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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________ to _____________
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Commission File No.: 0-14213
U.S. MICROBICS, INC.
(Name of small business issuer in its charter)
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Colorado 84-0990371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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5922-B Farnsworth Court
Carlsbad, California 92008
(760) 918-1860
(Address of principal executive offices and Registrant's telephone number)
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Securities registered under Section 12(b) of the Exchange Act: None
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Title of each class Name of each exchange on which registered
None None
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Securities registered under Section 12(g) of the Exchange Act: Common
Stock, $0.0001 par value per share
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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, 2000: $18,900
Aggregate market value of voting and non-voting common equity held
by non-affiliates: $8,090,250.
Common Stock, $0.0001 par value per share 11,767,638 shares outstanding
as of December 21, 2000.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format
(check one): YES /X/ NO / /
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TABLE OF CONTENTS
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PART I......................................................................................................................1
Item 1. Description of Business......................................................................................1
Item 1. Organization of Business.....................................................................................3
Item 2. Description of Property.....................................................................................22
Item 3. Legal Proceedings...........................................................................................22
Item 4. Submission of Matters to a Vote of Security Holders.........................................................23
PART II....................................................................................................................24
Item 5. Market for Common Equity and Related Shareholder Matters....................................................24
Item 6. Management's Discussion and Analysis or Plan of Operation...................................................27
Item 7. Financial Statements........................................................................................34
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure........................34
PART III...................................................................................................................34
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act...............................................................................................34
Item 10. Executive Compensation......................................................................................37
Item 11. Security Ownership of Certain Beneficial Owners and Management..............................................40
Item 12. Certain Relationships and Related Transactions..............................................................43
Item 13. Exhibits and Reports on Form 8-K...........................................................................43
SIGNATURES.................................................................................................................45
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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") is in the process of becoming an
environmental technology service provider 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") in
conjunction with sound engineering practices that provide natural solutions to
many of today's environmental problems. The Company intends to leverage the
products, the prior field applications, and manufacturing techniques developed
by the Robinsons to apply, develop, license and commercialize the Microbial
Technology for applications in soil bioremediation, water treatment, and
agricultural growth enhancement. 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 objective is to establish itself as a profitable
technology service provider (TSP) of environmental products and professional
engineering services. To achieve this objective, the Company is building an
organizational strategy based on the following five elements: (i) Packaging
proprietary technology solutions which are protected by patents, trademarks,
trade secrets, confidentiality agreements, or distribution licenses; (ii)
Developing in-house manufacturing of microbial blends using proprietary
processes yielding high valued products; (iii) Providing professional
engineering services utilizing the proprietary microbial products for guaranteed
performance projects; (iv) Targeting profitable, niche markets in soil and water
bioremediation using the patented Bio-Raptor-TM- process and MTBEctomy-TM- and
agricultural growth enhancement using Bi-AGRA-TM-; and (v) Growing the Company
revenue base using strategic alliances with companies in the targeted markets on
a global basis.
The Company's achievement of its objective is highly dependent, among
other factors, on its ability to raise the necessary capital to develop the
organizational structure necessary to manufacture,
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sell, contract and deploy the technology to customers on a global basis. The
Company intends to raise additional working capital through the sale of shares
of its Common Stock through the Swartz Institutional Financing program (see
"SWARTZ FINANCING") and/or debt and through the potential licensing of
technology distribution agreements. 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 $18,900 during the fiscal year ended
September 30, 2000. 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 has additional offices in Littleton, CO and Culiacan, Sinoloa, Mexico.
The Company's home page on the Internet is located at http://www.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:
o XyclonyX;
o West Coast Fermentation Center ("WCFC");
o Sub Surface Waste Management, Inc. ("SSWM");
o Sol Tech Corporation, d.b.a. Wasteline Performance Corporation ("Sol
Tech");
o Bio-Con Microbes ("Bio-Con"); and
o Applied Microbic Technologies, Inc. ("AMTI").
XyclonyX is the technology company maintaining the patents, trademarks
and protection mechanisms, develops the proprietary formulations for specific
applications, and performs new product research and development based on the
Microbial Technology. WCFC's primary business is to manufacture microbial
cultures that are to be sold to other subsidiaries of the Company. SSWM's core
objective is to be a profitable technology service provider for bioremediation
customers who require guaranteed performance solutions for soil and water
contamination problems using the Bio-Raptor-TM- and MTBEctomy-TM- hydrocarbon
treatment products. 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 (SSWM, Sol-Tech, Bio-Con, and AMTI) to
sell and license the technology solutions to targeted customers.
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ITEM 1. ORGANIZATION 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 and related services to specific market segments. As the public holding
company, the Company intends to coordinate the deployment of the Microbial
Technology to its subsidiaries that in turn will license the technology and sell
products and related services 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 is in the process of acquiring the capital needed 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 provides 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 2001 if additional
funds are generated from sales and/or equity/debt funding.
XYCLONYX
XyclonyX provides research, develop, formulate, protect, apply,
acquire, license and transfer its technologies, consisting of patents,
proprietary knowledge, products, processes and personnel, for hydrocarbon
impacted soil and water treatment and agricultural growth enhancement.
In May 2000 XyclonyX completed a successful pilot program that
demonstrated the efficacy of using its proprietary microbes, (in a formulation
called MTBEctomy-TM-), to treat Methyl-Tertiary-Butyl-Ether (MTBE), a chemical
compound used as a fuel additive in gasoline, which has caused widespread and
serious contamination of the nation's drinking water supplies. Successful
implementation of the treatment protocol developed by XyclonyX could help reduce
the danger that MTBE poses to human health.
While the use of MTBE as a fuel additive has helped to achieve
significant reductions in air emissions, unlike other components of gasoline,
MTBE dissolves and spreads readily in groundwater, does not degrade easily and
is difficult and costly to remove from groundwater. The U.S. Environmental
Protection Agency (EPA) is considering a limit or ban on the use of MTBE as a
fuel additive.
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In response to the growing concerns regarding MTBE and customer
requests for a cost effective, environmentally friendly alternative for MTBE
cleanup, the XyclonyX research team performed a pilot project on client MTBE
contaminated water, fine tuning the recipe of microbes required to treat the
MTBE. The sample consisted of MTBE, Benzene, Toluene, Ethylbenzene, and Xylene
(BTEX), and gasoline with concentrations over 10,000 parts per billion. Within
five days after initial microbial treatment, non-detect (ND) levels were
validated by an independent, state-certified lab.
The excellent results achieved by the research team are directly
applicable to the cleanup of MTBE contaminated soil and water using injection of
microbes to contaminated groundwater, above-ground applications where
contaminated soil is processed through U.S. Microbics' patented Bio-Raptor-TM-,
in existing tank farm storage tanks, and, where necessary, transported to a
bioreactor for offsite treatment.
SUB-SURFACE WASTE MANAGEMENT, INC.
In August of 29,2000, Bruce Beattie was named President of Sub-Surface
Waste Management, Inc. (SSWM). Mr. Beattie brings over 24 years experience in
the environmental service industry with expertise in business development,
operations and project management. In early September of 2000, under the
directions of Mr. Beattie, SSWM formed an Engineering Services Division of four
professionals which to direct, support and execute project assignments within
SSWM and provide these same services to the water treatment and agriculture
subsidiaries within U.S. Microbics. The Engineering Services Division is
headquartered in Littleton, Colorado where Mr. Behzad Mirzayi, MS, P.E., manages
the office as Chief Engineer and Executive Vice President of SSWM.
Mr. Behzad Mirzayi, MS, P.E. has over 19 years experience in
diversified areas of engineering, construction, and management. He has extensive
experience managing office and field staffs and professionals involved in
multi-discipline design and construction projects and management of profit and
loss centers. He has a diverse background in all types of management, civil,
environmental, geotechnical and structural engineering, construction management,
technical supervision analysis and design, and construction oversight, cost and
time management, risk evaluation, cost estimation and client and regulatory
interface for mining, industrial, oil and gas facilities. His major areas of
specialization include engineering design and construction management,
geotechnical and structural design, and the determination and implementation of
remedial corrective measures associated with soil and groundwater contamination
due to oil and gas industrial and mining activities.
Mr. Behzad Mirzayi, MS, P.E. is a registered Professional Engineer,
Nationally and in the States of Colorado, Montana, Nebraska, North Dakota, Utah
and Wyoming and a Licensed General Contractor in the States of Idaho and New
Mexico.
Target Markets:
SSWM will participate principally with clients, their consultants and
contractors to provide on-site in-situ and ex-situ treatment services. SSWM can
act as sub-contractor, vendor or joint-venture partner. SSWM has the following
target client base:
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Major and Regional Oil Companies,
Manufacturing & Mining Companies,
Environmental Consulting Engineers & Contractors,
Property Development Companies,
Property Management Companies,
Railroads and Utilities,
Food Processing, Feedlot and Stable Operators.
Description of Service:
SSWM has both fixed and mobile treatment capacities designed to address
the following waste streams:
Petroleum Hydrocarbons, MTBE, Chlorinated Solvents & Heavy Metals,
i.e.: Soils, Wastewater & Groundwater, both In-situ & Ex-situ,
Wastewater and Water Run-off i.e.: industrial & agricultural to meet
conservation recycling and discharge requirements, Telephone Poles & Railroad
Ties, Green Wastes, Manure, Grease & Animal Wastes.
SSWM Project Managers and Professional Engineers provide:
Engineering support for treatment system design, start-up and
operation,
Interact with Federal, State and Local Regulatory Agencies,
Interface with clients, environmental clean-up contractors, engineers
& consultants,
Oversee, manage and direct the application of treatment services.
