on the names, Agriblend(R), Nutrimoist(R),
Hydroganic(R) and Prosper(R).
We have world wide marketing rights to a patented product known as the Agro
Tower.
We own the right to numerous formulas used to manufacture organic and
sustainable soil amendments, fertilizers and insecticides.
4
GOVERNMENT APPROVAL
Agriblend(R) and our other polymers are subject to regulatory standards
developed by the Environmental Protection Agency ("EPA") that are applicable to
maximum monomer concentrations in polymers. Polymer products cannot exceed
monomer concentrations of 200 mg/kg. All of the polymers we use are well below
the maximum monomer standard.
Many of our products are organically approved through the National Organic
Program ("NOP") and registered under EPA section 25B.
RESEARCH AND DEVELOPMENT COSTS
We spent $33 on research and development during the year ended September 30,
2009 as compared to $4,299 spent on research and development during the period
ended September 30, 2008.
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 and one part-time
employee. 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. NOT APPLICABLE
ITEM 1B. NOT APPLICABLE
ITEM 2. DESCRIPTION OF PROPERTY
On April 1, 2004, we entered into a Sublease Agreement to sublet 923.50 square
feet located at a facility in Pacoima, California. The majority shareholder of
the sublessor is a related party to us. All of our operations are conducted from
this facility, which requires monthly rental payments of approximately $554. The
Sublease Agreement expired on December 31, 2008 and we continue to rent the
facilities on a month to month basis. We also rent storage space in Tucson and
Phoenix, Arizona for approximately $200 per month. We rent 6,800 square feet
located in Hudson Florida for $2,914 per month on a month to month basis. This
facility is used for office and manufacturing of our Smart World products.
5
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. Stockhausen alleges that we breached an
agreement with them by failing to pay for goods purchased and failing to
purchase a minimum quantity of goods. We believe that Stockhausen provided
Defective products and waived any minimum purchase requirements. Stockhausen is
seeking a judgment in the amount of $188,180 plus interest and lost profits in
an unspecified amount, along with costs and attorneys fees. We filed an Answer
to the Complaint and a Cross-Complaint against Stockhausen on November 14, 2007.
Stockhausen has filed a motion to strike our answer and counterclaim which has
been recommended to the judge by the magistrate. We have filed a brief in
opposition as well as an explanation of damages and are awaiting the courts
decision.
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 has 60 days in which to remit
the amount or a judgment in the entire amount claimed will be entered against
us.
To the best knowledge of our management, there are no other legal proceedings
pending against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITES
MARKET FOR COMMON EQUITY
Our common stock is currently quoted on the Over-The-Counter Bulletin Board
under the Symbol "SOYL." Set forth below is the trading history of our common
stock without retail mark-up, mark-down or commissions:
6
2008
First Quarter .................. 0.09 0.08
Second Quarter ................. 0.12 0.03
Third Quarter .................. 0.05 0.01
Fourth Quarter ................. 0.02 0.01
2009
First Quarter .................. 0.03 0.01
Second Quarter ................. 0.01 0.01
Third Quarter .................. 0.01 0.01
Fourth Quarter ................. 0.05 0.01
On January 12, 2010, the closing stock price was $0.01.
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 January 9, 2010, 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.
DIVIDENDS
We have paid no dividends on our common stock since inception and do not
anticipate or contemplate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On September 2, 2009, Valerie Sarofim purchased a Convertible Debenture for
$125,000 , which on October 8, 2009, she converted into 3,125,000 shares of
common stock at the conversion price of $0.04 per share. We believe that Ms
Sarofim is an "accredited investor" under Rule 501 Regulation D of the Act and
had adequate access to information about us.
On October 8, 2009, the Board of Directors granted 1,000,000 shares of common
stock to each of its Directors Carl Ranno, Neil Kitchen,Scott Baker and to Diana
Visco. The grant was made because of each respective recipients contribution to
the Company. We believe that these individuals are "accredited investor" under
Rule 501 Regulation D of the Act and had adequate access to information about
us.
7
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, 2009 September 30, 2008
------------------ ------------------
(Audited) (Audited)
STATEMENT OF OPERATIONS DATA:
Revenue $ 236,954 $ 561,704
Loss From Continuing Operations (2,717,529) (2,777,799)
(Net Loss) (2,837,215) (2,678,876)
(Continuing Operations) Loss Per Share $ (0.05) $ (0.05)
(Net Loss) Per Share $ (0.05) $ (0.05)
BALANCE SHEET DATA:
Current Assets $ 120,068 $ 232,687
Property & Equipment, net 78,824 151,728
Intangible Assets; net 212,038 1,407,553
Total Assets 411,186 2,374,324
Total Current Liabilities (5,147,112) (4,415,879)
Accumulated Deficit (25,821,705) (22,984,490)
Stockholders' Deficit $ (4,864,453) $ (2,068,072)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
financial statements, including the notes thereto, appearing elsewhere in this
Report.
THE FOLLOWING INFORMATION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS OF OUR
MANAGEMENT. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE
HAPPENING OF FUTURE EVENTS AND ARE NOT BASED ON HISTORICAL FACT. FORWARD-LOOKING
STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS
"MAY," "COULD," "EXPECT," "ESTIMATE," "ANTICIPATE," "PLAN," "PREDICT,"
"PROBABLE," "POSSIBLE," "SHOULD," "CONTINUE," OR SIMILAR TERMS, VARIATIONS OF
THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN COMPILED BY OUR MANAGEMENT ON
THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND CONSIDERED BY MANAGEMENT TO BE
REASONABLE. OUR FUTURE OPERATING RESULTS, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND
NO REPRESENTATION, GUARANTY, OR WARRANTY IS TO BE INFERRED FROM THOSE
FORWARD-LOOKING STATEMENTS.
8
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, 2009 COMPARED TO SEPTEMBER 30, 2008
REVENUES
Revenues for the fiscal year-ended September 30, 2009 were $236,954 compared to
$561,704 for the fiscal year ended September 30, 2008, a decrease of 57.8%. This
decrease in revenue is directly related to severe economic conditions, which
necessitated a reduction in our sales and marketing staff and competition from a
former employee.
COST OF SALES
Cost of goods sold decreased to $110,483 for the fiscal year ended September 30,
2009 from $344,884 for the fiscal year ended September 30, 2008. The decrease in
the cost of sales is the result of the decrease in revenues during this period.
Our gross margins were 53.4% and 38.6% for the years ended September 30, 2009
and September 30, 2008, respectively. The increase in our gross margins was
caused by a decrease in the cost of raw materials
OPERATING EXPENSES
Operating expenses decreased approximately 3% for the fiscal year ended
September 30, 2009. This decrease in operating expenses is a result of many
factors.
General and administrative expenses decreased approximately 23% for the fiscal
year ended September 30, 2009 due to a reduction in staff and general
operational expenses.
Sales and marketing expenses decreased approximately 63% in that we further
reduced the amount of trade shows we attended, the sales force and the amount of
advertising.
Impairment of tooling was $67,500 and $0 for the years ended September 30, 2009
and 2008, respectively. In 2009, we could not determine that the tooling costs
to be used in our manufacturing will be recoverable through future cash flows
with any reliability or probability, as the tooling needs modifications and
likely could not be sold. At the present time, we believe it is unlikely the
Company will be able to recover the tooling costs through future cash flows.
Research and development costs have been eliminated because we have basically
completed our research and development on our existing products.
The amortization expense was $346,131 and $507,157 for the years ended September
30, 2009 and 2008, respectively.
The impairment of intangible assets and goodwill was $1,213,984 and $845,390 for
the years ended September 30, 2009 and 2008, respectively. In 2009, we could not
determine that our intangible assets will be recoverable through future cash
flows with any reliability or probability, as the Company has suffered from lack
of funding to to exploit technologies and formulas. At the present time, we
believe it is unlikely the Company will be able to recover its intangible assets
through future cash flows.
9
INTEREST EXPENSE
Interest expense decreased 62.6% for the fiscal year ended September 30, 2009
from the period ended September 30, 2008. The decrease resulted from the
elimination of higher average debt balances and non-cash interest expense
relating to the amortization of a debt discount as reported in the prior audited
period.
CHANGE IN THE FAIR VALUE OF DERIVATIVE LIABILITY
The change resulted from a decrease in our stock price from September 30, 2008
to September 30, 2009 and the cessation of the liability as the underlying note
is no longer convertible into common stock.
NET LOSS
For the reasons detailed above, we experienced losses in the year ended
September 30, 2009 and the year ended September 30, 2008. We have not been able
to continue our efforts started during the last three years to develop strategic
alliances, marketing agreements, and distribution networks. We believe once we
restart those efforts sales volume in subsequent periods should increase.
Revenues for the fiscal year-ended September 30, 2009 were $236,954 compared to
$561,704 for September 30, 2008. However, since these arrangements are new and
untested, it is uncertain whether these actions will be sufficient to produce
net operating income for the fiscal year ending September 30, 2010. However,
given the gross margins of our new products in turf and our acquisition of Smart
World, as well as our joint venture in the retail market with Green Hippo future
operating results should improve.
SEASONALITY
Our efforts in the United States have focused on the southern states and
therefore generally experience year round growing cycles, with the sale of the
agricultural products preceding the growing cycle of various crops.
International sales have not been sufficient enough or the geographic
distribution of sales concentrated enough to determine if a seasonal trend
exists although the initial indication is that our markets will become diverse
and therefore not indicate significant seasonal variations. As we expand into
the residential and commercial segments nationally, we will experience some
seasonal declines in sales during the fall and winter quarters in less temperate
climates.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $13,604 and $6,286 at September 30, 2009 and
September 30, 2008, respectively. Net cash used by operations was $154,823 for
the year ended September 30, 2009 as compared to $667,937 for the year ended
September 30, 2008. We have historically relied upon one of our officers and
significant shareholders to provide cash to meet short term operating cash
requirements.
In March 2000, we authorized the issuance of an aggregate of $1,325,000 of
convertible debentures with interest payable quarterly at 10% per annum. The
convertible debentures are convertible to our common stock at a rate of one
10
share for each three dollars converted. All of the debentures have matured and
at September 30, 2009, the outstanding balance of all notes payable totaled
$3,052,513. At September 30, 2009, debentures consisted of one $1,500,000 at 8%
debenture has been settled among the parties, $50,000 8% per annum debentures,
$60,000 at 8% debenture, $30,000 at 8% per annum debentures, $75,000 at 10% per
annum, $125,000 of 8% debenture convertible at $0.04 per share that was
converted in the amount of 3,125,000 shares on October 8, 2009 and $177,024 at
10% per annum.
Interest expense for the year ended September 30, 2009 was $129,894 and interest
expense for the year ended September 30, 2008 was $347,337.
