CleanTech Biofuels, Inc. - Quarter Report: 2019 March (Form 10-Q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _________

 

Commission file number 333-145939

 

CLEANTECH BIOFUELS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware	33-0754902
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7386 Pershing Ave., St. Louis, Missouri	63130
(Address of principal executive offices)	(Zip Code)

 

(Registrant's telephone number): (314) 802-8670

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	CLTH	OTC

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [✔] No [   ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

Yes [✔] No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [   ]	Accelerated filer [   ]
Non-accelerated filer [✔]	Smaller reporting company [✔]
Emerging growth company [   ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

[   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [✔]

 

As of May 13, 2019, 99,333,409 shares of the Company's common stock were outstanding.

 

 

 

 

 

CLEANTECH BIOFUELS, INC.

TABLE OF CONTENTS

 

 

		PAGE
PART I	Financial Information	3
Item 1	Consolidated Financial Statements	3
	Consolidated Balance Sheets – March 31, 2019 and December 31, 2018	3
	Consolidated Statements of Operations – Three months ended March 31, 2019 and 2018	4
	Consolidated Statements of Changes in Stockholders’ Equity (Deficit) – March 31, 2019	5
	Consolidated Statements of Cash Flows – Three months ended March 31, 2019 and 2018	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4	Controls and Procedures	29
PART II	Other Information	30
Item 1	Legal Proceedings	30
Item 1A	Risk Factors	30
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3	Defaults upon Senior Securities	31
Item 4	Mine Safety Disclosures	31
Item 5	Other Information	31
Item 6	Exhibits	31
Signatures		32

 

 

 

		(unaudited)				(audited)
		March 31,				December 31,
		2019				2018
ASSETS
Current Assets:
Cash and cash equivalents		$	20,999			$	11,057
Prepaids and other current assets			30,251				41,651
			51,250				52,708
Property and equipment, net			-				-
Non-Current Assets:
Technology license			1,569,250				1,569,250
Patents			600,000				600,000
Total Assets		$	2,220,500			$	2,221,958
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	416,326			$	422,053
Accrued interest			1,482,889				1,440,103
Accrued payroll and professional fees			2,023,571				1,975,724
Notes payable, net			3,244,360				3,197,152
Total Current Liabilities			7,167,146				7,035,032
Notes Payable - Long-Term			26,385				-
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value; 10,000,000 authorized shares; no shares issued or outstanding			-				-
Common stock, $0.001 par value; 240,000,000 authorized shares; 99,333,409 shares issued and outstanding at March 31, 2019 and December 31, 2018			99,333				99,333
Additional paid-in capital			7,494,357				7,494,357
Notes receivable - restricted common stock			(44,659	)			(44,100	)
Accumulated deficit			(12,522,062	)			(12,362,664	)
Total Stockholders' Equity (Deficit)			(4,973,031	)			(4,813,074	)
Total Liabilities and Stockholders' Equity (Deficit)		$	2,220,500			$	2,221,958

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		Three months ended
		March 31,
		2019				2018
Costs and expenses:
General and administrative		$	48,459			$	53,971
Professional fees			46,118				65,516
			94,577				119,487
Other expense (income):
Interest expense			65,380				61,387
Interest income, net of accrued interest written-off			(559	)			(886	)
			64,821				60,501
Income tax benefit			-				-
Net loss		$	159,398			$	179,988
Basic and diluted net loss per common share			**				**
Weighted average common shares outstanding			99,333,409				98,050,076

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																		Notes Rec -
										Additional								Restricted
		Common Stock								Paid-in				Minority				Common				Accumulated
		Shares				Amount				Capital				Interest				Stock				Deficit
Balances at December 31, 2018			99,333,409			$	99,333			$	7,494,357			$	-			$	(44,100	)		$	(12,362,664	)
Interest on notes receivable			-				-				-				-				(559	)			-
Net loss			-				-				-				-				-				(159,398	)
Balances at March 31, 2019			99,333,409			$	99,333			$	7,494,357			$	-			$	(44,659	)		$	(12,522,062	)

---

 

		Three months ended
		March 31,
		2019				2018
Operating Activities
Net loss applicable to common stockholders		$	(159,398	)		$	(179,988	)
Adjustments to reconcile net loss applicable to common stockholders to net cash used by operating activities:
Items that did not use (provide) cash:
Interest income, net of accrued interest written-off			(559	)			(886	)
Issuance of restricted common stock			-				20,000
Changes in operating assets and liabilities that provided (used) cash, net:
Prepaids and other current assets			11,400				(6,600	)
Accounts payable			(5,727	)			(3,216	)
Other assets and other liabilities			-				61,387
Accrued liabilities			113,226				47,832
Net cash used by operating activities			(41,058	)			(61,471	)
Cash Flows Provided (Used) by Investing Activities
Expenditures for equipment			-				-
Net cash provided by investing activities			-				-
Cash Flows Provided (Used) by Financing Activities
Issuance of Note Payable			60,000				67,000
Payments on Notes Payable			(9,000	)			-
Net cash provided by financing activities			51,000				67,000
Net increase in cash and cash equivalents			9,942				5,529
Cash and cash equivalents at beginning of period			11,057				2,505
Cash and cash equivalents at end of period		$	20,999			$	8,034
Supplemental disclosure of cash flow information:
Cash paid for interest		$	-			$	-
Supplemental disclosure of noncash investing and financing activities:
Common stock issued to consultant, directors, and/or employee		$	-			$	20,000

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Note 1 – Organization and Business

 

Alternative Ethanol Technologies, Inc. (the “Company”), was incorporated in Delaware on December 20, 1996. Effective August 2, 2007, the Company changed its name to CleanTech Biofuels, Inc. Except where otherwise noted, the words “we,” “us,” “our,” and similar terms, as well as “CleanTech” or the “Company,” refer to CleanTech Biofuels, Inc. and its subsidiaries, collectively.

