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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the year fiscal year ended September 30, 1999
|_| 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.
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(Name of small business issuer in its charter)
Colorado 84-0990371
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5922-B Farnsworth Court
Carlsbad, California 92008
(760) 915-1860
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(Address of principal executive offices and Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.0001 par value per share
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 |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Issuer's revenues for the fiscal year ended September 30, 1999: $66,900.
Aggregate market value of voting and non-voting common equity held by
non-affiliates: 18,031,140.
Common Stock, $0.0001 par value per share - 6,613,836 shares outstanding as
of January 10, 2000.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format (check one):
YES |X| NO |_|
<PAGE>
TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Description of Business.........................................1
Item 2. Description of Property........................................19
Item 3. Legal Proceedings..............................................19
Item 4. Submission of Matters to a Vote of Security Holders............19
PART II.......................................................................20
Item 5. Market for Common Equity and Related Shareholder Matters.......20
Item 6. Management's Discussion and Analysis or Plan of Operation......22
Item 7. Financial Statements...........................................27
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure...........................27
PART III......................................................................28
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.....28
Item 10. Executive Compensation.........................................29
Item 11. Security Ownership of Certain Beneficial
Owners and Management.........................................32
Item 12. Certain Relationships and Related Transactions.................34
Item 13. Exhibits and Reports on Form 8-K...............................35
SIGNATURES....................................................................37
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PART I
Item 1. Description of Business
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 in this
Report, including the matters set forth under the captions "Risk Factors" and in
the Company's 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.
Overview
U.S. Microbics, Inc. (the "Company") 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, toxic
waste, water and soil contamination. 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 its 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, the Company
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, easy to manufacture and apply 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, bioremediation contractors and land
developers for hydrocarbon waste cleanup; (ii) increasing the capacity of its
existing production facility; and (iii) licensing its technology to entities for
use in specific vertical markets and territories, for site clean-up and
maintenance products, agricultural growth enhancement and waste treatment and
odor control 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 customers with products based on the
Microbial Technology. The Company intends to raise additional working capital
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through the sale of shares of its Common Stock ("Common Stock") and/or debt and
through the potential licensing of its developed business arrangements. There
can be no assurance that the Company will raise sufficient capital to fund its
proposed operations and the Company's failure to obtain adequate financing may
jeopardize its existence. The Company has generated revenues of approximately
$66,900 during the fiscal year ended September 30, 1999. See "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."
The Company's principal office is located at 5922-B Farnsworth Court,
Carlsbad, California 92008, and its telephone number is (760) 918-1860. The
Company's home page on the Internet can be located at http://bugsatwork.com.
Business Development
The Company was incorporated in the State of Colorado on December 7, 1984
under the name "Venture Funding Corporation" and has been engaged in a variety
of operations since inception. The Company amended its Articles of Incorporation
in June 1993 to change 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. and its stock trading symbol on the Over-The-Counter Bulletin
Board to "BUGS." The Company's fiscal year ends on September 30.
The Company has six wholly-owned subsidiaries:
* XyclonyX;
* West Coast Fermentation Center ("WCFC");
* Sub Surface Waste Management, Inc. ("SSWM");
* Sol Tech Corporation, d.b.a. Wasteline Performance Corporation ("Sol
Tech");
* Bio-Con Microbes ("Bio-Con"); and
* Applied Microbic Technologies, Inc. ("AMTI").
WCFC's primary business is to cultivate microbial cultures that are to be
sold to other subsidiaries of the Company. SSWM's business is to assemble and
sell Bio-RaptorTM and hydrocarbon treatment products using technology licensed
from XyclonyX. Sol Tech and Bio-Con are companies formed to service the waste
treatment and agriculture markets, respectively. AMTI intends to sell products
to oil and gas operators that use microbial blends that are specially formulated
for Microbially Enhanced Oil Recovery (MEOR). The Company's strategy is to
maintain the Microbial Technology formulas with the technology experts at
XyclonyX, produce the microbe blends and formulations in its WCFC fermentation
facility and utilize sales subsidiaries to sell and license the microbe
solutions to targeted customers.
The Company intends to obtain private financing for additional equity to
provide working capital for current overhead costs as well as to finance startup
costs for its wholly-owned subsidiaries and to fund potential acquisitions.
Item 1. Description of Business
Organizational Structure
The Company has developed an organizational structure of multiple
corporations for the purpose of segmenting its operations into distinct units
for proprietary microbe or "bug" production, research and development ("R&D"),
licensing and patent protection and the intended sale and licensing of microbial
products to specific market segments. As the public holding company, the Company
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intends to coordinate the deployment of the Microbial Technology to its
subsidiaries that in turn will license the technology and sell products to end
users. Several of the Company's subsidiaries utilize corporate names that have
been used successfully by predecessor companies selling the Microbial
Technology.
The Company and its subsidiaries are described more fully below:
U.S. Microbics, Inc.
The Company intends to orchestrate profitably the operations of its
subsidiaries and to provide administrative functions at beneficial economies of
scale. The Company initially intends to acquire the capital needed to fund the
production plant, to acquire the necessary personnel and facilities and to
operate the individual subsidiaries. The Company then intends to allocate its
resources among the subsidiaries so that they can operate profitably within the
organizational structure. The Company also will provide to its subsidiaries
public relations, accounting, legal, human resources, capital acquisition and
merger and acquisition services.
West Coast Fermentation Center
WCFC manufactures microbial blends by using fermentation technology, powder
blending techniques and combinatorial liquifaction including microbial blends
for the Remediline(TM), Wasteline(TM) and Bi-Agra(TM) product lines. WCFC
intends to build a larger microbe laboratory, pilot plant and quality control
center to meet projected production demands in fiscal year 2000 if additional
funds are generated from sales and/or equity/debt funding.
XyclonyX
XyclonyX intends to research, develop, formulate, protect, apply, acquire,
license and transfer its technologies, consisting of patents, proprietary
knowledge, products, processes and personnel, in the environmental,
petrochemical, agriculture and waste treatment marketplaces. XyclonyX has
developed a formulation for mass producing proprietary microbial blends in
liquid and powder forms that the Company believes is highly concentrated, cost
effective and difficult to replicate.
Sub-Surface Waste Management, Inc.
SSWM intends to license patented Bio-Raptor(TM) processes, hydrocarbon
microbial blends (Remediline(TM)) and associated technical services to solve
customer environmental problems within the United States. SSWM has delivered
microbial blends to remove hydrocarbons from soil and has successfully
demonstrated crude oil bioremediation at an oil refinery in Southern California.
SSWM is working with environmental consultants, remediation contractors, and
commercial developers to place the Bio-Raptor(TM) into commercial operation as
either a transportable unit or as a fixed unit in a soil-recycling center. SSWM
also has successfully demonstrated the Bio-Raptor(TM) in greenwaste and
composting applications with typical processing times that are substantially
faster than processing using natural conversion. SSWM has licensed the sales and
marketing of the transportable Bio-Raptor(TM) to Builders Referral Inc. Sales to
the soil recycling centers are performed by in-house sales personnel in
conjunction with third-party joint venture partners that are experienced in
government relations and external project financing. SSWM also has developed a
bioremediation training course for use by new licensees and Bio-Raptor(TM)
users.
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Sol Tech Corporation
Sol Tech has delivered limited quantities of waste treatment and odor
control products (Wasteline(TM)) to customers in the hospitality, energy
generation, restaurant and assisted living markets. Sol Tech also has provided
technical support services to customers in these markets. The Company has
submitted sales proposals for municipal waste treatment in California and
Florida, prison system use in Texas, municipal solid waste treatment in
Massachusetts and composting use in Central California. In addition, Sol Tech
has developed a training course for customer support and training for new
licensees of waste treatment and odor control products.
Bio-Con Microbes, Inc.
Bio-Con has delivered limited quantities of Bi-Agra(TM) products to
customers in the United States for agricultural uses, including animal manure
remediation, greenwaste compost applications and bio-dynamic soil amendments for
vineyards, and has provided related technical support services. Bio-Con intends
to generate sales and support for customers with agricultural operations. In
addition, Bio-Con will need to implement a customer support and training program
as the number of new licensees and customers increases.
Applied Microbic Technology, Inc.
AMTI intends to license customers in the United States to use microbial
blends that are specially formulated for Microbially Enhanced Oil Recovery
(MEOR) and provide related technical support services.
Product/Service Profile
The Company intends to license its patented technology, manufacture and
sell its proprietary blends and educate and train customers concerning the
proper use and application of its products. The Company's major products and
processes include the following: in-situ bioremediation of underground
contaminants; surface enclosed and open bioremediation of contaminants;
open-water (both fresh and marine) containment/treatment bioremediation; habitat
restoration of environmentally "challenged" areas; increased
agriculture/aquaculture and mariculture food production; and decreased water and
fertilizer use in agricultural applications. In addition, the Microbial
Technology and related products can be used in niche markets, such as
agriculture, decorative water landscape maintenance and restaurant grease traps.
With services and products covering a variety of potential applications, the
Company believes that it is positioned to offer customer-driven applications
that are cost effective and beneficial to its future customers.
The SSWM Bio-Raptor(TM) is a patented bioremediation shredder, sprayer and
conveyor system for the cleanup of hydrocarbon contaminated soils. It treats
soil contamination on-site, reducing costs, increasing material treatment
surface area and aeration, reducing retention time, and lowering potential
liability through on-site treatment and the elimination of risks relating to
contaminant transportation and site downtime. The Bio-Raptor(TM) consists of the
Microbial Application System(TM) (MAS) which is comprised of the sprayer, pump
and activation system, and a separate shredder and conveyor system. The MAS can
be adapted to existing shredder/conveyor systems of prospective customers.
In addition to the above ground Bio-Raptor(TM) process, the Company offers
in-situ treatment for hydrocarbon reduction, a process that does not require
soil excavation. The in-situ and Bio-Raptor(TM) processes for waste
decomposition use non-genetically-engineered blends of naturally-occurring
microbes, which are effective in hard-to-reach contaminated areas and/or
environmentally sensitive locations.
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The Company's blends and bioprocessing treatment systems also are available
for agricultural yield enhancement, odor control, waste pretreatment and
stabilization, sewer/drain preventive maintenance, and fly control for dairies
and feedlots and feedlot waste cogeneration. The Company also offers a drain
maintenance and grease trap program for restaurants, hotels, resorts and the
hospitality industry. With the current emphasis on water and resource
conservation, another application involves algae control for decorative ponds
and golf course lakes and the use of reclaimed water for site irrigation.
Customer Profile
The Company plans to license its technology and sell its products to
customers that previously utilized the Microbial Technology in the
bioremediation, agricultural and waste treatment industries. The Company
believes that many customers require natural solutions for
"better-faster-cheaper" waste treatment, increased food production and lower
water and natural resource consumption. The Company further believes that future
customers could include contractors, insurance companies, petrochemical
manufactures, land fill operators, farmers, nurseries, food processors,
restaurants, municipalities, state and federal governments, golf courses, water
districts, fisheries, banks and financial institutions.
The Company has shipped (through December 1999) products to customers in
diverse industries such as hospitality (restaurant and hotel), wine (vineyard
growth), oil refinery (crude oil bioremediation), and assisted living (odor
control).
Technology Overview
Product Lines. The Company currently has four product lines that are
defined in the following table:
Product Line Description of Typical Use
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Bio-Raptor(TM) Bio-Raptor(TM) and Microbial Application System(TM)
Wasteline(TM) Anaerobic and Aerobic Waste Treatment Products
Remediline(TM) Hydrocarbon Treatment Products
Bi-Agra(TM) Agricultural, Aquaculture and Mariculture Treatment
Products, Biological
Pesticides, Bio-Dynamic Products
Patents. The process patents to be licensed by XyclonyX include the
following: decontamination of hydrocarbon contaminated soil - U.S. patent
#5,039,415; and oil contamination clean up by use of microbes and air--U.S.
patent 5,334,533. XyclonyX also owns the Australian patent #652103 entitled
"Decomposition of Hydrocarbon Contaminated Soil."
Culture Collection. The Company, through XyclonyX, has the rights to use a
culture collection developed by George M. Robinson and Mery C. Robinson during
the past 30 years. The proprietary culture collection consists of 30 microbes
that are combined into unique consortiums to solve particular environmental
problems, increase agricultural production, reduce water consumption or increase
oil production. The unique collection of microbes and the specific combinations
of bacteria comprise the products to be manufactured by WCFC.
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Research and Technical Notes. The research and technical notes of George M.
Robinson consist of 30 years of theoretical and empirical research leading to
the successful formulae for microbe separation, ultra-high yield fermentation,
consortium formulations for specific problem solving tasks, long term storage of
microorganism and completion of field-successful applications.
Research and Development. During each of the last two fiscal years, the
Company has incurred minimal R&D expenditures relating to its activities for
microbial blends and associated processes.
Market Segments Targeted
The Company has identified the following nine market segments in which its
product lines have been sold successfully by predecessor companies. The Company
and its subsidiaries plan to sell products to the same market segments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Product Line Series Designation
- ----------------------------------------------------------------------------------------------------------------------------
Market Description Bio-Raptor(TM) Remediline(TM) Wasteline(TM) Bi-Agra(TM)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial-R Retail Customer Outlets X X X
- ----------------------------------------------------------------------------------------------------------------------------
Commercial-W Wholesale to Commercial X X X
Accounts
- ----------------------------------------------------------------------------------------------------------------------------
Industrial Industrial Accounts X X X X
- ----------------------------------------------------------------------------------------------------------------------------
Municipal City, State and Federal X X X X
Governments
- ----------------------------------------------------------------------------------------------------------------------------
Agricultural Food/Non-Food Growers X X X X
- ----------------------------------------------------------------------------------------------------------------------------
Manufacturing Food Processors, Lumber, X X X
Textile
- ----------------------------------------------------------------------------------------------------------------------------
Military Armed Services X X X X
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Healthcare Hospitals, Clinics, X X X
Surgi-centers
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Energy Oil & Gas Operators X X X X
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</TABLE>
Human Resources
As of January 10, 2000, the Company had 20 full-time employees and 9
full-time and part-time consultants, for a combined total of 29 employees and
consultants. The Company's personnel are employed as follows: 5 in
administrative functions; 17 in production support and manufacturing; 2 in
promotion; and 5 in sales. During fiscal year 2000, the Company intends to hire
additional consultants and employees in the areas of manufacturing,
administration, sales and marketing, and customer support. In particular, the
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Company must recruit qualified personnel for key positions in its microbial
manufacturing and sales operations, including qualified personnel for product
management, quality control functions, web design and maintenance, and
experienced sales consultants. The Company's failure to effectively recruit,
hire, train and manage qualified personnel could have a material adverse effect
on its business, financial condition and results of operations. See "Risk
Factors--Dependence on Key Personnel."
