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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------------------
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended March 31, 2000
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______________ to ________________
Commission File No.: 0-14213
U.S. MICROBICS, INC.
(name of small business issuer as specified in its charter)
Colorado 84-0990371
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5922-B Farnsworth Court
Carlsbad, California 92008
(760) 918-1860
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of May 11, 2000. The registrant had 8,227,301 shares of its Common Stock,
$0.0001 par value per share, outstanding.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format (check one): Yes No |X|
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
as of as of
March 31, September 30,
2000 1999
ASSETS (Unaudited) (Audited)
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 125,400
Accounts receivable 2,929 --
Prepaid expenses and other assets 33,185 22,100
Inventories (Note 3) 72,516 68,600
------------- -------------
Total current assets 108,630 216,100
PROPERTY AND EQUIPMENT, NET 231,382 239,700
DEPOSITS 26,110 27,300
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Total assets $ 366,122 $ 483,100
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 658,492 $ 766,000
Current portion of capital lease obligation 4,952 4,900
------------- -------------
Total current liabilities 663,444 770,900
CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION 3,093 5,300
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Total liabilities 666,537 776,200
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COMMITMENTS AND CONTINGENCIES (NOTE 5) -- --
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $.10 par value; 20,000,000 shares authorized:
Series II; 500,000 shares authorized; 12,608 and 17,163 shares issued
and outstanding; aggregate liquidation preference of $12,608 and $17,163 1,261 1,700
Series B; 500,000 shares authorized; 8,007 and 13,969 shares issued
and outstanding; aggregate liquidation preference of $8,007 and $13,969 801 1,400
Series C; 50,000 shares authorized; 45,227 and 40,110 shares issued
and outstanding; aggregate liquidation preference of $4,522,700 and
$4,011,000 4,523 4,000
Series D; 50,000 shares authorized; 5,525 and 4,725 shares issued and
outstanding; no liquidation preference 553 500
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7,138 7,600
Common stock; $.0001 par value; 150,000,000 shares authorized;
7,138,190 and 6,010,380 shares issued and outstanding 714 600
Additional paid-in capital 6,810,193 6,212,900
Stock options and warrants 1,526,830 963,400
Treasury stock -- (33,300)
Stock subscriptions notes receivable (943,665) (804,200)
Accumulated deficit (7,701,625) (6,640,100)
------------- -------------
Total stockholders' deficit (300,415) (293,100)
------------- -------------
Total liabilities and stockholders' deficit $ 366,122 $ 483,100
============= =============
</TABLE>
The notes to consolidated condensed financial statements are an integral
part of these statements.
1
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES ($50,000 FROM RELATED PARTIES IN 1999) $ 13,894 $ 51,728
COST OF REVENUES 38,638 17,744
----------- -----------
GROSS (LOSS) PROFIT (24,744) 33,984
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 1,076,823 1,161,079
----------- -----------
LOSS FROM OPERATIONS (1,101,567) (1,127,095)
OTHER INCOME 40,020 8,579
=========== ===========
NET LOSS $(1,061,547) $(1,118,516)
=========== ===========
Net loss per common share (basic and diluted) (Note 4):
Net loss from continuing operations $ (.17) $ (.35)
Weighted average common shares outstanding 6,205,704 3,220,511
</TABLE>
The notes to consolidated condensed financial statements are an
integral part of these statements.
2
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,061,547) $(1,118,516)
Adjustment to reconcile net loss to cash used in
operating activities:
Depreciation 22,283 14,376
Stock, stock options, and warrants in exchange for
services 76,900 87,050
Decrease (increase) in:
Accounts receivable (2,929) (3,074)
Prepaid expense, deposits and other (9,895) (79,249)
Inventory (3,916) (139,519)
Increase (decrease) in:
Accounts payable and accrued expenses (112,146) 353,728
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,091,250) (885,204)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (14,000) (235,213)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (14,000) (235,213)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock and stock options in
private placements 939,350 808,227
Cancellation of treasury stock 33,300 --
Exercise of stock options 7,200 15,250
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 979,850 823,477
----------- -----------
DECREASE IN CASH (125,400) (296,940)
CASH AT BEGINNING OF PERIOD 125,400 316,600
----------- -----------
CASH AT END OF PERIOD $ -- $ 19,660
=========== ===========
</TABLE>
The notes to consolidated condensed financial statements are an
integral part of these statements.