 

On March 27, 2007, the Company acquired SRS Energy, Inc., a Delaware corporation (“SRS Energy”), pursuant to an Agreement and Plan of Merger and Reorganization. In accordance with the merger agreement, SRS Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, merged with and into SRS Energy. The merger was consummated on May 31, 2007 and resulted in SRS Energy becoming a wholly-owned subsidiary of the Company. As a result of the merger, the stockholders of SRS Energy surrendered all of their issued and outstanding Common Stock and received shares of the Company’s Common Stock, $.001 par value per share (“Common Stock”). The former parent of SRS Energy, Supercritical Recovery Systems, Inc., immediately prior to the merger, distributed 78.8% of its 96% ownership in SRS Energy to its shareholders on a pro rata basis. For accounting purposes, because the Company had been a public shell company prior to the merger, the merger was treated as an acquisition of the Company and a recapitalization of SRS Energy.

 

The Company is in its development stage and has been engaged in technology development and pre-operational activities since its formation. The Company is currently seeking outside sources of funding to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output is expected to be sold or provided to electric utilities, power and steam producers, and biofuel and chemical research firms for evaluation. In addition to research and development, the Company is also working towards licensing and/or developing potential commercial projects. These projects plan to focus on cleaning and separating municipal solid waste (also referred to as MSW) into its component parts in order to obtain: (i) a homogenous feedstock of cellulosic biomass for producing energy and other chemical products and (ii) recyclable products (metals, plastics, aluminum).

 

The Company has no operating history as a producer of biomass or energy sources and has not constructed any plants to date. We have no revenues and will be required to secure outside funding in order to execute our business plan and commercialize our products. Our current cash is not sufficient to fund our current operations. Our liabilities are substantially greater than our current available funds and current assets. Although we continue to seek additional financing through the sale of additional equity, various government funding opportunities and/or possibly through strategic alliances with larger energy or waste management companies, we have not had recent success securing meaningful amounts of financing. The Company will require substantial additional financing to implement its business plan and it may be unable to obtain the capital required to do so. If we are not able to immediately and successfully raise additional capital and/or achieve profitability or positive cash flow, we may not be able to continue operations.

 

The accompanying unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring items considered necessary for a fair presentation, have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019. For further information, refer to the Company’s audited Consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019.

 

 

 

Note 2 – Recent Accounting Pronouncements   

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modified the disclosure requirements in Topic 820, "Fair Value Measurement," based on the FASB Concepts Statement, "Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements," including consideration of costs and benefits. The guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718).” This ASU addresses share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.  The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

 

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).” This ASU changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. The standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. We are currently assessing the impact the guidance will have on our consolidated financial statements and related disclosures.

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting.” This ASU, which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The standard is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles —Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment.” This ASU simplifies several aspects of the accounting for goodwill impairment. The guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The standard is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently assessing the impact the guidance will have on our consolidated financial statements and related disclosures. 

 

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” This ASU requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The ASU requires adoption based upon a modified retrospective approach. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.  

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also specifies new accounting for costs associated with obtaining or fulfilling contracts with customers and expands the required disclosures related to revenue and cash flows from contracts with customers. This new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted. In August 2015, the FASB approved a one-year deferral of the effective date of this ASU. This standard became effective beginning with the first quarter 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. We have adopted the guidance and currently it does not have a material impact on the financial statements as the Company does not have revenue. The requirements of the ASU will be followed when the Company does have revenue.

 

There were various other accounting standards updates recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries and are not expected to have a material impact on the Company's financial position, results of operations or cash flows.

 

 

Note 3 – Mergers/Acquisitions

 

Biomass North America Licensing, Inc.

On September 15, 2008, the Company consummated the acquisition of Biomass North America Licensing, Inc. (“Biomass”) pursuant to a merger between Biomass and a wholly-owned subsidiary of the Company (with Biomass as the surviving subsidiary of the Company) in accordance with an Agreement and Plan of Merger by and between the Company and Biomass. By virtue of the merger, the Company acquired a license agreement pursuant to which the Company holds a license in the United States and Canada to use patented technology licensed from Biomass North America, LLC, the former parent of Biomass (the “Licensor”), to clean and separate MSW (the “Biomass Recovery Process”). In July 2010, the United States Patent and Trademark Office issued US patent number 7,745,208 for this process (the “BRP Patent”).