Technical Advisory Group
XyclonyX has assembled the following team of technical advisors to assist
with its operations:
* Kary Mullis, Ph.D.--Nobel Laureate, inventor/biochemist, recognized
expert of the PCR (Polymerase Chain Reaction) technology;
* Robert B. "Jones" Grubbs, Ph.D.--bioaugmentation expert and President
and CEO of Solmar Corporation, a leading marketer of biologicals to
municipalities and industry located in Vista, California;
* Zak Hassanian, Ph.D.--recognized expert in industrial-scale biological
fermentation, manufacturing and production and President and CEO of
Prima Pharma, a pharmaceutical biotechnology reagent company;
* Dominic Colasito, Ph.D.--microbiologist and co-patent holder of
Bio-Raptor(TM) with extensive fermentation and field application
experience; and
* Jack Smith--co-patent holder of Bio-Raptor(TM) with extensive field
experience in microbial bioremediation for various applications
including agricultural use.
Sales and Marketing
Marketing and Licensing
The Company believes that it is well positioned to exploit numerous market
opportunities through a controlled licensing and microbial production program.
This program will allow the Company to direct resources to research and
marketing rather than to heavy equipment manufacturing.
Marketing Plan
The Company's marketing plan employs several strategies:
Direct Sales by the Company's Employees. The Company's marketing personnel
have identified, contacted and shipped products to U.S.-based companies in the
oil refining, waste treatment, hospitality, wine and agricultural industries.
The Company sells a technology-licensing package to interested companies, using
exclusive and non-exclusive agreements depending upon the technology and
geographic area licensed.
Independent Distributors. Independent distributors specialize in specific
vertical markets where products based on the Microbial Technology augment
existing distributed products. As an additional revenue source, the Company will
distribute the products based on the Microbial Technology under territory
licenses and sell them at wholesale to distributors.
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Internet Commerce. The Company currently uses the Internet for distributing
information about its products and application results. The Company currently
plans to offer certain products via the Internet directly to end-users and
consumers in fiscal year 2000.
Other. The Company intends to engage in direct advertising, professional
conference participation and humanitarian support of environmentally responsible
projects. The Company has placed advertising in various trade publications and
has participated in Brownfield conferences, and was a co-sponsor of the In situ
and Onsite Bioremediation Symposium in 1999. In addition, the Company's products
have been showcased in Waste Treatment Technology News, Landscape Contractor
Magazine, San Diego Business Journal and the San Diego Daily Transcript.
Future Market Opportunities
The Company plans to build sales both geographically and along product
lines through two strategies. First, the Company plans to generate sales of its
proposed products and services based on the Microbial Technology in as many
countries and product lines as possible. Second, the Company intends to develop
additional technologies based on its existing technology and market such
technologies to existing and new customers.
Key Benefits
The Company intends to provide profitable niche opportunities for various
companies in the bioremediation, petroleum production, hazardous/toxic waste
reduction, municipal waste, landfill mitigation, agricultural and
aqua/mariculture markets. The Company believes that the key benefits of its
products and services based on the Microbial Technology include:
* proprietary mass production techniques that can be used in third world
countries;
* high "bug density count" offering efficient products;
* unique microbial cultures developed over multiple years;
* utilization of naturally occurring bacteria;
* environmentally friendly products and services that meet governmental
standards and are easy to apply;
* efficient results at affordable prices;
* ease of shipment using regular carriers;
* potential for on-site growth of products for special applications;
* applications of products by low skilled workers; and
* protected market opportunities through patent protection.
The Company believes that the foregoing benefits affect significantly
replacement, retrofit and new applications in its identified markets. In
addition, if new applications in prospective markets become economically
feasible, then the Company will offer these applications to companies that wish
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to exploit such opportunities. The Company believes that the products and
services based on the Microbial Technology, when licensed and offered by the
Company, will combine well with recent technological developments that have
focused on micro-miniaturization, low energy/high efficiency requirements and
environmentally friendly and high profit relationships.
Strategic Alliances
During fiscal year 1999, the Company entered into a sales and marketing
association with Builders Referral Inc., a network of contractors that will
assist the Company in marketing its products to customers in the contracting
industry. In addition, during the first quarter of fiscal year 2000, the Company
announced that it will enter into a series of joint ventures with LG Enterprises
to engage in a number of bioremediation businesses and initiatives. The Company
also announced a strategic alliance with Manufacturers Direct Services, a
marketing and distribution company, which will assist the Company in marketing
its products to new customers. The Company also has signed a letter of intent
with Commercial Foody's Ltda. for distribution of its Wasteline(TM) products in
Chile. The Company believes that these alliances may provide endorsements for
the Microbial Technology, technical validation and measurement of its
applications and financial rewards for the involved parties in terms of licenses
and technology exploitation.
Endorsements
The Company is engaged in educational and advocacy-building activities that
it believes will lead to professional, educational, business environmental and
utility-provider endorsements. The Company believes that these entities will
endorse its products and services as they are further introduced to the merits
of the Microbial Technology under development, its wide application potential
and related environmental and energy production enhancement and cost savings.
Predecessor Companies Customer Base
The predecessor companies of Bio-Con, AMTI and SSWM had customers in the
agricultural, aquaculture, municipal, financial, energy, military and commercial
market segments. The Company intends to renew these contacts and pursue orders
from these customers.
Manufacturing
The Company opened its new facility for the production of microbial blends
in September 1998 and commenced shipments and inventory buildup in December
1998. During fiscal year 1999, the Company expanded its manufacturing capacity
to supply the potential demand for its products at its leased facility located
in Carlsbad, California. The Company also shipped products for waste treatment,
odor control, bioremediation and agricultural use during fiscal year 1999.
The Company may continue third-party outsourcing arrangements for the
manufacture and supply of certain products and/or components to augment its
internal manufacturing capacity. The Company currently performs fermentation,
blending, packaging and shipping activities at its Carlsbad facility. The
Company's development of its internal manufacturing capacity depends in large
part on its ability to raise sufficient capital for this purpose. There can be
no assurance, however, that the Company will raise sufficient capital or that it
will develop adequate manufacturing capacity, the failure of either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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Licenses
XyclonyX has granted exclusive marketing licenses to its sister
subsidiaries for use of the Microbial Technology in the United States. These
licenses were granted to Bio-Con (agriculture and aqua/mariculture), SSWM
(Bio-Raptor(TM)), and Sol Tech (sewage treatment). A U.S. manufacturing license
was granted to WCFC. The MEOR technology was licensed to AMTI during fiscal year
1999.
Environmental Matters
The U.S. Environmental Protection Agency classifies the Company's "bugs" as
"GRS" or "generally regarded as safe." In addition, the Company believes that
its operations currently comply in all material respects with applicable
federal, state and local laws, rules, regulations and ordinances regarding the
discharge of materials into the environment. The Company does not believe that
such compliance will have a material impact on its capital expenditures, future
earnings and competitive position. No material capital expenditures for
environmental control facilities presently are planned. Although the
environmental technology opportunities are numerous and the Company has shipped
products and has licensed its technology, the ability to finance, build and
profitably manufacture the microbial blends has not yet been achieved. The
Company's failure to operate such a plant in a profitable manner could
materially affect the financial results and the amount of capital required to
operate the business in the future.
Government Approvals
The Company is not aware of any additional government approvals that are
needed for its products or services other than permits associated with the use
of the Bio-Raptor(TM) on a specific site. These permits may include a
conditional use permit (to compost or treat contaminated soil), and permits for
water usage, air quality, and toxic substances (to be treated). The lead-time
for permits can vary from several weeks to a year or more depending on
site-specific circumstances. These lead times may prevent the Company from
delivering Bio-Raptors(TM) on a timely basis for specific site applications
including soil recycling centers and/or transportable Bio-Raptor(TM)
applications.
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RISK FACTORS
An investment in the Common Stock involves a high degree of risk. In
addition to the other information in this Report, the following risk factors
should be considered carefully in evaluating the Company and its business. 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," "plan," "expect,"
or similar expressions, and are subject to numerous known and unknown risks and
uncertainties. In evaluating such statements, prospective investors should
review carefully various risks and uncertainties identified in this Report,
including the matters set below and in the Company's 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.
Startup Company/History of Losses/Uncertain Profitability. The Company and
its subsidiaries are startup companies with a business plan based on the
Microbial Technology and one year of operating experience. The Company has
experienced annual operating losses and negative operating cash flow since its
incorporation in 1984. As of September 30, 1999, the Company had an accumulated
deficit of $6,640,100. In addition, the Company generated no revenues during
fiscal year 1998, and has reported revenues of $66,900 for fiscal year 1999. The
Company will need to raise additional capital to continue as a going concern.
The Company's auditors have indicated uncertainty concerning the Company's
ability to continue as a going concern.
Accordingly, there can be no assurance that the Company and its
subsidiaries will commercialize successfully any products and services based on
the Microbial Technology or manage the related manufacturing, marketing, sales,
licensing and customer support operations in a profitable manner. In particular,
the Company's prospects must be considered in light of the problems, delays,
expenses and difficulties encountered by any company in the startup stage, many
of which may be beyond the Company's control. These problems, delays, expenses
and difficulties include, but are not limited to, unanticipated problems
relating to product development and formulation, testing, quality control,
production, inventory management, sales and marketing and additional costs and
competition, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company's proposed products and services, if fully developed,
can be successfully marketed or that the Company will ever achieve significant
revenues or profitable operations.
The Company's ability to become profitable will depend on a variety of
factors, including the following:
* The price, volume and timing of product sales;
* Variations in gross margins on the Company's products, which may be
affected by the sales mix and competitive pricing pressures;
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* Regulatory approvals for using the Company's bioremediation products,
including permitting soil recycling center sites, water quality
permits, air quality permits, and other permits as required by
particular jurisdictions;
* Changes in the Company's levels of research and development, including
the timing of any demonstration projects for regulatory approval; and
* Acquisitions of products, technology or companies.
The Company's long-term success also will be affected by expenses,
difficulties and/or delays encountered in developing and commercializing
microbial technology, competition, and the often burdensome environmental
regulations associated with permitting hydrocarbon remediation sites.
Significant Capital Requirements; Need for Working Capital and Additional
Financing. Since August 1997, the Company has focused its efforts on developing
its business in the environmental biotechnology sector. The Company will be
required to raise additional capital to implement fully its business plan and
establish adequate manufacturing, marketing, sales, licensing and customer
support operations. There can be no assurance that additional public or private
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.
Lack of Full Market Acceptance. The Microbial Technology has not been fully
utilized in any particular market. Market acceptance of the Company's products
and services will depend in large part upon the Company's ability to demonstrate
the technical and operational advantages and cost effectiveness of its products
and services as compared to alternative, competing products and services, and
its ability to train customers concerning the proper use and application of its
products. There can be no assurance that the Company's products and services
will achieve a level of market acceptance that will be profitable for the
Company.
International Distribution May Exploit Product Without Compensation To The
Company. When the Company ships to foreign distributors, they may try to reverse
engineer the microbial technology and exploit it without compensating the
Company. They may set up manufacturing and distribution operations that could
compete unfairly against the Company with lower prices and/or broader
distribution. There is no assurance that the Company will be able to protect
ourselves against such events.
The Company May Not Be Successful In Its International Sales Activities,
Which Could Adversely Affect the Company's Growth. The Company's international
sales will be limited if the Company is unable to establish and maintain
relationships with international distributors and customers. Even if the Company
increases its international sales efforts, the Company cannot be certain that
the Company will increase demand for its products in these markets. The
Company's international operations are subject to a number of risks, including:
* Market acceptance;
* Environmental laws;
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* Longer sales cycles;
* Difficulty in collecting accounts receivable;
* Political and economic instability;
* Reduced protection of intellectual property rights;
* Protectionist laws and business practices that favor local
competition;
* Dependence on local vendors; and
* Foreign language barriers.
In addition, because the Company intends to market its products
internationally, a portion of its expected international revenue may be
denominated in foreign currencies in the future, which will subject us to risks
associated with fluctuations in the foreign currencies. An increase in the value
of the U.S. dollar relative to foreign currencies could make the Company's
products more expensive and therefore less competitive in foreign markets.
Ability To Comply With Environmental Laws And Regulations. The Company is
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of hazardous materials and waste
products. The Company currently maintains a supply of several hazardous
materials at its facilities. While the Company currently meets these
environmental requirements, there is no assurance that future laws and
regulations could impose significant compliance costs. In the event of an
accident, the Company could be held liable for any resulting damages that result
and the liability could exceed its resources. In addition, the use of the
Company's Bio-Raptor(TM) requires permits to treat contaminated soil. Permit
issues may delay the implementation and installation of the Company's products,
including the Bio-Raptor(TM).
Ability to Manage Growth. The Company intends to pursue a strategy of rapid
growth, and plans to expand significantly its manufacturing capability and
devote substantial resources to its marketing, sales, administrative,
operational, financial and other systems and resources. Such expansion will
place significant demands on the Company's marketing, sales, administrative,
operational, financial and management information systems, controls and
procedures. Accordingly, the Company's performance and profitability will depend
on the ability of its officers and key employees to (i) manage its business and
its subsidiaries as a cohesive enterprise, (ii) manage expansion through the
timely implementation and maintenance of appropriate administrative,
operational, financial and management information systems, controls and
procedures, (iii) add internal capacity, facilities and third-party sourcing
arrangements as and when needed, (iv) maintain service quality controls, and (v)
attract, train, retain, motivate and manage effectively its employees. There can
be no assurance that the Company will integrate and manage successfully new
systems, controls and procedures for its business, or that its systems,
controls, procedures, facilities and personnel, even if successfully integrated,
will be adequate to support its projected future operations. Any failure to
implement and maintain such systems, controls and procedures, add internal
capacity, facilities and third-party sourcing arrangements or attract, train,
retain, motivate and manage effectively its employees could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, the Company may incur substantial expenses identifying,
investigating and developing appropriate products and services based on the
Microbial Technology in the global environmental, manufacturing, agricultural,
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natural resource and other potential markets. There can be no assurance that any
expenditures incurred in identifying, investigating and developing such products
and services will ever be recouped.
