ITEM 1 DESCRIPTION OF BUSINESS.......................................... 1
ITEM 2 DESCRIPTION OF PROPERTY.......................................... 5
ITEM 3 LEGAL PROCEEDINGS................................................ 5
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 6
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 6
ITEM 6 SELECTED FINANCIAL DATA.......................................... 8
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................ 8
ITEM 8 FINANCIAL STATEMENTS............................................. 16
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................................... 16
ITEM 9A CONTROLS AND PROCEDURES.......................................... 16
ITEM 9B OTHER INFORMATION................................................ 17
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT................ 17
ITEM 11 EXECUTIVE COMPENSATION........................................... 18
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................................. 23
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 24
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES........................... 25
ITEM 15 EXHIBITS ........................................................ 25
SIGNATURES................................................................. 30
PART I
ITEM 1. BUSINESS
DEVELOPMENT OF BUSINESS
American Soil Technologies, Inc., formerly Soil Wash Technologies, Inc., was incorporated in California on September 22, 1993 in the soil remediation business. In May 2002, we discontinued the soil remediation business.
BUSINESS OF ISSUER
We develop, manufacture on an outsourced basis and market cutting-edge technology that decreases the need for water and improves the soil in the "Green Industry" consisting of agriculture, turf and horticulture. Our products enhance growing environments and reduce the environmental damage caused by common growing practices.
We manufacture on an outsourced basis three primary products: Agriblend(R), a patented soil amendment developed for agriculture; Soil Medic, a patented slow release liquid fertilizer; and NutrimoistL(R), developed for homes, parks, golf courses and other turf related applications.
We market our products primarily in the United States. We are continually attempting to add sales representatives and distributors in both the agriculture and turf industries. The following table shows the current distributors and sales representatives of our products and products we license from others:
Distributor/Sales Representative Product Territory -------------- ------- --------- Gigot Aqua Services Agriblend(R) Kansas, Oklahoma, Nebraska, Nutrimoist(R) Colorado, northern Texas, Extend(TM) northern New Mexico Sircle Saver Sacks(R)
The Pacific Tree Company Agriblend(R) Exclusive distributor of our Soil Medic products for the Paulownia Nutrimoist(R) Megafolia Tree in the United States
Turf Masters Soil Medic(TM) San Diego and Orange Counties Soil Therapy(TM) California and Northern Mexico
Reinke Pasco, Inc. Agriblend(R) Washington Nutrimoist(R) Extend(TM) Dust Contain Sircle Saver Sack(R)
The Kern Company Agriblend(R) Washington Nutrimoist(R) Extend(TM) Canal Seal Dust Contain Anchor MP Sircle Saver Sack(R) Hydromulch
We also act as a distributor for products manufactured by others as follows:
Manufacturer Product Territory ------------ ------- --------- JT Water Management LLC Extend(TM), a liquid Western United States linear polymer, and Contain, a dust control technology
Richard Roos Sircle Saver Sack(R) Exclusive Worldwide Soil Saver Sack(TM)
Midwest Industrial Soil-Sement(R)and Those areas where the Supply, Inc. Envirokleen(R), manufacturer does not environmentally already have an exclusive certified dust and dealer or distributor erosion control products
On July 7, 2006, we acquired Smart World Organics, Inc. ("Smart World") as a wholly-owned subsidiary. Smart World is a "C" corporation located in Hudson, Florida. Smart World has developed organic and sustainable products through a unique research approach both in the field and with Universities and agricultural schools in Florida. The products are sold directly to the end user and through distributors in the United States
Smart World provides next-generation organic and sustainable fertilizers to commercial and residential customers worldwide. Smart World also provides advanced, custom-formulated products built to suit unusual growing conditions and environments. The product line includes homogenized fertilizers, non-toxic insect controls, plant protectants, seed, soil and silage inoculants.
We issued 2,300,000 shares of common stock to the shareholders of Smart World in exchange for 100% of the shares of common stock of Smart World and assumed approximately $400,000 in notes and trade payables.
On December 20, 2006, we entered into an Intellectual Property Purchase Agreement with Ray Nielsen whereby we purchased from Mr. Nielsen any and all intellectual property of Mr. Nielsen, including all formulas developed by Mr. Nielsen over the past 30 years, including but not limited to all formulas and intellectual property used in the business of Smart World, including all graphics and logos; all domain names and URL's; any proprietary software and its
source code; all existing content and HTML files; all branding and trademarks; all trade names; all services marks; all copywritten material; all patents; and all products and proceeds of the foregoing, in any form whatsoever and wheresoever located (collectively the "Intellectual Property"), in exchange for a convertible debenture in the amount of $1,500,000, bearing an interest rate of 8% per annum (the "Convertible Debenture"). The Convertible Debenture was convertible at the option of Mr. Nielsen at any time prior to the maturity date into shares of our common stock at a conversion price equal to the closing price of our common stock for the day immediately preceding the date of conversion. The Debenture is deemed no longer convertible due to the expiration of the conversion rights.
The Debenture is secured by the Intellectual Property. The principal of the Debenture and any unpaid accrued interest thereon was due and payable on January 19, 2008. We were to make quarterly interest payments until the maturity date. A dispute has arisen between Mr. Nielsen and us regarding the Convertible Debenture and the uniqueness and value of the Intellectual Property. See "Legal Proceedings."
COMPETITION
To the best knowledge of our management, there is no direct competition for our Agriblend(R) product, however, earlier polymer based technology was very expensive and the remembrance of its cost has a negative effect on marketing Agriblend(R). Accordingly, educating the end user regarding the benefits of using Agriblend(R) and gaining general acceptance of the new "micro grain" technology are obstacles to marketing the product.
There is some competition to our straight polymer products by companies that have been in business for a number of years.
There is some competition for Extend(TM), however, we have not as yet found a higher quality liquid linear polymer product.
We are not aware of any competition to Nutrimoist(R) L other than from our manufacturer(s) who would have to use our polymer to manufacture the product pursuant to our agreement.
The newly acquired slow release fertilizer Soil Medic does not seem to have competition at this time.
There is some competition for the organic products that we distribute and manufacture through Smart World.
SOURCES AND AVAILABILITY OF RAW MATERIAL AND PRINCIPAL SUPPLIERS
Our products are proprietary blends that include cross-linked micro grain polymer in the blend. Cross-linked polymer is manufactured by several chemical companies that include Stockhausen, BASF; Ciba Specialties; and Floerger. All other components of our products are readily available commercially throughout the world. Agriblend(R) products are custom blended in accordance with our specifications at a blending facility located near Truth or Consequences, New Mexico. Our warehouse facilities are located in Phoenix, Arizona and Pacoima, California. Nutrimoist(R) is blended by us through contract blenders and is a combination of different formulations, which include our polymer products. Two licensees under our patent manufacture our liquid slow release fertilizer. Custom blending of Soil Medic, as needed, is performed by us through independent blenders. Our organic products were manufactured at our Smart World plant in Hudson, Florida which is now dormant until funding can be secured. The Agro Tower is manufactured for us by Make-It Manufacturing in Paso Robles, California.
DEPENDENCE ON MAJOR CUSTOMERS
We are not dependent on any one customer for a substantial portion of our sales of any product.
INTELLECTUAL PROPERTY
We have six patents on the M-216 Polymer Injector machine designed to install our Nutrimoist(R) product into mature turf.
On March 21, 2006, we acquired the U.S. patent on a slow release liquid fertilizer through our acquisition of Advanced Fertilizer Technologies, Inc.
We have exclusive worldwide manufacturing/marketing rights to patented super absorbent cross-linked polymer application technology. The underlying patents include United States Patent number 5,649,495 and 5,868,087, commonly known and described as "Agricultural Retention Mixture and Application Technique."
We have exclusive worldwide marketing rights to the patent pending linear polymer product known as the Sircle Saver Sack(TM).
We own registered trademarks on the names, Agriblend(R), Nutrimoist(R), Hydroganic(R) and Prosper(R).
We have world wide marketing rights to a patented product known as the Agro Tower.
We own the right to numerous formulas used to manufacture organic and sustainable soil amendments, fertilizers and insecticides.
GOVERNMENT APPROVAL
Agriblend(R) and our other polymers are subject to regulatory standards developed by the Environmental Protection Agency ("EPA") that are applicable to
maximum monomer concentrations in polymers. Polymer products cannot exceed monomer concentrations of 200 mg/kg. All of the polymers we use are well below the maximum monomer standard.
Many of our products are organically approved through the National Organic Program ("NOP") and registered under EPA section 25B.
RESEARCH AND DEVELOPMENT COSTS
We have not spent material amounts for research and development during the years ended September 30, 2010 and September 30, 2009.
COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS
We provide Material Safety Data Sheets on all components of our product line and comply with labeling requirement for our products. In addition, we comply with EPA regulations applicable to monomer content in its polymer additives (no greater than five-hundredths percent (0.05%)). We believe that our operations currently comply in all material respects with applicable federal, state and local laws, rules, regulations and ordinances regarding the discharge of materials into the environment. We do not believe that such compliance will have a material impact on our capital expenditures, future earnings and competitive position. No material capital expenditures for environmental control equipment presently are planned.
EMPLOYEES
As of the date hereof, we have three full-time employees. We hire independent contractors on an "as needed" basis only. We have no collective bargaining agreements with our employees. We believe that our employee relationships are satisfactory.
ITEM 1A.
ITEM 1A. NON APPLICABLE
ITEM 1B.