 

Upon consummation of the merger, the Company paid $20,000 in cash and issued a promissory note in the original principal amount of $80,000 bearing interest at an annual rate of 6% to a shareholder of the Licensor. This note has been paid in full. Additionally, the Company issued to the four shareholders of the Licensor a total of 1,895,000 shares of Common Stock and deposited an additional 4,000,000 shares of Common Stock into an escrow account (collectively, the “Shares”). The Shares were issued as part of the merger consideration received by the shareholders of the Licensor. In accordance with a November 2013 amendment, the Company has an exclusive license in the United States and Canada to use the Biomass Recovery Process which includes no performance requirements on the Company; the license agreement is for a term of 21 years from the date of the amendment or the life of any patent issued for the Biomass Recovery Process, including any amendments, modifications or extensions; the license requires that the Company pay a royalty in the amount of $2.00 per ton of MSW used in the Biomass Recovery Process to the Licensor; and the Company released the 4,000,000 shares of Common Stock to the Licensor previously held in escrow since the merger. The Company has recorded a long-term asset of approximately $1.6 million which it will begin to amortize upon utilizing the license in our operations.

 

 

25 Van Keuren LLC

On June 23, 2016, the Company entered into an Acquisition Agreement with 25 Van Keuren LLC, a New Jersey Limited Liability Company (“Van Keuren”), pursuant to which the Company acquired 99% of the outstanding membership interests in Van Keuren with the former members of Van Keuren retaining a 1% interest. As payment for the acquisition, the Company issued in the aggregate 1,000,000 shares of restricted Common Stock of the Company (par value $0.001) to certain holders of membership interests in Van Keuren. As of the close of business on June 23, 2016, the Company stock quote was $0.05. Van Keuren has had no operations or revenue since inception and has solely been working towards obtaining the permits required to operate a municipal solid waste transfer station and material recovery facility (“TS/MRF”). The total assets of Van Keuren at the time of the acquisition were $51,000 (2.3% of the Company’s assets). The liabilities and equity consisted of accounts payable of $27,000 and member equity of $24,000. As of August 29, 2018, the Company’s investment in Van Keuren was divested pursuant to a Settlement Agreement and Release among the Company and the former members of Van Keuren (the “Van Keuren Settlement Agreement”), and the related intangible assets were written off.

 

The Solid Waste Management Plan of the New Jersey Department of Environmental Protection (“DEP”), following certification of an amendment to the New Jersey Sports and Exposition Authority, includes proposed operation of a TS/MRF at a site located in Jersey City, New Jersey. CleanTech Biofuels intends to seek the necessary permits and approvals from the New Jersey DEP to build, own and operate the TS/MRF. As part of the Van Keuren Settlement Agreement, CleanTech acquired a one-year option to lease certain property in Jersey City within 30 days after the final permit issues from the New Jersey DEP, which expires on August 29, 2019. The Company intends to: (1) install its Biomass Recovery Process on the site, and (2) operate the TS/MRF. Costs incurred towards obtaining the required permits were recorded as an intangible asset on our consolidated financial statements. These costs were removed from the consolidated financial statements as a part of the divestiture of CleanTech’s interest in Van Keuren.

 

 

Note 4 – Goodwill and Intangibles

 

The Company’s goodwill and acquired intangible assets with indefinite lives are not amortized, but are subject to an annual impairment test. The Company performs an impairment analysis on its goodwill and intangible assets at least annually and whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. Acquired intangible assets with definite lives are amortized over their estimated useful lives and are tested for impairment only when impairment indicators are present. The Goodwill recorded was a result of the acquisition of Van Keuren in June 2016 as disclosed previously in Note 3. As of August 29, 2018, the Company’s investment in Van Keuren was divested and the related intangibles were written off.

 

 

Note 5 – Patent

 

The Company owns US Patent No. 6,306,248 (the “PSC Patent”), which is the underlying technology upon which the BRP Patent is based. The Company acquired the PSC Patent on October 22, 2008 pursuant to a Patent Purchase Agreement (“Agreement”) with World Waste Technologies, Inc. (“WWT”). As part of the acquisition of the PSC Patent, we also became the licensor of such technology under the existing license agreement between Bio-Products International, Inc., the licensee (“Bio-Products”) and WWT. The Company has paid WWT $600,000 and issued warrants to purchase 1,800,000 shares of Common Stock at $0.10 per share and 500,000 shares of Common Stock at $0.11 per share. WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. (“Vertex”) as a result of a merger in March 2009. The warrants had an exercisable term of five years which expired on October 22, 2014. The cost of the PSC Patent acquisition of $600,000 is recorded as a long-term asset on the Balance Sheet.

 

On September 1, 2010, the Company issued a promissory note to CMS Acquisition, LLC (“CMS”) in the amount of $100,000 and bearing interest at 6.0% per annum. The note is secured with a security interest in the PSC Patent. In connection with the financing, the Company issued a warrant to CMS to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The warrant is exercisable at any time for five years from the date of issuance or re-issuance. The note was originally to mature on February 28, 2011. The Company and CMS have entered into various amendments extending the due date, the most recent of which was April 26, 2017, which extended the due date to April 26, 2018. As consideration in the various amendments to this note, the Company has: (i) paid $30,000 towards accrued interest to date and principal on the note, (ii) increased the interest rate to 10% as of May 15, 2011, (iii) re-dated the original warrants to April 26, 2017, (iv) issued new warrants for 300,000 shares of Common Stock with an exercise price of $0.05 and exercisable at any time until April 26, 2022, (v) issued new warrants for 150,000 shares of Common Stock with an exercise price of $0.10 and exercisable at any time until April 26, 2022, and (vi) approved the assignment of the note by CMS to the WL Meyer Legacy Trust. For more information on this note, see Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt.