SSWM is responding to emerging problems, such as the treatment of
gasoline releases with Methyl-Tertiary-Butyl Ether (MTBE). SSWM with support
from its sister company, XyclonyX, has successfully demonstrated the efficacy of
using its patented products to reduce MTBE concentrations in some cases to
non-detect in a matter of days.
Additional Markets Served:
Process Treatment System Optimization:
SSWM can address the needs of water, wastewater and industrial
process water treatment systems with its engineers and
microbial scientists providing system planning, design,
construction, start-up, operation and monitoring programs.
Additionally, SSWM develops small systems for rural
communities, large systems for population centers, and
specialized systems for industrial and municipal needs. SSWM
specialists have experience in upgrading and improving
existing facilities considering the costs for alternative
technologies. This often results in expanded capacity and
decreased operational expenses while producing savings in
capital investments.
Emergency Response Support
SSWM engineers and technical staff are 40 hour Hazwopper
Health & Safety trained and certified and will support
emergency spill response crews with mobile treatment
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systems such as the Bio-Raptor-TM- which in optimum soil
conditions can process and inoculate contaminated soils up to
500 tons per hour. SSWM engineers have also prepared and
implemented several Spill Prevention Control and
Countermeasure (SPCC) Plans, Stormwater Pollution Prevention
Plans, and Stormwater Management Plans.
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 and in foreign
countries to qualified technical service firms with engineering capabilities.
SSWM has delivered microbial blends and performed large-scale treatment
demonstrations this past year to remove hydrocarbons from soil at petroleum
production facilities in California. SSWM is working with clients faced with
significant impacts to soils, 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.
In October 1999 SSWM's patented Bio-Raptor-TM- process and proprietary
microbial blends were applied to soil contaminated with crude oil at a site in
Long Beach, California owned by Signal Hill Petroleum. The demonstration project
was undertaken to provide current data on the effectiveness of the
bioremediation process using the Bio-Raptor-TM- and the proprietary microbial
blends custom manufactured for client jobs. The Signal Hill site was chosen due
to its crude oil contamination presence in a monitored bio-cell. The 3,000 ton
bioremediation project was set up to measure hydrocarbon degradation rates and
times, equipment and manpower operation, throughput rates, process costs,
sampling methodology and soil morphology logistics. The application of microbial
blends was accomplished in less than three days and target results were
completed within 9 weeks.
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 is revamping its
marketing strategy from a product company to a technology solutions provider for
water and waste treatment problems.
BIO-CON MICROBES, INC.
In July of 2000, Robert Brehm, CEO of U.S. Microbics, Inc., appointed
F.L. "Gus" Olson to head Bio-Con Microbes, Inc. Mr. Olson has over 35 years of
agricultural industry experience prior to joining Bio-Con. Prior to joining
Bio-Con as Chief Executive Officer; Mr. Olson was President and CEO of CalAgra
Industries, a food processing company, GO/Western Produce and Commodities, Inc.,
a produce growing and marketing company, and Earth Resource Data Corporation, a
venture capital backed multispectral remote sensing company serving the
Agriculture and Forestry industries. In addition to his extensive experience
within the agricultural industry, Mr. Olson has developed and implemented
microbial inoculants within in his own farming operations in California,
Arizona, and Old Mexico. Olson is a graduate of the prestigious California
Agricultural Leadership program as a
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Kellogg Fellow. He received his Master's degree in Finance and his undergraduate
degree in Marketing.
On August 1, 2000 Bio-Con introduced the Bi-Agra-TM- product line that
restores the soil so it can heal itself, making agriculture sustainable. The
Bi-Agra-TM- product line of microbial soil supplements is able to restore and
enhance the soil's capability to sustain agriculture. The Bi-Agra-TM-
proprietary blends of microbes' work in the soil to increase germination rates,
accelerate growth, and enhance crop yields and quality. Bi-Agra-TM- blends have
demonstrated success in field studies carried out on sugar cane, beans,
potatoes, peppers, tomatoes, strawberries, melons, squash as well as ornamental
shrubs, trees and turf grass. As a result, the soil is able to function as it
was intended and the roots are able to extract from the soil the nutrients and
moisture that are now readily available. The crops become both disease and
insect suppressant and require less water and nitrogen based fertilizers to
sustain them.
On August 2, 2000, Bio-Con formed a 98% owned Mexican corporation
Natura Agricultura, de C.V. to serve as it's international marketing arm for
agricultural products and services based upon naturally occurring
micro-organisms and additives. Gus Olson, President of Bio-Con, appointed Rene
De S. Palomares as President of Natura Agricultura. Sr. Palomares has twenty
years experience in the manufacturing and marketing bio-rational fertilizers to
growers throughout the world. He also has extensive background in direct farming
of high value crops. Sr. Palomares is well know and respected throughout Mexico
and Latin America.
On September 7, 2000 Natura Agricultura S.A. de C.V. (Natura Ag), the
Mexican Subsidiary of Bio-Con Microbes completed the preliminary phases of
registration for the product Bi-Agra-TM- BTA 500. Bi-Agra-TM- BTA 500 is one
product in a line of proprietary soil supplements that is able to restore and
enhance the soil's capability to produce high value crops. Bi-Agra-TM- BTA 500
entered the formal testing phase with sales of the product executed under the
current registration number.
Entry into the registration process requires a comprehensive efficacy
testing program and Sonora State University's Extension Farm will be the site of
the testing trials and the efficacy performance required by Mexican Law.
Administered by Dr. Cosme Guerrero R, these trials will include comprehensive
trial testing of BTA 500 on grapes (both wine grapes and table grapes),
asparagus, tomatoes, and other vegetable crops. Due to efforts of Dr. Guerro and
his staff, Sonora State University is gaining an international reputation for
its work in bio rational approaches to soil and crop improvement.
To support the sales effort in Mexico, on December 15, 2000,
Bio-Con agreed to acquire the manufacturing equipment, formulas, labels and
products of Acidos Humicos located in Culiacan, Mexico. The assets were
incorporated as part of the Agricultura Natura, S.A. de C.V. operations.
Managed by Sr. Palomares. This acquisition gives Natura Ag a bio-rational
fertilizer manufacturing capability. Products being produced include
Penox-TM-, Fertizone-TM-, MicroVita-TM-, FertiVita-TM- and other bio-rational
fertilizers and biotics. These products will be sold internationally in
conjunction with the Bio-Con Bi-Agra-TM- microbial inoculates. Field research
has shown that combining these products with Bio-Con's microbes significantly
increases plant growth and yield. The first shipment of products from Natura
Agricultura was made in December of 2000.
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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, ongoing market research
and investigation of strategic partners.
PRODUCT PROFILE
The Company intends to license its patented technology, manufacture and
sell its proprietary blends, provide turn-key engineering services 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 the direct remediation of sub-surface soils and
groundwater regimes impacted by petroleum hydrocarbons, MTBE, heavy metals and
chlorinated solvents in 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, having been
accepted and classified by the U.S. Department of Agriculture (USDA Accession
no. AS 6.3) since 1979 as non-systemic, relatively safe microbes, the highest
level of safety authorized. In-situ applications are engineered solutions which
are effective in hard-to-reach contaminated areas and/or environmentally
sensitive locations.
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.
SERVICE PROFILE
The Engineering Services Division directs supports and executes project
assignments within SSWM and provides these same services to the water treatment
and agriculture subsidiaries within
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U.S. Microbics. SSWM mission is to provide cutting-edge environmental treatment
engineering and technology services to waste generators, their consultants and
contractors and address environmental impacts to soil, water and groundwater
regimes.
The Engineering Services Division is headquartered in Littleton,
Colorado where Robert Singer, P.E., has been appointed Director of Engineering
Services. Mr. Singer has BS in Civil Engineering from the University of Colorado
and is registered as a Professional Engineer in Colorado. Mr. Singer's expertise
encompasses both civil and environmental engineering with an emphasis in design,
permit, build and operate environmental waste clean-up treatment systems.
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 also include, insurance companies, land fill operators, farmers,
nurseries, food processors, restaurants, municipalities, state and federal
governments, golf courses, water districts, fisheries, and financial
institutions.
The Company has shipped (through December 2000) products to agriculture
customers in Mexico and SSWM captive petroleum remediation projects in
California and Scotland, U.K.
TECHNOLOGY OVERVIEW
PRODUCT LINES. The Company currently has four product lines now
supported by SSWM Engineering Services that are defined in the following table:
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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 for In-situ and Ex-situ projects
BI-AGRA-TM- Agricultural, Aquaculture and Mariculture Treatment Products, Biorational
fertilizers and Biotics, and Bio-Dynamic Products
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PATENTS. The process patents include the following: ex-situ
decontamination of hydrocarbon contaminated soil -- U.S. patent #5,039,415;
and in-situ 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
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or increase oil production. The unique collection of microbes and the specific
combinations of bacteria comprise the products to be manufactured by WCFC.
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 three fiscal years,
the Company has incurred minimal R&D expenditures relating to its activities for
microbial blends and associated processes. With the addition of SSWM Engineering
Services, new applications and microbial blends are being created to address
specific waste streams such as heavy metals. A new project feasibility test lab
was setup in 2000 in existing lab facilities.
