10-K
2012-09-30
false
AMERICAN SOIL TECHNOLOGIES INC
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--09-30
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<!--egx--><pre>1. ORGANIZATION AND BASIS OF PRESENTATION</pre><pre> </pre><pre>ORGANIZATION</pre><pre>American Soil Technologies, Inc. (the "Company" or "American Soil"), formerly</pre><pre>Soil Wash Technologies, Inc., was incorporated in the state of California on</pre><pre>September 22, 1993. On November 24, 1999, the Company entered into an exchange</pre><pre>agreement for the reverse acquisition of New Directions Manufacturing, Inc., a</pre><pre>publicly traded Nevada corporation incorporated on January 9, 1997 ("New</pre><pre>Directions"), wherein New Directions would acquire the assets of the Company and</pre><pre>change its name to American Soil Technologies, Inc. This exchange agreement was</pre><pre>effective as of the close of business on December 31, 1999.</pre><pre> </pre><pre>The Company is primarily engaged in the marketing and selling of polymer and</pre><pre>other soil amendments to the agricultural turf and horticulture industries. The</pre><pre>Company's products are used to decrease water usage, increase nutrient retention</pre><pre>in soil, enhance seed germination and sprout emergence, clarify ponds and</pre><pre>increase the effectiveness of chemical fertilizers and biological additives. In</pre><pre>2006, the Company acquired the patent to a slow release fertilizer. The Company</pre><pre>also has exclusive license rights to the use of patented polymer application</pre><pre>techniques, as well as numerous patents on a unique machine designed to inject</pre><pre>polymer and other liquid products into existing turf and some crops.</pre><pre> </pre><pre>The Company expanded to provide next-generation and sustainable fertilizers</pre><pre>through the acquisition of Smart World Organics, Inc. ("Smart World") on</pre><pre>December 20, 2006. Simultaneously, the Company entered into an Intellectual</pre><pre>Property Purchase Agreement with the founder of Smart World, Ray Nielsen</pre><pre>("Nielsen") that included certain formulas originally believed to be proprietary</pre><pre>and intellectual properties used in the business of Smart World. The formulas</pre><pre>acquired from Nielsen were later deemed not to be proprietary and subsequently</pre><pre>deemed to have little or no value (see Note 5). Smart World sold homogenized</pre><pre>fertilizers, non-toxic insect controls, plant protectants, seed, soil and silage</pre><pre>inoculants, and also provided advanced, custom-formulated products built to suit</pre><pre>unusual growing conditions and environments. Due to losses incurred in 2008,</pre><pre>management terminated Smart World employees, consolidated Smart Worlds operation</pre><pre>with those of American Soil, and continues to seek sales of certain of its</pre><pre>products. Additionally, the Company has several debt obligations related to</pre><pre>Smart World that are past the contractual maturity date or are due and payable</pre><pre>due to non payment of interest. Operations of Smart World have been limited</pre><pre>subsequent to fiscal 2008 due to insufficient working capital</pre><pre> </pre><pre>GOING CONCERN AND MANAGEMENT'S PLANS</pre><pre>The Company has sustained significant losses and has an accumulated deficit of</pre><pre>$28,675,193 and negative working capital of $7,445,480 as of September 30, 2012.</pre><pre>The ability of the Company to continue as a going concern is dependent upon</pre><pre>obtaining additional capital and financing, and generating positive cash flows</pre><pre>from operations. The Company intends to seek additional capital either through</pre><pre>debt or equity offerings and is attempting to increase sales volume and</pre><pre>operating margins to achieve profitability. Due to the current economic</pre><pre>environment and the Company's current financial condition, management cannot be</pre><pre>assured there will be adequate capital available when needed and on acceptable</pre><pre>terms. These factors raise substantial doubt about the Company's ability to</pre><pre>continue as a going concern. If the Company is unable to raise capital of</pre><pre>sustain profitable operations, the Company may have to curtail or discontinue</pre><pre>operations. The financial statements do not include any adjustments relating to</pre><pre>the recoverability and classification of asset carrying amounts or the amount</pre><pre>and classification of liabilities that might result should the Company be unable</pre><pre>to continue as a going concern.</pre>
<!--egx--><pre>2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</pre><pre> </pre><pre>PRINCIPLES OF CONSOLIDATION</pre><pre>The consolidated financial statements include the accounts of American Soil</pre><pre>Technologies, Inc, and its wholly-owned subsidiary, Smart World Organics, Inc.</pre><pre>All intercompany balances and transactions have been eliminated in</pre><pre>consolidation.</pre><pre> </pre><pre>USE OF ESTIMATES</pre><pre>The preparation of consolidated financial statements in conformity with</pre><pre>accounting principles generally accepted in the United States of America,</pre><pre>requires management to make estimates and assumptions that affect the reported</pre><pre>amounts of assets and liabilities and disclosure of contingent assets and</pre><pre>liabilities at the date of the financial statements and the reported amounts of</pre><pre>revenues and expenses during the reporting periods. Actual results could differ</pre><pre>from those estimates. The Company's significant estimates made in connection</pre><pre>with the preparation of the accompanying financial statements include the</pre><pre>carrying value of the intangible assets.</pre><pre> </pre><pre>CASH AND CASH EQUIVALENTS</pre><pre>Cash and cash equivalents includes all short-term highly liquid investments that</pre><pre>are readily convertible to known amounts of cash and have original maturities of</pre><pre>three months or less.</pre><pre> </pre><pre>ACCOUNTS AND NOTES RECEIVABLE</pre><pre>The Company utilizes the allowance method to provide a reserve for uncollectible</pre><pre>accounts. The Company determines any required allowance by considering a number</pre><pre>of factors including length of time trade accounts receivable are past due and</pre><pre>the Company's previous loss history. The Company records a reserve account for</pre><pre>accounts receivable when they become uncollectible. Payments subsequently</pre><pre>received on such receivables are credited to the allowance for doubtful</pre><pre>accounts.</pre><pre> </pre><pre>The Company performs ongoing credit evaluations and continually monitors its</pre><pre>collection of amounts due from its customers. The Company adjusts credit limits</pre><pre>and payment terms granted to its customers based upon payment history and the</pre><pre>customer's current creditworthiness. The Company does not require collateral</pre><pre>from its customers to secure amounts due from them. Reserves for uncollectible</pre><pre>amounts are provided based on past experience and a specific analysis of the</pre><pre>accounts which management believes is sufficient.</pre><pre> </pre><pre>INVENTORY</pre><pre>Inventory consists primarily of purchased polymer soil amendments. Inventory is</pre><pre>stated at the lower of cost (on a first-in, first-out basis) or market.</pre><pre> </pre><pre>PROPERTY AND EQUIPMENT</pre><pre>Property and equipment are stated at cost less accumulated depreciation.</pre><pre>Depreciation is recorded on a straight-line basis over the estimated useful</pre><pre>lives of the assets ranging from three to 15 years. Betterments, renewals and</pre><pre>extraordinary repairs that extend the lives of the assets are capitalized.</pre><pre>Repairs and maintenance costs are expensed as incurred. The cost and related</pre><pre>accumulated depreciation applicable to assets disposed or retired are removed</pre><pre>from the accounts, and the gain or loss on disposition is recognized in the</pre><pre>respective period.