ITEM 1B. NON APPLICABLE
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
On April 1, 2004, we entered into a Sublease Agreement to sublet 923.50 square feet located at a facility in Pacoima, California. The majority shareholder of the sublessor is a related party to us. All of our operations are conducted from this facility, which requires monthly rental payments of approximately $554. The Sublease Agreement expired on December 31, 2008 and we continued to rent the facilities through December 2010. In January 2011, we moved offices to a location in Canoga Park and sublease the space from a related party. The new lease is month to month. We also rent storage space in Tucson and Phoenix, Arizona for approximately $200 per month.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On or about September 21, 2007, Stockhausen, Inc. ("Stockhausen") filed a Complaint in the United States District Court, for the Middle District of North Carolina, against us seeking damages. The parties entered into a settlement
agreement on June 2, 2010. Under the settlement agreement, we agreed to pay Stockhausen $250,000 on or before June 23, 2010 as a compromise to Stockhausen's claims that currently total $603,921. We further agreed that we would consent to the entry of a Judgment against us in favor of Stockhausen in the amount of $603,92 if we failed to make complete and timely payment as agreed. The company was unable to make the agreed upon payment and on July 8, 2010 Stockhausen entered a judgment for the above stated amount against the company.
On or about October 4, 2007, Raymond J. Nielsen and Cheryl K. Nielsen (collectively, "Plaintiffs"), filed a Complaint in the Circuit Court in the Sixth Judicial District of Pasco County, Florida, against us and Smart World (collectively "Defendants") seeking damages, declaratory, and injunctive relief. Plaintiffs allege that Defendants failed to pay interest when due on the Convertible Debenture from Defendants to Plaintiffs and, thus, the entire amount of the Convertible Debenture is accelerated and Plaintiffs are seeking a judgment in the amount of $1,500,000 plus interest. On December 29, 2009, the matter was settled for $400,000 and the Company had 60 days in which to remit the amount or a judgment in the entire amount claimed will be entered against us. The Company was not able to meet the terms of the settlement and have been actively communicating with the Plaintiffs to extend the terms of the settlement.
To the best knowledge of our management, there are no other legal proceedings pending against us.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITES
MARKET FOR COMMON EQUITY
Our common stock is currently quoted on the Over-The-Counter Bulletin Board under the Symbol "SOYL." Set forth below is the trading history of our common stock without retail mark-up, mark-down or commissions:
High Low ---- --- First Quarter ...................... 0.03 0.01 Second Quarter ..................... 0.01 0.01 Third Quarter ...................... 0.01 0.01 Fourth Quarter ..................... 0.05 0.01
First Quarter ...................... 0.03 0.01 Second Quarter ..................... 0.01 0.01 Third Quarter ...................... 0.01 0.01 Fourth Quarter ..................... 0.05 0.01
On January 12, 2011, the closing stock price was $0.01.
The above quotations are inter-dealer quotations from market makers of our common stock. At certain times the actual closing or opening quotations may not represent actual trades that took place.
HOLDERS
As of January 12, 2011, there were 283 shareholders holding certificated securities and approximately 545 shareholders currently listed in the Depository Trust Company as holding shares in brokerage accounts. Our transfer agent is Standard Registrar & Transfer Company 1528 South 1840 East, Draper, Utah 84020.
DIVIDENDS
We have paid no dividends on our common stock since inception and do not anticipate or contemplate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On September 2, 2009, Valerie Sarofim purchased a Convertible Debenture for $125,000 , which on October 8, 2009, she converted into 3,125,000 shares of common stock at the conversion price of $0.04 per share. We believe that Ms Sarofim is an "accredited investor" under Rule 501 Regulation D of the Act and had adequate access to information about us.
On October 8, 2009, the Board of Directors granted 1,000,000 shares of common stock to each of its Directors Carl Ranno, Neil Kitchen, Scott Baker and to Diana Visco. The grant was made because of each respective recipients contribution to the Company. We believe that these individuals are "accredited investor" under Rule 501 Regulation D of the Act and had adequate access to information about us.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, our selected financial information:
Fiscal Year Ended Fiscal Year Ended September 30, 2010 September 30, 2009 ------------------ ------------------ (Audited) (Audited) STATEMENT OF OPERATIONS DATA: Revenue $ 117,052 $ 236,954 Loss From Continuing Operations (963,620) (2,717,529) (Net Loss) (1,488,300) (2,837,215) (Continuing Operations) Loss Per Share $ (0.02) $ (0.05) (Net Loss) Per Share $ (0.02) $ (0.05)
BALANCE SHEET DATA: Current Assets $ 36,218 $ 120,068 Property & Equipment, net 15,014 78,824 Intangible Assets; net 162,147 212,038
Total Assets 213,379 411,186 Total Current Liabilities (6,277,388) (5,147,112) Accumulated Deficit (27,310,005) (25,821,705) Stockholders' Deficit $ (6,064,009) $ (4,864,453)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Report.
THE FOLLOWING INFORMATION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS OF OUR MANAGEMENT. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE HAPPENING OF FUTURE EVENTS AND ARE NOT BASED ON HISTORICAL FACT. FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY," "COULD," "EXPECT," "ESTIMATE," "ANTICIPATE," "PLAN," "PREDICT," "PROBABLE," "POSSIBLE," "SHOULD," "CONTINUE," OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.
OVERVIEW
We develop, manufacture and market cutting-edge technology that decreases the need for water and improves the soil in the "Green Industry" consisting of agriculture, turf and horticulture.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2010 COMPARED TO SEPTEMBER 30, 2009
REVENUES
Revenues for the fiscal year-ended September 30, 2010 were $117,052 compared to $236,954 for the fiscal year ended September 30, 2009, a decrease of 51 %. This decrease in revenue is directly related to severe economic conditions, which necessitated a reduction in our sales and marketing staff and competition from a former employee, as well as a lack of liquidity to sell or license our products.
COST OF SALES
Cost of goods sold decreased to $90,654 for the fiscal year ended September 30, 2010 from $110,483 for the fiscal year ended September 30, 2009. The decrease in the cost of sales is the result of the decrease in revenues during this period. Our gross margins were 23 % and 53% for the years ended September 30, 2010 and September 30, 2009, respectively. The decrease in our gross margins was caused by an impairment of our inventory which created an increase in our cost of goods.
OPERATING EXPENSES
Operating expenses decreased approximately 65 % for the fiscal year ended September 30, 2010. This decrease in operating expenses is a result of many factors.
General and administrative expenses decreased approximately 23 % for the fiscal year ended September 30, 2010 due to a reduction in staff and general operational expenses.
Sales and marketing expenses decreased approximately 97% as we eliminated the trade shows we normally attend and reduced our sales force.
Research and development costs have been eliminated because we have basically completed our research and development on our existing products.
The amortization expense of intangible assets was $49,891 and $346,131 for the year ended September 30, 2010 and 2009, respectively.
INTEREST EXPENSE
Interest expense decreased 14.5% for the fiscal year ended September 30, 2010 from the period ended September 30, 2009. The decrease resulted from the elimination of higher average debt balances and non-cash interest expense relating to the amortization of a debt discount as reported in the prior audited period.
NET LOSS
For the reasons detailed above, we experienced reduced losses in the year ended September 30, 2010 compared to the year ended September 30, 2009. We expect that as a result of our efforts during the last three years to develop strategic alliances, marketing agreements, and distribution networks, sales volume in subsequent periods should increase. However, since these arrangements are new and untested and we do not have the funds to promote these programs, it is uncertain whether these actions will be sufficient to produce net operating income for the fiscal year ending September 30, 2011. Given the gross margins of our turf products as well as a renewed interest in consumer organic products for the retail market future operating results should improve.
SEASONALITY
Our efforts in the United States have focused on the southern states and therefore generally experience year round growing cycles, with the sale of the agricultural products preceding the growing cycle of various crops. International sales have not been sufficient enough or the geographic distribution of sales concentrated enough to determine if a seasonal trend exists although the initial indication is that our markets will become diverse and therefore not indicate significant seasonal variations. As we expand into the residential and commercial segments nationally, we will experience some seasonal declines in sales during the fall and winter quarters in less temperate climates.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $2,045 and $13,604 at September 30, 2010 and September 30, 2009, respectively. Net cash used by operations was $89,442 for the year ended September 30, 2010 as compared to $154,823 for the year ended September 30, 2009. We have historically relied upon one of our officers and significant shareholders to provide cash to meet short term operating cash requirements.
In March 2000, we authorized the issuance of an aggregate of $1,325,000 of convertible debentures with interest payable quarterly at 10% per annum. The convertible debentures were convertible to our common stock at a rate of one share for each three dollars converted. The debentures matured in the first calendar quarter of 2002. All of the debentures were subscribed and at September 30, 2010, the outstanding balance of all notes payable totaled $1,892,024. At September 30, 2010, debentures consisted of one $1,500,000 of 8% debenture which is currently in default and in dispute among the parties, $50,000 of 8% per
annum debentures at a rate of $0.50 per share, $60,000 of 8% debenture convertible at $0.10 per share, $30,000 of 8% per annum debentures at a rate of $0.25 per share, $75,000 of 8% per annum debentures at a rate of $0.19 per share, and $177,024 of 10% per annum convertible at a rate of $3.00 per share All of the above mentioned convertible debentures are beyond their due dates and as such are no longer convertible unless the company and the holders agree on each debenture.
