ITEM 1B.
Unresolved Staff Comments
Not applicable.
We currently occupy 1,800 square feet of office space in St. Louis, Missouri. The lease has expired and we are in the process of renewing the lease while we continue to occupy the space. The monthly lease payment is $1,800, plus utilities. We took possession of the leased space in January, 2008.
None.
PART II
ITEM 5.
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock was originally listed on the Pink Sheets under the symbol “CLTH.PK.” On March 13, 2008 we became listed on the OTCBB under “CLTH.” The following table sets forth for the periods indicated the high and low bid prices per share of our common stock as quoted on the OTCBB or Pink Sheets, as appropriate (in February 2011, the market-makers in our common stock have completed their migration off of FINRA’s BB (Bulletin Board) to OTC Markets Group. As a result, the Company is categorized and quotes can currently be found under the OTCQB tier):
On March 22, 2011, the closing price of our common stock, as quoted on the OTCQB, was $0.07 per share. As of March 22, 2011, we had approximately 130 stockholders of record.
In connection with the merger with SRS Energy, we assumed SRS Energy’s 2007 Stock Option Plan, which was adopted by the SRS Energy Board of Directors on April 16, 2007 and approved by the SRS Energy shareholders on April 16, 2007.
Equity Compensation Plan Information
Dividend Policy
We have no material operating history and therefore have had no earnings to distribute to stockholders. Even though we have recommenced operations, we do not anticipate paying any cash dividends in the foreseeable future. Rather, we currently intend to retain our earnings, if any, and reinvest them in the development of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under any existing indebtedness and other factors the board of directors may deem relevant.
Recent Sales of Unregistered Securities -
During April 2009, the Company commenced a second offering of units comprised of a convertible promissory note and a warrant (this offering closed in September 2010). The Company raised a total of $1,198,500 of investment proceeds. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at $0.08 per share at the holder’s option. Each note was issued with a warrant to purchase additional shares of Common Stock to provide 100% coverage of the principal amount of the associated note at a price of $0.30 per share. Two notes have been converted leaving $1,163,500 face value of notes outstanding as of December 31, 2010. The issuance of units and the issuance of Common Stock upon conversion of notes were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Rule 506 of Regulation D promulgated under the Securities Act (“Rule 506”) and/or Section 4(2) of the Securities Act.
During June 2010, the Company commenced another offering of units comprised of a convertible promissory note and a warrant. As of December 31, 2010, the Company had raised a total of $75,000 of investment proceeds. Each convertible promissory note carries a one-year term, a 12% interest rate and a payback provision of the note if $250,000 or more in the aggregate is raised by the Company in future offerings. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.08 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock to provide for 100% coverage of the promissory note at a price of $0.30 per share. The issuance of units and the issuance of Common Stock upon conversion of notes were exempt from the registration requirements of the Securities Act, pursuant to Rule 506 and/or Section 4(2) of the Securities Act.
In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note is due the earlier of: (i) February 28, 2011 or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The Company and CMS Acquisition, LLC entered into an amendment in February 2011 that extended the due date of the note to May 15, 2011 for payment of $25,000 towards the accrued interest to date and principal of the note. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The issuance of Common Stock upon conversion of warrants was exempt from the registration requirements of the Securities Act, pursuant to Rule 506 and/or Section 4(2) of the Securities Act.
During November 2010, the Company commenced a third offering of units comprised of a convertible promissory note and a warrant. As of March 22, 2011, the Company raised a total of $141,000 of investment proceeds. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted into shares of Common Stock at $0.06 per share at the holder’s option. Two notes have been converted leaving $95,000 face value of notes outstanding as of February 28, 2011. Each note was issued with a warrant to purchase additional shares of Common Stock to provide 100% coverage of the principal amount of the associated note at a price of $0.30 per share. The issuance of units and the issuance of Common Stock upon conversion of notes were exempt from the registration requirements of the Securities Act, pursuant to Rule 506 and/or Section 4(2) of the Securities Act.
Not applicable.
ITEM 7.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our plan of operation should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance. These risks and other factors include, among others, those listed under “Statement Regarding Forward-Looking Statements” and “Risk Factors” and those included elsewhere in this report.
Plan of Operation
Our focus is to secure sufficient capital to fund our current working capital requirements and the construction of a commercial plant as described further in this section. We currently do not have sufficient capital to continue operations. All of our developments/projects require a significant amount of capital that we currently do not have. While we continue to aggressively pursue capital, we have not had recent success securing meaningful amounts of financing. As a result, we can provide no assurance that we will secure any capital in the immediate time frame required and the failure to do so will likely result in an inability to continue operations.
Our company was initially conceived as a fully-integrated producer of cellulosic ethanol from MSW. Based on our investigation and acquisition of new technologies and research and development of our existing technologies in 2008, we re-focused our business to the commercialization of our Biomass Recovery Process technology for cleaning and separating MSW into its component parts and initiated a plan to consolidate the ownership and/or rights to use intellectual property around this technology. The technology is currently in use by another operator in a commercial setting in Australia. As a result, we believe this technology is ready for commercial implementation in the United States and elsewhere. In furtherance of our new focus, we are currently in the process of raising capital to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output will be sold or provided to electric utilities, power and steam producers, and biofuel research firms for evaluation. In addition to this capital raise for plant development, the Company is also working towards licensing and/or developing potential commercial projects as they present themselves. All of our developments plan to focus on cleaning and separating MSW into its component parts in order to obtain: (i) a homogenous feedstock of cellulosic biomass for producing energy and other chemical products and (ii) recyclable products (metals, plastics).
As a result of our focus on converting MSW into a biomass feedstock for energy or chemical products, we determined that we no longer would use the Brelsford and HFTA technologies. In the fourth quarter of 2008, Brelsford Engineering, Inc. terminated our license to the Brelsford technology for non-payment of certain fees. We decided not to use the technology going forward in our operations and wrote off the remaining asset as of December 31, 2008. The impairment loss of $97,500 is included in research and development expense on the statement of operations for the year ended December 31, 2008. Additionally, we terminated our agreement with HFTA, Inc. during the fourth quarter of 2009 as we determined to not use the HFTA technology going forward in our operations. We wrote off the related asset of approximately $693,000 as an impairment loss and the loss is included in research and development expense on the statement of operations for the year ended December 31, 2009.
Biomass Feedstock Production
The Company plans to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output will be sold or provided to electric utilities, power and steam producers, and biofuel and chemical research firms for evaluation. In addition to research and development, the Company is also working towards licensing and/or developing potential commercial projects.
We completed construction of a small test vessel in Kentucky and, beginning in April 2009, this vessel has processed approximately 12 tons of MSW into approximately 4-5 tons of biomass. We have provided the biomass produced during this testing phase to a number of fuel producers who are evaluating whether they can use our biomass as a feedstock for their technologies. In July 2010, we entered into an agreement with Fiberight to install this test vessel at Fiberight’s cellulosic ethanol pilot plant in Lawrenceville, Virginia. We anticipate our vessel to be installed and operational during the second quarter 2011. Once upgraded and installed, the vessel is expected to produce cellulosic biomass feedstock for Fiberight’s Targeted Fuel Extraction process. We expect such production should further validate our licensed Biomass Recovery Process, which we believe could then be used for on-site cellulosic biomass feedstock production for alternative energy producers. Additionally, we will have access to biomass produced at the Lawrenceville plant for delivery to other companies interested in testing it as feedstock in their conversion technologies.
We are also seeking to develop a plant in a major metropolitan area. We are working to develop one or more locations where waste collected would be processed using our technology and the biomass produced used to create heat and/or power.
We were considering the possibility of implementing our technology in Maryville, Missouri. In late March 2011, the City of Maryville sent out Requests for Proposal for their transfer station site. At this time, the Company is not in a position to participate in this process. The biomass produced would have potentially been supplied to Northwest Missouri State University for research purposes in advanced biofuel technologies and to supply steam for the University. The University has used biomass to produce steam for more than twenty years.
In addition to the developments we are currently contemplating, other development opportunities are presented to us and we evaluate those potential developments. Upon operating a plant and after refining our know-how with respect to implementation of the technology, we intend to seek to partner with waste haulers, landfill owners and municipalities to implement the technology across the United States and internationally.
The further development of commercial plants and/or implementation of the licensing of our technology described above will require significant additional capital, which we currently do not have. We cannot provide any assurance that we will be able to raise this additional capital. While we anticipate that financing for the commercial biomass recovery plant and these other potential projects could also be provided in part via tax exempt bond financing or through the use of loan guarantees from local, state and federal authorities, we have not secured any such financing and there can be no assurance that we will be able to secure any such financing.
Diesel Fuel Production
We previously anticipated completing an agreement with Green Power, Inc. (“Green Power”) to provide biomass for testing at Green Power’s facility and if that proves successful, to build a 200 ton per day MSW processing station to provide biomass for an existing 100 ton per day diesel fuel production plant. To date we have not been able to reach an agreement as to the nature and amount of biomass to be produced or other key terms of this relationship that are required for us to proceed. These issues and a number of other items will be required to be resolved before we are able to complete any agreement with Green Power. We have not completed an agreement to date and there can be no assurance that we will complete any agreement and proceed with this development.
Bio-Fuel and Bio-Chemical Joint Testing/Research
As soon as we are able to process MSW into biomass through our future biomass recovery plant, our test vessel at Fiberight’s facility in Virginia, and/or in future commercial vessels, we plan to enter into joint research agreements with companies looking to process biomass in their system(s) for various types of energy and chemical production. This testing and research will provide possible revenue streams, projects and additional opportunities for use of our biomass.
In August 2009, we entered into a joint research agreement with GeoSyn Fuels, L.L.C. (“GeoSyn”) whereby we agreed to provide GeoSyn with biomass feedstock derived from MSW from the City of Chicago for GeoSyn’s testing of their proprietary process for converting biomass into ethanol and other products.
In May 2010, we entered into a joint research agreement with Ze-Gen, Inc., a developer of technology for converting biomass into a variety of fuel products and other chemical products, whereby we agreed to provide biomass to Ze-Gen, Inc. for testing in their proprietary processes.
New Technologies; Commercializing Existing Technologies
Because of our unique ability to produce a clean, homogenous biomass feedstock, we are frequently presented with the opportunity to partner with or acquire new technologies. In addition to developing our current technologies, we will continue to add technologies to our suite of solutions that complement our core operations. We believe that our current technologies and aspects of those in development will enable us to eventually expand our business to use organic material from other waste streams such as municipal bio-solids from waste water facilities and animal waste for fuel production.