As of September 30, 2009 we had a working capital deficit (current assets less
current liabilities) of $5,027,044 compared to a deficit of $ $4,183,192 as of
September 30, 2008. The increase in the working capital deficit has been caused
by an increase in our current liabilities.
As shown in the accompanying financial statements, we have incurred an
accumulated deficit of $25,821,705 and a working capital deficit of $5,027,044
as of September 30, 2009. This working capital deficit is directly related to
the increase in the current portion of our liabilities. Our ability to continue
as a going concern is dependent on obtaining additional capital and financing
and operating at a profitable level. We intend to seek additional capital either
through debt or equity offerings and to increase sales volume and operating
margins to achieve profitability. Our working capital and other capital
requirements during the next fiscal year and thereafter will vary based on the
sales revenue generated by the recent accumulation of additional products and
the distribution and sales network we have created and will continue to grow.
We will consider both the public and private sale of securities and debt
instruments for expansion of our operations if such expansion would benefit our
overall growth and income objectives. Should sales growth not materialize, we
may look to these public and private sources of financing. There can be no
assurance, however, that we can obtain sufficient capital on acceptable terms,
if at all. Under such conditions, failure to obtain such capital likely would,
at a minimum, negatively impact our ability to timely meet our business
objectives.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the U.S., which requires us to make estimates
and assumptions in certain circumstances that affect amounts reported. In
preparing these financial statements, management has made its best estimates and
judgments of certain amounts, giving due consideration to materiality. We
believe that of our significant accounting policies (more fully described in
notes to the consolidated financial statements), the following are particularly
11
important to the portrayal of our results of operations and financial position
and may require the application of a higher level of judgment by our management,
and as a result are subject to an inherent degree of uncertainty.
ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. By their nature, these estimates and judgments are subject
to an inherent degree of uncertainty. We review our estimates on an on-going
basis, including those related to the allowance for doubtful accounts,
inventories and related reserves, long-lived assets, income taxes, litigation
and stock-based compensation. We base our estimates on our historical
experience, knowledge of current conditions and our beliefs of what could occur
in the future considering available information. Actual results may differ from
these estimates, and material effects on our operating results and financial
position may result. We believe the following critical accounting policies
involve our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
REVENUE RECOGNITION
We generate our revenues from the sale of products and services and recognize
revenue when the following fundamental criteria are met:
* persuasive evidence that an arrangement exists;
* the products and services have been delivered;
* selling prices are fixed and determinable and not subject to refund or
adjustment; and
* collection of amounts due is reasonably assured.
Delivery occurs when goods are shipped and title and risk of loss transfer to
the customer, in accordance with the terms specified in the arrangement with the
customer. Revenue recognition is deferred in all instances where the earnings
process is incomplete. We provide for sales returns and allowances in the same
period as the related revenues are recognized. We base these estimates on our
historical experience or the specific identification of an event necessitating a
reserve. To the extent actual sales returns differ from our estimates; our
future results of operations may be affected. Should changes in conditions cause
management to determine that these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
affected.
12
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.
INVENTORIES
We seek to purchase and maintain raw materials at sufficient levels to meet lead
times based on forecasted demand. If forecasted demand exceeds actual demand, we
may need to provide an allowance for excess or obsolete quantities on hand. We
also review our inventories for changes in the market prices of our products and
provide reserves as deemed necessary. If actual market conditions are less
favorable than those projected by management, additional inventory reserves may
be required. We state our inventories at the lower of cost, using the first-in,
first-out method on an average costs basis, or market.
We account of inventory costs in accordance with Accounting Standards
Condification ("ASC") No. 310, "Current Assets". Abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage)are
recognized as current-period charges. Fixed production overhead is allocated to
the costs of conversion into inventories based on the normal capacity of the
production facilities. We utilize an expected normal level of production units,
based on our plant capacity. To the extent we do not achieve a normal expected
production levels, we charge such under-absorption of fixed overhead to
operations.
LONG-LIVED ASSETS
We account for goodwill and acquired intangible assets in accordance with ASC
No. 350, Intangibles, Goodwill and Other, whereby goodwill is not amortized. ASC
No. 350 also requires that, at least annually, an impairment test be performed
to support the carrying value of goodwill. In addition, whenever events occur
that would more likely than not reduce the fair value of reporting unit below
its carrying amount, a goodwill impairment test will be performed. The fair
value of our goodwill is based upon estimates of future cash flows and other
factors.
ASC No. 350 requires a two-step approach to test goodwill for impairment for
each reporting unit. The first step tests for impairment by applying fair
value-based tests to a reporting unit. The second step, if deemed necessary,
measures the impairment by applying fair value-based tests to specific assets
and liabilities within the reporting unit. Application of the goodwill
13
impairment tests require judgment, including identification of reporting units,
assignment of assets and liabilities to each reporting unit, assignment of
goodwill to each reporting unit, and determination of the fair value of each
reporting unit. The determination of fair value for a reporting unit could be
materially affected by changes in these estimates and assumptions.
Based on analysis of the carrying value of goodwill as of September 30, 2009
relating to Smart World Organics, the fair value did not exceeded the carrying
amount. As a result we fully impaired goodwill in the amount of $364,600, which
is reflected in the statement of operations.
We continually monitor and review long-lived assets, including fixed assets,
goodwill and intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of any such asset may not be
recoverable. The determination of recoverability is based on an estimate of the
cash flows expected to result from the use of an asset and its eventual
disposition. The estimate of cash flows is based upon, among other things,
certain assumptions about expected future operating performance, growth rates
and other factors. If the sums of the cash flows are less than the carrying
value, we recognize an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset.
We evaluated the Soil Medic intangible asset totaling $389,038, net of
accumulated amortization, consisting of the slow release patent, undiscounted
cash flows, and identified customers that we believe will sublicense our patent
and pay us royalties of $1.50 per gallon on certain products. We generated
sublicense fees of $8,359 in fiscal 2009 and estimate fees through 2014, at
which time the patent expires. As of September 30, 2009, we expect future cash
flows will not be able to fully recover such assets. As a result we impaired the
intangible asset in the amount of $177,000, which is reflected in the statement
of operations.
We also evaluated the Smart World intangible assets, consisting of the formulas,
trade secrets and goodwill, aggregating $1,036,984, net of accumulated
amortization. We evaluated undiscounted cash flows for definite lived intangible
assets and fair value related to goodwill. Based on the lack of capital to
implement our business plan we have been unable to enter the retail market with
a major retailer, we fully impaired the Smart World intangible assets and
goodwill in the amount of $1,036,984, based on future expected cash flows, which
is reflected in the statement of operations.
ACCOUNTING FOR INCOME TAXES
We account for income taxes under the provisions of ASC NO. 740, "Income Taxes".
Under this method, we determine deferred tax assets and liabilities based upon
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. The tax consequences of most
events recognized in the current year's financial statements are included in
determining income taxes currently payable. However, because tax laws and
financial accounting standards differ in their recognition and measurement of
assets, liabilities, equity, revenues, expenses, gains and losses, differences
arise between the amount of taxable income and pre-tax financial income for a
year and between the tax bases of assets or liabilities and their reported
amounts in the financial statements. Because it is assumed that the reported
14
amounts of assets and liabilities will be recovered and settled, respectively, a
difference between the tax basis of an asset or a liability and its reported
amount on the consolidated balance sheet will result in a taxable or a
deductible amount in some future years when the related liabilities are settled
or the reported amounts of the assets are recovered. We then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and unless we believe that recovery is more likely than not, we must
establish a valuation allowance.
Effective September 30, 2007, the Company adopted ASC No. 740 Topic 10, Income
Taxes, General ("ASC 740.10"). ASC 740.10 prescribes, among other things, a
recognition threshold and measurement attributes for the financial statement
recognition and measurement of uncertain tax positions taken or expected to be
taken in a company's income tax return. The Company utilizes a two-step approach
for evaluating uncertain tax positions. Step one or recognition, requires a
company to determine if the weight of available evidence indicates a tax
position is more likely than not to be sustained upon audit, including
resolution of related appeals or litigation processes, if any. Step two or
measurement, is based on the largest amount of benefit, which is more likely
than not to be realized on settlement with the taxing authority.
We have provided a full valuation allowance against our U.S federal and state
deferred tax assets. If sufficient evidence of our ability to generate future
U.S federal and/or state taxable income becomes apparent, we may be required to
reduce our valuation allowance, resulting in income tax benefits in our
statement of operations. We evaluate the realizability of our deferred tax
assets and assess the need for a valuation allowance quarterly.
STOCK-BASED COMPENSATION
We account for stock-based compensation in accordance with ASC No. 718,
Compensation, Stock Compensation ("ASC 718"). ASC 718 requires that we account
for all stock-based compensation transactions using a fair-value method and
recognize the fair value of each award as an expense, generally over the service
period. The fair value of stock options is based upon the market price of our
common stock at the grant date. We estimate the fair value of stock option
awards, as of the grant date, using the Black-Scholes option-pricing model. The
use of the Black-Scholes model requires that we make a number of estimates,
including the expected option term, the expected volatility in the price of our
common stock, the risk-free rate of interest and the dividend yield on our
common stock. If our expected option term and stock-price volatility assumptions
were different, the resulting determination of the fair value of stock option
awards could be materially different and our results of operations could be
materially impacted.
ACCOUNTING FOR NON-EMPLOYEE STOCK-BASED COMPENSATION
We measure compensation expense for its non-employee stock-based compensation
under ASC No. 505 Topic 50, "Equity-Based Payments to Non-Employees". The fair
value of the option issued or expected to be issued is used to measure the
transaction, as this is more reliable than the fair value of the services
received. The fair value is measured at the value of our common stock on the
date that the commitment for performance by the counterparty has been reached or
the counterparty's performance is complete. In the case of the issuance of stock
options, we determine the fair value using the Black-Scholes option pricing
15
model. The fair value of the equity instrument is charged directly to
stock-based compensation expense and credited to additional paid-in capital.
ACCOUNTING FOR CONVERSION FEATURES AND WARRANTS ISSUED WITH CONVERTIBLE DEBT
During 2008, our derivative financial instruments consisted of embedded
derivatives related to the issuance of our $1.5 million convertible note payable
to Ray Nielsen. These embedded derivatives included the conversion feature that
was not considered conventional as defined in ASC No. 815, "Derivatives and
Hedging". The accounting treatment of derivative financial instruments require
that we record the derivative at its fair value and record it at fair value as
of each subsequent balance sheet date. Changes in fair value is recorded as
non-operating, non-cash income or expense at each reporting date. The
derivatives were valued using the Black-Scholes Option Pricing Model. On
December 31, 1999, we purchased exclusive license rights to patented polymer
application techniques. The licenses are being amortized using the straight line
method over the life of the licenses, which is 14 1/2 years. The carrying value
of these assets is periodically evaluated for impairment. The amortization
expense was $103,833 and $103,833 and for the years ended September 30, 2009 and
September 30, 2008, respectively.
