ITEM 1. DESCRIPTION OF BUSINESS.
Overview
We are a provider of green technology solutions, managing the equipment disposition needs of our government and commercial clients by buying, reselling, or recycling, in an environmentally and regulatory compliant manner, computers and other technology hardware. By delivering cost effective asset management solutions and capitalizing on our knowledge and relationships in the industry, we believe that we are able to maximize the technology dollars of our clients.
Our focus is on executing and managing secure, compliant end-of-life information technology (“IT”) asset management and disposition services. As part of our services, we provide a comprehensive asset management system or integrate with our clients existing asset management systems with the goal of providing clear audit trail of the asset and enabling our clients the ability to assess shipping or disposal status, take inventory and generate settlement reports for every returned asset. Additionally, we are focused on partnering with veterans. Either through providing employment opportunities directly or through our continuing support of Work Vessels For Veterans.
The company maintains its principal office in Fair Lawn, New Jersey and opened a second location in Tampa Florida in fiscal 2013.
Business Strategy
Our business strategy is based upon leveraging our experience and expanding our relationships and resources and includes:
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expanding our sources of public and private technology equipment;
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expanding our resources for environmentally compliant recycling and reuse of equipment,
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expanding our geographical footprint, and
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further penetrating the large global market for the resale of useful equipment.
We are giving special attention to federal, state and local government and public sector healthcare agencies as a source of legacy IT product. As a result of our GSA schedule award from the General Services Administration, we are approved to service all agencies of the government, including federal, state and local government, healthcare, education and Homeland Security. For the overall management of legacy IT equipment, we have a variety of programs including RecycleToday - immediate environmentally compliant downstream disposition - or RecycleTomorrow™ - advanced budgeting for the disposal of equipment in conjunction with new product purchases that will eventually become obsolete from one of our partners, either original equipment manufacturers (OEMs) or value-added resellers (VARs).
Growth and Acquisition Strategy
We expect that our ability to grow our company will be accelerated by expanding geographically, either organically or through acquisition. We believe we can grow through synergistic acquisitions of similar high service companies with positions in various geographic and product markets which we believe may be advantageous to us. Our internal research determined that our industry is primarily populated by small, regional companies, many with strong relationships and reputations but without the critical mass, resources or financial market expertise to maximize on their potential or create an exit strategy for their owners. It is our intent to seek to acquire one or more complementary companies in our space. We believe that there are several potential acquisition targets in the end-of-life IT asset management recycling business which would be synergistic and broaden our overall competiveness. However, as we do not have any agreements or understandings with any third parties regarding the terms and conditions of any future acquisitions or leases for additional warehouse space in other geographies, there are no assurances we will be successful in implementing this growth strategy. In addition, in all likelihood we will need to raise additional capital to fund this strategy, and as discussed elsewhere herein, our ability to access the capital markets is limited.
The Industry
We believe that the disposal of aging IT assets is becoming increasingly problematic. In 2010 the number of installed PCs worldwide had surpassed 1.4 billion units and was projected to eclipse 2.3 billion units in 2015, according to Gartner, Inc. Gartner, Inc. analysts estimate the worldwide installed base of personal computers (“PCs”) is growing just over 23% annually for mobile PCs in the home. According to Kleiner Perkins Caufield Byers the installed base of the PC is expected to remain static through 2015 while the growth in the installed base of tablets will increase from under 100 million in 2011 to over 700 million in 2015 and the installed base of smartphones will increase from over 600 million in 2011 to over 2.2 billion in 2015. Each PC, tablet, smartphone, server, storage system, printer or IT device retired can pose a data security risk and potential environmental hazard. If not processed properly for disposal, this increasing stream of electronic waste, or E-waste, can have a detrimental impact on the environment. E-waste has been identified by the U.S. Environmental Protection Agency (EPA) as the fastest-growing and potentially most hazardous waste stream in the world. Today, we believe that organizations are looking for solutions to divert this waste from the common waste stream and ensure that the hazardous materials that are resident in electronics do not end up in landfills.
In a recent IDC research report dated June 10, 2010 entitled “ITAD Trends and Outlook” analysts indicate that leading service providers in the area of information technology asset disposition, or ITAD, are focusing on data center consolidations. The report also states that globally there has been a 30% increase in European collection and processing of E-waste in 2009 based on the Waste Electrical and Electronic Equipment (WEEE) Directive. These analysts also believe the rise in volumes of legacy IT is made possible by:
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proliferation of collection points and expanding ITAD sector;
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growing consumer awareness of recycling issues; and
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expanding “best” practices into “common” practices made evident by the requirement by more enterprise organizations to perform data destruction services.
The report notes Fortune 1000 companies are increasingly searching for global solution and face very little offerings. Finally, the report noted that one of the biggest challenges that E-waste service providers face is in customer education more than even the competition against each other.
Products and Services
Our focus is on executing and managing secure, compliant end-of-life IT asset management and disposition services. As part of our services, our reporting systems provide a clear audit trail of the asset detailing disposal status, remarketing inventory and settlement reports for every remarketable asset.
We offer a full suite of ITAD services. Our products and services revolve around:
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government mandated IT redeployment Producer Takeback Trade-In and Asset Recovery and Remarketing Programs;
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regulatory compliant E-waste processing;
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global logistics management and secure disposal transportation; and
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secure data erasure and destruction.
We believe that our RecycleTomorrow™ is a cornerstone of our product offerings. The program was created as a means to facilitate the bundling of ITAD services on new devices. This is a stock-keeping unit, or SKU, based service that our clients can resell alongside any new equipment sales to their clients. For many organizations, we believe that this program addresses the various funding and budgetary hurdles of achieving regulatory compliance at a reduced recycling services cost. We believe that one inherent advantage of the RecycleTomorrow program is the capability of essentially capitalizing the expense of disposition requirements into the acquisition cost of the new IT asset.
We also provide a range of services that support our customer’s redeployment/remarketing programs, offering a second life to IT equipment that may otherwise be discarded. We believe that extending a product’s lifecycle not only promotes sustainability while reducing total cost of ownership, but contributes toward the basic tenets of waste reduction: reduce, re-use and recycle. As a means of reducing the total project cost and highest return on investment to our customers for their ITAD initiative, we can remarket these assets. We offer clients a number of remarketing options both domestically and internationally. Our services include conducting a detailed analysis of retired equipment, customized business intelligence-based reporting and recommending a course of action. Based upon our experience, we believe we have the unique ability to quickly remarket technology, utilizing our trading network to quickly access buyers and identify the best remarketing opportunities for equipment.
Logistics and transportation services are a significant part of the IT asset disposition process which we provide to our customers. Our customized solutions include:
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secure web-based E-waste pickup request tool;
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onsite packaging and removal;
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data erasure or destruction;
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onsite per system software “padlock” to ensure safe transport of customer data;
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IT asset serial number scanning;
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dedicated transport with optional global positioning satellite (GPS) tracking; and
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armored truck transport.
We offer data security services focused on proper data erasure and destruction techniques including:
● Data Erasure. Data erasure is done in accordance with U.S. Department of Defense 5220.22M standards at our certified facilities. We believe that data security is the most important aspect of IT asset disposition. To ensure that hard drives are properly sanitized and erased, we have assembled what we believe to be a technologically advanced data erasure system. Our hard drive erasure process is designed to ensure safety through 100% data eradication. We erase hard drives while they are either still in the system or out of the system, on our commercial erasure stations. Our capabilities range from single to bulk erasure schemes utilizing our multiport test systems. All hard drives are system audited by us for erasure, with random samples removed for stand-alone audits. Additionally, we conduct periodic random sampling to ensure proper hard drive erasure. Once we fully erase a hard drive and it passes our inspection, remarketing may be an option to regain residual value for the system, utilizing our global trading network to provide customers with the highest possible return of their assets. If remarketing is not an option, we will ensure that the drives are properly destroyed through our destruction process.
● Destruction. When erasure of hard drives and data devices is not secure enough or hard drive has an error making data erasure incomplete, we offer data protection by destroying and shredding disk drives in accordance with National Security Agency (NSA) standards. Hard drive shredding usually occurs when optimal data security is a necessity and a company maintains a zero tolerance for risk. Drives designated for destruction are shredded by us into small particles. The shredded material is then properly recycled in an environmentally friendly manner.
● On-Site Destruction. On-site media destruction is an option which we believe provides the ultimate data security. With our on-site media destruction services, a truck-mounted mobile shredder is dispatched directly to a facility so that data storage devices never leave a property, ensuring complete control and protection. We follow the same procedures used with off-site hard drive destruction, including shredding the devices into small particles meeting NSA standards and environmentally friendly recycling of the processed particles.
Our Customers
Our mission is to partner with our customers such that they are able to offer “green” initiatives to demonstrate a clear commitment to the community by addressing the environmental, data and even financial impact of the full technology lifecycle. Our customers include:
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the public sector including federal, state and local government agencies and healthcare providers;
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original equipment manufacturers (OEMs);
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value added resellers (VARs) and system integrators; and
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Commercial enterprises and end users.
In 2002, we were granted our initial General Services Administration (GSA) Schedule 70 which assists us in selling services to U.S. government agencies. GSA contracts provide government agencies, prime contractors, and state and local governments with an efficient and cost-effective means for buying commercial IT products and services. GSA purchasers may place unlimited orders for products under GSA contracts. In addition, GSA provides access to state and local government agencies to utilize GSA schedules. The terms of these schedules are five years, and our current schedule was renewed in 2012. We do not believe the changes at the GSA will have a negative impact on our Company. As a result of the services provided to date, since 2002 we have received U.S. Congressional Recommendations for IT asset management, forensic data scrub (Department of Defense 5220.22M certified), trade-in (Exchange/Sale), donation processing, and disposal services solutions. We sometimes act as a subcontractor for a prime contractor that sells new equipment to government agencies. We have also entered into task order contracts with Federal Government agencies. Task order contracts specify the period of performance, including the number of option periods, and specify the quantity and scope of products and services the Federal agency will acquire under the contract. After award of the master contract, the Federal agency will issue individual task orders, as needed, to address specific defined requirements. Task orders typically include a statement of work and/or a bill of materials that define the services or products the contractor will be obligated to deliver.
We offer our clients several types of contracts to meet their specific needs, including contracts which are for fixed fee-based services for management and recycling of legacy IT such as inventorying, data wiping, logistics, including removal and shipping from client, but do not guarantee a volume, or contracts that are specific to a particular type of product that will be decommissioned by our client over a period of time which anticipate a specified volume of legacy IT equipment, or a combination of these. Generally, the terms of these contracts are for one year with automatic renewals, but may be cancelled by either party upon notice.
During fiscal 2013 two customers represented approximately 22% of our net sales and in fiscal 2012, two customers represented approximately 34% of our net sales.
