U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number 0-27445
ENVIRO VORAXIAL TECHNOLOGY, INC.
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(Name of Small Business Issuer in its Charter)
Idaho 83-0266517
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
821 NW 57th Place, Fort Lauderdale, Florida 33309
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(Address of Principal Executive Offices) (Zip Code)
(954) 958-9968
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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(Title of Class)
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 contained in this form, and no disclosure will be contained, to
the best of the 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.[ ]
State issuer's revenues for its most recent fiscal year. $19,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days ($.51 as of April 7, 2005). $4,399,465.02.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: December 31, 2004: 17,676,402 Shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
- None -
Transitional Small Business Disclosure Format (Check One)
Yes [ ] No [X]
Table of Contents
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PART I
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Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
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Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
Item 6. Management Discussion and Analysis of Financial
Condition and Plan of Operations
Item 7. Financial Statements
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
Item 8A. Controls and Procedures
Item 8B. Other Information
PART III
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Item 9. Directors and Executive Officers
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits, Lists and Reports on Form 8-K
Item 14. Principal Accountant Fees and Services
2
PART I
Item 1. Description of Business
Our history
Enviro Voraxial Technology, Inc. (the "Company") was incorporated in
Idaho on October 19, 1964, under the name Idaho Silver, Inc. In May of 1996, we
entered into an agreement and plan of reorganization with Florida Precision
Aerospace, Inc., a privately held Florida corporation ("FPA"), and its
shareholders. FPA was incorporated on February 26, 1993.
General
We believe we are emerging as a potential leader in the rapidly growing
environmental and industrial separation industries. The Company has developed
and patented the Voraxial(R) Separator ("Voraxial(R) Separator" or
"Voraxial(R)"); a proprietary technology that efficiently separates large
volumes of liquid/liquid, liquid/solids or liquid/liquid/solids with distinct
specific gravities. Management believes this superior separation quality is
achieved in real-time, and in much greater volumes, with a more compact, cost
efficient and energy efficient machine than any comparable product on the market
today. The Voraxial(R) Separator operates in-line and is scaleable. It is
capable of processing volumes as low as 3 gallons per minute as well as volumes
over 10,000 gallons per minute with only one moving part. The Company believes
that the Voraxial(R) technology can help protect the environment and its natural
resources while simultaneously making numerous industries more productive and
cost effective.
The size and efficiency advantages provided by the Voraxial(R)
Separator to the end-user have provided us with a variety of market
opportunities. We have generated limited revenues to date partially because of
insufficient funds to adequately market our product; however, we have received
inquiries from parties in various industries, including the energy drilling,
sewage, pulp and paper, food processing, shipping, machine shops, and
marine/oil-spill industries. The Company believes the Voraxial(R) Separator will
enable companies in these industries to develop greater advantages or
differentiators, by substantially increasing their efficiency.
The Company is presently researching and developing Voraxial(R)
solutions for various applications and markets including pre-treatment
(headworks/entrance to municipal wastewater plant) of wastewater, grit/sand
separation, oil-water separation, oil exploration and production, oil
refineries, marine/oil-spill clean up and manufacturing waste treatment.
We have shipped units of the Voraxial(R) Separator on a trial basis to
a number of different companies that include a wide range of industrial
applications. We have also discussed the benefits of the Voraxial(R) Separator
with various government agencies. We have installed several Voraxial(R)
Separators to date including units to the Alaska Department of Environmental
Conservation, the US Navy and to REGS, an environmental service company.
Further we successfully completed a demonstration project at one of
seven wastewater treatment facilities operated by the Hillsborough County Water
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Department which services greater Tampa, Florida. The system at Hillsborough
incorporates a Voraxial(R) 4000 Grit Separator at the head-works of the 5
million gallons per day (MGD) wastewater treatment plant. The Voraxial(R)
generates a centrifugal that provides for efficient separation of sand/grit. It
is operated by only a 10 Hp explosion-proof motor.
The testing demonstrated the Voraxial(R) Grit Separator's ability to
achieve a very high separation efficiency of sand/grit and sugar sand from
wastewater. The overall removal efficiency obtained and verified by a 3rd party
varied from 81% to 89%. This means that 81% to 89%, by weight, of the entire
range of grit particle sizes in the influent wastewater was removed by the
Voraxial(R) 4000 Grit Separator. Management believes that this performance is
superior to the present state-of-the-art grit removal equipment. This
installation initiated the sales and marketing campaign for the Voraxial(R) Grit
Separator into the multi-billion dollar municipal wastewater treatment market
place. The Company received a very positive response at the WEFTEC 2004
Tradeshow after they demonstrated the Voraxial(R) Separator and disseminated the
results from the Hillsborough demonstration project. The Company is now pursuing
the opportunities that resulted from the dissemination of the test results.