To commercialize our technology, we intend to:
•
construct and operate a commercial plant that: (i) processes MSW into cellulosic biomass for conversion into energy or chemical products and (ii) separates recyclables (metals, plastics, glass) for single-stream recycling;
•
identify and partner with landfill owners, waste haulers and municipalities to identify locations suitable for our technology; and
•
pursue additional opportunities to implement our technology in commercial settings at transfer stations and landfills in the United States and elsewhere in the world.
Our ability to implement this strategy will depend on our ability to raise significant amounts of additional capital and to hire appropriate managers and staff. Our success will also depend on a variety of market forces and other developments beyond our control.
As a result of the limited operating history of our company, prior years’ financial statements provide little information and virtually no guidance as to our future performance. In order to finance our business beyond this stage, we will be required to raise additional capital. Management plans to secure additional funds through through future sales of the Company’s Common Stock, government grants, project financings, preferred stock or debentures, until such time as the Company’s revenues and cash flow are sufficient to meet its cost structure and ultimately achieve profitable operations. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. We may not be able to secure financing on favorable terms, or at all. If we are unable to obtain acceptable financing on a timely basis, our business will likely fail and our common stock may become worthless.
Results of Operations
We experienced the following changes in our operations:
Year ended December 31, 2010 compared to the year ended December 31, 2009
Costs and expenses:
General and administrative - The decrease in 2010 is due primarily to a decrease in salaries and share-based compensation of approximately $330,000 and a decrease of approximately $70,000 in marketing expenses.
Professional Fees - The decrease in 2010 is due to reductions in legal and consulting fees of approximately $132,000 and $65,000, respectively.
Research and Development - The expense in 2009 is entirely related to the write-off of our license asset related to the HFTA technology as we elected to terminate the license agreement during the fourth quarter of 2009. As we shifted our plan of operation from a fully-integrated producer of cellulosic ethanol to the commercialization of our technology for cleaning and separating MSW into its component parts as described earlier in this report, we have had no R&D expense in 2010.
Other expense (income):
Interest expense - The decrease in 2010 is due primarily to decreased amortization of approximately $500,000 of discounts related to various notes as the majority of these discounts became fully amortized during 2010.
Other income - The other income in 2009 was for a two-month lease and subsequent sale of the HFTA equipment previously purchased.
Year ended December 31, 2009 compared to the year ended December 31, 2008
Costs and expenses:
General and administrative - The increase in expense in 2009 is due primarily to accruing salaries for all employees in 2009 compared to salary earned only by the CEO in 2008 (an increase of approximately $300,000), an increase of approximately $143,000 in share-based compensation expense and an increase of approximately $88,000 in marketing expenses.
Professional Fees - The decrease in 2009 is due to a reduction in legal fees of approximately $182,000 offset by an increase in consulting fees of approximately $40,000.
Research and Development - The expense in 2009 is entirely related to the write-off of our license asset related to the HFTA technology as we elected to terminate the license agreement during the fourth quarter of 2009. As we shifted our plan of operation from a fully-integrated producer of cellulosic ethanol to the commercialization of our technology for cleaning and separating MSW into its component parts as described earlier in this report, we have had minimal other R&D expense in 2009 as compared to 2008.
Other expense (income):
Interest expense - The increase in 2009 is due primarily to increased amortization of approximately $675,000 of discounts related to various notes and increased interest of approximately $50,000 on those notes.
Amortization - The asset related to this amortization was written off as of December 31, 2008 as we no longer plan to use the technology in our plan of operations going forward. As we have not yet commenced our operations, we have no amortization in 2009 for our current technology assets.
Other income - The other income in 2009 was for a two-month lease and subsequent sale of the HFTA equipment previously purchased.
Liquidity and Capital Resources
As a development-stage company, we have no revenues and will be required to raise additional capital in order to execute our business plan and commercialize our products. Beginning in September 2008 and as of March 22, 2011, we raised an aggregate of $2,156,500, in separate offerings of units comprised of a convertible note and warrants. We are continuing to explore opportunities to raise cash through the issuance of these units and other financing opportunities. As of March 22, 2011, our current cash is not sufficient to fund our operations. Our liabilities are substantially greater than our current available funds. We are seeking additional financing through the sale of additional equity, various government funding opportunities and/or possibly through strategic alliances with larger energy or waste management companies. We have retained Houlihan Capital to assist the Company in exploring and evaluating a range of strategic financing alternatives and/or other transactions. However, we may not be successful in securing additional capital. If we are not able to obtain additional financing in the immediate future, we will be required to delay our development until such financing becomes available. Further, even assuming that we secure additional funds, we may never achieve profitability or positive cash flow. If we are not able to timely and successfully raise additional capital and/or achieve profitability or positive cash flow, we will not have sufficient capital resources to implement our business plan.
Debt
Convertible Notes Payable
During September 2008, the Company commenced an offering of units comprised of a convertible promissory note and a warrant. The Company raised a total of $642,000 of investment proceeds through March 31, 2009 and this offering is closed. As of March 31, 2010, all of these notes have either been converted to shares of Common Stock or re-priced to our second convertible note offering (resulting in new notes with a total face value of $539,829, which included the original principal and interest through the date of re-pricing). Each convertible promissory note carried a one-year term and a 6% interest rate. In addition, each note could have been converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.25 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock equal to the principal amount of the promissory note at a price of $0.45 per share. These promissory notes had been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts were being amortized on a straight-line basis over the term of each note and are fully expensed as of March 31, 2010. All outstanding warrants related to this offering have also been re-priced into our second note offering. For the years ended December 31, 2010 and 2009, amortization of approximately $7,000 and $524,000, respectively, for these discounts has been recorded in interest expense.
During April 2009, the Company commenced a second offering of units comprised of a convertible promissory note and a warrant. As of December 31, 2010, the Company raised a total of $1,198,500 of investment proceeds. One note was converted during the second quarter of 2009 and one note was converted during the second quarter 2010 leaving $1,163,500 face value of notes outstanding ($1,703,329 after adding the notes converted from our first offering as disclosed previously). Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.08 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock to provide for 100% coverage of the promissory note at a price of $0.30 per share. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note. For the years ended December 31, 2010 and 2009, amortization of approximately $253,000 and $113,000, respectively for these discounts, has been recorded in interest expense.
During June 2010, the Company commenced another offering of units comprised of a convertible promissory note and a warrant. As of December 31, 2010, the Company had raised a total of $75,000 of investment proceeds. Each convertible promissory note carries a one-year term, a 12% interest rate and a payback provision of the note if $250,000 or more in the aggregate is raised by the Company in future offerings. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.08 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock to provide for 100% coverage of the promissory note at a price of $0.30 per share. The promissory note has been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note. For the year ended December 31, 2010, amortization of approximately $14,000 for these discounts has been recorded in interest expense.
During November 2010, the Company commenced a third offering of units comprised of a convertible promissory note and a warrant. As of December 31, 2010, the Company raised a total of $35,000 of investment proceeds. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.06 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock to provide for 100% coverage of the promissory note at a price of $0.30 per share. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements.
CMS Acquisition, LLC Note Payable
In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note is due the earlier of: (i) February 28, 2011 or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The Company and CMS Acquisition, LLC entered into an amendment in February 2011 that extended the due date of the note to May 15, 2011 for payment of $25,000 towards the accrued interest to date and principal of the note. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and is being amortized through interest expense. For the year ended December 31, 2010, amortization of approximately $7,000 for this discount has been recorded in interest expense.
Vertex (formerly WWT) Note Payable
On October 22, 2008, the Company completed the purchase of Patent No. 6,306,248 (the “PSC Patent”) pursuant to a Patent Purchase Agreement (“Agreement”) with World Waste Technologies, Inc. (“WWT”). The PSC Patent is the basis for the pressurized steam classification technology that cleans and separates municipal solid waste into its component parts, which the Company had licensed from Bio-Products International, Inc. Pursuant to the Agreement, the Company issued to WWT a note in the amount of $450,000 (interest at 6% per annum and a security interest in the PSC Patent) and a warrant to purchase 900,000 shares of Common Stock at a price of $0.45 per share and warrants to purchase an additional 900,000 shares of Common Stock at a price of $0.45 per share contingent on payment of the note by July 22, 2009 (the original maturity date). WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. as a result of a merger in March 2009. We entered into amendments dated July 23, 2009 whereby: (i) the Company paid 10% of the original note and all accrued interest to date, (ii) all previous warrants (totaling 1,800,000 shares) were reissued at a price of $0.11 per share with no contingencies and (iii) the remaining payments on the note were scheduled to be paid on October 22, 2009 (50% of principal plus accrued interest to date not yet paid) and January 22, 2010 (remaining principal and accrued interest to date). We entered into amendments dated October 22, 2009 whereby: (i) the October 22, 2009 payment was deferred until November 22, 2009 and (ii) we issued additional warrants to Vertex for 500,000 shares of Common Stock at a price of $0.10 per share. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants had been recorded as a contra-balance amount discount with the note and has been fully amortized through interest expense. For the years ended December 31, 2010 and 2009, amortization of approximately $7,000 and $178,000 for this discount has been recorded in interest expense. This note was paid in full in September 2010.
Series A Convertible Debentures
In April 2007, the Company sold $1,400,000 of Series A Convertible Debentures (“Debentures”), due April 16, 2010, that convert into shares of the Company’s Common Stock at $0.15 per share. The Company filed a registration statement with regard to the sale of these shares of Common Stock, which was declared effective by the Securities and Exchange Commission on January 2, 2008. The debentures accrue interest at 6% per annum. The interest is payable in cash or shares of the Company’s Common Stock at the Company’s option. The Debenture Holders can convert their amount into shares at any time until the due date.
During March 2008, various debenture holders converted an aggregate amount of $630,000 of our Debentures, plus interest earned, into 4,433,067 shares of Common Stock. During April 2008, various debenture holders converted an aggregate amount of $630,000 of our Debentures, plus interest earned, into 4,455,844 shares of Common Stock. As of April 16, 2010, the remaining principal of $140,000 matured and with accumulated interest earned, converted to 2,069,375 shares of our common stock.
Summary of Cash Flow Activity
Net cash used by operating activities
During 2010 and 2009, cash used by operating activities was impacted primarily by increases in accounts payable and other accrued liabilities.