Regulation
Our operations are located in New Jersey. Companies that are strictly refurbishing electronics for resale or donation do not need an approval from the New Jersey Department of Environmental Protection to operate; however, if the company will be storing any unusable electronics, the company is regulated as a universal waste handler. We are subject to regulation by the State of New Jersey as a small quantity handler of consumer electronic waste, including batteries.
In June 2002, the New Jersey Department of Environmental Protection adopted an amendment to the Universal Waste Rule (UWR) including consumer electronics as a universal waste. Consumer electronics includes the components and sub-assemblies that collectively make up the electronic products and may, when individually broken down, include batteries, mercury switches, capacitors containing polychlorinated biphenyl, or PCBs, cadmium plated parts and lead or cadmium containing plastics. Under the UWR, a generator of consumer electronics is regulated as a small or large quantity handler. A small quantity handler of universal waste accumulates less than 5,000 kilograms (11,000 pounds) of universal waste at any given time. This includes all types of universal waste being generated at the site. A large quantity handler of universal waste accumulates greater than 5,000 kilograms of universal waste at any given time. Demanufacturers of consumer electronics are regulated in New Jersey as Class D recycling centers and are required to obtain a Class D Recycling Center Approval. Large quantity universal waste handlers may not demanufacture electronics and small quantity universal waste handlers are allowed to demanufacture electronics without obtaining a Class D Recycling Center Approval; however, processing or treating the components, for example by crushing or shredding, is prohibited. In July 2012 we filed for a Class D permit in New Jersey to enable us to expand our demanufacturing processes, which was approved in November 2012.
Although there is no standard regulation on the federal level, we have elected to voluntarily pursue the EPA sanctions Recycling Industry Operating Standard (RIOS) responsible recycling R2 practices as well as ISO 14001:2004 Environmental Management System certification for responsible electronics recyclers which are administered by the ISRI Services Corporation and the International Organization for Standardization (ISO), respectively. We have also completed our e-Stewards Certification from the Basel Action Network and ISO 9001 Quality Management Certification. These are defined as best practices for responsible electronics recycling and environmental management that incorporate EPA-supported requirements and the quality, environmental, and health and safety (QEH&S) management system standard for the recycling industry. In this vein, in October 2011 we were awarded certifications for RIOS responsible recycling R2 practices as well as ISO 14001:2004 and in June 2012 we were awarded the e-Stewards and ISO 9001 certifications. We believe these industry certifications will assist us in building awareness of the benefits of our services and differentiate us from many competitors in our industry.
Our Employees
As of September 10, 2013, we employed 37 full-time employees, one part time employee and approximately 13 contract personnel. We maintain a satisfactory working relationship with our employees.
In March 2011 we successfully concluded negotiations with the United Electrical, Radio and Machine Workers of America union on a collective bargaining agreement. The agreement does not apply to any of our employees. The agreement covers employees who were employed by us at the time of the initial union election, and the terms of the agreement do not apply to the balance of our current, or any of our future employees, in accordance with the terms negotiated.
Our History
Access Direct, Inc., our predecessor company, was formed in September 1992 under the laws of the State of New Jersey. We were formed in October 2000 under the laws of the State of Delaware for the purposes of redomiciling Access Direct to Delaware. In October 2000, we entered into a merger with Access Direct and its stockholders pursuant to which the two entities were merged with our company being the survivor.
ITEM 1.A RISK FACTORS.
Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected.
Risks Related to Our Business
OUR AUDITORS HAVE RAISED SUBSTANTIAL DOUBTS AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN.
For fiscal 2013 we reported a net loss of approximately $1,321,000 and net cash used in operating activities of approximately $725,000. At June 30, 2013 we had an accumulated deficit of approximately $8,874,000. The report of our independent registered public accounting firm on our financial statements for the year ended June 30, 2013 contains an explanatory paragraph regarding our ability to continue as a going concern based upon the loss for the current year, the accumulated deficit and the net cash used in operating activities. Our financial statements have been prepared assuming we will continue as a going concern. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We anticipate that we will continue to incur losses in future periods until we are successful in significantly increasing our sales. There are no assurances that we will be able to raise our sales to a level which supports profitable operations and provides sufficient funds to pay our obligations. If we are unable to meet those obligations, we could be forced to cease operations in which event investors would lose their entire investment in our company.
WE HAVE A HISTORY OF LOSSES, OUR NET SALES DECLINED IN FISCAL 2013 FROM FISCAL 2012, CASH FLOW HAS DRAMATICALLY DECREASED AND THERE ARE NO ASSURANCES WE WILL EVER REPORT PROFITABLE OPERATIONS.
Our net sales for fiscal 2013 declined approximately 30% from fiscal 2012, while our margins and operating expenses remained relatively constant. For fiscal years 2013 and 2012, we reported net losses of $1,321,411 and $509,847, respectively. At June 30, 2013, we had an accumulated deficit of approximately $8.9 million. Cash used in operations in fiscal 2013 was $725,000 as compared to $108,000 in fiscal 2012. We believe we have the staff, systems and infrastructure in place to scale the business but we need to grow sales to eliminate our losses. However, we operate in a very competitive environment and there are no assurances we will be able to increase our net sales in future periods. Until such time as we are able to increase our net sales to a level which supports our operating expenses, of which there are no assurances, we will continue to deplete our cash and report losses.
WE MAY NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON ACCEPTABLE TERMS. IF WE CANNOT RAISE ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY TO GROW OUR COMPANY AND SUSTAIN OUR BUSINESS COULD BE IN JEOPARDY.
At June 30, 2013 we had working capital of $10,271, a decline of 99% from June 30, 2012. In addition, our cash at June 30, 2013 declined 87% from June 30, 2012. The decline in our working capital is primarily related to the decline in our net sales in fiscal 2013. Capital is needed for the effective expansion of our business, as well as to provide sufficient working capital to sustain our current operations as we seek to increase our net sales. In addition, we have $500,000 principal amount 12% convertible promissory notes which are due in December 2014. Our future capital requirements, however, depend on a number of factors, including our ability to internally grow our sales, manage our business and control our expenses. In order to fully implement our growth strategy, we will need to raise additional capital. We do not have any firm commitments to provide any additional capital and we anticipate that we will have certain difficulties raising capital given the illiquid nature of an investment in our company, our recent decline in net sales and our history of losses. Accordingly, we cannot assure you that additional working capital will be available to us upon terms acceptable to us, if at all. We believe that we will need to raise capital to fund our existing operating expenses for the next 12 months, absent a significant increase in our net sales of which there are no assurances. If we are unable to obtain additional capital or increase sales, we will have to reduce our operating expenses that could impact our ability to successfully compete or execute on our strategy.
SUBSTANTIALLY ALL OF OUR INVENTORY IS ON CONSIGNMENT AND THERE ARE NO ASSURANCES IT WILL BE SOLD FOR THE CARRYING AMOUNT.
At June 30, 2013 we had $267,763 of inventory recorded as an asset on our audited balance sheet. Of this amount, approximately $236,000, or 88%, represents the carrying value of used equipment on consignment at a customer’s facility. We have already paid our vendor from whom we purchased this used equipment for approximately 70% the costs of the inventory, and we owe this vendor the remaining amount. While we retain title to this equipment and reasonably believe our customer will be able to resell the inventory for at least our carrying value, this used equipment has a limited resale market and we are unable to predict when, or at what price, this used equipment will ultimately be resold. Our ability to recoup our carrying costs of this inventory is dependent upon our customer paying us for this consigned inventory. If our customer is unable to resell all or substantially all of this consigned inventory, our ability to record a financial benefit from this transaction will be in jeopardy.
WE ARE SUBJECT TO RISKS THAT OUR INVENTORY MAY DECLINE IN VALUE BEFORE WE SELL IT OR THAT WE MAY NOT BE ABLE TO SELL THE INVENTORY AT THE PRICES WE ANTICIPATE.
We purchase and warehouse inventory, most of which is excess, used and off-lease, "as-is" and refurbished mainframes and associated peripherals, midrange computers and personal computer (PC) equipment and related IT products. As a result, we assume inventory risks and price erosion risks for these products. These risks are especially significant because computer equipment generally is characterized by rapid technological change and obsolescence. These changes affect the market for refurbished or excess inventory equipment. Generally, our inventory holding period ranged from 30 to 90 days during fiscal 2013 and fiscal 2012, except from December 2012 through March 2013 when it reached 150 days due to our management system implementation. Our success will depend on our ability to purchase inventory at attractive prices relative to its resale value and our ability to turn our inventory rapidly through sales. If we pay too much or hold inventory too long, we may be forced to sell our inventory at a discount or at a loss or write down its value, and our business could be materially adversely affected. In addition, fluctuations in the inventory holding periods and prices of the inventory impact our gross profit margins. Our gross profit margin in fiscals 2013 and 2012 were 46%. There may be fluctuations in our margins, which would impact our results of operations in future periods.
DECLINING PRICES FOR NEW COMPUTER EQUIPMENT COULD REDUCE DEMAND FOR OUR PRODUCTS.
The cost of new computer equipment, particularly personal computers, has declined dramatically in recent years. As the price of new computer products declines, consumers may be less likely to purchase “as-is” or refurbished computer equipment unless there is a substantial discount to the price of the new equipment. Accordingly, the price at which we sell "as-is" equipment to remarketers can decline. As prices of new products continue to decrease, our revenue, profit margins and earnings could be adversely affected. There can be no assurance that we will be able to maintain a sufficient pricing differential between new products and our "as-is" or refurbished products to avoid adversely affecting our revenues, profit margins and earnings.
THE INDUSTRY IN WHICH WE COMPETE IN IS HIGHLY COMPETITIVE.
We face intense competition in each area of our business, and many of our competitors have greater resources and a more established market position than we have. Our primary competitors include:
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privately and publicly owned businesses such as Redemtech, Intechra and Solectron that offer asset management and end-of-life product refurbishment and remarketing services; and
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major manufacturers of computer equipment such as, Dell Computer Corporation, Hewlett Packard and IBM, each of which offer "as-is", refurbished and new equipment through direct sales personnel, through their websites and direct e-mail broadcast campaigns.
Most of our competitors have larger customer or user bases, greater brand name recognition and significantly greater financial, marketing and other resources than we do. Many of these competitors already have an established brand name and can devote substantially more resources to increasing brand name recognition and product acquisition than we can. Our competitors may be able to secure products from sources of supply on more favorable terms, fulfill customer orders more efficiently or adopt more aggressive price or inventory availability policies than we can. We also anticipate that competition will intensify if prices for new computers continue to decrease. There are no assurances we will ever effectively compete in our industry.