Competition. The Company likely will face intense competition from other
environmental biotech companies, virtually all of which can be expected to be
have longer operating histories, greater name recognition, larger installed
customer bases and have significantly more financial resources, R&D facilities
and manufacturing and marketing experience than the Company. There can be no
assurance that developments by the Company's current or potential competitors
will not render the Company's proposed products or services obsolete. In
addition, the Company expects to face additional competition from new entrants
into its targeted industry segments. As the demand for products and services
based on the Microbial Technology grows and new markets are exploited, the
Company expects that competition will become more intense, as current and future
competitors begin to offer an increasing number of diversified products and
services. Although the Company believes that it has certain technical advantages
over certain of its competitors, including, without limitation, the development
of technological innovations that will make Bio-Raptor(TM) and the use of its
microbial blends more economical and efficient than other bioremediation
methods, maintaining such advantages will require a continued high level of
investment by the Company in R&D, marketing, sales and customer support. There
can be no assurance that the Company will have sufficient resources to maintain
its R&D, marketing, sales and customer support efforts on a competitive basis,
or that the Company will be able to make the technological advances necessary to
maintain a competitive advantage with respect to its products and services.
Increased competition could result in price reductions, fewer product orders,
obsolete technology and reduced operating margins, any of which could materially
and adversely affect the Company's business, financial condition and results of
operations.
Product Liability. The development, marketing, sale and/or licensing of
products based on the Microbial Technology entail liability risks in the event
of product failure or claim of harm caused by product operation. While the
Company is not aware of any claim against it based upon the use or failure of
its products, end users of any of the Company's proposed products and services
could assert claims against the Company. Although the Company maintains product
liability insurance against any such claims, there can be no assurance that such
insurance will be sufficient to cover all potential liabilities, or that the
Company will be able to continue to obtain insurance coverage in an amount that
the Company believes to be adequate. In the event of a successful suit against
the Company, lack or insufficiency of insurance coverage would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Limited Service and Manufacturing Facilities. The Company's future
performance will depend to a substantial degree upon the Company's ability to
manufacture, market and deliver the products and services based on the Microbial
Technology in an efficient and profitable manner. In this regard, the Company
has leased production facilities for its Microbial Products operation (the
"Facility"), and has partially implemented its manufacturing operations at the
Facility. However, the Company has no prior experience in maintaining a Facility
that will manufacture the Company's products in the quantities required for
profitable operations. Accordingly, there can be no assurance that the Company
will be able to complete the Facility in a timely manner, that the cost of
completing the Facility will not exceed management's current estimates, that the
Facility's capacity will not exceed the demand for the Company's products or
that such additional capacity will achieve satisfactory levels of manufacturing
efficiency in a timely manner or at a level of quality control that meets
competitive demands. In addition, the implementation of the Company's
manufacturing operations at the Facility presents risks that, singly or in any
combination, could have a material adverse effect on the Company's business,
financial condition and results of operations. These risks include, but are not
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limited to, production delays associated with products based on the Microbial
Technology, unavailability of required capital equipment and qualified
personnel, raw material shortages, higher-than-expected overhead or operational
costs, lack of sufficient quality control over the products and order backlogs.
In addition, the Company's development of its internal manufacturing capacity
will depend in large part on its ability to raise sufficient capital for this
purpose. There can be no assurance, however, that the Company will develop
adequate manufacturing capacity or raise sufficient capital, the failure of
either of which could have a material adverse effect on the Company's business,
financial condition, results of operations and possibly on the Company's
relationships with its customers. The Company may consider third-party
outsourcing arrangements for the manufacture and supply of certain products
during the period in which the Company expands its internal manufacturing
capacity. These outsourcing arrangements are subject to various risks,
including, without limitation, production delays or interruptions, inferior
product quality, misappropriation of trade secrets and lower profit margins.
Dependence on Key Personnel. The Company's success and execution of its
business strategy will depend significantly upon the continuing contributions
of, and on its ability to attract, train and retain qualified management,
marketing, sales, operational, production, administrative and technical
personnel. In this regard, the Company is particularly dependent upon the
services of Robert C. Brehm, its President and Chief Executive Officer, and Mery
C. Robinson, its Chief Operating Officer and Secretary and the President of
XyclonyX. The loss of the services of one or more of the Company's key employees
and the failure to attract, train and retain additional qualified personnel in a
timely manner could have a material adverse effect on the Company's business,
financial condition and results of operations.
No Dividends. The Company has never declared nor paid cash dividends on its
capital stock. The Company currently intends to retain any earnings for funding
growth and, therefore, does not intend to pay any cash dividends in the
foreseeable future.
Fluctuations in Quarterly Results. As a result of the Company's limited
operating history, the Company does not have historical financial data for a
significant number of periods in which to base its planned operating expenses.
The Company's expense levels are based in part on its projections as to future
revenues that are expected to increase. It is anticipated that as the Company
matures, the Company's sales and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors, including, among
others: (i) the volume, timing of, and ability to fulfill customer orders; (ii)
the demand for the Company's products and services; (iii) the number, timing and
significance of product enhancements and new product introductions by the
Company and its competitors; (iv) changes in the pricing policies by the Company
or its competitors; (v) changes in the level of operating expenses; (vi)
expenses incurred in connection with the Company's plans to fund greater levels
of sales and marketing activities and operations, develop new distribution
channels, broaden its customer support capabilities and continue its R&D
activities; (vi) personnel changes; (vii) product defects and other product or
service quality problems; and (viii) general domestic and international legal,
economic and political conditions. Any unfavorable changes in these or other
factors could have a material adverse effect on the Company's business,
financial condition and results of operation.
Dependence on Technological Developments. The markets for the Company's
products and services based on the Microbial Technology are generally
characterized by rapid technological change and are highly competitive with
respect to timely innovations. Accordingly, the Company believes that its
ability to succeed in the sale of its products and services will depend
significantly upon the technological quality of its products and services
relative to those of its competitors, and its ability to continue to develop and
introduce new and enhanced products and services at competitive prices and in a
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timely and cost-effective manner. In particular, the Company's future success is
dependent upon its Bio-Raptor(TM), Remediline(TM), Wasteline(TM) and Bi-Agra(TM)
product lines, each of which is new and has not achieved market acceptance. In
order to develop such new products and services, the Company will depend upon
close relationships with existing customers that previously utilized the
Microbial Technology in the bioremediation, agricultural and waste treatment
industries, and the Company's ability to continue to develop and introduce new
and enhanced products and services at competitive prices and in a timely and
cost-effective manner. There can be no assurance that the Company's customers
will provide the Company with timely access to such information or that the
Company will be able to develop and market its new products and services
successfully or respond effectively to technological changes or new product and
services of its competitors. In addition, there can be no assurance that the
Company will be able to develop the required technologies, products and services
on a cost-effective and timely basis, and any inability to do so could have a
material adverse effect on its business, financial condition and results of
operations.
Uncertain Protection of Intellectual Property. Although the Company relies
on patent, trademark, trade secret and copyright protection to protect its
technology, the Company believes that technological leadership in the Microbial
Technology will be achieved through additional factors such as the technological
and creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance. Nevertheless,
the Company's ability to compete effectively depends in part on its ability to
develop and maintain proprietary aspects of its technology, such as those
patents currently licensed by the Company's subsidiary, XyclonyX. There can be
no assurance, however, that any future patents will be granted or that any
patents will be valid or provide meaningful protection for the Company's product
innovations. In addition, the laws of some foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States. Furthermore, there can be no assurance that competitors will not
independently develop similar products, "reverse engineer" the Company's
products, or, if patents are issued to the Company, design around such patents.
The Company also relies upon a combination of copyright, trademark, trade secret
and other intellectual property laws to protect its proprietary rights by
entering into confidentiality or license agreements with its employees,
consultants and vendors, and by controlling access to and distribution of its
technology, documentation and other proprietary information. There can be no
assurance, however, that the steps taken by the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
a competitive advantage to the Company. Any such circumstance could have a
material adverse effect on the Company's business, financial condition and
results of operations. While the Company is not currently engaged in any
intellectual property litigation or proceedings, there can be no assurance that
it will not become so involved in the future or that its products do not
infringe any intellectual property or other proprietary right of any third
party. Such litigation could result in substantial costs, the diversion of
resources and personnel, and subject the Company to significant liabilities to
third parties, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also relies on certain technology which it licenses from third parties,
including the Microbial Technology which is integrated with internally developed
products and used in the XyclonyX product line to perform key functions. There
can be no assurance that the patents underlying such third party technology
licenses will continue to remain unchallenged or that the Company will not have
to defend them, along with the licensors, to continue their commercial viability
to the Company. The loss of or inability to maintain any of these technology
licenses could result in delays or reductions in product shipments which could
materially adversely affect the Company's business, financial condition or
results of operations.
The Company may not be able to protect its tradenames and domain names
against all infringers, which could decrease the value of its brand name and
proprietary rights. The Company currently holds the Internet domain name
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"bugsatwork.com" and the Company uses "U.S. Microbics" as a tradename. Domain
names generally are regulated by Internet regulatory bodies and are subject to
change and may be superceded, in some cases, by laws, rules and regulations
governing the registration of tradenames and trademarks with the United States
Patent and Trademark Office and certain other common law rights. If the domain
registrars are changed, new ones are created or the Company is deemed to be
infringing upon another's tradename or trademark, then the Company could be
unable to prevent third parties from acquiring or using, as the case may be, its
domain name, tradenames or trademarks, which could adversely affect its brand
name and other proprietary rights.
Concentration of Stock Ownership. The Company's existing directors,
executive officers, and their respective affiliates are the beneficial owners of
approximately 73.46% of the outstanding shares of Common Stock and common stock
equivalents (convertible Preferred Stock and stock options). As a result, the
Company's existing directors, executive officers, principal shareholders and
their respective affiliates, if acting together, would be able to exercise
significant influence over all matters requiring shareholder approval, including
the election of directors and the approval of significant corporate
transactions. Such concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company.
These shareholders may have interests that differ from other shareholders
of the Company, particularly in the context of potentially beneficial
acquisitions of the Company. For example, to the extent that these shareholders
are employees of the Company, they may be less inclined to vote for acquisitions
of the Company involving termination of their employment or diminution of their
responsibilities or compensation.
The Trading Price of the Company's Common Stock May Decrease Due to Factors
Beyond the Company's Control. The trading price of the Common Stock is subject
to significant fluctuations in response to numerous factors, including:
* Variations in anticipated or actual results of operations;
* Announcements of new products or technological innovations by the
Company or its competitors;
* Changes in earnings estimates of operational results by analysts;
* Results of product demonstrations.
* Inability of market makers to combat short positions on the stock;
* Inability of the market to absorb large blocks of stock sold into the
market;
* Developments or disputes concerning the Company's patents, trademarks
or proprietary rights; and
* Comments about us or the Company's markets posted on the Internet.
Moreover, the stock market from time to time has experienced extreme price
and volume fluctuations, which have particularly affected the market prices for
emerging growth companies and which often have been unrelated to the operating
performance of the companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. If the Company's
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shareholders sell substantial amounts of their common stock in the public
market, the price of the Company's common stock could fall. These sales also
might make it more difficult for us to sell equity or equity related securities
in the future at a price the Company deems appropriate.
The Company's business may be harmed if it becomes subject to securities
class action litigation. In the past, following periods of volatility in the
market price of a Company's Common Stock, securities class action litigation has
been brought against the issuing company. This type of litigation could be
brought against us in the future. The litigation could be expensive and divert
management's attention and resources, which could adversely affect the Company's
business and results of operations whether or not the Company's defense is
successful. If the litigation is determined against us, then the Company could
be subject to significant liabilities.
We have a shareholder derivative suit proceeding pending which, if decided
against us, could require a substantial cash payment or repurchase of stock from
the market. We have been sued by James A. Merriam in a shareholder derivative
suit. We intend to defend the suit vigorously. However, the litigation process
is inherently uncertain and we may not prevail. The Company's defense of this
litigation, regardless of its outcome, has and will continue to consume
management and financial resources. If we do not prevail, we could be subject to
material financial liabilities. See "Legal Proceedings."
Uncertainty of Conversion Effects. Within the next 24 months from the date
of this Report, the holders of a majority of the Company's Preferred Stock and
certain warrant and option holders will have the right to convert their
respective interests into approximately 9,285,976 shares of Common Stock. In the
event that such holders of Preferred Stock, warrants and options exercise their
conversion rights, the holders of the Common Stock then issued and outstanding
may experience immediate and substantial dilution in the net tangible book value
of their shares if earnings and other factors do not compensate for the
increased number of shares of such Common Stock.
Limited Public Market. The Common Stock currently is traded on the OTC
Bulletin Board, which is generally considered to be a less efficient market than
national exchanges such as NASDAQ. Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
difficulties in obtaining price quotations, reduction in security analysts' and
the new media's coverage of the Company, if any, and lower prices for the
Company's securities than might otherwise be attained. This circumstance could
have an adverse effect on the ability of an investor to sell any shares of the
Company's Common Stock as well as on the selling price for such shares. In
addition, the market price of the Company's Common Stock may be significantly
affected by various additional factors, including, but not limited to, the
Company's business performance, industry dynamics or changes in general economic
conditions.
Applicability of "Penny Stock Rules" to Broker-Dealer Sales of Company
Common Stock. The Company's Common Stock is subject to the "penny stock rules"
(the "Penny Stock Rules") adopted pursuant to Rule 15g-9 of the Securities and
Exchange Act of 1934, as amended, which apply to non-NASDAQ companies whose
common stock trades at less than $5.00 per share or which has a tangible net
worth of less than $5,000,000 (or $2,000,000 if the Company has been operating
for three or more years). The Penny Stock Rules impose additional sales practice
requirements on broker-dealers which sell such securities to persons other than
established customers and institutional accredited investors. For transactions
covered by this rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, the Penny Stock Rules
affect the ability of broker-dealers to sell shares of the Company's Common
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Stock and may affect the ability of shareholders to sell their shares in the
secondary market if such a market should ever develop, as compliance with such
rules may delay and/or preclude certain trading transactions. The Penny Stock
Rules could have an adverse effect on the liquidity and/or market price of the
Company's Common Stock.