Based on the test data from the Hillsborough demonstration, the Company
is now in discussions with a global heavy industrial manufacturing firm
interested in obtaining the marketing rights of the Voraxial(R) Grit Separator
for a specific nation.
We have formed an Advisory Committee to assist the Company with the
implementation of its corporate objectives. The members include individuals with
high-level experience in the wastewater and oil industry and in sales and
marketing.
We manufacture and assemble our separators at our facility located in
Ft. Lauderdale, FL. We operate a high-precision engineering machine facility,
which has designed, manufactured and assembled specialized parts and components
for the aerospace and automotive industries. Historically we have performed
contract-manufacturing services to both small and large customers.
The Company also expects market opportunities to present themselves
because of increased governmental regulation and standards enforcement by the
U.S. Environmental Protection Agency ("EPA"), and the European Union Commission
on the Environment. Additionally, emerging markets worldwide are opening as
growing nations recognize the need and benefit of addressing the environmental
issues faced by population growth and industrialization, such as China, Mexico,
and South America.
Subsequent Events
In February 2005, we sold a Voraxial(R) 4000 Separator to a
well-established Canadian-based mining company for oil/water separation. The
sale of the Model Voraxial(R) 4000 Separator was predicated upon the successful
testing of EVTN's smaller Model Voraxial(R) 2000 Separator in the separation of
petroleum-based liquids from water that is used during the production process.
In April 2005, we entered into an oral agreement with an oil company to
manufacture, ship and deploy a Voraxial(R) Separator Skid (two Voraxial(R)
4
Separators affixed to a steel platform) on an offshore oil production platform
off the coast of California for a produced oil and water separation trial. The
Voraxial(R) Separator Skid will be used to enhance the handling of large volumes
of produced water and water injection on the platform while improving the
purification process for its introduction back into the environment. The
Voraxial(R) Separator Skid provides superior separation while decreasing the
amount of space, energy and weight to conduct the separation, all of which are
an expensive commodity on the offshore platform. The skid is comprised of a
Model 4000 Voraxial(R) Separator and a Model 2000 Voraxial(R) Separator that
have been specifically modified to accommodate the offshore equipment
requirements. The skid was shipped to the oil company on April 12, 2005.
Business
The Company has shifted its focus from the high precision manufacturing
business to the opportunity presented by the Voraxial(R) Separator as management
believes that is where significant growth for the Company will occur. We will
continue to utilize our engineering expertise to manufacture the Voraxial(R)
Separator in-house. Although revenues from the Voraxial(R) Separator have been
nominal since inception, we believe that in the near future substantial revenues
will begin to be generated from the Voraxial(R) Separator.
In the past, the Company has delivered or installed Voraxial(R)
Separators to companies that need liquid/liquid and liquid/solid separation,
including the Alaska Department of Environmental Conservation, US Navy, Resource
Environmental Group of Colorado.
The Company has concentrated its efforts on the Voraxial(R) Separator
and has begun marketing to major equipment manufacturers and end-users
throughout various industrial sectors. In the past year, the Company has been
involved in discussions with several multi-national companies that are involved
in the development, manufacture, and sale of cutting-edge separation technology
to a wide range of end-users throughout various industrial sectors. The Company
has received a great deal of interest from a variety of industries. Although
management believes many different industries can utilize and benefit from the
Voraxial(R) Separator, the Company is focusing its efforts on a few key
opportunities, including municipal wastewater, oil exploration and production,
oil refineries, marine/oil-spill clean up and manufacturing.
During the past fiscal year, we announced the completion of the
Voraxial(R) Grit Separator for the specific use in the municipal wastewater
industry. The Voraxial(R) Grit Separator is configured for operation at the
headworks of a municipal wastewater treatment plant (WWTP). A single Voraxial(R)
Grit Separator is designed to provide for the continuous removal of grit from
screened wastewater at rates up to eight thousand (8000) gallons per minute
(11.5 mgd). We currently have designs for two models of Voraxial(R) Grit
Separators. The Voraxial(R) 4000 Grit Separator has an operating range of
three-tenths to one and three-tenths (0.3 to 1.3) million gallons per day (mgd),
powered by a ten (10) HP TEFC motor. The Voraxial(R) 8000 Grit Separator has an
operating range of three to eleven and five-tenths (3.0 to 11.5) mgd, powered by
a fifty (50) HP TEFC motor.
