ITEM 1. Business
The following discussion of our Company Overview and Plan of Operation should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance. These risks and other factors include, among others, those listed under “Statement Regarding Forward-Looking Information.”
Company Overview
We are a development stage company focused on being a provider of: (i) cellulosic biomass derived from municipal solid waste, also known as MSW, as a feedstock for producing energy and other chemical products and (ii) recyclables (metals, plastics, glass) from the MSW. We are the exclusive licensee in the United States and Canada of patented technology, which we refer to as our Biomass Recovery Process that cleans and separates MSW and generates a clean, homogeneous biomass feedstock that we believe can be converted into various energy products. Our license permits us to use the biomass we derive from MSW to produce all energy products. In addition, we own the patent for a pressurized steam classification technology originally developed by the University of Alabama Huntsville that we refer to as our PSC technology. The PSC technology is the underlying technology upon which the Biomass Recovery Process is based. Prior to March 2011, we had licensed the PSC technology to Bio-Products International, Inc. (“Bio-Products”). However, pursuant to a settlement agreement with Bio-Products in March 2009, we had the right to use the Biomass Recovery Process technology worldwide, for any product that we desired and with no royalty due to Bio-Products. We terminated the license to Bio-Products in March 2011 as further described in the section entitled “Intellectual Property Terms.”
We are a Delaware corporation. We were originally incorporated in 1996 as Long Road Entertainment, Inc., and were formed to operate as a holding company for businesses in the theater, motion picture and entertainment industries. We ceased conducting that business in 2005 and were dormant until the fall of 2006, at which time our founder and then controlling stockholder decided to pursue the sale of the company. In anticipation of that sale, we changed our name to Alternative Ethanol Technologies, Inc.
On March 27, 2007, we entered into an Agreement and Plan of Merger and Reorganization in which we agreed to acquire SRS Energy, Inc., a Delaware corporation that at that time was seeking to commercialize various technologies for the processing of waste materials into usable products. We consummated the merger on May 31, 2007 resulting in SRS Energy becoming our wholly-owned subsidiary. Effective August 2, 2007, we changed our name to CleanTech Biofuels, Inc.
We have no operating history as a producer of biomass feedstocks or any energy products and have not constructed any operating plants to date. We have not earned any revenues to date and our current capital and other existing resources are not sufficient to fund the implementation of our business plan or our required working capital. We will require substantial additional capital to implement our business plan and we may be unable to immediately obtain the capital required to continue operating.
Plan of Operation
Our focus is to secure sufficient capital to fund our current working capital requirements and the construction of a commercial plant as described further in this section. We currently do not have sufficient capital to continue to fund our proposed operations, and are relying on the minimal assets on hand to fund our limited operations and corporate existence. All of our on-going and proposed developments/projects require a significant amount of capital that we currently do not have. While we continue to aggressively pursue outside sources of funding, we have not had recent success securing meaningful amounts of financing. As a result, we can provide no assurance that we will secure any source of funding in the immediate time frame required and the failure to do so will likely result in an inability to continue operations.
Our company was initially conceived as a fully-integrated producer of cellulosic ethanol from MSW. Based on our investigation and acquisition of new technologies and research and development of our existing technologies in 2008, we re-focused our business to the commercialization of our Biomass Recovery Process technology for cleaning and separating MSW into its component parts and initiated a plan to consolidate the ownership and/or rights to use intellectual property around this technology. The technology is currently in commercial use in Coffs Harbor, Australia by an operator not affiliated with the Company (the “Third-Party Operator”). As a result, we believe this technology is ready for commercial implementation in the United States and elsewhere. In furtherance of our new focus, we are currently seeking an outside source of financing to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output is expected to be sold or provided to electric utilities, power and steam producers, and biofuel research firms for evaluation. In addition to seeking a source of funding for plant development, the Company is also working towards licensing and/or developing potential commercial projects as they present themselves. All of our developments plan to focus on cleaning and separating MSW into its component parts in order to obtain: (i) a homogenous feedstock of cellulosic biomass for producing energy and other chemical products and (ii) recyclable products (metals, plastics).
Biomass Feedstock Production
The Company plans to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output is expected to be sold or provided to electric utilities, power and steam producers, and biofuel and chemical research firms for evaluation. In addition to research and development, the Company is also working towards licensing and/or developing potential commercial projects.
We are also seeking to develop a plant in a major metropolitan area. We are working to develop one or more locations where waste collected would be processed using our technology and the biomass produced used to create heat and/or power.
In addition to the developments we are currently contemplating, other development opportunities are presented to us and we evaluate those potential developments. Upon operating a plant and after refining our know-how with respect to implementation of the technology, we intend to seek to partner with waste haulers, landfill owners and municipalities to implement the technology across the United States and internationally.
The further development of commercial plants and/or implementation of the licensing of our technology described above will require significant additional capital, which we currently do not have. We cannot provide any assurance that we will be able to raise this additional capital. While we anticipate that financing for the commercial biomass recovery plant and these other potential projects could also be provided in part via tax exempt bond financing or through the use of loan guarantees from local, state and federal authorities, we have not secured any such financing and there can be no assurance that we will be able to secure any such financing.
Bio-Fuel and Bio-Chemical Joint Testing/Research
After we are able to process MSW into biomass through our potential future biomass recovery plant and/or in future commercial vessels, we plan to enter into joint research agreements with companies looking to process biomass in their system(s) for various types of energy and chemical production. We anticipate that this testing and research will provide possible revenue streams, projects and additional opportunities for use of our biomass.
In February 2012, we entered into a Confidentiality Agreement and Material Transfer Agreement with Sweetwater Energy, Inc. (“Sweetwater”), a renewable energy company with patent-pending technology to produce sugars from several types of biomass for use in the biofuel, biochemical and bioplastics markets. We agreed and coordinated with the Third-Party Operator in Australia to ship 10 pounds of biomass produced at the Third-Party Operator’s facility to the Sweetwater lab for testing. The shipment arrived in May 2012. Sweetwater has completed their initial testing and we expect additional testing to occur on future samples upon securing our requisite funding.
In June 2011, we entered into a Confidential Disclosure and Sampling Agreement with Novozymes North America, Inc., a developer of industrial enzymes, microorganisms, and biopharmaceutical ingredients for conversion into a variety of energy and chemical products. In July 2011, we supplied a sample of our biomass product for testing in their enzymatic hydrolysis process. Some initial testing was completed during the 3rd Quarter of 2011. We expect further testing to occur upon securing the requisite financing.
New Technologies; Commercializing Existing Technologies
Because of what we believe to be our unique ability to produce a clean, homogenous biomass feedstock, we are frequently presented with the opportunity to partner with or acquire new technologies. In addition to developing our current technologies, we intend to continue to add technologies to our suite of solutions that complement our core operations. We believe that our current technologies and aspects of those in development will enable us to eventually expand our business to use organic material from other waste streams such as municipal bio-solids from waste water facilities and animal waste for fuel production.
To commercialize our technology, we intend to:
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construct and operate a commercial plant that: (i) processes MSW into cellulosic biomass for conversion into energy or chemical products and (ii) separates recyclables (metals, plastics, glass) for single-stream recycling;
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identify and partner with landfill owners, waste haulers and municipalities to identify locations suitable for our technology; and
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pursue additional opportunities to implement our technology in commercial settings at transfer stations and landfills in our licensed territories.
Our ability to implement this strategy will depend on our ability to raise significant amounts of additional capital and to hire appropriate managers and staff. Our success will also depend on a variety of market forces and other developments beyond our control.
Industry Overview
There are two types of MSW Disposal:
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Municipal Solid Waste Landfills (“MSWLFs”) - includes municipal solid waste, commercial waste, industrial waste, construction and demolition debris, and bioreactors.
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Mass Burn/Incineration Plants
Municipal Solid Waste Landfills
MSWLFs primarily receive household waste and commercial waste. MSWLFs can also receive non-hazardous sludge, industrial solid waste, and construction and demolition debris. All MSWLFs must comply with various federal, state and local laws and regulations.
Disposing of waste in a landfill involves burying waste, and this remains a common practice in most countries. Historically, landfills were often established in disused quarries, mining voids or borrow pits. A properly-designed and well-managed landfill can be a hygienic and relatively inexpensive method of disposing of waste materials. Older, poorly-designed or poorly-managed landfills can create a number of adverse environmental impacts such as wind-blown litter, attraction of vermin, and generation of liquid leachate. Another common byproduct of landfills is gas (mostly composed of methane and carbon dioxide), which is produced as organic waste breaks down anaerobically. This gas can create odor problems, kill surface vegetation, and contributes to global warming.
Waste haulers or municipalities pay tipping fees, or gate rates, on a per ton basis to dispose of garbage at a landfill. Gate rates operate in a manner similar to the published prices for airline tickets or hotels, before discounts or contract prices (which could be higher or lower) are considered. The gate rate is the true daily market value of the tipping fee. The average tipping fee in the United States has risen consistently from $8.20 per ton in 1985 to $45.02 in late 2012 (the latest data available) and continues to increase.
Mass Burn/Incineration Plants
Mass Burn - Mass burn is combusting MSW generally without any pre-processing or separation. The resulting steam is employed for industrial uses or for generating electricity. Mass burn facilities are sized according to the daily amount of solid waste they expect to receive. Most mass burn plants can remove non-combustible steel and iron for recycling before combustion using magnetic separation processes. Other non-ferrous metals can be recovered from the leftover ash.
Waste-to-Energy (WTE) Plants - Current operating WTE plants burn MSW in a controlled environment to create steam or electricity. Through this process the volume of solid waste is reduced by about 90%.
Modular Incinerators - Modular incinerators are small mass burn plants, with a capacity of 15 to 100 tons per day. The boilers for modular incinerators are built in a factory and shipped to the WTE site, rather than being built on the WTE site itself. The advantage of a modular WTE incinerator is flexibility. If more capacity is needed, modular WTE units can be added. These facilities are used primarily by small communities and industrial sites. Costs limit the use of this technology because the return on investment in terms of energy produced over time is much lower than in mass burn plants.
Refuse-Derived Fuel (RDF) Plants - RDF plants process solid waste before it is burned. A typical plant will remove non-combustible items, such as glass, metals and other recyclable materials. The remaining solid waste is then shredded into smaller pieces for burning. RDF plants require significantly more sorting and handling than mass burn, but can recover recyclables and remove some potentially environmentally harmful materials prior to combustion. RDF can be burned in power boilers at factories or even at large housing complexes. Sometimes RDF materials are "densified" (compacted at high pressure) to make fuel pellets. The "pellet fuel" may also include various sludges, by-products of municipal or industrial sewage treatment plants.
MSW contains a diverse mix of waste materials, some benign and some very toxic. Effective environmental management of MSW plants aims to exclude toxics from the MSW-fuel and to control air pollution emissions from the WTE plants. Toxic materials include trace metals such as lead, cadmium and mercury, and trace organics, such as dioxins and furans. Such toxins pose an environmental problem if they are released into the air with plant emissions or if they are dispersed in the soil and allowed to migrate into ground water supplies and work their way into the food chain. The control of such toxics and air pollution are key features of environmental regulations governing MSW fueled electric generation.
U.S. EPA rules are among the most stringent environmental standards for WTE facilities in the world. These rules mandate that all facilities use the most modern air pollution control equipment available to ensure that WTE smokestack emissions are as clean as possible, and are safe for human health and the environment.
Burning any fuel, including MSW, can produce a number of pollutants, such as carbon monoxide, sulfur dioxide, and fine particles containing heavy metals. Other toxic organic compounds, such as dioxins, are also potential emissions from any combustive activity where certain chemical compounds are present, a situation that could take place in the WTE process. Air emission control devices in a WTE facility usually include:
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Dry Scrubbers - these "wash" the air emissions from the WTE process (called the gas stream) and remove any acidic gases by passing the gas stream through a liquid.
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Electrostatic Precipitators (ESP) - these use high voltage electricity to remove up to 98% of all particles remaining in the gas stream after passing through the scrubbers, including any heavy metal particles.
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Fabric Filters (baghouses) - these consist of a series of nearly two thousand fabric bags made of heat-resistant material which filter remaining particles from the gas stream. This includes any large concentrations of condensed toxic organic compounds (such as dioxins) and heavy metal compounds.
Incinerators and RDF processors are paid tipping fees for the garbage that they accept. Typically, these fees are more costly than the fees paid to landfill operators, largely because of the high capital and operating costs at combustion facilities.
Environmental Matters
We believe our operations will be subject to international, federal, state and local laws and regulations with regard to air and water quality, hazardous and solid waste disposal and other environmental matters upon operation. There is always a risk that the federal agencies may enforce certain rules and regulations differently than state and local environmental administrators. Federal, state and local rules are subject to change, and any such changes could result in greater regulatory burdens on plant operations. We could also be subject to environmental or nuisance claims from adjacent property owners or residents in the areas arising from possible foul smells, noise or other air or water discharges from the plant. We do not know the potential cost of these requirements or potential claims. Environmental laws and regulations that may affect us in the future may include, but are not limited to:
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The Clean Air Act, as well as state laws and regulations impacting air emissions, including State Implementation Plans related to existing and new National Ambient Air Quality Standards for ozone and particulate matter. Owners and/or operators of air emission sources are responsible for obtaining permits and for annual compliance and reporting.