IF WE ARE UNABLE TO ATTRACT AND RETAIN SUFFICIENT PERSONNEL, OUR ABILITY TO OPERATE AND GROW OUR COMPANY WILL BE IN JEOPARDY.
We believe that there is, and will continue to be, intense competition for qualified personnel in our industry, and there is no assurance that we will be able to attract or retain the personnel necessary for the management and development of our business. Turnover can also create distractions as we search for replacement personnel, which may result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with our business and operations. The inability to attract or retain employees currently or in the future may have a material adverse effect on our business, financial condition and results of operations.
ANY POTENTIAL FUTURE ACQUISITIONS MAY SUBJECT US TO SIGNIFICANT RISKS, ANY OF WHICH MAY HARM OUR BUSINESS.
Our long-term strategy includes identifying and acquiring companies in our industry with operations that complement ours. Acquisitions would involve a number of risks and present financial, managerial and operational challenges, including:
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diversion of management attention from running our existing business,
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increased expenses including legal, administrative and compensation expenses related to newly hired employees,
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increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with our own,
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potential exposure to material liabilities not discovered in the due diligence process,
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potential adverse effects on our reported operating results due to possible write-down of goodwill and other intangible assets associated with acquisitions, and
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acquisition financing may not be available on reasonable terms or at all.
Any acquired business, technology, service or product may significantly under-perform relative to our expectations, and we may not achieve the benefits we expect from our acquisitions. For all these reasons, our pursuit of an acquisition may cause our actual results to differ materially from those anticipated.
CERTAIN OF OUR OUTSTANDING WARRANTS CONTAIN CASHLESS EXERCISE PROVISIONS WHICH MEANS WE WILL NOT RECEIVE ANY CASH PROCEEDS UPON THEIR EXERCISE.
At June 30, 2013 we have common stock warrants outstanding to purchase an aggregate of 794,187 shares of our common stock with exercise prices of $0.45 and $0.75 per share which are exercisable on a cashless basis. This means that the holders, rather than paying the exercise price in cash, may surrender a number of warrants equal to the exercise price of the warrants being exercised. It is possible that the warrant holders will utilize the cashless exercise feature which will deprive us of additional capital which might otherwise be obtained if the warrants did not contain a cashless feature.
OUR COMMON STOCK IS CURRENTLY QUOTED ON THE OTC BULLETIN BOARD, BUT TRADING IN THE SECURITIES IS LIMITED.
Currently, our common stock is quoted on the OTC Bulletin Board. The market for our common stock is extremely limited and there are no assurances an active market for either security will ever develop.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.
Provisions of our certificate of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Delaware General Corporation Law also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation's disinterested stockholders.
Further, our certificate of incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our board of directors in their sole discretion. Our board of directors may, without stockholder approval, issue series of preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.
THE TRADABILITY OF OUR COMMON STOCK IS LIMITED UNDER THE PENNY STOCK REGULATIONS WHICH MAY CAUSE THE HOLDERS OF OUR COMMON STOCK DIFFICULTY SHOULD THEY WISH TO SELL THE SHARES.
Because the quoted price of our common stock is less than $5.00 per share and we do not meet certain other exemptions, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities and this limited liquidity will make it more difficult for an investor to sell his shares of our common stock in the secondary market should the investor wish to liquidate the investment. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
WE HAVE OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE NOTES TO PURCHASE APPROXIMATELY 34% OF OUR CURRENTLY OUTSTANDING COMMON STOCK.
At September 11, 2013 we had 36,670,238 shares of common stock outstanding together with outstanding options and warrants to purchase an aggregate of 10,635,881 shares of common stock at exercise prices of between $0.03 and $0.75 per share, as well as 12% convertible promissory notes which, including accrued interest, are presently convertible into an aggregate of 1,765,848 shares of our common stock. In the event of the exercise of the warrants and/or options, or the conversion of the notes, the number of our outstanding common stock will increase by up to approximately 34%, which will have a dilutive effect on our existing stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2. PROPERTIES.
Our principal executive offices are located in approximately 48,000 square feet of commercial and office space. We lease approximately 27,000 square feet of these facilities from an unrelated third party for approximately $192,000 per year base rent plus common area maintenance expenses, insurance and real estate taxes under an agreement expiring in March 2018. In May 2011 we leased an additional approximately 21,000 square feet in adjacent premises from the same unrelated third party for an additional approximately $115,000 per year base rent plus common area maintenance expenses, insurance and real estate taxes under a lease agreement expiring in October 2013. On November 15, 2011 we entered into the Fifth Amendment to Modified Net Lease Agreement with the unaffiliated third party from whom we lease our principal executive offices. Under the terms of this lease agreement, the rent for a portion of these facilities which comprises approximately 21,000 square feet was increased by $0.35 per square foot per month and the term for that portion of the facilities was extended from April 30, 2012 to October 31, 2012. On September 13, 2012 we entered into the Sixth Amendment to Modified Net Lease Agreement with the unaffiliated third party from whom we lease our principal executive offices. Under the terms of this lease agreement, the rent for a portion of these facilities which comprises approximately 21,000 square feet remained the same and the term for that portion of the facilities was extended from October 31, 2012 to April 30, 2013. On December 15, 2012 we entered into the Seventh Amendment to Modified Net Lease Agreement with the unaffiliated third party from whom we lease our principal executive offices. Under the terms of this lease agreement, the rent for a portion of these facilities which comprises approximately 21,000 square feet remained the same and the term for that portion of the facilities was extended from April 30, 2013 to October 31, 2013. We plan to consolidate the two New Jersey warehouses and not renew this lease.
We lease approximately 30,000 square feet of warehouse space in Tampa, Florida from an unrelated third party for approximately $101,000 per year base rent with annual 3% escalations plus sales tax, common area maintenance expenses, insurance and real estate taxes under an agreement expiring in March 2016.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending or threatened litigation.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our company.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock has been quoted on the OTC Bulletin Board under the symbol “ANYI” since December 2011. The reported high and low last sale prices for the common stock are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions. The historical share prices in this table have been adjusted to give effect to the reverse stock split of our common stock in June 2012.
The last sale price of our common stock as reported on the OTC Bulletin Board on September 10, 2013 was $0.045 per share. As of September 10, 2013, there were approximately 34 record owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock. Under Delaware law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits and dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.
Recent Sales of Unregistered Securities
On September l8,2013 our board of directors approved the issuance of an aggregate of 553,875 shares of our common stock valued at $22,155 to our three executive officers as payment of fiscal 2013 bonuses due each of them under the terms of their employment agreements. The shares, which were issued under our 2010 Equity Compensation Plan, were valued at fair market value and issued in lieu of a cash bonus. The recipients were accredited investors and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6.
SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations for fiscal 2013 and fiscal 2012 should be read in conjunction with the financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Item 1A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see our Financial Statements beginning on page of this annual report.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On October 23, 2012, we dismissed Sherb & Co., LLP as our independent registered public accounting firm and engaged D’Arelli Pruzansky, P.A. as our independent registered public accounting firm. Sherb & Co., LLP audited our financial statements for the periods ended June 30, 2012 and 2011. The dismissal of Sherb & Co., LLP was approved by our Board of Directors on October 22, 2012. Sherb & Co., LLP did not resign or decline to stand for re-election.
Neither the report of Sherb & Co., LLP dated August 16, 2012 on our balance sheets as of June 30, 2012 and 2011 and the related statements of operations, stockholders’ equity and cash flows for the years ended June 30, 2012 and 2011 nor the report of Sherb & Co., LLP dated September 27, 2011 on our balance sheets as of June 30, 2011 and 2010 and the related statements of operations, stockholders’ equity and cash flows for the years ended June 30, 2011 and 2010 contained an adverse opinion or a disclaimer of opinion, nor were either such report qualified or modified as to uncertainty, audit scope, or accounting principles.
During our two most recent fiscal years and the subsequent interim period preceding our decision to dismiss Sherb & Co., LLP we had no disagreements with the firm on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure which disagreement if not resolved to the satisfaction of Sherb & Co., LLP would have caused it to make reference to the subject matter of the disagreement in connection with its report.
During our two most recent fiscal years and the subsequent interim period prior to retaining D’Arelli Pruzansky, P.A. (1) neither we nor anyone on our behalf consulted D’Arelli Pruzansky, P.A. regarding (a) either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements or (b) any matter that was the subject of a disagreement or a reportable event as set forth in Item 304(a)(1)(iv) and (v), respectively, of Regulation S-K, and (2) D’Arelli Pruzansky, P.A. did not provide us with a written report or oral advice that they concluded was an important factor considered by us in reaching a decision as to accounting, auditing or financial reporting issue.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
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pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, our management has concluded that as of June 30, 2013, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive officers and directors
The following table provides information on our executive officers and directors:
David Bernstein. Mr. Bernstein has served as an executive officer and director of our company and our predecessor since co-founding Access Direct in 1992. Mr. Bernstein established the creation of customized information technology asset management programs for both government and private sector clients that facilitate the disposition/retirement services as a bundled integration solution allowing for complete-end-to-end technology lifecycle services practice. He has created an industry standard utilizing learned best practices in information technology asset management, disposition and disposal services to protect customer data security and environmental liability for both public and private sector marketplaces. Mr. Bernstein was awarded the first General Services Administration Schedule for IT Asset Management/Disposition Services under Schedule 70 - IT Professional Services and has personally received Congressional Recommendations for IT Asset Management, Forensic Data Scrub (Department of Defense 5220.22M certified), Trade-In (Exchange/Sale), Donation processing, and Disposal services solutions. From 2003 until 2006, Mr. Bernstein has served on the Board of Directors of The Computing Technology Industry Association (CompTIA) comprised of over 20,000 members from the information technology reseller and consulting community. He is a graduate of Rider University with a B.S. in Communications.
Vlad Stelmak. Mr. Stelmak has served as an executive officer and director of our company and our predecessor since co-founding Access Direct in 1992. Mr. Stelmak is responsible for the management of global remarketing of both Federal agency and Fortune 1000 IT assets. He instituted best practices in performing IT asset audits/inventory with necessary data capture to ensure highest return on resale value. He has experience in the oversight of all fair market valuations of IT assets and the development with ongoing support of our proprietary fair market valuation index. Mr. Stelmak is responsible for the day-to-day operations of the Global Remarketing sales staff. He supervises the ongoing development and negotiation of new channels of product remarketing/resale. He is also responsible for locating certified EPA/DEP Recycling partners, both domestic and international, and is in charge of oversight of partner and sub-contractor compliance with our standards as well as continued audits of partner practices. Mr. Stelmak is a graduate of New York University with a B.S. in Marketing and International Business.