On March 15, 2006, the Company acquired a patent and $300,000 of cash from
Advanced Fertilizer Technologies, Inc. ("AFT") in exchange for 4,500,000 shares
of Series A preferred stock with a stated value of $0.50 per share, or
$2,250,000. The Company recorded an intangible asset of $1,950,000. AFT had no
operations and owned the intellectual property, including patents on a slow
release fertilizer used primarily in the turf segment of its business. The
Company will collect royalty revenues from two existing licenses and will sell
products derived from the patents directly to its customers including qualified
distributors. The patent has approximately eight years left to expiration.
Amortization expense of the patent rights was $91,538 and $252,565 and for the
year ended September 30, 2009 and September 30, 2008, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2009, the Financial Accounting Standards Board ("FASB") issued ASC
820-10, "Fair Value Measurements and Disclosures - Overall", for the fair value
measurement of investments in certain entities that calculate net asset value
per share (or its equivalent). The amendments in this update are effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted in financial statements for earlier interim and annual periods that
have not been issued. The adoption of this update will have no material effect
on the Company's financial condition or results of operations. In August 2009,
the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic
820): Measuring Liabilities at Fair Value. This update provides amendments to
Subtopic 820-10, Fair Value Measurements and Disclosures - Overall, for the fair
value measurement of liabilities. The guidance provided in this update is
effective for the first reporting period beginning after issuance. The adoption
of this statement has had no material effect on the Company's financial
condition or results of operations.
16
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles--a
replacement of FASB Statement No. 162, which is codified in FASB ASC 105,
Generally Accepted Accounting Principles ("ASC 105"). ASC 105 establishes the
Codification as the source of authoritative GAAP in the United States (the "GAAP
hierarchy") recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the Securities and Exchange Commission
("SEC") under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. Once the Codification is in effect, all
of its content will carry the same level of authority and the GAAP hierarchy
will be modified to include only two levels of GAAP, authoritative and
non-authoritative. ASC 105 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The adoption of ASC
105 has had no material effect on the Company's financial condition or results
of operation.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) ("SFAS No. 167"), which amends the consolidation guidance applicable
to variable interest entities. The amendments significantly affect the overall
consolidation analysis under FASB ASC 810, Consolidation and require an
enterprise to perform an analysis to determine whether the enterprise's variable
interest or interests give it a controlling financial interest in a variable
interest entity. SFAS No. 167 has not yet been codified and in accordance with
ASC 105, remains authoritative guidance until such time that it is integrated in
the FASB ASC. SFAS No. 167 is effective as of the beginning of the first fiscal
year that begins after November 15, 2009, early adoption is prohibited. The
adoption of this update will have no material effect on the Company's financial
condition or results of operations.
In June, 2009, the Financial Accounting Standards Board issued ASC 860-10,
"Transfers and Servicing - Overall", the codification of FASB Statement No. 140"
("SFAS 166"). This statement removes the concept of a qualifying special-purpose
entity Statement 140 and removes the exception from applying Interpretation No.
46 (revised December 2003), Consolidation of Variable Interest Entities, to
qualifying special-purpose entities.SFAS No. 166 is effective for financial
asset transfers occurring after the beginning of an entity's first fiscal year
that begins after November 15, 2009 and early adoption is prohibited. The
adoption of this statement will have no material affect on the financial
statements. The adoption of this statement will have no material effect on the
Company's financial condition or results of operations.
In May, 2009, FASB issued ASC 855 Subsequent Events which establishes principles
and requirements for subsequent events. In accordance with the provisions of ASC
855, the Company currently evaluates subsequent events through the date the
financial statements are available to be issued.
17
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.
In connection with the reorganization of McKennon, Wilson & Morgan LLP (the
"Former Auditors") in which certain of its audit partners resigned from the
Former Auditors and have joined DBBMcKennon. The Former Auditors resigned as the
independent auditors of American Soil Technologies, Inc. (the "Company"),
effective May 4, 2009.
The Former Auditors had been the Company's auditor since September 21, 2007.
The Company's Board of Directors (the "Board") approved the resignation of
McKennon, Wilson & Morgan LLP on May 4, 2009.
During the fiscal years ended September 30, 2008 and 2007 and the subsequent
interim periods until the change, (a) there were no disagreements between the
Company and the Former Auditors on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the Former Auditors, would
have caused the Former Auditors to make reference to the subject matter of the
disagreement in connection with its report; and (b) no reportable events as set
forth in Item 304(a)(1)( v) of Regulation S-K have occurred.
Effective May 4, 2009, the Board appointed DBBMcKennon (the "New Auditors") as
the Company's new independent auditors.
During the Company's two most recent fiscal years and subsequent interim period
on or prior to May 4, 2009, the Company has not consulted with the New Auditors
regarding either i) the application of accounting principles to a specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on the Company's financial statements or (ii) any matter that was
either the subject of a disagreement or event identified in response to
(a)(1)(iv) of Item 304 of Regulation S-K.
18
ITEM 9A. CONTROLS AND PROCEDURES
Our President and Chief Financial Officer (the "Certifying Officers") is
responsible for establishing and maintaining our disclosure controls and
procedures. The Certifying Officer have designed such disclosure controls and
procedures to ensure that material information is made known to him,
particularly during the period in which this report was prepared. The Certifying
Officer has evaluated the effectiveness of our disclosure controls and
procedures and has determined that our projections and impairment analysis are
adequate. We hired a financial expert to assist who has assisted us in improving
our disclosure controls and procedures. We believe that the changes that have
been implemented enabled the Company to improve its timely reporting of the
required impairment analysis.
ITEM 9A(T). CONTROLS AND PROCEDURES
Not Applicable
ITEM 9B. OTHER INFORMATION
None.
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 70 Director, Chief Executive Officer, President,
Chief Financial Officer
Neil C. Kitchen 62 Director, Vice President
Diana Visco 52 Secretary
Scott Baker 52 Director
Donette Lamson 43 Vice President - Turf and Horticulture
19
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 has acted as an advisor in strategic planning, mergers and
acquisitions and as a securities attorney to numerous public companies. He has
served as president and CEO of public and private companies. He is also a member
of the board of directors of Central Utilities Production Company.
MR. NEIL C. KITCHEN, DIRECTOR, VICE PRESIDENT, has over 20 years experience in
business management in the environmental sector including management of
companies involved in general engineering, toxicology, and environmental
cleanup. Prior to joining us in 1994, he was Vice President of a publicly-held
environmental cleanup company. He holds a B.S. in Business Management from San
Diego State University and a class "A" General Engineering license with
Hazardous Material Certification from the State of California.
MS. DIANA VISCO, SECRETARY, Diana Visco, Secretary, has worked with us since
January 1999. Prior to that, she worked for 21 years with the Americana
Leadership College, Inc., traveling to all of its offices and conferences across
the USA and Caribbean in addition to Australia, New Zealand, Canada and Europe.
Ms Visco spent several years as a traveling administrator and as International
Administrator handling all aspects of finance, administration as well as
marketing and promotion in addition to being assistant to the President of that
company. She is the daughter of Mr. Louie Visco, a former director who passed
away on January 3, 2008
MR. SCOTT BAKER, DIRECTOR, has practiced law in Arizona for the past 19 years.
He graduated from the University of Arizona with a B.S. in business in 1978 and
obtained his J.D. from the University of Arizona in 1981. As a general
practitioner, he has appeared before the U.S. District Tax Court and the U.S.
District Court.
Ms. DONETTE LAMSON, VICE PRESIDENT TURF and HORTICULTURE obtained her Bachelor
of Science Degree in Horticulture with a Business Management Concentration from
Colorado State University (C.S.U.). She has been a Horticulture Extension Agent
and served as a manger of one of the nations largest Certified Master Gardener
Programs. Additionally, Ms. Lamson has over 20 years of regional, national and
international turf, horticulture and landscape products manufacturing,
distribution and sales experience with Lesco, Helena, SAJ Turf Products
(currently United Horticultural Supply) and Golf Enviro Systems.
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.
20
Based solely upon a review of the copies of such forms, we believe that all
Reporting Persons have complied on a timely basis with all filing requirements
applicable to them, except that Louie Visco filed one late report on Form 4
disclosing his conversion of debt to equity.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Set forth below is a summary of compensation for our principal executive officer
and our two most highly compensated officers other than our principal executive
officer (collectively, the "named executive officers") for our last two fiscal
years. There have been no annuity, pension or retirement benefits ever paid to
our officers, directors or employees.
With the exception of reimbursement of expenses incurred by our named executive
officers during the scope of their employment and unless expressly stated
otherwise in a footnote below, none of the named executive officers received
other compensation, perquisites and/or personal benefits in excess of $10,000.
Name and Non-Equity
Principal Stock Option Incentive Plan All Other
Position Year Salary ($) Bonus($) Awards($) Awards($) Compensation($) Compensation($) Total($)
-------- ---- ---------- -------- --------- --------- --------------- --------------- --------
Carl P. Ranno, CEO, 2009 $180,000 $0 $0 $0 $0 $0 $180,000
President, CFO 2008 $120,000 $0 $0 $0 $0 $0 $120,000
(Principal Executive
Officer)
Neil C. Kitchen, 2009 $120,746 $0 $0 $0 $0 $0 $120,746
Vice President 2008 $ 79,484 $0 $0 $0 $0 $0 $ 79,484
Donette Lamson, 2009 $ 36,050 $0 $0 $0 $0 $0 $ 36,050
Vice President 2008 $ 75,000 $0 $0 $0 $0 $0 $ 75,000
Johnny Dickinson, 2009 $ 38,942 $0 $0 $0 $0 $0 $ 38,942
VP - Marketing 2008 $ 75,000 $0 $0 $0 $0 $0 $ 75,000
Diana Visco 2009 $ 76,750 $0 $0 $0 $0 $0 $ 76,750
Secretary 2008 $ 52,000 $0 $0 $0 $0 $0 $ 52,000
21
GRANTS OF PLAN-BASED AWARDS
We did not grant any plan-based awards during this fiscal year ended September
30, 2009:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information for the named executive officers
regarding the number of shares and underlying shares both exercisable and
unexercisable stock options, as well as the exercise prices and expiration dates
thereof, as of September 30, 2009.