3
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Supplemental disclosures of non-cash
Investing and financing activities:
Purchase of equipment under capital lease obligation $ -- $ 14,900
Preferred stock issued for note receivable $ 100,000 $ 785,000
Common stock issued in exchange for services $ 11,900 $ --
Common stock options exercised in settlement of
accrued expenses $ 65,000 $ 59,000
Cash paid for:
Interest $ 3,007 $ 276
Income taxes $ -- $ --
</TABLE>
The notes to consolidated condensed financial statements are an
integral part of these statements.
4
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements of U.S. Microbics,
Inc. (the "Company") and subsidiaries have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
suggests that the these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the fiscal year ended September 30, 1999.
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments, consisting only of normal
recurring entries, necessary to present fairly its financial position at March
31, 2000 and the results of its operations and its cash flows for the periods
presented.
The preparation of financial statements, in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
2. ORGANIZATION AND RISKS AND UNCERTAINTIES
ORGANIZATION
The Company was organized on December 7, 1984 under the laws of the State of
Colorado as Venture Funding Corporation. The Company amended its Articles of
Incorporation in June 1993 changing its name to Global Venture Funding, Inc. The
Company amended its Articles of Incorporation in May 1998 changing its name to
U.S. Microbics, Inc. The Company has been engaged in a variety of operations
since inception.
During August 1997, the Company acquired the assets of Xyclonyx, a privately
held company founded to develop, apply and license patented toxic and hazardous
waste treatment and recovery processes as well as to license and apply
microbially enhanced oil recovery technologies and products.
The Company has five wholly-owned subsidiaries: West Coast Fermentation Center,
Sub Surface Waste Management, Inc. (SSWM), Sol Tech Corporation (d.b.a. -
Wasteline Performance Corporation), Bio-Con Microbes and Applied Microbic
Technologies, Inc. West Coast Fermentation Center's primary business is to
cultivate microbial cultures that are to be sold to other subsidiaries of the
Company. Sub Surface Waste Management's business is to assemble and sell
products using technology licensed from Xyclonyx. Sol Tech Corporation and
Bio-Con Microbes are companies formed to service the sewage treatment and
agriculture markets, respectively. Applied Microbic Technologies, Inc. intends
to (i) license customers in the United States to use microbial blends that are
specially formulated for Microbially Enhanced Oil Recovery ("MEOR") in the
United States and (ii) provide related technical support services.
RISKS AND UNCERTAINTIES
For the six months ended March 31, 2000, the Company has generated only limited
revenues of $13,894. During this same period, the Company incurred a net loss of
$1,061,547 and had negative cash flows from operations of $1,091,250. As of
March 31, 2000, the Company has an accumulated deficit of $7,701,625. The
Company had no revenues during the fiscal years ended September 30, 1998 and
1997. The Company incurred net losses of $2,932,500 in fiscal 1999 and
$1,411,800 in fiscal 1998.
5
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
To date, the Company has relied on private placements of equity and debt to fund
its operating and capital requirements. The Company is planning on raising
additional capital through the issuance of stock in private placements or a
public offering. The Company is currently developing business opportunities and
operations through its wholly-owned subsidiaries. There can be no assurance that
such additional equity financing will be available on terms acceptable to the
Company, if at all or that such business opportunities will occur as planned, if
at all. Based upon the current financial condition of the Company, additional
capital will be required in order for the Company to continue its ongoing
operations. These matters raise substantial doubt about the Company's ability to
continue as a going concern.
Subsequent to March 31, 2000, the Company has raised approximately $109,000, net
of issuance costs, pursuant to a private placement offering for its Series C
preferred stock at ranging in price from $100 to $150 per share.
3. INVENTORIES:
Inventories consist of the following:
MARCH 31,
2000
-------------------
Raw materials and supplies $ 5,315
Finished goods 67,201
-------------------
$ 72,516
===================
4. NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the
reporting period. During the six months ended March 31, 2000 and 1999, common
stock equivalents are not considered because they would be anti-dilutive.