</pre><pre> </pre><pre>LONG-LIVED ASSETS</pre><pre>The Company reviews its fixed assets and certain identifiable intangibles for</pre><pre>impairment whenever events or changes in circumstances indicate that the</pre><pre>carrying amount of an asset may not be recoverable. Recoverability of assets to</pre><pre>be held and used is measured by a comparison of the carrying amount of an asset</pre><pre>to the future undiscounted operating cash flow expected to be generated by the</pre><pre>asset. If such assets are considered to be impaired, the impairment to be</pre><pre>recognized is measured by the amount by which the carrying amount of the asset</pre><pre>exceeds the fair value of the asset. Long-lived assets to be disposed of are</pre><pre>reported at the lower of carrying amount or fair value less costs to sell.</pre><pre> </pre><pre>ACCOUNTING FOR CONVERTIBLE DEBT</pre><pre>Convertible debt is accounted for under the guidelines established by the</pre><pre>Financial Accounting Standards Board ("FASB") Accounting Standards Codification</pre><pre>("ASC") No. 470 Topic 20, "Debt with Conversion and Other Options" and ASC No.</pre><pre>740, "Income Tax". The Company records a beneficial conversion feature ("BCF")</pre><pre>related to the issuance of convertible debt that have conversion features at</pre><pre>fixed or adjustable rates that are in-the-money when issued and records the fair</pre><pre>value of warrants issued with those instruments. The BCF for the convertible</pre><pre>instruments is recognized and measured by allocating a portion of the proceeds</pre><pre>to warrants and as a reduction to the carrying amount of the convertible</pre><pre>instrument equal to the intrinsic value of the conversion features, both of</pre><pre>which are credited to paid-in-capital. The Company calculates the fair value of</pre><pre>warrants issued with the convertible instruments using the Black-Scholes</pre><pre>valuation method. Under these guidelines, the Company allocates the value of the</pre><pre>proceeds received from a convertible debt transaction between the conversion</pre><pre>feature and any other detachable instruments (such as warrants) on a relative</pre><pre>fair value basis. The allocated fair value is recorded as a debt discount or</pre><pre>premium and is amortized over the expected term of the convertible debt to</pre><pre>interest expense.</pre><pre> </pre><pre>INTELLECTUAL PROPERTY</pre><pre>Intellectual property includes the exclusive licenses to the patented polymer</pre><pre>application techniques and certain acquired intellectual property which are</pre><pre>being amortized using the straight-line method over the respective estimated</pre><pre>useful lives.</pre><pre> </pre><pre>ADVERTISING</pre><pre>The Company expenses advertising costs as incurred. Advertising expense was $476</pre><pre>and $684, for year ended September 30, 2012 and 2011, respectively.</pre><pre> </pre><pre>REVENUE RECOGNITION</pre><pre>In accordance with ASC No. 605, "Revenue Recognition", revenue is recognized</pre><pre>when products are shipped to a customer and the risks and rewards of ownership</pre><pre>have passed based on the terms of the sale. Royalty revenues are recognized</pre><pre>monthly based on customer usage as defined by individual agreements.</pre><pre> </pre><pre>SHIPPING AND HANDLING COST</pre><pre>Shipping and handling fees charged to customers are included in revenue in</pre><pre>accordance with ASC No. 605, "Revenue Recognition". The shipping and handling</pre><pre>costs incurred by the Company are included in cost of sales.</pre><pre> </pre><pre>INCOME TAXES</pre><pre>The Company accounts for income taxes in accordance with ASC 740 "Income Taxes"</pre><pre>("ASC 740") which requires the Company to provide a net deferred tax</pre><pre>asset/liability equal to the expected future tax benefit/expense of temporary</pre><pre>reporting differences between book and tax accounting methods and any available</pre><pre>operating loss or tax credit carry forwards. If available evidence suggests that</pre><pre>it is more likely than not that some portion or all of the deferred tax assets</pre><pre>will not be realized, a valuation allowance is required to reduce the deferred</pre><pre>tax assets to the amount that is more likely than not to be realized. Future</pre><pre>changes in such valuation allowance are included in the provision for deferred</pre><pre>income taxes in the period of change.</pre><pre> </pre><pre>ASC 740 also prescribes, among other things, a recognition threshold and</pre><pre>measurement attributes for the financial statement recognition and measurement</pre><pre>of uncertain tax positions taken or expected to be taken in a company's income</pre><pre>tax return. The Company utilizes a two-step approach for evaluating uncertain</pre><pre>tax positions. Step one or recognition, requires a company to determine if the</pre><pre>weight of available evidence indicates a tax position is more likely than not to</pre><pre>be sustained upon audit, including resolution of related appeals or litigation</pre><pre>processes, if any. Step two or measurement, is based on the largest amount of</pre><pre>benefit, which is more likely than not to be realized on settlement with the</pre><pre>taxing authority.</pre><pre> </pre><pre>FAIR VALUE OF FINANCIAL INSTRUMENTS</pre><pre>On October 1, 2009, the Company adopted ASC 820 ("ASC 820") Fair Value</pre><pre>Measurements and Disclosures. The Company did not record an adjustment to</pre><pre>retained earnings as a result of the adoption of the guidance for fair value</pre><pre>measurements, and the adoption did not have a material effect on the Company's</pre><pre>results of operations.</pre><pre> </pre><pre>Fair value is defined as the exit price, or the amount that would be received to</pre><pre>sell an asset or paid to transfer a liability in an orderly transaction between</pre><pre>market participants as of the measurement date. The guidance also establishes a</pre><pre>hierarchy for inputs used in measuring fair value that maximizes the use of</pre><pre>observable inputs and minimizes the use of unobservable inputs by requiring that</pre><pre>the most observable inputs be used when available. Observable inputs are inputs</pre><pre>market participants would use in valuing the asset or liability and are</pre><pre>developed based on market data obtained from sources independent of the Company.</pre><pre>Unobservable inputs are inputs that reflect the Company's assumptions about the</pre><pre>factors market participants would use in valuing the asset or liability. The</pre><pre>guidance establishes three levels of inputs that may be used to measure fair</pre><pre>value:</pre><pre> </pre><pre>Level 1. Observable inputs such as quoted prices in active markets; Level 2.</pre><pre>Inputs, other than the quoted prices in active markets, that are observable</pre><pre>either directly or indirectly; and Level 3. Unobservable inputs in which there</pre><pre>is little or no market data, which require the reporting entity to develop its</pre><pre>own assumptions.</pre><pre> </pre><pre>The respective carrying value of certain on-balance-sheet financial instruments</pre><pre>approximated their fair values. These financial instruments include cash,</pre><pre>prepaids and other current assets, accounts receivable, accounts payable,</pre><pre>accrued liabilities, and notes payable. Fair values for these items were assumed</pre><pre>to approximate carrying values because of their short term nature or because</pre><pre>they are payable on demand.</pre><pre> </pre><pre>As of September 30, 2012 and 2011, the Company had no material level 1,2, or 3</pre><pre>assets or liabilities.</pre><pre> </pre><pre>CONCENTRATION OF CREDIT RISK</pre><pre>Accounts receivable from individual customers representing 10% or more of the</pre><pre>net accounts receivable balance consists of the following as of September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---- ----</pre><pre>Percent of accounts receivable -- 83%</pre><pre>Number of customers -- 3</pre><pre> </pre><pre>Sales from individual customers representing 10% or more of sales consist of the</pre><pre>following customers for the years ended September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---- ----</pre><pre>Percent of sales 95% 82%</pre><pre>Number of customers 3 4</pre><pre> </pre><pre>As a result of the Company's concentration of its customer base, the loss or</pre><pre>cancellation of business from, or significant changes in scheduled deliveries of</pre><pre>product sold to the above customers or a change in their financial position</pre><pre>could materially and adversely affect the Company's consolidated financial</pre><pre>position, results of operations and cash flows.