Net cash used by investing activities
During 2009, cash used by investing activities was for capital expenditures. During 2008, cash used by investing activities was for the acquisition of a patent, the merger of Biomass North America Licensing, Inc. and capital expenditures.
Net cash provided by financing activities
During 2010, cash provided by financing activities was from the continued issuance of our Convertible Notes for $485,000 offset by payments against other Notes Payable. During 2009, cash provided by financing activities was from the continued issuance of our Convertible Notes for $958,500 offset by payments against other Notes Payable. During 2008, cash provided by financing activities was primarily from the issuance of our Convertible Notes for $607,000 and the remaining portion of the Series A Convertible Debentures plus interest of $474,900.
Contractual Obligations and Commitments
In the table below, we set forth our obligations as of December 31, 2010. Some of the figures we include in this table are based on our estimates and assumptions about these obligations, including their durations, anticipated actions by third parties and other factors. The obligations we may pay in future periods may vary from those reflected in this table because of estimates or actions of third parties as disclosed in the notes to the table.
(1)
Amount represents value of principal amount of notes and estimates for interest. These notes are with various individuals, carry one-year terms and are convertible into shares of Common Stock at the noteholders option. The first of these notes matured in April 2010. If the noteholders do not convert their notes into shares of Common Stock, the notes will have to be repaid or refinanced.
(2)
Amount represents value of principal amount of note and interest and is secured by a security interest in the PSC Patent. Final payment on this note is due May 15, 2011.
(3)
Represents lease on office furniture.
(4)
The lease for our office space expired December 2010 and is currently being negoiated while we occupy the space.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
We have not entered into any transaction, agreement or other contractual arrangement with an unconsolidated entity under which we have:
•
a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit;
•
liquidity or market risk support to such entity for such assets; or
•
an obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging, or research and development services with us.
Critical Accounting Estimates
Long-Lived Assets - Our acquisition and merger activities have resulted in aggregate licensing and patent assets of approximately $2.1 million as of December 31, 2010. We are required to conduct impairment tests of long-lived assets on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset below its carrying value. As we have not commenced commercial operations, these assets have not yet been placed in service. In the fourth quarter of 2008, we determined that we are no longer going to use the Brelsford technology for which an asset was previous capitalized and partially amortized. At December 31, 2008, the net remaining asset of $97,500 was written-off through our research and development expense for the year ended December 31, 2008. In the fourth quarter of 2009, we determined that we are no longer going to use the HFTA technology for which an asset was previous capitalized. The net remaining asset of $693,000 was written-off through our research and development expense for the year ended December 31, 2009.
Deferred Taxes - We recognize deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company incurred no income taxes to date. Any benefits are the result of temporary differences (start-up costs, stock compensation and other items) and operating loss carryforwards. The difference between the expected income tax benefit and non-recognition of an income tax benefit in each period is the result of a valuation allowance applied to deferred tax assets. A valuation allowance in the same amount of the benefit has been provided to reduce the deferred tax asset, as realization of the asset is not assured.
Stock-Based Compensation - We account for stock-based compensation in accordance with accounting guidance that requires measuring all stock-based compensation awards at fair value and recognizing an expense in the financial statements. We compensate certain employees, officers, directors and consultants with share-based payment awards and recognize compensation costs for these awards based on their fair values and expense is recognized over the requisite service period. The fair values of certain awards are estimated on the grant date using the Black-Scholes-Merton option-pricing formula, which incorporates certain assumptions including the expected term of an award and expected stock price volatility.
Convertible Notes Payable and Warrants - The Company has issued Convertible Promissory Notes (“Notes”). These Notes may be converted at the option of the noteholder into shares of the Company’s common stock. Additionally, these Notes carry warrants for shares of the Company’s common stock. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note.
Fair Value Measurement - We use fair value accounting and reporting to specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources or reflect our own assumptions of market participant valuation. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
•
Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
•
Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets, or financial instruments for which significant inputs are observable, either directly or indirectly;
•
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As of and during the year ended December 31, 2010 and 2009, we utilized Level 1 inputs to determine the fair value of cash equivalents and we utilized Level 2 inputs to determine the fair value of certain long-lived assets.
Contingent Liabilities - We are, from time to time, subject to litigation to our business. Assessments regarding the ultimate cost of lawsuits require judgments concerning matters such as the anticipated outcome of negotiations, the number and cost of pending and future claims, and the impact of evidentiary requirements. A significant amount of judgment and use of estimates is required to quantify our ultimate exposure in these matters. We regularly review the valuation of these liabilities and account for changes in circumstances for ongoing and emerging issues. The Company intends to defend itself vigorously in all litigation.
ITEM 7A.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2010, all of our debt instruments (Notes Payable and Capital Lease) carry fixed interest rates. We do not have any arrangements for borrowings under a credit facility. We currently have no operations and are not subject to any currency fluctuations or credit risk.
ITEM 8.
ITEM 8.
Financial Statements and Supplemental Data
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CleanTech Biofuels, Inc.
St. Louis, Missouri
We have audited the accompanying balance sheet of CleanTech Biofuels, Inc. as of December 31, 2010 and the related Statements of Operations, Changes in Stockholder’s Equity, and Cash Flows for the year ended December 31, 2010. CleanTech Biofuels Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of the 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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CleanTech Biofuels, Inc. as of December 31, 2010, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s significant operating losses and recent inability to secure additional capital to implement its business plan raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
MILHOUSE & NEAL, LLP
Certified Public Accountants
March 22, 2011
To the Board of Directors and Stockholders of
CleanTech Biofuels, Inc.
St. Louis, Missouri
We have audited the accompanying balance sheet of CleanTech Biofuels, Inc. as of December 31, 2009 and the related Statements of Operations, Changes in Stockholders’ Equity, and Cash Flows for the year ended December 31, 2009. CleanTech Biofuels, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of the 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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CleanTech Biofuels, Inc. as of December 31, 2009, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
MILHOUSE & NEAL, LLP
Certified Public Accountants
March 15, 2011
To the Board of Directors and Stockholders of
CleanTech Biofuels, Inc.
St. Louis, Missouri
We have audited the accompanying Statements of Operations, Changes in Stockholder’s Equity and Cash Flows for the year ended December 31, 2008. CleanTech Biofuels, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of CleanTech Biofuels, Inc. for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
MILHOUSE & NEAL, LLP
Certified Public Accountants
March 15, 2011
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
The accompanying notes are an integral part of these financial statements.
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS cont’d
The accompanying notes are an integral part of these financial statements
CLEANTECH BIOFUELS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Business
Alternative Ethanol Technologies, Inc. (the “Company”), was incorporated in Delaware on December 20, 1996. Effective August 2, 2007, the Company changed its name to CleanTech Biofuels, Inc.
On March 27, 2007, the Company acquired SRS Energy, Inc., a Delaware corporation (“SRS Energy”), pursuant to an Agreement and Plan of Merger and Reorganization. In accordance with the merger agreement, SRS Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, merged with and into SRS Energy. The merger was consummated on May 31, 2007 and resulted in SRS Energy becoming a wholly-owned subsidiary of the Company. As a result of the merger, the stockholders of SRS Energy surrendered all of their issued and outstanding common stock and received shares of the Company’s common stock, $.001 par value per share (“Common Stock”). The former parent of SRS Energy, Supercritical Recovery Systems, Inc., immediately prior to the merger, distributed 78.8% of its 96% ownership in SRS Energy to its shareholders on a pro rata basis.
For accounting purposes, because the Company had been a public shell company prior to the merger, the merger was treated as an acquisition of the Company and a recapitalization of SRS Energy. As a result, the historical information of the Company prior to the merger is that of SRS Energy. In addition, historical share amounts have been restated to reflect the effect of the merger.
The Company is a development stage company that has been engaged in technology development and pre-operational activities since its formation. The Company is currently in the process of raising capital to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output will be sold or provided to electric utilities, power and steam producers, and biofuel and chemical research firms for evaluation. In addition to research and development, the Company is also working towards licensing and/or developing potential commercial projects. These projects plan to focus on cleaning and separating municipal solid waste (also referred to as MSW) into its component parts in order to obtain: (i) a homogenous feedstock of cellulosic biomass for producing energy and other chemical products and (ii) recyclable products (metals, plastics, aluminum).
The Company has no operating history as a producer of biomass or energy sources and has not constructed any plants to date. We have no revenues and will be required to raise additional capital in order to execute our business plan and commercialize our products. Our current cash is not sufficient to fund our current operations. Our liabilities are substantially greater than our current available funds. Although we continue to seek additional financing through the sale of additional equity, various government funding opportunities and/or possibly through strategic alliances with larger energy or waste management companies, we have not had recent success securing meaningful amounts of financing. The Company will require substantial additional capital to implement its business plan and it may be unable to obtain the capital required to do so. If we are not able to immediately and successfully raise additional capital and/or achieve profitability or positive cash flow, we may not be able to continue operations.
As previously disclosed in our Forms 8-K and 8-K/A filed in October 2010 and January 2011, respectively, the Company’s financial statements for the years ended December 31, 2008 and 2009 required re-audits due to our previous independent registered public accounting firm having its registration with the Public Company Accounting Oversight Board revoked in December 2010. Included in this report are our financial statements for the years ended December 31, 2008 and 2009 with no adjustments from those previously issued.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.
Except where otherwise noted, the words “we,” “us,” “our,” and similar terms, as well as “Cleantech” or the “Company,” refer to Cleantech Biofuels, Inc. and its’ subsidiaries, collectively.
Consolidation - The financial statements include the accounts of Cleantech Biofuels, Inc. and its wholly owned subsidiaries, SRS Energy, Inc. and CTB Licensing, LLC. All significant intercompany transactions and balances are eliminated in consolidation.
Research and Development Costs - Research and development expenditures (which are comprised of costs incurred in performing research and development activities including wages and associated employee benefits, facilities and overhead costs), including payments to collaborative research partners are expensed as incurred.
Impairment of Long-Lived Assets - The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable primarily through reviewing changes in business plans and use of such assets. When factors indicate that an asset should be evaluated for possible impairment, the Company reviews long-lived assets to assess future use or recoverability of such asset. Impairments are recognized in earnings to the extent that the carrying value exceeds fair value. Impairment losses of approximately $690,000 and $97,500 were recorded in the years ended December 31, 2009 and 2008, respectively. See further footnote disclosures for details of these impairments.