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The Clean Water Act which requires permits for facilities that discharge wastewaters into the environment.
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The Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, which requires certain solid wastes, including hazardous wastes, to be managed pursuant to a comprehensive regulatory regime.
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The National Environmental Policy Act, which requires federal agencies to consider potential environmental impacts in their decisions, including siting approvals.
Government Approvals
The Company is not currently subject to any government approvals or oversight for its current operations other than normal corporate governance and taxes. Once we begin developing commercial production facilities, however, we will be subject to multiple federal, state and local environmental laws and regulations, such as those described above and for employee health and safety. In addition, some of these laws and regulations will require our facilities to operate under permits that are subject to renewal or modification. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.
Our Technology
We believe we can convert MSW into cellulosic material using our Biomass Recovery Process, which can then be used by a variety of third party technologies as a feedstock to process that cellulosic material into a variety of energy and chemical products.
Biomass Recovery Process
MSW contains valuable resources if they can be recovered economically. Waste haulers often bring unsorted waste by truck to material recovery facilities, also known as MRFs, for sorting and removal of selected materials prior to disposal in sanitary landfills. In addition, certain waste haulers’ customers separate recyclables prior to collection. Per the most recent Michigan University study statistics available, approximately 35% of MSW was recycled and composted in 2011.
The PSC technology was developed at the University of Alabama, Huntsville and improved by Anthony Noll into the technology we refer to as the Biomass Recovery Process. The process separates curbside MSW into organic and inorganic materials using a patented and proprietary process that involves a unique combination of steam, pressure and agitation. The separation is accomplished by placing waste material in a rotating pressure vessel, or autoclave. In the autoclave, the material is heated to several hundred degrees, which sterilizes the waste material, while the pressure and agitation cause a pulping action. This combination is designed to result in a large volume reduction, yielding the following two sterilized resource streams for further manufacturing of new products:
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Cellulosic biomass, a decontaminated, homogeneous feedstock that we expect will represent approximately 50 to 60 percent of the incoming MSW and will be suitable for conversion to multiple energy or chemical products.
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Separated recyclables (steel cans and other ferrous materials, aluminum cans, plastics, and glass), which we expect will represent about 25 percent of the MSW input and are sorted and can be sold to recyclers.
The process also creates residual waste (fines, rocks, soil, textiles and non-recyclable fractions), which we expect will represent the remaining 15 to 25 percent of the MSW input. We will not be able to recover any value in this residual waste. We will be required to deliver this waste to landfills and incur the tipping fees expense.
The process is currently working in a commercial plant operated by a Third-Party Operator in Coffs Harbor, Australia and has been in operation for over five years. We believe that our process represents a significant improvement over other autoclave technologies currently in use because of:
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the relationship between agitation of the waste material, moisture, and the temperature and pressure of steam in the vessel uses less energy while obtaining a cleaner biomass resource;
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the method of introduction of steam into the autoclave vessel, the pressure range, along with the method of full depressurization, and treatment of the steam being vented from the process to prevent air pollution make our process more environmentally friendly than any other means to handle MSW;
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the method of mixing the heat and steam with the waste uniformly throughout the vessel create a homogenous feedstock for fuel production; and,
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the direct and critical correlation between the length and diameter of the vessel, internal flighting and the total tonnage of waste to be processed for proper mixing and product yield.
As we continue to develop our business and pursue opportunities, we may incur research and development costs. In 2013 and 2012, we incurred $-0- and $120,000, respectively, in research and development costs. The costs incurred in 2012 were in connection with our engagement of an engineering firm to provide the front-end engineering for the Company’s first operating commercial plant at an existing transfer station.
Principal Products or Services and their Markets
If we determine that our licensed technologies are commercially viable and we are able to raise a significant amount of additional capital, we may be in a position to begin to license and/or enter into long-term contracts with municipalities, solid waste haulers, and operators of landfills and materials recovery facilities to process a large portion of their waste streams into biomass and recyclable materials.
Energy/Chemicals
We expect the primary product we will sell will be biomass from our Biomass Recovery Process to be used for conversion to energy or chemical products. We believe our biomass can be used in multiple varieties of energy production systems. We expect the uses for our biomass to expand as new energy production technologies are developed.
MSW Processing Services
We believe that the opportunity to help communities, haulers and landfill managers reduce the amount of material transported and deposited in landfills is large and growing. The Resource Conservation and Recovery Act of 1991, referred to as RCRA, requires landfills to install expensive liners and other equipment to control leaching toxics. Due to the increased costs and expertise required to manage landfills under RCRA, many small, local landfills closed during the 1990’s. Larger regional landfills were built requiring increased transportation costs for the waste haulers. As a result, landfill space is increasingly scarce and disposal costs have been increasing.
Currently, landfill operators charge a tipping fee to deliver MSW to a landfill, waste-to-energy facility, recycling facility, transfer station or similar facility. Tipping fees vary widely based on geographic location and the number of available places to dispose of MSW in a given location. Because of the increasing cost pressures on waste haulers and based on current tipping fee pricing, we believe we will be able to negotiate a payment of part of their tipping fee from waste haulers who deliver MSW to us for processing that would range from as low as $15 per ton in some central parts of the country to over $90 per ton in the Northeast and parts of the Southeast. The availability of tipping fees at favorable rates will be a key component of our business.
Recyclable Byproducts
We anticipate that our Biomass Recovery Process will generate other recyclable byproducts from the processing of MSW, such as aluminum, metals, tin, steel, glass and plastic (typically 20 to 25 percent of the total waste stream). The markets for these recovered products are volatile and subject to rapid and unpredictable market changes making it impossible at this time to provide estimated per ton cost to revenue information.
Sources and Availability of Raw Materials
The emergence of technologies to convert MSW to energy or chemicals is opening new opportunities. What was once perhaps the greatest sanitation and health challenge for communities may now become an economic and environmental asset. Instead of adding to landfills already nearing capacity limits, converting MSW to biomass can provide one of the building blocks to a more sustainable energy future.
Americans produce more than 250 million tons of MSW annually. About 35% of this waste is currently recovered and recycled. We estimate that approximately up to an additional 45-50% could potentially be recovered. As various waste processing technologies are refined, competition for this future resource will intensify. As a result, it will be important for us to attempt to lock up as much of it as possible through long-term feedstock supply agreements with operators of materials recovery facilities and landfills.
Intellectual Property Terms
Biomass North America Licensing, Inc.
On September 15, 2008, the Company consummated the acquisition of Biomass North America Licensing, Inc., an Illinois corporation (“Biomass”), pursuant to a merger between Biomass and a wholly-owned subsidiary of the Company (with Biomass as the surviving subsidiary of the Company) in accordance with an Agreement and Plan of Merger by and between the Company and Biomass. By virtue of the merger, the Company acquired a license agreement pursuant to which the Company holds a license in the United States and Canada to use the patented technology that cleans and separates MSW that we refer to as the Biomass Recovery Process, which is owned by Biomass North America, LLC, the former parent of Biomass (the “Licensor”). In July 2010, the United States Patent and Trademark Office issued US patent number 7,745,208 for this process (the “BRP Patent”).
In accordance with a November 2013 amendment, the Company has an exclusive license in the United States and Canada to use the Biomass Recovery Process and includes no performance requirements on the Company; the license agreement is for a term of 21 years from the date of the amendment or the life of any patent issued for the Biomass Recovery Process, including any amendments, modifications or extensions; the license requires that the Company pay a royalty in the amount of $2.00 per ton of MSW used in the Biomass Recovery Process to the Licensor; and the Company released the 4,000,000 shares of common stock to the Licensor previously held in escrow since the merger.
PSC Patent
The Company owns U.S. Patent No. 6,306,248 (the “PSC Patent”), which is the underlying technology upon which the BRP Patent is based. The Company acquired the PSC Patent on October 22, 2008, pursuant to a Patent Purchase Agreement with World Waste Technologies, Inc. (“WWT”). The Patent is the basis for the pressurized steam classification technology that cleans and separates MSW into its component parts, which we refer to as the PSC technology. Pursuant to a Master License Agreement with Bio-Products that the Company acquired in connection with the acquisition of the PSC Patent (the “Bio-Products License Agreement”), Bio-Products was the exclusive licensee of the PSC technology (but not the Biomass Recovery Process), although pursuant to a settlement agreement with Bio-Products in March 2009, the Company has the right to use the Biomass Recovery Process worldwide, for any product and with no royalty due to Bio-Products. On September 22, 2010, the Company sent a Notice of Breach to the licensee of our PSC Patent. We received a response from the licensee on November 5, 2010. In February 2011, we became aware that the licensee affected a transfer of the license in violation of the Bio-Products License Agreement. As a result, on March 21, 2011, we sent a notice of termination to the licensee and the transferee terminating the Bio-Products License Agreement. On June 16, 2011, Steve Vande Vegte, a shareholder of the parent of Bio-Products, filed a lawsuit against various individuals and companies, including the Company. The only Cause of Action against the Company was for Declaratory Relief seeking to void our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint is not ripe. On December 8, 2011, the demurrer to dismiss the Company was granted. In October 2011, a Cross-Complaint was filed by Clean Conversion Technologies, Inc. (“CCT”) and Michael Failla against the Company. CCT was seeking to void the Company’s termination of the Bio-Products License Agreement. This case has been voluntarily dismissed per the filing with the court in February 2014. Additionally, CCT filed suit against the Company and Steve Vande Vegte alleging anti-trust violations. This case was voluntarily dismissed per the filing with the court in August 2013.
Employees
The Company currently has two full-time employees, its Chief Executive Officer, Edward P. Hennessey, Jr. and its Chief Financial Officer, Thomas Jennewein and two part-time employees, its Chief Technology Officer, David Fenton and its VP-Business Development, Scott Fenton. Both David and Scott Fenton are continuing their engineering consulting business, Fenton Engineering International, on a full-time basis and are available to the Company as needed. Neither David nor Scott Fenton receive a salary from the Company but they are eligible for stock awards.
Access to SEC Filings
Interested readers can access, free of charge, all of our filings with the SEC and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the About Us/Investor Relations/SEC Filings section of our website at www.cleantechbiofuels.net as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. We will also provide a copy of these documents, free of charge, to any stockholder upon written request addressed to: CleanTech Biofuels, Inc., 7386 Pershing Ave, University City, MO 63130.
ITEM 1A.
ITEM 1A. Risk Factors
You should carefully consider the following risk factors and other information contained in this annual report on Form 10-K when evaluating our business and financial condition. Additional risks not presently known to us and risks that we currently deem immaterial may also impair our business operations.
Risks Related to Our Business
We need to obtain significant additional capital to fund our current and planned operations and complete the implementation of our business plan, and the failure to secure additional capital will prevent us from commercializing our technology and executing our plan of operation.
We do not currently have enough cash or other liquid assets to fund our proposed business operations, although we are continuing to fund our basic corporate obligations. If we are not able to obtain additional financing in the immediate future, we will be required to delay our development until such financing becomes available and may be required to cease operations. In order to fund the development of our business plan, we will be required to identify and execute upon some form of outside funding, such as to:
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obtain additional debt or equity financing,
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secure significant government grants, and/or
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enter into a strategic alliance with a larger energy or chemical company to provide funding.
The amount of funding needed to complete the development of our business plan will be very substantial and may be in excess of the amount of funding we are able to obtain. We are attempting to identify the sources for additional financing that we will require, but currently do not have binding commitments from any third parties to provide this financing. Our ability to obtain additional funding will be subject to a number of factors, including market conditions, acceptance of our business plan, the quality of our biomass and investor sentiment. These factors may make the timing, amount, terms and conditions of additional funding unattractive. For these reasons sufficient funding, whether on terms acceptable to us or not, may not be available. If we are unable to obtain sufficient financing on a timely basis, the development of our technology, facilities and/or products will be delayed and we could be forced to limit or terminate our operations altogether. Further, any additional funding that we obtain in the form of equity will reduce the percentage ownership held by our existing shareholders.
We have no operating experience and may not be able to implement our business plan.
As a development stage company, there is no material operating history upon which to evaluate our business and prospects. We do not expect to commence any significant operations until we test and refine information from a commercial plant for biomass production and/or develop or license an operating facility. As a result, we expect to sustain losses without corresponding revenues, which could result in the Company incurring a net operating loss that will increase continuously for the foreseeable future. We cannot provide any assurance that we will be profitable in any given period or at all.
In addition, we currently have only two full-time employees, our Chief Executive Officer and Chief Financial Officer, each of whom spend at least 40 hours a week on our business. Collectively, they have less experience in operating an alternative energy company compared to many of our competitors. Moreover, given the rapid changes in the industry, we face challenges in planning and forecasting accurately. Our lack of expertise and resources may have a negative impact on our ability to implement our strategic plans, which may result in our inability to commence meaningful operations, achieve profitable operations or otherwise succeed in other aspects of our business plan.