</pre><pre> </pre><pre>STOCK-BASED COMPENSATION</pre><pre>The Company accounts for equity based compensation under the provisions of ASC</pre><pre>No. 718, "Compensation, Stock Compensation" ("ASC 718"). ASC 718 requires the</pre><pre>recognition of the fair value of equity-based compensation in net income. The</pre><pre>fair value of the Company's stock option awards are estimated using a</pre><pre>Black-Scholes option valuation model. This model requires the input of highly</pre><pre>subjective assumptions and elections including expected stock price volatility</pre><pre>and the estimated life of each award. The fair value of equity-based awards is</pre><pre>amortized over the vesting period of the award.</pre><pre> </pre><pre>NET LOSS PER SHARE</pre><pre>Basic loss per share is calculated by dividing net loss by the weighted average</pre><pre>common shares outstanding during the period. Diluted net loss per share reflects</pre><pre>the potential dilution to basic EPS that could occur upon conversion or exercise</pre><pre>of securities, options or other such items to common shares using the treasury</pre><pre>stock method, based upon the weighted average fair value of our common shares</pre><pre>during the period. For each period presented, basic and diluted loss per share</pre><pre>amounts are identical as the effect of potential common shares is antidilutive.</pre><pre> </pre><pre>The following is a summary of outstanding securities which have been excluded</pre><pre>from the calculation of diluted net loss per share because the effect would have</pre><pre>been antidilutive for the following periods:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---------- ----------</pre><pre>Series A convertible preferred stock 2,763,699 2,763,699</pre><pre> ---------- ----------</pre><pre> 2,763,699 2,763,699</pre><pre> ========== ==========</pre><pre> </pre><pre>LEGAL COSTS ASSOCIATED WITH LOSS CONTINGENCIES</pre><pre>The Company expenses legal costs in connection with loss contingencies as</pre><pre>incurred.</pre><pre> </pre><pre>RECENT ACCOUNTING PRONOUNCEMENTS</pre><pre>The FASB issues Accounting Standards Updates ("ASUs") to amend the authoritative</pre><pre>literature in ASC. There have been a number of ASUs to date that amend the</pre><pre>original text of ASC. The Company believes those issued to date either (1)</pre><pre>provide supplemental guidance, (ii) are technical corrections, (iii) are not</pre><pre>applicable to the Company or (iv) are not expected to have a significant impact</pre><pre>on the Company.</pre>
<!--egx--><pre>3. INVENTORY</pre><pre> </pre><pre>Inventory consists of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> -------- --------</pre><pre>Raw materials $ -- $ --</pre><pre>Finished goods 5,144 6,286</pre><pre> -------- --------</pre><pre> $ 5,144 $ 6,286</pre><pre> ======== ========</pre>
<!--egx--><pre>4. PROPERTY AND EQUIPMENT, NET</pre><pre> </pre><pre>Property and equipment consisted of the following at September 30:</pre><pre> </pre><pre> Estimated</pre><pre> useful life</pre><pre> (in years) 2012 2011</pre><pre> ---------- --------- ---------</pre><pre>Machinery 10 $ 543,793 $ 543,793</pre><pre>Office furnishings, fixtures</pre><pre> and equipment 3-5 25,068 25,068</pre><pre> --------- ---------</pre><pre> 568,861 568,861</pre><pre>Less accumulated depreciation (568,642) (568,101)</pre><pre> --------- ---------</pre><pre> $ 219 $ 760</pre><pre> ========= =========</pre><pre> </pre><pre>Depreciation expense for the year ended September 30, 2012 and 2011 was $541 and</pre><pre>$7,255, respectively.</pre><pre> </pre><pre>Management assessed property and equipment for impairment due to the decreased</pre><pre>revenue streams from operations and specifically the lack of revenues being</pre><pre>generated. Because the net remaining property and equipment value is</pre><pre>insignificant as of September 30, 2012 and will be fully depreciated in fiscal</pre><pre>2013 Management does not believe impairment is necessary as of September 30,</pre><pre>2012.</pre>
<!--egx--><pre>5. INTANGIBLE ASSETS AND GOODWILL</pre><pre> </pre><pre>The following table summarizes the components of intangible assets as of</pre><pre>September 30:</pre><pre> </pre><pre> Soil Medic</pre><pre> patent</pre><pre> -------</pre><pre> </pre><pre>Balance at September 30, 2010 $ 162,147</pre><pre> Additions --</pre><pre> Amortization (49,891)</pre><pre> Impairment (19,000)</pre><pre> ---------</pre><pre>Balance at September 30, 2011 $ 93,256</pre><pre> Additions --</pre><pre> Amortization (41,447)</pre><pre> Impairment --</pre><pre> ---------</pre><pre>Balance at September 30, 2012 $ 51,809</pre><pre> =========</pre><pre> </pre><pre>Weighted average remaining life at:</pre><pre>September 30, 2012 1.2</pre><pre>September 30, 2011 2.2</pre><pre> </pre><pre>As of September 30, 2011, Management evaluated the value of the remaining</pre><pre>intangible asset. It was determined that the associated expected cash flow of</pre><pre>future revenues required an impairment charge of $19,000. Per Management's</pre><pre>evaluation, no impairment was necessary as of September 30, 2012 based on future</pre><pre>expected cash flows.</pre><pre> </pre><pre>Amortization expense was $41,447 and $49,891 for the years ended September 30,</pre><pre>2012 and 2011, respectively. Amortization expense is expected to be $41,447 and</pre><pre>$10,362 for fiscal 2013 and 2014, respetively.</pre>
<!--egx--><pre>6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES</pre><pre> </pre><pre>Accounts payable consisted of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---------- ----------</pre><pre>Accounts payable $ 712,845 $ 716,086</pre><pre>Accounts payable - related party 361,299 377,980</pre><pre>Accrued litigation 603,921 603,921</pre><pre> ---------- ----------</pre><pre> $1,678,065 $1,697,987</pre><pre> ========== ==========</pre><pre> </pre><pre>Accrued expenses consisted of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---------- ----------</pre><pre> </pre><pre>Interest $ 415,861 $ 370,335</pre><pre>Interest to related parties 252,086 200,892</pre><pre>Compensation and related 2,040,629 1,587,569</pre><pre> ---------- ----------</pre><pre> $2,708,576 $2,158,796</pre>
<!--egx--><pre>7. NOTES PAYABLE</pre><pre> </pre><pre>Notes payable consists of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ----------- -----------</pre><pre>Debenture payable to a related party. Original balance 25,000 25,000</pre><pre>of $25,000 bearing interest at 8% per annum with</pre><pre>interest payable quarterly. The principal was</pre><pre>convertible into common stock at a conversion price of</pre><pre>$0.50 per share prior to maturity. The principal was due</pre><pre>February 1, 2008.</pre><pre> </pre><pre>Debenture payable to a related party bearing interest at 25,000 25,000</pre><pre>8% per annum with interest payable quarterly. The</pre><pre>principal was convertible into common stock at a</pre><pre>conversion price of $0.50 per share prior to maturity.</pre><pre>The principal was due February 1, 2008.</pre><pre> </pre><pre>Note payable to a related party, original balance of 88,000 88,000</pre><pre>$85,000 bearing interest at prime rate payable monthly.</pre><pre>Note is unsecured and was due August 31, 2011.</pre><pre> </pre><pre>Note payable to Diana Visco bearing interest at 834,842 789,842</pre><pre>prime rate with interest payable monthly. The note is</pre><pre>unsecured and is due in May 2013.</pre><pre> </pre><pre>Debenture payable to a related party. Original balance 177,024 177,024</pre><pre>of $250,000 bearing interest at a rate of 10% per annum.</pre><pre>Monthly principal and interest payments of $3,000 are</pre><pre>due through 2014. The note is in default for</pre><pre>non-payment. Principal was convertible into common stock</pre><pre>at a conversion price of $3.00 per share prior to</pre><pre>initial maturity in 2002. The note is unsecured.</pre><pre> </pre><pre>Dbenture payable to Ray Nielsen bearing interest at a 1,500,000 1,500,000</pre><pre>rate of 8% per annum with interest payable quarterly.