Intellectual Property - Intellectual property, consisting of our licensed/owned patents and other proprietary technology, are stated at cost and will be amortized on a straight-line basis over their economic estimated useful life. Costs and expenses incurred in creating intellectual property are expensed as incurred. The cost of purchased intellectual property is capitalized. Amortization of these assets has not yet begun as the assets have not been placed in service as we have not yet commenced operations.
Property, plant and equipment - Newly acquired property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets, on the straight-line method for financial reporting purposes. Expenditures for maintenance and repairs are charged to expense as incurred.
Income Taxes - The Company accounts for income taxes in accordance with accounting guidance, which requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between financial statement and tax accounting methods and any available operating loss or tax credit carry forwards. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses and tax credits that are available to offset future taxable income.
The standards on accounting for uncertainty in income taxes (incorporated into the FASB Accounting Standards Codification (Codification) Topic 740, Income Taxes, effective for periods ending after September 15, 2009) clarify the accounting and recognition for income tax positions taken or expected to be taken in the Company’s income tax returns. The Company’s income tax filings are subject to audit by various taxing authorities. The Company’s open audit periods are 2007-2010. In evaluating the Company’s tax provisions and accruals, future taxable income, and the reversal of temporary differences, interpretations and tax planning strategies are considered. The Company believes their estimates are appropriate based on facts and circumstances.
Convertible Notes Payable and Warrants - The Company has issued Convertible Promissory Notes (“Notes”). These Notes may be converted at the option of the noteholder into shares of the Company’s common stock. Additionally, these Notes carry warrants for shares of the Company’s common stock. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note.
Stock-based compensation - The Company accounts for stock-based compensation in accordance with accounting guidance that requires measuring all stock-based compensation awards at fair value and recognizing an expense in the financial statements. In March 2007, the Company adopted the 2007 Stock Option Plan (“Stock Plan”) for its employees, officers, directors and consultants. The Company has reserved a maximum of 14,000,000 shares of common stock to be issued for stock options or shares of restricted stock under the Stock Plan. We compensate certain employees, officers, directors and consultants with stock-based payment awards and recognize compensation costs for these awards based on their fair values and expense is recognized over the requisite service period. The fair values of certain awards are estimated on the grant date using the Black-Scholes-Merton option-pricing formula, which incorporates certain assumptions including the expected term of an award and expected stock price volatility. Our key assumptions are described in further detail in the Share-Based Payments Note to the Consolidated Financial Statements.
Fair Value Measurement - We use fair value accounting and reporting to specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources or reflect our own assumptions of market participant valuation. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
•
Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
•
Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets, or financial instruments for which significant inputs are observable, either directly or indirectly;
•
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As of and during the year ended December 31, 2010, we utilized Level 1 inputs to determine the fair value of cash equivalents and we utilized Level 2 inputs to determine the fair value of certain long-lived assets.
Contingent Liabilities - We are, from time to time, subject to litigation to our business. Assessments regarding the ultimate cost of lawsuits require judgments concerning matters such as the anticipated outcome of negotiations, the number and cost of pending and future claims, and the impact of evidentiary requirements. A significant amount of judgment and use of estimates is required to quantify our ultimate exposure in these matters. We regularly review the valuation of these liabilities and account for changes in circumstances for ongoing and emerging issues. The Company intends to defend itself vigorously in all litigation. The Company is not currently in any litigation and is not aware of any pending litigation against the Company.
Dividends - We have no material operating history and therefore have had no earnings to distribute to stockholders. We currently intend to retain our earnings, if any, and reinvest them in the development and growth of our business and do not foresee payment of a dividend in any upcoming fiscal period.
Net Loss per Common Share - The Company calculates basic loss per share (“EPS”) and diluted EPS. Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted EPS would reflect the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities. As of December 31, 2010, 2009 and 2008, the Company had options, warrants and convertible notes to purchase an aggregate of approximately 44 million, 32 million and 21 million shares of common stock, respectively, that were excluded from the calculation of diluted loss per share as their effects would have been anti-dilutive. Therefore, the Company only presents basic loss per share on the face of the statements of operations and in its disclosure of unaudited quarterly financial data in Note 14.
Recent Accounting Pronouncements - In December 2010, the FASB issued accounting guidance on Business Combinations regarding how public entities disclose supplemental pro forma information for business combinations that occur during the year. Entities that present comparative financial statements for business combinations must disclose the revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the prior annual reporting period. The authoritative guidance also expanded the disclosures for entities to provide the nature and amount of material, nonrecurring pro forma adjustments directly related to the business combination that is included in the reported pro forma revenue and earnings. The authoritative guidance is effective for business combinations completed in the periods beginning after December 15, 2010 and is applied prospectively as of the date of adoption. We adopted the authoritative guidance on January 1, 2011.
In December 2010, the FASB issued accounting guidance on Intangibles-Goodwill and Other, which requires entities with a zero or negative carrying value to assess, considering qualitative factors, whether it is more likely than not that a goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. The authoritative guidance does not prescribe a specific method of calculating the carrying value of a reporting unit in the performance of step 1 of the goodwill impairment test. The authoritative guidance is effective for impairment tests performed for fiscal years beginning after December 15, 2010. We adopted the authoritative guidance on January 1, 2011.
In February 2010, the FASB accounting guidance on Amendments to Certain Recognition and Disclosure Requirements, which amends authoritative guidance on certain implementation issues related to the requirement for entities to perform and disclose subsequent events procedures. The authoritative guidance requires SEC filers to evaluate subsequent events through the date the financial statements are available to be issued and exempts SEC filers from disclosing the date through which subsequent events have been evaluated. The authoritative guidance was effective immediately for financial statements that are issued or available to be issued. We adopted the authoritative guidance as of January 1, 2010, and it did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued an amendment to the fair value measurement and disclosure standard improving disclosures about fair value measurements. The guidance requires additional disclosure for transfer activity pertaining to Level 1 and 2 fair value measurements and purchase, sale, issuance, and settlement activity for Level 3 fair value measurements. The guidance for the Level 1 and 2 disclosures was adopted on January 1, 2010 and did not have an impact on our consolidated financial statements. The guidance for the activity in Level 3 disclosures is effective for fiscal years beginning after December 15, 2010. The Company had no transfers between Level 1, 2 or 3 inputs during the year ended December 31, 2010.
On July 1, 2009, the FASB released the Codification becoming the single source of authoritative nongovernmental generally accepted accounting principles (GAAP) in the United States of America. The Codification is a reorganization of current GAAP into a topical format that eliminates the current GAAP hierarchy and establishes two levels of guidance - authoritative and non-authoritative. According to the FASB, all “non-grandfathered, non-SEC accounting literature” that is not included in the Codification would be considered non-authoritative. The FASB has indicated that the Codification does not change current GAAP. Instead, the proposed changes aim to (1) reduce the time and effort it takes for users to research accounting questions and (2) improve the usability of current accounting standards. The Codification is effective for interim and annual periods ending after September 15, 2009.
Note 3 - Mergers/Acquisitions
On September 15, 2008, the Company consummated the acquisition of Biomass North America Licensing, Inc. (“Biomass”) pursuant to a merger between Biomass and a wholly-owned subsidiary of the Company (with Biomass as the surviving subsidiary of the Company) in accordance with an Agreement and Plan of Merger by and between the Company and Biomass. By virtue of the merger, the Company acquired a license agreement pursuant to which the Company holds a license in the United States and Canada to use patented technology owned by Biomass North America, LLC, the former parent of Biomass (the “Licensor”), to clean and separate MSW (the “Biomass Recovery Process”). In July 2010, the United States Patent and Trademark Office issued US patent number 7,745,208 for this process (the “BRP Patent”).
Upon consummation of the merger, the Company paid $20,000 in cash and issued a promissory note in the original principal amount of $80,000 bearing interest at an annual rate of 6% (the “Note”) to a shareholder of the Licensor. This note has been paid in full. Additionally, the Company issued to the four shareholders of the Licensor a total of 1,895,000 shares of Common Stock and deposited an additional 4,000,000 shares of Common Stock into an escrow account (collectively, the “Shares”). The Shares were issued as part of the merger consideration received by the shareholders of the Licensor. The escrowed shares will be released to the Licensor’s shareholders if and when the Company commences a commercial development that utilizes the Biomass Recovery Process. The Company recorded a long-term asset of $1.5 million which it will begin to amortize upon utilizing the license in our operations. If the escrowed shares are released based on the specified future events, an increase to the value of the asset will be recorded at that time. Based on the market value of Common Stock as of December 31, 2010, it would result in an increase of approximately $160,000 to the asset. Any future increase in the value of the asset would depend on the market value of our Common Stock at the time of utilization.
Note 4 - Property and Equipment
At December 31, our property and equipment consisted of:
For the years ended December 31, 2010 and 2009, we had depreciation expense of $10,531 and $19,220, respectively. In 2009, we sold equipment that was fully depreciated resulting in a gain of $7,000, which is recorded in Other Income on the Statement of Operations for the year ended December 31, 2009.
Note 5 - Patent
On October 22, 2008, the Company completed the purchase of Patent No. 6,306,248 (the “PSC Patent”), pursuant to a Patent Purchase Agreement (“Agreement”) with World Waste Technologies, Inc. (“WWT”). The PSC Patent is the basis for the pressurized steam classification technology from which our Biomass Recovery Process was developed. As part of the acquisition of the PSC Patent, we also became the licensor of such technology to Bio-Products International, Inc. Upon signing the Agreement, the Company paid WWT $150,000, issued a note in the amount of $450,000 (interest at 6.0% per annum and secured by a security interest in the PSC Patent) and issued warrants to purchase 900,000 shares of Common Stock at a price of $0.45 per share and to purchase an additional 900,000 shares of Common Stock at a price of $0.45 per share contingent on payment of the note by July 22, 2009 (the original maturity date). WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. (“Vertex”) as a result of a merger in March 2009. We entered into amendments dated July 23, 2009 whereby: (i) the Company paid 10% of the original note and all accrued interest to date, (ii) all previous warrants (totaling 1,800,000 shares) were reissued at a price of $0.11 per share with no contingencies and (iii) the remaining payments on the note were scheduled to be paid on October 22, 2009 (50% of principal plus accrued interest to date not yet paid) and January 22, 2010 (remaining principal and accrued interest to date). We entered into amendments dated October 22, 2009 whereby: (i) the October 22, 2009 payment was deferred until November 22, 2009 and (ii) we issued additional warrants to Vertex for 500,000 shares of Common Stock at a price of $0.10 per share. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The cost of the PSC Patent acquisition of $600,000 is recorded as a long-term asset on the Balance Sheet. The value of the warrants had been recorded as a contra-balance amount with the note and has been fully amortized through interest expense. The note had been recorded as short-term debt (notes payable) in the financial statements, net of the discount for the warrant feature. This note was paid in full in September 2010. For the year ended December 31, 2010 and 2009, amortization of this discount of approximately $7,000 and $178,000, respectively, has been recorded in interest expense.