HUMAN RESOURCES
As of December 19, 2000, the Company had 13 full-time employees and 5
full-time and part-time consultants, for a combined total of 18 employees and
consultants. The Company's personnel are employed as follows: 4 in
administrative functions; 7 in production support and manufacturing; 5 in
engineering; and 2 in sales. During fiscal year 2001, the Company intends to
hire additional consultants and employees in the areas of manufacturing,
administration, sales and marketing, and customer support. In particular, the
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 works with the following team of technical advisors to assist
with its operations:
o 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;
o 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;
o Dominic Colasito, Ph.D.--microbiologist and co-patent holder of
BIO-RAPTOR-TM- with extensive fermentatiOn and field application
experience; and
o Jack Smith--co-patent holder of BIO-RAPTOR-TM- with extensive field
experience in microbial bioremediatiOn for various applications
including agricultural use.
o Dr. Cosme Guerrero R - administrator for Sonora State University
Extension Farm in Mexico responsible for comprehensive trial testing
of Natura Ag microbial products. Due to the efforts of Dr. Guerrero
and his staff, Sonora State University is gaining an
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international reputation for its work in bio-rational approaches to
soil and crop improvement.
SALES AND MARKETING
MARKETING
With the addition of its engineering function in September of 2000, the
Company believes that it is particularly well positioned to exploit numerous
market opportunities through a controlled licensing, engineered systems 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 REPRESENTATIVES. Independent representatives 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.
OTHER. The Company intends to engage in direct advertising,
professional conference participation and humanitarian support of
environmentally responsible projects. The Company's products and services 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 Engineering Service Solutions and
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 believes that the key benefits of its products and services
based on the Microbial Technology include:
o proprietary mass production techniques that can be used in third
world countries;
o high "bug density count" offering efficient products;
o unique microbial cultures developed over multiple years;
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o utilization of naturally occurring bacteria;
o environmentally friendly products and services that meet
governmental standards and are easy to apply;
o efficient results at affordable prices;
o ease of shipment using regular carriers;
o potential for on-site growth of products for special applications;
o applications of products by low skilled workers; and
o 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
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.
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.
MANUFACTURING
The Company opened its new facility for the production of microbial
blends in September 1998 and commenced shipments and inventory build-up in
December 1998. During fiscal year 2000, the Company expanded its manufacturing
capacity with the addition of 3 operational fermentors and supplemental
equipment which increased it production capacity by 3 times over the prior year.
The Company has approximately a 3-month supply of inventory based on current
revenue projections. The production capability is located 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
2000.
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
engineering function is located in its offices in Littleton Colorado. The
Company's continued 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 to meet anticipated
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customer demand, the failure of either of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
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 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 maintaining 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 U.S. government approvals
that are needed for its products or services other than permits, and local
agency approvals, associated with the ex-situ use of the Bio-Raptor-TM- on A
specific site and in-situ use of its proprietary microbial blends. These permits
may include a conditional use permit (to compost or treat contaminated soil),
point specific discharge permits for in-situ applications 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
remediation technology services on a timely basis for specific site applications
including soil recycling centers and/or transportable Bio-Raptor-TM-
applications. Where possible, SSWM EngineerinG Services will strive to bill its
Standard Professional Engineering rates for documented time to complete site
characterization and remedial action permitting for its customers seeking
design-build-operate remediation services.
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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 two years of operating experience. The Company has
experienced annual operating losses and negative operating cash flow since its
incorporation in 1984. As of September 30, 2000, the Company had an accumulated
deficit of $9,191,000. In addition, the Company generated revenues during fiscal
year 1999 of $66,900, and had reported revenues of $18,900 for fiscal year 2000.
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:
o The price, volume and timing of product sales;
o SSWM ability to identify and secure new contract opportunities in
the coming year,
o 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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o 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;
o Changes in the Company's levels of research and development,
including the timing of any demonstration projects for regulatory
approval; and
o 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. However, SSWM projects are typically engineered
solutions where the microbial technology application is an integral component of
the service solution. In these instances, the microbial technology is under the
constant supervision of a SSWM Professional Engineer.
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
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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:
o Market acceptance;
o Environmental laws;
o Longer sales cycles;
o Difficulty in collecting accounts receivable;
o Political and economic instability;
o Reduced protection of intellectual property rights;
o Protectionist laws and business practices that favor local
competition;
o Dependence on local vendors; and
o 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.
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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,
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 and environmental service 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
intends to maintain 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.
ENGINEERING SERVICES LIABILITY. The SSWM Engineering Services are
covered under a $1M professional errors and omissions policy for the execution
of Professional Engineering Services in support of company activities. While the
Company is not aware of any claims or disputes exceeding this insured limit the
Company will continue to maintain 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
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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
engineer, manufacture, market and deliver the products and services based on the
Microbial Technology in an efficient and profitable manner. In this regard, the
Company leases 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
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, Bruce Beattie, President of SSWM and Behzad Mirzayi, MS, P.E. SSWM
Chief Engineer. 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
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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
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
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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
"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 59.33 % 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:
o Variations in anticipated or actual results of operations;
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o Announcements of new products or technological innovations by the
Company or its competitors;
o Changes in earnings estimates of operational results by analysts;
o Results of product demonstrations.
o Inability of market makers to combat short positions on the stock;
o Inability of the market to absorb large blocks of stock sold into
the market;
o Developments or disputes concerning the Company's patents,
trademarks or proprietary rights; and
o 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 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 9,361,043 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
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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
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 and since September 2000, 2,100 square feet of
administration office space in Littleton, Colorado for the SSWM Engineering
Services Division. The Company has a five-year lease commitment on the
Carlsbad facility with a five-year option and a right of first refusal on
adjacent space. The Company has a one-year lease on the Littleton facility
with an option for renewal each subsequent year. The Company believes that
these facilities should provide adequate space for the next two 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
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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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.
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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.
<TABLE>
<CAPTION>
BID AND ASK PRICES
PERIOD ENDING HIGH CLOSE LOW CLOSE
------------- ---------- ---------
<S> <C> <C>
September 30, 2000 $1.62 $0.87
June 30, 2000 $2.56 $0.75
March 31, 2000 $3.12 $1.87
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
</TABLE>
The approximate number of registered certificate holders in each class
of stock as of December 21, 2000 is as follows: Common Stock:11,767,588; Series
II Preferred:7,053; Series B Preferred:5,772; Series C Preferred:42,822; Series
D Preferred:5,425.
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, 1998 and September 30, 2000, 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 THE YEAR ENDED 2000
During February, 200 the Company issued 100,000 shares of common stock
to a consultant for services provided during the year ended September 30, 1999.
The transaction was valued at approximately $.65 per share.
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During March, 2000, the Company issued 5,000 shares of common stock
to a consultant for services provided during March, 2000. The transaction was
valued at approximately $2.38 per share.
During April, 2000, the Company issued 150,000 shares of common stock
to a consultant for services provided during the year ended September 30,1999.
The transaction was valued at approximately $.67 per share.
During May, 2000, the Company issued 10,000 shares of common stock to a
consultant for services provided during in April and May, 2000 and 70,884 shares
of common stock to a law firm for services provided during the year ended
September 30, 2000. The transactions were valued at approximately $1.56 to $1.87
per share.
During June, 2000, the Company issued 5,000 shares of common stock to a
consultant for services provided in June, 2000. The transactions were valued at
approximately $1.13 per share.
During July, 2000, the Company issued 20,000 shares of common stock
to consultants for services provided in July, 2000. The transaction was
valued at approximately $1.13 to $1.25 per share.
Also during July 2000, the Company issued 6,000 shares of common
stock to employees in lieu of cash salary payments. The transactions were
valued at approximately $1.37 per share.
During August, 2000, the Company issued 5,000 shares of common stock to
a employee in lieu of cash salary payments. The transaction was valued at
approximately $1.00 per share.
During September, 2000, the Company issued 42,875 shares of common
stock to consultants for services performed between June, 2000 and September
2000. The transaction was valued at approximately $.60 per share.
During the year ended September 30, 2000, the Company sold 200,000
shares of common 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 proceeds to the Company were $150,500.
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.
PREFERRED STOCK TRANSACTIONS
FOR THE FISCAL YEAR 1999
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.
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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 and the Company issued
2,387,826 shares of common stock in exchange of 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 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 note is short term in nature, bears interest at 10 percent per
annum, and is collateralized by the stocks. The Company is currently holding
this stock certificates and will release it upon payment of the note.
FOR THE FISCAL YEAR 2000
During November, 1999, the company issued 5,000 shares of the Series
D preferred stock to the Chief Operating Officer of the company. The stock
was granted as a bonus in October, 1998 for services rendered during the
period from August, 1997 to September, 1998. The transactions was valued at
approximately $20 per share.
During May, 2000, The Company 140 shares of Series C preferred stock
to a consultant for services. The transaction was valued at $100 per share.
During September 2000, the Company issued 1,000 shares of Series C
preferred stock to a consultant for services. The transaction was valued at
$100 per share.
Throughout the year ended September 30, 2000 certain stockholders
exercised their preferred stock conversion rights and the Company issued
3,367,355 shares of common stock in exchange for cancellation of 8.742 shares
of Series II preferred stock, 7,010 shares of Series B preferred stock,
28,275 shares of Series C preferred stock, and 4,200 shares of Series D
preferred stock.
Throughout the year ended September 30, 2000, the Company sold 23,867
shares of Series C preferred stock pursuant to a private placement offering as
provided under regulation D of the securities Act of 1935 related to
transactions not involving a public offering. The net provided to the Company
after issuing costs of $94,750 were $1,695,900. Of these sales, 1,000 shares of
Series C preferred stock were sold subject to a stock subscriptions notes
receivable. The note is short term in nature, bears interest at 10 percent per
annum, and is collateralized by the stock. The Company is currently holding this
stock certificate and will release it upon payment of the note.
Subsequent to September 30, 2000 the company has sold subject to
purchase commitment 5,870 shares of series C preferred stock at $ per share.
The net proceeds to the Company after issuance costs of $16,100 were $198,900.