5. COMMITMENTS AND CONTINGENCIES
Litigation:
In March 1999, the Company was served with a stockholder derivative lawsuit
titled Merriam v. U.S.Microbics, et. al. This lawsuit alleges, among other
things, that certain stock was improperly issued to the President of the
Company and to certain consultants for services. The Company has formed a
special independent committee of the Board of Directors to investigate
these claims. The Company has engaged outside legal counsel to represent it
in this matter and intends to vigorously defend this action. Although
management believes the lawsuit to be without merit, an unfavorable ruling
would have a material adverse impact on the Company's financial position
and results of operations.
In December, 1999, the Company was served with a lawsuit by one of its
suppliers for nonpayment of various purchases. The company has settled this
lawsuit by paying all of the amounts owed to the supplier.
6
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
COMMITMENTS AND CONTINGENCIES (CONTINUED):
Purchase commitment:
During the year ended September 30, 1999, the Company entered into an
agreement with a supplier to purchase certain inventories at a total cost
of $194,000. The Company made deposits totaling $29,400. The Company has
not completed the purchase transaction and the supplier has sued the
Company for the remainder of the purchase price plus attorney's fees under
the purchase agreement. The company is currently in settlement negotiations
with the supplier and expects to negotiate a resolution that is equitable
and fair to both parties.
6. EQUITY FINANCING
During the six months ended March 31, 2000, the Company received cash
proceeds, net of offering costs of $35,400, totaling $939,350 pursuant to a
private placement offering for its Series C Preferred Stock at $100 to $150
per share. Subsequent to March 31, 2000, the Company has raised
approximately $109,000, net of placement fees.
7
<PAGE>
PART I
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY
UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING
FUTURE EVENTS OR FUTURE PERFORMANCE OF THE COMPANY. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH ARE ONLY
PREDICTIONS AND SPEAK ONLY AS OF THE DATE HEREOF. FORWARD-LOOKING STATEMENTS
USUALLY CONTAIN THE WORDS "ESTIMATE," "ANTICIPATE," "BELIEVE," "EXPECT," OR
SIMILAR EXPRESSIONS, AND ARE SUBJECT TO NUMEROUS KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY REVIEW VARIOUS RISKS AND UNCERTAINTIES IDENTIFIED BELOW, AS WELL AS
THE MATTERS SET FORTH IN THE COMPANY'S ANNUAL REPORT ON 10-KSB FOR THE YEAR
ENDED SEPTEMBER 30, 1999 AND ITS OTHER SEC FILINGS. THESE RISKS AND
UNCERTAINTIES COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE OR PUBLICLY ANNOUNCE REVISIONS TO ANY FORWARD-LOOKING
STATEMENTS TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
THE COMPANY
U.S. Microbics, Inc. (the "Company" or "USMX") intends to build an environmental
biotech company utilizing the proprietary microbial technology, bioremediation
patents, knowledge, processes and unique microbial culture collection developed
over 30 years by the late George M. Robinson and his daughter Mery C. Robinson
(collectively, the "Microbial Technology"). The Company creates and markets
proprietary microbial technologies that provide natural solutions to many of
today's environmental problems. The Company's microbes or "bugs" can be used to
break down various substances, including oil, diesel, fuel, arsenic, certain
toxic waste, and certain water and soil contaminants. The Company intends to
leverage the products, applications and customer contacts developed by the
Robinsons to apply, develop, license and commercialize the Microbial Technology.
The Company believes that it can build the foundation for the international
commercialization of proprietary products based on the Microbial Technology for
applications in the global environmental, manufacturing, agricultural and
natural resource markets. Unlike certain other start-up companies that need to
develop a product or technology and find a market and customers, USMX already
has advanced, proprietary technology, as well as products that have been
utilized in various environmental and agricultural applications worldwide. The
Company is in the process of determining and obtaining the capital, personnel
and manufacturing and distribution capacity necessary to commercialize the
Microbial Technology.