Our financial statements reflect a “going concern” qualification.
Because of our lack of revenues, lack of working capital, and lack of any assured financing sources, our financial statements raise doubt about our ability to continue as a going concern because of our financial condition, and substantial losses. The opinion of our auditors for the year ended December 31, 2013, expressed a qualification about our ability to continue as a going concern. This condition has continued since those financial statements, and we expect that these conditions will continue for the foreseeable future unless we are able to raise a substantial amount of additional financing. In view of the matters described our ability to continue to pursue our plan of operations as described herein is dependent upon our ability to raise the capital necessary to meet our financial requirements on a continuing basis.
Our Biomass Recovery Process technology may have design and engineering issues that may increase the costs of using the technology.
The Biomass Recovery Process technology involves the use of a rotating pressure vessel, or autoclave, to combine heat, pressure and agitation to convert MSW into biomass. Although technologies that involve the separation and processing of MSW using large-scale autoclaves have not been widely adapted in commercial applications, two vessels using this process are currently operating in Australia. We have completed a small scale research and testing vessel that initially processed MSW for testing purposes.
Although we believe the autoclaves will operate properly on a commercial scale, we may encounter design and engineering problems when we try to implement this technology on a large-scale for biomass and energy production. Any design, engineering or other issue may cause delays, increase production and development costs and require us to shut down our operation.
We may not have sufficient legal protection of our technologies and other proprietary rights, which could result in the loss of some or all of our rights or the use of our intellectual properties by our competitors.
Our success depends substantially on our ability to use our owned and/or licensed technologies and to keep our licenses in full force, and for us and our technology licensor to maintain our patents, maintain trade secrecy and not infringe the proprietary rights of third parties. There can be no assurance that the patents of others will not have an adverse effect on our ability to conduct our business. Further, we cannot be sure that others will not independently develop similar or superior technologies, duplicate elements of our technologies or design around them. Even if we are able to obtain or license patent protection for our process or products, there is no guarantee that the coverage of these patents will be sufficiently broad to protect us from competitors or that we will be able to enforce our patents against potential infringers. Patent litigation is expensive, and we may not be able to afford the costs. Third parties could also assert that our process or products infringe patents or other proprietary rights held by them.
We also rely on trade secrets, proprietary know-how and technology that we will seek to protect, in part, by confidentiality agreements with our prospective joint venture partners, employees and consultants. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.
We will be dependent on our ability to negotiate favorable feedstock supply and biomass off-take agreements.
In addition to proving and commercializing our technology, the viability of our business plan will depend on our ability to develop long-term supply relationships with municipalities, municipal waste haulers, MRF operators, and/or landfills to provide us with the necessary waste streams on a long-term basis. We also will depend on these haulers, operators and facilities to take residual waste streams from our plants and to deliver or accept these streams for land filling. Additionally, we will need to develop off-take agreements with conversion technology companies and/or energy companies for the consumption of our biomass. We currently have no such relationships or agreements and there can be no assurance that we will be able to enter into any such relationships or agreements. If we are unable to create these relationships and receive supply agreements and/or off-take agreements on terms favorable to us we may not be able to implement our business plan and achieve profitability.
We may not be able to attract and retain management and other personnel we need to succeed.
We currently have two full-time employees, our Chief Executive Officer and Chief Financial Officer. As a result, part of our success depends on our ability to recruit senior management and other key technology development, construction and operations employees. Especially given our lack of financial resources, we cannot be certain that we will be able to attract, retain and motivate such employees. The inability to hire and retain one or more of these employees could cause delays or prevent us from implementing our business strategy. The majority of our new hires could be engineers, project managers and operations personnel. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we cannot attract and retain, on acceptable terms, the qualified personnel necessary for the development of our business, we may not be able to commence operations or grow at an acceptable pace.
We incur significant costs as a result of being a public company.
As a public company, we are incurring significant legal, accounting and other expenses and our corporate governance and financial reporting activities are more time-consuming. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, has required changes in corporate governance practices of public companies. For example, as a public company, we are required to adopt policies regarding internal controls and disclosure controls and procedures. In addition, we are incurring significant additional costs associated with our public company reporting requirements. These rules and regulations could make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
The Company has incurred significant indebtedness and has various obligations to satisfy or repay that indebtedness.
The Company has issued various forms of debt instruments to raise capital. The Company has obligations to repay or otherwise satisfy its debt obligations. As a result, the Company has incurred a significant amount of indebtedness which could limit the Company’s ability to incur additional indebtedness for capital raising purposes, securing a line of credit, or otherwise. The Company’s indebtedness could adversely affect the Company’s operations, including among other things, its ability to obtain additional financing if necessary, and a significant portion of the Company’s resources could be dedicated to the repayment of such indebtedness which would reduce the amount of funds available for other corporate purposes. The Company’s ability to meet its expected debt obligations and reduce its indebtedness will be dependent upon the Company’s future performance, which will be subject to the success of its business strategy, general economic conditions, and other factors affecting the Company’s operations, many of which are beyond the Company’s control.
Our senior management’s limited experience managing a publicly traded company diverts management’s attention from operations and could harm our business.
Our management team has limited experience managing a publicly traded company and complying with federal securities laws, including compliance with disclosure requirements on a timely basis. Our management is required to design and implement appropriate programs and policies in response to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.
Our failure to adequately adhere to the established corporate governance practices or the failure or circumvention of our controls and procedures could seriously harm our business.
Compliance with the evolving corporate governance practices takes a significant amount of management time and attention, particularly with regard to disclosure controls and procedures and internal control over financial reporting. Although we have reviewed our disclosure and internal controls and procedures in order to determine whether they are effective, our controls and procedures may not be able to prevent errors or frauds in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it difficult for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations.
Risks Related to our Industry
As a small company, we will be at a competitive disadvantage to most of our competitors, which include larger, established companies that have substantially greater financial, technical, manufacturing, marketing, distribution and other resources than us.
The alternative energy and waste hauling/landfill industries in the United States are highly competitive and continually evolving as participants strive to distinguish themselves. Competition is likely to continue to increase with the emergence and commercialization of new alternative energy technologies. If we are not successful, we will not be able to compete within these industries. Moreover, the success of alternative energy generation technologies may cause larger, conventional energy companies with substantial financial resources to enter the alternative energy industry. These companies, due to their greater capital resources and substantial technical expertise, may be better positioned to develop and exploit new technologies. Our inability to respond effectively to our competition could result in our inability to commence meaningful operations, achieve profitable operations or otherwise succeed in other aspects of our business plan.
Our success may be dependent on continued high energy prices.
Prices for energy can vary significantly over time and decreases in price levels could adversely affect our profitability and viability. Worldwide energy prices are subject to a myriad of factors almost all of which are completely beyond our ability to control. Frequently, unforeseen events can have a dramatic impact on the price paid for energy. If the prices for more traditional sources of energy fall and remain low, such a pricing environment could cause our business model to be unviable and our technology worthless.
Waste processing and energy production is subject to inherent operational accidents and disasters from which we may not be able to recover, especially if we have only one or a very small number of facilities.
Our anticipated operations would be subject to significant interruption if any of our potential facilities experience a major accident or are damaged by severe weather or other natural disasters. In particular, processing waste and producing energy products is subject to various inherent operational hazards, such as equipment failures, fires, explosions, abnormal pressures, blowouts, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Currently we do not have any insurance to cover those risks. We intend to seek insurance appropriate for our business before we commence significant operations. The insurance that we plan to obtain, if obtained, may not be adequate to cover fully the potential operational hazards described above.
Alternative technologies could make our business obsolete.
Even if our technology proves to be commercially feasible, there is extensive research and development being conducted in alternative energy sources. Technological developments in any of a large number of competing processes and technologies could make our technology obsolete and we have little ability to manage that risk.
Risks Related to Government Regulation and Subsidization
Enforcement of energy policy regulations could change.
Energy policy in the United States is evolving rapidly. Over the last few decades, the United States Congress has passed separate major pieces of legislation addressing energy policy and related regulations. We anticipate that energy policy will continue to be a very important legislative priority on a national, state and local level. As energy policy continues to evolve, the existing rules and regulations that benefit our industry may change. It is difficult, if not impossible, to predict changes in energy policy that could occur on a federal, state or local level in the future. The elimination of or a change in any of the current rules and regulations could create a regulatory environment that prevents us from developing a commercially viable or profitable business.
Costs of compliance may increase with changing environmental and operational safety regulations.
As we implement our business plan, we will become subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require our contemplated facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.
Furthermore, we may become liable for the investigation and cleanup of environmental contamination at any property that we would own or operate and at off-site locations where we may arrange for the disposal of hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory agencies, we may be responsible under CERCLA, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require expending significant amounts for investigation, cleanup, or other costs.
In addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws, or other developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at any future production facility. Present and future environmental laws and regulations applicable to MSW processing and energy production, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse effect on the results of our contemplated operations and financial position.
The hazards and risks associated with processing MSW and producing and/or transporting various energy or chemical products (such as fires, natural disasters, explosions, and abnormal pressures and blowouts) may also result in personal injury claims or damage to property and third parties. As protection against operating hazards, we intend to maintain insurance coverage against some, but not all, potential losses. We could, however, sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. Events that result in significant personal injury or damage to our property or third parties or other losses that are not fully covered by insurance could have a material adverse effect on the results of our contemplated operations and financial position.
Risks related to our Common Stock and Stock Price Fluctuation
Our stock is thinly traded, so you may be unable to sell at or near ask prices or at all.
Our common stock trades on the OTCQB. Shares of our common stock are thinly-traded, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including:
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we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume; and
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stock analysts, stock brokers and institutional investors may be risk-averse and be reluctant to follow an unproven, early stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.
As a consequence, our stock price may not reflect an actual or perceived value. Also, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. A broader or more active public trading market for our common shares may not develop or if developed, may not be sustained. Due to these conditions, you may not be able to sell your shares at or near ask prices or at all if you need money or otherwise desire to liquidate your shares.
Even if an active trading market develops, the market price for our common stock may be highly volatile and could be subject to wide fluctuations.
We believe that newer alternative energy companies and companies that effect reverse mergers, such as our company, are particularly susceptible to speculative trading that may not be based on the actual performance of the company, which increases the risk of price volatility in a common stock. In addition, the price of the shares of our common stock could decline significantly if our future operating results fail to meet or exceed the expectations of market analysts and investors. Some of the factors that could affect the volatility of our share price include:
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significant sales of our common stock or other securities in the open market;
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speculation in the press or investment community;
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actual or anticipated variations in quarterly operating results;
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changes in earnings estimates;
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publication (or lack of publication) of research reports about us;
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increases in market interest rates, which may increase our cost of capital;
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changes in applicable laws or regulations, court rulings and other legal actions;
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changes in market valuations of similar companies;
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additions or departures of key personnel;
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actions by our stockholders; and
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general market and economic conditions.
Trading in our common stock is subject to special sales practices and may be difficult to sell.
Our common stock is subject to the Securities and Exchange Commission’s “penny stock” rule, which imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. Penny stocks are generally defined to be an equity security that has a market price of less than $5.00 per share. For purposes of the rule, the phrase “accredited investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth or a joint net worth with the person’s spouse, in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse’s income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities and also may affect the ability of our shareholders in this offering to sell their securities in any market that might develop.
Stockholders should be aware that, according to Securities and Exchange Commission Release No. 34-29093, the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
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control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
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manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
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“boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons;
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excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.
Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our common stock.
Substantial future sales of our common stock shares in the public market could cause our stock price to fall.
If our stockholders sell substantial amounts of our common stock, or the public market perceives that stockholders might sell substantial amounts of our common stock, the market price of our common stock could decline significantly. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that our management deems appropriate. As of December 31, 2013, we had 78,546,647 shares of our common stock outstanding. We also have outstanding convertible notes (including accrued interest) with warrants convertible into approximately 49 million shares of our common stock, and warrants, immediately exercisable and representing the right to purchase 10,630,000 shares of our common stock. An additional 14,000,000 shares of our common stock have been reserved for issuance pursuant to our 2007 Stock Option Plan.
Potential issuance of additional common and preferred stock could dilute existing stockholders.
We are authorized to issue up to 240,000,000 shares of common stock. To the extent of such authorization, our board of directors has the ability, without seeking stockholder approval, to issue additional shares of common stock in the future for such consideration as the board of directors may consider sufficient. We are also authorized to issue up to ten million shares of preferred stock, the rights and preferences of which may be designated in series by the board of directors. Such designation of new series of preferred stock may be made without stockholder approval, and could create additional securities which would have dividend and liquidation preferences over the common stock offered hereby. Preferred stockholders could adversely affect the rights of holders of common stock by:
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exercising voting, redemption and conversion rights to the detriment of the holders of common stock;
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receiving preferences over the holders of common stock regarding a surplus of funds in the event of our dissolution or liquidation;
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delaying, deferring or preventing a change in control of our company; and
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discouraging bids for our common stock.