As of September 30, 2010 we had a working capital deficit of $6,241,170 (current assets less current liabilities) of compared to a deficit of $ $5,027,044 as of September 30, 2009. The increase in the working capital deficit has been caused by an increase in our current liabilities.
As shown in the accompanying financial statements, we have incurred an accumulated deficit of $27,310,005 and a working capital deficit of $6,241,170 as of September 30, 2010. Our ability to continue as a going concern is dependent on obtaining additional capital and financing and operating at a profitable level. We intend to seek additional capital either through debt or equity offerings and to increase sales volume and operating margins to achieve profitability. Our working capital and other capital requirements during the next fiscal year and thereafter will vary based on the sales revenue generated by the recent accumulation of additional products and the distribution and sales network we have created and will continue to grow.
We will consider both the public and private sale of securities and debt instruments for expansion of our operations if such expansion would benefit our overall growth and income objectives. Should sales growth not materialize, we may look to these public and private sources of financing. There can be no assurance, however, that we can obtain sufficient capital on acceptable terms, if at all. Under such conditions, failure to obtain such capital likely would, at a minimum, negatively impact our ability to timely meet our business objectives.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which requires us to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. We believe that of our significant accounting policies (more fully described in notes to the consolidated financial statements), the following are particularly important to the portrayal of our results of operations and financial position and may require the application of a higher level of judgment by our management, and as a result are subject to an inherent degree of uncertainty.
ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We review our estimates on an on-going basis, including those related to the allowance for doubtful accounts, inventories and related reserves, long-lived assets, income taxes, litigation and stock-based compensation. We base our estimates on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result. We believe the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.
REVENUE RECOGNITION
We generate our revenues from the sale of products and services and recognize revenue when the following fundamental criteria are met:
* persuasive evidence that an arrangement exists;
* the products and services have been delivered;
* selling prices are fixed and determinable and not subject to refund or adjustment; and
* collection of amounts due is reasonably assured.
Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete. We provide for sales returns and allowances in the same period as the related revenues are recognized. We base these estimates on our historical experience or the specific identification of an event necessitating a reserve. To the extent actual sales returns differ from our estimates; our future results of operations may be affected. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.
ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While our credit losses have historically been within our expectations and the allowance established, we may not continue to experience the same credit loss rates as we have in the past. Our accounts receivable are concentrated in a relatively few number of customers. Therefore, a significant change in the liquidity or financial position of any one customer could make it more difficult for us to collect our accounts receivable and require us to increase our allowance for doubtful accounts, which could have a material adverse impact on our consolidated financial position, results of operations and cash flows.
INVENTORIES
We seek to purchase and maintain raw materials at sufficient levels to meet lead times based on forecasted demand. If forecasted demand exceeds actual demand, we may need to provide an allowance for excess or obsolete quantities on hand. We also review our inventories for changes in the market prices of our products and provide reserves as deemed necessary. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required. We state our inventories at the lower of cost, using the first-in, first-out method on an average costs basis, or market.
We account of inventory costs in accordance with Accounting Standards Condification ("ASC") No. 310, "Current Assets". Abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage)are recognized as current-period charges. Fixed production overhead is allocated to the costs of conversion into inventories based on the normal capacity of the production facilities. We utilize an expected normal level of production units, based on our plant capacity. To the extent we do not achieve a normal expected production levels, we charge such under-absorption of fixed overhead to operations.
LONG-LIVED ASSETS
The Company reviews its fixed assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Based on analysis of the carrying value of goodwill as of September 30, 2009 relating to Smart World Organics, the fair value did not exceeded the carrying amount. As a result we fully impaired goodwill in the amount of $364,600, which is reflected in the statement of operations.
We evaluated the Soil Medic and as of September 30, 2009 partially impaired the intangible asset in the amount of $177,000, which is reflected in the statement of operations. No impairment was necessary for the year ended September 30, 2010 and the intangible had a remaining value of approximately $162,000.
During the year ended September 30, 2009 we evaluated the Smart World intangible assets, consisting of the formulas, trade secrets and goodwill, aggregating $1,036,984, net of accumulated amortization. We evaluated undiscounted cash flows for definite lived intangible assets and fair value related to goodwill. Based on the lack of capital to implement our business plan we have been unable to enter the retail market with a major retailer, we fully impaired the Smart
World intangible assets and goodwill in the amount of $1,036,984, based on future expected cash flows, which is reflected in the statement of operations.
ACCOUNTING FOR INCOME TAXES
We account for income taxes under the provisions of ASC NO. 740, "Income Taxes". Under this method, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year's financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pre-tax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount on the consolidated balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and unless we believe that recovery is more likely than not, we must establish a valuation allowance.
Effective September 30, 2007, the Company adopted ASC No. 740 Topic 10, Income Taxes, General ("ASC 740.10"). ASC 740.10 prescribes, among other things, a recognition threshold and measurement attributes for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company's income tax return. The Company utilizes a two-step approach for evaluating uncertain tax positions. Step one or recognition, requires a company to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two or measurement, is based on the largest amount of benefit, which is more likely than not to be realized on settlement with the taxing authority.
We have provided a full valuation allowance against our U.S federal and state deferred tax assets. If sufficient evidence of our ability to generate future U.S federal and/or state taxable income becomes apparent, we may be required to reduce our valuation allowance, resulting in income tax benefits in our statement of operations. We evaluate the realizability of our deferred tax assets and assess the need for a valuation allowance quarterly.
STOCK-BASED COMPENSATION
We account for stock-based compensation in accordance with ASC No. 718, Compensation, Stock Compensation ("ASC 718"). ASC 718 requires that we account for all stock-based compensation transactions using a fair-value method and recognize the fair value of each award as an expense, generally over the service period. The fair value of stock options is based upon the market price of our common stock at the grant date. We estimate the fair value of stock option awards, as of the grant date, using the Black-Scholes option-pricing model. The
use of the Black-Scholes model requires that we make a number of estimates, including the expected option term, the expected volatility in the price of our common stock, the risk-free rate of interest and the dividend yield on our common stock. If our expected option term and stock-price volatility assumptions were different, the resulting determination of the fair value of stock option awards could be materially different and our results of operations could be materially impacted.
ACCOUNTING FOR NON-EMPLOYEE STOCK-BASED COMPENSATION
We measure compensation expense for its non-employee stock-based compensation under ASC No. 505 Topic 50, "Equity-Based Payments to Non-Employees". The fair value of the option issued or expected to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of our common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty's performance is complete. In the case of the issuance of stock options, we determine the fair value using the Black-Scholes option pricing model. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.
ACCOUNTING FOR CONVERSION FEATURES AND WARRANTS ISSUED WITH CONVERTIBLE DEBT
Our derivative financial instruments consisted of embedded derivatives related to the issuance of our $1.5 million convertible note payable to Ray Nielsen. These embedded derivatives included a conversion feature that was not considered conventional as defined in ASC No. 815, "Derivatives and Hedging". The accounting treatment of derivative financial instruments required that we record the derivative at its fair value and record it at fair value as of each subsequent balance sheet date. Changes in fair value was recorded as non-operating, non-cash income or expense at each reporting date. The derivative was valued using the Black-Scholes Option Pricing Model.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB amended authoritative guidance for improving disclosures about fair-value measurements. The updated guidance requires new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The guidance also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. The guidance became effective for interim and annual reporting periods beginning on or after December 15, 2009, with an exception for the disclosures of purchases, sales, issuances and settlements on the roll-forward of activity in Level 3 fair-value measurements. Those disclosures will be effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not expect that the adoption of this guidance will have a material impact on the financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT FINANCIAL RISKS
Not Applicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 begin on page of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
In connection with the reorganization of McKennon, Wilson & Morgan LLP (the "Former Auditors") in which certain of its audit partners resigned from the Former Auditors and have joined dbbmckennon. The Former Auditors resigned as the independent auditors of American Soil Technologies, Inc. (the "Company"), effective May 4, 2009.
The Former Auditors had been the Company's auditor since September 21, 2007.
The Company's Board of Directors (the "Board") approved the resignation of McKennon, Wilson & Morgan LLP on May 4, 2009.
Effective May 4, 2009, the Board appointed dbbmckennon (the "New Auditors") as the Company's new independent auditors.
During the Company's two most recent fiscal years and subsequent interim period on or prior to May 4, 2009, the Company has not consulted with the New Auditors regarding either i) the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on the Company's financial statements or (ii) any matter that was either the subject of a disagreement or event identified in response to (a)(1)(iv) of Item 304 of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Our President and Chief Financial Officer (the "Certifying Officers") is responsible for establishing and maintaining our disclosure controls and procedures. The Certifying Officer have designed such disclosure controls and procedures to ensure that material information is made known to him, particularly during the period in which this report was prepared. The Certifying Officer has evaluated the effectiveness of our disclosure controls and procedures and has determined that our projections and impairment analysis need to be improved. We will retain a financial expert to assist us in improving our disclosure controls and procedures as needed. We believe that the changes to be implemented will enable the Company to improve its timely reporting of the required impairment analysis.
ITEM 9A(T). CONTROLS AND PROCEDURES
Not Applicable
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
Our directors and executive officers are as follows:
Name Age Position - ---- --- --------
Carl P. Ranno 70 Director, Chief Executive Officer, President, Chief Financial Officer
Neil C. Kitchen 62 Director, Vice President
Diana Visco 52 Secretary
Scott Baker 52 Director
MR. CARL P. RANNO, DIRECTOR, CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL OFFICER, received a degree in Economics from Xavier University in Cincinnati, Ohio and his Juris Doctor from the University of Detroit School of Law. Mr. Ranno became a Director in September 2001 and Chief Executive Officer and President in May 2002. For the five years prior to becoming the President/CEO of the Company, he has acted as an advisor in strategic planning, mergers and acquisitions and as a securities attorney to numerous public companies. He has served as president and CEO of public and private companies. He is also a member of the board of directors of Central Utilities Production Company.