Item 2. Description of Property
Since September 1998, the Company has occupied 22,000 square feet of
manufacturing and administration office space in the Carlsbad Research Center in
Carlsbad, California. The Company has a five-year lease commitment with a
five-year option and a right of first refusal on adjacent space. The Company
believes that this facility should provide adequate space for the next three
years, at which time one or more of the subsidiaries may have to relocate to
other space.
Item 3. 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 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 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 intends to negotiate a payment schedule with the
plaintiff. Unsuccessful negotiations would have a material adverse impact on the
Company's financial position and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during year ended September 30, 1999.
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PART II
Item 5. Market for Common Equity and Related Shareholder Matters
The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol "BUGS". The following table indicates the high and low bid prices for
the Company's Common Stock as quoted on the OTC Bulletin Board for the periods
indicated. The prices shown are representative inter-dealer prices, do not
include retail markups, markdowns or commissions and may not necessarily reflect
actual transactions.
Bid and Ask Prices
Period Ending High Close Low Close
- ------------------ ------------------ ---------
December 31, 1999 $3.38 $1.56
September 30, 1999 $3.88 $2.75
June 30, 1999 $4.81 $3.00
March 31, 1999 $5.44 $3.63
December 30, 1998 $4.87 $0.91
September 30, 1998 $1.94 $1.06
June 30, 1998 $2.47 $1.22
March 31, 1998 $2.03 $1.33
December 31, 1997 $2.06 $0.13
The approximate number of registered certificate holders in each class of
stock as of January 10, 2000 is as follows: Common Stock: 6,613,836; Series II
Preferred: 16,711; Series B Preferred: 13,613; Series C Preferred: 44,519;
Series D Preferred: 5,725.
Dividends
The Company has not paid cash dividends on its Common Stock and has no
present plans to do so. Any payment of cash dividends in the future will be at
the discretion of the Board of Directors and will depend upon the financial
condition, capital requirements, and earnings, if any, of the Company, as well
as other factors which the Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
Between October 1 1997 and September 31, 1999, the Company issued and sold
the following unregistered securities, all of which were not registered under
the Securities Act of 1933, as amended (the "Securities Act"), because the
subject transactions involved non-public offerings exempt from registration
under Section 4(2) of the Securities Act and Regulation D promulgated
thereunder:
During February 1997, the Company sold 14,400 shares of Common Stock with
warrants to purchase an additional 9,350 shares of Common Stock at $60 per share
pursuant to a private placement offering. The net proceeds to the Company after
issuing costs were $225,600.
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Common Stock Transactions
During December 1997, the Company issued 320,000 shares of Common Stock in
exchange for various services. The issued shares were valued at approximately
$0.38 to $1.32 per share.
During April 1998, the Company issued 23,000 shares of Common Stock in
exchange for various services. The issued shares were valued at approximately
$0.75 to $1 per share.
During July 1998, the Company issued 150,000 shares of Common Stock in
exchange for various services. The issued shares were valued at approximately
$1.25 per share.
During November, 1998, the Company issued 5,000 shares of common stock in
exchange for various services. The exchanges were valued at approximately $1.00
per share.
During July 1997, the Company issued 40,000 shares of Common Stock for
finder's fees related to assisting the Company in obtaining financing. The
issued shares were valued at approximately $0.01 per share.
During July 1997, the Company issued 250,000 shares of Common Stock to the
Company's President of the Company in exchange for prior services rendered as a
consultant to the Company. The issued shares were valued at approximately $0.20
per share. Such shares were not registered under the Securities Act because the
transaction involved a non-public offering exempt from registration under
Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
During August 1997, the Company issued 14,667 shares of Common Stock in
exchange for various services. The issued shares were valued at approximately
$0.50 per share.
During August 1997, the Company issued 60,000 shares of Common Stock to a
creditor in exchange for debt owed by the Company in the amount of $54,111. The
issued shares were valued at approximately $0.90 per share.
During September 1997, the Company issued 560,000 shares of Common Stock in
exchange for various services. All issued shares were valued at approximately
$1.00 per share.
Preferred Stock Transactions
During October 1997, the Company issued 2,000 shares of Series D Preferred
Stock to the Company's President in lieu of a cash salary payment and 100 shares
of Series D Preferred Stock to a consultant for services. These issued shares
were valued at approximately $5 per share, and each such share of Series D
Preferred Stock is convertible into 100 shares of Common Stock.
During fiscal year 1998, the Company sold 12,225 shares of Series C
Preferred Stock at prices ranging from $50 to $100 per share pursuant to a
private placement offering. The net proceeds to the Company after issuing costs
were $780,100. The shares of Series C Preferred Stock issued during fiscal year
1998 are convertible into 1,222,500 shares of Common Stock.
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During November 1997, the Company issued 7,000 shares of Series D Preferred
Stock to the President of the Company and 7,000 shares of Series D Preferred
Stock the Executive Vice President of the Company in lieu of cash salary
payments. The issued shares were valued at approximately $10 per share, and each
such share of Series D Preferred Stock is convertible into 100 shares of Common
Stock.
During December 1997, the Company issued 920 shares of Series C Preferred
Stock to various creditors in exchange for debt owed by the Company in the
amount of $52,800. The issued shares were valued at approximately $57 per share,
and each such share of Series C Preferred Stock is convertible into 100 shares
of Common Stock.
During May 1998, the Company issued 500 shares of Series D Preferred Stock
to the Company's President, and 500 shares of Series D Preferred Stock to the
Company's Executive Vice President, and 200 shares of Series D Preferred Stock
to the Company's Vice President in lieu of cash salary payments. These issued
shares were valued at approximately $20 per share, and each such share of Series
D Preferred Stock is convertible into 100 shares of Common Stock.
During April 1997, the Company issued 125 shares of Series C Preferred
Stock to two employees in lieu of cash salary payments. These issued shares were
valued at approximately $4 per share, and each such share of Series C Preferred
Stock is convertible into 100 shares of Common Stock.
During July 1997, the Company issued 12,500 shares of Series D Preferred
Stock to five employees in lieu of cash salary payments. These issued shares
were valued at approximately $1 per share, and each such share of Series D
Preferred Stock is convertible into 100 shares of Common Stock.
During December 1998, the Company issued 500 shares of Series D Preferred
Stock to the Company's President, and 500 shares of Series D Preferred Stock to
the Company's Chief Operating Officer, and 200 shares of Series D Preferred
Stock to the Company's Vice President as bonuses. These issued shares were
valued at approximately $20 per share, and each such share of Series D Preferred
Stock is convertible into 100 shares of Common Stock.
During March, 1999, the Company issued 1,589 shares of C preferred stock to
consultants for services. All exchanges were valued at approximately $75 per
share.
Throughout the year ended September 30, 1999, certain stockholders
exercised their preferred stock conversion rights pursuant to which the Company
issued 2,387,826 shares of common stock in exchange for cancellation of 4,344
shares of series II preferred stock, 1,946 shares of series B preferred stock,
6,433 shares of series C preferred stock and 16,913 shares of series D preferred
stock.
During July and August 1997, the Company issued 100 shares of Series C
Preferred Stock and 4,600 shares of Series D Preferred Stock for finder's fees
related to assisting the Company in obtaining financing. these issued shares
were valued at approximately $1 per share, and each such share of Series C and
Series D Preferred Stock is convertible into 100 shares of Common Stock.
Throughout the year ended September 30, 1999, the Company sold 29,597
shares of series C preferred stock pursuant to a private placement offering as
provided under regulation D of the Securities Act of 1933 related to
transactions not involving a public offering. The net proceeds to the Company,
after issuance costs, of $206,800, were $1,946,500. Of these sales, 7,950 shares
of series C preferred stock were sold subject to stock subscriptions notes
receivable. The notes are short term in nature, bear interest at 10 percent per
annum, and collateralized by the stock. The Company is currently holding these
stock certificates and will release them upon payment of the notes.
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<PAGE>
Subsequent to September 30, 1999 the Company has sold 5,870 shares of
series C preferred stock at $100 per share pursuant to a private placement
offering as provided under regulation D of the Securities Act of 1933 related to
transactions not involving a public offering. The net proceeds to the Comany
after issuance costs of $24,000, were $563,000.
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. Of the warrants issued, 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 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. The warrant's exercise price will equal the lesser of (i) the lowest
closing bid price for the five trading days prior to January 10, 2000, as
subject to an exercise price adjustment set forth in the warrant or (ii) the
lowest closing bid price for five trading days prior to the date of execution of
all of the equity line documents. There can be no assurance that the Company
will enter into a definite agreement with Swartz Private Equity or any other
investment entity with respect to the equity line or that the Company will
receive any related financing thereto.
Item 6. Management's Discussion and Analysis or Plan of Operation
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 in this
Report, including the matters set forth under the captions "Risk Factors" and in
the Company's 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.
Overview
During fiscal year 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 greenwaste conversion to compost, and restaurant
and hotel applications. A technical support team consisting of hydrocarbon,
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<PAGE>
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 with
specific steps for government permitting, environmental approvals, funding and
operations. The Company ran a demonstration center using manure and greenwaste
to demonstrate product efficacy, develop operator training techniques, determine
Bio-Raptor(TM) operational logistics, manpower requirements, water application
and control procedures, and loading, 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.
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 financings 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 significant
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 establishing 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 50 by the end of the fiscal 2000.
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<PAGE>
Results of Operations
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
The Company had revenues of $66,900 for fiscal year 1999 compared with no
sales revenues during the fiscal year ended September 30, 1998. The Company
incurred a net loss of $2,932,500 in fiscal year 1999 compared to a net loss of
$1,411,800 in fiscal year 1998. During fiscal year 1999 the Company had limited
revenues, but raised capital for its new biotechnology operations, entered its
new administration and manufacturing site and increased its personnel in
preparation for manufacturing proprietary microbial blends during fiscal year
1999. The Company had no gross profit during fiscal years 1999 and 1998 due to
the lack of sales.
Selling, general and administrative ("SG&A") expenses for fiscal year 1999
totaled $2,775,700 compared to $1,378,200 in fiscal year 1998. SG&A expenses
consisted of accounting, legal, consulting, public relations, subsidiary startup
and organization and fund raising expenses. SG&A expenses also included non-cash
charges from the issuance of stock and stock options in the amounts of $410,100
for fiscal year 1999 and $987,500 for fiscal year 1998, a year-to-year decrease
of $(577,400). The remaining SG&A expenses which required cash amounted to
approximately $2,365,600 for fiscal year 1999. The Company used stock in lieu of
cash to conserve its cash resources.
Interest expense for fiscal year 1999 was $1,600. Interest expense for
fiscal year 1998 was $34,800, consisting of interest associated with notes that
were paid down with stock and cash payments during the fiscal year.
As a result of the above-mentioned expenses, net losses from continuing
operations increased from $1,406,200 in fiscal year 1998 to $2,932,500 in fiscal
year 1999.
The Company experienced total net losses of $2,932,500 for the fiscal year
ended September 30, 1999 and total net losses of $1,411,800 for the fiscal year
ended September 30, 1998. Net loss per share decreased from a net loss per share
of $0.78 in fiscal year 1998 to a net loss per share of $0.58 in fiscal year
1999.
There was no provision for income taxes in either fiscal year 1998 or
fiscal year 1999 due to the net operating loss carry forwards from prior years,
and the likelihood that the Company would be able to utilize these net operating
losses in the future.
Liquidity and Capital Resources
Cash and cash equivalents totaled $125,400 on September 30, 1999, compared
to $316,600 for the prior fiscal year. During the fiscal year 1999, net cash
used by operating activities totaled $1,911,200 compared to $381,100 for fiscal
year 1998. Operating activities included payments for accounting, legal fees and
professional services.
Net cash provided by financing activities for fiscal year 1999 totaled
$1,987,700 compared to $760,500 for the prior fiscal year. Net cash used by
investing activities during fiscal year 1999 totaled $267,700 for the purchase
of property and equipment. The above cash flow activities provided a net cash
decrease of $191,200 during fiscal year 1999 compared to a net cash increase of
$314,900 during fiscal year 1998.
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<PAGE>
Net working capital (current assets less current liabilities) was a
negative $554,800 as of September 30, 1999 and $120,300 as of September 30,
1998. During the twelve months ended September 30, 1999, the Company raised
$1,946,500, net of placement fees of approximately $206,800 from private
placements of Series C Preferred Stock. The Company will need to continue to
raise funds through various financings 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. The Company
had long-term debt of $5,300, net of the current portion of $4,900, as of
September 30,1999, resulting from a long term equipment lease. There was no long
term debt as of September 30, 1998.
Total Shareholders' (deficit) equity decreased to ($293,100) in fiscal year
1999 from $236,900 in fiscal year 1998. Stock options increased to $963,400 in
fiscal year 1999 from $868,800 in fiscal year 1998. Additional paid in capital
increased to $6,212,900 in fiscal year 1999 from $3,068,000 in fiscal year 1998.
To date, the Company has financed its operations principally through
borrowings and private placements of equity securities and debt. 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.
During fiscal year 2000, the Company projects expenditures for plant and
equipment of approximately $5,000,000 and research and development costs of less
than $1,000,000, assuming the Company raises projected capital. 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 50 by the end of fiscal year 2000.
Future Funding Requirements
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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<PAGE>
Significant Accounting Issues
Accounting Treatment of Discontinued Operations
On December 30, 1997, the Company formally disposed of its Houston, Texas
cellular phone product store. The sale was effective as of October 31, 1997,
with the buyer assuming all liabilities for products or services entered into
from November 1, 1997 and forward. In accordance with the Financial Accounting
Standards Board Emerging Issue Task Force 95-18, when the measurement date for a
discontinued operation as defined in APBO No. 30, "Reporting the Results of
Operations Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
occurs after the balance sheet date but before the financial statements for the
period have been issued, the estimated loss on disposal should be recognized and
the segments operating results should be presented as a discontinued operation
in the not yet released financial statements. As such, the estimated loss on
disposal was recognized and the operating results were presented as a
discontinued operation in the September 30, 1997 financial statements.
Long-Lived Asset Review
- -----------------------
The Company periodically review the recorded value of its long-lived assets
to determine if the future cash flows to be derived from these assets will be
sufficient to recover the remaining recorded asset values. In accordance with
SFAS 121, during the year ended September 30, 1999, based upon a comprehensive
review of the Company's long-lived assets, the Company recorded a charge of
$102,300 related to the write-down of a portion of the recorded asset values of
the Company's production equipment and leasehold improvements as of
September 30, 1999.