Gail L. Babitt. Ms. Babitt has served as our Chief Financial Officer since January 2012 and a member of our Board of Directors since March 2012. Prior to joining our company, she was a Partner of Advisory Financial Group, an accounting and business consulting firm headquartered in South Florida, in 2011. From 2009 until 2010 she served as the Chief Financial Officer for Inuvo, Inc. (NYSE MKT: INUV), an internet advertising company that leverages data and analytics, where she provided financial and operational leadership to drive organizational change and recapitalize the company. From 2007 to 2008, Ms. Babitt served as Chief Financial Officer of WorldSage, Inc., a global consolidator of post-secondary education institutions. Previously, from 2006 to 2007 she served as Chief Financial Officer for Pamida Stores, a private equity owned national merchandiser operating over 200 stores in 16 states with annualized revenues in excess of $800 million. She was a Partner with Envision Management Group, Inc., a private consulting firm that provides financial consulting services to various industries (active from 2004 to 2006), Chief Financial Officer for Onstream Media Corporation, a NASDAQ-listed digital asset management and streaming media company (from 2000 to 2004), and served as VP of Finance and Corporate Controller for Telecomputing ASA, an Oslo Stock Exchange listed application service provider (from 1999 to 2000). Ms. Babitt began her career with Ernst & Young and Price Waterhouse in the assurance and advisory practice, providing audit services for clients in diversified industries, with most of her clients being publicly-traded companies. From there she became a Manager in the Transaction Services Group of PricewaterhouseCoopers, providing financial due diligence for mergers and acquisitions supporting financial and strategic buyers and sellers. Ms. Babitt received her Bachelor of Science degree in accounting from Nova Southeastern University and her MBA from Boston University. She is a Certified Public Accountant. She is currently on the Board of Directors for The First Tee of Tampa Bay and Medjo, Inc.
Richard Hausig. Mr. Hausig has been a member of our Board of Directors since August 2008 and was a co-founder of our company. Since January 2010 Mr. Hausig has been Chief Operating Officer of Paisa Services, a Columbian outsource services supplier. From May 2003 until August 2009, Mr. Hausig was Chief Operating Officer of MDM Worldwide Solutions, an EDGAR filing agent.
There are no family relationships between any of the executive officers and directors. Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified.
Director Qualification
Our Board of Directors is currently comprised of four individuals, three of whom are co-founders of our company. Each of Messrs. Bernstein and Stelmak, are co-founders and who are also our executive officers, have over 21 years of experience in management of legacy IT and ITAD services. Mr. Hausig, who is currently an independent director, was also a co-founder of our company and has significant institutional knowledge about our company and our industry. Ms. Babitt has significant experience as a chief financial officer of public companies as well as significant experience in with growing technology companies that require strategic and operational leadership. Our Board concluded that as a result of these directors individual experience, qualifications, attributes or skills that such person should be serving as a member of our Board of Directors as of the date of this report in light of our business and structure. In addition to their individual skills and backgrounds which are focused on our industry as well as financial and managerial experience, we believe that the collective skills and experience of our Board members are well suited to guide us as we continue to grow our company. We expect to expand our Board of Directors in the future to include additional independent directors. In adding additional members to our Board, we will consider each candidate’s independence, skills and expertise based on a variety of factors, including the person’s experience or background in management, finance, regulatory matters and corporate governance. Further, when identifying nominees to serve as director, we expect that our Board will seek to create a Board that is strong in its collective knowledge and has a diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business operations, business judgment, industry knowledge and corporate governance.
Director Compensation
We have not established standard compensation arrangements for our directors and the compensation payable to each individual for their service on our Board is determined from time to time by our Board of Directors based upon the amount of time expended by each of the directors on our behalf. Currently, executive officers of our company who are also members of the Board of Directors do not receive any compensation specifically for their services as directors. The following table provides information on compensation paid to our non-employee director during fiscal 2013 for his services as a director.
The amounts included in the “Option Awards” column represent the aggregate grant date fair value of the stock options granted to directors during fiscal 2013, computed in accordance with ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 11 of the Notes to our Financial Statements for the year ended June 30, 2013 appearing elsewhere herein.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our President and Chief Executive Officer, Chief Operating Officer, Chief Financial Officer or Controller and any other persons performing similar functions. This code provides written standards that we believe are reasonably designed to deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, and full, fair, accurate, timely and understandable disclosure in reports we file with the Securities Exchange Commission. A copy of the Code of Business Conduct and Ethics may be found on our website at www.anythingit.com. Copies of this Code are also available without charge upon written request to our Corporate Secretary.
Committees of our Board of Directors and the Role of our Board in Risk Oversight
Mr. Bernstein serves as both our Chief Executive Officer and as one of the four members of our Board of Directors. None of our directors has been designated as Chairman of the Board. Mr. Hausig is considered an independent director, but we do not have a “lead” independent director. The Board of Directors oversees our business affairs and monitors the performance of management. In accordance with our corporate governance principles, the Board of Directors does not involve itself in day-to-day operations. Our independent director keeps himself informed through discussions with our executive officers and by reading the reports and other materials that we send him and by participating in Board of Directors meetings. At the present stage of our company, our Board believes that in the context of risk oversight, with executive officers making up the majority of the Board, the Board gains valuable perspective that combines operational experience of a member of management with the oversight focus of a member of the Board.
We have not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, or any committee performing a similar function. The functions of those committees are being undertaken by the Board of Directors as a whole. Because we only have one independent director, we believe that the establishment of these committees would be more form than substance.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. Further, when identifying nominees to serve as director, while we do not have a policy regarding the consideration of diversity in selecting directors, at such time as we expand our Board, our Board will seek to create a Board of Directors that is strong in its collective knowledge and has a diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business operations, business judgment, industry knowledge and corporate governance. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given our relative size, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees. In considering a director nominee, it is likely that our Board will consider the professional and/or educational background of any nominee with a view towards how this person might bring a different viewpoint or experience to our Board.
Ms. Babitt is considered an “audit committee financial expert” within the meaning of Item 407(d) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who:
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understands generally accepted accounting principles and financial statements,
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is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
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has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,
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understands internal controls over financial reporting, and
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understands audit committee functions.
Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our 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 executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, and to the best of our knowledge, all executive officers, directors and persons holding greater than 10% of our issued and outstanding stock have filed the required reports in a timely manner during fiscal 2013 except Mr. Hausig who failed to timely file a Form 4 reporting one transaction of option grants. This delinquent report has subsequently been filed.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation recorded by us in fiscal 2013 and fiscal 2012 for our principal executive officer, each other executive officer serving as such whose annual compensation exceeded $100,000, and up to two additional individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer of our company at June 30, 2013. The value attributable to any option awards is computed in accordance with FASB ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 11 of the Notes to our Financial Statements appearing later in this report.
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(1) All other compensation in fiscal 2013 and fiscal 2012 represents the automobile allowance and health and dental insurance premiums paid for Mr. Bernstein, which he is entitled to under the terms of his employment agreement. Additionally, in fiscal 2013 it includes out of pocket health insurance cost reimbursed and the use of company tickets for personal use of $520. The $11,000 bonus for 2013 has not been paid and is expected to be paid in fiscal 2014 through the issuance of common stock of the Company.
(2) All other compensation in fiscal 2013 and fiscal 2012 represents the automobile allowance and health and dental insurance premiums paid for Mr. Stelmak, which he is entitled to under the terms of his employment agreement. The $11,000 bonus for 2013 has not been paid and is expected to be paid in fiscal 2014 through the issuance of common stock of the Company.
(3) Ms. Babitt joined the company in January 2012. All other compensation in fiscal 2013 and fiscal 2012 represents the automobile allowance and health and dental insurance premiums paid for Ms. Babitt, which she is entitled to under the terms of her employment agreement. Additionally, in fiscal 2013 it includes the use of company tickets for personal use of $130. The $11,000 bonus for 2013 has not been paid and is expected to be paid in fiscal 2014 through the issuance of common stock of the Company.
Employment Agreements with our Executive Officers
We are a party to an employment agreement with each of our executive officers. The terms and conditions of these agreements are as follows:
Effective July 1, 2010 we entered into three year employment agreements with each of Messrs. Bernstein and Stelmak which superseded their prior agreements. Under the terms of these agreements, we pay each of them an annual salary of $180,000, and they are entitled to an annual bonus of 1% of our revenues up to a maximum of $40,000. Each of these executive officers is also entitled to a $925 per month automobile allowance and participation in all benefit programs we offer our employees. The agreements, which contain an automatic yearly renewal provision, contain customary confidentially and non-compete provisions. Each employee's employment may be terminated upon his death or disability and with or without cause. In the event we should terminate his employment upon his death or disability, he is entitled to his base salary for a period of one year from the date of termination. In the event we should terminate the agreement for cause or if he should resign, he is entitled to payment of his base salary through the date of termination. At our option we may terminate his employment without cause, in which event he is entitled to payment of his base salary and bonus through the date of termination together with one years’ salary payable over six months from the date of termination.
On December 22, 2011 we entered into a letter agreement with Ms. Babitt at the time we engaged her to serve as our Chief Financial Officer. Under the terms of the letter agreement, we agreed to pay her a base salary of $2,500 per week together with an additional $100 per hour for all hours in excess of 25 per week. We also granted her 333,334 shares of our common stock, vesting in four tranches between December 2011 and October 2012, and incentive options to purchase an additional 550,000 shares of our common stock at an exercise price of $0.36 per share, vesting in one thirds between December 2011 and December 2013. Under the terms of our agreement with Ms. Babitt, she was also entitled to participate in all company benefits including health care, retirement and discretionary bonuses, and we agree to reimburse her for certain pre-approved out of pocket expenses.
Effective March 1, 2012 we entered into a three year executive employment agreement with Ms. Babitt which replaced this letter agreement. Under the terms of the executive employment agreement, we agreed to pay Ms. Babitt an annual salary of $180,000, and she is entitled to an annual bonus of 1% of our revenues, not to exceed $40,000. Ms. Babitt is also entitled to a $925 per month automobile allowance and participation in all benefit programs we offer our employees. As additional compensation under the new employment agreement, we granted Ms. Babitt options to purchase 666,667 shares of our common stock, at an exercise price of $0.15 per share, vesting in arrears annually over four years, which are exercisable at the fair market value of our common stock on the date of grant. The agreement, which contain an automatic yearly renewal provision, contain customary confidentially and non-compete provisions. Ms. Babitt’s employment may be terminated upon her death or disability and with or without cause. In the event we should terminate her employment upon her death or disability, she is entitled to her base salary for a period of one year from the date of termination. In the event we should terminate the agreement for cause or if she should resign, she is entitled to payment of her base salary through the date of termination. At our option we may terminate her employment without cause, in which event she is entitled to payment of her base salary and bonus through the date of termination together with one years’ salary payable over six months from the date of termination.