Option Awards Stock Awards
------------------------------------------------------------------------- -----------------------------------
Equity
Incentive
Plan
Equity Awards
Incentive Market
Plan or
Awards: Payout
Equity Number of Value of
Incentive Market Unearned Unearned
Plan Awards: Number of Value of Shares, Shares,
Number of Number of Number of Shares of Shares Units or Units of
securities securities Securities Units of or Units other other
Underlying Underlying Underlying Stock of Stock rights rights
Unexercised Unexercised Unexercised Option Option that have that that have that
Options(#) Options(#) Unearned Exercise Expiration not have not not have not
Name Exercisable Unexercisable Options(#) Price($) Date vested(#) vested($) vested(#) vested($)
---- ----------- ------------- ---------- -------- ---- --------- --------- --------- ---------
Carl P. Ranno, 150,000 0 0 $0.50 6/30/12 0 0 0 0
CEO, President, 470,000 235,000 0 $0.11 9/27/12 0 0 0 0
CFO (Principal
Executive
Officer)
Neil C. Kitchen, 150,000 0 0 $0.50 6/30/12 0 0 0 0
Vice President 430,000 215,000 0 $0.11 9/27/12 0 0 0 0
22
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.
On May 23, 2008 the Company entered into an Employment Agreement with Neil C.
Kitchen to act as the Company's Vice President and Chief Technical Officer (the
"Agreement"). The Agreement is for a term of five years, commencing on May 23,
2008 and expiring on May 22, 2013 with automatic one-year extensions unless
either the Company or Mr. Kitchen provides written notice of their intention not
to renew the Agreement at least 30 days prior to the expiration of the then
current term. The Agreement provides that, in addition to receiving paid
vacation in accordance with the Company's policies as well as other customary
benefits and provisions, Mr. Kitchen shall receive an annual base salary of
$130,000. If, at any time during the term of the Agreement, Mr. Kitchen is
terminated "without cause," he will be entitled to receive a cash payment equal
to the aggregate compensation payable to Mr. Kitchen during the remaining term
of the Agreement.
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.
We have an employment agreement Donette Lamson as our Vice President in charge
of the Turf, Horticulture and Landscape Division. The agreement has a term of
three years from January 2006. Per the terms of the agreement, Ms. Lamson is to
receive a salary of $75,000 per year, bonus compensation based upon sales in her
division, and standard employee benefits. If we terminate Ms. Lamson without
cause, we shall continue to pay her salary and all other benefits for the
remainder of the term of the agreement.
23
2002 STOCK OPTION PLAN
Our shareholders adopted a Stock Option Plan on November 8, 2002 (the "2002
Plan"). Under the 2002 Plan, 2,000,000 shares of common stock have been
authorized for issuance as Incentive Stock Options or Nonstatutory Stock
Options. Under the 2002 Plan, options may be granted to our key employees,
officers, directors or consultants. The purchase price of the common stock
subject to each Incentive Stock Option shall not be less than the fair market
value (as determined in the 2002 Plan), or in the case of the grant of an
Incentive Stock Option to a principal stockholder, not less that 110% of fair
market value of such common stock at the time such option is granted. The
purchase price of the common stock subject to each Nonstatutory Stock Option
shall be determined at the time such option is granted, but in no case less than
100% of the fair market value of such shares of common stock at the time such
option is granted.
The 2002 Plan shall terminate ten years from the date of its adoption by our
shareholders, and no option shall be granted after termination of the 2002 Plan.
Subject to certain restrictions, the 2002 Plan may at any time be terminated and
from time to time be modified or amended by the affirmative vote of the holders
of a majority of the outstanding shares of our capital stock present, or
represented, and entitled to vote at a meeting duly held in accordance with the
applicable laws of the State of Nevada.
As of the date hereof, 1,310,000 options have been issued pursuant to the 2002
Plan.
2005 STOCK OPTION/STOCK ISSUANCE PLAN
GENERAL
On January 31, 2005, our Board of Directors adopted our 2005 Stock Option/Stock
Issuance Plan (the "2005 Plan") and directed that it be presented to the
stockholders for their approval and adoption.
The 2005 Plan provides for the issuance of up to 10,000,000 shares of common
stock to our directors, officers, employees and consultants in the form of stock
options and shares of common stock.
Our Board of Directors will initially administer the 2005 Plan, except that the
Board may, at its discretion, establish a committee comprised of two or more
members of the Board or two or more other persons to administer the 2005 Plan
(the "Plan Administrator").
The 2005 Plan has two separate components: the option grant program and the
stock issuance program. To date, 498,240 shares of common stock have been issued
pursuant to the 2005 Plan.
OPTION GRANT PROGRAM
Incentive stock options (those stock options that qualify under Section 422 of
the Internal Revenue Code of 1986 ("the "Code")) may be granted to any
individual who is, at the time of the grant, our employee. Non-qualified stock
options (those options that do not qualify under Section 422 of the Code) may be
granted to employees and other people, including our directors and officers.
24
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.
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.
25
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.
26
Name and Address Amount and Nature of Percent
of Beneficial Owners (1) Beneficial Ownership Ownership (2)
------------------------ -------------------- -------------
Carl P. Ranno, CEO, President, CFO, Director 3,072,900 (3) 4.5%
Neil C. Kitchen, Vice President, Director 2,981,455 (4) 4.3%
Diana Visco, Secretary 3,383,428 (5) 4.9%
Scott Baker, Director 504,818 (5) *
Donette Lamson, Vice President 150,000 *
All executive officers and directors
as a group (5 persons) 10,092,601 15.2%
The Benz Group 2,819,061 (6) 4.1%
FLD Corporation 17,907,003 (7) 26.2%
----------
* Less than 1%.
1. C/o our address, 12224 Montague Street Pacoima, CA 91331, unless otherwise
noted.
2. Except as otherwise indicated, we believe that the beneficial owners of
common stock listed above, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject
to community property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Shares of common
stock subject to options or warrants currently exercisable, or exercisable
within 60 days, are deemed outstanding for purposes of computing the
percentage of the person holding such options or warrants, but are not
deemed outstanding for purposes of computing the percentage of any other
person.
3. Includes options to purchase 150,000 shares of common stock at an exercise
price of $0.50 expiring June 30, 2012 and 470,000 shares of common stock at
an exercise price of $0.11 expiring September 27, 2012
4. Includes options to purchase 150,000 shares of common stock at an exercise
price of $0.50 expiring June 30, 2012 and 430,000 shares of common stock at
an exercise price of $0.11 expiring September 27, 2012
5. Includes options to purchase 150,000 shares of common stock at an exercise
price of $0.50 expiring June 30, 2012 and 150,000 shares of common stock at
an exercise price of $0.11 expiring September 27, 2012
6. The Visco family which includes the Secretary of the Company Diana Visco
owns the controlling shares of Benz Group
7. The Visco family which includes the Secretary of the Company Diana Visco
owns the controlling shares of FLD.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Visco Family is an owner and director of FLD Corporation, owns 17,907,003
shares of common stock.
The Visco Family is an owner and director of Benz Group, the holder of 2,819,061
shares of common stock and 2,763,699 shares of Preferred Stock.
On April 1, 2004, we entered into a Sublease Agreement to sublet 923.50 square
feet located at a facility in Pacoima, California. The majority shareholder of
the sublessor is a related party to us. All of our operations are conducted from
this facility, which requires monthly rental payments of approximately $554. The
Sublease Agreement has been continued beyond December 31, 2009.
27
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
MCKENNON, WILSON & MORGAN, LLP ("MCKENNON")
McKennon was our independent auditor and examined our financial statements to
May 4, 2009 and performed the services listed below.
AUDIT FEES
McKennon fees for professional services rendered for the audit of our annual
financial statements and for the reviews of the financial statements included in
our quarterly reports on Form 10-Q during this period was $61,567.
ALL OTHER FEES
DBBMcKennon became our Auditor on May 4, 2009 and its fee to date for
professional services rendered for the audit of our annual financial statements
and for the reviews of the financial statements included in our quarterly
reports on Form 10-Q during this period is $24,000
AUDIT RELATED FEES
McKennon 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
McKennon was paid aggregate fees of approximately $13,000 for the fiscal year
ended September 30, 2009 for professional services rendered for tax compliance,
tax advice and tax planning during this fiscal year.
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)
28
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
----------
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
29
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, 2010 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)
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
American Soil Technologies, Inc.
We have audited the accompanying consolidated balance sheet of American Soil
Technologies, Inc. and subsidiary (the "Company") as of September 30, 2009, and
the related statements of operations, stockholders' deficit, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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 audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 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, 2009, and the results of
their operations and their cash flows for the year 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 2 of the
consolidated financial statements, the Company incurred losses in recent
history, and has significant working capital and accumulated deficits. 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 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ dbbmckennon
--------------------------
Newport Beach, California
January 13, 2010
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors American Soil Technologies, Inc.
We have audited the accompanying consolidated balance sheet of American Soil
Technologies, Inc. and subsidiary (the "Company") as of September 30, 2008, and
the related consolidated statement of operations, stockholders' deficit and cash
flows for the year ended September 30, 2008. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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 audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides 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, 2008 and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 of the
consolidated financial statements, the Company has incurred losses in recent
history, and has significant working capital and accumulated deficits. 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 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ McKennon, Wilson & Morgan LLP
----------------------------------------
Irvine, California
January 13, 2009
F-2
American Soil Technologies, Inc.
Consolidated Balance Sheets
September 30, September 30,
2009 2008
------------ ------------
Assets:
Current assets
Cash and cash equivalents $ 13,604 $ 6,286
Accounts receivable, net of allowance of $38,538 and $38,738
at September 30, 2009 and 2008, respectively 16,648 50,954
Inventories 70,227 139,324
Prepaid expenses and other current assets 19,589 36,123
------------ ------------
Total current assets 120,068 232,687
Property and equipment, net 78,824 151,728
Deposits and other assets 256 217,756
Goodwill -- 364,600
Intangible assets 212,038 1,407,553
------------ ------------
Total assets $ 411,186 $ 2,374,324
============ ============
Liabilities and Stockholders' Deficit:
Current liabilities
Accounts payable $ 1,120,307 $ 993,363
Accrued liabilities 1,080,031 529,104
Notes payable 1,924,039 1,947,862
Capital lease obligations 19,261 16,358
Derivative liability -- 11,580
Notes payable to related parties 1,003,474 917,612
------------ ------------
Total current liabilities 5,147,112 4,415,879
Capital lease obligations 3,527 22,788
Convertible notes payable 125,000 3,729
------------ ------------
Total liabilities 5,275,639 4,442,396
------------ ------------
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, 2009 and 2008, respectively 1,381,849 1,381,849
Common stock, $0.001 par value, 100,000,000 shares authorized,
60,965,590 shares issued and outstanding at September 30, 2009
and 2008, respectively 60,966 60,966
Additional paid-in capital 19,514,437 19,473,603
Accumulated deficit (25,821,705) (22,984,490)
------------ ------------
Total stockholders' deficit (4,864,453) (2,068,072)
------------ ------------
Total liabilities and stockholders' deficit $ 411,186 $ 2,374,324
============ ============
See Notes to Consolidated Financial Statements.
F-3
American Soil Technologies, Inc.