MR. NEIL C. KITCHEN, DIRECTOR, VICE PRESIDENT, has over 20 years experience in business management in the environmental sector including management of companies involved in general engineering, toxicology, and environmental cleanup. Prior to joining us in 1994, he was Vice President of a publicly-held environmental cleanup company. He holds a B.S. in Business Management from San Diego State University and a class "A" General Engineering license with Hazardous Material Certification from the State of California.
MS. DIANA VISCO, SECRETARY, Diana Visco, Secretary, has worked with us since January 1999. Prior to that, she worked for 21 years with the Americana Leadership College, Inc., traveling to all of its offices and conferences across the USA and Caribbean in addition to Australia, New Zealand, Canada and Europe.
Ms Visco spent several years as a traveling administrator and as International Administrator handling all aspects of finance, administration as well as marketing and promotion in addition to being assistant to the President of that company. She is the daughter of Mr. Louie Visco, a former director who passed away on January 3, 2008
MR. SCOTT BAKER, DIRECTOR, has practiced law in Arizona for the past 19 years. He graduated from the University of Arizona with a B.S. in business in 1978 and obtained his J.D. from the University of Arizona in 1981. As a general practitioner, he has appeared before the U.S. District Tax Court and the U.S. District Court.
Directors serve until the next annual meeting or until their successors are qualified and elected. Officers serve at the discretion of the Board of Directors.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and certain officers, as well as persons who own more than 10% of a registered class of our equity securities, ("Reporting Persons") to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission.
Based solely upon a review of the copies of such forms, we believe that all Reporting Persons have complied on a timely basis with all filing requirements applicable to them, except that Louie Visco filed one late report on Form 4 disclosing his conversion of debt to equity.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Set forth below is a summary of compensation for our principal executive officer and our two most highly compensated officers other than our principal executive officer (collectively, the "named executive officers") for our last two fiscal years. There have been no annuity, pension or retirement benefits ever paid to our officers, directors or employees.
With the exception of reimbursement of expenses incurred by our named executive officers during the scope of their employment and unless expressly stated otherwise in a footnote below, none of the named executive officers received other compensation, perquisites and/or personal benefits in excess of $10,000.
- ---------- (1) Accrued but unpaid.
During the year ended September 30, 2010 we issued each of the listed individuals 1,000,000 shares of common stock, value based on the closing stock price of the Company on the date of the grant ($0.032).
GRANTS OF PLAN-BASED AWARDS
We did not grant any plan-based awards during this fiscal year ended September 30, 2010.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information for the named executive officers regarding the number of shares and underlying shares both exercisable and unexercisable stock options, as well as the exercise prices and expiration dates thereof, as of September 30, 2010.
EMPLOYMENT AGREEMENTS
We have an employment agreement Carl P. Ranno as our Chief Executive Officer and President. The Agreement is for a term of five years, commencing on May 23, 2008 and expiring on May 22, 2013 with automatic one-year extensions unless either the Company or Mr. Ranno provides written notice of their intention not to renew the Agreement at least 30 days prior to the expiration of the then current term. The Agreement provides that, in addition to receiving paid vacation in accordance with the Company's policies as well as other customary benefits and provisions, Mr. Ranno shall receive an annual base salary of $200,000. If, at any time during the term of the Agreement, Mr. Ranno is terminated "without cause," he will be entitled to receive a cash payment equal to the aggregate compensation payable to Mr. Ranno during the remaining term of the Agreement. The compensation is is being accrued.
On May 23, 2008 the Company entered into an Employment Agreement with Neil C. Kitchen to act as the Company's Vice President and Chief Technical Officer (the "Agreement"). The Agreement is for a term of five years, commencing on May 23, 2008 and expiring on May 22, 2013 with automatic one-year extensions unless either the Company or Mr. Kitchen provides written notice of their intention not to renew the Agreement at least 30 days prior to the expiration of the then current term. The Agreement provides that, in addition to receiving paid vacation in accordance with the Company's policies as well as other customary benefits and provisions, Mr. Kitchen shall receive an annual base salary of $130,000. If, at any time during the term of the Agreement, Mr. Kitchen is terminated "without cause," he will be entitled to receive a cash payment equal to the aggregate compensation payable to Mr. Kitchen during the remaining term of the Agreement. The compensation is being accrued.
On May 23, 2008, and effective the same date, the Company entered into an Employment Agreement with Diana Visco to act as the Company's Secretary and Administrative Assistant to the President (the "Agreement").The Agreement is for a term of five years, commencing on May 23, 2008 and expiring on May 22, 2013 with automatic one-year extensions unless either the Company or Ms. Visco provides written notice of their intention not to renew the Agreement at least 30 days prior to the expiration of the then current term. The Agreement provides that, in addition to receiving paid vacation in accordance with the Company's policies as well as other customary benefits and provisions, Ms. Visco shall receive an annual base salary of $85,000. If, at any time during the term of the Agreement, Ms. Visco is terminated "without cause," she will be entitled to receive a cash payment equal to the aggregate compensation payable to Ms. Visco during the remaining term of the Agreement. The compensation is being accrued.
2002 STOCK OPTION PLAN
Our shareholders adopted a Stock Option Plan on November 8, 2002 (the "2002 Plan"). Under the 2002 Plan, 2,000,000 shares of common stock have been authorized for issuance as Incentive Stock Options or Nonstatutory Stock Options. Under the 2002 Plan, options may be granted to our key employees, officers, directors or consultants. The purchase price of the common stock subject to each Incentive Stock Option shall not be less than the fair market value (as determined in the 2002 Plan), or in the case of the grant of an Incentive Stock Option to a principal stockholder, not less that 110% of fair
market value of such common stock at the time such option is granted. The purchase price of the common stock subject to each Nonstatutory Stock Option shall be determined at the time such option is granted, but in no case less than 100% of the fair market value of such shares of common stock at the time such option is granted.
The 2002 Plan shall terminate ten years from the date of its adoption by our shareholders, and no option shall be granted after termination of the 2002 Plan. Subject to certain restrictions, the 2002 Plan may at any time be terminated and from time to time be modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of our capital stock present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the State of Nevada.
As of the date hereof, 1,310,000 options have been issued pursuant to the 2002 Plan.
2005 STOCK OPTION/STOCK ISSUANCE PLAN
GENERAL
On January 31, 2005, our Board of Directors adopted our 2005 Stock Option/Stock Issuance Plan (the "2005 Plan") and directed that it be presented to the stockholders for their approval and adoption.
The 2005 Plan provides for the issuance of up to 10,000,000 shares of common stock to our directors, officers, employees and consultants in the form of stock options and shares of common stock.
Our Board of Directors will initially administer the 2005 Plan, except that the Board may, at its discretion, establish a committee comprised of two or more members of the Board or two or more other persons to administer the 2005 Plan (the "Plan Administrator").
The 2005 Plan has two separate components: the option grant program and the stock issuance program. To date, 4,010,840 shares of common stock have been issued pursuant to the 2005 Plan.
OPTION GRANT PROGRAM
Incentive stock options (those stock options that qualify under Section 422 of the Internal Revenue Code of 1986 ("the "Code")) may be granted to any individual who is, at the time of the grant, our employee. Non-qualified stock options (those options that do not qualify under Section 422 of the Code) may be granted to employees and other people, including our directors and officers.
Grants under the option grant program may be structured as installment options which become exercisable for vested shares over the optionee's period of service or as immediately exercisable options for unvested shares which will be subject to repurchase by us, at the option exercise price paid per share, upon the optionee's termination of service prior to vesting in those shares. All option grants must have an exercise price not less than 100% of the fair market value of the option shares on the grant date.
Each option is to have a maximum term of ten years, subject to earlier termination in the event the optionee leaves our service. The optionee will have up to a three month period following termination of service (for reasons other than death or disability) in which to exercise the option. This period will be extended to 12 months if the optionee's service terminates by reason of disability, and in the event of the optionee's death, the personal representative of the optionee's estate (or the person inheriting the option) will have up to a 12 month period following the optionee's death in which to exercise the option.
To exercise the option, the optionee must execute a stock purchase agreement and pay the exercise price for the purchased shares. Payment is to be made in cash; however, the Plan Administrator may also permit the optionee to deliver a full-recourse interest-bearing promissory note for the purchased shares payable in one or more installments. Provided that our shares remain publicly traded, the exercise price may be paid in shares of common stock or, alternatively, through the optionee's participation in a same-day sale program. Under such program, the option shares are sold immediately following the exercise of the option, and a portion of the sale proceeds is applied to the payment of the exercise price and all applicable withholding taxes.
In the event we are acquired by merger or asset sale, the option shares will immediately vest, and the option may be exercised for any or all of those vested shares prior to the effective date of such acquisition. However, such accelerated vesting will not occur if our repurchase rights with respect to the unvested option shares are assigned to the acquiring entity. The Plan Administrator will have the discretion to structure one or more option grants under the Plan so that the shares subject to those options will immediately vest in the event the optionee's service is involuntarily terminated within 18 months following an acquisition in which our repurchase rights are so assigned, and the optionee would then have a one-year period to exercise the accelerated options for fully-vested shares. It is anticipated that this special vesting acceleration provision would be made available only on a limited case-by-case basis.