On July 24, 2012, we entered into amendments to the employment agreements with David Bernstein, Vlad Stelmak and Gail Babitt, our executive officers. The terms of the amendments are identical for each executive officer. Under the terms of these amendments the annual base salary of each executive officer will be $220,000 per year. The executive officers will also receive an annual bonus of 1% of net sales, for all net sales in excess of $4,000,000. Under the terms of the amendment the executive’s automobile allowance will be $1,235 per month. Additionally, we agreed to reimburse the executive up to the maximum out-of-pocket health care expenses, representing the annual deductible, or portion thereof, and co-pays, excluding doctor’s visits and prescriptions, paid by the executive under our new health care insurance plan.
In February 2013, due to cash constraints of the company, Ms. Babitt reduced her time commitment, scope of services and compensation from $4,230.77 to $3,000 per week, in addition to eliminating her automobile allowance. This adjustment was originally from February 11, 2013 to May 10, 2013. The adjustment was extended from May 11, 2013 to August 8, 2013 and from August 9, 2013 to November 10, 2013.
On June 12, 2013, the employment agreements of Messrs. Bernstein and Stelmak were amended to extend the term from July 1, 2013 to July 1, 2015, with all other terms of the agreements remaining unchanged. Additionally, each of Messrs. Bernstein and Stelmak were granted options to purchase 1,000,000 shares of our common stock at $0.033 per share.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of June 30, 2013:
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
At September 11, 2013, we had 36,670,238 shares of our common stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our common stock as of September 11, 2013 by:
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each person known by us to be the beneficial owner of more than 5% of our common stock;
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each of our directors;
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each of our named executive officers; and
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our named executive officers and directors as a group.
Unless otherwise indicated, the business address of each person listed is in care of 17-09 Zink Place, Unit 1, Fair Lawn, NJ 07410. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.
1 The number of shares beneficially owned by Mr. Bernstein includes options to purchase 650,001 shares of our common stock with an exercise price of $0.30 per share and 1,000,000 shares of our common stock with an exercise price of $0.033 per share, but excludes options to purchase 283,333 shares of our common stock with an exercise price of $0.30 per share which have not yet vested.
2 The number of shares beneficially owned by Mr. Stelmak includes options to purchase 650,001 shares of our common stock with an exercise price of $0.30 per share and 1,000,000 shares of our common stock with an exercise price of $0.033 per share, but excludes options to purchase 283,333 shares of our common stock with an exercise price of $0.30 per share which have not yet vested.
3 The number of shares beneficially owned by Ms. Babitt includes options to purchase 366,667 shares of our common stock with an exercise price of $0.36 per share and 166,667 shares of our common stock with an exercise price of $0.15 per share, but excludes options to purchase 183,333 shares of our common stock with an exercise price of $0.36 per share and options to purchase 500,000 shares of our common stock with an exercise price of $0.15 per share which have not yet vested.
4 The number of shares beneficially owned by Mr. Hausig includes options to purchase 5,556 shares of our common stock with an exercise price of $0.30 per share and 50,000 shares of our common stock with an exercise price of $0.03 per share but excludes options to purchase 2,778 shares of our common stock with an exercise price of $0.30 per share which have not yet vested.
Stockholder Agreement
Five of our stockholders, including stockholders who purchased shares from us in a private offering in 2001, are subject to the terms of a Stockholder Agreement pursuant to which we have a right of first refusal to purchase these shares should the stockholder wish to sell the securities. This right of first refusal automatically terminates at such time as we undertake an initial public offering resulting in gross proceeds to us of at least $10 million.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our stockholders as well as any equity compensation plans not approved by our stockholders as of June 30, 2013.
2010 Equity Compensation Plan
On June 28, 2010, our Board of Directors authorized our 2010 Equity Compensation Plan covering 12,000,000 shares of common stock. The plan was approved by our stockholders on June 28, 2010. The purpose of the plan is to enable us to offer to our employees, officers, directors and consultants, whose past, present and/or potential contributions to our company have been, are or will be important to our success, an opportunity to acquire a proprietary interest in our company. The 2010 Equity Compensation Plan is administered by our Board of Directors. Plan options may either be:
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incentive stock options (ISOs),
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non-qualified options (NSOs),
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awards of our common stock, or
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rights to make direct purchases of our common stock which may be subject to certain restrictions.
Any option granted under the 2010 Equity Compensation Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any ISO granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The plan further provides that with respect to ISOs the aggregate fair market value of the common stock underlying the options which are exercisable by any option holder during any calendar year cannot exceed $100,000. The term of each plan option and the manner in which it may be exercised is determined by the Board of Directors or the compensation committee, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant. In the event of any stock split of our outstanding common stock, the Board of Directors in its discretion may elect to maintain the stated amount of shares reserved under the plan without giving effect to such stock split. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
We are not a party to any related party transactions with our executive officers, directors or principal stockholders.
Director Independence
Mr. Hausig is considered “independent” within the meaning of Rule 5605 of the NASDAQ Marketplace Rules.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table shows the fees that were billed for the audit and other services provided by D’Arelli Pruzansky, P.A. for fiscal 2013 and Sherb & Co., LLP for fiscal 2012.
Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees - This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the Securities and Exchange Commission and other accounting consulting.
Tax Fees - This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees - This category consists of fees for other miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of the Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to fiscal 2013 were pre-approved by the entire Board of Directors.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial statements.
● Reports of Independent Registered Public Accounting Firms
● Balance sheets at June 30, 2013 and 2012
● Statements of operations for the years ended June 30, 2013 and 2012
● Statements of cash flows for the years ended June 30, 2013 and 2012
● Statement of changes in stockholders’ equity at June 30 2013
● Notes to financial statements
(b) Exhibits.
* filed herewith.
** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this report on Form 10-K shall be deemed “furnished” and not “filed”.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Name
Positions
Date
/s/ David Bernstein
David Bernstein
Chief Executive Officer, President, director, principal executive officer
September 23, 2013
/s/ Vlad Stelmak
Vlad Stelmak
Chief Operating Officer, Secretary, director
September 23, 2013
/s/ Gail L. Babitt
Gail L. Babitt
Chief Financial Officer, director, principal financial and accounting officer
September 23, 2013
/s/ Richard Hausig
Richard Hausig
Director
September 23, 2013
AnythingIT, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
AnythingIT, Inc.
We have audited the accompanying balance sheet of AnythingIT, Inc. as of June 30, 2013 and the related statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AnythingIT, Inc. as of June 30 2013 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 financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred losses of $1,321,411 for the year ended June 30, 2013, and the Company had an accumulated deficit of $8,874,174 at June 30, 2013 and net cash used in operating activities of $724,791 for the year ended June 30, 2013. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ D’Arelli Pruzansky, P.A.
Certified Public Accountants
Boca Raton, Florida
September 12, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
AnythingIT, Inc.
We have audited the accompanying balance sheet of AnythingIT, Inc. as of June 30, 2012 and the related statements of operations, changes in stockholders’ equity and cash flows for the year ended June 30, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our 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 purposes 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 statements referred to above present fairly, in all material respects, the financial position of AnythingIT, Inc. as of June 30, 2012, and the results of their operations and their cash flows for the year ended June 30, 2012 in conformity with accounting principles generally accepted in the United States of America.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
August 16, 2012
AnythingIT, Inc.
Balance Sheets
As of June 30, 2013 and 2012
See accompanying notes to financial statements.
ANYTHINGIT, INC.
Statements of Operations
For the Years Ended June 30, 2013 and 2012
See accompanying notes to financial statements.
ANYTHINGIT, INC.
Statements of Cash Flows
For the Years Ended June 30, 2013 and 2012
See accompanying notes to financial statements.
AnythingIT, Inc.
Statements of Changes in Stockholders' Equity/(Deficit) For the Years Ended June 30, 2013 and 2012
See accompanying notes to financial statements.
ANYTHINGIT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. - DESCRIPTION OF OUR BUSINESS.
AnythingIT, Inc. (the “Company”) is a provider of green technology solutions, managing the equipment disposition needs of our government and commercial clients by buying, reselling, or recycling, in an environmentally and regulatory compliant manner, computers and other technology hardware. By delivering cost effective asset management solutions and capitalizing on our knowledge and relationships in the industry, we believe that we are able to maximize the technology dollars of our clients.
Our focus is on executing and managing secure, compliant end-of-life information technology (“IT”) asset management and disposition services. As part of our services, we provide a comprehensive asset management system or integrate with our clients existing asset management systems with the goal of providing clear audit trail of the asset and enabling our clients the ability to assess shipping or disposal status, take inventory and generate settlement reports for every returned asset.
Additionally, we are focused on partnering with veterans either through providing employment opportunities directly or through our continuing support of Work Vessels For Veterans.
The Company maintains its principal office in Fair Lawn, New Jersey and opened a second location in Tampa Florida in Fiscal 2013.
NOTE 2. - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
All share and per share information contained in this report gives retroactive effect to a 1 for 3 (1:3) reverse stock split of our outstanding common stock effective June 12, 2012.
For fiscal 2013 the Company reported a net loss of approximately $1,321,000 and net cash used for operating activities of approximately $725,000. At June 30, 2013 the Company had an accumulated deficit of approximately $8,874,000. The report of the Company’s independent registered public accounting firm on our financial statements for the year ended June 30, 2013 contains an explanatory paragraph regarding the Company’s ability to continue as a going concern based upon the loss for the current year, the accumulated deficit and the net cash used in operating activities. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances the Company will be successful in its efforts to increase sales and report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in the Company.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses in the reporting period. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, inventory valuation, useful lives of property and equipment, deferred income tax asset valuation allowances, stock compensation, and valuation of stock options and warrants. We base our estimates and assumptions on current facts, historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The credit risk associated with cash equivalents is considered low due to the credit quality of the issuers of the financial instruments.
Restricted Cash
The Company maintains certain cash accounts that are restricted from general use. At June 30, 2013, the Company had a $60,000 certificate of deposit that collateralizes a letter of credit we have entered into for a new facility in Tampa, Florida. Additionally, in accordance with our R2 certification we need to have a separate account to ensure a proper winding down of any facility, should that ever be necessary. As of June 30, 2013 and June 30, 2012, the balance in that restricted account was $30,534 and $30,387, respectively.
Concentration of Credit Risk
The Company maintains cash in financial institutions insured by the Federal Deposit Insurance Corporation (“FDIC”), including non-interest bearing transaction account deposits protected in full by the Dodd-Frank Wall Street and Consumer Protection Act (the “Dodd-Frank Act”). As of June 30, 2013 and June 30, 2012, the Company had approximately $0 and $400,000 that exceeds the protected limits under FDIC and the Dodd-Frank Act. The Company had not experienced any losses in such accounts.