Consolidated Statements of Operations
Year Ended Year Ended
September 30, September 30,
2009 2008
------------ ------------
Revenue $ 236,954 $ 561,704
Cost of goods sold (excluding amortization of intangible assets) 110,483 344,884
------------ ------------
Gross profit 126,471 216,820
------------ ------------
Operating expenses:
General and administrative 1,172,179 1,521,717
Sales and marketing 44,206 120,355
Impairment of tooling 67,500 --
Amortization of intangible assets 346,131 507,157
Impairment of intangible assets 1,213,984 845,390
------------ ------------
Total operating expenses 2,844,000 2,994,619
------------ ------------
Loss from operations (2,717,529) (2,777,799)
Other (income) expense:
Interest expense 129,894 347,337
Change in fair value of derivative liability (11,580) (459,947)
Other -- (8,907)
Sale of equipment 572 21,794
------------ ------------
Loss before income taxes (2,836,415) (2,678,076)
Provision for income taxes 800 800
------------ ------------
Net loss $ (2,837,215) $ (2,678,876)
============ ============
Net loss per share basic and diluted $ (0.05) $ (0.05)
============ ============
Weighted average common shares outstanding used
in per share calculations 60,965,590 56,675,474
============ ============
See Notes to Consolidated Financial Statements.
F-4
American Soil Technologies, Inc.
Consolidated Statements of Stockholders' Deficit
Series A Preferred Common Stock
--------------------- ------------------
Shares Amount Shares Amount
------ ------ ------ ------
Balance at September 30, 2007 2,763,699 $1,381,849 52,674,574 $52,674
Conversion of debt and accrued interest into common stock -- -- 3,540,616 3,542
Sale of common stock -- -- 4,075,400 4,075
Common stock issued with debt -- -- 500,000 500
Stock compensation expense -- -- 175,000 175
Fair value of warrants issued with convertible debt -- -- -- --
Net loss -- -- -- --
--------- ---------- ---------- -------
Balance at September 30, 2008 2,763,699 1,381,849 60,965,590 60,966
Stock compensation expense -- -- -- --
Net loss -- -- -- --
--------- ---------- ---------- -------
Balance at September 30, 2009 2,763,699 $1,381,849 60,965,590 $60,966
========= ========== ========== =======
Paid-in Accumulated
Capital Deficit Total
------- ------- -----
Balance at September 30, 2007 $ 18,388,636 $(20,305,614) $ (482,455)
Conversion of debt and accrued interest into common stock 889,763 -- 893,305
Sale of common stock 86,059 -- 90,134
Common stock issued with debt 31,079 -- 31,579
Stock compensation expense 72,882 -- 73,057
Fair value of warrants issued with convertible debt 5,184 -- 5,184
Net loss -- (2,678,876) (2,678,876)
------------ ------------ ------------
Balance at September 30, 2008 19,473,603 (22,984,490) (2,068,072)
Stock compensation expense 40,834 -- 40,834
Net loss -- (2,837,215) (2,837,215)
------------ ------------ ------------
Balance at September 30, 2009 $ 19,514,437 $(25,821,705) $ (4,864,453)
============ ============ ============
See Notes to Consolidated Financial Statements.
F-5
American Soil Technologies, Inc.
Consolidated Statements of Cash Flows
Year Ended Year Ended
September 30, September 30,
2009 2008
----------- -----------
Cash flows from operating activities:
Net loss $(2,837,215) $(2,678,876)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of assets 572 37,304
Impairment of tooling 67,500 --
Impairment of goodwill 364,600 --
Impairment of intangible assets 849,384 845,390
Depreciation and amortization 418,463 628,601
Stock-based compensation 40,834 73,057
Change in derivative liabilities (11,580) (459,947)
Amortization of debt discount 4,811 44,401
Changes in operating assets and liabilities:
Accounts receivable 34,306 10,054
Inventory 69,097 110,742
Prepaid expenses and other assets 166,534 (3,148)
Accounts payable 126,944 414,043
Accrued expenses 550,927 300,442
----------- -----------
Net cash used in operating activities (154,823) (677,937)
----------- -----------
Cash flows from investing activities:
Capital expenditures -- (17,168)
Proceeds from sale of assets -- 11,162
Deposit on real property -- (83,786)
----------- -----------
Net cash used in investing activities -- (89,792)
----------- -----------
Cash flows from financing activities:
Proceeds from related party notes 91,450 656,170
Proceeds from the issuance of debt -- 150,000
Proceeds from the issuance of convertible debt 125,000 --
Proceeds from the issuance of common stock -- 90,134
Payments on capital lease obligations (16,358) (19,957)
Repayments on related party notes payable (5,587) --
Repayments on notes payable (32,364) (137,187)
----------- -----------
Net cash provided by financing activities 162,141 739,160
----------- -----------
Net decrease in cash and cash equivalents 7,318 (28,569)
Cash and cash equivalents at beginning of year 6,286 34,855
----------- -----------
Cash and cash equivalents at end of year $ 13,604 $ 6,286
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 32,969 $ 67,992
=========== ===========
Cash paid during the period for income taxes $ 800 $ 800
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Conversion of debt and accrued interest into common stock $ -- $ 891,834
=========== ===========
See Notes to Consolidated Financial Statements.
F-6
American Soil Technologies, Inc.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
American Soil Technologies, Inc. (the "Company"), formerly Soil Wash
Technologies, Inc., was incorporated in the state of California on September 22,
1993. On November 24, 1999, the Company entered into an exchange agreement for
the reverse acquisition of New Directions Manufacturing, Inc., a publicly traded
Nevada corporation incorporated on January 9, 1997 ("New Directions"), wherein
New Directions would acquire the assets of the Company and change its name to
American Soil Technologies, Inc. This exchange agreement was effective as of the
close of business on December 31, 1999.
The Company is primarily engaged in the marketing of polymer and other soil
amendments to the agricultural turf and horticulture industries. The Company's
products are used to decrease water usage, increase nutrient retention in soil,
enhance seed germination and sprout emergence, clarify ponds and increase the
effectiveness of chemical fertilizers and biological additives. In 2006, the
Company acquired the patent to a slow release fertilizer. The Company also has
exclusive license rights to the use of patented polymer application techniques,
as well as numerous patents on a unique machine designed to inject polymer and
other liquid products into existing turf and some crops.
The Company also expanded to provide next-generation and sustainable fertilizers
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 deemed not to be proprietary and subsequently deemed
to have little or no value (see Note 3). Smart World sells homogenized
fertilizers, non-toxic insect controls, plant protectants, seed, and soil and
silage inoculants. Smart World also provides advanced, custom-formulated
products built to suit unusual growing conditions and environments. Due to
losses incurred in 2008, management terminated Smart World employees and seeks
to operate through commission-based sales representatives. Additionally, the
Company has several debt obligations that are past the contractual maturity
date, or are due and payable due to non payment of interest.
GOING CONCERN AND MANAGEMENT'S PLANS
The Company has sustained significant losses and has an accumulated deficit of
$25,821,705 and negative working capital of $5,027,044 as of September 30, 2009.
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. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management 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. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In June 2009, the Financial Accounting Standards Board ("FASB") issued revised
accounting guidance which establishes the FASB Accounting Standards Codification
("ASC") as the authoritative source for accounting principles of
non-governmental entities to conform to United States Generally Accepted
Accounting Principles ("GAAP") used in the preparation of financial statements.
The ASC is not intended to change existing guidance for public companies. The
new guidance is effective for interim and annual reporting periods ending after
September 15, 2009.
F-7
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
valuation of inventories, impairment of goodwill and other intangible assets,
valuation of stock options and warrants to purchase common stock and the
valuation of the derivative liability.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes all short-term highly liquid investments that
are readily convertible to known amounts of cash and have original maturities of
three months or less.
ACCOUNTS AND NOTES RECEIVABLE
The Company utilizes the allowance method to provide a reserve for uncollectible
accounts. The Company determines any required allowance by considering a number
of factors including length of time trade accounts receivable are past due and
the Company's previous loss history. The Company records a reserve account 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 is 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 (3) to ten (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.
LONG-LIVED ASSETS
The Company reviews its fixed assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less costs to sell.
GOODWILL AND INTANGIBLE ASSETS WITH INDEFINITE LIVES
ASC No. 805, "Business Combinations", requires that all business combinations be
accounted for under the purchase method. The statement further requires separate
recognition of intangible assets that meet certain criteria. ASC No. 350,
requires that an acquired intangible asset meeting certain criteria shall be
initially recognized, and measured based on its fair value. The statement also
provides that goodwill and other indefinite-lived assets should not be
amortized, but shall be tested for impairment annually or more frequently, if
circumstances indicate potential impairment, through a comparison of fair value
to their carrying amount.
F-8
In accordance with ASC No. 350, "Intangible, Goodwill and Other", the goodwill
impairment test has two steps. The first step of the impairment test identifies
potential impairment by comparing the fair value with the carrying amount of the
reporting unit, including goodwill. If the carrying amount of the reporting unit
exceeds its fair value, the second step of the impairment test shall be
performed to measure the amount of the impairment loss, if any. Intangibles with
indefinite useful lives are measured for impairment by the amount that the
carrying value exceeds the estimated fair value of the intangible. The fair
value is calculated using the income approach. Intangible assets with definite
useful lives will continue to be amortized over their estimated useful lives.
Any impairment is recorded at the date of determination.
FAIR VALUE MEASUREMENTS
ASC 820-10 (SFAS No. 157), "Fair Value Measurements and Disclosures - Overall"
provides a framework for measuring fair value and requires expanded disclosures
regarding fair value measurements. ASC 820-10 defines fair value as the price
that would be received for an asset or the exit price that would be paid to
transfer a liability in the principal or most advantageous market in an orderly
transaction between market participants on the measurement date. ASC 820-10 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs, where available. The following summarizes the three levels
of inputs required by the standard that the Company uses to measure fair value.
* LEVEL 1: Quoted prices in active markets for identical assets or
liabilities.
* LEVEL 2: Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term
of the related assets or liabilities.
* LEVEL 3: Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
ACCOUNTING FOR CONVERTIBLE DEBT
Convertible debt is accounted for under the guidelines established by ASC No.