The stock purchase agreement will provide us with the right to repurchase, at the original exercise price paid per share, any unvested shares held by the optionee at the time of his or her termination of service. The applicable vesting schedule will be set forth in the Notice of Grant. Full and immediate vesting of all the option shares will occur upon an acquisition by merger or asset sale, unless the repurchase right applicable to those shares is assigned to the successor company. One or more repurchase rights outstanding under the Plan may be structured so that those rights will subsequently lapse (and the option shares will immediately vest) upon an involuntary termination of the optionee's service within 18 months following the effective date of an acquisition in which the repurchase rights are assigned to the successor company.
STOCK ISSUANCE PROGRAM
Shares of common stock may be issued to employees and other people, including our directors and officers.
The stock issuance program allows eligible persons to purchase shares of common stock at fair market value or at a discount of up to 15% of fair market value. The shares may be fully vested when issued or may vest over time as the recipient provides services or as specified performance objectives are attained. In addition, shares of common stock may be issued as bonus awards in recognition of services rendered, without any cash outlay required of the recipient.
The stock issuance component is structured as a stock purchase transaction, with the purchase price for the shares to be paid in cash or by promissory note at the time of issuance of the shares. The same repurchase rights summarized above for the "Stock Purchase Agreement" under the option grant program will apply to the purchased shares, namely, our right to repurchase, at the original purchase price, any unvested shares held by the participant at the time of his or her termination of service.
It is anticipated that any issued shares will vest either immediately or in a series of installments over the participant's period of service. Full and immediate vesting of all the shares will occur upon an acquisition by merger or asset sale, unless the repurchase right applicable to those shares is assigned to the successor company. The assigned repurchase rights may be structured so that they will subsequently lapse (and the shares will immediately vest) upon an involuntary termination of the participant's service within 18 months following the effective date of the acquisition.
COMPENSATION OF DIRECTORS
Our Directors do not receive any cash compensation, but are entitled to reimbursement of their reasonable expenses incurred in attending directors' meetings.
We do not have any audit, nominating, compensation or other committee of our Board of Directors.
Scott Baker is our only independent director.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding our shares of outstanding common stock beneficially owned as of the date hereof by (i) each of our directors and executive officers, (ii) all directors and executive officers as a group, and (iii) each other person who is known by us to own beneficially more than 5% of our common stock based upon 68,090,590 issued shares of common stock.
- ---------- 1. C/o our address, 12224 Montague Street Pacoima, CA 91331, unless otherwise noted. 2. Except as otherwise indicated, we believe that the beneficial owners of common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person. 3. Includes options to purchase 150,000 shares of common stock at an exercise price of $0.50 expiring June 30, 2012 and 470,000 shares of common stock at an exercise price of $0.11 expiring September 27, 2012 4. Includes options to purchase 150,000 shares of common stock at an exercise price of $0.50 expiring June 30, 2012 and 430,000 shares of common stock at an exercise price of $0.11 expiring September 27, 2012 5. Includes options to purchase 150,000 shares of common stock at an exercise price of $0.50 expiring June 30, 2012 and 150,000 shares of common stock at an exercise price of $0.11 expiring September 27, 2012 6. The Visco family which includes the Secretary of the Company Diana Visco owns the controlling shares of FLD. 7. The Visco family which includes the Secretary of the Company Diana Visco owns the controlling shares of Benz Group
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Visco Family is an owner and director of FLD Corporation, owns 17,907,003 shares of common stock.
The Visco Family is an owner and director of Benz Group, the holder of 2,819,061 shares of common stock and 2,763,699 shares of Preferred Stock.
Note payable to Diana Visco for $789,842 bearing interest at prime rate of 3.25% at September 30, 2010 and 2009, respectively with interest payable monthly. The note is unsecured and was due in January 2011.
On April 1, 2004, we entered into a Sublease Agreement to sublet 923.50 square feet located at a facility in Pacoima, California. The majority shareholder of the sublessor is a related party to us. All of our operations were conducted from this facility, which required monthly rental payments of approximately $554. In January 2011, the Company moved corporate offices to Canoga Park, which it share with the same related party. The lease is month to month.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
dbbmckennon
dbbmckennon, a registered public accounting firm, was our independent auditor and examined our financial statements to September 30, 2010 and performed the services listed below.
AUDIT FEES
dbbmckennon fees for professional services rendered for the audit of our annual financial statements included in this Form 10-K and for the reviews of the financial statements included in our quarterly reports on Form 10-QSB during this period was $42,000.
AUDIT RELATED FEES
dbbmckennon was not paid additional fees during that period for assurance and related services reasonably related to the performance of the audit or review of our financial statements.
TAX FEES
Tax filings have not been completed for the 2010 or 2009 fiscal year, thus no fees were paid.
ALL OTHER FEES
None
AUDIT COMMITTEE
We do not have an audit committee.
ITEM 15.
ITEM 15. EXHIBITS
3.1 Articles of Incorporation of New Directions Manufacturing, Inc., a Nevada corporation, dated January 9, 1997 (1) 3.2 Amendment to Articles of Incorporation of New Directions Manufacturing, Inc., a Nevada corporation, dated May 29, 1997 (1) 3.3 Amendment to Articles of Incorporation of New Directions Manufacturing, Inc., dated January 4, 2000 (2) 3.4 Amendment to Articles of Incorporation of American Soil Technologies, Inc., dated August 4, 2003 (3) 3.4 Bylaws of New Directions Manufacturing, Inc., dated May 29, 1997 (1) 3.5 Amended and Restated Bylaws of New Directions Manufacturing, Inc., dated July 20, 1998 (4) 3.6 Amendment to Articles of Incorporation, dated November 30, 2006 4.1 Convertible Debenture - Lump Sum Contribution (Form) (5) 4.2 Convertible Debenture - Incremental (Form) (5) 10.1 License Agreement between Ron Salestrom, American Soil Technologies, Inc., and Polymers Plus, L.L.C., dated January 4, 2000 (2) 10.2 Sublease Agreement with The Customized Box Company, dated April 1, 2004 (6) 10.8 Employment Contract with Donette Lamson, dated January 18, 2006 (7) 10.12 Acquisition Agreement for Smart World Organics, dated July 7, 2006 (8)
10.14 Intellectual Property Purchase Agreement with Ray Nielsen, dated December 20, 2006 (9) 10.15 Security Agreement with Ray Nielsen, dated December 22, 2006 (9) 10.16 Purchase and Sale Agreement and Joint Escrow Instructions for Silver Terrace Nurseries, dated November 27, 2007 (12) 10.17 Employment Contract with Carl Ranno, dated May 23, 2008 (13) 10.18 Employment Contract with Neil Kitchen, dated May 23, 2008 (13) 10.19 Employment Contract with Diana Visco, dated May 23, 2008 (13) 10.21 Subsidiaries: Smart World Organics Inc. a Florida corporation 31.1 Certification of Chief Executive Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
- ---------- 1. Incorporated by reference from our Registration Statement on Form SB-2, filed on July 2, 1997, as amended (Registration No. 333-30583). 2. Incorporated by reference from our Form 10-KSB for the fiscal year ended June 30, 2000, filed on September 27, 2000 (File No. 000-22855). 3. Incorporated by reference from our Form 10-KSB for the fiscal year ended December 31, 2005, filed on April 3, 2006. 4. Incorporated by reference from our Form 10-KSB for the fiscal year ended June 30, 1998, filed on September 16, 1998. 5. Incorporated by reference from our Form 10-QSB for the quarterly period ended March 31, 2000, filed on May 15, 2000. 6. Incorporated by reference from our Form 10-QSB for the quarterly period ended March 31, 2004, filed on May 5, 2004. 7. Incorporated by reference from our Form 10-QSB for the quarterly period ended March 31, 2006, filed on May 17, 2006. . 8 Incorporated by reference from our Form 10-QSB for the quarterly period ended June 30, 2006, filed on August 14, 2006. 9. Incorporated by reference from our Form 10-KSB for the fiscal year ended December 31, 2006, filed on April 18, 2007. 10. Incorporated by reference from our Form 10-KSB for the fiscal year ended December 31, 2006, filed on April 18, 2007. 11. Incorporated by reference from our Form 10-KSB for the fiscal year ended December 31, 2006, filed on April 18, 2007. 12. Incorporated by reference from our Form 10-KSB for the transition period ended September 30, 2007, filed on February 15, 2008. 13. Incorporated by reference from our Form 10-K for the period ended September 30, 2008, filed on January 13, 2009
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, duly authorized.
AMERICAN SOIL TECHNOLOGIES, INC.
DATED: January 13, 2011 By: /s/ Carl P. Ranno ------------------------------------------------- Carl P. Ranno Director, Chief Executive Officer, President, and Chief Financial Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders American Soil Technologies, Inc.
We have audited the accompanying consolidated balance sheets of American Soil Technologies, Inc. and subsidiary (the "Company") as of September 30, 2010 and 2009, and the related statements of operations, stockholders' deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Soil Technologies, Inc and subsidiary as of September 30, 2010 and 2009, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 of the consolidated financial statements, the Company incurred losses in recent history, and has significant working capital and accumulated deficits. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters are also discussed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ dbbmckennon - --------------------------
Newport Beach, California January 13, 2011
American Soil Technologies, Inc. Consolidated Balance Sheets
See Notes to Consolidated Financial Statements.