The Company's initial objective is to establish itself as a leading provider of
environmental technology and products to companies in the United States through
the licensing of technology that meets governmental standards, is
environmentally friendly, is easy to manufacture and apply
8
<PAGE>
and yields profit for its licensees. To achieve this objective, the Company
intends to focus its strategy on the following three elements: (i) licensing its
bioremediation technology to high-volume end-users for hydrocarbon waste
cleanup; (ii) developing a manufacturing center for its proprietary microbial
blends; and (iii) licensing its technology to entities for use in specific
vertical markets and territories, site clean-up and maintenance products,
agricultural growth enhancement and aquaculture/mariculture applications.
The Company's achievement of its objectives is highly dependent, among other
factors, on its ability to raise the necessary capital to build the production
facility that will supply potential new customers and satisfy the potential
demand from prior customers that previously utilized products based on the
Microbial Technology. The Company intends to raise additional working capital
through the sale of common and preferred stock or debt and through potential
licensing arrangements. There can be no assurance that the Company will raise
such capital on terms acceptable to the Company, or if at all. The Company's
failure to obtain adequate financing may jeopardize its existence. See
"Liquidity and Capital Resources."
OVERVIEW
During the fiscal year ended September 30, 1999, the Company's efforts were
directed to developing its biotechnology product line, fund raising, building
organizational infrastructure and the continued construction of manufacturing
facilities for production and shipment of microbes for remediation of
hydrocarbons, sewage treatment and agriculture applications and for the
retrofitting and shipment of the BIO-RAPTOR(TM). The Company conducted product
demonstrations to show the efficacy of the microbial products in hydrocarbon
applications, odor control, waste management, manure and green-waste conversion
to compost, and restaurant and hotel applications. A technical support team
consisting of hydrocarbon, sewage and agriculture specialists was hired and
trained, a catalogue of products was produced in printed and Internet
downloadable form, training courses were developed and given for new users and a
sales and marketing training program was developed.
The Company's powder blending facility is now complete and its expected
production capacity for its microbial blends is 200,000 units per month. The
Company has implemented its in-house fermentation production and is increasing
capacity to supply sufficient microbes to meet sales projections for fiscal year
2000.
The Soil Recycling Center business plan has been developed and defined specific
steps for obtaining government permits, environmental approvals and funding and
beginning operations. The Company ran a demonstration center using manure and
green-waste to demonstrate product efficacy, develop operator training
techniques, determine Bio-Raptor(TM) operational logistics, manpower
requirements, water application and control procedures, loading and unloading,
and land farming and windrow optimization. These results were used in the Signal
Hill Petroleum demonstration program that demonstrated bioremediation of heavy
crude oil hydrocarbons to non-detectable levels within a six-week time frame.
9
<PAGE>
The Company does not have an existing backlog of sales orders and has not
generated significant sales or revenues to date related to its Microbial
Technology. Further, there can be no assurance that projected production and
sales volumes or sales prices will be achieved.
PLAN OF OPERATIONS FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2000
The Company intends to generate revenue during fiscal year 2000 by focusing on
sales of its three product lines, Remediline(TM), Wasteline(TM) and Bi-Agra(TM)
and the sale of the BIO-RAPTOR(TM) and related consulting services for microbial
application. The Company plans to sell its products to new and existing end-user
prospects, to soil recycling center licensees, and through domestic and foreign
distributors. Sales of BIO-RAPTORS(TM) for soil recycling center applications
could be limited by land use permit lead times and local permitting for water
use, air quality control, and conditional use. The Company also plans to
distribute its product through the retail channel via strategic relationships
with existing distributors and joint ventures created for domestic and
international business.
With additional equity capital, the Company plans to identify profitable
candidates for acquisition where the product lines acquired are complimentary or
add new distribution channels, and the companies provide synergistic
opportunities for economies of scale.
The Company intends to raise additional capital to fund operations through
September 2000, and anticipates that cash generated from financing and projected
revenues will enable it to fulfill cash needs for fiscal year 2000 operations.
There can be no assurance that the Company will be able to raise such funds on
terms acceptable to the Company, if at all, or to generate such revenues. There
can be no assurance that the Company will receive such financing or generate
revenues in the time frame anticipated, if at all.