470 Topic 20, "Debt with Conversion and Other Options" and ASC No. 740, "Income
Tax". The Company records a beneficial conversion feature ("BCF") related to the
issuance of convertible debt that have conversion features at fixed or
adjustable rates that are in-the-money when issued and records the fair value of
warrants issued with those instruments. The BCF for the convertible instruments
is recognized and measured by allocating a portion of the proceeds to warrants
and as a reduction to the carrying amount of the convertible instrument equal to
the intrinsic value of the conversion features, both of which are credited to
paid-in-capital. The Company calculates the fair value of warrants issued with
the convertible instruments using the Black-Scholes valuation method, using the
same assumptions used for valuing employee options for purposes of ASC No. 718,
"Compensation - Stock Compensation", except that the contractual life of the
warrant is used. Under these guidelines, the Company allocates the value of the
proceeds received from a convertible debt transaction between the conversion
feature and any other detachable instruments (such as warrants) on a relative
fair value basis. The allocated fair value is recorded as a debt discount or
premium and is amortized over the expected term of the convertible debt to
interest expense.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments, as defined in ASC No. 815, "Derivatives and
Hedging", consist of financial instruments or other contracts that contain a
notional amount and one or more underlying (e.g. interest rate, security price
or other variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.
F-9
The Company does not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, the Company has issued
financial instruments including convertible debt that are either (i) not
afforded equity classification, (ii) embody risks not clearly and closely
related to host contracts, or (iii) may be net-cash settled by the counterparty.
As required by ASC No. 815, in certain instances, these instruments are required
to be carried as derivative liabilities, at fair value, in the Company's
consolidated financial statements.
The Company estimates the fair values of its derivative financial instrument
using the Black-Scholes option valuation technique because it embodies all of
the requisite assumptions (including trading volatility, estimated terms and
risk free rates) necessary to fair value these instruments. Estimating fair
values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, option-based techniques are highly volatile and
sensitive to changes in the trading market price of our common stock, which has
a high-historical volatility. Since derivative financial instruments are
initially and subsequently carried at fair values, the Company's operating
results reflect the volatility in these estimate and assumption changes in each
reporting period.
INTELLECTUAL PROPERTY
Intellectual property includes the exclusive licenses to the patented polymer
application techniques and certain acquired intellectual property which are
being amortized using the straight-line method over the respective estimated
useful lives.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense was
$5,874 and $17,952, for years ended September 30, 2009 and 2008, respectively.
REVENUE RECOGNITION
In accordance with ASC No. 605, "Revenue Recognition", revenue is recognized
when products are shipped to a customer and the risks and rewards of ownership
have passed based on the terms of the sale.
SHIPPING AND HANDLING
Shipping and handling fees charged to customers are included in net sales in
accordance with ASC 605, "Revenue Recognition". The shipping and handling costs
incurred by the Company are included in cost of sales.
INCOME TAXES
Deferred income taxes are determined using the liability method in accordance
with ASC 740, Income Taxes. The Company records a valuation allowance to reduce
its deferred tax assets to the amount it expects is more likely than not to be
realized. While the Company has considered future taxable income and its ongoing
tax planning strategies in assessing the need for the valuation allowance, if it
were to determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, an adjustment to the deferred
tax asset would increase income in the period such determination was made.
Likewise, should the Company determine it would not be able to realize all or
part of its net deferred tax assets in the future, an adjustment to the deferred
tax asset would decrease income in the period such determination was made.
Effective September 30, 2007, the Company adopted ASC No. 740 Topic 10, "Income
Taxes", General ("ASC 740.10"). ASC 740.10 prescribes, among other things, a
recognition threshold and measurement attributes for the financial statement
recognition and measurement of uncertain tax positions taken or expected to be
taken in a company's income tax return. The Company utilizes a two-step approach
for evaluating uncertain tax positions. Step one or recognition, requires a
company to determine if the weight of available evidence indicates a tax
position is more likely than not to be sustained upon audit, including
resolution of related appeals or litigation processes, if any. Step two or
measurement, is based on the largest amount of benefit, which is more likely
than not to be realized on settlement with the taxing authority.
F-10
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are recorded on the consolidated balance sheets. The
carrying amount for cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses approximates fair value due to the immediate or
short-term maturity of these financial instruments. The fair value of long-term
debt approximates the carrying amounts based upon our expected borrowing rate
for debt with similar remaining maturities and comparable risk. The fair value
of notes payable to related parties cannot readily be determined.
RESEARCH AND DEVELOPMENT EXPENSES
The Company expenses research and development costs as incurred.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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:
2009 2008
---- ----
Percent of accounts receivable 64% 69%
Number of customers 4 4
Sales from individual customers representing 10% or more of sales consist of the
following customers for the years ended September 30:
2009 2008
---- ----
Percent of sales 64% 10%
Number of customers 3 1
As a result of the Company's concentration of its customer base, the loss or
cancellation of business from, or significant changes in scheduled deliveries of
product sold to the above customers or a change in their financial position
could materially and adversely affect the Company's consolidated financial
position, results of operations and cash flows.
STOCK-BASED COMPENSATION
The Company accounts for equity based compensation under the provisions of ASC
No. 718, "Compensation, Stock Compensation" ("ASC 718"). ASC 718 requires the
recognition of the fair value of equity-based compensation in operations. The
fair value of the Company's stock option awards are estimated using a
Black-Scholes option valuation model. This model requires the input of highly
subjective assumptions and elections including expected stock price volatility
and the estimated life of each award. In addition, the calculation of
equity-based compensation costs requires that the Company estimate the number of
awards that will be forfeited during the vesting period. The fair value of
equity-based awards is amortized over the vesting period of the award and the
Company elected to use the straight-line method for awards granted after the
adoption of ASC 718.
ACCOUNTING FOR STOCK OPTIONS ISSUED TO CONSULTANTS
The Company measures compensation expense for its non-employee stock-based
compensation under ASC 505 Topic 50, "Equity-Based Payments to Non-Employees".
The fair value of the options issued or committed to be issued is used to
measure the transaction, as this is more reliable than the fair value of the
services received. The fair value is measured at the value of the Company's
common stock on the date that the commitment for performance by the counterparty
has been reached or the counterparty's performance is complete. The fair value
of the equity instrument is charged directly to stock-based compensation expense
and credited to additional paid-in capital.
F-11
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:
2009 2008
---------- ----------
Convertible debt 3,125,000 50,000,000
Series A convertible preferred stock 2,763,699 2,763,699
---------- ----------
5,888,699 52,763,699
========== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2009, the Financial Accounting Standards Board ("FASB") issued ASC
820-10, "Fair Value Measurements and Disclosures - Overall", for the fair value
measurement of investments in certain entities that calculate net asset value
per share (or its equivalent). The amendments in this update are effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted in financial statements for earlier interim and annual periods that
have not been issued. The adoption of this update will have no material effect
on the Company's financial condition or results of operations. In August 2009,
the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic
820): Measuring Liabilities at Fair Value. This update provides amendments to
Subtopic 820-10, Fair Value Measurements and Disclosures - Overall, for the fair
value measurement of liabilities. The guidance provided in this update is
effective for the first reporting period beginning after issuance. The adoption
of this statement has had no material effect on the Company's financial
condition or results of operations.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles--a
replacement of FASB Statement No. 162, which is codified in FASB ASC 105,
Generally Accepted Accounting Principles ("ASC 105"). ASC 105 establishes the
Codification as the source of authoritative GAAP in the United States (the "GAAP
hierarchy") recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the Securities and Exchange Commission
("SEC") under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. Once the Codification is in effect, all
of its content will carry the same level of authority and the GAAP hierarchy
will be modified to include only two levels of GAAP, authoritative and
non-authoritative. ASC 105 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The adoption of ASC
105 had no material effect on the Company's financial condition or results of
operation.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) ("SFAS No. 167"), which amends the consolidation guidance applicable
to variable interest entities. The amendments significantly affect the overall
consolidation analysis under ASC 810, "Consolidation" and require an enterprise
to perform an analysis to determine whether the enterprise's variable interest
or interests give it a controlling financial interest in a variable interest
entity. SFAS No. 167 has not yet been codified and in accordance with ASC 105,
remains authoritative guidance until such time that it is integrated in the FASB
ASC. SFAS No. 167 is effective as of the beginning of the first fiscal year that
begins after November 15, 2009, and early adoption is prohibited. The adoption
of this update will have no material effect on the Company's financial condition
or results of operations.
F-12
In June, 2009, the Financial Accounting Standards Board issued ASC 860-10,
"Transfers and Servicing - Overall", the codification of FASB Statement No. 140"
("SFAS 166"). This statement removes the concept of a qualifying special-purpose
entity Statement 140 and removes the exception from applying Interpretation No.
46 (revised December 2003), Consolidation of Variable Interest Entities, to
qualifying special-purpose entities.SFAS No. 166 is effective for financial
asset transfers occurring after the beginning of an entity's first fiscal year
that begins after November 15, 2009 and early adoption is prohibited. The
adoption of this statement will have no material affect on the financial
statements. The adoption of this statement will have no material effect on the
Company's financial condition or results of operations.
In May, 2009, FASB issued ASC 855 Subsequent Events which establishes principles
and requirements for subsequent events. In accordance with the provisions of ASC
855, the Company currently evaluates subsequent events through the date the
financial statements are available to be issued.
3. INVENTORIES
Inventories consist of the following at September 30:
2009 2008
-------- --------
Raw materials $ 64,818 $ 89,822
Finished goods 5,409 49,502
-------- --------
$ 70,227 $139,324
======== ========
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at September 30:
Estimated
useful life
(in years) 2009 2008
----------- --------- ---------
Machinery 10 $ 598,906 $ 599,946
Vehicles 5 44,615 44,615
Office furnishings, fixtures and equipment 3-5 46,330 46,330
--------- ---------
689,851 690,891
Less accumulated depreciation (611,027) (539,163)
--------- ---------
$ 78,824 $ 151,728
========= =========
Depreciation expense for the years ended September 30, 2009 and 2008 was $72,332
and $121,444, respectively.
The Company classified $67,500 of tooling costs in deposits and other assets as
of September 30, 2008. As of September 30, 2009, the Company fully impaired
these assets as it was determined they would not be recoverable through future
cash flows.
F-13
5. INTANGIBLE ASSETS AND GOODWILL
The following table summarizes the components of intangible assets as of
September 30:
Polymer Smart World
application Turf trade Soil Medic patents and
patents secrets patent formulas Total
------- ------- ------ -------- -----
Beginning balance at December 31, 2007 $ 311,498 $ 34,488 $1,578,531 $ 835,583 $2,760,100
Additions -- -- -- -- --
Amortization (103,833) (11,495) (252,565) (139,264) (507,157)
Impairment -- -- (845,390) -- (845,390)
--------- -------- ---------- ---------- ----------
Balance at September 30, 2008 207,665 22,993 480,576 696,319 1,407,553
Additions -- -- -- -- --
Amortization (103,833) (11,496) (91,538) (139,264) (346,131)
Impairment (103,832) (11,497) (177,000) (557,055) (849,384)
--------- -------- ---------- ---------- ----------
Balance at September 30, 2009 $ -- $ -- $ 212,038 $ -- $ 212,038
========= ======== ========== ========== ==========
Weighted average remaining life at:
September 30, 2009 4.2
September 30, 2008 5.8
In connection with the Soil Medic patent rights acquired in the Company's
acquisition of AFTI, during fiscal 2007 and early into fiscal 2008, the
management experienced a problem with the manufacturing of the formulas. During
2008, the Company resolved the manufacturing problems and began to remarket
these products. During the fourth quarter of fiscal 2008, management evaluated
the carrying value of these formulas. As a result of the above problems,
management reduced its projected future sales and resulting cash flows resulted
in an impairment charge of $845,390 during the year ended September 30, 2008.