American Soil Technologies, Inc. Consolidated Statements of Operations
See Notes to Consolidated Financial Statements.
American Soil Technologies, Inc. Consolidated Statements of Stockholders' Deficit
See Notes to Consolidated Financial Statements.
American Soil Technologies, Inc. Consolidated Statements of Cash Flows
See Notes to Consolidated Financial Statements.
American Soil Technologies, Inc. Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION American Soil Technologies, Inc. (the "Company" or "American Soil"), formerly Soil Wash Technologies, Inc., was incorporated in the state of California on September 22, 1993. On November 24, 1999, the Company entered into an exchange agreement for the reverse acquisition of New Directions Manufacturing, Inc., a publicly traded Nevada corporation incorporated on January 9, 1997 ("New Directions"), wherein New Directions would acquire the assets of the Company and change its name to American Soil Technologies, Inc. This exchange agreement was effective as of the close of business on December 31, 1999.
The Company is primarily engaged in the marketing of polymer and other soil amendments to the agricultural turf and horticulture industries. The Company's products are used to decrease water usage, increase nutrient retention in soil, enhance seed germination and sprout emergence, clarify ponds and increase the effectiveness of chemical fertilizers and biological additives. In 2006, the Company acquired the patent to a slow release fertilizer. The Company also has exclusive license rights to the use of patented polymer application techniques, as well as numerous patents on a unique machine designed to inject polymer and other liquid products into existing turf and some crops.
The Company also expanded to provide next-generation and sustainable fertilizers thru the acquisition of Smart World Organics, Inc. ("Smart World") on December 20, 2006. Simultaneously, the Company entered into an Intellectual Property Purchase Agreement with the founder of Smart World, Ray Nielsen ("Nielsen") that included certain formulas originally believed to be proprietary and intellectual properties used in the business of Smart World. The formulas acquired from Nielsen were deemed not to be proprietary and subsequently deemed to have little or no value (see Note 5). Smart World sells homogenized fertilizers, non-toxic insect controls, plant protectants, seed, and soil and silage inoculants. Smart World also provides advanced, custom-formulated products built to suit unusual growing conditions and environments. Due to losses incurred in 2008, management terminated Smart World employees and seeks to operate through commission-based sales representatives. Additionally, the Company has several debt obligations that are past the contractual maturity date or are due and payable due to non payment of interest.
GOING CONCERN AND MANAGEMENT'S PLANS The Company has sustained significant losses and has an accumulated deficit of $27,310,005 and negative working capital of $6,241,170 as of September 30, 2010. The ability of the Company to continue as a going concern is dependent upon obtaining additional capital and financing, and generating positive cash flows from operations. The Company intends to seek additional capital either through debt or equity offerings and is attempting to increase sales volume and operating margins to achieve profitability. Due to the current economic environment and the Company's current financial condition, management cannot be assured there will be adequate capital available when needed and on acceptable terms. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of American Soil Technologies, Inc, and its wholly-owned subsidiary, Smart World Organics, Inc. All intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company's significant estimates made in connection with the preparation of the accompanying financial statements include the valuation of inventories, impairment of property and equipment, carrying value of the intangible assets, and valuation of stock options.
CASH AND CASH EQUIVALENTS Cash and cash equivalents includes all short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less.
ACCOUNTS AND NOTES RECEIVABLE The Company utilizes the allowance method to provide a reserve for uncollectible accounts. The Company determines any required allowance by considering a number of factors including length of time trade accounts receivable are past due and the Company's previous loss history. The Company records a reserve account for accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
The Company performs ongoing credit evaluations and continually monitors its collection of amounts due from its customers. The Company adjusts credit limits and payment terms granted to its customers based upon payment history and the customer's current creditworthiness. The Company does not require collateral from its customers to secure amounts due from them. Reserves for uncollectible amounts are provided based on past experience and a specific analysis of the accounts which management believes is sufficient.
INVENTORIES Inventories consist primarily of purchased polymer soil amendments. Inventories are stated at the lower of cost (on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT Property and equipment is stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets ranging from three to 15 years. Betterments, renewals and extraordinary repairs that extend the lives of the assets are capitalized. Repairs and maintenance costs are expensed as incurred. The cost and related accumulated depreciation applicable to assets disposed or retired are removed from the accounts, and the gain or loss on disposition is recognized in the respective period.
LONG-LIVED ASSETS The Company reviews its fixed assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
GOODWILL AND INTANGIBLE ASSETS WITH INDEFINITE LIVES ASC No. 805, "Business Combinations", requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets that meet certain criteria. ASC No. 350, requires that an acquired intangible asset meeting certain criteria shall be initially recognized, and measured based on its fair value. The statement also provides that goodwill and other indefinite-lived assets should not be amortized, but shall be tested for impairment annually or more frequently, if circumstances indicate potential impairment, through a comparison of fair value to their carrying amount.
In accordance with ASC No. 350, "Intangible, Goodwill and Other", the goodwill impairment test has two steps. The first step of the impairment test identifies potential impairment by comparing the fair value with the carrying amount of the reporting unit, including goodwill. If the carrying amount of the reporting unit
exceeds its fair value, the second step of the impairment test shall be performed to measure the amount of the impairment loss, if any. Intangibles with indefinite useful lives are measured for impairment by the amount that the carrying value exceeds the estimated fair value of the intangible. The fair value is calculated using the income approach. Intangible assets with definite useful lives will continue to be amortized over their estimated useful lives. Any impairment is recorded at the date of determination.
ACCOUNTING FOR CONVERTIBLE DEBT Convertible debt is accounted for under the guidelines established by ASC No. 470 Topic 20, "Debt with Conversion and Other Options" and ASC No. 740, "Income Tax". The Company records a beneficial conversion feature ("BCF") related to the issuance of convertible debt that have conversion features at fixed or adjustable rates that are in-the-money when issued and records the fair value of warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to paid-in-capital. The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing employee options for purposes of ASC No. 718, "Compensation, Stock Compensation", except that the contractual life of the warrant is used. Under these guidelines, the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense.
DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments, as defined in ASC No. 815, "Derivatives and Hedging", consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial instruments including convertible debt that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC No. 815, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in the Company's consolidated financial statements.
The Company estimates the fair values of its derivative financial instrument using the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company's operating results reflect the volatility in these estimate and assumption changes in each reporting period.
INTELLECTUAL PROPERTY Intellectual property includes the exclusive licenses to the patented polymer application techniques and certain acquired intellectual property which are being amortized using the straight-line method over the respective estimated useful lives.
ADVERTISING The Company expenses advertising costs as incurred. Advertising expense was $309 and $5,874, for the year ended September 30, 2010 and 2009, respectively.
REVENUE RECOGNITION In accordance with ASC No. 605, "Revenue Recognition", revenue is recognized when products are shipped to a customer and the risks and rewards of ownership have passed based on the terms of the sale. Royalty revenues are recognized monthly based on customer usage as defined by individual agreements.
SHIPPING AND HANDLING COST Shipping and handling fees charged to customers are included in net sales in accordance with ASC No. 605, "Revenue Recognition". The shipping and handling costs incurred by the Company are included in cost of sales.
INCOME TAXES Deferred income taxes are determined using the liability method in accordance with ASC No. 740, Income Taxes. The Company records a valuation allowance to reduce its deferred tax assets to the amount it expects is more likely than not to be realized. While the Company has considered future taxable income and its ongoing tax planning strategies in assessing the need for the valuation allowance, if it were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period such determination was made.
Effective September 30, 2007, the Company adopted ASC No. 740 Topic 10, "Income Taxes", General ("ASC 740.10"). ASC 740.10 prescribes, among other things, a recognition threshold and measurement attributes for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company's income tax return. The Company utilizes a two-step approach for evaluating uncertain tax positions. Step one or recognition, requires a company to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two or measurement, is based on the largest amount of benefit, which is more likely than not to be realized on settlement with the taxing authority.
FAIR VALUE OF FINANCIAL INSTRUMENTS On October 1, 2009, the Company adopted ASC 820 ("ASC 820") Fair Value Measurements and Disclosures. The Company did not record an adjustment to retained earnings as a result of the adoption of the guidance for fair value measurements, and the adoption did not have a material effect on the Company's results of operations.
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1. Observable inputs such as quoted prices in active markets; Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
As of September 30, 2010, the Company had no level 1, 2, or 3 assets or liabilities.
RESEARCH AND DEVELOPMENT EXPENSES The Company expenses research and development costs as incurred.
CONCENTRATION OF CREDIT RISK Accounts receivable from individual customers representing 10% or more of the net accounts receivable balance consists of the following as of September 30:
2010 2009 ---- ---- Percent of accounts receivable 46% 64% Number of customers 1 4
Sales from individual customers representing 10% or more of sales consist of the following customers for the years ended September 30:
2010 2009 ---- ---- Percent of sales 67% 64% Number of customers 3 3
As a result of the Company's concentration of its customer base, the loss or cancellation of business from, or significant changes in scheduled deliveries of product sold to the above customers or a change in their financial position could materially and adversely affect the Company's consolidated financial position, results of operations and cash flows.
STOCK-BASED COMPENSATION The Company accounts for equity based compensation under the provisions of ASC No. 718, "Compensation, Stock Compensation" ("ASC 718"). ASC 718 requires the recognition of the fair value of equity-based compensation in net income. The fair value of the Company's stock option awards are estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award. In addition, the calculation of equity-based compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of equity-based awards is amortized over the vesting period of the award and the Company elected to use the straight-line method for awards granted after the adoption of ASC 718.