If the Company receives sufficient financing or generates sufficient revenues,
then the Company intends to expand its fermentation capacity and sales and
marketing efforts during fiscal year 2000. During the first quarter of fiscal
year 2000, the Company is building infrastructure (i.e., personnel, procedures
and systems) and intends to establish initial sales and marketing operations.
Research and development costs are projected to be under $1,000,000, which will
be associated primarily with specific product case study results for generating
sales and marketing collateral material. The Company plans to increase the
number of employees to approximately 40 by the end of the fiscal 2000.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO THE SIX MONTHS ENDED MARCH
31, 1999
The Company's revenues decreased 73%, or $37,834 to $13,894 for the six months
ended March 31, 2000, from $51,728 for the same period in fiscal 1999 primarily
as a result of a decrease in licenses revenue. Revenues for the six months
ended March 31, 2000 consisted
10
<PAGE>
primarily of bio-remediation of hydro-carbons in contaminated soil for and oil
company and sales of microbial blends for grease trap remediation.
Selling, general and administrative ("SG&A") expenses decreased 7%, or $84,256
to 1,076, for the six months ended march 31, 2000, from $1,161,079 for the same
period in fiscal 1999 primarily as a result of a reduction in consulting
expenses. SG&A expenses for the six months ended March 31, consisted primarily
of occupancy, payroll, accounting, legal, consulting, and public relations
expenses.
The Company incurred a net loss of $1,061,547 and had negative cash flows from
operations of $1,091,250 for the six months ended March 31, 2000 compared to a
net loss of $1,118,516 and negative cash flows from operations of $(885,204) for
the six months ended March 31, 1999. Basic and diluted net loss per share was
$(.17) for the six months ended March 31, 2000 compared to $(.35) for the six
months ended March 31, 1999. The decrease was due to the increase in average
shares outstanding to 6,205,704 for the six months ended March 31, 2000 compared
to 3,220,511 for the corresponding six months ended March 31, 1999.
Although the Company believes revenues will increase during the last half of
fiscal 2000, based on the current financial condition of the Company, additional
capital will be required in order for the Company to maintain its ongoing
operations. In order to continue implementing the Company's strategic plan, the
Company is planning on raising up to an additional $5,000,000 from private
placements during the third and fourth quarters fiscal 2000. The funds are
targeted to expand the fermentation manufacturing operation and the staffing of
sales subsidiaries. There can be no assurance that the Company will be able to
raise such capital on terms acceptable to the Company, if at all. The Company's
failure to obtain adequate financing may jeopardize its existence. See
"Liquidity and Capital Resources."
ENVIRONMENTAL RECLAMATION, INC. JOINT VENTURE
On March 27, 2000, the Company entered into a letter of intent with
Environmental Reclamation Inc., (ERI) that provided that the company and ERI
will establish a joint venture to engage in bioremediating contaminated
properties, and operate soil recycling centers in one or more major U.S. cities.
U.S. Microbics is to supply the bioremediation technology and ERI is to act as
the contractor for bioremediation projects or as the operator for the soil
recycling centers. It is expected that the definitive agreement will provide
that:
o U.S, Microbics Inc. and Sub-Surface Waste management. (SSWM), a wholly
owned subsidiary engaged in the manufacturing an distribution of
bioremediation products will (a) provide the Bio-Raptor(TM) and
bioremediation technology, products and services; (b) support the use of
the technology, products and services with technical support services; (c)
leverage its business and political relationships to secure bioremediation
contracts or clean-up opportunities and (d) arrange financing to acquire
the soil recycling centers and the deployment of its proprietary
technology. The soil recycling centers will be setup to process hydrocarbon
(including MTBE) and pesticide contaminated soil, greenwaste, animal waste,
kitchen grease,
11
<PAGE>
contaminated railroad ties and telephone poles, and other waste materials
as dictated by local market conditions.
o ERI will be responsible for (a) managing and operating the Soil Recycling
Centers, including interacting with various federal, state and local
environmental authorities and private environmental companies involved in
overseeing and administering clean-up efforts; (b) overseeing, managing and
administering the clean up of contaminated sites or properties remediated
by the joint venture; (c) identifying, bidding and acquiring contracts for
bio-remediation of contaminated sites/properties or other projects that
have potential for profitable contribution to the joint venture; and (d)
locating sites in various municipalities suitable for soil recycling
centers.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents totaled $ 0.00 and $125,400 at March 31, 2000 and
September 30, 1999, respectively. The Company had net bank overdrafts of $25,300
as of March 31, 2000. Net cash used in operations was $1,091,250 for the six
months ended March 31, 2000, compared to $885,204 for the comparable period in
fiscal 1999.