</pre><pre>The principal balance was convertible at the proceeding</pre><pre>day's rate for one share of common stock prior to</pre><pre>maturity. The note is secured by the intellectual</pre><pre>property acquired from the note holder. The principal</pre><pre>was due on January 19, 2008.</pre><pre> </pre><pre>Debenture payable to an unrelated party bearing interest 30,000 30,000</pre><pre>at a rate of 8% per annum with interest payable</pre><pre>quarterly. The principal balance was convertible into</pre><pre>common stock at a rate of $0.25 per share prior to</pre><pre>maturity. The note is unsecured. The principal was due</pre><pre>on October 1, 2008.</pre><pre> </pre><pre>Debenture payable to an unrelated party bearing interest 30,000 30,000</pre><pre>at a rate of 8% per annum with interest payable</pre><pre>quarterly. The principal was convertible into common</pre><pre>stock at a rate of $0.10 per share prior to maturity.</pre><pre>The note is unsecured and was due on October 1, 2008.</pre><pre> </pre><pre>Debenture payable to an unrelated party bearing interest 30,000 30,000</pre><pre>at a rate of 8% per annum with interest payable</pre><pre>quarterly. The principal was convertible into common</pre><pre>stock at a rate of $0.10 per share prior to maturity.</pre><pre>Note is unsecured and was due October 1, 2008.</pre><pre> </pre><pre>Notes payable to various individuals with interest 254,585 254,585</pre><pre>rates ranging from 6% to 20%. The notes are currently</pre><pre>in default.</pre><pre> </pre><pre>Debenture to an unrelated party bearing interest at a 75,000 75,000</pre><pre>rate of 10% per annum with interest payable quarterly.</pre><pre>The principal was convertible into common stock at a</pre><pre>conversion price of $0.19 per share prior to maturity.</pre><pre>Note is unsecured and was due on July 18, 2009.</pre><pre> ----------- -----------</pre><pre> 3,069,451 3,024,451</pre><pre>Less: debt discounts -- --</pre><pre> ----------- -----------</pre><pre> 3,069,451 3,024,451</pre><pre> </pre><pre> Current portion (3,069,451) (3,024,451)</pre><pre> ----------- -----------</pre><pre> Long-term portion $ -- $ --</pre><pre> =========== ===========</pre><pre> </pre><pre>The prime rate as of September 30, 2012 and 2011 was 3.25%, respectively.</pre><pre> </pre><pre>All notes are currently in default and are no longer convertible.</pre>
<!--egx--><pre>8. INCOME TAXES</pre><pre> </pre><pre>The provision for income taxes is comprised of the following for the years ended</pre><pre>September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> -------- --------</pre><pre>Federal $ -- $ --</pre><pre>State (800) (800)</pre><pre> -------- --------</pre><pre>Provision for income taxes $ (800) $ (800)</pre><pre> ======== ========</pre><pre> </pre><pre>The provision for income taxes differs from the amount computed by applying the</pre><pre>statutory federal income tax rate to income before provision for income taxes.</pre><pre>The differences between the federal statutory tax rate of 34% and the effective</pre><pre>tax rates are primarily due to state income tax provisions, net operating loss</pre><pre>("NOL") carry forwards, deferred tax valuation allowance and permanent</pre><pre>differences as follows for the years ended September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> -------- --------</pre><pre>Statutory rate (34%) (34%)</pre><pre>Increase (decrease) in taxes resulting from</pre><pre>the following:</pre><pre> State income taxes, net of federal benefit 5% 5%</pre><pre> Change in valuation allowance 29% 29%</pre><pre> ------ ------</pre><pre> --% --%</pre><pre> ====== ======</pre><pre> </pre><pre>Deferred income taxes reflect the net tax effects of temporary differences</pre><pre>between the carrying value of assets and liabilities for financial reporting</pre><pre>purposes and the amounts used for income tax purposes.</pre><pre> </pre><pre>Significant components of the Company's deferred tax assets and liabilities</pre><pre>consist of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> -------- --------</pre><pre>Deferred tax assets (liabilities):</pre><pre>Current:</pre><pre> Reserves and accruals $ 1,320,647 $ 1,104,915</pre><pre>Non-current:</pre><pre> Intangible assets 597,000 597,000</pre><pre> Net operating losses 5,779,734 7,326,145</pre><pre> Other 60,031 62,547</pre><pre> Valuation allowance (7,757,412) (9,090,607)</pre><pre> ----------- -----------</pre><pre> $ -- $ --</pre><pre> =========== ===========</pre><pre> </pre><pre>At September 30, 2012 and 2011, the valuation allowance was increased</pre><pre>(decreased) by a total of $(1,333,195) and $168,431 respectively. At September</pre><pre>30, 2012, the Company had federal net operating loss carryforwards of</pre><pre>approximately $22,049,098 that expire from 2012 through 2031 and state net</pre><pre>operating carryforwards of $2,861,945 expiring from 2012 through 2016. These net</pre><pre>operating losses may be suspended or limited due to changes in State and Federal</pre><pre>legislation, as well as a possible change in ownership as defined under Section</pre><pre>382 of the IRC. In addition certain of these NOL's are not valid until the</pre><pre>2008-2011 tax returns are filed as noted below.</pre><pre> </pre><pre>The Company has not filed its United States Federal and State tax returns for</pre><pre>the years ended September 30, 2011, 2010, 2009, and 2008. Management intends to</pre><pre>comply with the requirements to file the tax returns upon raising capital.</pre><pre>Failure to file the tax returns could result in penalties assessed against the</pre><pre>Company. The Company has identified the United States Federal tax returns as its</pre><pre>"major" tax jurisdiction. The United States Federal return years 2008 through</pre><pre>2011 are still subject to tax examination by the United States Internal Revenue</pre><pre>Service, when filed; however, we do not currently have any ongoing tax</pre><pre>examinations. The Company is subject to examination by the California Franchise</pre><pre>Tax Board for the years ended 2008 through 2011 and currently does not have any</pre><pre>ongoing tax examinations.</pre>
<!--egx--><pre>09. COMMITMENTS AND CONTINGENCIES</pre><pre> </pre><pre>OPERATING LEASES</pre><pre>During the year ended September 30, 2011, the Company moved its headquarters and</pre><pre>now shares office space with an entity owned by a related party, The Benz Group.</pre><pre>The Company does not pay rent to the related party as the resources and space</pre><pre>occupied the Company is minimal and the fair value of the rent is immaterial to</pre><pre>the financial statements taken as a whole.</pre><pre> </pre><pre>LITIGATION</pre><pre>On or about September 21, 2007, Stockhausen, Inc. ("Stockhausen") filed a</pre><pre>Complaint in the United States District Court, for the Middle District of North</pre><pre>Carolina, against us seeking damages. The parties entered into a settlement</pre><pre>agreement on June 2, 2010. Under the settlement agreement, we agreed to pay</pre><pre>Stockhausen $250,000 on or before June 23, 2010 as a compromise to Stockhausen's</pre><pre>claims that currently total $603,921. We further agreed that we would consent to</pre><pre>the entry of a Judgment against us in favor of Stockhausen in the amount of</pre><pre>$603,921 if we failed to make complete and timely payment as agreed. The Company</pre><pre>was unable to make the agreed upon payment and on July 8, 2010, Stockhausen</pre><pre>entered a judgment for the above stated amount against the Company. The Company</pre><pre>has accrued $603,921 related to the litigation as of September 30, 2012 and</pre><pre>2011, which is included in accounts payable in the accompanying balance sheets.</pre><pre> </pre><pre>On or about October 4, 2007, Raymond J. Nielsen and Cheryl K. Nielsen</pre><pre>(collectively, "Plaintiffs"), filed a Complaint in the Circuit Court in the</pre><pre>Sixth Judicial District of Pasco County, Florida, against us and Smart World</pre><pre>(collectively "Defendants") seeking damages, declaratory, and injunctive relief.</pre><pre>Plaintiffs allege that Defendants failed to pay interest when due on the</pre><pre>Convertible Debenture from Defendants to Plaintiffs and, thus, the entire amount</pre><pre>of the Convertible Debenture is accelerated and Plaintiffs are seeking a</pre><pre>judgment in the amount of $1,500,000 plus interest. On December 29, 2009, the</pre><pre>matter was settled for $400,000 and the Company had 60 days in which to remit</pre><pre>the amount or a judgment in the entire amount claimed would be entered against</pre><pre>us. The Company was not able to meet the terms of the settlement and have been</pre><pre>actively communicating with the Plaintiffs to extend the terms of the</pre><pre>settlement.</pre>