ACCOUNTING FOR STOCK OPTIONS ISSUED TO CONSULTANTS The Company measures compensation expense for its non-employee stock-based compensation under ASC No. 505 Topic 50, "Equity-Based Payments to Non-Employees". The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company's common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty's performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.
NET LOSS PER SHARE Basic loss per share is calculated by dividing net loss by the weighted average common shares outstanding during the period. Diluted net loss per share reflects the potential dilution to basic EPS that could occur upon conversion or exercise of securities, options or other such items to common shares using the treasury stock method, based upon the weighted average fair value of our common shares during the period. For each period presented, basic and diluted loss per share amounts are identical as the effect of potential common shares is antidilutive.
The following is a summary of outstanding securities which have been excluded from the calculation of diluted net loss per share because the effect would have been antidilutive for the following periods:
2010 2009 ---------- ---------- Convertible debt -- 3,125,000 Series A convertible preferred stock 2,763,699 2,763,699 ---------- ---------- 2,763,699 5,888,699 ========== ==========
LEGAL COSTS ASSOCIATED WITH LOSS CONTINGENCIES
The Company expenses legal costs in connection with loss contingencies as incurred and included in accounts payable.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB amended authoritative guidance for improving disclosures about fair-value measurements. The updated guidance requires new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The guidance also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. The guidance became effective for interim and annual reporting periods beginning on or after December 15, 2009, with an exception for the disclosures of purchases, sales, issuances and settlements on the roll-forward of activity in Level 3 fair-value measurements. Those disclosures will be effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not expect that the adoption of this guidance will have a material impact on the financial statements.
3. INVENTORIES
Inventories consist of the following at September 30:
2010 2009 -------- -------- Raw materials $ 9,167 $ 64,818 Finished goods 4,455 5,409 -------- -------- $ 13,622 $ 70,227 ======== ========
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at September 30:
Depreciation expense for the year ended September 30, 2010 and 2009 was $30,859 and $72,332, respectively.
Management assessed property and equipment for impairment due to the decreased revenue streams from operations and specifically the lack of revenues being generated from the Smart World subsidiary and Northern California business segment. The majority of property and equipment with remaining book value consists of machinery and equipment and furniture and fixtures. In determining if impairment was necessary, Management estimated the fair value of property and equipment by comparing other similar used assets being sold, less estimated costs to sell. Based on Management's assessment, impairment was necessary for property and equipment as the fair value, was less than the carrying value. Impairment of property and equipment for the year ended September 30, 2010 and 2009 was $32,951 and zero, respectively. Of the total impairment for the year ended September 30, 2010, $21,218 related to Smart World and $11,733 to the Northern California segment of American Soil.
5. INTANGIBLE ASSETS AND GOODWILL
The following table summarizes the components of intangible assets as of September 30:
As of September 30, 2009, Management evaluated the carrying value of its intangible assets and goodwill. Due to the lack of funding to execute certain business plans and the current state of the capital markets, management reduced its projected future sales and resulting cash flows resulted in an impairment charge of $849,384 related to intangible assets and $364,600 related to goodwill during the year ended September 30, 2009.
As of September 30, 2010, Management evaluated the value of the remaining intangible asset and determined that the associated expected cash flow of future revenues exceeded the carrying value of the asset. Accordingly, there was no impairment necessary in fiscal 2010.
The amortization expense was $49,891 and $346,131 for the year ended September 30, 2010 and 2009, respectively. Amortization is expected to be $49,891 for fiscal 2011, 2012, and 2013 and $12,474 for fiscal 2014.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable consisted of the following at September 30:
2010 2009 ---------- ---------- Accounts payable $ 653,519 $ 613,915 Accounts payable - related party 368,318 318,212 Accrued litigation 603,921 188,180 ---------- ---------- $1,625,758 $1,120,307 ========== ==========
Accrued expenses consisted of the following at September 30:
2010 2009 ---------- ----------
Interest $ 325,434 $ 282,349 Interest to related parties 150,675 101,427 Compensation and related 1,150,543 696,255 ---------- ---------- $1,626,652 $1,080,031 ========== ==========
7. NOTES PAYABLE
Notes payable consists of the following at September 30:
With the exception of the note payable to Diana Visco, all other notes are in default and are no longer convertible. Subsequent to year end, Ms. Visco's note also went into default.
CONVERTIBLE NOTES PAYABLE On October 25, 2007, the Company and holders of an aggregate of $120,000 outstanding convertible notes agreed to extend the maturity of the outstanding principal balance one year for a reduction in conversion from $0.30 to $0.10 while the market price was $0.09 per share. The Company also granted to one holder, a warrant to purchase 100,000 shares of the Company's common stock. The warrants vested immediately had an exercise price of $0.10 per share and expire two years from the date of issuance. The fair value of the warrants was approximately $6,267 as determined by the Black-Scholes option pricing model.
Since the notes had matured, the Company determined the extensions represent the issuance of new notes. No modification or extinguishment accounting was required. The proceeds were allocated between the convertible notes and the warrant based on their relative fair values and resulted in $24,816 being allocated to the convertible notes payable and $5,184 to the warrants. The resulting discount related to the warrants was amortized over the life of the convertible notes.
On September 2, 2009, the Company entered into a convertible note payable Agreement with a third party investor for $125,000. The note was unsecured and due on March 2, 2010, bearing interest at 8% per annum. The note was convertible in to common stock at the option of the holder at any time at a conversion price of $0.04 per share. The note was converted into 3,125,000 shares of common stock on October 8, 2009. The conversion price being equal to the stock price on the date of issuance.
8% CONVERTIBLE DEBENTURE On December 20, 2006, the Company purchased exclusive soil additive formulas, proprietary software, trademarks and patents. The Company funded the acquisition through the issuance of $1,500,000 of 8% Convertible Debenture ("Convertible Note") to Raymond Nielsen ("Holder"). The Debenture was convertible into common stock at the option of the Holder any time prior to the maturity date. The conversion price was equal to the closing price of the Company's common stock for the day immediately preceding the date of the conversion.
The Convertible Note contained an embedded conversion feature ("ECF") as prescribed in ASC No. 815. As a result of the ECF not being convertible into a fixed number of shares, the ECF was classified as derivative financial instruments under ASC No. 815. The accounting treatment required the Company to record the ECF as a derivative liability on the balance sheet at its fair values
as of each reporting date based on the Black-Scholes option pricing model. Any change in the Company's stock price results in a change in the fair value of the derivative liability and is recorded as non-operating, non-cash income or expense at each reporting date in the accompanying consolidated statement of operations.
The conversion feature ceased during the 2009 fiscal year and accordingly, the derivative liability was eliminated as of September 30, 2009 with the remaining decrease in fair value being shown in the statement of operations.
8. INCOME TAXES
The provision for income taxes is comprised of the following for the years ended September 30:
2010 2009 ------ ------ Federal $ -- $ -- State (800) (800) ------ ------ Provision for income taxes $ (800) $ (800) ====== ======
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The differences between the federal statutory tax rate of 34% and the effective tax rates are primarily due to state income tax provisions, net operating loss ("NOL") carry forwards, deferred tax valuation allowance and permanent differences as follows for the years ended September 30:
2010 2009 ------- -------
Statutory rate (34.0)% (34.0)% Increase (decrease) in taxes resulting from the following: State income taxes, net of federal benefit 5.64% 2.6% Amortization of debt discount 0.0% 0.0% Derivative liability (0.0)% (0.14)% Change in valuation allowance 28.36% 31.54% ------- ------- --% --% ======= =======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities consist of the following at September 30:
2010 2009 ----------- ----------- Deferred tax assets (liabilities): Current: Reserves and accruals $ 912,509 $ 513,023 Non-current: Intangible assets 597,000 597,000 Net operating losses 7,325,707 7,306,182 Other 86,960 56,032 Valuation allowance (8,922,176) (8,472,237) ----------- ----------- $ -- $ -- =========== ===========
At September 30, 2010 and 2009, the valuation allowance was increased by a total of $449,939 and $2,086,542 respectively. At September 30, 2010, the Company had federal net operating loss carryforwards of approximately $24,363,665 that expire from 2010 through 2030 and state net operating carryforwards of $9,290,652 expiring from 2010 through 2015. These net operating losses may be suspended or limited due to changes in State and Federal legislation, as well as a possible change in ownership as defined under Section 382 of the IRC.
The Company has not filed its state and federal income tax returns for the fiscal year ended September 30, 2009; management intends to comply with the requirements to file the tax returns upon raising capital. Failure to file the tax returns could result in penalties assessed against the Company.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES During the year ended September 30, 2010, the Company leased real property located in Pacoima, California from an entity owned by Ms. Visco. The Company currently occupied this facility on a month-to-month basis. Rent expense under this lease for the year ended September 30, 2010 and 2009 was $7,061 and $7,061, respectively. Subsequent to year end, the Company moved its corporate offices, see Note 14.
In connection with the acquisition Smart World, the Company assumed leases for a warehouse and office space which expired on April 30, 2008 and November 30, 2007, respectively. The Company is currently renting this facility on a month-to-month basis for $2,914 per month.