Significant Customers
During the year ended June 30, 2013 sales to two customers represented $1,050,637 (22%) of the Company’s net sales. During the year ended June 30, 2012 sales to two customers represented $2,209,931 (33%) of the Company’s net sales. As of June 30, 2013 and 2012, the Company had three customers representing approximately 54% of gross accounts receivable and two customers representing approximately 37% of gross accounts receivable, respectively.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on the expected collectability of its accounts receivable. The Company performs credit evaluations of significant customers and establishes an allowance for doubtful accounts based on the aging of receivables, payment performance factors, historical trends and other information. In general, the Company reserves 2% of the receivables outstanding 31 to 60 days, 5% of the receivables outstanding 61 to 90 days and 20% of the receivables outstanding more than 90 days. The Company evaluates and revises the reserve on a quarterly basis based on a review of specific accounts outstanding and our history of uncollectible accounts. As of June 30, 2013 and 2012, the Company recorded $47,449 and $64,065, respectively of allowance for doubtful accounts.
Inventories
Inventories, consisting of used computer equipment, is stated at the lower of cost or market. Cost is determined by the amount the Company pays for each specific unit in inventory. The Company reviews inventory for excess or obsolete inventory and writes-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. No allowance is necessary at June 30, 2013 and 2012.
Unprocessed inventory is shipped to the Company’s facilities and is considered to be end-of-life. The Company does not place a valuation on unprocessed inventory until it is received into the processing queue whereby it is tested and inventoried. Only after this process occurs can the Company provide final valuation in the form of purchase orders for equipment acquisitions and issue a Certificate of Indemnification confirming transfer of ownership and liability. This process usually takes between 30 to 60 days from the time of receipt at the Company’s warehouse. Due to the implementation of a new fully automated management system, we experienced certain process slowdowns during the six months ended December 31, 2012 that caused a buildup of orders to be processed in our operation. We resolved our process challenges and have increased throughput to targeted levels. As a result, we currently have a little over 60 days of orders waiting to be processed at our main facility in New Jersey as of June 30, 2013 and are back to normal production levels.
Property and equipment
The Company records property, equipment and leasehold improvements at historical cost. Expenditures for maintenance and repairs are recorded to expense; additions and improvements are capitalized. The Company generally provides for depreciation using the straight-line method at rates that approximate the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over remaining term of the lease of twelve years.
Depreciation for the years ended June 30, 2013 and 2012 was $76,202 and $56,934, respectively.
Revenue Recognition
The Company is an equipment recycler. The Company generates sales from services that are provided on recycled equipment or for the sale of used equipment. The customers who are providing the equipment are referred to as upstream customers. The Company charges services fees for data wiping, auditing, inventory management and logistics. If the equipment being provided by the upstream customer still has a value, the Company will credit the customer for the equipment purchased, which is an offset to the service fees. If the equipment is worth more than the service fees, the result is a credit memo that is booked to accounts receivable, with the net credit memos reclassified to customer deposits at each quarter end. The Company sells the equipment to a downstream customer, primarily a wholesaler. If the equipment is not valuable in its current form, the Company will sell the equipment either to a refurbisher or a demanufacturer, depending on where the Company can realize the greatest value for the equipment.
For product sales, the Company recognizes revenue at the time products are shipped and title is transferred, which is in accordance with the stated shipping terms. Revenue is recognized in accordance with these shipping terms so long as a purchase order, electronic, written or phone commitment has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. If uncertainties exist regarding customer acceptance or collectability, revenue is recognized when those uncertainties have been resolved. The Company provides a limited as-is warranty on some of its products. The Company analyzes its estimated warranty costs and provides an allowance as necessary, based on experience. At June 30, 2013 and June 30, 2012, a warranty reserve was not considered necessary.
The Company is party to brokered transactions whereby an upstream customer provides product to the Company if the parameters of the transactions can be satisfied. Based upon the upstream customer parameters and the nature of the risk and control of the transaction by the Company these sales may be recorded on a gross or net basis.
Service fees are recognized once the lot of equipment has been received, audited, inventoried, data wiped and the equipment has been valued and the results reported to the upstream customer. In those circumstances where the Company disposes of the upstream customer’s product, or purchases the product from the upstream customer for resale, revenue is recognized as a “product sale” described above.
Shipping and Handling Costs
Shipping costs paid to carriers for logistics that we arrange are included in cost of sales, whereas the corresponding amounts that we charge to customers for shipping that we arrange is included in net sales.
Cost of Sales
Cost of sales includes cost of equipment, testing, freight, warehouse salaries, and technicians.
Earnings Per Share
The Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 260, Earnings Per Share. Basic earnings (loss) per share is based on the weighted effect of all common shares issued and outstanding and is calculated by dividing net income (loss) available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares, if any, that would be issued assuming conversion of all potentially dilutive securities outstanding
Shares potentially issuable were as follows:
For the years ended June 30, 2013 and 2012 the Company had a net loss. The impact of additional shares would be anti-dilutive, and, as such, the basic and diluted shares are the same for those periods.
Income Taxes
Under the asset and liability method prescribed under ASC 740, Income Taxes, The Company uses the liability method of accounting for income taxes. The liability method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
The Company recognizes the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount recognized in the financial statements is the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. As of June 30, 2013 and 2012, the Company has had no uncertain tax positions. The Company recognizes interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. The Company currently has no federal or state tax examinations nor has it had any federal or state examinations since its inception. The Company's 2012, 2011 and 2010 tax years may still be subject to federal and state tax examination.
Share-Based Payments
The Company recognizes share-based compensation expense in connection with our share-based awards, net of an estimated forfeiture rate and therefore only recognizes compensation cost for those awards expected to vest over the service period of the award. The Company accounts for the grant of stock and option awards to employees in accordance with ASC Topic 718, Compensation - Stock Compensation. ASC 718 requires companies to recognize in the statement of operations the grant-date fair value of warrants and stock options and other equity based compensation. The Company utilizes a Black-Scholes option pricing model to estimate the fair value of our stock options. Calculating share-based compensation expense requires the input of highly subjective judgment and assumptions, including estimates of expected life of the award, stock price volatility, forfeiture rates and risk-free interest rates. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, our share-based compensation expense could be materially different in the future.
The Company accounts for non-employee share-based awards in accordance with ASC Topic505-50, Equity Based Payments to Non-Employees. The Company estimates the fair value of stock options by using the Black-Scholes option pricing model.
For the years ending June 30, 2013 and 2012, total stock-based compensation was $366,214 and $646,731, respectively. The Company granted 2,893,338 stock options and issued 333,334 restricted shares of common stock in December 2011. In March 2012, the Company granted 666,667 stock options and in January 2012, the Company granted 666,667 restricted shares of common stock. In November 2012, we granted 60,000 restricted shares of common stock, in February 2013, we granted 60,000 restricted shares of common stock, in April 2013, we granted 100,000 restricted shares of common stock, May 2013, we granted 60,000 restricted shares of common stock and in June 2013, we granted 2,050,000 stock options. Additionally, stock based compensation for the year ending June 30, 2013 includes $33,000 of accrued bonuses for executive officers expected to be paid in the form of stock in fiscal 2014.
Financial Instruments
The Company adopted FASB ASC 820, Fair Value Measurements and Disclosures, for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing US GAAP that require the use of fair value measurements which establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1:
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
Level 2:
Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3:
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
The carrying amounts reported in the balance sheet for accounts receivable, prepaid expenses and other current assets, accounts and notes payable, accrued interest and expenses, and customer deposits approximates fair market value based on the short-term maturity of these instruments.
In addition, FASB ASC 825-10-25 Fair Value Option was effective January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and -permits entities to choose to measure many financial instruments and certain other items at fair value.
Advertising
Advertising costs are charged to operations when incurred. During the years ended June 30, 2013 and 2012, the Company incurred $12,223 and $10,801, respectively in advertising expense.
Reclassifications
Certain prior period balances and amounts have been reclassified to conform to the current year’s presentation. While these reclassifications resulted in a change in our net sales for fiscal 2012, these reclassifications had no impact on previously reported results of operations or stockholders’ equity. In addition to standard balance sheet and income statement reclassifications, the Company had reclassifications to freight fees charged for logistics in net sales, which had previously been treated as a contra cost of sale item, consistently applied. The Company did not deem any of these reclassifications to be material.
New Accounting Standards
The Company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.
In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. This update amends ASC 350, Intangibles-Goodwill and Other to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Under that option, an entity no longer would be required to calculate the fair value of the intangible asset unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which will be fiscal 2014 for the Company. Early adoption is permitted. This update does not have a material impact on the Company’s financial statements.
In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This update amends ASC 210, “Balance Sheet,” specifically the disclosure requirements created by ASU 2011-11, Disclosures About Offsetting Assets and Liabilities, issued by the FASB in December 2011. This update clarifies the scope of these disclosure requirements to be applicable only to derivatives and securities borrowing and lending transactions that are offset in accordance with GAAP or are subject to an enforceable master netting arrangement or similar agreement. The disclosure requirements continue to be effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013, which will be fiscal 2014 for the Company. Based on the scope clarification of this update, the Company does not believe it has any financial instruments requiring these disclosures but will continue to evaluate this assessment.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update amends ASC 220, Comprehensive Income, to require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net earnings if the amount is being reclassified in its entirety to net earnings. For other amounts that are not being reclassified in their entirety to net earnings, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The amendments in this update are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012, which is fiscal 2014 for the Company. This update does not have a material impact on the Company’s financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This update amends ASC 740, Income Taxes, to require that in certain cases, an unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, which is fiscal 2015 for the Company. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, and retrospective application is permitted. The Company is currently evaluating the impact this update will have on its financial statements.
Other accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
NOTE 3. - ACCOUNTS RECEIVABLE.
Accounts receivable consisted of the following at June 30, 2013 and 2012:
NOTE 4. - INVENTORIES.
Inventories consisted of finished goods at June 30, 2013 and 2012. At June 30, 2013 and 2012, the balance is $267,763 and $141,087, respectively. From time to time we consign inventory to customers who refurbish and sell the used equipment. At June 30, 2013, we had approximately $236,000 of used equipment on consignment at a customers’ facility.
NOTE 5. - CAPITAL LEASE OBLIGATIONS.
The Company has entered into several capital lease obligations to purchase equipment for operations. The Company has the option to purchase the equipment at the end of the lease agreement for one dollar. The underlying assets and related depreciation were included in the appropriate property and equipment category and related depreciation account.
Property and equipment includes the following amounts for leases that have been capitalized as of June 30, 2013 and 2012:
Future minimum payments required under capital leases at June 30, 2013, are as follows:
NOTE 6. - RELATED PARTY TRANSACTIONS.
Amounts outstanding under a loan and credit line from a bank (Note 8) are personally guaranteed by officers of the Company.