On September 1, 2010, the Company issued a promissory note to CMS Acquisition, LLC (“CMS”) in the amount of $100,000 and entered into a related Security Agreement. The Note matures on February 28, 2011 (see Subsequent Event footnote for extension of due date), bears interest at 6.0% per annum and is secured by a security interest in the PSC Patent. In connection with the financing, the Company issued a warrant to CMS to purchase 2,000,000 shares of the Company’s Common Stock at a price of $0.05 per share. The warrant is exercisable at any time for five years from the date of issuance.
Note 6 - Technology Licenses
Biomass North America Licensing, Inc.
On September 15, 2008, in connection with the acquisition of Biomass described in Note 3 - Mergers/Acquisitions, we acquired a license in the United States and Canada to use technology owned by Biomass North America, LLC, the former parent of Biomass (the “Licensor”), to clean and separate MSW into cellulosic biomass feedstock, which we refer to as the Biomass Recovery Process. In July 2010, the United States Patent and Trademark Office issued US Patent number 7,745,208 for this process (the “BRP Patent”). As a result of the merger, a long-term asset of $1.5 million was recorded for the value of this license. Amortization of this asset will begin upon commencement of the use of the Biomass Recovery Process. The Company also deposited an additional 4,000,000 shares of the Company’s Common Stock into an escrow account for the benefit of the Licensor. For accounting purposes, the shares remaining in escrow are not considered issued and outstanding as a project has not started using the Biomass Recovery Process. The shares are not deemed issued or vested until that time as described above.
The license requires that the Company pay a royalty in the amount of $1.00 per ton of bone-dry biomass produced using the Biomass Recovery Process. The license agreement is for a term of 21 years or the life of any patent issued for the Biomass Recovery Process. The Company has an exclusive license in the United States and Canada to use the Biomass Recovery Process, except that a principal owner of the Licensor has the right of first offer to manage and operate with respect to any development commenced using the licensed technology within 100 miles of the City of Chicago, Illinois. The license agreement further provides that the Company and the Licensor will work in good faith to complete a commercial development in the City of Chicago using the Biomass Recovery Process.
HFTA, Inc.
On March 20, 2008, the Company entered into a license agreement with HFTA, Inc. (“HFTA”) granting the Company the exclusive worldwide right to use the HFTA technology for the production of ethanol from MSW. The terms in the original agreement required us to pay an initial license fee of $25,000 to HFTA on execution of the agreement and a second license fee of $150,000 on September 1, 2009 if we were using the technology at that time. On August 24, 2009, we entered into an amendment with HFTA that moved the September 1, 2009 payment, plus interest at 6% per annum from the date of the amendment, to March 1, 2010.
Additionally, we deposited 2,887,687 shares of our Common Stock into an escrow account on May 12, 2008. The shares held in escrow were released to HFTA as follows: the first third of the shares (962,562 shares) were released from escrow on September 20, 2008 (six months from the date of the original agreement) and the remaining 1,925,125 shares were released upon the amendment in August 2009. As a result, the Company recorded an asset for the value of the first third share payment of approximately $500,000 in September 2008 and recorded an addition to the asset of approximately $190,000 related to the release of the remaining shares in August 2009. During the fourth quarter 2009, the Company decided not to use this technology going forward in our operations and thus have written off the asset as of December 31, 2009. The impairment loss of approximately $690,000 is included in research and development expense on the statement of operations for the year ended December 31, 2009.
Bio-Products International, Inc.
On August 17, 2005, the Company entered into a license agreement with Bio-Products International, Inc. (“Bio-Products”) giving the Company limited exclusive rights to use the PSC Patent to process MSW and convert the cellulosic component of that waste to a homogenous feedstock to produce ethanol in the United States, subject to the right of Bio-Products to request five sites to construct MSW-to-ethanol plants in the United States. The Company’s license with Bio-Products was for a period of twenty years. Under the license, Bio-Products was to be paid a process royalty of $1.50 for every ton of waste received and processed at each facility to be constructed and operated under the agreement. The Company also was required to pay a by-product royalty of 2.5 percent of the gross sales price in excess of $10 per ton obtained from the sale of recyclable by-products, excluding the cellulosic biomass. Bio-Products would also have been paid a monthly fee for technical services to be provided by Bio-Products for each facility to be constructed and operated which initially would have been $10,000 per month and increase to $20,000 per month when vessels for processing waste are ordered for the facility. The $20,000 per month fee would have continued until construction of a facility was completed. The Company’s litigation involving Bio-Products was settled in March 2009 and as a result, this sublicense has been mutually terminated by all parties.
As disclosed in Note 5 - Patent, the Company acquired the PSC Patent pursuant to an Agreement with WWT. The Company is now the licensor to Bio-Products for the PSC Patent. Bio-Products (a wholly-owned subsidiary of Clean Earth Solutions, Inc., “CES”) is the exclusive licensee of the PSC Patent and has the right to sublicense the technology that is part of the PSC Patent (but not the BRP Patent) to any party. Under the Master License Agreement, we are entitled to be paid 5% of any revenue derived by Bio-Products from the use of the technology and 40% of any sublicensing fees paid to Bio-Products for the use of the technology. The Master License Agreement is for a term of 20 years that commenced on August 18, 2003. On September 22, 2010, the Company sent a Notice of Breach to the licensee of our PSC Patent. We received a response from the licensee on November 5, 2010. In February 2011, we became aware that the licensee effected a transfer of the license in violation of the License Agreement. As a result, on March 21, 2011, we sent a notice of termination to the licensee and the transferee terminating the License Agreement.
All intangible assets are reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. An impairment charge is recognized if the carrying amount of an intangible asset exceeds its implied fair value.
Note 7 - Debt
Convertible Notes Payable
During September 2008, the Company commenced an offering of units comprised of a convertible promissory note and a warrant. The Company raised a total of $642,000 of investment proceeds through March 31, 2009 and this offering is closed. As of March 31, 2010, all of these notes have either been converted to shares of our common stock or re-priced to our second convertible note offering (resulting in new notes with a total face value of $539,829, which included the original principal and interest through the date of re-pricing). Each convertible promissory note carried a one-year term and a 6% interest rate. In addition, each note could have been converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.25 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock equal to the principal amount of the promissory note at a price of $0.45 per share. These promissory notes had been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts were being amortized on a straight-line basis over the term of each note and are fully expensed as of March 31, 2010. For the years ended December 31, 2010 and 2009, amortization of approximately $7,000 and $524,000, respectively, for this discount has been recorded in interest expense. All outstanding warrants related to this offering have also been re-priced into our second note offering.
During April 2009, the Company commenced another offering of units comprised of a convertible promissory note and a warrant. As of December 31, 2010, the Company had raised a total of $1,198,500 of investment proceeds and this offering is now closed. One note was converted during the second quarter of 2009 and one note was converted during the second quarter 2010 leaving $1,163,500 face value of notes outstanding ($1,703,329 after adding the notes from our first offering previously disclosed). Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.08 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock to provide for 100% coverage of the promissory note at a price of $0.30 per share. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note. For the years ended December 31, 2010 and 2009, amortization of approximately $253,000 and $113,000, respectively, for this discount has been recorded in interest expense. These notes began maturing in April 2010. The notes that have matured, have not yet been repaid, refinanced or converted to shares of our common stock. We plan to work with each noteholder to extend the terms of, or convert, these promissory notes. There can be no assurance that we will reach agreements with any or all of these noteholders and we may be required to repay such amounts.
During June 2010, the Company commenced another offering of units comprised of a convertible promissory note and a warrant. As of December 31, 2010, the Company had raised a total of $75,000 of investment proceeds and is closed. Each convertible promissory note carries a one-year term, a 12% interest rate and a payback provision of the note if $250,000 or more in the aggregate is raised by the Company in future offerings. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.08 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock to provide for 100% coverage of the promissory note at a price of $0.30 per share. The promissory note has been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note. For the year ended December 31, 2010, amortization of approximately $14,000 for this discount has been recorded in interest expense.
During November 2010, the Company commenced another offering of units comprised of a convertible promissory note and a warrant. As of December 31, 2010, the Company had raised a total of $35,000 of investment proceeds. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.06 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock to provide for 100% coverage of the promissory note at a price of $0.30 per share. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements and carry no discounts. See the Subsequent Event footnote for an update on the continuation of this offering.
CMS Acquisition, LLC Note Payable
In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note is due the earlier of: (i) February 28, 2011 (see the Subsequent Event footnote for disclosure on extension of the due date) or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and is being amortized through interest expense. For the year ended December 31, 2010, amortization of approximately $7,000 for this discount has been recorded in interest expense.
Vertex (formerly WWT) Note Payable
As disclosed previously, as part of the purchase of the PSC Patent, the Company issued a note in the amount of $450,000 (interest at 6.0% per annum and secured by a security interest in the PSC Patent) and issued warrants to purchase 900,000 shares of Common Stock at a price of $0.45 per share and to purchase an additional 900,000 shares of Common Stock at a price of $0.45 per share contingent on payment of the note by July 22, 2009 (the original maturity date). WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. as a result of a merger in March 2009. We entered into amendments dated July 23, 2009 whereby: (i) the Company paid 10% of the original note and all accrued interest to date, (ii) all previous warrants (totaling 1,800,000 shares) were reissued at a price of $0.11 per share with no contingencies and (iii) the remaining payments on the note were scheduled to be paid on October 22, 2009 (50% of principal plus accrued interest to date not yet paid) and January 22, 2010 (remaining principal and accrued interest to date). We entered into amendments dated October 22, 2009 whereby: (i) the October 22, 2009 payment was deferred until November 22, 2009 and (ii) we issued additional warrants to Vertex for 500,000 shares of Common Stock at a price of $0.10 per share. The warrants are exercisable at any time for five years from the date of issuance or reissuance. This note was paid in full in September 2010. The value of these warrants has been recorded as a contra-balance amount discount with the note and is being amortized through interest expense over the life of the note. For the years ended December 31, 2010 and 2009, amortization of approximately $7,000 and $178,000, respectively, for this discount has been recorded in interest expense
Series A Convertible Debentures
In April 2007, the Company sold $1,400,000 of Series A Convertible Debentures (“Debentures”), due April 16, 2010, that convert into shares of the Company’s common stock at $.15 per share. The Company filed a registration statement with regard to the sale of these shares of common stock, which was declared effective by the Securities and Exchange Commission on January 2, 2008. The debentures accrue interest at 6% per annum. The interest is payable in cash or shares of the Company’s common stock at the Company’s option.