 

 

 

Note 6 – Technology Licenses

 

Biomass North America Licensing, Inc.

We own an exclusive license in the United States and Canada to use the Biomass Recovery Process (See Note 3 – Mergers/Acquisitions). We have recorded a long-term asset of approximately $1.6 million for the value of this license. Amortization of this asset will begin upon commencement of the use of the Biomass Recovery Process.

 

In accordance with a November 2013 amendment, the Company has an exclusive license in the United States and Canada to use the Biomass Recovery Process and includes no performance requirements on the Company; the license agreement is for a term of 21 years from the date of the amendment or the life of any patent issued for the Biomass Recovery Process, including any amendments, modifications or extensions; and the license requires that the Company pay a royalty in the amount of $2.00 per ton of MSW used in the Biomass Recovery Process to the Licensor.

 

Bio-Products International, Inc.

As disclosed in Note 5 - Patent, the Company acquired the PSC Patent in 2008 and as a result, became the licensor to Bio-Products for the PSC Patent pursuant to a Master License Agreement dated as of August 18, 2003 (the “PSC License Agreement”). Pursuant to the terms of the PSC License Agreement, Bio-Products (a wholly-owned subsidiary of Clean Earth Solutions, Inc., (“CES”)) is the exclusive licensee of the PSC Patent and has the right to sublicense the technology that is part of the PSC Patent (but not the BRP Patent) to any party. In addition, we are entitled to be paid 5% of any revenue derived by Bio-Products from the use of the technology and 40% of any sublicensing fees paid to Bio-Products for the use of the technology. The Master License Agreement is for a term of 20 years that commenced on August 18, 2003. On September 22, 2010, the Company sent a Notice of Breach to Bio-Products, which included removing the exclusivity of the license. We received a response from Bio-Products on November 5, 2010 disputing our claims. In February 2011, we became aware that Bio-Products effected a transfer of the license in violation of the PSC License Agreement. As a result, on March 21, 2011, we sent a notice of termination to Bio-Products and the transferee terminating the License Agreement. In June 2011, Steve Vande Vegte, a shareholder in CES, filed a lawsuit against various parties, including the Company. The only Cause of Action against the Company is for Declaratory Relief seeking to avoid our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint is not ripe. The court granted our demurrer to dismiss Cleantech from this lawsuit on December 8, 2011.

 

25 Van Keuren LLC

As discussed in Note 3 – Mergers/Acquisitions, the Company entered into an Acquisition Agreement with 25 Van Keuren LLC (“Van Keuren”). The total assets of Van Keuren at the time of the acquisition were approximately $51,000. The assets were recorded as an intangible asset in our consolidated financial statements; however, as of August 29, 2018, the Company’s investment in Van Keuren was divested and the related intangibles were written off.

 

All intangible assets are reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. An impairment charge is recognized if the carrying amount of an intangible asset exceeds its implied fair value.

 

 

 

Note 7 – Debt

 

 

 

Convertible Notes Payable - Since September 2008, the Company has conducted six offerings of units comprised of a convertible promissory note and a warrant, and one offering of a convertible note (with no warrant), having the terms set forth as follows:

 

 

Each note holder retains the option of a cash repayment of the note plus interest, or the note can be converted at any time during the term of the note or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million), into shares of Common Stock at the conversion price noted above. All notes have been recorded as debt (notes payable) in the consolidated financial statements, net of discounts for the conversion and warrant features (except for the 11/10, 5/12, 2/14, and 2015 Offerings which carried no discounts). See Subsequent Event footnote for further disclosure regarding our notes.

 

2008 Offering - During September 2008, the Company commenced an offering of units and raised a total of $642,000 of investment proceeds through March 31, 2009. As of March 31, 2010, all of these notes had either been converted to shares of our Common Stock or exchanged into our 2009 Offering (resulting in new notes with a total face value of $539,829, which included the original principal and interest through the date of exchange).

 

2009 Offering - During April 2009, the Company commenced an offering of units and raised a total of $1,198,500 of investment proceeds through August 2010. Four notes have been converted to shares of Common Stock (one each in 2009, 2010, 2014 and 2017). Beginning in March 2011, certain notes were exchanged into our 11/10 Offering or a convertible note payable. As a result, as of March 31, 2019, we had $189,185 face value of notes outstanding, which includes the exchanged notes from our 2008 Offering. All of these notes have matured. We plan to work with each remaining note holder to exchange, convert or repay these notes.

 

6/10 Offering - During June 2010, the Company commenced an offering of units and raised a total of $75,000 of investment proceeds in one note. Upon maturity in June 2011, this note was exchanged into our 11/10 Offering. As a result, the balance due in connection with this offering is $-0-.