SWARTZ FINANCING
On March 14, 2000, the Company entered into an investment agreement to
sell up to $35 million of the Company's common stock to Swartz Private Equity,
LLC ("Swartz")
Under the terms of the investment agreement the company periodically
may choose to sell shares of its common stock to Swartz. If the company elects
to sell shares to Swartz, then the purchase price for such shares will be the
lesser of (i) ninety-two percent (92%) of the lowest closing bid price for the
Company's common stock during the thirty days following the date that the shares
are delivered to Swartz, or (ii) the market price minus $.10 per share. In no
event will the purchase price be less than the designated minimum share price
set by the Company. The number of shares that the Company can sell to Swartz is
limited by specified amounts based upon shares that have
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traded in the market during specified periods prior to the sale. If the Company
elects not to sell shares to Swartz, then it may be obligated to pay fees to
Swartz of up to $100,00 every six months. If the investment agreement is
terminated by the Company, then the Company may be obligated to pay fees to
Swartz of up $200,000. Each time that the Company elects to sell shares to
Swartz, the Company is obligated to issue Swartz a warrant to purchase a number
of shares equal to fifteen percent (15%) of the shares sold in the transaction.
The warrant is exercisable at one hundred ten-perecnt (110%) if the market price
for such shares.
In Conjunction with the agreement, the Company registered,
20,000,000 shares of its common stock on a Securities and Exchange Commission
Form SB-2 Registration Statement.
During the year ended September 30, 2000, the Company elected to make
on slae of stock to Swartz. In the transaction 59,730 shares of common stock and
warrants to purchase 8,960 shares of common stock at $.89 per share were
issused. Net proceed to the Company were $44,800
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND 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 2000, the Company's efforts were directed to
developing its biotechnology product line, fund raising, building organizational
infrastructure and increasing the manufacturing capacity for production and
shipment of microbes for remediation of hydrocarbons, MTBE treatment and
agriculture applications. . The Company also hired Bruce Beattie as President of
Sub-Surface Waste Management (SSWM) and Gus Olson as President of Bio-Con
Microbes, Inc., (Bio-Con) both wholly owned subsidiaries. Both companies
conducted product demonstrations to show the efficacy of the microbial products
in their respective markets. as a prelude to executing revenue activities
centered around a service company rather than a product company. Individual
company activities are described below.
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U.S. MICROBICS, INC.
The U.S. Microbics activities centered on fund raising and adding key
management for execution of the operations plans of its subsidiaries, SSWM and
Bio-Con. The Company completed the SB-2/A registration of the $35 Million Swartz
Private Equity, LLC financing and has taken the first trounce of the three year
shelf registration. The Company also received shareholder approval for the 1997
reverse stock split and subsequent events (see "Approval of 1997 Stock Split")
XYCLONYX
XyclonyX established the efficacy of the MTBEctomy-TM- microbial blend
for MTBE treatment. ThiS breakthrough technology allows treatment under ten days
compared to conventional technology which can take twelve months or more.
WEST COAST FERMENTATION CENTER (WCFC)
WCFC has successfully added a major refrigeration room and power drying
facility to its manufacturing operations. In addition, its liquid manufacturing
capability has been enhanced with multiple fermentor operations implemented.
Daily manufacturing runs have commenced and microbial inventory has been
expanded significantly over the prior year.
SUB-SURFACE WASTE MANAGEMENT (SSWM)
SSWM has transformed into an operating subsidiary with Bruce Beattie as
the new president. The company is establishing itself as a niche technology
service provider of engineered solutions using conventional and natural
microbial products. It has successfully demonstrated the Bio-Raptor-TM-
technology at Signal Hill Petroleum, a major energy company, and its
MTBEctomy-TM- product for MTBE impacted groundwater, a major problem in the
United States.
BIO-CON MICROBES
Bio-Con has also transformed into a technology solutions provider in
the agricultural market in Mexico. Gus Olson was named to be president and he
has quickly established a manufacturing and sales/demonstration operation in
Mexico. A major distributor relationship has been established and, products have
been registered, and promising growth enhancement results have been experienced
by Azucar, a major sugar cane grower in Mexico.
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, 2001
The Company objective is to operate profitably in 2001 by
establishing profitable operations for SSWM in the bioremediation market and
with Bio-Con in the agricultural market in Mexico. Each of these subsidiaries
has a management team which can successfully guide them to profitable
operations. The SSWM engineering team has been working together for over 7
years and has enjoyed a successful track record with prior companies and
should bring a similar track record to SSWM. Bio-Con products have been used
in Mexico over the past two decades and with current registration and field
demonstrations with key growers, could have a successful future.
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With the new management of SSWM and Bio-Con, the Company has begun the
switch from a product-oriented company to a service and solution company
supported by a professional engineering staff. This marketing change, together
with the industry shift to "pay-for-performance" projects in both markets,
requires numerous technology demonstrations, longer marketing cycles, political
support, local environmental agency approval, and customer awareness of
alternative technologies that are "better, faster, cheaper and safer", using
mother nature's technology coupled with sound engineering principals, rather
than conventional technology. This marketing change to an alternative technology
requires a paradigm shift in thinking and each company has adopted the
"pay-for-performance" concept to help facilitate implementation of
demonstrations and related follow-on projects which should establish the
economical and environmental benefits of the Microbial technology. Based upon
the successful demonstrations and projects completed in the first quarter of the
fiscal year, both subsidiaries expect profitable projects to be granted during
the second quarter and thereafter.
U.S. Microbics, Inc. has an effective SB-2 registration statement in
effect with Swartz and intends to draw working capital from the equity line
when economically feasible. The Company anticipates that future engineering
contracts will generate profitable operations and that investors will react
accordingly to fully value the publicly traded stock. As stock prices and
volumes increase, the Swartz equity line becomes more attractive.
With additional equity capital, the Company plans to expand the SSWM
project base and the Mexico operations of Bio-Con. The Company intends to raise
additional capital to fund operations through September 2001, and anticipates
that cash generated from financings and projected revenues will enable it to
fulfill cash needs for fiscal year 2001 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.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000COMPARED TO YEAR ENDED SEPTEMBER 30, 1999,
The Company had revenues of $18,900 for fiscal year 2000 compared
with sales revenues of $66,900 during the fiscal year ended September 30,
1999. The Company incurred a net loss of $2,550,900 in fiscal year 2000
compared to a net loss of $2,932,500 in fiscal year 1999. During fiscal year
2000 the Company had limited revenues, but raised additional capital for its
biotechnology operations. The Company had no gross profit during fiscal years
2000 and 1999 due to the lack of sales.
Selling, general and administrative ("SG&A") expenses for fiscal
year 2000 totaled $2,496,800 compared to $2,775,700 in fiscal year 1999. SG&A
expenses consisted of accounting, legal, consulting, public relations,
subsidiary startup and organization. SG&A expenses also included non-cash
charges from the issuance of stock and stock options in the amounts of
$535,900 for fiscal year 2000 and $410,100 for fiscal year 1999, a
year-to-year increase of $125,860. The Company used stock in lieu of cash to
conserve its cash resources.
Interest expense for fiscal year 2000 was $16,700. Interest expense for
fiscal year 1999 was $1,600.
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As a result of the above-mentioned expenses, net losses from
operations decreased from $2,932,500 in fiscal year 1999 to $2,550,900 in
fiscal year 2000.
The Company experienced total net losses of $2,550,900 for the fiscal
year ended September 30, 2000 and total net losses of $2,932,500 for the fiscal
year ended September 30, 1999. Net loss per share decreased from a net loss per
share of $0.58 in fiscal year 1999 to a net loss per share of $0.32 in fiscal
year 2000.
There was no provision for income taxes in either fiscal year 1999
or fiscal year 2000 due to the net operating loss carry forwards from prior
years, and the likelihood that the Company would not be able to utilize these
net operating losses in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $162,900 on September 30, 2000,
compared to $125,400 for the prior fiscal year. During the fiscal year 2000, net
cash used by operating activities totaled $1,870,500 compared to $1,911,200 for
fiscal year 1999. Operating activities included payments for accounting, legal
fees and professional services.
Net cash provided by financing activities for fiscal year 2000 totaled
$1,943,500 compared to $1,987,700 for the prior fiscal year. Net cash used by
investing activities during fiscal year 2000 totaled $35,500 for the purchase of
property and equipment. The above cash flow activities provided a net cash
increase of $37,500 during fiscal year 2000 compared to a net cash decrease of
$191,200 during fiscal year 1999.
Net working capital (current assets less current liabilities) was a
negative $726,000 as of September 30, 2000 and $554,800 as of September 30,
1999. During the twelve months ended September 30, 2000, the Company raised
$1,695,900, net of placement fees of approximately $94,750 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 $900, net of the current portion of $4,900, as of
September 30, 2000, resulting from a long term equipment lease.
Total Shareholders' (deficit) increased to ($410,700) in fiscal year
2000 from ($293,100) in fiscal year 1999. Stock options increased to $1,130,900
in fiscal year 2000 from $963,400 in fiscal year 1999. Additional paid in
capital increased to $10,723,300 in fiscal year 2000 from $6,212,900 in fiscal
year 1999.
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 2001, 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
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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 2001.
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.
SIGNIFICANT ACCOUNTING ISSUES
LONG-LIVED ASSET REVIEW
The Company 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. 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.
31
<PAGE>
SUBSEQUENT EVENTS AFTER FISCAL YEAR 2000
SUB-SURFACE WASTE MANAGEMENT, INC. (SSWM)
In October 2000 SSWM completed the successful bioremediation of a
diesel-contaminated site in Arbroath, Scotland for an environmental contractor.
The Arbroath site consists of a nest of underground petroleum storage tanks in a
gravel lined cell. An inadvertent spill of diesel fuel caused the pooling of
free product that threatened to become a potential off-site release. SSWM
engineers and bio-technicians supervised the removal of free product and
administered a custom microbial blend designed to rapidly penetrate the gravel
liner and surrounding soil to remediate the remaining petroleum hydrocarbon
constituents.