Additionally, some of our convertible securities and warrants to purchase common stock have anti-dilution protection. This means that if we issue securities for a price less than the price at which these securities are convertible or exercisable for shares of common stock, the securities will become eligible to acquire more shares of common stock at a lower price, which will dilute the ownership of our common stockholders.
In all the situations described above, the issuance of additional common stock in the future will reduce the proportionate ownership and voting power of our current stockholders.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2.
ITEM 2. Properties
We currently occupy 1,800 square feet of office space in St. Louis, Missouri. The initial term of the lease has expired, however, the lease can be extended for two year periods at expiring terms and conditions (current term ends December 2014). The monthly lease payment is $1,800, plus utilities. We took possession of the leased space in January, 2008.
ITEM 3.
ITEM 3. Legal Proceedings
Steve Vande Vegte v. various individuals and companies, including Cleantech Biofuels, Inc. - On March 21, 2011, we terminated the Bio-Products License Agreement. On June 16, 2011, Steve Vande Vegte, a shareholder of the parent of Bio-Products, filed a lawsuit against various individuals and companies, including the Company, filed in the Superior Court of California, Orange County. The only Cause of Action against the Company was for Declaratory Relief seeking to void our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint was not ripe. On December 8, 2011, the demurrer to dismiss Cleantech was granted. In October 2011, a Cross-Complaint was filed by Clean Conversion Technologies, Inc. (“CCT”) and Michael Failla against the Company. CCT is seeking to void the Company’s termination of the sub-license agreement. The Company filed a motion to compel arbitration, which was denied. This case was voluntarily dismissed per the filing with the court in February 2014.
ITEM 4.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table sets forth for the periods indicated the high and low prices per share of our common stock as transacted on the OTC Market:
On March 18, 2014, the closing price of our common stock, as quoted on the OTCQB, was $0.02 per share. As of March 18, 2014, we had approximately 123 stockholders of record.
Dividend Policy
We have no material operating history and therefore have had no earnings to distribute to stockholders. We do not anticipate paying any cash dividends in the foreseeable future. Rather, we currently intend to retain our earnings, if any, and reinvest them in the development of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under any existing indebtedness and other factors the board of directors may deem relevant.
Recent Sales of Unregistered Securities -
In August 2013, the Company commenced an offering of units, under a Subscription Agreement, at a purchase price of $1,000 per unit (Equity Offering 8/13). Each unit consists of: (i) 10,000 shares of the Company’s authorized but unissued restricted Common Stock and (ii) warrants to purchase 30,000 additional shares of Common Stock for a one-year period from the date of issuance of the units at an initial exercise price of $0.15 per share. As of December 31, 2013, the Company raised a total of $206,000 of investment proceeds. The issuance of units and the issuance of Common Stock were exempt from the registration requirements of the Securities Act, pursuant to Rule 506(b) of Regulation D promulgated under the Securities Act (“Rule 506”) and/or Section 4(a)(2) of the Securities Act.
ITEM 6.
ITEM 6. Selected Financial Data
Not applicable.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our plan of operation should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance. These risks and other factors include, among others, those listed under “Statement Regarding Forward-Looking Statements” and “Risk Factors” and those included elsewhere in this report.
As a result of the limited operating history of our company, prior years’ financial statements provide little information and virtually no guidance as to our future performance. In order to finance our business beyond this stage, we will be required to raise additional capital. All of our potential developments/projects will require a significant amount of capital. While we continue to aggressively pursue outside sources of funding, we have not had recent success securing meaningful amounts of financing. As a result, we can provide no assurance that we will secure any funding in the immediate time frame required and the failure to do so will likely result in an inability to continue operations. Management hopes to secure additional funds through equity or debt financing, government grants, or project financings, until such time as the Company begins to generate revenue and the Company’s revenues and cash flow are sufficient to meet its cost structure and ultimately achieve profitable operations. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. We may not be able to secure financing on favorable terms, or at all. If we are unable to obtain acceptable financing on a timely basis, our business will likely fail and our common stock may become worthless.
Overview
Our focus is to secure sufficient capital to fund our current working capital requirements and the construction of a commercial plant as described previously in Item 1 of this report - Plan of Operations.
Results of Operations
The following tables set forth the amounts of expenses and changes in our consolidated statements of operations:
Year ended December 31, 2013 compared to the year ended December 31, 2012
Costs and expenses:
General and administrative - The increase in 2013 is due primarily to $11,000 increases in both payroll and travel offset by a decrease of $12,000 in all other expenses.
Professional Fees - The decrease in 2013 is due to decreases of $50,000 in legal fees and $14,000 in consulting fees.
Research and Development - The amount in 2012 is due to an engagement with an engineering firm to provide the front-end engineering for the Company’s first operating commercial plant at an existing transfer station. The Company did not engage in any comparable activities during 2013.
Other expense (income):
Interest expense - The increase in 2013 is due to increased interest expense on our convertible notes due to the addition of new notes in 2013.
Year ended December 31, 2012 compared to the year ended December 31, 2011
Costs and expenses:
General and administrative - The decrease in 2012 is due primarily to a decrease in share-based compensation of approximately $67,000 and a decrease of approximately $15,000 in travel expenses.
Professional Fees - The increase in 2012 is due to increases in legal fees.
Research and Development - The amount in 2012 is due to an engagement with an engineering firm to provide the front-end engineering for the Company’s first operating commercial plant at an existing transfer station. The Company did not engage in any comparable activities during 2011.
Other expense (income):
Interest expense - The decrease in 2012 is due to decreased amortization of approximately $41,000 of discounts related to various notes as the remaining discounts became fully amortized during 2011, offset by an increase of $10,000 in interest expense on our convertible notes due to the addition of new notes in 2012.
Other income - The amount in 2011 is related to a diesel fuel production agreement not completed.
Liquidity and Capital Resources
As a development-stage company, we have no revenues and will be required to raise additional capital in order to execute our business plan and commercialize our products. Beginning in September 2008 and as of March 21, 2014, we raised an aggregate of approximately $3.15 million in separate offerings of units comprised of a convertible note and warrants and $206,000 in an equity offering of Common Stock. We are continuing to explore opportunities to raise cash through the issuance of these units and other financing opportunities. As of March 21, 2014, our current cash and other assets are not sufficient to fund our operations. As of December 31, 2013, we had a significant working capital deficit. Our liabilities are substantially greater than our current assets. Our only significant assets are our intellectual property rights, which are intangible and not readily convertible into liquid assets.
We are attempting to identify one or more potential sources of additional financing, such as through the sale of additional equity, various government funding opportunities and/or possibly through strategic alliances with larger energy or waste management companies. The Company will continue to explore and evaluate financing alternatives and/or other transactions, including potentially retaining a financial advisor. However, we may not be successful in securing additional financing. If we are not able to obtain additional financing in the immediate future, we will be required to delay our development until such financing becomes available. Further, even assuming that we secure additional funds, we may never achieve profitability or positive cash flow. If we are not able to timely and successfully raise additional capital and/or achieve profitability or positive cash flow, we will not have sufficient capital resources to implement our business plan or to continue our operations.
Debt
Convertible Notes Payable - Since September 2008, the Company has conducted five offerings of units comprised of a convertible promissory note and a warrant having the terms set forth below:
Each note holder retains the option of cash repayment of the note plus interest, or can convert the note at any time during the term of the note or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million) into shares of Common Stock at the conversion price noted above. All notes have been recorded as debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features (except for the 11/10 and 5/12 Offerings which carried no discounts). The discounts have been amortized on a straight-line basis over the term of each note and were fully amortized as of December 31, 2011. Amortization of the discounts (included in interest expense in the financial statements) was $41,661 for 2011.
2008 Offering - During September 2008, the Company commenced an offering of units and raised a total of $642,000 of investment proceeds through March 31, 2009. As of March 31, 2010, all of these notes had either been converted to shares of our common stock or exchanged into our 2009 Offering (resulting in new notes with a total face value of $539,829, which included the original principal and interest through the date of exchange).
2009 Offering - During April 2009, the Company commenced an offering of units and raised a total of $1,198,500 of investment proceeds through August 2010. One note was converted to shares of Common Stock during 2009 and one note was converted to shares of Common Stock during 2010. Beginning in March 2011, certain notes were exchanged into our 11/10 Offering. As a result, as of December 31, 2013, we had $254,738 face value of notes outstanding, which includes the exchanged notes from our 2008 Offering. All of these notes have matured. We are working with the remaining note holders to either: repay the notes, refinance to our 11/10 Offering or convert the notes to shares of our Common Stock.
6/10 Offering - During June 2010, the Company commenced an offering of units and raised a total of $75,000 of investment proceeds in one note. Upon maturity in June 2011, this note was exchanged into our 11/10 Offering. As a result, the balance due on this offering is $-0-.
11/10 Offering - During November 2010, the Company commenced an offering of units, and as of December 31, 2013, had raised a total of $451,713 of investment proceeds. Three notes were converted to shares of common stock in 2011 and four notes were converted to common stock in 2012. As of December 31, 2013, we had $1,851,004 face value of notes outstanding, which includes the exchanged notes from our 2009 Offering.
5/12 Offering - During May 2012, the Company commenced an offering of units and, as of December 31, 2013, had raised a total of $583,510 of investment proceeds. As of December 31, 2013, we had $583,510 face value of notes outstanding.
CMS Acquisition, LLC Note Payable - In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum through May 15, 2011 and 10.0% thereafter and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note is due the earlier of: (i) March 1, 2015 (extended from February 28, 2011 through various amendments) or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and was amortized (interest expense) through the original due date of February 28, 2011. As consideration in these amendments, the Company has: (i) paid $25,000 in February 2011 towards accrued interest to date and principal on the Note (ii) increased the interest rate to 10% as of May 15, 2011, (iii) re-dated the original warrants to March 21, 2014 and (iv) issued new warrants for 300,000 shares of the Company’s Common Stock with an exercise price of $0.05 and exercisable at any time until March 21, 2019. As of December 31, 2013, $77,696 face value of this note is outstanding.
The following is a summary of warrants issued and outstanding as of the dates below, at the exercise price and the amount of shares of Common Stock (these warrants have not been exercised or converted to common shares):
(a) Warrants either expired or exchanged into 11/10 Offering as part of new Note
Summary of Cash Flow Activity
Net cash used by operating activities
During 2013, 2012 and 2011, cash used by operating activities was impacted primarily by increases in accounts payable and other accrued liabilities.
Net cash provided by financing activities
During 2013, cash provided by financing activities was primarily from the continued issuance of our Convertible Notes and Equity Offering for $406,000. During 2012 and 2011, cash provided by financing activities was primarily from the continued issuance of our Convertible Notes for $435,000 and $365,000, respectively, offset by payments against other Notes Payable.
Contractual Obligations and Commitments
In the table below, we set forth our obligations as of December 31, 2013. Some of the figures we include in this table are based on our estimates and assumptions about these obligations, including their durations, anticipated actions by third parties and other factors. The obligations we may pay in future periods may vary from those reflected in this table because of estimates or actions of third parties as disclosed in the notes to the table.
(1) Amount represents value of principal amount of notes and estimates for interest. These notes are with various individuals, carry one-year or 18-month terms and are convertible into shares of Common Stock at the noteholders option. The first of these notes matured in April 2010. We are working with the noteholders to refinance their notes, convert their notes into shares of Common Stock or repay the notes.
(2) Amount represents value of principal amount of note and interest and is secured by a security interest in the PSC Patent. Final payment on this note is due March 1, 2015.
(3) The lease for our office space has expired and can be extended for two year periods at expiring terms and conditions (the current term ends December 2014).
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements. We have not entered into any transaction, agreement or other contractual arrangement with an unconsolidated entity under which we have:
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a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit;
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liquidity or market risk support to such entity for such assets; or
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an obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging, or research and development services with us.
Critical Accounting Estimates
Long-Lived Assets - Our acquisition and merger activities have resulted in aggregate licensing and patent assets of approximately $2.2 million as of December 31, 2013. We are required to conduct impairment tests of long-lived assets on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset below its carrying value. As we have not commenced commercial operations, these assets have not yet been placed in service.
Deferred Taxes - We recognize deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company has incurred no income taxes to date. Any benefits are the result of temporary differences (start-up costs, stock compensation and other items) and operating loss carryforwards. The difference between the expected income tax benefit and non-recognition of an income tax benefit in each period is the result of a valuation allowance applied to deferred tax assets. A valuation allowance in the same amount of the benefit has been provided to reduce the deferred tax asset, as realization of the asset is not assured.
Stock-Based Compensation - We account for stock-based compensation in accordance with accounting guidance that requires measuring all stock-based compensation awards at fair value and recognizing an expense in the financial statements. We compensate certain employees, officers, directors and consultants with share-based payment awards and recognize compensation costs for these awards based on their fair values and expense is recognized over the requisite service period. The fair values of certain awards are estimated on the grant date using the Black-Scholes-Merton option-pricing formula, which incorporates certain assumptions including the expected term of an award and expected stock price volatility.