Subsequent Events After Fiscal Year 1999
LG Enterprises Joint Venture
In December 1999, the Company announced that it will establish and operate
a jointly-owned company with LG Enterprises and Global Environmental Inc., that
will engage in bioremediation businesses and initiatives, including acquiring
and bioremediating contaminated properties, establishing and operating soil
recycling centers in one or more major U.S. cities, licensing the Company's
technology in Mexico and establishing companies in Mexico to engage in
bioremediation of Mexican properties.
The agreement provides that:
* SSWM will (i) provide the Bio-Raptor(TM) and bioremediation
technology, products and services; (ii) manage and operate the soil
recycling centers including interacting with various federal, state
and local environmental authorities and private environmental
companies overseeing and administering clean-up efforts; and (iii)
oversee, manage and administer the clean-up of contaminated sites
acquired by the joint venture.
* Global Environmental, Inc. will identify and secure a variety of
contaminated sites and properties that have the potential for
commercially viable redevelopment.
* LG Enterprises, an affiliate of LandGrant Corporation which is a full
service real estate operating company headquartered in San Diego,
California, will assist in the development of a number of projects
containing contaminated soil that must be remediated. The Company
believes that LandGrant's financial expertise, developed through its
financing of acquisition and construction projects, will benefit the
Company.
Manufacturer's Direct Services Retail Distribution Agreement
On December 22, 1999, the Company signed an agreement with Manufacturers'
Direct Services, Inc., (MDS) of San Diego, to develop new channels of
distribution and market products in the automotive, rail, aviation, marine,
trucking, recreational vehicle and sporting goods industries. MDS is a full
service, sales and marketing company that specializes in assisting companies
seeking sales growth through multiple channels of distribution.
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<PAGE>
Under the terms of the agreement, MDS will develop and design retail
packaging, wholesale and retail pricing structures, promotional and advertising
campaigns, and identify and solicit retailers and oversee distribution. The
Company will provide MDS with product costing and performance information and
identify and develop products for retail/consumer use.
Term Sheet With Swartz Private Equity, LLC
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. Of the warrants issued, 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 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. The warrant's exercise price will equal the lesser of (i) the lowest
closing bid price for the five trading days prior to January 10, 2000, as
subject to an exercise price adjustment set forth in the warrant or (ii) the
lowest closing bid price for five trading days prior to the date of execution of
all of the equity line documents. There can be no assurance that the Company
will enter into a definite agreement with Swartz Private Equity or any other
investment entity with respect to the equity line or that the Company will
receive any related financing thereto.
Approval of 1-for-20 Reverse Stock Split
On February 4, 2000, Common and Preferred shareholders approved a 1-for-20
reverse stock split which had been implemented on August 20, 1997.
Item 7. Financial Statements
Please refer to the Company's Consolidated Financial Statements and notes
thereto contained in this Report.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
On March 22, 1999, the Company dismissed Bradshaw, Smith & Co. as its
independent certifying accountants, and engaged Arthur Andersen LLP as its
independent certified accountants. On November 21, 1999, the Company dismissed
Arthur Andersen, LLP and re-engaged Bradshaw, Smith & Co. as its independent
certified accountants. Neither change was made because of any disagreements with
either firm.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The directors and executive officers of the Company and their ages at
January 10, 2000 are as follows:
Name Age Position
---- --- --------
Robert C. Brehm 51 President, Chief Executive Officer and
Chairman of the Board
Mery C. Robinson 43 Chief Operating Officer, Secretary and
Director
Roger K. Knight 76 Vice President, Director
Conrad Nagel 58 Chief Financial Officer
Steven C. Hopkins 57 Director
Robert Key 54 Director
The Company's Bylaws provide for a minimum of three directors and a maximum
of 11. Each director of the Company holds office until the next annual meeting
of shareholders and until his or her successor has been elected and qualified.
Each executive officer holds office at the pleasure of the Board of Directors
and until his or her successor has been elected and qualified. A brief
background of each Director and Executive Officer is provided below:
Robert C. Brehm has served as the Company's Chief Executive Officer,
President and Chairman of the Board since July 1997. He also served as the
Company's Vice President from November 1996 to January 1997 and as a consultant
to the Company through Robert C. Brehm Consulting, Inc, an investment banking,
investor relations and strategic planning company. From July 1994 through the
present, Mr. Brehm has served as the President of Robert C. Brehm Consulting,
Inc. From 1991 to 1994, he was the President of Specialty Financing
International, Inc., a finance procurement company. Mr. Brehm has owned computer
hardware, software, finance and consulting companies. Mr. Brehm has a double
engineering degree in electrical engineering and computer science and an MBA in
Finance and Accounting from UC Berkeley.
Mery C. Robinson has served as a Director since September 1997 and the
Company's Executive Vice President and Secretary since September 1997. Ms.
Robinson was appointed Chief Operating Officer on October 1, 1998. Ms. Robinson
is the founder of XyclonyX and has served as its President and Chief Executive
Officer since August 1997. Ms. Robinson was the President of Sub-Surface Waste
Management from 1992 to 1995 and President of Omega Resources Management from
1995 to 1997. From 1986 to 1992, she served as the Vice President of Finance and
Administration of Westside Telephone Systems in Santa Monica, California, a
telephone interconnect service and equipment sales company. Ms. Robinson has
held various other positions in operating and starting up high-tech engineering
and biotech companies. She received her BS in Journalism from California
Polytechnic State University, San Luis Obispo, a Masters of Science in
Environmental Science/Engineering from California State University, Dominguez
Hills, and has and has attended the NFWBO-sponsored/Wharton Graduate School of
Business/Entrepreneurial Mini-MBA program.
Roger K. Knight has served as a Director since February 1990 and the
Company's Vice President-Business Development since July 1997. Mr. Knight has
significant experience in identifying business candidates for acquisitions, and
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<PAGE>
served as the Company's President from January 1995 through October 1996. Mr.
Knight retired from the U.S. Navy as a Captain in July 1965, and has been
involved in retail operations since the mid-1970s.
Conrad Nagel has served as the Company's Chief Financial Officer since July
1998. Mr. Nagel was previously hired as the Chief Financial Officer of Global
Venture Funding, Inc. in April 1997, and served the Company as a consultant from
September 15, 1997 through June 1998. Mr. Nagel has an MS degree in Accounting,
Kansas University (1964), a BS degree in Business, University of Kansas (1963)
and a CPA since 1966. Mr. Nagel has been associated with SEC work, auditing, and
finance operations for the past 30 years including Audit Manager for Touche Ross
(now Deloitte - Touche), Vice President of Finance - Decision Incorporated,
Internal Audit Manager for Kaiser Aetna, CFO for Calusa Financial Medical, Inc.,
Vice President of Finance for Medical Capital Corporation and over fifteen years
CPA practice specializing in taxation and SEC work.
Stephen C. Hopkins has served as a director of the Company since July 1998.
Mr. Hopkins is the President of Hopkins Real Estate Group, Inc., a commercial
real estate development company located in Newport Beach, California. Founded in
1972, Mr. Hopkins' company specializes in the acquisition and development of
shopping centers in urban landfill and redevelopment areas. He received his BA
in Public Service from the University of California, Los Angeles in 1964.
Robert H. Key is Chairman and Chief Executive Office of Arivest
Corporation, a real estate investment and development firm, located in Phoenix,
Arizona. Arivest Corporation is the parent corporation of Corporate Realty
Advisors, Inc., a commercial real estate brokerage firm. Mr. Key joined Arivest
Corporation as president upon its formation in April, 1979. He holds a Bachelor
of Science degree from Arizona State University, Tempe, Arizona, (1972) with a
major in Business Administration. Mr. Key has been a general partner, real
estate broker, consultant or developer of a large number of commercial real
estate projects. Directores are elected for a period of one year. Robert H. Key
began serving as a director on July 18, 1999.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representation that no other
reports were required, the Company's officers, directors and greater than ten
percent (10%) shareholders complied with all applicable Section 16(a) filing
requirements, except for: (i) one Form 4s and one Form 5 filed late by Robert C.
Brehm, the President, Chief Executive Officer and Chairman of the Board of the
Company; (ii) one Form 4 and one Form 5 filed late by Mery C. Robinson, the
Chief Operating Officer, Secretary and Director of the Company; (iii) one Form
4 and one Form 5 filed late by Roger K. Knight, the Vice President and
Director of the Company; (iv) one Form 4 and one Form 5 filed late by Conrad
Nagel, Chief Financial Officer of the Company; and (v) one Form 4 and one Form 5
filed late by Steven C. Hopkins, a Director of the Company and (vi) one Form 3
and one form 5 by Robert H. Key a director of the Company. The Company intents
to file all delinquent Form 4s and 5s within 30 days of the filing of this
Report.
Item 10. Executive Compensation
Summary of Compensation
The following executive compensation disclosure reflects all compensation
awarded to, earned by or paid to the Named Executive Officers (as defined below)
for the fiscal years ended September 30, 1999, 1998 and 1997. The named
executive officers (the "Named Executive Officers") are the Company's Chief
Executive Officer, regardless of compensation level, and the other executive
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officers of the Company who each received in excess of $100,000 in total annual
salary and bonus for fiscal year 1999. Compensation is shown in the following
table:
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
----------------------
Annual Compensation Awards
------------------------------------------------------------------- -----------------------------
Securities
Name and Principal Restricted Stock Underlying Other Annual All Other
Position Fiscal Year Salary ($) Awards ($) Options/SARs (#) Compensation Compensation
- -------- ----------- ---------- ---------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Brehm(1) 1999 191,166 -- -- --
President 1998 75,675 90,000(3) -- -- --
1997 15,000 -- -- -- --
Mery C. Robinson(2) 1999 191,231 -- -- --
Chief Operating 1998 55,000 80,000(4) -- -- --
Officer 1997 -- -- -- -- --
</TABLE>
- --------------
(1) Mr. Brehm's employment with the Company commenced in July 1997.
(2) Ms. Robinson's employment with the Company commenced in September 1997.
(3) During fiscal year 1998, Mr. Brehm received the following shares as bonus
compensation: 2,000 shares of Series D Preferred Stock valued at $5.00 per
share in October 1997, 7,000 shares of Series D Preferred Stock valued at
$10.00 per share in November 1997, and 500 shares of Series D Preferred
Stock valued at $20.00 per share in May 1998.
(4) During fiscal year 1998, Ms. Robinson received the following shares as
bonus compensation: 7,000 shares of Series D Preferred Stock valued at
$10.00 per share in November 1997, and 500 shares of Series D Preferred
Stock valued at $20.00 per share in May 1998. In addition on October 19,
1998, the Board of Directors authorized the issuance of an additional 5,000
shares of Series D Preferred Stock to Ms. Robinson as compensation, but
such shares have not been issued as of the date of this Report and are not
reflected in the above table.
Stock Option Grants
The following table shows all individual grants of stock options to the
Named Executive Officers during the fiscal year ended September 30, 1999.
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<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Percent of Total
Options/SARs
Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#)(1) Fiscal Year Price ($/SH) Date
---- -------------- ----------- ------------ ----
<S> <C> <C> <C> <C> <C>
Robert C. Brehm 500,000 31.2% 1.00 10/19/03
1,000,000 15.6% 1.25 10/01/03
Mery C. Robinson 500,000 31.2% 1.00 10/19/03
1,000,000 15.6% 1.25 10/01/03
</TABLE>
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(1) These options are completely vested and may be exercised at any time.
Vesting may be accelerated and the options may be re-priced at the
discretion of the Board of Directors. In the event of a specified corporate
transaction such as a dissolution, merger or other reorganization of the
Company in which more than 50% of the Company's stock is exchanged, vesting
on such options shall be accelerated unless the surviving corporation
assumes the options outstanding, substitutes similar rights for outstanding
options or the options shall continue.
Option Exercises in Fiscal Year 1999
Set forth below is information with respect to exercises of stock options
by the Named Executive Officers during fiscal year 1999 and the fiscal year-end
value of all unexercised stock options held by such persons.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Unexercised Value of Unexercised,
Options Held at Fiscal In-the-Money Options at
Year-End 09/30/99 Fiscal Year-End ($)
------------------------------- --------------------------------
Shares Value
Acquired on Realized ($) Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#)
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert C. Brehm -- -- 1,275,000 900,000 $1,100,000 $1,575,000
Mery C. Robinson -- -- 1,150,000 900,000 $ 850,000 $1,575,000
</TABLE>
- ----------
(1) Based on the closing price of $3.00 for the shares of Common Stock of the
Company traded on the OTC Bulletin Board as of September 30, 1999.
Employment and Consulting Agreements
Effective October 1, 1998, the Company entered into an employment agreement
with Robert C. Brehm, the Company's President and Chief Executive Officer. Mr.
Brehm's employment agreement provides for a term of five years, an initial
annual base salary of $180,000, salary increases of $30,000 per annum and
discretionary incentive bonuses. Pursuant to the employment agreement, the
Company granted to Mr. Brehm stock options covering 1,000,000 shares of Common
Stock exercisable at $1.25 per share. These stock options will vest in ten equal
-32-
<PAGE>
installments of 100,000 shares commencing on April 1, 1999 and on the first day
of each six-month period thereafter. In the event that the ownership or control
of the Company is changed with respect to over 30% of the issued and outstanding
shares of Common Stock, Mr. Brehm will have the right to exercise 100% of his
unvested stock options. All unvested stock options are subject to cancellation
by the Company in the event that Mr. Brehm's employment with the Company is
terminated at any time prior to the term of the employment agreement.
Effective October 1, 1998, the Company entered into an employment agreement
with Mery C. Robinson, the Company's Chief Operating Officer. Ms. Robinson's
employment agreement provides for a term of five years, an initial annual base
salary of $180,000, salary increases of $30,000 per annum and discretionary
incentive bonuses. Pursuant to the employment agreement, the Company granted to
Ms. Robinson stock options covering 1,000,000 shares of Common Stock exercisable
at $1.25 per share. These stock options will vest in ten equal installments of
100,000 shares commencing on April 1, 1999 and on the first day of each
six-month period thereafter. In the event that the ownership or control of the
Company is changed with respect to over 30% of the issued and outstanding shares
of Common Stock, Ms. Robinson will have the right to exercise 100% of her
unvested stock options. All unvested stock options are subject to cancellation
by the Company in the event that Ms. Robinson's employment with the Company is
terminated at any time prior to the term of the employment agreement.