In November 2000 Sub-Surface Waste Management, Inc. successfully
completed a 100 day technology demonstration of its patented Bio-Raptor ex-situ
bioremediation system for the treatment of hydrocarbon contaminated soil. SSWM
treated over 1,000 cubic yards of petroleum impacted soil for a confidential
major U.S. energy company. The client is under an administrative order to clean
up over 500,000 cubic yards of petroleum production impacted soils in a western
U.S. location. SSWM was successful in reducing over 96% of the total petroleum
hydrocarbons of concern in approximately 30 days. Further work at the site is
dependent upon the client negotiating a final clean-up limit for those
quantities of impacted soils to remain on-site once treated. The Bio-Raptor-TM-
system proved extremely efficient in removing "tar ball" materials and
inoculating soils at an average sustained rate of 500 tons per hour
In December 2000 SSWM established a formal exclusive agency
agreement with Nyhuus Environnement SARL of Nice, France to market and sell
proprietary products and services in France, Denmark, Lithuania, Estonia, and
Latvia. Nyhuus Environnement SARL is an established environmental firm in
Western Europe providing cutting-edge bioremediation treatment technology
solutions to both industry and government organizations seeking immediate
relief from impacts to soils and groundwater resources.
32
<PAGE>
BIO-CON MICROBES, INC.
In October 2000 Agricultura Natura S.A. de C.V. (Natura Ag), the
Mexican Subsidiary of Bio-Con Microbes has received a $50,000 purchase order
from Agro-Industrias for humic acid and bio rational fertilizer products which
were shipped in the first quarter FY 2001.
Agro-Industrias is one of the most important agricultural distributors
in Mexico and they have a long-standing reputation for being leaders in adopting
new technologies. Natura Ag will be working with their extensive field staff
promoting Natura Ag's proprietary line of products to growers in the state of
Sinaloa, the most productive fresh market vegetable growing area in Mexico.
These bio rational fertilizer products are designed to be part of a
growing system that will include Bi-Agra-TM- BTA 500, Bio-Con Microbe's
agricultural inoculant. By providing these nutrients and inoculants to the
micro-flora, the growing system increases root efficiency which optimizes plant
growth, increases yields, and allows for the reduction of conventional
fertilizer application. Increased root efficiency also allows reduced water
consumption and reduced soil borne disease.
In November 2000 Natura Ag, announced that it had achieved promising
growth results from its field trials on sugar cane using BTA 500, a proprietary
blend of natural microbes. Forty-five days after application of BTA 500, Natura
Ag's agronomists evaluated the crop's response to its microbial inoculant. Forty
random samples each were taken of treated and untreated newly planted sugar
cane. The results were as follows:
Height: Crowns from the treated areas averaged 15.7 mm tall whereas
crowns from the untreated areas averaged 12.75 mm tall. This was an
increase of 25.6%.
Diameter: Crowns from the treated areas averaged a diameter of 19.8 mm
while crowns from the untreated areas averaged 14.8 mm. This was an
increase of 33.7%.
Root Volume: Roots from the treated areas averaged a volume of 61 cu mm
where roots from the untreated areas averaged 42 cu mm. This is an
increase of 45% in the effective root area of the plant.
These results are verified by the field staff of Azucar de Mexico
(Mexico's 2nd largest sugar Company) and are part of an ongoing trial to
demonstrate the ability of Natura Ag's growing system to increase sugar yields.
While it is too soon to declare the trial a success, increased root mass and
increased plant size are considered important indicators of plant health and
yield potential.
Natura Ag is confident that the outcome of the trials will demonstrate
the effectiveness of its biorational-growing program. Natura Ag anticipates
future sales to sugar cane producers worldwide resulting from definitive trials
such as this.
ITEM 7. FINANCIAL STATEMENTS
Please refer to the Company's Consolidated Financial Statements and
notes thereto following.
33
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent auditors' report 1
Consolidated financial statements:
Balance sheets 2
Statements of operations 3
Statements of changes in stockholders' (deficit) equity 4
Statements of cash flows 5
Notes to financial statements 6-22
</TABLE>
<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, 2000 and
1999, 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, 2000
and 1999, 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, 2000. 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 6, 2001
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 162,900 $ 125,400
Prepaid expenses and other assets 20,200 22,100
Inventories 28,800 68,600
--------------- ---------------
Total current assets 211,900 216,100
PROPERTY AND EQUIPMENT (NOTE 2) 287,500 239,700
DEPOSITS (NOTE 3) 28,700 27,300
DEFERRED TAX ASSETS (NOTE 7) -- --
--------------- ---------------
$ 528,100 $ 483,100
=============== ===============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Note 4) $ 882,500 $ 766,000
Current portion of obligations under capital lease (Note 5) 4,900 4,900
Notes payable, related parties (Note 8) 50,500 --
--------------- ---------------
Total current liabilities 937,900 770,900
OBLIGATION UNDER CAPITAL LEASE, NET OF CURRENT PORTION (NOTE 5) 900 5,300
--------------- ---------------
Total liabilities 938,800 776,200
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTE 9) -- --
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 8,421 and 17,163
shares (aggregate liquidation preference
of $8,421 and $17,163) 800 1,700
Series B; authorized 500,000 shares; issued and outstanding
6,959 and 13,969 shares (aggregate liquidation preference
of $6,959 and $13,969) 700 1,400
Series C; authorized 50,000 shares; issued and outstanding
39,342 and 40,110 shares (aggregate liquidation preference
of $3,934,200 and $4,011,000) 3,900 4,000
Series D; authorized 50,000 shares; issued and outstanding
5,525 and 4,725 shares (no liquidation preference) 600 500
--------------- ---------------
6,000 7,600
Common stock $.0001 par value; authorized 150,000,000
shares; issued and outstanding 11,491,888 and 6,010,380 shares 1,100 600
Additional paid-in capital 10,723,300 6,212,900
Stock options and warrants 1,130,900 963,400
Treasury stock -- (33,300)
Stock subscriptions notes receivable (2,486,000) (804,200)
Deferred equity issuance costs (595,000) --
Accumulated deficit (9,191,000) (6,640,100)
--------------- ---------------
(410,700) (293,100)
--------------- ---------------
$ 528,100 $ 483,100
=============== ===============
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
2
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
REVENUES (INCLUDING $0 AND $50,000 FROM RELATED PARTIES, NOTE 9) $ 18,900 $ 66,900
COST OF REVENUES 56,900 192,600
---------------- ----------------
GROSS LOSS (38,000) (125,700)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,496,800 2,775,700
---------------- ----------------
LOSS FROM OPERATIONS (2,534,800) (2,901,400)
---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income 600 72,800
Interest expense (16,700) (1,600)
Impairment of property and equipment (Note 2) -- (102,300)
---------------- ----------------
(16,100) (31,100)
---------------- ----------------
NET LOSS BEFORE INCOME TAXES (2,550,900) (2,932,500)
PROVISION FOR INCOME TAXES (NOTE 7) -- --
---------------- ----------------
NET LOSS $ (2,550,900) $ (2,932,500)
================ ================
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) $ 0.32 $ 0.58
================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,966,052 5,084,676
================ ================
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
3
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
--------------------- -------------------- PAID-IN OPTIONS AND TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS STOCK
--------- --------- ---------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1998 73,217 $ 7,300 3,447,554 $ 400 $ 3,068,000 $ 868,800 $ --
Conversion of preferred stock (Note 6) (29,636) (3,000) 2,387,826 200 2,800 -- --
Issuance of stock options and warrants in
exchange for services (Note 6) -- -- -- -- -- 258,300 --
Exercise of stock options and warrants (Note 6) -- -- 170,000 -- 368,200 (289,000)
Issuance of stock and stock options in private
placement (Note 6) 29,597 3,000 -- -- 2,417,700 330,000 --
Issuance of stock in exchange for services
(Note 6) 2,789 300 5,000 -- 151,500 -- --
Expiration of stock options and warrants (Note 6) -- -- -- -- 204,700 (204,700) --
Return of shares issued (Note 6) -- -- -- -- -- -- (33,300)
Net loss for the year -- -- -- -- -- -- --
--------- --------- ---------- --------- ----------- ----------- --------
BALANCE, SEPTEMBER 30, 1999 75,967 7,600 6,010,380 600 6,212,900 963,400 (33,300)
Conversion of preferred stock (Note 6) (48,227) (4,800) 3,367,355 400 4,400 -- --
Exercise of stock options and warrants (Note 6) 2,500 200 1,473,000 100 2,023,900 (436,200) --
Issuance of stock in private placement (Note 6) 23,867 2,400 200,000 -- 1,944,000 -- --
Issuance of stock in exchange for services (Note 6) 6,140 600 414,759 -- 535,300 -- --
Expiration of stock options and warrants (Note 6) -- -- -- -- 400 (400) --
Retirement of treasury stock (Note 6) -- -- (33,336) -- (33,300) -- 33,300
Issuance of warrants pursuant to equity line
(Note 6) -- -- -- -- -- 595,000 --
Issuance of stock and warrants through equity line
(Note 6) -- -- 59,730 -- 35,700 9,100 --
Net loss for the year -- -- -- -- -- -- --
--------- --------- ---------- --------- ----------- ----------- --------
BALANCE, SEPTEMBER 30, 2000 60,247 $ 6,000 11,491,888 $ 1,100 $10,723,300 $1,130,900 $ --
========= ========= ========== ========= =========== =========== ========
STOCK TOTAL
SUBSCRIPTIONS DEFERRED EQUITY ACCUMULATED STOCKHOLDERS'
NOTES RECEIVABLES ISSUANCE COSTS DEFICIT (DEFICIT) EQUITY
----------------- --------------- ----------- ----------------
BALANCE, SEPTEMBER 30, 1998 $ -- $ -- $(3,707,600) $ 236,900
Conversion of preferred stock (Note 6) -- -- -- --
Issuance of stock options and warrants in
exchange for services (Note 6) -- -- -- 258,300
Exercise of stock options and warrants (Note 6) -- -- -- 79,200
Issuance of stock and stock options in private
placement (Note 6) (804,200) -- -- 1,946,500
Issuance of stock in exchange for services
(Note 6) -- -- -- 151,800
Expiration of stock options and warrants (Note 6) -- -- -- --
Return of shares issued (Note 6) -- -- -- (33,300)
Net loss for the year -- -- (2,932,500) (2,932,500)