Convertible Notes Payable and Warrants - The Company has issued various Convertible Promissory Notes (“Notes”). These Notes may be converted at the option of the note holder into shares of the Company’s common stock. Additionally, these Notes carry warrants for shares of the Company’s common stock. These promissory notes have been recorded as debt (notes payable) in the financial statements, net of discounts, if any, for the conversion and warrant features. The discounts have been amortized on a straight-line basis over the term of each note.
Fair Value Measurement - We use fair value accounting and reporting to specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources or reflect our own assumptions of market participant valuation. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
●
Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
●
Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets, or financial instruments for which significant inputs are observable, either directly or indirectly;
●
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As of and during the year ended December 31, 2013 and 2012, we utilized Level 1 inputs to determine the fair value of cash equivalents and we utilized Level 2 inputs to determine the fair value of certain long-lived assets.
Contingent Liabilities - We are, from time to time, subject to litigation to our business. Assessments regarding the ultimate cost of lawsuits require judgments concerning matters such as the anticipated outcome of negotiations, the number and cost of pending and future claims, and the impact of evidentiary requirements. A significant amount of judgment and use of estimates is required to quantify our ultimate exposure in these matters. We regularly review the valuation of these liabilities and account for changes in circumstances for ongoing and emerging issues. The Company intends to defend itself vigorously in all litigation.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2013, all of our debt instruments (Notes Payable) carry fixed interest rates. We do not have any arrangements for borrowings under a credit facility. We currently have no operations and are not subject to any currency fluctuations or credit risk.
ITEM 8.
ITEM 8. Financial Statements and Supplemental Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CleanTech Biofuels, Inc.
St. Louis, Missouri
We have audited the accompanying consolidated balance sheets of CleanTech Biofuels, Inc. (a development stage company) and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013 and for the period from July 14, 2004 (inception) to December 31, 2013. CleanTech Biofuels Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company and its subsidiaries are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CleanTech Biofuels, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013 and from July 14, 2004 (inception) to December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company and its subsidiaries will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s significant operating losses and recent inability to secure additional capital to implement its business plan raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
MILHOUSE & NEAL, LLP
Certified Public Accountants
Maryland Heights, Missouri
March 19, 2014
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
The accompanying notes are an integral part of these financial statements.
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS cont'd
The accompanying notes are an integral part of these financial statements
CLEANTECH BIOFUELS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Business
Alternative Ethanol Technologies, Inc. (the “Company”), was incorporated in Delaware on December 20, 1996. Effective August 2, 2007, the Company changed its name to CleanTech Biofuels, Inc.
On March 27, 2007, the Company acquired SRS Energy, Inc., a Delaware corporation (“SRS Energy”), pursuant to an Agreement and Plan of Merger and Reorganization. In accordance with the merger agreement, SRS Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, merged with and into SRS Energy. The merger was consummated on May 31, 2007 and resulted in SRS Energy becoming a wholly-owned subsidiary of the Company. As a result of the merger, the stockholders of SRS Energy surrendered all of their issued and outstanding common stock and received shares of the Company’s common stock, $.001 par value per share (“Common Stock”). The former parent of SRS Energy, Supercritical Recovery Systems, Inc., immediately prior to the merger, distributed 78.8% of its 96% ownership in SRS Energy to its shareholders on a pro rata basis. For accounting purposes, because the Company had been a public shell company prior to the merger, the merger was treated as an acquisition of the Company and a recapitalization of SRS Energy.
The Company is a development stage company that has been engaged in technology development and pre-operational activities since its formation. The Company is currently seeking outside sources of funding to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output will be sold or provided to electric utilities, power and steam producers, and biofuel and chemical research firms for evaluation. In addition to research and development, the Company is also working towards licensing and/or developing potential commercial projects. These projects plan to focus on cleaning and separating municipal solid waste (also referred to as MSW) into its component parts in order to obtain: (i) a homogenous feedstock of cellulosic biomass for producing energy and other chemical products and (ii) recyclable products (metals, plastics, aluminum).
The Company has no operating history as a producer of biomass or energy sources and has not constructed any plants to date. We have no revenues and will be required to raise additional capital in order to execute our business plan and commercialize our products. Our current cash is not sufficient to fund our current operations. Our liabilities are substantially greater than our current available funds and current assets. Although we continue to seek additional financing through the sale of additional equity, various government funding opportunities and/or possibly through strategic alliances with larger energy or waste management companies, we have not had recent success securing meaningful amounts of financing. The Company will require substantial additional financing to implement its business plan and it may be unable to obtain the capital required to do so. If we are not able to immediately and successfully raise additional capital and/or achieve profitability or positive cash flow, we may not be able to continue operations.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates. Except where otherwise noted, the words “we,” “us,” “our,” and similar terms, as well as “Cleantech” or the “Company,” refer to Cleantech Biofuels, Inc. and its’ subsidiaries, collectively.
Consolidation - The financial statements include the accounts of Cleantech Biofuels, Inc. and its wholly owned subsidiaries, SRS Energy, Inc. and CTB Licensing, LLC. All significant intercompany transactions and balances are eliminated in consolidation.
Research and Development Costs - Research and development expenditures (which are comprised of costs incurred in performing research and development activities including wages and associated employee benefits, facilities and overhead costs), including payments to collaborative research partners are expensed as incurred.
Impairment of Long-Lived Assets - The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable primarily through reviewing changes in business plans and use of such assets. When factors indicate that an asset should be evaluated for possible impairment, the Company reviews long-lived assets to assess future use or recoverability of such asset. Impairments are recognized in earnings to the extent that the carrying value exceeds fair value.
Intellectual Property - Intellectual property, consisting of our licensed/owned patents and other proprietary technology, are stated at cost and will be amortized on a straight-line basis over their economic estimated useful life. Costs and expenses incurred in creating intellectual property are expensed as incurred. The cost of purchased intellectual property is capitalized. Amortization of these assets has not yet begun as the assets have not been placed in service as we have not yet commenced operations.
Property, plant and equipment - Newly acquired property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets, on the straight-line method for financial reporting purposes. Expenditures for maintenance and repairs are charged to expense as incurred.
Income Taxes - The Company accounts for income taxes in accordance with accounting guidance, which requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between financial statement and tax accounting methods and any available operating loss or tax credit carry forwards. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses and tax credits that are available to offset future taxable income.
The standards on accounting for uncertainty in income taxes (incorporated into the FASB Accounting Standards Codification (Codification) Topic 740, Income Taxes) clarify the accounting and recognition for income tax positions taken or expected to be taken in the Company’s income tax returns. The Company’s income tax filings are subject to audit by various taxing authorities. The Company’s open audit periods are 2010-2013. In evaluating the Company’s tax provisions and accruals, future taxable income, and the reversal of temporary differences, interpretations and tax planning strategies are considered. The Company believes their estimates are appropriate based on facts and circumstances.
Convertible Notes Payable and Warrants - The Company has issued various Convertible Promissory Notes (the “Notes”). These Notes may be converted at the option of the note holder into shares of the Company’s common stock. Additionally, these Notes carry warrants for shares of the Company’s common stock. These promissory notes have been recorded as debt (notes payable) in the financial statements, net of discounts, if any, for the conversion and warrant features. The discounts have been amortized on a straight-line basis over the term of each note.
Stock-based compensation - The Company accounts for stock-based compensation in accordance with accounting guidance that requires measuring all stock-based compensation awards at fair value and recognizing an expense in the financial statements. In March 2007, the Company adopted the 2007 Stock Option Plan (“Stock Plan”) for its employees, officers, directors and consultants. The Company has reserved a maximum of 14,000,000 shares of common stock to be issued for stock options or shares of restricted stock under the Stock Plan. We compensate certain employees, officers, directors and consultants with stock-based payment awards and recognize compensation costs for these awards based on their fair values and expense is recognized over the requisite service period. The fair values of certain awards are estimated on the grant date using the Black-Scholes-Merton option-pricing formula, which incorporates certain assumptions including the expected term of an award and expected stock price volatility. Our key assumptions are described in further detail in the Share-Based Payments Note to the Consolidated Financial Statements.
Fair Value Measurement - We use fair value accounting and reporting to specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources or reflect our own assumptions of market participant valuation. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
●
Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
●
Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets, or financial instruments for which significant inputs are observable, either directly or indirectly;
●
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As of and during the year ended December 31, 2013, we utilized Level 1 inputs to determine the fair value of cash equivalents and we utilized Level 2 inputs to determine the fair value of certain long-lived assets.
Contingent Liabilities - We are, from time to time, subject to litigation to our business. Assessments regarding the ultimate cost of lawsuits require judgments concerning matters such as the anticipated outcome of negotiations, the number and cost of pending and future claims, and the impact of evidentiary requirements. A significant amount of judgment and use of estimates is required to quantify our ultimate exposure in these matters. We regularly review the valuation of these liabilities and account for changes in circumstances for ongoing and emerging issues. The Company intends to defend itself vigorously in all litigation.
Dividends - We have no material operating history and therefore have had no earnings to distribute to stockholders. We currently intend to retain our earnings, if any, and reinvest them in the development and growth of our business and do not foresee payment of a dividend in any upcoming fiscal period.
Net Loss per Common Share - The Company calculates basic loss per share ("EPS") and diluted EPS. Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted EPS would reflect the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities. As of December 31, 2013, 2012 and 2011, the Company had options, warrants and convertible notes to purchase an aggregate of approximately 71 million, 68 million and 62 million shares of common stock, respectively, that were excluded from the calculation of diluted loss per share as their effects would have been anti-dilutive. Therefore, the Company only presents basic loss per share on the face of the statements of operations and in its disclosure of unaudited quarterly financial data in Note 14.
Recent Accounting Pronouncements - In July 2013, the FASB issued amendments to guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments require entities to present an unrecognized tax benefit netted against certain deferred tax assets when specific requirements are met. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (early adoption is permitted). This has not impacted the Company as the amendments only affect gross versus net presentation and do not impact the calculation of the unrecognized tax benefit.
In February 2013, the FASB issued updated authoritative guidance for Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI)" that requires entities to disclose either on the face of or in the notes to the financial statements the effects of reclassifications out of AOCI. For items reclassified out of AOCI and into net income in their entirety, entities must disclose the effect of the reclassification on each affected net income item. For items that are not reclassified in their entirety into net income, entities must provide a cross reference to other required disclosures. This ASU does not change the items currently reported in other comprehensive income and is effective for annual reporting periods beginning after December 15, 2012 and interim periods within those years. The adoption of these provisions did not have an impact on the Company’s consolidated financial statements.
In July 2012, the FASB issued updated authoritative guidance to amend previous guidance on the annual and interim testing of indefinite-lived intangible assets for impairment. The guidance provides entities with the option of first assessing qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If it is determined, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not less than the carrying amount, a quantitative impairment test would still be required. The Company performs annual impairment tests. The authoritative guidance is effective for fiscal 2013 and did not have a significant impact on the Company’s consolidated financial statements.
There were various other accounting standards updates recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries, and are not expected to have a material impact on the Company's financial position, results of operations or cash flows.
Note 3 - Mergers/Acquisitions
On September 15, 2008, the Company consummated the acquisition of Biomass North America Licensing, Inc. (“Biomass”) pursuant to a merger between Biomass and a wholly-owned subsidiary of the Company (with Biomass as the surviving subsidiary of the Company) in accordance with an Agreement and Plan of Merger by and between the Company and Biomass. By virtue of the merger, the Company acquired a license agreement pursuant to which the Company holds a license in the United States and Canada to use patented technology licensed from Biomass North America, LLC, the former parent of Biomass (the “Licensor”), to clean and separate MSW (the “Biomass Recovery Process”). In July 2010, the United States Patent and Trademark Office issued US patent number 7,745,208 for this process (the “BRP Patent”).
Upon consummation of the merger, the Company paid $20,000 in cash and issued a promissory note in the original principal amount of $80,000 bearing interest at an annual rate of 6% to a shareholder of the Licensor. This note has been paid in full. Additionally, the Company issued to the four shareholders of the Licensor a total of 1,895,000 shares of Common Stock and deposited an additional 4,000,000 shares of Common Stock into an escrow account (collectively, the “Shares”). The Shares were issued as part of the merger consideration received by the shareholders of the Licensor. In accordance with a November 2013 amendment, the Company has an exclusive license in the United States and Canada to use the Biomass Recovery Process and includes no performance requirements on the Company; the license agreement is for a term of 21 years from the date of the amendment or the life of any patent issued for the Biomass Recovery Process, including any amendments, modifications or extensions; the license requires that the Company pay a royalty in the amount of $2.00 per ton of MSW used in the Biomass Recovery Process to the Licensor; and the Company released the 4,000,000 shares of common stock to the Licensor previously held in escrow since the merger. The Company has recorded a long-term asset of approximately $1.6 million which it will begin to amortize upon utilizing the license in our operations.