Voraxial(R) Separator
The Voraxial(R) Separator is a continuous flow turbo machine that
generates a strong centrifugal force, a vortex, capable of separating light and
5
heavy liquids, such as oil and water, or any other combination of liquids and
solids at extremely high flow rates. As the fluid passes through the machine,
the Voraxial(R) Separator accomplishes this separation through the creation of a
vortex. In liquid/liquid and liquid/solid mixtures, this vortex causes the
heavier compounds to gravitate to the outside of the flow and the lighter
elements to move to the center where an inner core is formed. The liquid stream
processed by the machine is divided into separate streams of heavier and lighter
liquids and solids. As a result of this process, separation is achieved.
The Voraxial(R) Separator is a self-contained, non-clogging device that
can be powered by an electric motor, diesel engine or by hydraulic power
generation. Further, the Voraxial(R) Separator's scalability allows it to be
utilized in a variety of industries and to process various amounts of liquid.
The following are the various sizes and the corresponding capacity range:
Product and Capacity Range
Model Diameter Capacity Range
Number Size Gallons Per Minute
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Voraxial(R)1000 1 inch 3 - 10
Voraxial(R)2000 2 inches 25 - 80
Voraxial(R)4000 4 inches 250 - 900
Voraxial(R)8000 8 inches 2,000 - 6,000
The Voraxial(R) Separator can transfer various liquids in either
direction by reversing the machine's rotation. We currently maintain an
inventory of various models of the Voraxial(R) Separator. During fiscal year
2004, we have furthered tested, demonstrated and delivered on a trial basis the
Voraxial(R) Separator units to companies within various industries including
energy production, wastewater, manufacturing and mining. During 2004 the Company
provided Voraxial(R) Separators to several firms on a trial basis and is engaged
in discussions to deliver additional Voraxial(R) Separators on an
income-producing basis.
Management believes that our Voraxial(R) Separator offers substantial
applications on a cost-effective basis, including: oil exploration and
production, oil remediation services, municipal wastewater treatment, bilge
water purification, metal finishing, machining and manufacturing, food
processing waste treatment and numerous other industrial production and
environmental remediation processes. We also believe that the quality of the
water separated from the contaminant is good enough to recycle back into the
process stream (back into the plant) or discharge to the environment. As clean
water becomes less available to the ever-increasing world population, this
technology may become more valuable.
The Voraxial(R) Separator is now manufactured and assembled at our Fort
Lauderdale, Florida facilities.
Voraxial(R) Separator products, services and the market
The need for effective and cost efficient wastewater treatment and
separation technology is global in scale. Moreover, virtually every industry
requires some type of separation process either during the manufacturing
process, prior to treatment or discharge of wastewater into the environment, for
6
general clean up, or emergency response capability. Separation processes,
however, are largely unknown to the average consumer. These processes are deeply
integrated in almost all industrial processes from oil to wastewater to
manufacturing. Management believes that the Voraxial(R) technology has
applications in most, if not all major separation industries. The unique
characteristics of the Voraxial(R) allow it to be utilized either as a
stand-alone unit or within an existing system to provide a more efficient and
cost effective way to handle the separation needs of the customer.
If, as we expect, environmental regulations, both domestically and
internationally, become more stringent, companies will be required to more
effectively treat their wastewater prior to discharge. We believe this offers a
great opportunity for the Company as the Voraxial(R) Separator can be utilized
in most separation applications to significantly increase the efficiency of the
separation processes while simultaneously reduce the cost to the end-user.
Further, management will only pursue the industries whereby the
customer will either see a decrease in cost or an increase in revenues. As the
Voraxial(R) Separator can provide an efficient means to separate contaminants
from water, it also enables the customer to conduct such operations while
utilizing less energy and a smaller footprint than conventional equipment in the
market today.
The Company has developed a comprehensive sales and marketing program
to stimulate awareness of the Voraxial(R) Separator to companies in several key
industries which management believes have the ability to establish its
Voraxial(R) Separator technology as an industry-wide standard. Management
believes this visibility will result in increase sales.
To demonstrate the efficiency of the Voraxial(R) Grit Separator, the
Company initiated and completed a demonstration project at one of seven
wastewater treatment facilities operated by the Hillsborough County Water
Department which services greater Tampa, Florida. Plans for this demonstration
program were developed with the assistance and support of the Hillsborough Water
Department. The system at Hillsborough incorporates a Voraxial(R) 4000 Grit
Separator at the head-works of the 5 million gallons per day (MGD) wastewater
treatment plant.
This demonstration initiates the sales and marketing program for the
Voraxial(R) Grit Separator in the municipal wastewater industry. With over
16,000 publicly owned wastewater treatment facilities in the United States
serving approximately 190 million people, Management believes that the municipal
wastewater industry can potentially be profitable for the Company. We believe
that the savings from the eliminated construction alone will more than justify
the cost to install a Voraxial Separator system.