As of September 30, 2009, the Company evaluated the carrying value of its
intangible assets and goodwill. Due to the lack of funding to execute certain
business plans and the current state of the capital markets, management reduced
its projected future sales and resulting cash flows resulted in an impairment
charge of $849,384 related to intangible assets and $364,600 related to goodwill
during the year ended September 30, 2009.
The amortization expense was $346,131 and $507,157 for the years ended September
30, 2009 and 2008, respectively.
Estimated intangible asset amortization expense for the remaining carrying
amount of intangible assets is as follows for the years ended September 30:
2010 $ 49,891
2011 49,891
2012 49,891
2013 49,891
2014 12,474
--------
$212,038
========
F-14
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
2009 2008
-------- --------
Interest $ 282,349 $ 237,091
Interest to related parties 101,427 54,578
Compensation and related 696,255 236,287
Other -- 1,148
---------- ----------
$1,080,031 $ 529,104
========== ==========
7. NOTES PAYABLE
Notes payable consists of the following at September 30:
2009 2008
----------- -----------
Debenture payable to a related party. Original balance $ 25,000 $ 25,000
of $25,000 bearing interest at 8% per annum with
interest payable quarterly. The principal is
convertible into common stock at a conversion price of
$0.50 per share. The principal is unsecured and was due
February 1, 2008
Debenture payable to a related party bearing interest 25,000 25,000
at 8% per annum with interest payable quarterly. The
principal is convertible into common stock at a
conversion price of $0.50 per share. The principal is
unsecured and was due February 1, 2008.
Note payable to a related party, original balance of 85,000 85,000
$85,000 bearing interest at prime rate of 3.25% and 5%
payable monthly. Note is unsecured and was due August
31, 2009.
Note payable to Diana Visco bearing interest at the 691,450 600,000
prime rate of 3.25% and 5% at September 30, 2009 and
2008, respectively and is payable monthly. The note is
unsecured and is due on September 2010.
Note payable to Carl Ranno. The note was paid in 2009. -- 5,587
Convertible debenture payable to a related party. 177,024 177,024
Original balance of $250,000 bearing interest at a rate
of 10% per annum. Monthly principal and interest
payments of $3,000 are due through 2014. The note is
in default for non-payment. Principal is convertible
into common stock at a conversion price of $3.00 per
share. The note is unsecured.
Debenture payable to Ray Nielsen bearing interest at a 1,500,000 1,500,000
rate of 8% per annum with interest payable quarterly.
The note is secured by the intellectual property
acquired from the note holder. The principal was due on
January 19, 2008 (see below for further discussion).
Convertible note payable to an unrelated party. The 125,000 --
note is unsecured, convertible at $0.04 per share, and
is due March 2, 2010 bearing interest at 8% per annum.
The note was converted on October 8, 2009 into
3,125,000 shares of common stock, and therefore has
been classified at long-term.
F-15
Debenture payable to an unrelated party bearing 30,000 30,000
interest at a rate of 8% per annum with interest
payable quarterly. The note is unsecured. The principal
was due on October 1, 2008.
Debenture payable to an unrelated party bearing 30,000 30,000
interest at a rate of 8% per annum with interest
payable quarterly. The note is unsecured and was due on
October 1, 2008.
Debenture payable to an unrelated party bearing 30,000 30,000
interest at a rate of 8% per annum with interest
payable quarterly. Note is unsecured and was due
October 1, 2008.
Note payable to finance company, original balance of 4,455 12,320
$48,542 bearing interest at a rate of 2.9% per annum.
Monthly principal and interest payments of $736 are due
through 2009. The note is collateralized by vehicle
financed.
Note payable to finance company, original balance of -- 19,817
$75,000 bearing interest at a rate of 17.7% per annum.
The loan is collateralized by the polymer injection
machine being financed.
Notes payable to various unrelated parties with 254,584 259,266
interest rates ranging from 6% to 20%. The notes are
currently in default.
Debenture to an unrelated party bearing interest at a 75,000 75,000
rate of 10% per annum with interest payable quarterly.
Note is unsecured and was due on July 18, 2009.
----------- -----------
3,052,513 2,874,014
Less: debt discounts -- (4,811)
----------- -----------
3,052,513 3,119,401
Current portion (2,927,513) (2,865,474)
----------- -----------
Long-term portion $ 125,000 $ 3,729
=========== ===========
CONVERTIBLE NOTES PAYABLE
On October 25, 2007, the Company and holders of an aggregate of $120,000
outstanding convertible notes agreed to extend the maturity until October 1,
2008 of the outstanding principal balance from $0.30 to $0.10 while the market
price was $0.09 per share. The Company also granted to one holder, a warrant to
purchase 100,000 shares of the Company's common stock. The warrants vested
immediately have an exercise price of $0.10 per share and expire two years from
the date of issuance. The fair value of the warrants was approximately $6,267 as
determined by the Black-Scholes option pricing model using the following
assumptions:
F-16
Estimated fair value of underlying common stock $0.09
Exercise price $0.10
Expected life (in years) 2
Risk-free interest rate 3.69%
Expected volatility 146.9%
Dividend yield 0%
Since the notes had matured, the Company determined the extensions represent the
issuance of new notes. No modification or extinguishment accounting was
required. The proceeds were allocated between the convertible notes and the
warrant based on their relative fair values and resulted in $24,816 being
allocated to the convertible notes payable and $5,184 to the warrants. The
resulting discount related to the warrants is being amortized over the life of
the convertible notes.
On September 2, 2009, the Company entered into a convertible note payable
Agreement with a third party investor for $125,000. The note is unsecured and is
due on March 2, 2010, bearing interest at 8% per annum. The note is convertible
in to common stock at the option of the holder at any time at a conversion price
of $0.04 per share. The note was converted into 3,125,000 shares of common stock
on October 8, 2009. The conversion price being equal to the stock price on the
date of issuance.
NOTES PAYABLE
On December 7, 2007, the Company issued a $150,000 face value non-convertible
note due January 15, 2008 together with 500,000 shares of common stock. The
proceeds from the issuance of the note and underlying common stock were
allocated based on their relative fair value on the date of issuance. The note
was assumed and repaid by Ms. Visco in January 2008.
8% CONVERTIBLE DEBENTURE
On December 20, 2006, the Company purchased exclusive soil additive formulas,
proprietary software, trademarks and patents. The Company funded the acquisition
through the issuance of $1,500,000 of 8% Convertible Debenture ("Convertible
Note") to Raymond Nielsen ("Holder"). The Debenture was convertible into common
stock at the option of the Holder. The conversion price was equal to the closing
price of the Company's common stock for the day immediately preceding the date
of the conversion. See Note 11 for discussion of litigation regarding this note.
The Convertible Note contained an embedded conversion feature ("ECF") as
prescribed in ASC No. 815. The Company also assessed whether bifurcation of the
ECF from the debt host met certain criteria. The ECF met all three criteria of
ASC No. 815 Topic 10: (1) the conversion feature is not clearly and closely
related to the host component, (2) the convertible instrument is not accounted
for at fair value, and (3) the ECF meets the definition of a derivative in Topic
10 of ASC No. 815.
To assess whether or not the ECF would be classified as stockholders' equity if
it were freestanding, management considered the guidance in ASC No. 815
"Derivatives and Hedging" in assessing whether or not the conversion option
would be classified as equity or a liability if it were freestanding, management
determined whether or not the Convertible Note was considered "conventional."
ASC 815 defines conventional convertible debt as debt whereby the holder will,
at the issuer's option, receive a fixed amount of shares or the equivalent
amount of cash as proceeds when he exercises the conversion option. As a result
of the ECF not being convertible into a fixed number of shares of stock and that
the Company not ultimately knowing the number of common shares that could be
issued upon exercise (no floor on the ECF) management determined the Convertible
Note was not "conventional". As of September 30, 2008, based on the current
number of outstanding common shares, together with the number of shares of
common stock the Convertible Note may be converted into, the Company does not
have enough authorized shares available for issuance to permit for this
potential conversion. The conversion option ceased during 2009.
F-17
This caused the ECF to be classified as derivative financial instruments under
ASC No. 815. The accounting treatment requires the Company to record the ECF as
a derivative liability on the balance sheet at its fair values as of each
reporting date. Any change in the Company's stock price results in a change in
the fair value of the derivative liability was recorded as non-operating,
non-cash income or expense at each reporting date in the accompanying
consolidated statement of operations. The derivative was valued using the
Black-Scholes option pricing model and was classified in the consolidated
balance sheet as a short-term liability as the underlying note is past due and
in default for non-payment.
The conversion option ceased during 2009.
The fair value of the ECF was determined using the Black-Scholes option pricing
model with the following assumptions at September 30, 2008:
2008
-------
Fair value of underlying common stock $ 0.03
Expected life (in years) 0
Risk-free interest rate 1.02%
Expected volatility 193.50%
Dividend yield 0%
8. INCOME TAXES
The provision for income taxes is comprised of the following for the years ended
September 30:
2009 2008
------ ------
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:
2009 2008
------- -------
Statutory rate (34.0)% (34.0)%
Increase (decrease) in taxes resulting from the following:
State income taxes, net of federal benefit 2.6% 2.9%
Amortization of debt discount 0.0% 0.6%
Derivative liability (0.14)% (5.8)%
Change in valuation allowance 31.54% 36.3%
------ ------
--% --%
====== ======
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-18
Significant components of the Company's deferred tax assets and liabilities
consist of the following at September 30:
2009 2008
----------- -----------
Deferred tax assets (liabilities):
Current:
Reserves and accruals $ 513,023 $ 229,282
Non-current:
Intangible assets 597,000 237,935
Net operating losses 7,306,182 5,868,713
Other 56,032 49,764
Valuation allowance (8,472,237) (6,385,694)
----------- -----------
$ -- $ --
=========== ===========
At September 30, 2009 and 2008, the valuation allowance was increased by a total
of $2,086,542 and $467,175 respectively. At September 30, 2009, the Company had
federal net operating loss carryforwards of approximately $23,282,221 that
expire from 2010 through 2029 and state net operating carryforwards of
$7,952,737 expiring from 2010 through 2014. 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.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases real property located in Pacoima, California from an entity
owned by Ms. Visco. The Company currently occupies this facility on a
month-to-month basis. Rent expense under this lease for the year ended September
30, 2009 and 2008 was $7,061 and $7,061, respectively.