 

11/10 Offering - During November 2010, the Company commenced an offering of units, and raised a total of $451,713 of investment proceeds. Three notes were converted to shares of Common Stock in 2011 and four notes were converted to Common Stock in 2012. As of March 31, 2019, we had $1,804,370 face value of these notes outstanding, which includes the exchanged notes from our 2009 Offering. As of March 31, 2019, all of these notes have matured. We plan to work with each remaining note holder to exchange, convert or repay these notes.

 

5/12 Offering - During May 2012, the Company commenced an offering of units and raised a total of $583,510 of investment proceeds. As of March 31, 2019, all of these notes are outstanding and have matured. We plan to work with each remaining note holder to exchange, convert or repay these notes.

 

2/14 Offering - During February 2014, the Company commenced an offering of units and raised a total of $100,000 of investment proceeds in one note. As of March 31, 2019, this note is outstanding and has matured. We plan to work with the note holder to exchange, convert or repay this note.

 

2015 Offering - During September 2015, the Company commenced an offering of units and raised a total of $85,000 of investment proceeds in one note. As of March 31, 2019, this note is outstanding and has matured. We plan to work with the note holder to exchange, convert or repay this note.

 

 

WL Meyer Legacy Trust (formerly CMS Acquisition, LLC) Note Payable - In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum through May 15, 2011 and 10.0% thereafter and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note was due the earlier of: (i) April 26, 2018 pursuant to an amendment on April 26, 2017 or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and was fully amortized (interest expense) as of February 28, 2011 (the original due date). As consideration in these amendments, the Company has: (i) paid $30,000 towards accrued interest to date and principal on the note, (ii) increased the interest rate to 10% as of May 15, 2011, (iii) re-dated the original warrants to April 26, 2017, (iv) issued new warrants for 300,000 shares of Common Stock with an exercise price of $0.05 and exercisable at any time until April 26, 2022, (v) issued new warrants for 150,000 shares of Common Stock with an exercise price of $0.10 and exercisable at any time until April 26, 2022, and (vi) approved the assignment of the note by CMS Acquisition LLC to the WL Meyer Legacy Trust per the March 17, 2015 amendment. As of March 31, 2019, $72,696 face value of this note is outstanding. We plan to work with the note holder to exchange, convert or repay this note.

 

June and October 2016 Note Payable – The Company issued two notes payable, with no conversion feature, to a current Board of Directors member, in the amounts of $50,000 and $35,000, respectively. In March of 2018, both notes were replaced with a convertible note payable with a face value of $97,599, and a 6% interest rate, which was due March 2019. We are currently working with the note holder to renew or repay the note.

 

January 2017 Note Payable – The Company issued a note payable, with no conversion feature, to William Meyer in the amount of $15,000, with a 6% interest rate, which was due March 20, 2017. We are currently working with the note holder to renew or repay the note.

 

October 2017 Note Payable – The Company issued a note payable, with no conversion feature, to a current Board of Directors member, in the amount of $25,000, with a 6% interest rate, which was due October 2018. We are currently working with the note holder to renew or repay the note.

 

March 2018 Notes Payable – The Company issued two convertible notes payable to a current Board of Directors member in the amounts of $50,000 and $17,000, respectively, with a 6% interest rate, which was due March 2019. We are currently working with the note holder to renew or repay the note.

 

May 2018 Note Payable – The Company issued a convertible note payable to a current Board of Directors member in the amount of $30,000, with a 6% interest rate, due May 2019. As of March 31, 2019, the note was outstanding.

 

August 2018 Note Payable – The Company issued a convertible note payable to a current Board of Directors member in the amount of $20,000, with a 6% interest rate, due August 2019. As of March 31, 2019, the note was outstanding.

 

November 2018 Note Payable – The Company issued a convertible note payable to a current Board of Directors member in the amount of $35,000, with a 6% interest rate, due November 2019. As of March 31, 2019, the note was outstanding.

 

March 2019 Note Payable – The Company issued a convertible note payable to a current Board of Directors member in the amount of $60,000, with a 6% interest rate, due March 2020. As of March 31, 2019, the note was outstanding.

 

January 2019 Note Payable – The Company issued a note payable, to a current note holder, with no conversion feature, in the amount of $95,385 which is due August 2020. This note replaced past notes issued on January 7, 2011 and January 28, 2011, plus accrued interest.

 

 

The discounts on notes payable are amortized on a straight-line basis over the original term of each note. The following is a summary of warrants issued and outstanding as of the dates below, at the exercise price and the number of shares of Common Stock (these warrants have not been exercised or converted to common shares):

 

 

(a) Warrants issued to investors under these Subscription Agreements can be exercised anytime within three years from date of Agreement. These warrants currently expire at various dates from July 2019 to April 2022.

 

 

Note 8 – Stockholders' Equity (Deficit)

 

In August 2013, the Company commenced an offering of units, under a Subscription Agreement, at a purchase price of $1,000 per unit (Equity Offering 8/13). Each unit consists of: (i) 10,000 shares of the Company’s authorized but unissued restricted Common Stock and (ii) warrants to purchase 30,000 additional shares of Common Stock for a three-year period from the date of issuance of the units at an initial exercise price of $0.15 per share. As of March 31, 2019, the Company had issued 7,635,000 restricted shares (at $0.10 per share) of our Common Stock in exchange for $763,500 in investment in this offering. See Subsequent Event footnote for further updates to this offering and other share grants affecting Stockholders Equity.