During the six months ended March 31, 2000, the Company raised $939,350, net of
placement fees, of approximately $35,400, from private placements of Series C
Preferred Stock. As of March 31, 2000, the Company has negative working capital
of $554,814 as compared to negative working capital of $554,800 as of September
30, 1999. The Company will need to continue to raise funds by various financing
methods such as private placements to maintain its operations until such time as
cash generated by operations is sufficient to meet its operating and capital
requirements. There can be no assurance that the Company will be able to raise
such capital on terms acceptable to the Company, if at all.
To date, the Company has financed its operations principally through private
placements of equity securities and debt. Subsequent to March 31, 2000 the
Company has raised approximately $109,000, net of placement fees However the
Company will have to raise an additional $900,000 either from the sale of equity
securities, debt or operating revenues to continue it operations through June
30, 2000, The Company anticipates that cash generated from anticipated private
placements and projected revenues during the third and fourth quarters of fiscal
2000 will enable it to fulfill cash needs for fiscal 2000 and through fiscal
2003 operations. However, thee can be no assurance that any such private
placements will be completed or that any such revenues will materialize either
of which could have a material adverse effect on the Company.
In January 2000, the Company signed a term sheet with Swartz Private Equity, LLC
of Atlanta, Georgia for up to a $35 million equity line. The term sheet calls
for a private equity line for the purchase of the Company's Common Stock,
subject to registration and certain other conditions and limited to a percentage
of dollar trading volume. On January 27, 2000, the Company issued a warrant to
Swartz for the purchase of up to 250,000 shares of Common Stock in connection
with the proposed equity line. Warrants for 100,000 shares of Common stock will
be exercisable upon the end of the final document review period, 75,000 shares
will be exercisable upon the
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execution of the equity line documents, and 75,000 shares shall be exercisable
upon the earlier of (i) July 10, 2000 or (ii) the date on which the related
registration is declared effective. Each warrant has an exercise price equal to
$2.00 per share. On March 14, 2000 the Company completed the investment
agreement with Swartz Private Equity, LLC for the equity line up to $35 million.
The Company filed an SB-2 registration statement with regard to the equity line
on May 5, 2000.
The Company will need additional capital to continue its operations and will
endeavor to raise funds through the sale of equity shares and revenues from
operations. There can be no assurance that the Company will obtain sufficient
capital or generate revenues on acceptable terms, if at all. Failure to obtain
such capital or generate such revenues would have an adverse impact on the
Company's financial position and results of operations and ability to continue
as a going concern.
Assuming the Company raises projected capital during the last half of fiscal
2000, the Company projects expenditures for plant and equipment of approximately
$3,000,000 and research and development costs of less than $1,000,000,. Research
and development costs will be associated primarily with Bio-Raptor(TM)
configuration for specific applications. The Company also plans to increase its
number of employees to approximately 40 by the end of fiscal year 2000.
The Company's operating and capital requirements during the next fiscal year and
thereafter will vary based on a number of factors, including: (i) the rate at
which microbial products are shipped and generate profits; (ii) the necessary
level of sales and marketing activities for environmental products; and (iii)
the level of effort needed to develop additional distribution channels to the
point of commercial viability.
There can be no assurance that additional private or public financing, including
debt or equity financing, will be available as needed, or, if available, on
terms favorable to the Company. Any additional equity financing may be dilutive
to shareholders and such additional equity securities may have rights,
preferences or privileges that are senior to those of the Company's existing
common or preferred stock. Furthermore, debt financing, if available, will
require payment of interest and may involve restrictive covenants that could
impose limitations on the operating flexibility of the Company. The failure of
the Company to successfully obtain additional future funding may jeopardize the
Company's ability to continue its business and operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In March 1999, the Company was served with a shareholder derivative lawsuit
titled Merriam v. U.S. Microbics, et al., Marin County Superior Court, Case No.