NOTE 7. - ACCRUED EXPENSES.
Accrued expenses represent obligations that apply to the reported period and have not been billed by the provider or paid by the Company.
At June 30, 2013 and 2012, accrued expenses consisted of the following:
NOTE 8. - LONG TERM DEBT.
Loan Payable - TD Banknorth
On July 2, 2001 the Company entered into a loan agreement for the principal amount of $100,000, maturing in October 2028 payable with varying monthly installments including interest at approximately 5.25% per annum, secured by all assets of the Company. At June 30, 2013 and 2012, the balance is $30,297 and $33,498, respectively.
Line of Credit Payable - American Express
The Company obtained a Business Capital line from American Express in the amount of $63,200. The line is payable in varying monthly installments including interest at approximately 9.49% per annum. The line is secured by all assets of the Company. At June 30, 2013 and 2012, the balance is $31,981 and $35,177, respectively.
12% Convertible Promissory Notes
In January and February 2011 the Company issued and sold $550,000 principal amount 12% convertible promissory notes in a private offering resulting in net proceeds of $495,000. The notes are unsecured and pay interest at 12% per annum, in arrears, in shares of our common stock valued at $0.30 per share. The notes mature on December 31, 2013, provided, however, that in our sole option we may extend the maturity date until December 31, 2014 if the note is not converted by December 31, 2013. The notes are convertible at any time at the option of the holder into shares of our common stock at a conversion price of $0.30 per share. At any time that the closing price of our common stock on any exchange on which it might be listed or in the over the counter market equals or exceeds $0.60 per share for 20 consecutive trading days, we have the right to convert the notes into shares of our common stock at a conversion price of $0.30 per share. The conversion price of the note is subject to proportional adjustment in the event of stock splits, dividends, recapitalizations and similar corporate events. As such, the conversion prices reflect the adjustment for our 1 for 3 reverse stock split that was effective June 12, 2012. Presently, these notes are convertible into an aggregate of 1,666,668 shares of our common stock. At June 30, 2013 and 2012, the Company had $29,753 in accrued interest on the notes. On December 31, 2011 $60,937 of accrued interest was converted to 203,125 shares of common stock at $0.30. On January 17, 2012, one of the noteholders of the 12% convertible promissory notes converted $50,000 plus accrued interest of $263 into 167,544 shares of common stock. On December 31, 2012 $60,000 of accrued interest was converted to 200,000 shares of common stock at $0.30.
Debt Discount
In connection with the 12% convertible promissory notes offering, we issued the purchasers Series C Warrants to purchase an aggregate of 733,335 shares of our common stock at an exercise price of $0.45 per share. The exercise price of the Series C warrant is subject to adjustment in the event of stock splits, dividends, recapitalizations and similar corporate events.
In accordance with ASC 470, the Company has analyzed the beneficial nature of the conversion terms and determined that a beneficial conversion feature (BCF) existed as of February 10, 2011. The Company calculated the value of the BCF using the intrinsic method as stipulated in ASC 470. Based on the stock price on the day of commitment, the discount as agreed to in the note, and the number of convertible shares, and the value of the warrants included in the units, the BCF was valued at $165,579.
The Company used the Black-Scholes option pricing model to value the warrants included in the convertible units. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.85% (based on the US Treasury note yield), three year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock over two years from the commitment date), and a strike price of $0.45.
In accordance with ASC 470, the Company is amortizing the BCF and relative fair value of the warrants over the two year term of the note. The notes have a prepayment option for the Company, after January 1, 2013, with a 20 day notice to the holders. As such, we are amortizing the BCF over the two year period. For the years ended June 30, 2013 and 2012 the Company recognized $48,294 and $82,789, respectively of amortization expense. As of June 30, 2013 and 2012 the BCF had a carrying value of $0 and $48,294, respectively.
NOTE 9. - INCOME TAXES.
The Company’s income tax expense at June 30, 2013 and 2012 was $0 as follows:
Reconciliation of the Federal statutory income tax rate to the Company's effective tax rate is as follows:
The Company has increased its deferred tax asset and valuation allowance accounts by approximately $505,000 at June 30, 2013. This increase includes adjustments to prior year deferred tax assets and the valuation allowance of $210,000 relating to net operating loss carryforwards and ($124,000) relating to stock options not expected to reverse. The remaining $419,000 relates to current year items. This change has no effect on the Company’s net tax provision. The Company files its returns on a calendar basis, and as of December 31, 2012, the Company has an unused net operating loss carry forward of approximately $2,100,000 available to offset future taxable income through 2032. As of June 30, 2013, The Company’s net operating loss carryforward was $2,130,000. Management has determined that a full valuation allowance is appropriate since it is more “likely than not” that the deferred tax assets will be realized. Pursuant to IRS Section 382 the Company’s net operating losses may be limited in the event of certain changes in ownership.
The Company has recorded a valuation allowance that fully offsets deferred tax assets arising from net operating loss carryforwards because the likelihood of the realization of the benefit cannot be established.
NOTE 10. - STOCKHOLDERS’ EQUITY.
Our authorized capital stock consists of 200,000,000 shares of common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. As of June 30, 2013 and 2012, there are 36,670,238 and 36,190,238 shares of common stock issued and outstanding. There are no shares of preferred stock issued and outstanding.
Common stock
Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights. Holders of common stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up, subject to the preferences of any shares of our preferred stock which may then be outstanding, each outstanding share entitles its holder to participate in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions for the common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is authorized and issued. All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.
In October 2010, we closed the sale of 5,250,000 units of our securities to accredited investors in a private placement which resulted in gross proceeds to us of $525,000. The securities included 1,750,010 shares of our common stock and Series A Warrants and Series B Warrants. Forge Financial Group, Inc. (“Forge”), a broker-dealer and member of FINRA, acted as placement agent for us in this offering. As compensation for its services, we paid Forge a cash commission of $52,500 and issued its designees of Forge five-year warrants to purchase 175,003 shares of our common stock with an exercise price of $0.30 per share, which are exercisable on a cashless basis. We used the net proceeds for general working capital.
In January 2011 and February 2011 the Company sold $550,000 principal amount 12% convertible promissory notes to accredited investors in a private placement and issued those investors Series C Warrants. The12% convertible promissory notes can convert into shares of our common stock at $0.30 per share, resulting in a potential issuance of 1,833,335 shares of our common stock upon conversion of the entire principal. Forge acted as placement agent for us in this offering. As compensation for its services, we paid Forge a cash commission of $55,000 and issued its designees five-year warrants to purchase 183,336 shares of our common stock with an exercise price of $0.30 per share, which are exercisable on a cashless basis. We used the net proceeds for general working capital.
In March 2011 the Company sold 125,000 units of our securities to an accredited investor in a private placement which resulted in gross proceeds to us of $12,500. The securities included 41,667 shares of our common stock and Series D Warrants and Series E Warrants. Forge acted as placement agent for us in this offering. As compensation for its services, we paid Forge a cash commission of $1,250 and issued its designees five year warrants to purchase 4,169 shares of our common stock with an exercise price of $0.30 share, which are exercisable on a cashless basis. We used the net proceeds for general working capital.
On December 22, 2011, the Company entered into an employment agreement with its Chief Financial Officer. As part of the agreement the Company issued 333,334 shares of the Company’s restricted common stock (“Compensation Shares”), granted under the 2010 Equity Compensation Plan. The Compensation Shares were valued at $120,000, the fair market value at the date of grant for the Company’s common stock as reported on the OTC Bulletin Board. As of June 30, 2013 and June 30, 2012, 166,667 of the Compensation Shares vested and the Company recognized $60,000 in compensation expense related to these shares during each of the periods.
On December 31, 2011, the Company issued 203,125 shares of our common stock to satisfy accrued interest of $60,937 to the three noteholders of the 12% convertible promissory notes (Note 7).
On January 3, 2012 the Company entered into a consulting agreement with Wall Street Grand, LLC (“WSG”) to provide financial marketing consulting services for a period of three months starting January 15, 2012. The Company paid WSG $50,000 and issued 666,667 shares of our common stock valued at $260,000, the fair market value on the date of issuance.
On January 17, 2012, one of the noteholders of the 12% convertible promissory notes converted $50,000 plus accrued interest of $263 into 167,544 shares of common stock (Note 7).
On November 15, 2012 the Company entered into a consulting agreement with Investor Awareness, Inc. (“InvA”) to provide financial public relations services for a period of twelve months starting November 15, 2012. The compensation to InvA is $4,000 per month for the first three months and $5,000 per month thereafter plus 60,000 restricted shares of our common stock for each 3 month period, beginning November 15, 2012. We issued 60,000 shares of our common stock on November 15, 2012 valued at $2,400, issued 60,000 shares of our common stock on February 15, 2013 valued at $660 and issued 60,000 shares of our common stock on May 15, 2013 valued at $3,600, the fair market value, based on quoted trading price on the date of issuance and is being accounted for in accordance with ASC 505-50. This agreement can be terminated with a 30 day notice after six months.
On December 31, 2012, the Company issued 200,000 shares of our common stock to satisfy accrued interest of $60,000 to the three noteholders of the 12% convertible promissory notes (Note 7).
On April 24, 2013 the Company entered into a consulting agreement with First Market, LLC (“FirstM”) to provide strategic consulting services. The compensation to FirstM is $10,000 per month, with the first two months paid in advance. Additionally, the Company issued 100,000 restricted shares of our common stock immediately and an additional 25,000 restricted shares of our common stock per month for the next six months. We issued 100,000 shares of our common stock on April 24, 2013 valued at $3,000, the fair market value, based on quoted trading price on the date of issuance and is being accounted for in accordance with ASC 505-50. This agreement can be cancelled by either party with a fifteen day notice.
Preferred stock
Our Board of Directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. Our Board of Directors may authorize the issuance of preferred stock, which ranks senior to our common stock for the payment of dividends and the distribution of assets on liquidation. In addition, our Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on our common stock to be effective while any shares of preferred stock are outstanding. The rights granted to the holders of any series of preferred stock could adversely affect the voting power of the holders of common stock and issuance of preferred stock may delay, defer or prevent a change in our control.