In connection with the acquisition Smart World, the Company assumed leases for a
warehouse and office space which expired on April 30, 2008 and November 30,
2007, respectively. The Company is currently renting this facility on a
month-to-month basis for $2,914 per month.
On November 3, 2006, the Company entered into an agreement to lease
approximately 100 acres of land in San Mateo, CA. for the purpose of obtaining
water rights to be used in operations. This lease was subsequently terminated
after management determined that the water rights were not as represented to
them. Per the terms of the agreement, lease payments were $100,000 per year for
a total of seven years or $700,000. The Company paid the first year's rent in
advance of $100,000 and a security deposit of $100,000. Management made a demand
for return of the amounts paid, without success. Due to the lack of capital to
pursue the matter, management determined that it is unlikely the Company will be
able to recover such amounts, and accordingly, they recorded a provision for
loss on the security deposit in the amount of $100,000 during the year ended
September 30, 2009.
CAPITAL LEASES
The Company leases certain equipment under capital leases. Minimum annual
required lease payments under the lease agreements are as follows as of
September 30:
2010 $ 21,600
2011 3,600
--------
Total minimum lease payments 25,200
Less amount representing interest (2,412)
--------
Present value of future minimum lease payments 22,788
Current portion 19,261
--------
Long-term portion $ 3,527
========
F-19
Equipment under capital leases included in machinery and equipment at September
30, 2009 are as follows:
Machinery and equipment $ 75,000
Less - accumulated depreciation (56,250)
--------
$ 18,750
========
PENDING PROPERTY ACQUISITION
On November 27, 2007, the Company entered into a Purchase and Sale Agreement and
Joint Escrow Instructions to acquire real property in Pescadero, California for
a purchase price of $5,400,000. The property has been improved with
approximately 700,000 square feet of greenhouses and the Company plans to
continue to operate the property as a nursery. In connection with the agreement,
the Company deposited $50,000 with the escrow agent of which a $10,000
non-refundable deposit was released to the sellers. In December 2007, per the
terms of the agreement, the Company was to have deposited an additional $100,000
into the escrow account on or before December 14, 2007 if the Company's due
diligence had been completed. Said due diligence has not been completed,
therefore the deposit has not been made. The remaining $5,350,000 was due by
December 28, 2007, the original closing date, and then extended to May 27, 2008.
As of the current date, the remaining amounts have not been paid and no action
has been taken to recover the deposit or close the transaction. Based on the
passage of time, the Company believes it is more likely than not that such
amounts will not be recovered. As a result the $50,000 in deposits have been
charged to general and administrative expense in the consolidated statement of
operations.
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. Stockhausen alleges that we breached an
agreement with them by failing to pay for goods purchased and failing to
purchase a minimum quantity of goods. We believe that Stockhausen provided
Defective products and waived any minimum purchase requirements. Stockhausen is
seeking a judgment in the amount of $188,180 plus interest and lost profits in
an unspecified amount, along with costs and attorneys fees. We filed an Answer
to the Complaint and a Cross-Complaint against Stockhausen on November 14, 2007.
Stockhausen has filed a motion to strike our answer and counterclaim which has
been recommended to the judge by the magistrate. We have filed a brief in
opposition as well as an explanation of damages and are awaiting the courts
decision.
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 has 60 days in which to remit
the amount or a judgment in the entire amount claimed will be entered against
us.
11. PREFERRED STOCK
The Company has 10,000,000 preferred stock authorized of which 2,763,699 shares
of $0.50 stated value Series A convertible preferred stock ("Series A
Preferred") are issued and outstanding as of September 30, 2009 and 2008. The
Series A Preferred have the following characteristics:
F-20
DIVIDENDS
Each holder is entitled to receive preferential quarterly dividends equal to the
prime interest rate as quoted in the Wall Street Journal when and if declared by
the Board of Directors, out of any assets that are legally available. If the
Board of Directors declares that such dividends may only be payable in shares of
common stock for any quarter, holders of Series A preferred stock have the
option of accepting the dividend paid in shares of common stock of the Company,
or letting the dividend accrue for a cash payment. No dividends have been
declared, accrued or paid.
CONVERSION
Each holder has the option to convert each share of Series A Preferred into
common stock at a rate of one share of common stock for each share of preferred
stock tendered
VOTING
The holders have no voting rights.
LIQUIDATION PREFERENCE
Each holder is entitled to be paid the stated value of their holdings out of the
assets of the Company, prior and in preference to any payment or distribution
out of the assets of the Company to the holders' common stock or any other class
or series of capital stock.
12. COMMON STOCK
STOCK OPTIONS
In November 2002, the Company enacted a stock option plan (the "2002 Plan") to
provide additional incentives to selected employees, directors and consultants.
Two million shares were authorized for grant. The purchase price of the common
stock subject to each Incentive Stock Option shall not be less than the fair
market value or in the case of a grant of an incentive stock option to a
principal shareholder, not less than 110% of the fair market value of such
common stock at the time each option is granted. The 2002 Plan terminates in
November 2012. The options are fully-vested when granted and are exercisable for
a period of ten years from the date of grant and are subject to cancellation
upon termination of employment. The Company has granted options to purchase
1,010,000 shares and 300,000 shares with exercise prices of $0.50 and $0.25,
respectively. The market price at the date of grant was $0.12. At September 30,
2009, 690,000 stock options are available for grant.
On January 6, 2005, the Company enacted the 2005 Stock Option/Stock Issuance
Plan (the "2005 Plan"). The 2005 Plan provides for the issuance of up to
10,000,000 shares of common stock to our directors, officers, employees and
consultants in the form of stock options and shares of common stock. The 2005
Plan has two separate components: the option grant program and the stock
issuance program.
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:
F-21
Weighted-Average
Remaining
Number of Weighted-Average Contractual Term
Shares Exercise Price (in years)
------ -------------- ----------
Outstanding at September 30, 2007 680,000 $0.50 5.1
Granted 3,330,840 0.11
Exercised --
Cancelled (1,579,000) 0.17
-----------
Outstanding at September 30, 2008 2,431,840 0.18 3.9
Granted --
Exercised --
Cancelled (435,840) 0.11
-----------
Outstanding at September 30, 2009 1,996,000 $0.19 3.0
===========
The fair value of stock options awarded were estimated at the date of grant
using the Black-Scholes option-pricing model. The expected option term was
estimated based upon the contractual term of the underlying stock option. The
expected volatility of the Company's stock price was based upon the historical
daily changes in the price of the Company's common stock. The risk-free interest
rate was based upon the current yield on U.S. Treasury securities having a term
similar to the expected option term. Dividend yield is estimated at zero because
the Company does not anticipate paying dividends in the foreseeable future.
The following table summarizes the weighted-average assumptions used and the
resulting fair value of options granted:
2009 2008
---- ----
Weighed-average fair value of options granted n/a $0.11
Weighted-average assumptions:
Expected volatility n/a 145%
Dividend yield n/a 0%
Expected option life n/a 5 years
Risk-free interest rate n/a 4%
Outstanding Exercisable
---------------------------------------------- -------------------------------------------
Weighted Weighted Average Weighted Weighted Average
Average Remaining Average Remaining
Number of Exercise Contractual Life Number of Exercise Contractual Life
Exercise Prices shares Price (in years) shares Price (in years)
--------------- ------ ----- ---------- ------ ----- ----------
$0.50 470,000 $0.50 3.1 470,000 $0.50 3.1
$0.11 1,526,000 $0.11 3.0 763,000 $0.11 3.0
At September 30, 2009, total unrecognized estimated compensation expense of
$71,000 related to 763,000 non-vested stock options is expected to be recognized
over a weighted-average period of 2.0 years.
Stock based compensation expense was $40,834 and $72,882 for the years ended
September 30, 2009 and 2008, respectively.
F-22
WARRANTS TO PURCHASE COMMON STOCK
The following tables summarize the issuances of warrants to purchase shares of
the Company's common stock:
Number of
Shares
-------
Outstanding at September 30, 2007 834,000
Granted 50,000
Exercised --
Cancelled --
--------
Outstanding at September 30, 2008 884,000
Granted --
Exercised --
Cancelled (100,000)
--------
Outstanding at September 30, 2009 784,000
========
As of September 30, 2009
-------------------------------------------------------------------------
Outstanding Exercisable
---------------------------------------------- ----------------------
Weighted Weighted Average Weighted
Average Remaining Average
Range of Number of Exercise Contractual Life Number of Exercise
Exercise Prices shares Price (in years) shares Price
--------------- ------ ----- ---------- ------ -----
$0.07 - $0.30 784,000 $0.23 0.1 184,000 $0.23
13. RELATED PARTY TRANSACTIONS
YEAR ENDED SEPTEMBER 30, 2009
During the year ended September 30, 2009, Ms. Visco loaned the Company an
additional $91,450. This note was consolidated with a note issued in August 2008
to Ms. Visco for $600,000, and accordingly the previous note has been
superceeded. The new note is for a total of $691,450. The principal is due on
September 30, 2010. Interest is payable monthly based upon the prime rate.
YEAR ENDED SEPTEMBER 30, 2008
On August 18, 2008, Ms. Visco converted $41,383 of outstanding notes payable
into 1,379,428 shares of common stock based on the closing stock price on the
date of conversion.
On May 8, 2008, Ms. Visco loaned the Company an additional $85,000 which is due
August 31, 2008. Interest is payable monthly based on the prime rate.
In August 2008, the Company executed a promissory note for all amounts due and
payable at that time to Ms. Visco in the amount of $600,000. This note was
superceeded by a new note issued in fiscal 2009 as noted above.
On March 9, 2008, Ms. Visco converted $20,000 of convertible notes into 40,000
shares of common stock at the original stated conversion price of $0.50 per
share.
On October 29, 2007, FLD Corporation, an entity partially controlled by Ms.
Visco converted $800,000 of notes payable into 1,757,143 shares of common stock
at the original stated conversion prices ranging from $0.28 to $0.50 per share.
F-23
Rent expense incurred in connection with an entity partially controlled by Ms.
Visco was $7,061 for each of the year ended September 30, 2009 and 2008.
Interest expense incurred in connection with outstanding loans and notes payable
to Ms. Visco or entities partially controlled was $25,145 and $73,690 for the
year ended September 30, 2009 and 2008, respectively.
14. SUBSEQUENT EVENTS
On October 8, 2009, a third party investor converted a promissory note with an
outstanding balance of $125,000 into 3,125,000 shares of common stock at the
contractual exercise price $0.04 per share.
On October 9, 2009, the Company issued 4,000,000 shares of common stock at $0.03
per share to officers and directors.
On December 29, 2009, the Company completed a settlement of litigation. See Note
10.
The Company has evaluated subsequent events through January 13, 2010.
F-2