Note 4 - Property and Equipment
For the years ended December 31, 2013 and 2012, we had depreciation expense of $-0- and $4,783, respectively.
Note 5 - Patent
The Company owns US Patent No. 6,306,248 (the “PSC Patent”), which is the underlying technology upon which the BRP Patent is based. The Company acquired the PSC Patent on October 22, 2008 pursuant to a Patent Purchase Agreement (“Agreement”) with World Waste Technologies, Inc. (“WWT”). As part of the acquisition of the PSC Patent, we also became the licensor of such technology under the existing license agreement between Bio-Products International, Inc, the licensee (“Bio-Products”) and WWT. The Company has paid WWT $600,000 and issued warrants to purchase 1,800,000 shares of Common Stock at a price of $0.10 per share. WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. (“Vertex”) as a result of a merger in March 2009. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The cost of the PSC Patent acquisition of $600,000 is recorded as a long-term asset on the Balance Sheet. The value of the warrants had been recorded as a contra-balance amount with the note and has been fully amortized, as of March 31, 2010, through interest expense.
On September 1, 2010, the Company issued a promissory note to CMS Acquisition, LLC (“CMS”) in the amount of $100,000 and bearing interest at 6.0% per annum. The note is secured with a security interest in the PSC Patent. In connection with the financing, the Company issued a warrant to CMS to purchase 2,000,000 shares of the Company’s Common Stock at a price of $0.05 per share. The warrant is exercisable at any time for five years from the date of issuance. The note was originally to mature on February 28, 2011. The Company and CMS have entered into various amendments extending the due date, the most recent of which was March 21, 2014, which extended the due date to March 1, 2015. As consideration in these amendments, the Company has: (i) paid $25,000 in February 2011 towards accrued interest to date and principal on the Note (ii) increased the interest rate to 10% as of May 15, 2011, (iii) re-dated the original warrants to March 21, 2014 and (iv) issued new warrants for 300,000 shares of the Company’s Common Stock with an exercise price of $0.05 and exercisable at any time until March 21, 2019.
Note 6 - Technology Licenses
Biomass North America Licensing, Inc.
We own an exclusive license in the United States and Canada to use the Biomass Recovery Process (See Note 3 - Mergers/Acquisitions). We have recorded a long-term asset of approximately $1.6 million for the value of this license ($1.52 million when we acquired the license on September 15, 2008 and another $48,000 when we released the shares from escrow in November 2013 as described previously in Note 3). Amortization of this asset will begin upon commencement of the use of the Biomass Recovery Process.
In accordance with a November 2013 amendment, the Company has an exclusive license in the United States and Canada to use the Biomass Recovery Process and includes no performance requirements on the Company; the license agreement is for a term of 21 years from the date of the amendment or the life of any patent issued for the Biomass Recovery Process, including any amendments, modifications or extensions; the license requires that the Company pay a royalty in the amount of $2.00 per ton of MSW used in the Biomass Recovery Process to the Licensor.
Bio-Products International, Inc.
As disclosed in Note 5 - Patent, the Company acquired the PSC Patent in 2008 and as a result, became the licensor to Bio-Products for the PSC Patent pursuant to a Master License Agreement dated as of August 18, 2003 (the “PSC License Agreement”). Pursuant to the terms of the PSC License Agreement, Bio-Products (a wholly-owned subsidiary of Clean Earth Solutions, Inc., “CES”) is the exclusive licensee of the PSC Patent and has the right to sublicense the technology that is part of the PSC Patent (but not the BRP Patent) to any party. In addition, we are entitled to be paid 5% of any revenue derived by Bio-Products from the use of the technology and 40% of any sublicensing fees paid to Bio-Products for the use of the technology. The Master License Agreement is for a term of 20 years that commenced on August 18, 2003. On September 22, 2010, the Company sent a Notice of Breach to Bio-Products, which included removing the exclusivity of the license. We received a response from Bio-Products on November 5, 2010 disputing our claims. In February 2011, we became aware that Bio-Products effected a transfer of the license in violation of the PSC License Agreement. As a result, on March 21, 2011, we sent a notice of termination to Bio-Products and the transferee terminating the License Agreement. In June 2011, Steve Vande Vegte, a shareholder in CES, filed a lawsuit against various parties, including the Company. The only Cause of Action against the Company is for Declaratory Relief seeking to avoid our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint is not ripe. The court granted our demurrer to dismiss Cleantech from this lawsuit on December 8, 2011.
All intangible assets are reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. An impairment charge is recognized if the carrying amount of an intangible asset exceeds its implied fair value.
Note 7 - Debt
Convertible Notes Payable - Since September 2008, the Company has conducted five offerings of units comprised of a convertible promissory note and a warrant having the terms set forth below:
Each note holder retains the option of a cash repayment of the note plus interest, or the note can be converted at any time during the term of the note or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million), into shares of Common Stock at the conversion price noted above. All notes have been recorded as debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features (except for the 11/10 and 5/12 Offerings which carried no discounts). See Subsequent Event footnote for further disclosure regarding our notes.
2008 Offering - During September 2008, the Company commenced an offering of units and raised a total of $642,000 of investment proceeds through March 31, 2009. As of March 31, 2010, all of these notes had either been converted to shares of our common stock or exchanged into our 2009 Offering (resulting in new notes with a total face value of $539,829, which included the original principal and interest through the date of exchange).
2009 Offering - During April 2009, the Company commenced an offering of units and raised a total of $1,198,500 of investment proceeds through August 2010. One note was converted to shares of Common Stock during 2009 and one note was converted to shares of Common Stock during 2010. Beginning in March 2011, certain notes were exchanged into our 11/10 Offering. As a result, as of December 31, 2013, we had $254,738 face value of notes outstanding, which includes the exchanged notes from our 2008 Offering. All of these notes have matured. We are working with the remaining note holders to either: repay the notes, refinance to our 11/10 Offering or convert the notes to shares of our Common Stock.
6/10 Offering - During June 2010, the Company commenced an offering of units and raised a total of $75,000 of investment proceeds in one note. Upon maturity in June 2011, this note was exchanged into our 11/10 Offering. As a result, the balance due on this offering is $-0-.
11/10 Offering - During November 2010, the Company commenced an offering of units and, as of December 31, 2013, had raised a total of $451,713 of investment proceeds. Three notes were converted to shares of common stock during 2011 and four notes were converted to shares of common stock in 2012. As of December 31, 2013, we had $1,851,004 face value of notes outstanding, which includes the exchanged notes from our 2009 Offering.
5/12 Offering - During May 2012, the Company commenced an offering of units and, as of December 31, 2013, had raised a total of $583,510 of investment proceeds.
CMS Acquisition, LLC Note Payable - In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum through May 15, 2011 and 10.0% thereafter, and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note is due the earlier of: (i) March 1, 2015 pursuant to an amendment on March 21, 2014 or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and was fully amortized (interest expense) as of February 28, 2011 (the original due date). As consideration in various amendments, the Company has: (i) paid $25,000 in February 2011 towards accrued interest to date and principal on the Note (ii) increased the interest rate to 10% as of May 15, 2011, (iii) re-dated the original warrants to March 21, 2014 and (iv) issued new warrants for 300,000 shares of the Company’s Common Stock with an exercise price of $0.05 and exercisable at any time until March 21, 2019.
The discounts on all notes payable have been amortized on a straight-line basis over the term of each note and all discounts became fully amortized during 2011. Amortization of the discounts (included in interest expense in the financial statements) was $41,661 for 2011.
The following is a summary of warrants issued and outstanding as of the dates below, at the exercise price and the amount of shares of Common Stock (these warrants have not been exercised or converted to common shares):
(a) Warrants either expired or exchanged into 11/10 Offering as part of new Note
Note 8 - Stockholders' Deficit
In January 2011 and February 2011, the Company issued 350,805 and 416,667 shares of Common Stock ($0.06 per share), respectively, to investors upon their conversion of Convertible Notes.
In June and December 2011, separate notes receivable from a consultant matured and were not paid. The notes were originally issued in June 2009 and December 2009 to purchase shares of our common stock. As a result, 625,000 shares of restricted stock, issued at $0.12 per share, and 625,000 shares of restricted stock, issued at $0.06 per share were forfeited and cancelled.
In July 2011, the Company issued 333,333 restricted shares of Common Stock ($0.06 per share) to a consultant in exchange for $20,000 owed in consulting fees to the consultant.
In August 2011, the Company issued 150,000 restricted shares of our Common Stock ($0.055 per share) to each of our non-management Directors (600,000 shares in the aggregate) in recognition of their additional service and assistance to the Company outside of their duties as a member of the Company’s board of directors.
In September 2011, the Company issued 200,000 restricted shares of our Common Stock ($0.05 per share) to a former employee as part of a final settlement agreement.
In December 2011, the Company issued 860,183 shares of Common Stock ($0.06 per share) to an investor upon the conversion of a Convertible Note.
In January 2012, the Company issued 83,333 shares of Common Stock ($0.06 per share) to an investor upon the conversion of a Convertible Note.
In April 2012, the Company issued 2,564,055 shares of Common Stock ($0.06 per share) to an investor upon the conversion of Convertible Notes.
In April 2012, the Company issued 78,592 restricted shares of Common Stock ($0.06 per share) in exchange for $4,715.55 related to certain accounts payable.
In June 2012, the Company issued 150,000 restricted shares of our Common Stock ($0.04 per share) to our newly elected non-management director. The director issued a promissory note to the Company in exchange for the stock purchase similar to the restricted share grants to all other newly elected directors.
In August 2012, a note receivable from a former director matured and was not paid. The note was originally issued in August 2007 to purchase shares of our common stock. As a result, 150,000 shares of restricted stock, issued at $0.15 per share were forfeited and cancelled.
In August 2013, the Company commenced an offering of units, under a Subscription Agreement, at a purchase price of $1,000 per unit (Equity Offering 8/13). Each unit consists of: (i) 10,000 shares of the Company’s authorized but unissued restricted Common Stock and (ii) warrants to purchase 30,000 additional shares of Common Stock for a one-year period from the date of issuance of the units at an initial exercise price of $0.15 per share. As of December 31, 2013, the Company issued 2,060,000 restricted shares (at $0.10 per share) of our Common Stock in exchange for $206,000 in investment in this offering. The Company has closed all debt offerings. See Subsequent Event footnote for further updates to this offering and other share grants affecting Stockholders Equity.
In November 2013, the Company released 4,000,000 shares (at $0.012 per share) from escrow in accordance with the amended technology license previously disclosed in footnote 6.
Note 9 - Related Party Transactions
The Company has entered into stock purchase agreements with its executive officers and certain members of the Board of Directors. The executive officers and directors issued notes to the Company in exchange for their stock purchases. These notes and accumulated interest are recorded as notes receivable in Stockholders’ Deficit.
In September 2013, the Company hired, on a part-time basis, a Chief Technology Officer (CTO) and a VP-Business Development (VP-BD). These individuals maintain their engineering firm Fenton Engineering International (FEI) on a full-time basis and receive no salary in their part-time positions but are eligible for grants of stock options. We have used and continue to use their services. As of December 31, 2013, all amounts have been paid to FEI except for approximately $52,000.
In August 2010, certain notes receivable from former and current members of our Board of Directors matured. The notes were originally issued in August 2007 to purchase shares of our common stock. Two of the former directors declined to pay these notes or extend the due date. As a result, 300,000 shares of restricted stock, issued at $0.15 per share, were forfeited and cancelled. The two other directors agreed to extend the due date of their notes to August 2012. In August 2012, one former director declined to pay the note and, as a result, 150,000 shares of common stock, issued at $0.15 per share, were forfeited and cancelled. The other director elected to extend the due date of the note to August 2014.
The Company had engaged the law firm of Sauerwein, Simon and Blanchard (“SSB”) related to various issues including our reverse merger, our SB-2 registration statement, litigation matters and general business activity. A member of our board of directors is a partner of SSB. We no longer use SSB as legal counsel. As of December 31, 2013, all amounts have been paid to SSB except for approximately $90,000.
Beginning in 2009, the Company has provided advances to two employees - Ed Hennessey and Mike Kime. Mr. Kime resigned from his positions with the Company effective June 21, 2010. As of December 31, 2013 and 2012, the aggregate balances of advances totaled approximately $33,000. The balances are included in Prepaids and Other Current Assets on the Balance Sheet.
Two members of our current Board of Directors, James Russell and David Bransby are parties in investments made in our convertible note offerings. As of December 31, 2013 and 2012, the aggregate amount due on these investments, including interest, is approximately $426,000 and $402,000, respectively.
Note 10 - Share-based Payments
The Company recognizes share-based compensation expense for all share-based payment awards including stock options and restricted stock issued to employees, directors and consultants and is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. The Company has no awards with market or performance conditions.