The Company has entered into consulting agreements for various services,
including public relations, marketing, technology transfer and engineering
services. The Company typically has compensated its consultants through stock
options and share issuances.
Compensation of Directors
Members of the Board of Directors are not compensated for serving as
directors of the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Principal Shareholders
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of January 10, 2000 by (i) each person who is
known by the Company to own beneficially more than five percent (5%) of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Chief Executive Officer and the four (4) most highly compensated
executive officers who earned in excess of $100,000 for all services in all
capacities (collectively, the "Named Executive Officers") and (iv) all directors
and executive officers of the Company as a group. Unless otherwise indicated
below, to the knowledge of the Company, all persons listed below have sole
voting and investing power with respect to their shares of Common Stock, except
to the extent authority is shared by spouses under applicable community property
laws, and, unless otherwise stated, their address is 5922-B Farnsworth Court,
Carlsbad, California 92008.
-33-
<PAGE>
Name and Address of Beneficial Owner Amount(1) Percent
------------------------------------ --------- -------
Robert C. Brehm 3,283,612 (2) 39.98%
President, Chief Executive Officer
and Chairman of the Board
Mery C. Robinson 3,175,000 (3) 37.51%
Chief Operating Officer,
Secretary and Director
Stephen Hopkins 800,000 (4) 10.71%
Director
Roger K. Knight 634,575 (5) 9.38%
Director
Conrad Nagel 252,860 (6) 3.75%
Chief Financial Officer
Robert Key 65,000 (7) .97%
Director
All Officers and Directors 8,161,047 (8) 73.46%
As a group (6 persons)
Other 5% Shareholders:
Scott Sabins 761,667 (9) 10.69%
514 Avenida La Costa
San Clemente, CA 92672
John Feighner 500,000 (10) 7.03%
P.O. Box 1875
Rancho Santa Fe, CA 92067
Lance Bauerlein 363,000 (11) 5.35%
430 Walnut 2506
Lisle, IL 60532
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options, warrants or convertible securities exercisable or convertible
within 60 days of January 10, 2000, are deemed outstanding for computing
the percentage of the person or entity holding such options, warrants or
convertible securities but are not deemed outstanding for computing the
percentage of any other person.
(2) Includes: (i) 250,000 shares Common Stock owned by Robert C. Brehm
Consulting, Inc., of which Robert C. Brehm is the President; and (ii)
1,475,000 shares of Common Stock issuable under stock options exercisable
within 60 days of January 10, 2000.
(3) Includes: (i) 5,000 shares of Series D Preferred Stock convertible into
500,000 shares of Common Stock; and (ii) 1,350,000 shares issuable of
Common Stock under stock options exercisable within 60 days of January 10,
2000.
-34-
<PAGE>
(4) Includes: (i) 6,000 shares of series C. Preferred Stock convertible into
600,000 shares of common Stock; and (ii) 200,000 shares of Common Stock
issuable under stock options exercisable within 60 days of January 10,
2000.
(5) Includes: (i) 665 shares of Series B Preferred Stock convertible into 3,325
shares of Common Stock; (ii) 1,250 shares of Common Stock owned by First
Venture Group Inc., an affiliated company of Roger K. Knight; and (iii)
150,000 shares of Common Stock issuable under stock options exercisable
within 60 days of January 10, 2000.
(6) Includes (i) 119 shares of Series II Preferred
Stock convertible into 1,190 shares of Common Stock; (ii) 214 shares of
Series B Preferred Stock convertible into 1,070 shares of Common Stock
owned by Kathrina B. Nagel, wife of Conrad Nagel; (iii) 600 shares of
Common Stock owned by Kathrina B. Nagel; and (v) and 150,000 shares of
Common Stock issuable under stock options exercisable within 60 days of
January 10, 2000.
(7) Consists of 650 shares of Series C Preferred Stock convertible into 65,000
shares of Common Stock.
(8) Includes 4,495,585 shares issuable under stock options, warrants or
convertible securities held by directors and executive officers exercisable
or convertible within 60 days of January 10, 2000.
(9) Consists of (i) 6,250 shares of Series C Preferred Stock convertible into
625,000 shares of Common Stock and (ii) 166,667 shares of Common Stock
issuable under stock options exercisable within 60 days of January 10,
2000.
(10) Consists of 5,000 shares of Series C Preferred Stock convertible into
500,000 shares of Common Stock.
(11) Includes 175,000 shares of Common Stock issuable under stock options
exercisable within 60 days of January 10, 2000.
Item 12. Certain Relationships and Related Transactions
In August 1997, the Company entered into a Technology License Agreement for the
Exclusive Right and License to the Patents, Technical Information and Biological
Product Line with Mery Robinson, Dominic Colasito, and Alvin Smith, the
technology owners. The Technology License Agreement provides for product royalty
payments, to the technology owners, of a maximum six percent (6%) of the gross
revenue received by the Company.
-35-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Financial Statements.
(1) Index to the Company's financial statements appears on page A-1.
(b) Current Report on Form 8-K
(1) The Company filed a Form 8-K regarding a change in auditors.
(c) Exhibits.
Number Description
- ------ -----------
3.1 -- Articles of Incorporation, as amended
3.2 -- Bylaws, as amended
4 -- Reference is made to Exhibits 3.1 and 3.2
10.1(1) -- Lease Agreement, dated as of July 14, 1998, by and among
the Company and each of Ridgecrest Properties, R and B
Properties and Hindry West Development
10.2(1)(2) -- Employment Agreement, effective as of October 1, 1998,
between Robert C. Brehm and the Registrant
10.3(1)(2) -- Employment Agreement, effective as of October 1, 1998,
between Mery C. Robinson and the Registrant
10.4(1) -- Stock for Stock Acquisition Agreement, effective as of
August 31, 1997, among XyclonyX, Mery C. Robinson and the
Registrant
10.5(1) -- Technology License Agreement, effective as of March 1,
1998, between XyclonyX and West Coast Fermentation Center
10.6(1) -- Technology License Agreement, effective as of March 1,
1998, between XyclonyX and Sub-Surface Waste Management,
Inc.
10.7(1) -- Technology License Agreement, effective as of August 21,
1997, among XyclonyX and Mery C. Robinson, Dominic J.
Colasito and Alvin J. Smith
10.8(1) -- Technology License Agreement, effective as of March 1,
1998, between XyclonyX and Bio-Con Microbes, Inc.
10.9(1) -- Technology License Agreement, effective as of March 1,
1998, between XyclonyX and Sol-Tech Corporation
-36-
<PAGE>
10.10(3) -- Product Line License Agreement effective May 24, 1999,
between Sub-Surface Waste Management, Inc. and Builders
Referral, Inc.
21(1) -- Subsidiaries of the Registrant
27(1) -- Financial Data Schedule for the fiscal year ended
September 30, 1999
- ------------
(1) Incorporated by reference to the similarly described exhibit included with
the registrant's Current Report on Form 10-KSB filed on February 8, 1999.
(2) Identifies a management contract or compensatory plan or arrangement of the
Registrant.
(3) Incorporated by reference to the similarly described exhibit included with
the registrant's Current Report on Form 10-QSB filed on August 16, 1999.
-37
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
CONTENTS
PAGE
----
Independent auditors' report F-1
Consolidated financial statements:
Balance sheets F-2
Statements of operations F-3
Statements of changes in stockholders' (deficit) equity F-4
Statements of cash flows F-5
Notes to financial statements F-6-F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
U.S. Microbics, Inc. and Subsidiaries
Carlsbad, California
We have audited the accompanying consolidated balance sheets of U.S.
Microbics, Inc. and Subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders'
(deficit) equity, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S.
Microbics, Inc. and Subsidiaries as of September 30, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered significant
recurring losses from operations and has a net stockholders' deficit at
September 30, 1999. These conditions raise substantial doubt about its ability
to continue as a going concern. Management's plans regarding these matters also
are described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Bradshaw, Smith & Co., LLP
Las Vegas, Nevada
January 28, 2000
(Except for Note 6 as to
which the date is February 4, 2000)
F-1
<PAGE>
<TABLE>
<CAPTION>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 125,400 $ 316,600
Prepaid expenses and other assets 22,100 10,000
Inventories (Note 2) 68,600 --
----------- -----------
Total current assets 216,100 326,600
Property and equipment (Note 3) 239,700 99,100
Deposits (Note 4) 27,300 17,500
Deferred tax assets (Note 7) -- --
----------- -----------
$ 483,100 $ 443,200
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 766,000 $ 206,300
Current portion of obligations under capital lease (Note 5) 4,900 --
----------- -----------
Total current liabilities 770,900 206,300
Obligation under capital lease, net of current portion (Note 5) 5,300 --
----------- -----------
Total liabilities 776,200 206,300
----------- -----------
Commitments and contingencies (Note 10) -- --
Stockholders' (deficit) equity (Note 6):
Convertible preferred stock, $.10 par value; authorized
20,000,000 shares:
Series II; authorized 500,000 shares; issued and outstanding 1,700 2,200
17,163 and 21,507 shares (aggregate liquidation preference
of $17,163 and $21,507)
Series B; authorized 500,000 shares; issued and outstanding 1,400 1,600
13,969 and 15,915 shares (aggregate liquidation preference
of $13,969 and $15,915)
Series C; authorized 50,000 shares; issued and outstanding 4,000 1,500
40,110 and 15,357 shares (aggregate liquidation preference
of $4,011,000 and $1,535,700)
Series D; authorized 50,000 shares; issued and outstanding 500 2,000
4,725 and 20,438 shares (no liquidation preference)
----------- -----------
7,600 7,300
Common stock $.0001 par value; authorized 150,000,000 600 400
shares; issued and outstanding 6,010,380 and 3,447,554
shares
Additional paid-in capital 6,212,900 3,068,000
Stock options and warrants 963,400 868,800
Treasury stock (33,300) --
Stock subscriptions notes receivable (804,200) --
Accumulated deficit (6,640,100) (3,707,600)
----------- -----------
(293,100) 236,900
----------- -----------
$ 483,100 $ 443,200
=========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-2
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30,
-----------------------------------
1999 1998
----------- -----------
Revenues (including $ 50,000 from related parties, Note 9) $ 66,900 $ --
Cost of revenues 192,600 --
----------- -----------
Gross (loss) profit (125,700) --
Selling, general and administrative expenses 2,775,700 1,378,200
----------- -----------
Loss from operations (2,901,400) (1,378,200)
----------- -----------
Other income (expense):
Interest income 72,800 6,800
Interest expense (1,600) (34,800)
Impairment of property and equipment (Note 3) (102,300) --
----------- -----------
(31,100) (28,000)
----------- -----------
Net loss from continuing operations before tax (2,932,500) (1,406,200)
Provision for income taxes (Note 7) -- --
----------- -----------
Net loss from continuing operations (2,932,500) (1,406,200)
Discontinued operations (Note 8):
Loss on disposal of Houston, Texas tele- -- (5,600)
communications store (no income tax benefit)
----------- -----------
Net loss $(2,932,500) $(1,411,800)
=========== ===========
Net loss per common share (basic and diluted):
Net loss from continuing operations $ (0.58) $ (0.78)
Loss on disposal of Houston, Texas -- (NIL)
telecommunications store
----------- -----------
Net loss $ (0.58) $ (0.78)
=========== ===========
Weighted average common shares outstanding 5,084,676 1,802,481
=========== ===========
The Notes to Consolidated FinancialStatements are an integral part of these statements.
F-3
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
Preferred Stock Common Stock
-----------------------------------------------------
Shares Amount Shares Amount
-----------------------------------------------------
Balance, September 30, 1997 61,552 $ 6,200 1,447,929 $ 200
Issuance of stock in exchange for 920 100 -- --
extinguishment of debt (Note 6)
Conversion of preferred stock (Note (18,780) (1,900) 1,526,625 200
Issuance of stock options and -- -- -- --
warrants in exchange for services
(Note 6)
Exercise of stock options and -- -- 30,000 --
warrants (Note 6)
Issuance of stock and stock options 12,225 1,200 -- --
in private placement (Note 6)
Issuance of stock in exchange for 17,300 1,700 493,000 --
services (Note 6)
Retirement of treasury stock -- -- (50,000) --
Expiration of stock options and -- -- -- --
warrants (Note 6)
Net loss for the year -- -- -- --
------- ----------- --------- ------
Balance, September 30, 1998 73,217 7,300 3,447,554 400
Conversion of preferred stock (Note (29,636) (3,000) 2,387,826 200
Issuance of stock options and -- -- -- --
warrants in exchange for services
(Note 6)
Exercise of stock options and -- -- 170,000 --
warrants (Note 6)
Issuance of stock and stock options 29,597 3,000 -- --
in private placement (Note 6)
Issuance of stock in exchange for 2,789 300 5,000 --
services (Note 6)
Expiration of stock options and -- -- -- --
warrants (Note 6)
Return of shares issued (Note 6) -- -- -- --
Net loss for the year -- -- -- --
------- ----------- --------- ------
Balance, September 30, 1999 75,967 $ 7,600 6,010,380 $ 600
======= =========== ========= ======
Additional Stock Treasury Stock Accumulated Total
paid-in options and stock subscriptions deficit stockholders'
capital warrants notes receivables (deficit) equity
-------------------------------------------------------------------------------------------
Balance, September 30, 1997 $ 1,928,000 $ 187,700 $ (1,000) $ -- $(2,295,800) $ (174,700)
Issuance of stock in exchange for 52,700 -- -- -- -- 52,800
extinguishment of debt (Note 6)
Conversion of preferred stock (Note 1,700 -- -- -- -- --
6)
Issuance of stock options and -- 429,700 -- -- -- 429,700
warrants in exchange for services
(Note 6)
Exercise of stock options and 31,800 (28,800) -- -- -- 3,000
warrants (Note 6)
Issuance of stock and stock options 480,400 298,500 -- -- -- 780,100
in private placement (Note 6)
Issuance of stock in exchange for 556,100 -- -- -- -- 557,800
services (Note 6)
Retirement of treasury stock (1,000) -- 1,000 -- -- --
Expiration of stock options and 18,300 (18,300) -- -- -- --
warrants (Note 6)
Net loss for the year -- -- -- -- (1,411,800) (1,411,800)
--------- --------- ------- -------- ----------
Balance, September 30, 1998 3,068,000 868,800 -- -- (3,707,600) 236,900
Conversion of preferred stock (Note 2,800 -- -- -- -- --
6)
Issuance of stock options and -- 258,300 -- -- -- 258,300
warrants in exchange for services
(Note 6)
Exercise of stock options and 368,200 (289,000) -- -- -- 79,200
warrants (Note 6)
Issuance of stock and stock options 2,417,700 330,000 -- (804,200) -- 1,946,500
in private placement (Note 6)
Issuance of stock in exchange for 151,500 -- -- -- -- 151,800
services (Note 6)
Expiration of stock options and 204,700 (204,700) -- -- -- --
warrants (Note 6)
Return of shares issued (Note 6) -- -- (33,300) -- -- (33,300)
Net loss for the year -- -- -- -- (2,932,500) (2,932,500)
----------- ----------- --------- ----------- ----------- -----------
Balance, September 30, 1999 $ 6,212,900 $ 963,400 $ (33,300) $ (804,200) $(6,640,100) $ (293,100)
=========== =========== ========= =========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-4
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
----------------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss $(2,932,500) $(1,411,800)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 39,700 1,600
Stock, stock options, and warrants in exchange for services 410,100 987,500
Impairment of property and equipment 102,300 --
Loss on disposal of discontinued operation -- 5,600
Change in net liabilities of discontinued operation -- (82,500)
Decrease (increase) in:
Prepaid expenses and other assets (12,100) 18,000
Inventories (68,600) --
Deposits (9,800) (17,500)
Increase (decrease) in:
Accounts payable and accrued liabilities 559,700 118,000
----------- -----------
Net cash used in operating activities (1,911,200) (381,100)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (267,700) (64,500)
----------- -----------
Net cash used in investing activities (267,700) (64,500)
----------- -----------
Cash flows from financing activities:
Repayment of obligation under capital lease (4,700) --
Repayment of notes payable -- (22,600)
Issuance of preferred stock and stock 1,946,500 780,100
options in private placements
Exercise of stock options 45,900 3,000
----------- -----------
Net cash provided by financing activities 1,987,700 760,500
----------- -----------
Net (decrease) increase in cash and cash equivalents (191,200) 314,900
Cash and cash equivalents, beginning of period 316,600 1,700
----------- -----------
Cash and cash equivalents, end of period $ 125,400 $ 316,600
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ -- $ --
=========== ===========
Cash paid for interest $ 1,600 $ 1,400
=========== ===========
Schedule of non-cash investing and financing activities:
Property and equipment acquired through capital lease (Note 5) $ 14,900 $ --
=========== ===========
Conversion of preferred stock to common stock (Note 6) $ 2,800 $ 1,700
=========== ===========
Stock issued in exchange for extinguishment of debt $ -- $ 52,800
(Note 6)
=========== ===========
The Notes to consolidated Financial Statements are an integral part of these statements.