Common Stock Purchase Warrants
Warrants Included in the 2010 Unit Offering
In October 2010, we closed the sale of 5,250,000 units of our securities which resulted in gross proceeds to us of $525,000. The securities issued in this 2010 unit offering included Series A Warrants to purchase 1,750,010 shares of our common stock and Series B Warrants to purchase 1,750,010 shares of our common stock. Each Series A Warrant is exercisable into one share of common stock for three years from issuance at an exercise price of $0.45 per share. Each Series B Warrant is exercisable into one share of common stock for three years from issuance at an exercise price of $0.75 per share. The Series B Warrant is not exercisable by the holder unless the Series A Warrant has previously been exercised. Upon 30 days’ notice, we have the right to call any series of warrants at $0.03 per warrant at any time that the average 20-day last sale price exceeds 200% of the respective warrant exercise price. Other than the exercise price and call provisions of each series of warrant, and the restriction on the exercisability of the Series B Warrant, all other terms and conditions of the warrants are the same. As partial compensation for the placement agent services in this offering, we issued to the designees of Forge 175,003 Series A Warrants and 175,003 Series B Warrants to purchase shares of our common stock at an exercise price of $0.45 and $0.75 per share, respectively, exercisable on a cashless basis. The exercise price of the warrants and the number of shares of our common stock issuable upon the exercise of the warrants, sold to investor or provided to designees of Forge, are subject to proportional adjustment for stock splits, dividends and similar corporate events.
Warrants Included in the 2011 Note Offering
In connection with the 12% convertible promissory notes offering, we issued the purchasers Series C Warrants to purchase an aggregate of 733,335 shares of our common stock at an exercise price of $0.45 per share for three years from the date of issuance. The exercise price of the Series C warrant is subject to adjustment in the event of stock splits, dividends, recapitalizations and similar corporate events. As partial compensation for the placement agent services, we issued its designees of Forge Series C warrants exercisable at $0.45 per share into 73,335 shares of our common stock, exercisable on a cashless basis. The exercise price of the warrants and the number of shares of our common stock issuable upon the exercise of the warrants, sold to investor or provided to designees of Forge, are subject to proportional adjustment for stock splits, dividends and similar corporate events.
The Company used the Black-Scholes option pricing model to value the warrants included in the note offering. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.85% (based on the US Treasury note yield), five year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock over two years from the commitment date), and a strike price of $0.30 and $0.45, respectively.
Warrants Included in 2011 Unit Offering
In March 2011, we closed the sale of 125,000 units of our securities which resulted in gross proceeds to us of $12,500. The securities issued in this 2011 unit offering included Series D Warrants to purchase 41,667 shares of our common stock and Series E Warrants to purchase 41,667 shares of our common stock. Each Series D Warrant is exercisable into one share of common stock for three years from issuance at an exercise price of $0.45 per share. Each Series E Warrant is exercisable into one share of common stock for three years from issuance at an exercise price of $0.75 per share. The Series E Warrant is not exercisable by the holder unless the Series D Warrant has previously been exercised. Upon 30 days’ notice, we have the right to call any series of warrants at $0.03 per warrant at any time that the average 20-day last sale price exceeds 200% of the respective warrant exercise price. Other than the exercise price and call provisions of each series of warrant, and the restriction on the exercisability of the Series E Warrant, all other terms and conditions of the warrants are the same. As partial compensation for the placement agent services in this offering, we issued to the designees of Forge 4,169 Series D Warrants with an exercise price of $0.45 per share and 4,169 Series E Warrants with an exercise price of $0.75 per share, which are exercisable on a cashless basis. The exercise price of the warrants and the number of shares of our common stock issuable upon the exercise of the warrants, sold to investor or provided to designees of Forge, are subject to proportional adjustment for stock splits, dividends and similar corporate events.
The Company currently has 5,110,876 warrants that can be exercised for shares of our common stock outstanding.
In accordance with ASC 470, the Company is amortizing the deferred financing costs associated with the above mentioned warrants over the two year term of the note. As of June 30, 2013 and 2012, the Company had recognized $27,986 and $52,112 of interest expense, respectively, resulting in a carrying value of $0 and $27,986 at June 30, 2013 and 2012, respectively.
NOTE 11. STOCK OPTIONS AND WARRANTS.
Stock Option Plans
2010 Equity Compensation Plan
On June 28, 2010, our Board of Directors authorized our 2010 Equity Compensation Plan covering 12,000,000 shares of common stock (the “Plan”). The Plan was approved by our stockholders on June 28, 2010. The purpose of the Plan is to enable us to offer to our employees, officers, directors and consultants whose past, present and/or potential contributions to our company have been or will be important to our success, an opportunity to acquire a proprietary interest in our company. The Plan is administered by our Board of Directors. Plan options may either be (i) incentive stock options (ISOs), (ii) non-qualified options (NSOs), (iii) awards of our common stock or (iv) rights to make direct purchases of our common stock which may be subject to certain restrictions. Any option granted under the Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any ISO granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The Plan further provides that with respect to ISOs the aggregate fair market value of the common stock underlying the options which are exercisable by any option holder during any calendar year cannot exceed $100,000. The term of each Plan option and the manner in which it may be exercised is determined by the Board of Directors or the compensation committee, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant. In the event of any stock split of our outstanding common stock, the Board of Directors in its discretion may elect to maintain the stated amount of shares reserved under the Plan without giving effect to such stock split. On June 12, 2012, the Company affected a 1 for 3 reverse stock split. The Board of Directors did not adjust the shares eligible under the Plan. Subject to the limitation on the aggregate number of shares issuable under the Plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted.
On December 20, 2011, the Company issued 1,941,670 non-qualified five year options, and 401,668 five year incentive stock options under the Plan. The options were issued at $0.30 the fair market value at the date of grant. The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.88% (based on the US Treasury note yield), five year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock), and a strike price of $0.30.
On December 22, 2011, the Company hired its Chief Financial Officer. As part of the agreement the Company granted to her under the Plan incentive stock options to purchase an aggregate of 550,000 shares of the Company’s common stock at an exercise price of $0.36 , vesting as follows: options to purchase 183,334 shares vested on December 22, 2011, options to purchase an additional 183,333 shares vest on December 22, 2012; and options to purchase the remaining 183,333 shares vest on December 22, 2013. The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.91%, (based on the US Treasury note yield), five year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock), and a strike price of $0.36.
On March 7, 2012, the Company entered into an employment agreement with its Chief Financial Officer. As part of the agreement the Company granted to her under the Plan incentive stock options to purchase an aggregate of 666,667 shares of the Company’s common stock at an exercise price of $0.15 , vesting as follows: options to purchase 166,667 shares vested on March 7, 2013, options to purchase an additional 166,667 shares vest on March 7, 2014; options to purchase an additional 166,667 shares vest on March 7, 2015; and options to purchase the remaining 166,666 shares vest on March 7, 2016.
On June 12, 2013, the Company issued 50,000 non-qualified five year options, and 2,000,000 five year incentive stock options under the Plan. The non-qualified options were issued at $0.03 the fair market value at the date of grant and the incentive stock options were issued at $0.033, which is 110% of the fair market value at the date of grant. The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation, the Company used a risk-free rate of 1.11% (based on the US Treasury note yield), five year maturity, volatility of 339.1%, and a strike price of $0.03 and $0.033, respectively.
The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation were the following:
The following information applies to options outstanding at June 30, 2013:
As of June 30, 2013, there were 12,000,000 shares of our common stock authorized to be issued under the Plan, of which 6,141,661 shares of our common stock remain available for future grants.
The total intrinsic value of stock options granted for the years ending June 30, 2013 and 2012 was $0. The total intrinsic value of stock options outstanding and exercisable as of June 30, 2013 and 2012 was $0. For the years ending June 30, 2013 and 2012, total stock-based compensation was $366,214 and $646,731, respectively, of which $263,554 and $326,731, respectively, represented the fair value of vested stock options. The value of stock based compensation expense not yet recognized pertaining to unvested options and stock grants was approximately $154,000 and $358,000 at June 30, 2013 and 2012, respectively, which will be recognized primarily over the next 0.5 and 1.5 years in the future, respectively. Additionally, stock based compensation for the year ending June 30, 2013 includes $33,000 of accrued bonuses for executive officers expected to be paid in the form of stock in fiscal 2014.
NOTE 12. - LEASE COMMITMENTS.
Lease
Our principal executive offices are located in approximately 48,000 square feet of commercial and office space. We lease approximately 27,000 square feet of these facilities from an unrelated third party for approximately $192,000 per year base rent plus common area maintenance expenses, insurance and real estate taxes, under an agreement expiring in March 2018. In May 2011 we leased an additional approximately 21,000 square feet in adjacent premises from the same unrelated third party for an additional approximately $115,000 per year base rent plus common area maintenance expenses, insurance and real estate taxes, under a lease agreement expiring in October 2013.
We lease approximately 30,000 square feet of warehouse space in Tampa, Florida from an unrelated third party for approximately $101,000 per year base rent with annual 3% escalations plus sales tax, common area maintenance expenses, insurance and real estate taxes under an agreement expiring in March 2016.
The Company has leases for racks, machinery and equipment utilized in its operations in Tampa. The Company entered into three leases in 2013. All three of these leases have a bargain purchase option of $1.00 at the end of the lease term, and, as such, are treated as capital leases. The leases are paid off in 2016 and 2017. The monthly lease payments range from approximately $290 to approximately $1,000. Additionally, in 2010, the Company entered into an operating lease for a copier with monthly lease payments of approximately $350. The copier is leased through July 2014.
In May, 2012, the Company entered into a car lease. The lease is a 36 month lease, with monthly payments of $180.
Rent expense for the years ended June 30, 2013 and 2012 were approximately $349,000 and $282,000, respectively.
NOTE 13. - DEFINED CONTRIBUTION 401 (k) PLAN.
The Company implemented a 401(k) plan in September, 2007. Eligible employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after one year of employment with the Company. The employee may become a participant of the 401(k) plan on the first day of the month following the completion of the eligibility requirements. Effective September, 2007, the Company implemented an elective contribution to the plan of 25% of the employee’s contribution up to 6% of the employee’s contribution (the “Contribution”). The Contributions are subject to a vesting schedule and become fully vested after one year of service, retirement, death or disability, whichever occurs first. The Company made contributions of approximately $15,000 and approximately $14,000 for the years ended June 30, 2013 and 2012.
NOTE 14. - SUBSEQUENT EVENTS.
On September 16, 2013 we notified the holders of our 12% convertible promissory notes that the Company was extending the maturity date of the notes from December 31, 2013 to December 31, 2014 pursuant to the terms of the notes
On August 23, 2013 we received an invoice of approximately $46,000 from our lessor in New Jersey for additional common area maintenance and tax charges relating to calendar years 2011 and 2012 with the predominant increase relating to real estate taxes. We are still reviewing the details and intend to dispute these charges from both the city of Fair Lawn and from the lessor. At this time the amount owed is neither probable nor estimable.
On September 18, 2013 our board of directors approved the issuance of an aggregate of 553,875 shares of our common stock valued at $22,155 to our three executive officers as payment of fiscal 2013 bonuses due each of them under the terms of their employment agreements. The shares, which were issued under our 2010 Equity Compensation Plan, were valued at fair market value and issued in lieu of a cash bonus. The recipients were accredited investors and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.