----------------- --------------- ------------- ----------------
BALANCE, SEPTEMBER 30, 1999 (804,200) -- (6,640,100) (293,100)
Conversion of preferred stock (Note 6) -- -- -- --
Exercise of stock options and warrants (Note 6) (1,581,800) -- -- 6,200
Issuance of stock in private placement (Note 6) (100,000) -- -- 1,846,400
Issuance of stock in exchange for services (Note 6) -- -- -- 535,900
Expiration of stock options and warrants (Note 6) -- -- -- --
Retirement of treasury stock (Note 6) -- -- -- --
Issuance of warrants pursuant to equity line
(Note 6) -- (595,000) -- --
Issuance of stock and warrants through equity line
(Note 6) -- -- -- 44,800
Net loss for the year -- -- (2,550,900) (2,550,900)
----------------- --------------- ----------- ----------------
BALANCE, SEPTEMBER 30, 2000 $ (2,486,000) $ (595,000) $(9,191,000) $ (410,700)
================= =============== =========== ================
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,550,900) $ (2,932,500)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 52,700 39,700
Stock, stock options, and warrants in exchange for services 535,900 410,100
Impairment of property and equipment -- 102,300
Decrease (increase) in:
Prepaid expenses and other assets 1,900 (12,100)
Inventories (25,200) (68,600)
Deposits (1,400) (9,800)
Increase (decrease) in:
Accounts payable and accrued liabilities 116,500 559,700
---------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (1,870,500) (1,911,200)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (35,500) (267,700)
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (35,500) (267,700)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of obligation under capital lease (4,400) (4,700)
Proceeds from notes payable, related parties 50,500 --
Issuance of preferred stock and stock
options in private placements 1,846,400 1,946,500
Issuance of stock and warrants through
equity line 44,800 --
Exercise of stock options 6,200 45,900
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,943,500 1,987,700
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 37,500 (191,200)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 125,400 316,600
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 162,900 $ 125,400
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ -- $ --
================ ================
Cash paid for interest $ 4,900 $ 1,600
================ ================
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) $ 4,400 $ 2,800
================ ================
Transfer of inventory to property and equipment $ 65,000 $ --
================ ================
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements
5
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
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 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.
During the year ended September 30, 1999, the Company created a subsidiary,
Applied Microbic Technology, Inc. Applied Microbic Technology's primary
business is to license customers to use microbial blends for oil
remediation applications.
During the year ended September 30, 2000, the Company created two
subsidiaries: Natura Agricultura, S.A. DE C.V. and Proleedores Laborales
Por Contrato, S.A. DE C.V. Both companies are domiciled in the country of
Mexico and are 98 percent owned by Bio-Con Microbes and 2 percent owned
by U.S. Microbics, Inc. The purpose of these subsidiaries is to serve as
the Company's international marketing arm for agricultural products and
services. Neither subsidiary had significant operations during the year
ended September 30, 2000.
The Company has experienced losses of $2,550,900 and $2,932,500 for the
years ended September 30, 2000 and 1999, respectively. Additionally, the
Company had a net stockholder's deficit of $410,700 as of September 30,
2000. The Company is planning on raising additional capital through the
issuance of additional stock in a private placement or public offering
and through its equity line (See Note 6). 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.
6
<PAGE>
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.
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 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:
In accordance 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.
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.
7
<PAGE>
Deferred equity issuance costs:
During the year ended September 30, 2000, the Company entered into an
agreement with Swartz Private Equity, LLC (See Note 6). In conjunction
with entering into the agreement, the Company granted warrants to
purchase 250,000 shares of the Company's common stock to Swartz Private
Equity, LLC. The cost of the warrants, as determined by utilizing the
Black-Scholes option pricing model, will be amortized against additional
paid-in capital as the Company utilizes the equity line.
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 2000 and 1999, 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 and notes payable,
related parties at September 30, 2000 and 1999 approximates fair value.
Revenue recognition:
Revenue is recognized at the time the product is shipped to or picked up by
the customer.
8
<PAGE>
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
2000 1999
----------------- ----------------
<S> <C> <C>
Office furniture and equipment $ 130,200 $ 128,300
Leasehold improvements 19,400 17,700
Production equipment 221,300 135,000
----------------- ----------------
370,900 281,000
Less accumulated depreciation (83,400) (41,300)
----------------- ----------------
$ 287,500 $ 239,700
================= ================
</TABLE>
Depreciation expense for the year ended September 30, 2000 and 1999 was
$52,700 and $39,700 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.
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.
3. DEPOSITS:
Deposits at September 30, 2000 and 1999 consisted of security deposits on
the Company's building leases, a utility company deposit and a state
sales and use tax deposit.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
2000 1999
----------------- ----------------
<S> <C> <C>
Accounts payable $ 335,000 $ 266,500
Accrued expenses:
Interest 11,800 --
Salaries, wages, vacation, and related taxes 385,000 273,300
Amounts due to employees 76,000 --
Other 74,700 226,200
----------------- ----------------
$ 882,500 $ 766,000
================= ================
</TABLE>
9
<PAGE>
5. OBLIGATION UNDER CAPITAL LEASE:
The Company leases certain production equipment under a capital lease which
runs through the calendar 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 2000. 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 2,
are as follows at September 30, 2000:
<TABLE>
<S> <C>
Production equipment $ 21,200
Less accumulated depreciation (5,300)
----------------
$ 15,900
================
</TABLE>
At September 30, 2000, the future minimum payments under the capital lease
consisted of the following:
<TABLE>
<S> <C>
2001 $ 5,800
2002 1,000
----------------
Total minimum lease payments 6,800
Less amount representing interest (1,000)
----------------
Present value of future minimum lease payments 5,800
Less current portion 4,900
----------------
Obligations under capital lease, net of current portion $ 900
================
</TABLE>
The interest charged to expense for the capital lease for the years ended
September 30, 2000 and 1999 was $800 and $600, respectively. The
depreciation charged to expense for the capital lease for the years ended
September 30, 2000 and 1999 was $3,000 and $2,300, respectively.
6. STOCKHOLDERS'(DEFICIT) EQUITY:
Equity line:
On March 14, 2000, the Company entered into an investment agreement to sell
up to $35 million of the Company's common stock to Swartz Private Equity,
LLC ("Swartz").
10
<PAGE>
Under the terms of the investment agreement the Company periodically may
choose to sell shares of its common stock to Swartz. If the Company
elects to sell shares to Swartz, then the purchase price for such shares
will be the lesser of (i) ninety-two percent (92%) of the lowest closing
bid price for the Company's common stock during the thirty days following
the date that the shares are delivered to Swartz, or (ii) the market
price minus $.10 per share. In no event will the purchase price be less
than the designated minimum share price set by the Company. The number of
shares that the Company can sell to Swartz is limited by specified
amounts based upon shares that have traded in the market during specified
periods prior to the sale. If the Company elects not to sell shares to
Swartz, then it may be obligated to pay fees to Swartz of up to $100,000
every six months. If the investment agreement is terminated by the
Company or by Swartz for certain enumerated reasons, including breach of
the investment agreement by the Company, then the Company may be
obligated to pay fees to Swartz of up to $200,000. Each time that the
Company elects to sell shares to Swartz, the Company is obligated to
issue Swartz a warrant to purchase a number of shares equal to fifteen
percent (15%) of the shares sold in the transaction. The warrant is
exercisable at one hundred ten percent (110%) of the market price for
such shares.
Inconjunction with the agreement, the Company registered 20,000,000 shares
of its common stock on a Securities and Exchange Commission Form SB-2
Registration Statement.
During the year ended September 30, 2000, the Company elected to make one
sale of stock to Swartz. In the transaction, 59,730 shares of common
stock and warrants to purchase 8,960 shares of common stock at $.89 per
share were issued. Net proceeds to the Company were $44,800.
The investment agreement with Swartz Private Equity, LLC specifies that the
Company cannot sell equity securities for cash during the period from the
date of the agreement (March, 2000) until 90 days after the termination
of the agreement without written approval from Swartz. In February, 2000,
the Company entered into an agreement to sell 13,000 shares of Series C
preferred stock for $1,250,000 to an individual pursuant to a private
placement. During the period from July, 2000 to September, 2000 this
individual assigned certain of his rights to purchase this stock to other
individuals and these individuals purchased this stock. The total of
these transactions was 11,500 shares and $547,500, before issuing costs.
Additionally, during the period from April, 2000 to June, 2000 the
Company sold 2,167 shares of Series C preferred stock for $191,250,
before issuing costs, pursuant to a private placement. The Company does
not believe any violations of the agreement have occurred as the sales
commitment transaction was entered into prior to the investment agreement
and the other sales pursuant to a private placement were prior to the
effective date (July, 2000) of the registration statement.