The Company received cash of $950,000 and Promissory Notes (“Notes”) with an aggregate principal amount of $450,000 that accrue interest at 6.0%. Effective with the listing of our common stock on the OTCBB on March 13, 2008 (previously traded on Pink Sheets) we received full payment on all principal and accrued interest on the Notes totaling approximately $475,000 on March 14, 2008.
During March 2008, various debenture holders converted an aggregate amount of $630,000 of our Debentures, plus interest earned, into 4,433,067 shares of our common stock. During April 2008, various debenture holders converted an aggregate amount of $630,000 of our Debentures, plus interest earned, into 4,455,844 shares of our common stock. The remaining $140,000 of Debentures matured on April 16, 2010 and, with interest earned, were converted into 2,069,375 shares of our common stock.
Note 8 - Stockholders’ Deficit
In March 2008, the Company issued 4,433,067 shares of Common Stock ($0.15 per share) upon the conversion of an aggregate amount of $630,000 of the Company’s Debentures and accrued interest of approximately $35,000. In April 2008, the Company issued 4,455,844 shares of Common Stock ($0.15 per share) upon the conversion of an aggregate amount of $630,000 of the Company’s Debentures and accrued interest of approximately $38,000.
In September 2008, the Company released 962,562 shares of Common Stock ($0.52 per share) to HFTA in accordance with the previously disclosed licensing agreement with HFTA representing one-third of the total shares escrowed as part of the compensation for the licensing agreement. The Company released the remaining 1,925,125 shares of Common Stock ($0.10 per share) to HFTA in accordance with the previously disclosed amendment to the licensing agreement with HFTA representing the remaining shares previously held in escrow.
In September 2008, the Company issued 1,895,000 shares of Common Stock ($0.75 per share) to Biomass in accordance with the previously disclosed merger agreement.
In December 2008, June, September and December 2009, the Company issued 180,000, 625,000, 300,000 and 625,000, respectively, of restricted shares of Common Stock at $0.36, $0.12, $0.10 and $0.06 per share, respectively, to employees, a consultant pursuant to the consulting agreement and directors. For all of these restricted common stock grants, each individual issued promissory notes to the Company in exchange for their stock purchases. See the share-based footnote for further details.
During 2009, the Company issued 466,268 shares of Common Stock ($0.25 per share) and 687,500 shares of Common Stock ($0.08 per share) to investors upon their conversions of Convertible Notes.
In August 2009, the Company issued 357,778 shares of Common Stock ($0.13 per share) to the holders of two separate warrants under the Net Issuance clause of the warrant agreements.
In February 2010, the Company issued 150,000 restricted shares of our common stock at $0.10 per share to our newly elected director. The director issued a promissory note to the Company in exchange for the stock purchases similar to the restricted share grants to all other directors. See the share-based footnote for further details.
In April 2010, the Company issued 2,069,375 shares of Common Stock ($0.08 per share) upon the conversion of $140,000 of the Company’s Debentures and accrued interest of approximately $25,000.
In June 2010, the Company issued 133,480 shares of Common Stock ($0.08 per share) to an investor upon the conversion of a Convertible Note.
In August 2010, certain notes receivable from former and current members of our Board of Directors matured. The notes were originally issued in August 2007 to purchase shares of our common stock. Two of the former directors declined to pay these notes or extend the due date. As a result, 300,000 shares of restricted stock, issued at $0.15 per share, were forfeited and cancelled. The two other Directors agreed to extend the due date of their notes to August 2012. As the notes were carried in additional paid-in capital, there was no effect on our financial results for the period from the write-off of these notes.
Note 9 - Related Party Transactions
The Company had a $72,103 advance from one of its board of director members at December 31, 2006 evidenced by a promissory note that accrued interest at 9.5% per annum. The promissory note also contained an option to acquire 5% of the outstanding capital stock of SRS Energy at a price of $250,000. In April 2007, the indebtedness under the promissory note was repaid and the promissory note was cancelled. Under its terms, the right to exercise the option to purchase shares survived after the repayment of the indebtedness under the note. As part of the merger consideration issued by the Company pursuant to the acquisition of SRS Energy, the Company issued a warrant exercisable until August 31, 2009 to purchase 1,923,495 shares of its common stock at $0.13 per share to replace the option included in the promissory note on substantially similar terms as the option. In August 2009, this warrant was exercised under the Net Issuance clause of the warrant agreement resulting in 178,889 shares being issued.
In September 2009 and February 2010, the Company entered into stock purchase agreements with certain members of the Board of Directors. In December 2008, the Company entered into stock purchase agreements with the executive officers. The directors and executive officers issued notes to the Company in exchange for their stock purchases. See Share-Based Payments footnote for further discussion. These notes and accumulated interest are recorded as notes receivable in Stockholders’ Deficit.
In August 2010, certain notes receivable from former and current members of our Board of Directors matured. The notes were originally issued in August 2007 to purchase shares of our common stock. Two of the former directors declined to pay these notes or extend the due date. As a result, 300,000 shares of restricted stock, issued at $0.15 per share, were forfeited and cancelled. The two other Directors agreed to extend the due date of their notes to August 2012.
The Company had engaged the law firm of Sauerwein, Simon and Blanchard (“SSB”) related to various issues including our reverse merger, our SB-2 registration statement, litigation matters and general business activity. A member of our board of directors is a partner of SSB. For the years ended December 31, 2010, 2009 and 2008, we incurred $-0-, $10 and $181,000, respectively, in legal fees with SSB. As of December 31, 2010, all amounts have been paid to SSB except for approximately $90,000.
The Company uses the Crane Agency (“Crane”) as its broker for business and property insurance. Our CEO’s brother was employed by Crane through 2010 and was involved in the negotiation of coverage and premiums related to policies. For the years ended December 31, 2010 and 2009, the Company paid less than $3,000 and $3,000, respectively, in commissions on policies placed by Crane.
Beginning in 2009, the Company has provided advances to two employees - Ed Hennessey and Mike Kime (Mr. Kime resigned from his positions with the Company effective June 21, 2010). As of December 31, 2010 and 2009, the aggregate balances of advances totaled approximately $20,000 and $22,000, respectively. The balances are included in Prepaids and Other Current Assets on the Balance Sheet.
Three members of our Board of Directors, Dr. Jackson Nickerson, Mr. Jose Bared, Sr. and David Bransby are parties in investments made in our convertible note offerings. As of December 31, 2010 and December 31, 2009, the aggregate amount due on these investments, including interest, is approximately $613,000 and $518,000, respectively.
Note 10 - Share-based Payments
The Company recognizes share-based compensation expense for all share-based payment awards including stock options and restricted stock issued to employees, directors and consultants and is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. The Company has no awards with market or performance conditions.
In March 2007, the Company adopted the 2007 Stock Option Plan (“Stock Plan”) for its employees, directors and consultants, which includes an equity compensation plan for non-employee directors pursuant to which stock options and shares of restricted stock may be granted. The Company currently has reserved a maximum of 14,000,000 shares of common stock to be issued for stock options or restricted shares awarded under the Stock Plan.
The estimated fair value of stock option grants is computed using the binomial option-pricing model. Generally, expected volatility is based on historical periods commensurate with contractual term of options. However, since we have no history of stock price volatility as a public company at the time of the grants, we calculated volatility by considering historical volatilities of public companies in our industry. Due to the short history of our industry, the historical period used in our calculations is shorter than the contractual term of the options. The fair value for options granted was determined at the date of grant. The following assumptions were used for options granted in the corresponding year.
Stock option expense is recognized in the statements of operations ratably over the vesting period based on the number of options that are expected to ultimately vest. Our options have characteristics significantly different from those of traded options and changes in the assumptions can materially affect the fair value estimates. The following table presents the components of share-based compensation recorded as general and administrative expense.
Related to all grants, the Company will record future compensation expense for stock options of approximately $25,000 for 2011. The potential tax benefit realizable for the anticipated tax deductions of the exercise of share-based payments pertaining to stock options totaled approximately $287,000 at December 31, 2010. However, due to the uncertainty that the tax benefits will be realized, these potential benefits were not recognized currently.
As of December 31, 2010, there was approximately $25,000 of unrecognized compensation cost related to all share-based payment arrangements, which will be recognized over a remaining period of approximately 1.3 years. There are 613,333 options granted that are not yet vested as of December 31, 2010. These options have a weighted average exercise price of $0.20.
A summary of the Company’s stock option activity and related information as of and for the three years ended December 31, 2010, is set forth in the following table:
The following table summarizes information about the Company’s issuances of restricted stock for the three years ended December 31, 2010:
Note 11 - Income Taxes
The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
The Company incurred no income taxes for the years ended December 31, 2010, 2009 and 2008. The expected income tax benefit and resulting deferred tax asset for the years ended December 31, 2010, 2009 and 2008 is approximately $460,000, $1,086,000 and $585,000, respectively. These benefits are the result of temporary differences (start-up costs, stock compensation and other items) and operating loss carryforwards. The difference between the expected income tax benefit and non-recognition of an income tax benefit in each period is the result of a valuation allowance applied to deferred tax assets. A valuation allowance in the same amount of the benefit has been provided to reduce the deferred tax asset, as realization of the asset is not assured.
At December 31, 2010, net operating loss carryforwards of approximately $18,000, $182,000 $630,000, $928,000 and $74,000 are available to offset future taxable income and expire in 2026, 2027, 2028, 2029 and 2030, respectively. This results in a net deferred tax asset of approximately $730,000 for which the Company has recorded a full valuation allowance. The net operating loss carryforwards may be limited under the Change of Control provisions of the Internal Revenue Code section 382.