<!--egx--><pre>10. PREFERRED STOCK</pre><pre> </pre><pre>The Company has 10,000,000 shares of preferred stock authorized of which</pre><pre>2,763,699 shares of $0.50 stated value Series A convertible preferred stock</pre><pre>("Series A Preferred") are issued and outstanding as of September 30, 2012 and</pre><pre>2011. The Series A Preferred have the following characteristics:</pre><pre> </pre><pre>DIVIDENDS</pre><pre>Each holder is entitled to receive preferential quarterly dividends equal to the</pre><pre>prime interest rate as quoted in the Wall Street Journal when and if declared by</pre><pre>the Board of Directors, out of any assets that are legally available. If the</pre><pre>Board of Directors declares that such dividends may only be payable in shares of</pre><pre>common stock for any quarter, holders of Series A preferred stock have the</pre><pre>option of accepting the dividend paid in shares of common stock of the Company,</pre><pre>or letting the dividend accrue for a cash payment. No dividends have been</pre><pre>declared, accrued or paid during the years ended September 30, 2012 and 2011.</pre><pre> </pre><pre>CONVERSION</pre><pre>Each holder has the option to convert each share of Series A Preferred into</pre><pre>common stock at a rate of one share of common stock for each share of preferred</pre><pre>stock tendered.</pre><pre> </pre><pre>VOTING</pre><pre>The holders have no voting rights.</pre><pre> </pre><pre>LIQUIDATION PREFERENCE</pre><pre>Each holder is entitled to be paid the stated value of their holdings out of the</pre><pre>assets of the Company, prior and in preference to any payment or distribution</pre><pre>out of the assets of the Company to the holders of common stock or any other</pre><pre>class or series of capital stock.</pre>
<!--egx--><pre>11. COMMON STOCK</pre><pre> </pre><pre>STOCK OPTIONS</pre><pre>In November 2002, the Company enacted a stock option plan (the "2002 Plan") to</pre><pre>provide additional incentives to selected employees, directors and consultants.</pre><pre>Two million shares were authorized for grant. The purchase price of the common</pre><pre>stock subject to each Incentive Stock Option was not to be less than the fair</pre><pre>market value or in the case of a grant of an incentive stock option to a</pre><pre>principal shareholder, not less than 110% of the fair market value of such</pre><pre>common stock at the time each option was granted. The 2002 Plan terminates in</pre><pre>November 2012. The options are fully-vested when granted and are exercisable for</pre><pre>a period of ten years from the date of grant and are subject to cancellation</pre><pre>upon termination of employment. The Company has granted options to purchase</pre><pre>1,010,000 shares and 300,000 shares with exercise prices of $0.50 and $0.25,</pre><pre>respectively. The market price at the date of grant was $0.12. At September 30,</pre><pre>2012 and 2011, 450,000 stock options were available for grant.</pre><pre> </pre><pre>On January 6, 2005, the Company enacted the 2005 Stock Option/Stock Issuance</pre><pre>Plan (the "2005 Plan"). The 2005 Plan provides for the issuance of up to</pre><pre>10,000,000 shares of common stock to our directors, officers, employees and</pre><pre>consultants in the form of stock options and shares of common stock. The 2005</pre><pre>Plan has two separate components: the option grant program and the stock</pre><pre>issuance program.</pre><pre> </pre><pre>Grants under the option grant program may be structured as installment options</pre><pre>which become exercisable for vested shares over the optionee's period of service</pre><pre>or as immediately exercisable options for unvested shares which will be subject</pre><pre>to repurchase by the Company, at the option exercise price paid per share, upon</pre><pre>the optionee's termination of service prior to vesting in those shares. All</pre><pre>option grants must have an exercise price not less than 100% of the fair market</pre><pre>value of the option shares on the grant date.</pre><pre> </pre><pre>The stock issuance program allows eligible persons to purchase shares of common</pre><pre>stock at fair market value or at a discount of up to 15% of fair market value.</pre><pre>The shares may be fully vested when issued or may vest over time as the</pre><pre>recipient provides services or as specified performance objectives are attained.</pre><pre>In addition, shares of common stock may be issued as bonus awards in recognition</pre><pre>of services rendered, without any cash outlay required of the recipient.</pre><pre> </pre><pre>Upon stock option exercise, the Company issues new shares of common stock.</pre><pre> </pre><pre>The following table summarizes stock option activity under the above stock</pre><pre>option plans:</pre><pre> </pre><pre> Remaining</pre><pre> Number of Weighted-Average Contractual Term</pre><pre> Shares Exercise Price (in years)</pre><pre> ------ -------------- ----------</pre><pre>Outstanding at September 30, 2010 1,976,000 $0.20 2.0</pre><pre> Granted --</pre><pre> Exercised --</pre><pre> Cancelled --</pre><pre> -----------</pre><pre>Outstanding at September 30, 2011 1,976,000 $0.20 1.0</pre><pre> Granted --</pre><pre> Exercised --</pre><pre> Cancelled 1,526,000 $0.11 0.0</pre><pre> -----------</pre><pre>Outstanding at September 30, 2012 450,000 $0.50 0.1</pre><pre> ===========</pre><pre> </pre><pre>The fair value of stock options awarded were estimated at the date of grant</pre><pre>using the Black-Scholes option-pricing model. The expected option term was</pre><pre>estimated based upon the contractual term of the underlying stock option. The</pre><pre>expected volatility of the Company's stock price was based upon the historical</pre><pre>daily changes in the price of the Company's common stock. The risk-free interest</pre><pre>rate was based upon the current yield on U.S. Treasury securities having a term</pre><pre>similar to the expected option term. Dividend yield is estimated at zero because</pre><pre>the Company does not anticipate paying dividends in the foreseeable future.</pre><pre>There were no options issued during the years ended September 30, 2012 and 2011</pre><pre>that required valuation.</pre><pre> </pre><pre> Outstanding Exercisable</pre><pre> ---------------------------------------------- -------------------------------------------</pre><pre> Weighted Weighted Average Weighted Weighted Average</pre><pre> Average Remaining Average Remaining</pre><pre> Number of Exercise Contractual Life Number of Exercise Contractual Life</pre><pre>Exercise Prices shares Price (in years) shares Price (in years)</pre><pre>--------------- ------ ----- ---------- ------ ----- ----------</pre><pre> $0.50 450,000 $0.50 0.1 450,000 $0.50 1.1</pre><pre> </pre><pre>At September 30, 2012, all stock options are vested, and there is no remaining</pre><pre>unrecognized compensation expense. The intrinsic value of options is zero as all</pre><pre>options had an exercise price above the closing price of the stock at September</pre><pre>30, 2012.</pre><pre> </pre><pre>Stock based compensation expense was $0 and $35,744 for the years ended</pre><pre>September 30, 2012 and 2011, respectively, which is included in general and</pre><pre>administrative expenses in the accompanying statements of operations.</pre>
<!--egx--><pre>12. RELATED PARTY TRANSACTIONS</pre><pre> </pre><pre>During the year ended September 30, 2012, Ms. Visco loaned the Company an</pre><pre>additional $45,000. The Company entered into a new note for $834,842 with Ms.</pre><pre>Visco which superseded all previous notes. The principal is due on May 1, 2013.</pre><pre>Interest is payable monthly based on the current Prime Rate of 3.25%.</pre><pre> </pre><pre>See Note 13 for additional loan subsequent to September 30, 2012.</pre><pre> </pre><pre>Interest expense incurred in connection with outstanding loans and notes payable</pre><pre>to Ms. Visco or entities partially controlled was $26,563 and $25,670 for the</pre><pre>year ended September 30, 2012 and 2011, respectively.</pre>