F-5
</TABLE>
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1. Basis of presentation and accounting policies:
Organization and basis of presentation:
The Company was organized 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"). The Company has
been engaged in a variety of operations since inception.
During July, 1997, the Company opened a store in Houston, Texas that was
engaged in the business of selling cellular phone products. Effective
October 31, 1997, the Company sold this business.
During August, 1997, the Company acquired the assets of Xyclonyx, a 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.
During the year ended September 30, 1998, the Company created four
subsidiaries: West Coast Fermentation Center, Sub Surface Waste Management,
Inc., Sol Tech Corporation, and Bio-Con Microbes. 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. All
four subsidiaries have entered into technology license agreements with
Xyclonyx. These agreements are ten years in length and call for license
fees and royalties as specified in the agreement.
In November, 1998, the Company created a new subsidiary, Applied Microbic
Technology, Inc. Applied Microbic Technology's primary business is to
license customers to use microbial blends for oil remediation applications.
The Company has experienced losses from continuing operations of
$2,932,500 and $1,406,200 for the years ended September 30, 1999 and 1998,
respectively. Additionally, the Company had a net stockholder's deficit of
$293,100 as of September 30, 1999. The Company is planning on raising
additional capital through the issuance of additional stock in a private
placement or public offering. The Company is also currently developing
business opportunities and operations through its wholly-owned
subsidiaries. Based upon the current status of the Company, additional
capital will be required in order for the Company to complete any
development or to maintain their ongoing operations. These matters raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result from the outcome of this uncertainty.
F-6
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1. Basis of presentation and accounting policies (continued):
Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany transactions
have been eliminated in consolidation.
Discontinued operations:
On December 30, 1997, the Company formally disposed of its Houston, Texas
cellular phone product store. The sale was effective as of October 31, 1997
with the buyer assuming all liabilities for products or services entered
into from November 1, 1997 and forward. In accordance with the Financial
Accounting Standards Board Emerging Issue Task Force 95-18, when the
measurement date for a discontinued operation, as defined in APBO No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" occurs after the balance sheet date but
before the financial statements for the prior period have been issued, the
estimated loss on disposal should be recognized and the segments operating
results should be presented as a discontinued operation in the not yet
released financial statements. As such, the estimated loss on disposal was
recognized and the operating results were presented as a discontinued
operation in the September 30, 1997 financial statements.
Cash and cash equivalents:
The Company considers highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Inventories:
Inventories consist of materials and equipment used to make products which
treat hazardous waste and are valued at the lower of cost (first-in,
first-out) or market.
Property and equipment:
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets.
Impairment of long-lived assets:
Inaccordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121), assets are evaluated in making a
determination as to whether asset values are impaired. At each year-end,
the Company reviews its long-lived assets for impairment based on estimated
future nondiscounted cash flows attributable to the assets. In the event
such cash flows are not expected to be sufficient to recover the recorded
value of the assets, the assets are written down to their estimated fair
value.
F-7
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1. Basis of presentation and accounting policies (continued):
Income taxes:
The Company has implemented the provisions on Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
SFAS 109 requires that income tax accounts be computed using the liability
method. Deferred taxes are determined based upon the estimated future tax
effects of differences between the financial reporting and tax reporting
bases of assets and liabilities given the provisions of currently enacted
tax laws.
Net loss per common share:
The Company computes earnings per share under Financial Accounting Standard
No. 128, "Earnings Per Share" (SFAS 128). Net loss per common share is
computed by dividing net loss by the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding during the
year. Dilutive common stock equivalents consist of shares issuable upon
conversion of convertible preferred shares and the exercise of the
Company's stock options and warrants (calculated using the treasury stock
method). During 1999 and 1998, common stock equivalents are not considered
in the calculation of the weighted average number of common shares
outstanding because they would be anti-dilutive, thereby decreasing the net
loss per common share.
Pervasiveness of estimates:
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 those
estimates.
Fair value of financial instruments:
Based on the borrowing rates currently available to the Company, the
carrying value of the obligation under capital lease at September 30, 1999
approximates fair value.
F-8
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
Comprehensive Income:
In June, 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 130 "Reporting Comprehensive Income"(SFAS 130).
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general purpose financial statements. This Statement requires that
an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company does not have any items of
other comprehensive income and, as such, the adoption of SFAS 130 did not
impact reporting in the Company's financial statements.
2.Inventories:
Inventories:
Inventories consisted of the following at September 30, 1999:
Raw materials (microbial cultures and related items) $ 3,600
Finished goods (equipment used for soil remediation) 65,000
---------
$ 68,600
=========
3. Property and equipment:
Property and equipment consisted of the following:
1999 1998
----------- ------------
Office furniture and equipment $ 128,300 $ 57,400
Leasehold improvements 17,700 7,100
Production equipment 135,000 36,200
----------- ------------
281,000 100,700
Less accumulated depreciation (41,300) (1,600)
----------- ------------
$ 239,700 $ 99,100
=========== ============
Depreciation expense for the year ended September 30, 1999 and 1998 was $
39,700 and $1,600, respectively.
The Company periodically reviews the recorded value of its long-lived
assets to determine if the future cash flows to be derived from these
assets will be sufficient to recover the remaining recorded asset values.
F-9
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
In accordance with SFAS 121, during the year ended September 30, 1999,
based upon a comprehensive review of the Company's long-lived assets, the
Company recorded a charge of $102,300 related to the write-down of a
portion of the recorded asset values of the Company's production equipment
and leasehold improvements as of September 30, 1999.
4. Deposits:
Deposits at September 30, 1999 and 1998 consisted of a security deposit on
the Company's building lease, a utility company deposit, a state sales and
use tax deposit, and a software consulting contract deposit.
5. Obligation under capital lease:
The Company leases certain production equipment under a capital lease which
runs through the year 2001. The asset and liability under the capital lease
are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The asset is amortized over the
lower of its related lease term or its estimated productive life.
Depreciation of the asset under capital lease is included in depreciation
expense for 1999. The implicit interest rate on the capital lease is 10.8%.
The cost and related depreciation of equipment under the capital lease,
which is included in the property and equipment referred to in Note 3, are
as follows at September 30, 1999:
Production equipment $21,200
Less accumulated depreciation (2,300)
-------
$18,900
=======
At September 30, 1999, the future minimum payments under the capital lease
consisted of the following:
2000 $ 5,800
2001 5,800
2002 400
-------
Total minimum lease payments 12,000
Less amount representing interest (1,800)
-------
Present value of future minimum lease payments 10,200
Less current portion (4,900)
-------
Obligations under capital lease, net of current portion $ 5,300
=======
F-10
<PAGE>
The interest charged to expense for the capital lease for the year ended
September 30, 1999 was $600. The depreciation charged to expense for the
capital lease for the year ended September 30, 1999 was $2,300.
6. Stockholders'(deficit) equity:
On August 20, 1997, the Board of Directors authorized a one-for-twenty
(1:20) reverse stock split of all shares of outstanding common and
preferred stock. The effect was a reduction in the number of issued and
outstanding common shares from 11,173,898 to 558,695 and preferred shares
from 843,599 to 42,180. All references in the accompanying financial
statements to the number of common and preferred shares and per share
amounts have been restated to reflect the above reverse stock split.
During 1999, the Company learned that the securities laws in the state of
Colorado required that the reverse stock split had to be put to a
stockholder vote for approval. The Company filed a proxy statement and
scheduled a specific meeting of stockholders for February 4, 2000 to vote
on the reverse stock split. The reverse stock split was approved by the
stockholders during the meeting on February 4, 2000.
Preferred stock:
The Company's preferred stock may be divided into such series as may be
established by the Board of Directors. The Board of Directors may fix and
determine the relative rights and preferences of the shares of any series
established. All convertible preferred shares are noncumulative,
nonparticipating and do not carry any voting privileges.
In October, 1991, the Board of Directors authorized the issuance of 500,000
shares of Series II Convertible Preferred Stock. Each share of Series II
preferred stock is entitled to preference upon liquidation of $1.00 per
share for any unconverted shares. Each Series II preferred share may be
converted to common stock after a specified holding period as follows:
after one year, two shares of common stock; after two years, five shares of
common stock; after three years, ten shares of common stock. In November,
1996, the Board of Directors changed the conversion schedule as follows:
commencing January 1, 1997, each shareholder shall be entitled to convert
an initial amount of 250 shares to 2,500 shares of common stock. The
shareholder shall be entitled to convert the balance of their Series II
Preferred shares in increments of 475 shares during each six-month period
thereafter beginning July 1, 1997.
F-11
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
In March, 1992, the Board of Directors authorized the issuance of 500,000
shares of Series B Convertible Preferred Stock. Each share of Series B
preferred stock is entitled to preference upon liquidation of $1.00 per
share for any unconverted shares. Each Series B preferred share may be
converted to common stock after a specified holding period as follows:
after one year, two shares of common stock; after two years, five shares of
common stock. In November, 1996, the Board of Directors changed the
conversion schedule as follows: Commencing January 1, 1997, each
shareholder shall be entitled to convert an initial amount of 250 shares to
1,250 shares of common stock. The shareholder shall be entitled to convert
the balance of their Series B Preferred shares in increments of 475 shares
during each six-month period thereafter beginning July 1, 1997.
In June, 1992, the Board of Directors authorized the issuance of 50,000
shares of Series C Convertible Preferred Stock. Each share of Series C
preferred stock is entitled to preference upon liquidation of $100 per
share for any unconverted shares, and the liquidation preference is junior
only to that of all previously issued preferred shares. Each Series C
preferred share may be converted to 100 shares of common stock after a
specified holding period of one year.
In June, 1992, the Board of Directors authorized the issuance of 50,000
shares of Series D Convertible Preferred Stock. The Series D preferred
stock carries no liquidation preferences. Each Series D preferred share may
be converted to 100 shares of common stock after a specified holding period
of one year. The Series D preferred stock is also subject to forfeiture at
any time prior to conversion if the recipient thereof fails or refuses to
perform such reasonable duties as may be assigned to them from time to time
by the Board of Directors. The Series D preferred stock may not be sold,
transferred, or conveyed to any other person and is subject to redemption
at a price of $.001 per share in the event of death, disability, or
incompetency of the original holder or the attempted transfer or conveyance
of the shares to any other person.
The Company has reserved 17,500,000 shares of its $.0001 par value common
stock for conversion of preferred stock issuances. As of September 30,
1999, there were 17,163 shares of Series II preferred stock, 13,969 shares
of Series B preferred stock, 40,110 shares of Series C preferred stock, and
4,725 shares of Series D preferred stock issued and outstanding. Conversion
of all issued and outstanding convertible preferred stock to common stock
would result in an additional 4,724,975 shares of common stock.
Preferred stock transactions:
All valuations of preferred stock issued for services were based upon the
value the services performed or the value of the preferred stock, whichever
was more reliably measurable. If the value of the preferred stock was used,
it was based upon the closing price of the Company's common stock on the
date of the agreement. This amount was then multiplied by the applicable
conversion rate and then discounted by management. These discounts are
based upon the restrictive nature of the stock, block size and other
factors.
F-12
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
Preferred stock transactions during the year ended September 30, 1999:
During December, 1998, the Company issued 500 shares of Series D preferred
stock to the President of the company, 500 shares of Series D preferred
stock to the Chief Operating Officer of the Company and 200 shares of
Series D preferred stock to the Vice-President of the Company in lieu of
cash salary payments. All transactions were valued at approximately $20 per
share.
During March, 1999, the Company issued 1,589 shares of Series C preferred
stock to consultants for services. All exchanges were valued at
approximately $75 per share.