Temporary differences which give rise to net deferred tax assets at December 31, 2010 and 2009 are:
Note 12 - Commitments and Contingencies
Leases - The Company’s lease to rent approximately 1,800 square feet of office space for use as our corporate office, located at 7386 Pershing Ave. in St. Louis, Missouri has expired. We are currently in the process of extending this lease while occupying the space. Our monthly rent under the lease is $1,800 plus the cost of utilities. We entered into a lease for office furniture in January 2008. The final lease payments are now due and total approximately $3,000. This lease is accounted for as a capital lease for accounting purposes.
Note 13 - Subsequent Events
Beginning in November 2010, the Company commenced a third offering of units comprised of a convertible promissory note and a warrant. As of March 22, 2011, the Company has received $141,000 in investment proceeds. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted into shares of Common Stock at $0.06 per share, at the Note holder’s option. Each note was issued with a warrant to purchase additional shares of Common Stock to provide 100% coverage of the Note at a price of $0.30 per share. Under the first and second offerings of units comprised of a convertible promissory note and warrants, which are now closed, the Company received $1,840,500 in investment proceeds.
Certain promissory notes in our second offering of units comprised of a convertible promissory note and a warrant (notes convertible at $0.08 per share) came due in April through December 2010. These promissory notes totaling approximately $975,000 (including approximately $85,000 of accrued interest through March 15, 2011), have not yet been repaid, refinanced or converted to shares of our common stock. We plan to work with each noteholder to extend the terms of, or convert, these promissory notes. There can be no assurance that we will reach agreements with any or all of these noteholders and we may be required to repay such amounts.
The Company issued a promissory note to CMS Acquisition, LLC (“CMS”) that was due to mature on February 28, 2011. On February 11, 2011, the Company and CMS entered into an amendment extending the due date to May 15, 2011 while paying $25,000 towards accrued interest to date and principal on the Note.
Note 14 - Quarterly Financial Data (Unaudited)
The results of operations by quarter were as follows:
ITEM 9.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A.
Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Effectiveness of Disclosure Controls and Procedures - We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Security and Exchange Commission’s rules and regulations. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management does not expect that our disclosure controls and procedures will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives outlined above. Based on their most recent evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level at December 31, 2010. Further, the design of a control system must reflect the fact that there are resource constraints, including, but not limited to having two total employees (chief executive officer and chief financial officer), and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Management’s Report on Internal Control Over Financial Reporting - Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. Internal control over financial reporting provides reasonable assurance of the reliability of our financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control involves maintaining records that accurately represent our business transactions, providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization, and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be detected or prevented on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, has not been audited by Milhouse & Neal, LLP, an independent registered public accounting firm, as there was no Securities and Exchange Commission requirement for Cleantech Biofuels, Inc. to obtain this audit as of December 31, 2010.
Changes in Internal Control Over Financial Reporting - During the three months ended December 31, 2010, there were no material changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Attestation Report of Registered Public Accounting Firm - This annual report does not include an attestation report of our registered public accounting firm as such report is not required due to established rules of the Securities and Exchange Commission for smaller reporting companies.
None.
PART III
ITEM 10.
ITEM 10.
Directors, Executive Officers and Corporate Governance
The Company’s Restated Articles of Incorporation, as amended, and Amended and Restated By-laws provide for a division of the Board of Directors into three classes. One of the classes is elected each year to serve a three-year term. The Company’s Amended and Restated By-Laws currently specify that the number of directors shall be not less than three nor more than nine, subject to amendment by the Board of Directors. Currently, the Company has five members of the Board of Directors as detailed below.
The following table sets forth for each director and officer, such director’s or officer’s age, principal occupation for at least the last five years, present position with the Company, the year in which such director or officer was first elected or appointed (each director serving continuously since first elected or appointed), directorships with other companies whose securities are registered with the SEC, and the class of such director.
Class III Director: Terms expiring in 2013
Class I Directors: Terms expiring in 2011
Service as
Name
Age
Principal Occupation
Director Since
Paul Simon, Jr.
Mr. Simon is a licensed attorney practicing in St. Louis, Missouri and has been a partner in the firm, Sauerwein, Simon, & Blanchard, P.C. since 2006. Prior to that time, he was a partner with the firm Helfrey, Simon and Jones, P.C. from 1991 until 2006. Mr. Simon is a graduate of the University of Missouri where he received his B.S. in Business Administration and St. Louis University School of Law where he received his J.D.
Jose Bared, Sr.
Mr. Bared began his career as an engineer and in 1968 founded The Bared Company, a Mechanical and Electrical Engineering and Design company. Mr. Bared was also a member of the founding group that purchased Republic National Bank of Miami in 1971. Mr. Bared served as a director of the bank from 1971 until its sale in 1998. Currently Mr. Bared serves on the Board of Directors of Jackson - United Petroleum, a natural gas producer operating in Kentucky and Pennsylvania. He has served on the Board of Trustees for the University of Miami for the past 30 years. He also has served on the Board of Governors of the Sylvester Cancer Center for the past 15 years and is a life member of the center. Mr. Bared holds a B.S. in Mechanical Engineering from the University of Miami.
Class II Directors: Terms expiring in 2012
Service as
Name
Age
Principal Occupation
Director Since
Jackson Nickerson, Phd
Dr. Nickerson is the Frahm Family Professor of Organization and Strategy at Washington University’s Olin Business School in St. Louis and has been at the university since 1996. He consults with numerous profit and not-for-profit organizations on strategy development. Dr. Nickerson launched and is currently a director of nformd.net, a privately held new media company. He has a B.S. in mechanical engineering from Worcester Polytechnic Institute and an M.S. in mechanical engineering, an M.B.A. and a Ph.D. from the University of California, Berkeley.
David Bransby, Phd
Dr. Bransby is a Professor of Energy Crops and Bioenergy in the Department of Agronomy and Soils at Auburn University where he has taught and conducted research since 1987. He has more than 30 years of experience in agronomic research, and has spent over 20 years specializing in the production and processing of energy crops. He serves on the editorial boards of two international bioenergy journals, and consults for several private bioenergy companies.
Audit Committee
The Audit Committee is currently comprised of Messrs. Nickerson (Chairman) and Bransby, each of whom is “independent” in accordance with the Nasdaq standards, as well as the independence requirements for audit committee members under Rule 10A-3 promulgated under the Exchange Act. In addition, the Company has determined that Mr. Nickerson is qualified as an “audit committee financial expert” as that term is defined in the rules of the SEC. The Audit Committee evaluates significant matters relating to the audit and internal controls of the Company, reviews the scope and results of the audits conducted by the Company’s independent public accountants and performs other functions or duties provided in the Audit Committee Charter. During the 2010 fiscal year, the Audit Committee held one meeting.
Compensation Committee
Our Compensation Committee and Compensation Committee Charter have been eliminated and replaced by the Board of Directors, whom now perform duties including reviewing the Company’s remuneration policies and practices, executive compensation and administering the Company’s stock option plan.
Nomination of Directors
The Board of Directors does not currently have a standing Nominating Committee or a charter regarding the nominating process. The Board of Directors will give appropriate consideration to written recommendations from stockholders regarding the nomination of qualified persons to serve as directors of the Company, provided that such recommendations contain sufficient information regarding proposed nominees so as to permit the independent members of the Board of Directors to properly evaluate each nominee’s qualifications to serve as a director. Nominations must be addressed to the Secretary of the Company at 7386 Pershing Ave, University City, MO 63130. The Board of Directors may also conduct their own search for potential candidates that may include candidates identified directly by a variety of means as deemed appropriate by the independent directors.
There are no established term limits for service as a director of the Company. In general, it is expected that each director of the Company will have the highest personal and professional ethics, integrity and values and will consistently exercise sound and objective business judgment. In addition, it is expected that the Board of Directors as a whole will be made up of individuals with significant senior management and leadership experience, a long-term and strategic perspective and the ability to advance constructive debate.
Code of Ethics
All directors, officers and employees of the Company, including its Chief Executive Officer and its Chief Financial Officer, are required to comply with the Company’s Code of Ethics to ensure that the Company’s business is conducted in a legal and ethical manner. The Code of Ethics covers all areas of business conduct, including employment policies and practices, conflict of interest and the protection of confidential information, as well as strict adherence to all laws and regulations applicable to the conduct of our business. Directors, officers and employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of our Code of Ethics. The Company, through the Audit Committee, has procedures in place to receive, retain and treat complaints received regarding accounting, internal accounting control or auditing matters and to allow for the confidential and anonymous submission of concerns regarding questionable accounting or auditing matters. The Company’s Code of Ethics was filed as Exhibit 14 in its December 31, 2007 Form 10-KSB filed with the Securities and Exchange Commission on March 28, 2008 and can be obtained free of charge by written request to the attention of the Secretary of the Company at 7386 Pershing Ave, University City, MO 63130 or by telephone at (314) 802-8670. Any changes to or amendments of the Code of Ethics will be filed as a future Exhibit in our filings.
Compensation Discussion and Analysis
Two key aspects of the duties and responsibilities of the Board of Directors are the administration of our compensation programs, including our equity incentive program, and the approval of compensation for our executive officers. The Board of Directors has the authority to retain outside counsel and/or such other experts or consultants as it deems necessary to discharge its duties.
Our Executive Compensation Policy
We believe that a critical factor in attracting and retaining talented and dedicated management that is necessary for our success is the establishment and fair implementation of a comprehensive executive compensation program. Accordingly, our overall compensation philosophy is to offer our executives and other members of our management team compensation and benefits that meet and enhance our goals of attracting, retaining and motivating highly skilled people to work together as a team to achieve our financial and strategic business objectives. In furtherance of this compensation philosophy, our executive compensation program is designed to:
•
provide fair and reasonable compensation that meets the competitive environment for executive talent;
•
help motivate the members of our executive team for excellent performance; and
•
align the interests of our executive team members with those of our stockholders and the long-term success of our company.
While all decisions regarding executive compensation are ultimately made by our Board of Directors, they also rely on the recommendations of the Chief Executive Officer with respect to all of our executive officers (other than the Chief Executive Officer himself), particularly with regard to his assessment of each executive officer’s individual performance against achievement of strategic objectives, level of responsibility exercised and the level of specialized experience and knowledge required to do the job. Determinations by our Board of Directors are not made in accordance with strict formulas which measure weighted qualitative and quantitative factors. Rather, such determinations are more subjective in nature and take into account not only the recommendations of our Chief Executive Officer, but such other factors as deemed relevant in an effort to blend competitive ranges into our own internal policies and practices. The Board of Directors may also seek advice from a compensation consultant.