<!--egx--><pre>13. SUBSEQUENT EVENTS</pre><pre> </pre><pre>Subsequent to year end, Ms. Visco loaned the Company an additional $38,000. The</pre><pre>previous note was amended to increase the principal due to $872,842. The terms</pre><pre>of the note remained the same while extending the due date to October 2013. The</pre><pre>note is in default for non-payment of interest.</pre>
<!--egx--><pre>PRINCIPLES OF CONSOLIDATION</pre><pre>The consolidated financial statements include the accounts of American Soil</pre><pre>Technologies, Inc, and its wholly-owned subsidiary, Smart World Organics, Inc.</pre><pre>All intercompany balances and transactions have been eliminated in</pre><pre>consolidation.</pre>
<!--egx--><pre>USE OF ESTIMATES</pre><pre>The preparation of consolidated financial statements in conformity with</pre><pre>accounting principles generally accepted in the United States of America,</pre><pre>requires management to make estimates and assumptions that affect the reported</pre><pre>amounts of assets and liabilities and disclosure of contingent assets and</pre><pre>liabilities at the date of the financial statements and the reported amounts of</pre><pre>revenues and expenses during the reporting periods. Actual results could differ</pre><pre>from those estimates. The Company's significant estimates made in connection</pre><pre>with the preparation of the accompanying financial statements include the</pre><pre>carrying value of the intangible assets.</pre>
<!--egx--><pre>CASH AND CASH EQUIVALENTS</pre><pre>Cash and cash equivalents includes all short-term highly liquid investments that</pre><pre>are readily convertible to known amounts of cash and have original maturities of</pre><pre>three months or less.</pre>
<!--egx--><pre>ACCOUNTS AND NOTES RECEIVABLE</pre><pre>The Company utilizes the allowance method to provide a reserve for uncollectible</pre><pre>accounts. The Company determines any required allowance by considering a number</pre><pre>of factors including length of time trade accounts receivable are past due and</pre><pre>the Company's previous loss history. The Company records a reserve account for</pre><pre>accounts receivable when they become uncollectible. Payments subsequently</pre><pre>received on such receivables are credited to the allowance for doubtful</pre><pre>accounts.</pre><pre> </pre><pre>The Company performs ongoing credit evaluations and continually monitors its</pre><pre>collection of amounts due from its customers. The Company adjusts credit limits</pre><pre>and payment terms granted to its customers based upon payment history and the</pre><pre>customer's current creditworthiness. The Company does not require collateral</pre><pre>from its customers to secure amounts due from them. Reserves for uncollectible</pre><pre>amounts are provided based on past experience and a specific analysis of the</pre><pre>accounts which management believes is sufficient.</pre>
<!--egx--><pre>INVENTORY</pre><pre>Inventory consists primarily of purchased polymer soil amendments. Inventory is</pre><pre>stated at the lower of cost (on a first-in, first-out basis) or market.</pre>
<!--egx--><pre>PROPERTY AND EQUIPMENT</pre><pre>Property and equipment are stated at cost less accumulated depreciation.</pre><pre>Depreciation is recorded on a straight-line basis over the estimated useful</pre><pre>lives of the assets ranging from three to 15 years. Betterments, renewals and</pre><pre>extraordinary repairs that extend the lives of the assets are capitalized.</pre><pre>Repairs and maintenance costs are expensed as incurred. The cost and related</pre><pre>accumulated depreciation applicable to assets disposed or retired are removed</pre><pre>from the accounts, and the gain or loss on disposition is recognized in the</pre><pre>respective period.</pre>
<!--egx--><pre>LONG-LIVED ASSETS</pre><pre>The Company reviews its fixed assets and certain identifiable intangibles for</pre><pre>impairment whenever events or changes in circumstances indicate that the</pre><pre>carrying amount of an asset may not be recoverable. Recoverability of assets to</pre><pre>be held and used is measured by a comparison of the carrying amount of an asset</pre><pre>to the future undiscounted operating cash flow expected to be generated by the</pre><pre>asset. If such assets are considered to be impaired, the impairment to be</pre><pre>recognized is measured by the amount by which the carrying amount of the asset</pre><pre>exceeds the fair value of the asset. Long-lived assets to be disposed of are</pre><pre>reported at the lower of carrying amount or fair value less costs to sell.</pre>
<!--egx--><pre>ACCOUNTING FOR CONVERTIBLE DEBT</pre><pre>Convertible debt is accounted for under the guidelines established by the</pre><pre>Financial Accounting Standards Board ("FASB") Accounting Standards Codification</pre><pre>("ASC") No. 470 Topic 20, "Debt with Conversion and Other Options" and ASC No.</pre><pre>740, "Income Tax". The Company records a beneficial conversion feature ("BCF")</pre><pre>related to the issuance of convertible debt that have conversion features at</pre><pre>fixed or adjustable rates that are in-the-money when issued and records the fair</pre><pre>value of warrants issued with those instruments. The BCF for the convertible</pre><pre>instruments is recognized and measured by allocating a portion of the proceeds</pre><pre>to warrants and as a reduction to the carrying amount of the convertible</pre><pre>instrument equal to the intrinsic value of the conversion features, both of</pre><pre>which are credited to paid-in-capital. The Company calculates the fair value of</pre><pre>warrants issued with the convertible instruments using the Black-Scholes</pre><pre>valuation method. Under these guidelines, the Company allocates the value of the</pre><pre>proceeds received from a convertible debt transaction between the conversion</pre><pre>feature and any other detachable instruments (such as warrants) on a relative</pre><pre>fair value basis. The allocated fair value is recorded as a debt discount or</pre><pre>premium and is amortized over the expected term of the convertible debt to</pre><pre>interest expense.</pre>
<!--egx--><pre>INTELLECTUAL PROPERTY</pre><pre>Intellectual property includes the exclusive licenses to the patented polymer</pre><pre>application techniques and certain acquired intellectual property which are</pre><pre>being amortized using the straight-line method over the respective estimated</pre><pre>useful lives.</pre>
<!--egx--><pre>ADVERTISING</pre><pre>The Company expenses advertising costs as incurred. Advertising expense was $476</pre><pre>and $684, for year ended September 30, 2012 and 2011, respectively.</pre>
<!--egx--><pre>REVENUE RECOGNITION</pre><pre>In accordance with ASC No. 605, "Revenue Recognition", revenue is recognized</pre><pre>when products are shipped to a customer and the risks and rewards of ownership</pre><pre>have passed based on the terms of the sale. Royalty revenues are recognized</pre><pre>monthly based on customer usage as defined by individual agreements.</pre>
<!--egx--><pre>SHIPPING AND HANDLING COST</pre><pre>Shipping and handling fees charged to customers are included in revenue in</pre><pre>accordance with ASC No. 605, "Revenue Recognition". The shipping and handling</pre><pre>costs incurred by the Company are included in cost of sales.</pre>
<!--egx--><pre>INCOME TAXES</pre><pre>The Company accounts for income taxes in accordance with ASC 740 "Income Taxes"</pre><pre>("ASC 740") which requires the Company to provide a net deferred tax</pre><pre>asset/liability equal to the expected future tax benefit/expense of temporary</pre><pre>reporting differences between book and tax accounting methods and any available</pre><pre>operating loss or tax credit carry forwards. If available evidence suggests that</pre><pre>it is more likely than not that some portion or all of the deferred tax assets</pre><pre>will not be realized, a valuation allowance is required to reduce the deferred</pre><pre>tax assets to the amount that is more likely than not to be realized. Future</pre><pre>changes in such valuation allowance are included in the provision for deferred</pre><pre>income taxes in the period of change.</pre><pre> </pre><pre>ASC 740 also prescribes, among other things, a recognition threshold and</pre><pre>measurement attributes for the financial statement recognition and measurement</pre><pre>of uncertain tax positions taken or expected to be taken in a company's income</pre><pre>tax return. The Company utilizes a two-step approach for evaluating uncertain</pre><pre>tax positions. Step one or recognition, requires a company to determine if the</pre><pre>weight of available evidence indicates a tax position is more likely than not to</pre><pre>be sustained upon audit, including resolution of related appeals or litigation</pre><pre>processes, if any. Step two or measurement, is based on the largest amount of</pre><pre>benefit, which is more likely than not to be realized on settlement with the</pre><pre>taxing authority.</pre>