Throughout the year ended September 30, 1999, certain stockholders
exercised their preferred stock conversion rights and the Company issued
2,387,826 shares of common stock in exchange for cancellation of 4,344
shares of Series II preferred stock, 1,946 shares of Series B preferred
stock, 6,433 shares of Series C preferred stock, and 16,913 shares of
Series D preferred stock.
Throughout the year ended September 30, 1999, the Company sold 29,597
shares of Series C preferred stock pursuant to a private placement offering
as provided under regulation D of the Securities Act of 1933 related to
transactions not involving a public offering. The net proceeds to the
Company after issuing costs of $ 206,800 was $ 1,946,500. Of these sales,
7,950 shares of Series C preferred stock were sold subject to stock
subscriptions notes receivable. The notes are short term in nature, bear
interest at 10 percent per annum, and are collateralized by the stock. The
Company is currently holding these stock certificates and will release them
upon payment of the notes.
Preferred stock transactions during the year ended September 30, 1998:
During October, 1997, the Company issued 2,000 shares of Series D preferred
stock to the President of the Company in lieu of a cash salary payment and
100 shares of Series D preferred stock to a consultant for services. All
exchanges were valued at approximately $5 per share.
During November, 1997, the Company issued 7,000 shares of Series D
preferred stock to the President of the Company and 7,000 shares of Series
D preferred stock to the Chief Operating Officer of the Company in lieu of
cash salary payments. All transactions were valued at approximately $10 per
share.
During December, 1997, the Company issued 920 shares of Series C preferred
stock to various creditors in exchange for debt owed by the Company in the
amount of $52,800. All exchanges were valued at approximately $57 per
share.
F-13
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
6. Stockholders'(deficit) equity (continued):
Preferred stock transactions during the year ended September 30, 1998
(continued):
During May, 1998, the Company issued 500 shares of Series D preferred stock
to the President of the Company, 500 shares of Series D preferred stock to
the Chief Operating Officer of the Company, and 200 shares of Series D
preferred stock to the Vice President of the Company in lieu of cash salary
payments. All transactions were valued at approximately $20 per share.
Throughout the year ended September 30, 1998, certain stockholders
exercised their preferred stock conversion rights and the Company issued
1,526,625 shares of common stock in exchange for cancellation of 1,012
shares of Series II preferred stock, 2,740 shares of Series B preferred
stock, 1,028 shares of Series C preferred stock, and 14,000 shares of
Series D preferred stock.
Throughout the year ended September 30, 1998, the Company sold 12,225
shares of Series C preferred stock pursuant to a private placement offering
as permitted under Regulation D of the Securities Act of 1933 related to
transactions not involving a public offering. The net proceeds to the
Company after issuing costs of $104,600 was $780,100. In conjunction with a
5,000 shares issuance of Series C preferred stock to an individual, an
option to purchase 300,000 shares of common stock at prices ranging from
$2.00 to $2.50 per share was granted to this individual. This individual is
now on the Company's Board of Directors.
Common stock transactions:
All valuations of common stock issued for services were based upon the
closing price of the Company's common stock on the date of the agreement.
In the event restricted common stock was issued, the value of the service
was based upon the value of the services performed or the value of the
restricted common stock, whichever was more reliably measurable. If the
value of the restricted common stock was used, a discount was applied by
management. These discounts are based upon the restrictive nature of the
stock, block size, and other factors.
Common stock transactions during the year ended September 30, 1999:
During November, 1998, the Company issued 5,000 shares of common stock in
exchange for various services. The exchanges were valued at approximately
$1.00 per share.
Common stock transactions during the year ended September 30, 1998:
During December, 1997, the Company issued 320,000 shares of common stock in
exchange for various services. The exchanges were valued at approximately
$.38 to $1.32 per share.
F-14
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
6. Stockholders'(deficit) equity (continued):
During April, 1998, the Company issued 23,000 shares of common stock in
exchange for various services. The exchanges were valued at approximately
$.75 to $1 per share.
In July, 1998, the Company issued 150,000 shares of common stock in
exchange for various services. The exchanges were valued at approximately
$1.25 per share.
Treasury stock:
The Company is holding 33,336 shares of common stock in treasury awaiting
return to the transfer agent. The stock was returned to the Company by a
consultant who failed to completely perform the agreed services. The shares
are valued at $1 per share.
Stock options and warrants:
The Company issued options and warrants during the years ended September
30, 1999 and 1998 for consulting services, fees in connection with
obtaining financing, and various other services.
Stock options and warrants summary information:
Activity of options and warrants granted is as follows:
Options and warrants outstanding
--------------------------------
Shares Weighted
average
exercise price
------------ --------------
Balance, September 30, 1997 270,500 $ 3.55
Granted 2,523,000 2.63
Exercised (30,000) 0.10
Expired (38,150) 0.43
------------ --------------
Balance September 30, 1998 2,725,350 $ 2.78
Granted 3,575,000 1.34
Exercised (150,000) 0.28
Expired (589,350) 2.46
------------ --------------
Balance September 30, 1999 5,561,000 $ 2.37
============ ==============
Exercisable, September 30, 1999 3,761,000 $ 2.90
============ ==============
F-15
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
6. Stockholders'(deficit) equity (continued):
The following is a summary of options and warrants outstanding at September
30, 1999:
<TABLE>
<CAPTION>
Options and warrants outstanding Options and warrants exercisable
----------------------------------------------------------------------- -------------------------------------
Range of exercise Number Weighted Weighted Number exercisable Weighted
prices outstanding average average average
remaining exercise price exercise price
contractual
life (years)
------------------------------------- ----------------- --------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.15 48,000 $ 1.00 $ 0.15 48,000 $ 0.15
1-5 5,400,000 3.94 2.21 3,600,000 2.69
10 103,000 3.97 10.00 103,000 10.00
20 10,000 2.00 20.00 10,000 20.00
----------------- ----------------- --------------- ------------------- -----------------
5,561,000 3.91 $ 2.37 3,761,000 $ 2.90
================= ================= =============== =================== =================
</TABLE>
Options and warrants granted during the year ended September 30, 1999
consisted of 3,100,000 to officers and directors, 250,000 in conjunction
with a private placement offering and 225,000 to consultants for services.
The Company accounts for stock compensation under the provisions of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation". SFAS 123 provides that companies may elect to
account for employee stock options using a fair value-based method or
continue to apply the intrinsic value-based method prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25").
Under the fair value-based method prescribed by SFAS 123, all employee
stock option grants are considered compensatory. Compensation cost is
measured at the date of grant based on the estimated fair value of the
options determined using an option pricing model. The model takes into
account the stock price at the grant date, the exercise price, the expected
life of the option, the volatility of the stock, expected dividends on the
stock and the risk-free interest rate over the expected life of the option.
Under APB 25, generally only stock options that have intrinsic value at the
date of grant are considered compensatory. Intrinsic value represents the
excess, if any, of the market price of the stock at the grant date over the
exercise price of the options.
As permitted by SFAS 123, the Company accounts for these employee stock
options under APB 25, under which no compensation cost has been recognized
because the exercise price of the options was equal to or exceeded the
market price of the stock on the date of grant.
F-16
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
6. Stockholders'(deficit) equity (continued):
The following table discloses the Company's proforma net loss per share
assuming compensation cost for employee stock options had been determined
using the fair value-based method prescribed by SFAS 123 for the year
ended September 30, 1999:
Net loss:
As reported $(2,932,500)
Proforma (4,194,500)
Net loss per common share (basic and diluted):
As reported $ (0.58)
Proforma (0.83)
The fair value of each option and warrant is estimated on the date of grant
using the Black-Scholes option pricing model. The following assumptions
were used to estimate the fair value:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Expected stock price volatility 99.69% 243.08%
Expected option/warrant lives 1-5 years 1-5 years
Expected dividend yields -- --
Risk-free interest rates 4.52 - 5.94% 4.70 - 5.72%
Weighted average fair value of options/warrants granted 1.10 0.51
</TABLE>
F-17
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
7. Income taxes:
The benefit for income taxes from continuing operations is different than
the amount computed by applying the statutory federal income tax rate to
net loss before taxes. A reconciliation of income tax benefit follows:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Computed tax benefit at federal statutory rate $977,100 $480,000
Equity issuances for services (60,000) (122,000)
Change in valuation allowance (917,100) (358,000)
------------ -------------
$ -- $ --
============ =============
The provision for federal and state income taxes consisted of the
following:
1999 1998
------------ -------------
Current $ -- $ --
Deferred -- --
------------ -------------
$ -- $ --
============ =============
1999 1998
------------ -------------
The deferred tax asset consisted of the following:
Net operating loss carryforwards $1,985,300 $ 1,046,300
Valuation allowance (1,985,300) (1,046,300)
------------ -------------
Net deferred tax asset $ -- $ --
============ =============
</TABLE>
The Company has net operating loss carryforwards ("NOL's") for federal
income tax reporting purposes of approximately $5,839,300. The NOL's expire
at various times through 2014.
Included in the above NOL's are net operating loss carryforwards which may
be subject to substantial limitations in accordance with various provisions
of the Internal Revenue Code. The Company has not yet determined the amount
and nature of these limitations.
F-18
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
8. Discontinued operations:
On October 31, 1997, the Company adopted a formal plan to sell its Houston,
Texas cellular phone products store. The sale was effective as of October
31, 1997 with the buyer assuming all liabilities for products or services
entered into from November 1, 1997 forward. The assets of this operation
consisted of inventories, deposits and leasehold improvements.
For the year ended September 30, 1997, the Company estimated a loss on
disposal of the discontinued operation of $42,220 (no income tax benefit)
which included a provision for expected operating losses of $11,900 (no
income tax benefit) during the phase-out period. The actual loss on the
disposal of the assets exceeded the estimate by $5,600 (no income tax
benefit). Accordingly, the accompanying statement of operations for the
year ended September 30, 1998 includes an additional loss of $5,600.
Net sales of the discontinued operation were $23,200 for the one month
ended October 31, 1997. This amount is not included in sales in the
accompanying statement of operations for this period.
The disposal was completed upon the asset and liability exchange and the
exchange of 80,000 shares of the Company's common stock in December, 1998.
9. Related party transactions:
Revenues:
Included in the consolidated statement of operations is $50,000 in sales to
two members of the Company's Board of Directors. The sales are in the form
of license agreements whereby the licensee acquired the right to use the
Company's products and trademarks for use with their customers. The
licenses are five years in duration and require royalty payments to the
Company based upon gross sales.
Office space and computer usage:
During the year ended September 30, 1998, the Company was provided office
space and computer usage at a cost of $9,500 to the Company by the
President of the Company.
Legal fees:
Certain stockholders of the Company are affiliated with firms who currently
provide or have provided legal services to the Company in prior years.
During the years ended September 30, 1999 and 1998, fees and other expenses
charged by these firms totaled approximately $ 5,700 and $24,400,
respectively. As of September 30, 1999 and 1998, amounts due these firms
totaled $ 0 and $400, respectively.
F-19
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
10. Commitments and contingencies:
Employment agreements:
On October 1, 1998, the Company entered into employment agreements with its
President and Chief Operating Officer. Both of the new agreements are for
five years and provide for minimum salary levels, incentive bonuses, and
specified benefits. Additionally, the President and Chief Operating Officer
each received options to purchase 1,000,000 shares of common stock at a
price of $1.25 per share as part of their employment agreements. These
options vest over a five year period. The aggregate commitment for future
salaries, excluding bonuses and benefits, from these employment agreements
is $2,040,000 as of September 30, 1999.
Technology license agreement:
Xyclonyx, a wholly-owned subsidiary of the Company, has a technology
license agreement with three individuals including the Chief Operating
Officer of the Company. The agreement is for seventeen years or the life of
the patents, which ever is greater, and specifies royalties in the amount
of six percent of gross revenues subject to certain adjustments as
specified in the agreement.
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.
F-20
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
10. 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 performance under the purchase agreement.
Building lease:
During the year ended September 30, 1999, the Company began leasing office
and warehouse space under an operating lease expiring in August, 2003. The
Company has an option to extend the lease for five more years if it so
desires. Minimum future rental payments under this lease for each of the
next five years is as follows:
Year ending
September 30,
-------------------
2000 $ 192,000
2001 199,300
2002 207,700
2003 197,500
----------
$ 796,500
===========
Rent expense totaled $ 217,700 during the year ended September 30, 1999.
11. Subsequent events:
Private placement:
During the period from October 1, 1999 to December 31, 1999, the Company
raised approximately $575,000 before issuing costs, pursuant to a private
placement offering as permitted under Regulation D of the Securities Act of
1933 related to transactions not involving a public offering.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. Microbics, Inc.
Date: February 7, 2000 By /s/ Robert C. Brehm
-------------------------------
Robert C. Brehm, President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
in the capacities indicated and on February 7, 2000.
/s/ Robert C. Brehm President, Chief Executive
- ------------------------ Officer and Chairman of the Board
Robert C. Brehm
/s/ Conrad Nagel Chief Financial Officer
- ------------------------
Conrad Nagel
/s/ Mery C. Robinson Chief Operating Officer, Secretary and Director
- ------------------------
Mery C. Robinson
/s/ Stephen C. Hopkins Director
- ------------------------
Stephen C. Hopkins
/s/ Roger K. Knight Director
- ------------------------
Roger K. Knight
/s/ Robert Key Director
- ------------------------
Robert Key
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 125,400 316,600
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 68,600 0
<CURRENT-ASSETS> 216,100 326,600
<PP&E> 0 0
<DEPRECIATION> 41,300 1,600
<TOTAL-ASSETS> 483,100 443,200
<CURRENT-LIABILITIES> 770,900 206,300
<BONDS> 0 0
0 0
7,600 7,300
<COMMON> 600 400
<OTHER-SE> (301,300) 229,200
<TOTAL-LIABILITY-AND-EQUITY> 483,100 443,200
<SALES> 66,900 0
<TOTAL-REVENUES> 66,900 0
<CGS> 192,600 0
<TOTAL-COSTS> 192,600 0
<OTHER-EXPENSES> 2,702,900 1,378,200
<LOSS-PROVISION> 102,300 0
<INTEREST-EXPENSE> 1,600 34,800
<INCOME-PRETAX> (2,932,500) (1,406,200)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 (5,600)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,932,500) (1,411,800)
<EPS-BASIC> (.58) (.78)
<EPS-DILUTED> (.58) (.78)
</TABLE>