In March 2007, the Company assumed and adopted the 2007 Stock Option Plan (“Stock Plan”) for its employees, directors and consultants, which includes an equity compensation plan for non-employee directors pursuant to which stock options and shares of restricted stock may be granted. The Company currently has reserved a maximum of 14,000,000 shares of common stock to be issued for stock options or restricted shares awarded under the Stock Plan.
The estimated fair value of stock option grants is computed using the binomial option-pricing model. Generally, expected volatility is based on historical periods commensurate with contractual term of options. However, since we have no history of stock price volatility as a public company at the time of the grants, we calculated volatility by considering historical volatilities of public companies in our industry. Due to the short history of our industry, the historical period used in our calculations is shorter than the contractual term of the options. The fair value for options granted was determined at the date of grant. The following assumptions were used for options granted in the corresponding year.
Stock option expense is recognized in the statements of operations ratably over the vesting period based on the number of options that are expected to ultimately vest. Our options have characteristics significantly different from those of traded options and changes in the assumptions can materially affect the fair value estimates. The following table presents the components of share-based compensation recorded as general and administrative expense.
Related to all grants, the Company will record future compensation expense for stock options of approximately $2,000 for 2014. The potential tax benefit realizable for the anticipated tax deductions of the exercise of share-based payments pertaining to stock options totaled approximately $311,000 at December 31, 2013. However, due to the uncertainty that the tax benefits will be realized, these potential benefits were not recognized currently.
As of December 31, 2013, there was approximately $2,000 of unrecognized compensation cost related to all share-based payment arrangements, which will be recognized over a remaining period of eight months. There are approximately 2.4 million options granted that are not yet vested as of December 31, 2013. These options have a weighted average exercise price of $0.07.
A summary of the Company's stock option activity and related information as of and for the three years ended December 31, 2013, is set forth in the following table:
(1) The weighted-average exercise price at December 31, 2013, 2012 and 2011 for all options was greater than the fair value of the Company's common stock on that date, resulting in an aggregate intrinsic value of $-0-.
The following table summarizes information about the Company's issuances of restricted stock for the three years ended December 31, 2013:
Note 11 - Income Taxes
The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
The Company incurred no income taxes for the years ended December 31, 2013, 2012 and 2011. The expected income tax benefit and resulting deferred tax asset for the years ended December 31, 2013, 2012 and 2011 is approximately $256,000, $305,000 and $280,000, respectively. These benefits are the result of temporary differences (start-up costs, stock compensation and other items) and operating loss carryforwards. The difference between the expected income tax benefit and non-recognition of an income tax benefit in each period is the result of a valuation allowance applied to deferred tax assets. A valuation allowance in the same amount of the benefit has been provided to reduce the deferred tax asset, as realization of the asset is not assured.
At December 31, 2013, the Company has the following net operating loss (“NOL”) carryforwards which are available to offset future taxable income.
This NOL results in a net deferred tax asset of approximately $770,000 for which the Company has recorded a full valuation allowance. The NOL carryforwards may be limited under the Change of Control provisions of the Internal Revenue Code section 382. Temporary differences which give rise to net deferred tax assets are:
Note 12 - Commitments and Contingencies
Contingencies
As disclosed previously in Note 6 - Technology Licenses, in June 2011, Steve Vande Vegte, a shareholder in CES, filed a lawsuit against various parties, including the Company. The only Cause of Action against the Company is for Declaratory Relief seeking to avoid our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint is not ripe. On December 8, 2011, the demurrer to dismiss Cleantech was granted. In October 2011, a Cross-Complaint was filed by Clean Conversion Technologies, Inc. (“CCT”) and Michael Failla v. the Company. CCT is asking that the Company’s termination of the license agreement is void. The Company filed a motion to compel arbitration, which was denied. This case was voluntarily dismissed per the stipulation filed with the court in February 2014.
On January 30, 2012, CCT filed an anti-trust lawsuit against the Company and Mr. Vande Vegte alleging monopolistic and anti-competitive acts to conspire to completely eliminate competition in an emerging line of commerce known as PSC conversion, which is a patented process owned by Cleantech (the PSC technology). This case has been voluntarily dismissed per the stipulation filed with the court in August 2013.
Commitments
Lease - The Company leases approximately 1,800 square feet of office space for use as our corporate office, located at 7386 Pershing Ave. in St. Louis, Missouri. The original lease term expired and can be extended for two year periods at expiring terms and conditions (current term ends December 2014). Our monthly rent under the lease is $1,800 plus the cost of utilities.
Note 13 - Subsequent Events
All of the promissory notes in our 2009 Offering and certain notes in our 11/10 and 5/12 Offerings are now due. As of March 21, 2014, approximately $2.5 million is currently due, including interest. We are working with each remaining note holder to exchange, convert or repay these promissory notes.
In August 2013, the Company commenced an offering of units, under a Subscription Agreement, at a purchase price of $1,000 per unit (Equity Offering 8/13). Each unit consists of: (i) 10,000 shares of the Company’s authorized but unissued restricted Common Stock and (ii) warrants to purchase 30,000 additional shares of Common Stock for a one-year period from the date of issuance of the units at an initial exercise price of $0.15 per share. As of March 21, 2014, the Company has issued 2,060,000 restricted shares of our Common Stock in exchange for $206,000 in investment in this offering. The Company has closed all debt offerings.
In January 2014, the Company entered into a consulting agreement with GWS Environmental Consultants (GWS). GWS has certain expertise and contacts in the collection, recycling, transfer and disposal of MSW and will provide the Company consulting regarding these items. The term is for three years and the Company issued 500,000 common shares of the Company to GWS as compensation.
In February 2014, the Company issued a Note Payable for a $100,000 investment in the Company. The note’s term is 18 months at 6% interest and can be converted, at the option of the note holder, into common shares of the Company at a price of $0.10 per share.
Note 14 - Quarterly Financial Data (Unaudited)
The results of operations by quarter were as follows:
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Effectiveness of Disclosure Controls and Procedures - We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Security and Exchange Commission’s rules and regulations. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management does not expect that our disclosure controls and procedures will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives outlined above. Based on their most recent evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rule 15d-15(e) promulgated under the Securities Act of 1934) are effective at that reasonable assurance level at December 31, 2013. Further, the design of a control system must reflect the fact that there are resource constraints, including, but not limited to having two total full-time employees (chief executive officer and chief financial officer), and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Management’s Report on Internal Control Over Financial Reporting - Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 15d-15(f) of the Securities Exchange Act of 1934. Internal control over financial reporting provides reasonable assurance of the reliability of our financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control involves maintaining records that accurately represent our business transactions, providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization, and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be detected or prevented on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.
Changes in Internal Control Over Financial Reporting - During the three months ended December 31, 2013, there were no material changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information
None.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance
The Company’s Restated Articles of Incorporation, as amended, and Amended and Restated By-laws provide for a division of the Board of Directors into three classes. One of the classes is elected each year to serve a three-year term. The Company’s Amended and Restated By-Laws currently specify that the number of directors shall be not less than three nor more than nine, subject to amendment by the Board of Directors. Currently, the Company has four members of the Board of Directors as detailed below. There are no family relationships between any of the persons serving as the directors and/or executive officers of the Company.
The following table sets forth for each director and officer, such director’s or officer’s age, principal occupation for at least the last five years, present position with the Company, the year in which such director or officer was first elected or appointed (each director serving continuously since first elected or appointed), directorships with other companies whose securities are registered with the SEC, and the class of such director.
Class III Directors: Terms expiring in 2016
Class I Director: Terms expiring in 2014
Class II Director: Terms expiring in 2015
Involvement in Certain Legal Proceedings
During the past ten years, no present director or executive officer of the Company has been the subject matter of any of the following legal proceedings that are required to be disclosed pursuant to Item 401(f) of Regulation S-K including: (a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (b) any criminal convictions; (c) any order, judgment, or decree permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (d) any finding by a court, the SEC or the CFTC to have violated a federal or state securities or commodities law, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud; or (e) any sanction or order of any self-regulatory organization or registered entity or equivalent exchange, association or entity. Further, no such legal proceedings are believed to be contemplated by governmental authorities against any director or executive officer.
Code of Ethics
All directors, officers and employees of the Company, including its Chief Executive Officer and its Chief Financial Officer, are required to comply with the Company’s Code of Ethics to ensure that the Company’s business is conducted in a legal and ethical manner. The Code of Ethics covers all areas of business conduct, including employment policies and practices, conflict of interest and the protection of confidential information, as well as strict adherence to all laws and regulations applicable to the conduct of our business. Directors, officers and employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of our Code of Ethics. The Company, through the Audit Committee, has procedures in place to receive, retain and treat complaints received regarding accounting, internal accounting control or auditing matters and to allow for the confidential and anonymous submission of concerns regarding questionable accounting or auditing matters. The Company’s Code of Ethics was filed as Exhibit 14 in its December 31, 2007 Form 10-KSB filed with the Securities and Exchange Commission on March 28, 2008 and can be obtained free of charge by written request to the attention of the Secretary of the Company at 7386 Pershing Ave, University City, MO 63130 or by telephone at (314) 802-8670. Any changes to or amendments of the Code of Ethics will be filed as a future exhibit in our filings with the Securities and Exchange Commission.
Audit Committee
The Audit Committee is currently comprised of Messrs. Russell (Chairman) and Bransby, each of whom is “independent” in accordance with the definition of “independent” as set forth in Rule 5605(a)(2) of the Nasdaq Listing Rules, as well as the independence requirements for audit committee members under Rule 10A-3 promulgated under the Securities Exchange Act of 1934. The Company has determined that none of the members of our audit committee qualifies as an "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K. The Company has determined that one member understands fundamental financial statements and has substantial business experience that results in that member's financial sophistication. While we intend to add an "audit committee financial expert" in the future, we believe our current members provide financial understanding given the early stages of our development and the fact that we have not generated any revenues to date. The Audit Committee evaluates significant matters relating to the audit and internal controls of the Company, reviews the scope and results of the audits conducted by the Company’s independent public accountants, confers with the independent public accountants regarding the adequacy of our financial controls and fiscal policy and performs other functions or duties provided in the Audit Committee Charter.
Nomination of Directors
The Board of Directors does not currently have a standing Nominating Committee or a charter regarding the nominating process and, as a result, the Board of Directors as a whole performs the functions of the nominating committee and directs and oversees the process by which individuals may be nominated to our Board of Directors. The Company does not believe that given the small size of the Company that designating a separate nominating committee is necessary, and that the Board of Directors as a whole is the appropriate body to oversee the nomination of directors. The Board of Directors will give appropriate consideration to written recommendations from stockholders regarding the nomination of qualified persons to serve as directors of the Company, provided that such recommendations contain sufficient information regarding proposed nominees so as to permit the independent members of the Board of Directors to properly evaluate each nominee’s qualifications to serve as a director. Nominations must be addressed to the Secretary of the Company at 7386 Pershing Ave, University City, MO 63130. The Board of Directors may also conduct their own search for potential candidates that may include candidates identified directly by a variety of means as deemed appropriate by the independent directors.
There are no established term limits for service as a director of the Company. In general, it is expected that each director of the Company will have the highest personal and professional ethics, integrity and values and will consistently exercise sound and objective business judgment. In addition, it is expected that the Board of Directors as a whole will be made up of individuals with significant senior management and leadership experience, a long-term and strategic perspective and the ability to advance constructive debate.
ITEM 11.
ITEM 11. Executive Compensation
Compensation Discussion and Analysis
Two key aspects of the duties and responsibilities of the Board of Directors are the administration of our compensation programs, including our equity incentive program, and the approval of compensation for our executive officers. The Board of Directors has the authority to retain outside counsel and/or such other experts or consultants as it deems necessary to discharge its duties.
Summary Compensation Table
The following table summarizes the total compensation paid or earned by the Company’s Principal Executive Officer and Principal Financial Officer, the only executive officers of the Company (together the “Named Executive Officers”), who served these positions during 2013.
(1) The assumptions made when calculating the amounts in this column are found in footnote 10 to the Consolidated Financial Statements included in this report. The amounts represent the accounting cost in accordance with FASB ASC Topic 718 that the Company recorded in its Statements of Operations in each year.
(2) In September 2013, we added, on a part-time basis, a Chief Technology Officer (CTO) and a VP-Business Development (VP-BD). These individuals maintain their engineering consulting firm on a full-time basis and assist our company as needed. Neither receive a salary but each do receive stock options (the cost of these options is $-0- based on the same calculations and assumptions used in (1) above).
Our Executive Compensation Policy
We believe that a critical factor in attracting and retaining talented and dedicated management that is necessary for our success is the establishment and fair implementation of a comprehensive executive compensation program. Accordingly, our overall compensation philosophy is to offer our executives and other members of our management team compensation and benefits that meet and enhance our goals of attracting, retaining and motivating highly skilled people to work together as a team to achieve our financial and strategic business objectives; provided however, that our ability to pay salaries and other benefits to our executive officers is significantly limited by our lack of financial resources and revenues. In furtherance of our compensation philosophy, and subject to our financial resources, our executive compensation program is designed to:
●
provide fair and reasonable compensation that meets the competitive environment for executive talent;
●
help motivate the members of our executive team for excellent performance; and
●
align the interests of our executive team members with those of our stockholders and the long-term success of our company.