As of January, 2001, the Company had not made additional sales of stock to
Swartz other than the shares sold as described above. As such, in
accordance with the terms of the investment agreement, the Company could
be obligated to pay fees in the amount of approximately $95,000 to
Swartz.
11
<PAGE>
Reverse stock split:
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. In February, 2000
these conversion restrictions were removed.
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 February, 2000 these conversion restrictions were removed.
12
<PAGE>
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,
2000, there were 8,421 shares of Series II preferred stock, 6,959 shares
of Series B preferred stock, 39,342 shares of Series C preferred stock,
and 5,525 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 4,605,705 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.
Preferred stock transactions during the year ended September 30, 2000:
During November, 1999, the Company issued 5,000 shares of the Series D
preferred stock to the Chief Operating Officer of the Company. The stock
was granted as a bonus in October, 1998 for services rendered during the
period from August, 1997 to September, 1998. The transaction was valued
at approximately $20 per share.
13
<PAGE>
During May, 2000, the Company issued 140 shares of Series C preferred stock
to a consultant for services. The transaction was valued at approximately
$100 per share.
During September, 2000, the Company issued 1,000 shares of Series C
preferred stock to a consultant for services. The transaction was valued
at approximately $100 per share.
Throughout the year ended September 30, 2000, certain stockholders
exercised their preferred stock conversion rights and the Company issued
3,367,355 shares of common stock in exchange for cancellation of 8,742
shares of Series II preferred stock, 7,010 shares of Series B preferred
stock, 28,275 shares of Series C preferred stock, and 4,200 shares of
Series D preferred stock.
Throughout the year ended September 30, 2000, the Company sold 23,867
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 $94,750 were $1,695,900. Of these
sales, 1,000 shares of Series C preferred stock were sold subject to a
stock subscription note receivable. The note is short term in nature,
bears interest at 10 percent per annum, and is collateralized by the
stock. The Company is currently holding this stock certificate and will
release it upon payment of the note.
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 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 are collateralized by
the stock. The Company is currently holding these stock certificates and
will release them upon payment of the notes.
14
<PAGE>
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, 2000:
During February, 2000, the Company issued 100,000 shares of common stock to
a consultant for services provided during the year ended September 30,
1999. The transaction was valued at approximately $.65 per share.
During March, 2000, the Company issued 5,000 shares of common stock to a
consultant for services provided during March, 2000. The transaction was
valued at approximately $2.38 per share.
During April, 2000, the Company issued 150,000 shares of common stock to a
consultant for services provided during the year ended September 30,
1999. The transaction was valued at approximately $.67 per share.
During May, 2000, the Company issued 10,000 shares of common stock to a
consultant for services provided in April and May, 2000 and 70,884 shares
of common stock to a law firm for services provided during the year ended
September 30, 2000. The transactions were valued at approximately $1.56
to $1.87 per share.
During June, 2000, the Company issued 5,000 shares of common stock to a
consultant for services provided in June, 2000. The transaction was
valued at approximately $1.13 per share.
During July, 2000, the Company issued 20,000 shares of common stock to
consultants for services provided in July, 2000. The transactions were
valued at approximately $1.13 to $1.25 per share.
Also during July, 2000, the Company issued 6,000 shares of common stock to
employees in lieu of cash salary payments. The transactions were valued
at approximately $1.37 per share.
During August, 2000, the Company issued 5,000 shares of common stock to an
employee in lieu of cash salary payments. The transaction was valued at
approximately $1.00 per share.
During September, 2000, the Company issued 42,875 shares of common stock to
consultants for services performed between June, 2000 and September,
2000. The transactions were valued at approximately $.60 per share.
15
<PAGE>
During the year ended September 30, 2000, the Company sold 200,000 shares
of common 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 were
$150,500.
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.
Treasury stock:
The Company held 33,336 shares of common stock in treasury at September 30,
1999 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. The treasury stock was
retired during the year ended September 30, 2000.
Stock options and warrants:
The Company issued options and warrants during the years ended September
30, 2000 and 1999 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:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS
OUTSTANDING
------------------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------------- ---------------
<S> <C> <C>
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
Granted 603,960 1.41
Exercised (1,723,000) 0.98
Expired (5,000) 20.00
--------------- ---------------
Balance, September 30, 2000 4,436,960 $ 2.15
=============== ===============
Exercisable, September 30, 2000 3,036,960 $ 2.56
=============== ===============
</TABLE>
16
<PAGE>
The following is a summary of options and warrants outstanding at September
30, 2000:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS
OPTIONS AND WARRANTS OUTSTANDING EXERCISABLE
----------------------------------------------------------------------- ------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE EXERCISE PRICE
------------------- --------------- ---------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
$ 0.89 8,960 5.00 $ 0.89 8,960 $ 0.89
1-5 4,320,000 2.98 1.94 2,920,000 2.27
10 103,000 2.92 10.00 103,000 10.00
20 5,000 2.00 20.00 5,000 20.00
--------------- ---------------- --------------- ------------------ ---------------
4,436,960 2.98 $ 2.15 3,036,960 $ 2.56
=============== ================ =============== ================== ===============
</TABLE>
Options and warrants granted during the year ended September 30, 2000
consisted of 345,000 to employees and 258,960 in conjunction with the
Company's equity line.
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.
Of the 1,723,000 options exercised during the year ended September 30,
2000, 1,425,000 were exercised by the Company's President, Chief
Operating Officer, Chief Financial Officer and Vice President subject to
stock subscriptions notes receivable. The notes are short term in nature,
bear interest at seven 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. No interest will be charged on
the notes if they are paid in full by December 31, 2003. Additionally
250,000 options exercised during the year ended September 30, 2000 were
exercised subject to stock subscriptions notes receivable and were issued
as 2,500 shares of Series C preferred stock. The notes are short term in
nature, bear interest at 10 percent per annum, and are collateralized by
the stock. The Company is holding these stock certificates and will
release them upon payment of the notes.
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").
17
<PAGE>
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.
Aspermitted 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.
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, 2000:
<TABLE>
<S> <C>
Net loss:
As reported $ (2,550,900)
Proforma (3,357,700)
Net loss per common share (basic and diluted):
As reported $ (0.32)
Proforma (0.42)
</TABLE>
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>
2000 1999
---------------- ----------------
<S> <C> <C>
Expected stock price volatility 194-245% 99%
Expected option/warrant lives 1-5 years 1-5 years
Expected dividend yields -- --
Risk-free interest rates 5.95 - 6.60% 4.52 - 5.94%
Weighted average fair value of options/warrants granted $ 1.53 $ 1.10
</TABLE>
18
<PAGE>
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>
2000 1999
---------------- ----------------
<S> <C> <C>
Computed tax benefit at federal statutory rate $ 867,300 $ 977,100
Equity issuances for services -- (60,000)
Change in valuation allowance (867,300) (917,100)
---------------- ----------------
$ -- $ --
================ ================
The provision for federal and state income taxes consisted of the
following:
<CAPTION>
2000 1999
----------------- ------------------
Current $ -- $ --
Deferred -- --
----------------- ------------------
$ -- $ --
================= ==================
<CAPTION>
2000 1999
----------------- ------------------
The deferred tax asset consisted of the following:
Net operating loss carryforwards $ 3,082,000 $ 2,214,700
Valuation allowance (3,082,000) (2,214,700)
------------------ ------------------
Net deferred tax asset $ -- $ --
================== ==================
</TABLE>
The Company has net operating loss carryforwards ("NOL's") for federal
income tax reporting purposes of approximately $9,064,600. The NOL's
expire at various times through 2015.
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.
8. RELATED PARTY TRANSACTIONS:
Notes payable:
During the year ended September 30, 2000, the Company received loans from
its president's profit sharing plan, a member of the Board of Directors,
and the mother of the Chief Operating Officer. Two of the notes are
unsecured, payable on demand, and bear interest at 12 percent per annum.
The other, in the amount of $20,000, is secured by the Company's property
and equipment and inventory, is payable on demand, and bears interest at
10 percent per annum.
19
<PAGE>
Inventory purchases:
During the year ended September 30, 2000, the Company purchased
approximately $30,800 in inventory related products from a company
affiliated with the Chief Operating Officer.
Revenues:
Included in the consolidated statement of operations for the year ended
September 30, 1999 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.
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 year ended September 30, 1999, fees and other expenses charged
by these firms totaled approximately $5,700.
9. COMMITMENTS AND CONTINGENCIES:
Employment agreements:
OnOctober 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 $1,620,000 as of September 30, 2000.
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.
20
<PAGE>
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
formed a special independent committee of the Board of Directors to
investigate these claims and believes them to be meritless. 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.
Purchase commitments:
In September, 2000, the Company agreed to acquire certain assets, in the
amount of $95,000, from a Mexican Company.
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.
Off-balance-sheet credit risk:
The Company has cash and cash equivalents on deposit with a financial
institution which exceeds the federally insured amounts by approximately
$119,800 at September 30, 2000.
Building lease:
During the year ended September 30, 1998, 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. During the year ended September 30, 2000, the Company began
leasing office space for its engineering staff under an operating lease
expiring in September, 2003. Minimum future rental payments under these
leases for each of the next five years is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
------------------
<S> <C>
2001 $ 231,300
2002 239,700
2003 229,500
----------------
$ 700,500
================
</TABLE>
Rent expense totaled $230,200 during the year ended September 30, 2000.
21
<PAGE>
10. SUBSEQUENT EVENTS:
During the period from October 1, 2000 to December 31, 2000, the Company
raised approximately $215,000 before issuing costs, pursuant to the sales
commitment described in Note 6.
22
<PAGE>
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.