991288. This lawsuit alleges, among other things, that certain stock was
improperly issued to the President of the Company and to certain consultants for
services. The Company has formed a special independent committee of the Board of
Directors to investigate these claims. The Company has engaged outside legal
counsel to represent it in this matter and intends to vigorously defend this
action. Although management believes the lawsuit to be without merit, an
unfavorable ruling would have a material adverse impact on the Company's
financial position and results of operations.
On December 16, 1999, Extec USA, Inc. filed a lawsuit against the Company in the
Riverside County Superior Court, Case No. 336732. This lawsuit asserts that the
Company failed to pay the full purchase price for certain shredding equipment.
The Company has reached an out of court settlement with Extec USA to increase
the deposit on the equipment by $30,000 by May 31, 2000. The Company anticipates
fulfilling this agreement.
On December 17, 1999, Red Mountain Pacific, LLC filed a lawsuit against the
Company in the San Diego County Superior Court, Case No. N002193. This lawsuit
asserts that the Company failed to pay the full rental price for certain
equipment. The company has negotiated a settlement where by a payment of $10,000
is to be made by February 15 and final payment of $8,000 by February 22, 2000.
The Company has fulfilled its obligation under this agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2000, the Company raised $532,350 net of
placement fees, from the issuance of shares of Series C Preferred Stock pursuant
to a private placement. The shares of Series C Preferred Stock issued pursuant
to the private placement were not registered under the Securities Act of 1933,
as amended (the "Securities Act"), because the subject transaction involved a
non-public offering exempt from registration under Section 4(2) of the
Securities Act and Regulation D promulgated thereunder.
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 4, 2000, a special meeting of shareholders was held to approve a
1-for-20 reverse stock split of each class of the Company's capital stock and
ratify all stock transfers and sales of the Company's capital stock made as if
the Reverse Split had been implemented effective August 20, 1997. Both matters
were required to be approved by a majority of the shares of Common Stock and
Preferred Stock, each voting separately as a class and each was so approved.
Shares eligible to vote -
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Common Shares 6,639,546 and for Preferred Shares 219,363. The proposal passed as
follows: Common Stock votes for approval- 1,263,900, votes against 21,816 and
votes abstaining 10,124. Preferred Stock approval - votes for 205,044, votes
against 10,000 and abstaining votes 4,325.
SUBSEQUENT EVENTS:
To date, the Company has financed its operations principally through private
placements of equity securities and debt. Subsequent to March 31, 2000 the
Company has raised approximately $109,000, net of placement fees.
On May 5, 2000, the Company filed a SB-2 Registration Statement related to the
result of shares issued to Schwartz Private Equity, LLC in connection with a $35
million equity line provided to the Company. In general the Company is
registering up to 20,094,000 shares of Common Stock to be sold over a period of
3 years as provided in an Investment Agreement dated March 14, 2000. The Company
filed a Form 8-K on April 10, 2000 reporting the Investment Agreement and other
related agreements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Investment Agreement, dated March 14, 2000 by and between the Company and
Schwartz Private Equity, LLC (incorporated by reference to Exhibit 5.1 of
the Company's Form 8-K filed April 10, 2000).
Warrant to Purchase Common Stock, dated as of January 27, 2000, issued to
Schwartz Private Equity, LLC (incorporated by reference to Exhibit 5.2 of
the Company's Form 8-K filed April 10, 2000)
Registration Rights Agreement, dated as of March 14, 2000, by and between
the Company and Schwartz Private Equity, LLC (incorporated by reference to
the Company's Form 8-K, filed April 10, 2000)
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed in its behalf by the undersigned, thereunto duly
authorized.
U.S. MICROBICS, INC.
Date: May 15, 2000 By: By: /s/ Robert C. Brehm
--------------------------------------
Robert C. Brehm, President and
Chief Executive Officer
By: /s/ Conrad Nagel
--------------------------------------
Conrad Nagel, Chief Financial Officer
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