While all decisions regarding executive compensation are ultimately made by our Board of Directors, they also rely on the recommendations of the Chief Executive Officer with respect to all of our executive officers (other than the Chief Executive Officer himself), particularly with regard to his assessment of each executive officer’s individual performance against achievement of strategic objectives, level of responsibility exercised and the level of specialized experience and knowledge required to do the job. Determinations by our Board of Directors are not made in accordance with strict formulas which measure weighted qualitative and quantitative factors. Rather, such determinations are more subjective in nature and take into account not only the recommendations of our Chief Executive Officer, but such other factors as deemed relevant in an effort to blend competitive ranges into our own internal policies and practices. The Board of Directors may also seek advice from a compensation consultant.
All of our executive officers entered into three-year employment agreements with the Company effective as of August 31, 2007 that provide for, among other things, the base salary, if any, of such executive officer’s compensation package. These employment contracts permit us to increase, but not decrease, base salaries within the contract term. The contracts expired on August 31, 2010 and by their terms, automatically renew for additional one-year periods, unless terminated by either the Company or the employee.
Elements of our Executive Compensation Program
Our executive officer program consists of three basic elements: base salary, annual incentive bonus, and long-term incentive compensation. Currently our executive officers whose compensation is reported in the Summary Compensation Table are paid their approved salaries as cash is available and have not been paid any bonus. We expect that in the future we will begin paying the Named Executive Officers salary and bonuses consistent with their position and job performance. Consistent with our executive officer compensation philosophy, we have structured each element of our compensation package as follows:
Base Salary - In December 2008, annual base salaries, effective beginning November 2008, were approved of $144,000 for Mr. Hennessey and $120,000 for Mr. Jennewein. Salaries are currently paid based on cash availability. Salary that is not paid is accrued in our financial statements. Currently, the salaries paid to our executive officers as a group are substantially less than the salaries typically paid to executives with the experience and background of our executive officers.
Bonuses - None of our executive officers were paid a bonus in 2013, 2012, or 2011. We do not currently have any bonus plan for executive officers.
Long-Term Incentive Compensation - The long-term incentive awards for our executive officers can be made under our 2007 Stock Option Plan under which the Board of Directors may, among other things, grant or award stock options and other stock-based awards, subject to certain limitations and restrictions as set forth in the plan. Our use of stock-based awards for our executive officers is the primary means by which we provide our executive officers a long-term incentive that becomes more valuable to the executive to the extent our share value increases, thereby aligning each executive’s interest with the interest of our stockholders.
It is the policy of the Board of Directors that, with respect to all equity-based compensation for the executive officers, the award dates for each grant shall be specified by the Board of Directors at a duly convened meeting as of a date on or after the date of its action, and that the exercise price or value of the grant shall be determined by reference to the closing price of our common stock on the specified award date. See “Outstanding Equity Awards at Fiscal Year-End” table for additional information. Equity grants may also be made to new executive officers upon commencement of their employment and, on occasion, to executive officers and members of our board of directors in connection with a significant change in job responsibility, extraordinary performance, or other reasons.
Tax and Accounting Implications
Section 162(m) of the Internal Revenue Code generally precludes a public company from taking a federal income tax deduction for annual compensation in excess of $1 million per individual paid to its chief executive officer or the other named executive officers. Under Section 162(m), certain compensation, including “performance-based compensation,” is excluded from this deduction limitation. Our intent is to structure compensation paid to our executives to be deductible; however, from time to time, the Board of Directors may award compensation that may not be deductible if it determines that such awards are consistent with our compensation philosophy and in the best interest of our stockholders. We believe that all of the 2013 compensation paid to our executive officers is fully deductible.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information on stock options and restricted stock awards granted to the Named Executive Officers that were outstanding as of December 31, 2013. The market values in this table were computed using the closing price of the Company’s common stock on December 31, 2013, which was $0.02.
(1) The options shown in this column are nonvested as of December 31, 2012.
(2) This option grant vests in three equal annual installments beginning on August 31, 2012, 2013 and 2014.
(3) This option grant vest in three equal installments on March 12, 2013, August 31, 2013 and August 31, 2014.
Option Exercises and Stock Vested
(1) The values reflect the market value of Cleantech Biofuels, Inc. common stock as of the vesting dates. These prices ranged from $0.02 to $0.36.
(2) The price of our common stock on these vesting dates was less than or equal to the exercise price of the options.
(3) This stock award was granted (and vested) on December 4, 2008. Each officer issued a promissory note with an exercise price of $0.36.
Pension Benefits - None of our Named Executive Officers are covered by a defined benefit pension plan or other similar benefit plan that provides for payments or other benefits.
Nonqualified Deferred Compensation - We do not have any nonqualified deferred compensation plans.
Potential Payments Upon Termination or Change-in-Control
Each of the employment agreements with our Named Executive Officers was entered into for an initial term of employment that commenced as of August 31, 2007 and expired on August 31, 2010. By their terms, the employment agreements automatically renew for additional one-year periods, unless terminated by either the Company or the employee.
The employment agreements may be terminated upon: (i) the Company’s dissolution, (ii) the death or permanent disability of the employee, (iii) by the Company upon the employee’s unsatisfactory performance of his duties under the agreement, (iv) ten days’ written notice by the Company upon breach or default of the terms of the agreement by the employee, or (v) by the employee upon 30 days’ written notice to us. The employment agreements also permit the Company to terminate the employee’s employment following an act of misconduct.
If employment is terminated for any of the reasons set forth above, the Named Executive Officers discussed above will only receive their base salary accrued but unpaid as of the date of the termination. If employment is terminated for any reason other than those set forth above and those subsequent to a change in control of the Company, as discussed below, the Officers will receive one year of base salary. Additionally, all of Mr. Hennessey’s and Mr. Jennewein’s shares subject to stock options will vest.
If, pursuant to a change in control of the Company, an employee’s employment agreement is involuntarily terminated, the employee will receive severance pay in an amount equal to his annual base salary for one year following the date on which he was terminated.
Director Compensation
For the year ending December 31, 2013, the following table summarizes compensation for members of our Board of Directors.
(1) As of December 31, 2013, the following number of options were outstanding for each Director: Simon and Bransby - 130,000 options each, 100% vested; Russell - 40,000 options, 50% vested.
In 2011, each of the Company’s non-employee directors at that time, received compensation of 150,000 restricted shares of the Company’s common stock and a grant of 90,000 options (two-year vesting period). Each non-employee board member receives a grant of 40,000 options and 150,000 restricted shares of common stock upon joining as a director of the Company. The Company’s non-employee directors received no fees or other compensation as a board or committee member in 2013.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of December 31, 2013 with respect to each person or group known by the Company to be the beneficial owner of more than five percent of its outstanding shares of Common Stock. Beneficial ownership of shares has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under which a person is deemed to be the beneficial owner of securities if he or she has or shares voting or investment power with respect to such securities or has the right to acquire ownership thereof within 60 days. Accordingly, the amounts shown in the tables do not purport to represent beneficial ownership for any purpose other than compliance with the reporting requirements of the SEC.
(1)
Amount represents shares owned by Supercritical Recovery Systems, Inc., of which Mr. Hennessey serves as President and a Member of the Board of Directors.
(2)
SRS Legacy Trust is an irrevocable trust of which Edward P. Hennessey, Jr. is a beneficiary. Michael Hennessey, Mr. Hennessey’s brother, has sole voting power, and Paul Simon, Jr., one of our directors, has sole dispositive power with respect to these shares.
(3)
Rodney H. Thomas, as Trustee of the Trust which is the majority owner of RAM Resources, L.L.C., has controlling voting and dispositive power over these shares.
SECURITY OWNERSHIP OF MANAGEMENT
Under regulations of the SEC, persons who have power to vote or to dispose of our shares, either alone or jointly with others, are deemed to be beneficial owners of those shares. The following table sets forth, as of December 31, 2013, the beneficial ownership of the outstanding Common Stock of each current director, each of the executive officers named in the Summary Compensation Table set forth herein and the executive officers and directors as a group. Unless otherwise noted, the Company believes that all persons named in the table below have sole voting power and dispositive power with respect to all shares beneficially owned by them.
*Less than 1%.
(1)
Includes the shares described in footnote 1 to the “Security Ownership of Certain Beneficial Owners” table and the vested portion and the portion that will vest within 60 days hereof of shares of options and restricted stock.
(2)
Amounts represent the vested portion and the portion that will vest within 60 days hereof of shares of options and restricted stock.
(3)
Amount includes the vested portion and the portion that will vest within 60 days hereof of shares of options and restricted stock and shares held individually.
In connection with the merger with SRS Energy, we assumed SRS Energy’s 2007 Stock Option Plan, which was adopted by the SRS Energy Board of Directors and approved by the SRS Energy shareholders on April 16, 2007. We currently have 14,000,000 shares of our common stock reserved under our 2007 Stock Option Plan.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
From time to time, the Company has engaged in various transactions with certain of its directors, executive officers and other affiliated parties. The following paragraphs summarize certain information concerning certain transactions and relationships that have occurred during the past fiscal year or are currently proposed.
Paul Simon, Jr., a director of the Company, is a Member of the law firm Sauerwein, Simon & Blanchard, P.C., which had provided legal services to the Company through 2009. No services have been provided since. The Company currently owes Sauerwein, Simon & Blanchard, P.C. approximately $90,000.
Beginning in 2009, the Company provided advances to partially cover for months with no payroll, to two employees - Ed Hennessey and Mike Kime (who resigned from the Company in June 2010) and as of December 31, 2013, the balance of advances were approximately $13,000 and $20,000, respectively.
Two members of our Board of Directors, James Russell and David Bransby are parties to investments in our Convertible Note offerings - approximately $426,000 in the aggregate, including principal and interest, as of December 31, 2013. No principal or interest has been paid on these notes. Interest accrues at 6% per annum.
In September 2013, the Company hired, on a part-time basis, a Chief Technology Officer (CTO) and a VP-Business Development (VP-BD). These individuals maintain their engineering firm Fenton Engineering International (FEI) on a full-time basis and receive no salary in their part-time positions but are eligible for grants of stock options. We have used and continue to use their services. As of December 31, 2013, all amounts have been paid to FEI except for approximately $52,000.
Determination of Director Independence
The Company utilizes the definition of “independent” as set forth in Rule 5605(a)(2) of the NASDAQ Listing Rules. Nasdaq requires that a majority of the Board of Directors be “independent,” as defined in Nasdaq Marketplace Rule 5605(a)(2). Under the Nasdaq rules, the Board of Directors must make an affirmative determination that a director is independent by determining that the director has no relationships that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The Board of Directors has reviewed the independence of its directors under the Nasdaq rules. During this review, the Board of Directors considered transactions and relationships between each director or any member of his family and the Company. The Board of Directors has determined that Messrs. Russell and Bransby are independent under Nasdaq Rule 5605(a)(2).
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
The following table sets forth the amount of audit fees, audit-related fees, tax fees and all other fees billed or expected to be billed by Milhouse & Neal, LLP, the Company’s independent registered public accounting firm:
(1) Includes annual financial statement audit.
(2) Includes fees for the preperation of the Company's tax returns.
The Audit Committee is required to review and approve in advance the retention of the independent auditors for the performance of all audit and lawfully permitted non-audit services and the fees for such services. The Audit Committee may delegate to one or more of its members the authority to grant pre-approvals for the performance of non-audit services, and any such Audit Committee member who pre-approves a non-audit service must report the pre-approval to the full Audit Committee at its next scheduled meeting. The Audit Committee is required to periodically notify the Board of their approvals. The required pre-approval policies and procedures were complied with during 2013 and 2012.
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this report:
1.
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 and Inception to December 31, 2013
Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 and Inception to December 31, 2013
Notes to Consolidated Financial Statements
2.
Exhibits:
*Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CleanTech Biofuels, Inc.
(registrant)
March 21, 2014 By: /s/ Edward P. Hennessey, Jr.
Edward P. Hennessey, Jr.
Chief Executive Officer
March 21, 2014 By: /s/ Thomas G. Jennewein
Thomas G. Jennewein
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
March 21, 2014 /s/ Edward P. Hennessey, Jr.
Edward P. Hennessey, Jr., Chairman of the Board of Directors and Chief Executive Officer (principal executive officer)
March 21, 2014 /s/ Thomas G. Jennewein.
Thomas G. Jennewein, Chief Financial Officer (principal financial and accounting officer)
March 21, 2014 /s/ James Russell
James Russell, Director
March 21, 2014 /s/ Dr. David Bransby
David Bransby, Director
March 21, 2014 /s/ Paul Simon, Jr.
Paul Simon, Jr., Director
INDEX TO EXHIBITS
*Management contract or compensatory plan or arrangement.