 

In January 2014, the Company issued 500,000 restricted shares (at $0.012 per share) of our Common Stock per the consulting agreement with GWS Environmental Consultants. GWS has certain expertise and contacts in the collection, recycling, transfer, and disposal of MSW and provided the Company consulting for a three-year period regarding these items.

 

In February 2016, the Board approved a grant to certain Board members and management for an aggregate of 4,000,000 shares of restricted Common Stock (at $0.013 per share). The Board granted these awards in recognition of the efforts of the recipients towards the furtherance and implementation of the Company’s strategic plan and to induce the recipients to continue those efforts on behalf of the Company. Based on the foregoing, the Board determined such grants were in the best interest of the Company and its stockholders. 

 

In June 2016, the Company completed an acquisition of Van Keuren, as previously disclosed in Note 3, and issued in the aggregate 1,000,000 shares of restricted Common Stock of the Company (at $0.05 per share) to certain holders of membership interests in Van Keuren.  Pursuant to the Van Keuren Settlement Agreement, as of August 29, 2018, the Company’s investment in Van Keuren was divested and the restrictions on the shares of Company Common Stock issued as part of the Van Keuren acquisition were lifted.

 

In August 2016, a note receivable from a former director matured and was not paid. The note was originally issued in August 2007 to purchase shares of our Common Stock. As a result, 150,000 shares of restricted Common Stock, issued at $0.15 per share were forfeited and cancelled.

 

In September 2016, the Company issued 750,000 shares of restricted Common Stock to a consultant for business transactions and financing services to be provided over a one-year term.

 

In May 2017, the Company issued 100,000 shares of restricted Common Stock to a consultant for accounting services provided to the Company.

 

In July 2017, the Company issued 200,000 shares of restricted Common Stock to a consultant for accounting services provided to the Company.

 

In August 2017, the Company granted 3,000,000 shares of restricted Common Stock to consultants for business consulting services regarding the collection and disposal of MSW in the New York and New Jersey markets to be provided over a two-year term. Of the 3,000,000 shares of restricted Common Stock granted, 2,000,000 were issued.

 

 

In September 2017, the Company issued 204,996 shares of Common Stock ($0.08 per share) to an investor on conversion of a Convertible Note.

 

In December 2017, a note receivable from an employee matured and was not paid. The note was originally issued in December 2008 to purchase shares of our Common Stock. As a result, 60,000 shares of restricted Common Stock, issued at $0.36 per share were forfeited and cancelled.

 

In March 2018, the Company issued 250,000 shares of restricted Common Stock to a consultant for legal / corporate finance services provided to the Company.

 

In March 2018, the Company issued the remaining 1,000,000 shares of restricted Common Stock granted in August 2017, to a consultant for business consulting services regarding the collection and disposal of MSW in the New York and New Jersey markets.

 

In April 2018, the Company issued 200,000 shares of restricted Common Stock to a consultant for accounting services provided to the Company.

 

In September 2018, a note receivable from a Board of Directors member matured and was not paid. The note was originally issued in September 2009 to purchase shares of our Common Stock. As a result, 150,000 shares of restricted Common Stock, issued at $0.10 per share were forfeited and cancelled.

 

In October 2018, the Company issued 400,000 shares of restricted Common Stock to a consultant for accounting services provided to the Company.

 

Net Loss per share – The Company calculates basic loss per share (“EPS”) and diluted EPS. EPS is computed as net earnings (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS would reflect the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. As of March 31, 2019 and December 31, 2018, the Company had options, warrants and other convertible securities to purchase an aggregate of approximately 84 million and 86 million shares, respectively, of our Common Stock, that were excluded from the calculation of diluted loss per share as their effects would have been anti-dilutive. Therefore, the Company only presents basic loss per share on the statement of operations.

 

 

Note 9 – Related Party Transactions

 

The Company has entered into stock purchase agreements with its executive officers and certain members of the Board of Directors. The executive officers and directors issued notes to the Company in exchange for their stock purchases. These notes and accumulated interest are recorded as notes receivable in Stockholders’ Deficit.

 

In September 2013, the Company hired, on a part-time basis, a Chief Technology Officer (CTO) and a VP-Business Development (VP-BD). These individuals maintain their engineering firm Fenton Engineering International (FEI) on a full-time basis and receive no salary in their part-time positions but are eligible for grants of stock options. We have used and continue to use their services. As of March 31, 2019, all amounts have been paid to FEI except for approximately $48,000.

 

Beginning in 2009, the Company has provided advances to two employees – Ed Hennessey and Mike Kime. Mr. Kime resigned from his position with the Company effective June 21, 2010. As of March 31, 2019 and December 31, 2018, the aggregate balance of Mr. Hennessey’s advances totaled approximately $14,000. Mr. Kime’s advances were netted against monies due and paid to him in 2016 pursuant to a settlement agreement following his departure from the Company. The balance of Mr. Hennessey’s advances is included in Prepaids and Other Current Assets on the Balance Sheet.