<!--egx--><pre>FAIR VALUE OF FINANCIAL INSTRUMENTS</pre><pre>On October 1, 2009, the Company adopted ASC 820 ("ASC 820") Fair Value</pre><pre>Measurements and Disclosures. The Company did not record an adjustment to</pre><pre>retained earnings as a result of the adoption of the guidance for fair value</pre><pre>measurements, and the adoption did not have a material effect on the Company's</pre><pre>results of operations.</pre><pre> </pre><pre>Fair value is defined as the exit price, or the amount that would be received to</pre><pre>sell an asset or paid to transfer a liability in an orderly transaction between</pre><pre>market participants as of the measurement date. The guidance also establishes a</pre><pre>hierarchy for inputs used in measuring fair value that maximizes the use of</pre><pre>observable inputs and minimizes the use of unobservable inputs by requiring that</pre><pre>the most observable inputs be used when available. Observable inputs are inputs</pre><pre>market participants would use in valuing the asset or liability and are</pre><pre>developed based on market data obtained from sources independent of the Company.</pre><pre>Unobservable inputs are inputs that reflect the Company's assumptions about the</pre><pre>factors market participants would use in valuing the asset or liability. The</pre><pre>guidance establishes three levels of inputs that may be used to measure fair</pre><pre>value:</pre><pre> </pre><pre>Level 1. Observable inputs such as quoted prices in active markets; Level 2.</pre><pre>Inputs, other than the quoted prices in active markets, that are observable</pre><pre>either directly or indirectly; and Level 3. Unobservable inputs in which there</pre><pre>is little or no market data, which require the reporting entity to develop its</pre><pre>own assumptions.</pre><pre> </pre><pre>The respective carrying value of certain on-balance-sheet financial instruments</pre><pre>approximated their fair values. These financial instruments include cash,</pre><pre>prepaids and other current assets, accounts receivable, accounts payable,</pre><pre>accrued liabilities, and notes payable. Fair values for these items were assumed</pre><pre>to approximate carrying values because of their short term nature or because</pre><pre>they are payable on demand.</pre><pre> </pre><pre>As of September 30, 2012 and 2011, the Company had no material level 1,2, or 3</pre><pre>assets or liabilities.</pre>
<!--egx--><pre>CONCENTRATION OF CREDIT RISK</pre><pre>Accounts receivable from individual customers representing 10% or more of the</pre><pre>net accounts receivable balance consists of the following as of September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---- ----</pre><pre>Percent of accounts receivable -- 83%</pre><pre>Number of customers -- 3</pre><pre> </pre><pre>Sales from individual customers representing 10% or more of sales consist of the</pre><pre>following customers for the years ended September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---- ----</pre><pre>Percent of sales 95% 82%</pre><pre>Number of customers 3 4</pre><pre> </pre><pre>As a result of the Company's concentration of its customer base, the loss or</pre><pre>cancellation of business from, or significant changes in scheduled deliveries of</pre><pre>product sold to the above customers or a change in their financial position</pre><pre>could materially and adversely affect the Company's consolidated financial</pre><pre>position, results of operations and cash flows.</pre>
<!--egx--><pre>STOCK-BASED COMPENSATION</pre><pre>The Company accounts for equity based compensation under the provisions of ASC</pre><pre>No. 718, "Compensation, Stock Compensation" ("ASC 718"). ASC 718 requires the</pre><pre>recognition of the fair value of equity-based compensation in net income. The</pre><pre>fair value of the Company's stock option awards are estimated using a</pre><pre>Black-Scholes option valuation model. This model requires the input of highly</pre><pre>subjective assumptions and elections including expected stock price volatility</pre><pre>and the estimated life of each award. The fair value of equity-based awards is</pre><pre>amortized over the vesting period of the award.</pre>
<!--egx--><pre>NET LOSS PER SHARE</pre><pre>Basic loss per share is calculated by dividing net loss by the weighted average</pre><pre>common shares outstanding during the period. Diluted net loss per share reflects</pre><pre>the potential dilution to basic EPS that could occur upon conversion or exercise</pre><pre>of securities, options or other such items to common shares using the treasury</pre><pre>stock method, based upon the weighted average fair value of our common shares</pre><pre>during the period. For each period presented, basic and diluted loss per share</pre><pre>amounts are identical as the effect of potential common shares is antidilutive.</pre><pre> </pre><pre>The following is a summary of outstanding securities which have been excluded</pre><pre>from the calculation of diluted net loss per share because the effect would have</pre><pre>been antidilutive for the following periods:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---------- ----------</pre><pre>Series A convertible preferred stock 2,763,699 2,763,699</pre><pre> ---------- ----------</pre><pre> 2,763,699 2,763,699</pre><pre> ========== ==========</pre>
<!--egx--><pre>LEGAL COSTS ASSOCIATED WITH LOSS CONTINGENCIES</pre><pre>The Company expenses legal costs in connection with loss contingencies as</pre><pre>incurred.</pre>
<!--egx--><pre>RECENT ACCOUNTING PRONOUNCEMENTS</pre><pre>The FASB issues Accounting Standards Updates ("ASUs") to amend the authoritative</pre><pre>literature in ASC. There have been a number of ASUs to date that amend the</pre><pre>original text of ASC. The Company believes those issued to date either (1)</pre><pre>provide supplemental guidance, (ii) are technical corrections, (iii) are not</pre><pre>applicable to the Company or (iv) are not expected to have a significant impact</pre><pre>on the Company.</pre>
<!--egx--><pre>Accounts receivable from individual customers representing 10% or more of the</pre><pre>net accounts receivable balance consists of the following as of September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---- ----</pre><pre>Percent of accounts receivable -- 83%</pre><pre>Number of customers -- 3</pre><pre> </pre><pre>Sales from individual customers representing 10% or more of sales consist of the</pre><pre>following customers for the years ended September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---- ----</pre><pre>Percent of sales 95% 82%</pre><pre>Number of customers 3 4</pre>
<!--egx--><pre>The following is a summary of outstanding securities which have been excluded</pre><pre>from the calculation of diluted net loss per share because the effect would have</pre><pre>been antidilutive for the following periods:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---------- ----------</pre><pre>Series A convertible preferred stock 2,763,699 2,763,699</pre><pre> ---------- ----------</pre><pre> 2,763,699 2,763,699</pre><pre> ========== ==========</pre>
<!--egx--><pre>Inventory consists of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> -------- --------</pre><pre>Raw materials $ -- $ --</pre><pre>Finished goods 5,144 6,286</pre><pre> -------- --------</pre><pre> $ 5,144 $ 6,286</pre><pre> ======== ========</pre>