All of our executive officers have entered into three-year employment agreements with the Company effective as of August 31, 2007 that provide for, among other things, the base salary, if any, of such executive officer’s compensation package. These employment contracts permit us to increase, but not decrease, base salaries within the contract term. The contracts expired on August 31, 2010 and by their terms, automatically renew for additional one-year periods, unless terminated by either the Company or the employee.
Elements of our Executive Compensation Program
Our executive officer program consists of three basic elements: base salary, annual incentive bonus, and long-term incentive compensation. Currently our executive officers whose compensation is reported in the Summary Compensation Table are paid their approved salaries as cash is available and have not been paid any bonus. We expect that in the future we will begin paying the Named Executive Officers salary and bonuses consistent with their position and job performance. Consistent with our executive officer compensation philosophy, we have structured each element of our compensation package as follows:
Base Salary - In December 2008, annual base salaries, effective beginning November 2008, were approved of $144,000 for Messrs. Hennessey and Kime and $120,000 for Mr. Jennewein (Mr. Kime resigned from the Company in June 2010). In addition, Mr. Hennessey was paid $56,000 during 2008 under a previous employment agreement. Salaries are currently paid based on cash availability. Currently, the salaries paid to our executive officers as a group are substantially less than the salaries typically paid to executives with the experience and background of our executive officers.
Bonuses - None of our executive officers were paid a bonus in 2010, 2009, or 2008. We do not currently have any bonus plan for executive officers.
Long-Term Incentive Compensation - The long-term incentive awards for our executive officers are made under our 2007 Stock Option Plan under which the Board of Directors may, among other things, grant or award stock options and other stock-based awards, subject to certain limitations and restrictions as set forth in the plan. Our use of stock-based awards for our executive officers is the primary means by which we provide our executive officers a long-term incentive that becomes more valuable to the executive to the extent our share value increases, thereby aligning each executive’s interest with the interest of our stockholders.
It is the policy of the Board of Directors that, with respect to all equity-based compensation for the executive officers, the award dates for each grant shall be specified by the Board of Directors at a duly convened meeting as of a date on or after the date of its action, and that the exercise price or value of the grant shall be determined by reference to the closing price of our common stock on the specified award date. See “Outstanding Equity Awards at Fiscal Year-End” table for additional information. Equity grants may also be made to new executive officers upon commencement of their employment and, on occasion, to executive officers in connection with a significant change in job responsibility, extraordinary performance, or other reasons.
Executive Perquisites - Historically, we have not offered perquisites to our executive officers.
Tax and Accounting Implications
Section 162(m) of the Internal Revenue Code generally precludes a public company from taking a federal income tax deduction for annual compensation in excess of $1 million per individual paid to its chief executive officer or the other named executive officers. Under Section 162(m), certain compensation, including “performance-based compensation,” is excluded from this deduction limitation. Our intent is to structure compensation paid to our executives to be deductible; however, from time to time, the Board of Directors may award compensation that may not be deductible if it determines that such awards are consistent with our compensation philosophy and in the best interest of our stockholders. We believe that all of the 2010 compensation paid to our executive officers is fully deductible.
Summary Compensation Table
The following table summarizes the total compensation paid or earned by the Company’s Principal Executive Officer, Principal Financial Officer and General Counsel/Chief Operating Officer, the only executive officers of the Company (together the “Named Executive Officers”), who served these positions during 2010.
(1)
The assumptions made when calculating the amounts in this column are found in footnote 10 to the Consolidated Financial Statements included in this report. The amounts represent the accounting cost in accordance with U.S. GAAP that the Company recorded in its Statements of Operations in each year.
(2)
Mr. Kime resigned from the Company in June 2010.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information on stock options and restricted stock awards granted to the Named Executive Officers that were outstanding as of December 31, 2010. The market values in this table were computed using the closing price of the Company’s common stock on December 31, 2010, which was $0.04.
Option Exercises and Stock Vested
(1)
The values reflect the market value of Cleantech Biofuels, Inc. common stock as of the vesting dates. These prices ranged from $0.03 to $0.90.
(2)
The price of our common stock on these vesting dates was less than or equal to the exercise price of the options.
(3)
Mr. Kime resigned from the Company in June 2010.
Pension Benefits - None of our Named Executive Officers are covered by a defined benefit pension plan or other similar benefit plan that provides for payments or other benefits.
Nonqualified Deferred Compensation - We do not have any nonqualified deferred compensation plans.
Director Compensation - The Company’s non-employee directors received no salary or compensation as a board or committee member in 2010, 2009, and 2008. Each non-employee board member receives a grant of 40,000 options and 150,000 restricted shares of company common stock upon beginning as a director of the Company.
Potential Payments Upon Termination or Change-in-Control
Each of the employment agreements with our Named Executive Officers was entered into for an initial term of employment that commenced as of August 31, 2007 and expired on August 31, 2010. By their terms, the employment agreements automatically renew for additional one-year periods, unless terminated by either the Company or the employee.
The employment agreements may be terminated upon: (i) the Company’s dissolution, (ii) the death or permanent disability of the employee, (iii) by the Company upon the employee’s unsatisfactory performance of his duties under the agreement, (iv) ten days’ written notice by the Company upon breach or default of the terms of the agreement by the employee, or (v) by the employee upon 30 days’ written notice to us. The employment agreements also permit the Company to terminate the employee’s employment following an act of misconduct.
If employment is terminated for any of the reasons set forth above, the Named Executive Officers discussed above will only receive their base salary accrued but unpaid as of the date of the termination. If employment is terminated for any reason other than those set forth above and those subsequent to a change in control of the Company, as discussed below, the Officers will receive one year of base salary. Additionally, all of Mr. Hennessey’s shares subject to stock options will vest and one-half of Mr. Jennewein’s shares subject to stock options will vest.
If, pursuant to a change in control of the Company, an employee’s employment agreement is involuntarily terminated, the employee will receive severance pay in an amount equal to his annual base salary for one year following the date on which he was terminated.
ITEM 12.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of December 31, 2010 with respect to each person or group known by the Company to be the beneficial owner of more than five percent of its outstanding shares of Common Stock. Beneficial ownership of shares has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under which a person is deemed to be the beneficial owner of securities if he or she has or shares voting or investment power with respect to such securities or has the right to acquire ownership thereof within 60 days. Accordingly, the amounts shown in the tables do not purport to represent beneficial ownership for any purpose other than compliance with the reporting requirements of the SEC.
(1)
Amount represents shares owned by Supercritical Recovery Systems, Inc., of which Mr. Hennessey serves as President and a Member of the Board of Directors.
(2)
SRS Legacy Trust is an irrevocable trust of which Edward P. Hennessey, Jr. is a beneficiary. Michael Hennessey, Mr. Hennessey’s brother, has sole voting power, and Paul Simon, Jr., one of our directors, has sole dispositive power with respect to these shares.
(3)
Rodney H. Thomas, as Trustee of the Trust which is the majority owner of RAM Resources, L.L.C., has controlling voting and dispositive power over these shares.
SECURITY OWNERSHIP OF MANAGEMENT
Under regulations of the SEC, persons who have power to vote or to dispose of our shares, either alone or jointly with others, are deemed to be beneficial owners of those shares. The following table sets forth, as of December 31, 2010, the beneficial ownership of the outstanding Common Stock of each current director, each of the executive officers named in the Summary Compensation Table set forth herein and the executive officers and directors as a group. Unless otherwise noted, the Company believes that all persons named in the table below have sole voting power and dispositive power with respect to all shares beneficially owned by them.
*
Less than 1%.
(1)
Includes the shares described in footnote 1 to the “Security Ownership of Certain Beneficial Owners” table and the vested portion and the portion that will vest within 60 days hereof of shares of options and restricted stock.
(2)
Amounts represent the vested portion and the portion that will vest within 60 days hereof of shares of options and restricted stock.
(3)
Amount includes the vested portion and the portion that will vest within 60 days hereof of shares of options and restricted stock and shares held individually.
We currently have 14,000,000 shares of our common stock approved under our 2007 Stock Option Plan. See Part II, Item 5 for the table reflecting shares issued and available.
ITEM 13.
ITEM 13.
Certain Relationships and Related Transactions and Director Independence
From time to time, the Company has engaged in various transactions with certain of its directors, executive officers and other affiliated parties. The following paragraphs summarize certain information concerning certain transactions and relationships that have occurred during the past fiscal year or are currently proposed.
Paul Simon, Jr., a director of the Company, is a Member of the law firm Sauerwein, Simon & Blanchard, P.C., which had provided legal services to the Company in prior years.
Beginning in 2009, the Company provided advances to partially cover for months with no payroll, to two employees - Ed Hennessey and Mike Kime (who resigned from the Company in June 2010). As of December 31, 2010, the aggregate balance of advances totaled approximately $20,000.
Three members of our Board of Directors, Dr. Jackson Nickerson, Mr. Jose Bared, Sr. and Mr. David Bransby are parties to investments in our Convertible Note offerings - approximately $613,000 in the aggregate, including principal and interest as of December 31, 2010.
We use the Crane Agency Co. as our broker for business and property insurance. Our CEO’s brother was employed at the Crane Agency Co. through the end of 2010 and had been involved in the negotiation of our insurance policies. We expect to purchase additional insurance through the Crane Agency Co. in the future.
Determination of Director Independence
Rules of The NASDAQ Stock Market LLC (“Nasdaq”) require that a majority of the Board of Directors be “independent,” as defined in Nasdaq Marketplace Rule 5605(a)(2). Under the Nasdaq rules, the Board of Directors must make an affirmative determination that a director is independent by determining that the director has no relationships that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The Board of Directors has reviewed the independence of its directors under the Nasdaq rules. During this review, the Board of Directors considered transactions and relationships between each director or any member of his family and the Company. The Board of Directors has determined that Messrs. Nickerson, Bransby and Bared are independent under Nasdaq Rule 5605(a)(2).
ITEM 14.
ITEM 14.
Principal Accountant Fees and Services
The following table sets forth the amount of audit fees, tax fees, audit-related fees and all other fees billed or expected to be billed by Milhouse & Neal, LLP, the Company’s independent registered public accounting firm and/or Larry O’Donnell, CPA (the Company’s former independent registered public accounting firm),:
PART IV
ITEM 15.
ITEM 15.
Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this report:
1. Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended December 31, 2010,
2009 and 2008 and Inception to December 31, 2010
Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 and Inception to December 31, 2010
Notes to Consolidated Financial Statements
2. Exhibits:
*
Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
*
Management contract or compensatory plan or arrangement.