 

One member of our current Board of Directors, James Russell, is party to investments made in our convertible note offerings. As of March 31, 2019 and December 31, 2018, the aggregate amount due on these investments, including interest, is approximately $1,125,000 and $1,049,000, respectively.

 

 

In June and October of 2016, the Company issued notes payable, with no conversion feature, to a current Board of Directors member, in the amounts of $50,000 and $35,000, respectively. In March of 2018, both notes were replaced with a convertible note payable with a face value of $97,599, and a 6% interest rate, due March 2019. As of March 31, 2019, the notes were outstanding.

 

In February 2017, the Company received $50,000 form a Board Member in exchange for 500,000 shares of Common Stock.

 

In June 2017, the Company received $50,000 from a Board Member in exchange for 500,000 shares of Common Stock.

 

In October 2017, the Company issued a note payable, with no conversion feature, to a current Board of Directors member, in the amount of $25,000. As of March 31, 2019, the note was outstanding.

 

In March 2018, the Company issued two convertible notes payable to a current Board member in the amounts of $50,000 and $17,000, respectively, with a 6% interest rate, due March 2019. As of March 31, 2019, the notes were outstanding.

 

In May 2018, the Company issued a convertible note payable to a current Board of Directors member in the amount of $30,000, with a 6% interest rate, due May 2019. As of March 31, 2019, the note was outstanding.

 

In August 2018, the Company issued a convertible note payable to a current Board of Directors member in the amount of $20,000, with a 6% interest rate, due August 2019. As of March 31, 2019, the note was outstanding.

 

In November 2018, the Company issued a convertible note payable to a current Board of Directors member in the amount of $35,000, with a 6% interest rate, due November 2019. As of March 31, 2019, the note was outstanding.

 

In March 2019, the Company issued a convertible note payable to a current Board of Directors member in the amount of $60,000, with a 6% interest rate, due March 2020. As of March 31, 2019, the note was outstanding.

 

 

Note 10 – Share-based Payments

 

The Company recognizes share-based compensation expense for all share-based payment awards including stock options and restricted stock issued to employees, directors and consultants measured at the grant date, based on the estimated fair value of the award, and expense is recognized over the requisite service period. The Company has no awards with market or performance conditions.

 

In March 2007, the Company assumed and adopted the 2007 Stock Option Plan (“Stock Plan”) for its employees, directors and consultants, which includes an equity compensation plan for non-employee directors pursuant to which stock options and shares of restricted stock may be granted.  The Company currently has reserved a maximum of 14,000,000 shares of Common Stock to be issued for stock options or restricted shares awarded under the Stock Plan.

 

In September 2013, the Company granted options under the Stock Plan to purchase an aggregate of 1,000,000 shares of Common Stock to two part-time employees (newly hired CTO and VP–BD) in which one-third will vest ratably beginning in September 2014, with an exercise price of $0.10. As of March 31, 2019, none of these options were cancelled or expired and 1,000,000 shares of these options were vested.

 

In February 2015, the Company granted options under the Stock Plan to purchase an aggregate of 350,000 shares of Common Stock to a consultant in which one-half vested immediately and the remaining options vested in February 2016, with an exercise price of $0.10. As of March 31, 2019, none of these options were cancelled or expired and all 350,000 shares of these options were vested.

 

 

In February 2016, the Board approved Common Stock grants to a member of management, and certain Board members, for 4.0 million shares, in the aggregate, of restricted Common Stock. Additionally, the Board approved the issuance of stock option agreements to a member of management and certain consultants for the purchase of 3.5 million shares, in the aggregate, of Common Stock. The Board granted these awards in recognition of the efforts of the recipients towards the furtherance and implementation of the Company’s strategic plan and to induce the recipients to continue those efforts on behalf of the Company. Based on the foregoing, the Board determined the grants were in the best interest of the Company and its stockholders. All of the share grant awards vest immediately and were issued pursuant to Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”), or Section 4(a)(2) of the Securities Act, and will therefore be “restricted securities” as such term is used in Rule 144 of the Securities Act. The option agreements were issued outside of the Company’s 2007 Stock Option Plan and carry the following terms: seven-year agreements, vesting in thirds ratably over three years, and are exercisable at the Company’s closing stock price as of the date of the grant. These options were calculated to have no value. Accordingly, there was no share-based compensation expense recorded in general and administrative expense.

 

In February 2016, the Company issued a stock option agreement to a consultant for the purchase of 100,000 shares of Common Stock. The option agreement was issued outside of the Company’s 2007 Stock Option Plan and carries the following terms: seven-year agreement, vesting in thirds ratably over three years, and are exercisable at the Company’s closing stock price as of the date of the grant. These options were calculated to have no value. Accordingly, there was no share-based compensation expense recorded in general and administrative expense.

 

In May 2017, the Company issued 100,000 shares of restricted Common Stock to a consultant for accounting services provided to the Company.

 

In July 2017, the Company issued 200,000 shares of restricted Common Stock to a consultant for accounting services provided to the Company.