<!--egx--><pre>Property and equipment consisted of the following at September 30:</pre><pre> </pre><pre> Estimated</pre><pre> useful life</pre><pre> (in years) 2012 2011</pre><pre> ---------- --------- ---------</pre><pre>Machinery 10 $ 543,793 $ 543,793</pre><pre>Office furnishings, fixtures</pre><pre> and equipment 3-5 25,068 25,068</pre><pre> --------- ---------</pre><pre> 568,861 568,861</pre><pre>Less accumulated depreciation (568,642) (568,101)</pre><pre> --------- ---------</pre><pre> $ 219 $ 760</pre><pre> ========= =========</pre>
<!--egx--><pre>The following table summarizes the components of intangible assets as of</pre><pre>September 30:</pre><pre> </pre><pre> Soil Medic</pre><pre> patent</pre><pre> -------</pre><pre> </pre><pre>Balance at September 30, 2010 $ 162,147</pre><pre> Additions --</pre><pre> Amortization (49,891)</pre><pre> Impairment (19,000)</pre><pre> ---------</pre><pre>Balance at September 30, 2011 $ 93,256</pre><pre> Additions --</pre><pre> Amortization (41,447)</pre><pre> Impairment --</pre><pre> ---------</pre><pre>Balance at September 30, 2012 $ 51,809</pre><pre> =========</pre>
<!--egx--><pre>Accounts payable consisted of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---------- ----------</pre><pre>Accounts payable $ 712,845 $ 716,086</pre><pre>Accounts payable - related party 361,299 377,980</pre><pre>Accrued litigation 603,921 603,921</pre><pre> ---------- ----------</pre><pre> $1,678,065 $1,697,987</pre><pre> ========== ==========</pre>
<!--egx--><pre>Accrued expenses consisted of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ---------- ----------</pre><pre> </pre><pre>Interest $ 415,861 $ 370,335</pre><pre>Interest to related parties 252,086 200,892</pre><pre>Compensation and related 2,040,629 1,587,569</pre><pre> ---------- ----------</pre><pre> $2,708,576 $2,158,796</pre><pre> ========== ==========</pre>
<!--egx--><pre>Notes payable consists of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> ----------- -----------</pre><pre>Debenture payable to a related party. Original balance 25,000 25,000</pre><pre>of $25,000 bearing interest at 8% per annum with</pre><pre>interest payable quarterly. The principal was</pre><pre>convertible into common stock at a conversion price of</pre><pre>$0.50 per share prior to maturity. The principal was due</pre><pre>February 1, 2008.</pre><pre> </pre><pre>Debenture payable to a related party bearing interest at 25,000 25,000</pre><pre>8% per annum with interest payable quarterly. The</pre><pre>principal was convertible into common stock at a</pre><pre>conversion price of $0.50 per share prior to maturity.</pre><pre>The principal was due February 1, 2008.</pre><pre> </pre><pre>Note payable to a related party, original balance of 88,000 88,000</pre><pre>$85,000 bearing interest at prime rate payable monthly.</pre><pre>Note is unsecured and was due August 31, 2011.</pre><pre> </pre><pre>Note payable to Diana Visco bearing interest at 834,842 789,842</pre><pre>prime rate with interest payable monthly. The note is</pre><pre>unsecured and is due in May 2013.</pre><pre> </pre><pre>Debenture payable to a related party. Original balance 177,024 177,024</pre><pre>of $250,000 bearing interest at a rate of 10% per annum.</pre><pre>Monthly principal and interest payments of $3,000 are</pre><pre>due through 2014. The note is in default for</pre><pre>non-payment. Principal was convertible into common stock</pre><pre>at a conversion price of $3.00 per share prior to</pre><pre>initial maturity in 2002. The note is unsecured.</pre><pre> </pre><pre>Dbenture payable to Ray Nielsen bearing interest at a 1,500,000 1,500,000</pre><pre>rate of 8% per annum with interest payable quarterly.</pre><pre>The principal balance was convertible at the proceeding</pre><pre>day's rate for one share of common stock prior to</pre><pre>maturity. The note is secured by the intellectual</pre><pre>property acquired from the note holder. The principal</pre><pre>was due on January 19, 2008.</pre><pre> </pre><pre>Debenture payable to an unrelated party bearing interest 30,000 30,000</pre><pre>at a rate of 8% per annum with interest payable</pre><pre>quarterly. The principal balance was convertible into</pre><pre>common stock at a rate of $0.25 per share prior to</pre><pre>maturity. The note is unsecured. The principal was due</pre><pre>on October 1, 2008.</pre><pre> </pre><pre>Debenture payable to an unrelated party bearing interest 30,000 30,000</pre><pre>at a rate of 8% per annum with interest payable</pre><pre>quarterly. The principal was convertible into common</pre><pre>stock at a rate of $0.10 per share prior to maturity.</pre><pre>The note is unsecured and was due on October 1, 2008.</pre><pre> </pre><pre>Debenture payable to an unrelated party bearing interest 30,000 30,000</pre><pre>at a rate of 8% per annum with interest payable</pre><pre>quarterly. The principal was convertible into common</pre><pre>stock at a rate of $0.10 per share prior to maturity.</pre><pre>Note is unsecured and was due October 1, 2008.</pre><pre> </pre><pre>Notes payable to various individuals with interest 254,585 254,585</pre><pre>rates ranging from 6% to 20%. The notes are currently</pre><pre>in default.</pre><pre> </pre><pre>Debenture to an unrelated party bearing interest at a 75,000 75,000</pre><pre>rate of 10% per annum with interest payable quarterly.</pre><pre>The principal was convertible into common stock at a</pre><pre>conversion price of $0.19 per share prior to maturity.</pre><pre>Note is unsecured and was due on July 18, 2009.</pre><pre> ----------- -----------</pre><pre> 3,069,451 3,024,451</pre><pre>Less: debt discounts -- --</pre><pre> ----------- -----------</pre><pre> 3,069,451 3,024,451</pre><pre> </pre><pre> Current portion (3,069,451) (3,024,451)</pre><pre> ----------- -----------</pre><pre> Long-term portion $ -- $ --</pre><pre> =========== ===========</pre>
<!--egx--><pre>The provision for income taxes is comprised of the following for the years ended</pre><pre>September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> -------- --------</pre><pre>Federal $ -- $ --</pre><pre>State (800) (800)</pre><pre> -------- --------</pre><pre>Provision for income taxes $ (800) $ (800)</pre><pre> ======== ========</pre>
<!--egx--><pre>differences as follows for the years ended September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> -------- --------</pre><pre>Statutory rate (34%) (34%)</pre><pre>Increase (decrease) in taxes resulting from</pre><pre>the following:</pre><pre> State income taxes, net of federal benefit 5% 5%</pre><pre> Change in valuation allowance 29% 29%</pre><pre> ------ ------</pre><pre> --% --%</pre><pre> ====== ======</pre>
<!--egx--><pre>Significant components of the Company's deferred tax assets and liabilities</pre><pre>consist of the following at September 30:</pre><pre> </pre><pre> 2012 2011</pre><pre> -------- --------</pre><pre>Deferred tax assets (liabilities):</pre><pre>Current:</pre><pre> Reserves and accruals $ 1,320,647 $ 1,104,915</pre><pre>Non-current:</pre><pre> Intangible assets 597,000 597,000</pre><pre> Net operating losses 5,779,734 7,326,145</pre><pre> Other 60,031 62,547</pre><pre> Valuation allowance (7,757,412) (9,090,607)</pre><pre> ----------- -----------</pre><pre> $ -- $ --</pre><pre> =========== ===========</pre>
<!--egx--><pre>The following table summarizes stock option activity under the above stock</pre><pre>option plans:</pre><pre> </pre><pre> Remaining</pre><pre> Number of Weighted-Average Contractual Term</pre><pre> Shares Exercise Price (in years)</pre><pre> ------ -------------- ----------</pre><pre>Outstanding at September 30, 2010 1,976,000 $0.20 2.0</pre><pre> Granted --</pre><pre> Exercised --</pre><pre> Cancelled --</pre><pre> -----------</pre><pre>Outstanding at September 30, 2011 1,976,000 $0.20 1.0</pre><pre> Granted --</pre><pre> Exercised --</pre><pre> Cancelled 1,526,000 $0.11 0.0</pre><pre> -----------</pre><pre>Outstanding at September 30, 2012 450,000 $0.50 0.1</pre><pre> ===========</pre>
<!--egx--><pre> Outstanding Exercisable</pre><pre> ---------------------------------------------- -------------------------------------------</pre><pre> Weighted Weighted Average Weighted Weighted Average</pre><pre> Average Remaining Average Remaining</pre><pre> Number of Exercise Contractual Life Number of Exercise Contractual Life</pre><pre>Exercise Prices shares Price (in years) shares Price (in years)</pre><pre>--------------- ------ ----- ---------- ------ ----- ----------</pre><pre> $0.50 450,000 $0.50 0.1 450,000 $0.50 1.1</pre>
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