On November 3, 2006, the Company entered into an agreement to lease approximately 100 acres of land in San Mateo, CA. for the purpose of obtaining water rights to be used in operations. This lease was subsequently terminated after management determined that the water rights were not as represented to them. Per the terms of the agreement, lease payments were $100,000 per year for a total of seven years or $700,000. The Company paid the first year's rent in advance of $100,000 and a security deposit of $100,000. Management made a demand for return of the amounts paid, without success. Due to the lack of capital to pursue the matter, management determined that it is unlikely the Company will be able to recover such amounts, and accordingly, they recorded a provision for loss on the security deposit in the amount of $100,000 during the year ended September 30, 2009. There is no additional contingent liability related to this transaction.
CAPITAL LEASES The Company leases certain equipment under capital leases. Minimum annual required lease payments under the lease agreements are as follows as of September 30:
2011 $ 3,600 -------- Total minimum lease payments 3,600 Less amount representing interest (73) -------- Present value of future minimum lease payments $ 3,527 ========
Equipment under capital leases included in machinery and equipment at September 30, 2010 are as follows:
Machinery and equipment $ 75,000 Less - accumulated depreciation (71,250) -------- $ 3,750 ========
PENDING PROPERTY ACQUISITION On November 27, 2007, the Company entered into a Purchase and Sale Agreement and Joint Escrow Instructions to acquire real property in Pescadero, California for a purchase price of $5,400,000. The property has been improved with approximately 700,000 square feet of greenhouses and the Company plans to continue to operate the property as a nursery. In connection with the agreement, the Company deposited $50,000 with the escrow agent of which a $10,000 non-refundable deposit was released to the sellers. In December 2007, per the terms of the agreement, the Company was to have deposited an additional $100,000 into the escrow account on or before December 14, 2007 if the Company's due diligence had been completed. Said due diligence has not been completed, therefore the deposit has not been made. The remaining $5,350,000 was due by December 28, 2007, the original closing date, and then extended to May 27, 2008 for additional consideration of $50,000. In fiscal 2009, the company determined that it was unlikely the advanced funds would be able to be recovered, and recorded a provision for loss on the deposit in the amount of $50,000.
LITIGATION
On or about September 21, 2007, Stockhausen, Inc. ("Stockhausen") filed a Complaint in the United States District Court, for the Middle District of North Carolina, against us seeking damages. The parties entered into a settlement agreement on June 2, 2010. Under the settlement agreement, we agreed to pay Stockhausen $250,000 on or before June 23, 2010 as a compromise to Stockhausen's claims that currently total $603,921. We further agreed that we would consent to the entry of a Judgment against us in favor of Stockhausen in the amount of $603,921 if we failed to make complete and timely payment as agreed. The Company was unable to make the agreed upon payment and on July 8, 2010 Stockhausen entered a judgment for the above stated amount against the company. The Company has accrued $603,921 and $188,180 related to the litigation as of September 30, 2010 and 2009, respectively, which is included in accounts payable in the accompanying balance sheets.
On or about October 4, 2007, Raymond J. Nielsen and Cheryl K. Nielsen (collectively, "Plaintiffs"), filed a Complaint in the Circuit Court in the Sixth Judicial District of Pasco County, Florida, against us and Smart World (collectively "Defendants") seeking damages, declaratory, and injunctive relief. Plaintiffs allege that Defendants failed to pay interest when due on the Convertible Debenture from Defendants to Plaintiffs and, thus, the entire amount of the Convertible Debenture is accelerated and Plaintiffs are seeking a judgment in the amount of $1,500,000 plus interest. We allege that jurisdiction of this matter belongs in the California court system per the terms of the documents. We have filed a Motion to Dismiss the lawsuit which has been denied. We have filed an answer and affirmative defenses. It is our position that the intellectual property we purchased from the Plaintiffs is not what it was represented to be.
11. PREFERRED STOCK
The Company has 10,000,000 preferred stock authorized of which 2,763,699 shares of $0.50 stated value Series A convertible preferred stock ("Series A Preferred") are issued and outstanding as of September 30, 2010 and 2009. The Series A Preferred have the following characteristics:
DIVIDENDS Each holder is entitled to receive preferential quarterly dividends equal to the prime interest rate as quoted in the Wall Street Journal when and if declared by the Board of Directors, out of any assets that are legally available. If the Board of Directors declares that such dividends may only be payable in shares of common stock for any quarter, holders of Series A preferred stock have the option of accepting the dividend paid in shares of common stock of the Company, or letting the dividend accrue for a cash payment. No dividends have been declared, accrued or paid.
CONVERSION Each holder has the option to convert each share of Series A Preferred into common stock at a rate of one share of common stock for each share of preferred stock tendered.
VOTING The holders have no voting rights.
LIQUIDATION PREFERENCE Each holder is entitled to be paid the stated value of their holdings out of the assets of the Company, prior and in preference to any payment or distribution out of the assets of the Company to the holders common stock or any other class or series of capital stock.
12. COMMON STOCK
On October 8, 2009, the Board of Directors granted 1,000,000 shares of common stock to each of its Directors Carl Ranno, Neil Kitchen, Scott Baker and to Diana Visco. The grant was made because of each respective recipient's contribution to the Company. The stock was valued at $0.032 per share based on the closing stock price on the day of grant, resulting in stock compensation expense of $128,000.
STOCK OPTIONS In November 2002, the Company enacted a stock option plan (the "2002 Plan") to provide additional incentives to selected employees, directors and consultants. Two million shares were authorized for grant. The purchase price of the common stock subject to each Incentive Stock Option shall not be less than the fair market value or in the case of a grant of an incentive stock option to a principal shareholder, not less than 110% of the fair market value of such common stock at the time each option is granted. The 2002 Plan terminates in
November 2012. The options are fully-vested when granted and are exercisable for a period of ten years from the date of grant and are subject to cancellation upon termination of employment. The Company has granted options to purchase 1,010,000 shares and 300,000 shares with exercise prices of $0.50 and $0.25, respectively. The market price at the date of grant was $0.12. At September 30, 2010 and 2009, 450,000 and 690,000 stock options are available for grant, respectively.
On January 6, 2005, the Company enacted the 2005 Stock Option/Stock Issuance Plan (the "2005 Plan"). The 2005 Plan provides for the issuance of up to 10,000,000 shares of common stock to our directors, officers, employees and consultants in the form of stock options and shares of common stock. The 2005 Plan has two separate components: the option grant program and the stock issuance program.
Grants under the option grant program may be structured as installment options which become exercisable for vested shares over the optionee's period of service or as immediately exercisable options for unvested shares which will be subject to repurchase by the Company, at the option exercise price paid per share, upon the optionee's termination of service prior to vesting in those shares. All option grants must have an exercise price not less than 100% of the fair market value of the option shares on the grant date.
The stock issuance program allows eligible persons to purchase shares of common stock at fair market value or at a discount of up to 15% of fair market value. The shares may be fully vested when issued or may vest over time as the recipient provides services or as specified performance objectives are attained. In addition, shares of common stock may be issued as bonus awards in recognition of services rendered, without any cash outlay required of the recipient.
Upon stock option exercise, the Company issues new shares of common stock.
The following table summarizes stock option activity under the above stock option plans:
The fair value of stock options awarded were estimated at the date of grant using the Black-Scholes option-pricing model. The expected option term was estimated based upon the contractual term of the underlying stock option. The expected volatility of the Company's stock price was based upon the historical daily changes in the price of the Company's common stock. The risk-free interest rate was based upon the current yield on U.S. Treasury securities having a term similar to the expected option term. Dividend yield is estimated at zero because the Company does not anticipate paying dividends in the foreseeable future. There were no options issued during the years ended September 30, 2010 and 2009 that required valuation.
At September 30, 2010, total unrecognized estimated compensation expense of $35,500 related to 381,500 non-vested stock options is expected to be recognized over a weighted-average period of 1.0 year. The intrinsic value of options is zero as all options had an exercise price above the closing price of the stock at September 30, 2010.
Stock based compensation expense was $163,744 and $40,834 for the years ended September 30, 2010 and 2009 respectively.
WARRANTS TO PURCHASE COMMON STOCK The following tables summarize the issuances of warrants to purchase shares of the Company's common stock:
Number of Shares ------- Outstanding at September 30, 2008 884,000 Granted -- Exercised -- Cancelled (100,00) ------- Outstanding at September 30, 2009 784,000 Granted -- Exercised -- Cancelled (784,000) ------- Outstanding at September 30, 2010 -- =======
13. RELATED PARTY TRANSACTIONS
During the year ended September 30, 2009, Ms. Visco loaned the Company an additional $91,450. This note was consolidated with a note issued in August 2008 to Ms. Visco for $600,000, and accordingly the previous note was superseded. The new note was for a total of $691,450. The principal was due on September 30, 2010. Interest was payable monthly based upon the prime rate.
During the year ended September 30, 2010, Ms. Visco loaned the Company an additional $98,392. The Company entered into a new note for $789,842 with Ms. Visco which superseded all previous notes. The principal was due on January 12, 2011. Interest is payable monthly based on Prime rate.
Rent expense incurred in connection with an entity partially controlled by Ms. Visco was $7,061 for each of the years ended September 30, 2010 and 2009.
Interest expense incurred in connection with outstanding loans and notes payable to Ms. Visco or entities partially controlled was $24,781 and $25,145 for the year ended September 30, 2010 and 2009, respectively.
14. SUBSEQUENT EVENTS
Subsequent to year end, the Company moved its corporate offices to Canoga Park, CA. The Company shares office space with an entity owned by a related party and does not pay rent.