 

In August 2017, the Company granted 3,000,000 shares of restricted Common Stock to consultants for business consulting services regarding the collection and disposal of MSW in the New York and New Jersey markets to be provided over a two-year term. Of the 3,000,000 shares of restricted Common Stock granted, 2,000,000 were issued as of December 31, 2017. In March 2018, the Company issued the remaining 1,000,000 shares of restricted Common Stock granted in August of 2017.

 

In March 2018, the Company issued 250,000 shares of restricted Common Stock to a consultant for legal / corporate finance services provided to the Company.

 

In April 2018, the Company issued 200,000 shares of restricted Common Stock to a consultant for accounting services provided to the Company.

 

In October 2018, the Company issued 400,000 shares of restricted Common Stock to a consultant for accounting services provided to the Company.

 

As of March 31, 2019, there was $13,100 in prepaids for compensation costs related to all share-based payment arrangements. There were 3,600,000 options granted outside of the Company’s 2007 Stock Option Plan with a weighted-average exercise price of $0.15. As of March 31, 2019, none of these options were cancelled or expired and 3,600,000 shares of these options were vested.

 

Stock option expense is recognized in the statements of operations ratably over the vesting period based on the number of options that are expected to ultimately vest. Our options have characteristics significantly different from those of traded options and changes in the assumptions can materially affect the fair value estimates. The Company incurred no share-based compensation expense related to option grants for the three months ended March 31, 2019 and 2018.

 

 

The following table summarizes the Company's stock option activity and related information under the Stock Plan:

 

 

(1)  The weighted-average exercise price at March 31, 2019 and December 31, 2018 for all outstanding and exercisable options was greater than the fair value of the Company's common stock on that date, resulting in an aggregate intrinsic value of $-0-.

 

In February 2016, the Company issued to members of management and a consultant 3,600,000 options outside of the Stock Plan. The options granted were in recognition of the efforts of the recipients towards the furtherance and implementation of the Company’s strategic plan and to induce the recipients to continue those efforts on behalf of the Company.

 

The following table summarizes information about the Company's issuances of restricted stock under the Stock Plan:

 

 

The Company issued the following grants outside of the Stock Plan: (1) restricted Common Stock: (i) in January 2015 for 500,000 shares to a member of management, (ii) in January 2014 for 500,000 shares to a consultant to provide services regarding the collection, recycling, transfer, and disposal of MSW, (iii) in April 2014, to certain Board members and management for 4,250,000 shares in the aggregate, (iv) in February 2016, to certain Board members and a member of management for 4,000,000 shares in the aggregate, (v) in May 2017 for 100,000 shares to a consultant for accounting services provided, (vi) in July 2017 for 200,000 shares to a consultant for accounting services provided, (vii) in August 2017 for 3,000,000 shares to a consulting group for business consulting services regarding the collection and disposal of MSW in the New York and New Jersey markets, (viii) in March 2018 for 250,000 shares to a consultant for legal services provided, (ix) in April 2018 for 200,000 shares to a consultant for accounting services provided, and (x) in October 2018 for 400,000 shares to a consultant for accounting services provided, and (2) in February 2016, the Board approved the issuance of stock option agreements to a member of management and certain consultants for the purchase of 3,600,000 shares, in the aggregate, of Common Stock. The shares and options issued to Board members and management were in recognition of the efforts of the recipients towards the furtherance and implementation of the Company’s strategic plan and to induce the recipients to continue those efforts on behalf of the Company. Total expense related to these grants for the three months ended March 31, 2019 and 2018, was $11,400 and $13,400, respectively (included in our general and administrative expense).

 

All of the share grant awards vest immediately and were issued pursuant to Regulation D promulgated under the Securities Act, or Section 4(a)(2) of the Securities Act, and will therefore be “restricted securities” as such term is used in Rule 144 of the Securities Act. The option agreements carry the following terms: seven-year agreements, vesting in thirds ratably over three years, and are exercisable at the Company’s closing stock price as of the date of the grant.

 

 

 

Note 11 – Commitments and Contingencies

 

Commitments

Lease – The Company leases approximately 1,800 square feet of office space for use as our corporate office, located at 7386 Pershing Ave. in St. Louis, Missouri. The original lease term expired in December 2016; however, we are continuing to lease on a month-to-month basis. Our monthly rent under the lease is $1,800 plus the cost of utilities.

 

Contingencies

The Company currently has no open litigation or claims.

 

 

Note 12 – Subsequent Events

 

All of the promissory notes in our 2009, 5/12, 11/10, 2/14 and 2015 Offerings are now due. As of May 13, 2019, approximately $4.3 million is currently due, including interest. We plan to work with each remaining note holder to exchange, convert or repay these promissory notes.

 

 

Note 13 – Going Concern

 

During the three months ended March 31, 2019, the Company had a net loss of $159,000, negative cash flow from operations of $41,000 and negative working capital of $7.1 million. Additionally, the Company has significant debt currently due. Management has performed its evaluation of the entity’s ability to continue as a going concern and was not able to alleviate the substantial doubt about the Company’s ability to continue as a going concern within one year after May 15, 2019, the date these consolidated financial statements were available for issue.

 

 

 

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