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
December 21, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert C. Brehm 52 President, Chief Executive Officer and Chairman of the Board
Mery C. Robinson 44 Chief Operating Officer, Secretary and Director
Roger K. Knight 77 Vice President, Director
Conrad Nagel 59 Chief Financial Officer
Bruce Beattie 46 President, Sub Surface Waste Management, Inc.
Bezhad Mirzayi 44 Executive Vice President and Chief Engineer, Sub Surrface
Management Inc.
F.L. "Gus"Olson 63 President, Bio-Con Microbes
Rene de S. Palomares 69 President of Natura Agricultura, S.A. de C.V.
Steven C. Hopkins 58 Director
Robert Key 55 Director
</TABLE>
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
34
<PAGE>
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
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.
BRUCE BEATTIE has over 23 years experience in the environmental service
industry with expertise in business development, operations and project
management. His career spans the introduction of breakthrough treatment
technology for the sub surface remediation of chlorinated solvents, executive
level profit center turn-around management and was a pioneer in the development
of "Brownfield" redevelopment solutions for two nationally recognized
environmental firms. Mr. Beattie became President of Sub Surface Waste
Management, Inc.,. in August of 2000.
BEZHAD MIRZAYI has over 18 years experience in diversified areas of
engineering, construction, and management. He has extensive experience managing
office and field staffs and professionals involved in multi-discipline design
and construction projects and management of profit and loss centers. He has a
diverse background in all types of management, civil, environmental,
geotechnical and structural engineering, construction management, technical
supervision analysis and design, and construction oversight, cost and time
management, risk evaluation, cost estimation and client and regulatory interface
for mining, industrial, oil and gas facilities. Mr. Mirzayi has served as
Executive Vice President and Chief Engineer for Sub Surface Waste Management
Inc., since September of 2000.
F.L. "GUS" OLSON has over 35 years of agricultural industry experience
prior to joining Bio-Con. Mr. Olson has developed and implemented microbial
inoculates within his own farming operations in California, Arizona and Old
Mexico. Mr. Olson was appointed President of Bio-/con Microbes in July of 2000.
RENE DE S. PALAMARES, President of Natura Agricultra, S.A. de C.V. has
twenty years experience in the manufacturing and marketing bio-rational
fertilizers to growers throughout the world. He also has extensive background in
direct farming of high value crops. Sr. Palomares is well know and respected
throughout Mexico and Latin America.
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.
35
<PAGE>
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.
36
<PAGE>
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, 2000, 1999 and 1998. The
named executive officers (the "Named Executive Officers") are the Company's
Chief Executive Officer, regardless of compensation level, and the other
executive officers of the Company who each received in excess of $100,000 in
total annual salary and bonus for fiscal year 2000. Compensation is shown in the
following table:
37
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS
----------------------------------------------------------------- -----------------------------
SECURITIES
NAME AND PRINCIPAL RESTRICTED STOCK UNDERLYING OTHER ANNUAL ALL OTHER
POSITION FISCAL YEAR SALARY ($) AWARDS ($) OPTIONS/SARS (#) COMPENSATION COMPENSATION
-------- ----------- ---------- ---------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Brehm(1) 2000 222,324 -- -- --
President 1999 191,166 90,000(3) -- -- --
1998 75,675 -- -- -- --
Mery C. Robinson(2) 2000 222,324 -- -- --
Chief Operating 1999 191,166 80,000(4) -- -- --
Officer 1998 55,000 -- -- -- --
</TABLE>
--------------------
(1) Mr. Brehm's employment with the Company commenced in October 1, 1998
(2) Ms. Robinson's employment with the Company commenced in October 1, 1998
(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 $20.00 per share in May 1998. In addition, on October
19, 1998, the Board of Directors authorized the issuance of an
additional 5,000 shares of Series D Preferred Stock to Ms. Robinson as
compensation. These shares were issued in March of 2000.
STOCK OPTION GRANTS
There were no grants of stock options to the Named Executive Officers
during the fiscal year ended September 30, 2000.
38
<PAGE>
OPTION EXERCISES IN FISCAL YEAR 2000
Set forth below is information with respect to exercises of stock
options by the Named Executive Officers during fiscal year 2000 and the fiscal
year-end value of all unexercised stock options held by such persons.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END 09/30/00 FISCAL YEAR-END ($)
------------------------------- -------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Brehm 725,000 656,995 950,000 700,000 - -
Mery C. Robinson 600,000 543,720 950,000 700,000 - -
</TABLE>
----------------------
(1) Based on the closing price of $0.91 for the shares of Common Stock of
the Company traded on the OTC Bulletin Board as of September 30, 2000.
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
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.
39
<PAGE>
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 December 21, 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 Officers 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.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT(1) PERCENT
------------------------------------ --------- -------
<S> <C> <C>
Robert C. Brehm 3,433,612 (2) 27.00%
President, Chief Executive Officer and
Chairman of the Board
Mery C. Robinson 3,375,000 (3) 25.53%
Chief Operating Officer, Secretary and
Director
Stephen Hopkins 800,000(4) 6.68%
Director
Roger K. Knight 598,325(5) 5.02%
Director
Conrad Nagel 252,860(6) 2.13%
Chief Financial Officer
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT(1) PERCENT
------------------------------------ --------- -------
<S> <C> <C>
Robert Key 50,000 (7) .42%
Director
Bruce Beattie 150,000 (8) 1.26%
President, SSWM
Management
Bezhad Mirzay 150,000 (9) 1.26%
Chief Executive Officer, SSWM
Floyd "Gus" Olson 14,375 (10) .12%
President Bio-Con Microbes, Inc.
Rene de S. Palamares 28,500 (11) .24%
President, Natura Agrilcultura
All Officers and Directors 8,852,672 (12) 59.33%
As a group (6 persons)
Other 5% Shareholders of any class of Stock:
Scott Sabins 958,334 (13) 7.83%
514 Avenida La Costa
San Clemente, CA 92672
John Feighner 900,000 (14) 7.40%
P.O. Box 1875
Rancho Santa Fe, CA 92067
Cameron Karg 399,950 (15) 3.34%
17 North. La Senda
Laguna Beach, CA 92677
Marc L. Baker 400,000 (16) 3.31%
3389 Sheridan Street PMB254
Hollywood, FL 33021
Michael Knowles 308,167 (17) 2.55%
P.O. Box 2053
Rancho Santa Fe, CA 92067
Patrick D. Kirk 270, 000 (18) 2.24%
P.O. Box 1112
Del Mar, CA 92014
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT(1) PERCENT
------------------------------------ --------- -------
<S> <C> <C>
Ronald G. Kirk 258,667 (19) 2.15%
P.O. Box 21112
Del Mar, CA 92014
Gary K. Rasmussen
23852 Fairgreens East 121,000 (20) 1.02%
Laguna Niguel, CA 92677
</TABLE>
------------------
(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 December 21, 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 of Common Stock owned by Robert C. Brehm
Consulting, Inc., of which Robert C. Brehm is the President; and (ii)
950,000 shares of Common Stock issuable under stock options exercisable
within 60 days of December 21, 2000.
(3) Includes: (i) 5,000 shares of Series D Preferred Stock convertible into
500,000 shares of Common Stock; and (ii) 950,000 shares issuable of Common
Stock under stock options exercisable within 60 days of December 21, 2000.
(4) Includes: 200,000 shares of Common Stock issuable under stock options
exercisable within 60 days of December 21, 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 December 21, 2000.
(6) Includes 100,000 shares of Common Stock issuable under stock options
exercisable within 60 days of December 21, 2000.
(7) Consists of 50,000 shares of Common Stock.
(8) Consists of 150,000 shares of Common Stock issuable under stock options
exercisable within 60 days of December 21, 2000.
(9) Consists of 150,000 shares of Common Stock issuable under stock options
exercisable within 60 days of December 21, 2000.
(10) Consists of 14,375 shares of Common Stock.
42
<PAGE>
(11) Consists of 28,500 shares of Common Stock.
(12) Includes 3,153,325 shares issuable under stock options, warrants or
convertible securities held by directors and executive officers
exercisable or convertible within 60 days of December 21, 2000.
(13) Consists of (i) 3,081 shares of Series C Preferred Stock convertible into
308,100 shares of Common Stock and (ii) 166,667 shares of Common Stock
issuable under stock options exercisable within 60 days of December 21,
2000.
(14) Consists of 9,000 shares of Series C Preferred Stock convertible into
900,000 shares of Common Stock.
(15) Includes 175,000 shares of Common Stock issuable under stock options
exercisable within 60 days of January 10, 2000.
(16) Includes (i) 500 shares of Series C Preferred Stock convertible into
50,000 shares of Common stock owned by Cavalier Securities, an affiliated
company of Marc L. Baker, and (ii) 2,500 shares of Series C Preferred
Stock convertible into 250,000 shares of Common Stock.
(17) Consists of 3,081.67 shares of Series C Preferred Stock convertible into
308,167 shares of Common Stock.
(18) Consists of 2,700 shares of Series C Preferred Stock convertible into
270,000 shares of Common Stock.
(19) Consists of 2,586.67 shares of Series C Preferred Stock convertible into
258,667 shares of Common Stock.
(20) Includes, 394.17 shares of Series C Preferred Stock convertible into
39,417 shares of Common Stock.
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.
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.
43
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
3.1(4) -- Articles of Incorporation, as amended
3.2(4) -- Bylaws, as amended
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
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
</TABLE>
------------------
(1) Incorporated by reference to the similarly described exhibit included with
the registrant's Current Report on Form 10-KSB filed on January 16, 2000.
(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.
(4) Incorporated by reference to the similarly described exhibit included with
the registrant's Current Report on Form 10-KSB filed on February 7, 2000.
44
<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: January 16, 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.
<TABLE>
<S> <C>
/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>
45