In fiscal year 2005 Management intends to continue to concentrate its
marketing efforts in the following industrial sectors: municipal wastewater
treatment, oil/water separation, oil exploration and production, and industrial
wastewater. Industry-wide acceptance in any of these specific sectors could
imply extensive marketing and sales opportunities on a global scale. The Company
anticipates hiring additional management and staff to support the sales and
marketing program. Currently, interests have been expressed by companies, which
collectively have operations in North America, South America, Europe, the Middle
East, Australia, and Asia.
7
Inventory
Other than our Voraxial(R) Separators, we maintain no inventory of
finished parts until we receive a customer order. We currently have various
models of the Voraxial(R) Separator in inventory, which includes certain models
located at third party facilities on a trial basis.
FPA contract manufacturing is not initiated until corresponding
specifications have been obtained from a customer. Typically, a customer seeking
the manufacture of components will provide us with diagrams and specifications.
We complete any remaining design services and begin manufacturing the components
pursuant to the specific contract or purchase order.
Competition
We are subject to competition from a number of companies who have
greater experience, research abilities, engineering capability and financial
resources than we have.
Although we believe our Voraxial(R) Separator offers applications which
accomplish better or similar results on a more cost-effective basis than
existing products, other products have, in some instances, attained greater
market and regulatory acceptance. These competitors include, but are not limited
to Westfalia and AlfaLaval.
We believe the Voraxial(R) Separator can improve a company's technology
and in many ways result in a cost savings and other benefits to the customer.
These benefits result in and include:
o A reduction in water and energy usage,
o Less space needed to implement the Voraxial(R) Separator; the
Voraxial(R) Separator weighs less than current systems,
o A reduction in time to process and separate the fluids, allowing the
customer to be more efficient,
o Creation of a more efficient and faster process to treat water to
increase the overall productivity of the end-user,
o A reduction in the amount of disposable liquids,
o Fewer employees needed to operate the system, and
o Reduction of ongoing maintenance and servicing costs.
We believe that we are the only front-end solution for the separation
industry that can offer increased productivity while reducing the physical space
and energy required to operate the unit. These advantages translate into the
potential for substantial operating cost efficiencies that would increase the
profitability of the solution's end user.
Marketing
The Company's products and services are marketed through our existing
staff and consultants. To assist the Company in developing and penetrating the
municipal wastewater and oil industry, the Company has formed an Advisory
Committee consisting of John Combs, a consultant of the Company and principal of
Combs & Associates, a law firm with offices in Colorado and California; Barry
8
Gafner, former vice president of Atlantic Area Sales & Marketing for Cisco
Systems, Inc., where he was responsible for over $1.4 billion in direct sales
and marketing channels in the Eastern United States and Europe; Kevin Mulshine,
partner and managing director at Prager, Sealy & Co., LLC, a prominent
investment banking firm, with water and wastewater investment expertise; and
Henry Schlesinger, former president of Marshall Petroleum. To assist the Company
in entering the oil industry, in October, 2004, the Company added S. Randy
Miller, the former President of Serck Baker, a pre-eminent produced water firm,
to the Company's Advisory Committee.
We have presented the Voraxial(R) Separator at four prominent trade
shows in the past fiscal year. In October 2004, we demonstrated the Voraxial(R)
Separator at WEFTEC (Water Environment Federation's Technical Exhibition and
Conference) tradeshow in New Orleans, where the results of the Hillsborough
demonstration project was disseminated. The Water Environment Federation's
Technical Exhibition and Conference draws thousands of water and wastewater
professionals from around the world to view cutting-edge technologies in the
water quality field while learning about the latest practices, solutions, and
regulations in their industry.
In October 2004, we also demonstrated the Voraxial(R) Separator at the
Permian Basin International Oil Show in Odessa, Texas, "the largest inland
Petroleum Exposition in the world today" that showcases the latest technology
and newest equipment in the industry. In November, we showcased the Voraxial(R)
Separator at Clean Gulf 2004. Clean Gulf focuses on oil/haz-mat spill
prevention, response and technology in the Gulf Coast region. Clean Gulf
exhibition and conference provides a forum through which professionals from
regulatory agencies, the federal government, and the private sector can address
the real issues of cooperation, regulation, preparedness, prevention, and
response for today's energy industry.
In February 2005, we demonstrated our Voraxial(R) Separator in Shell
Technology Ventures (STV) trade booth, a division of Royal Dutch/Shell Group
(NYSE:RD), at the 22nd SPE/IADC Drilling Conference and Exhibition in Amsterdam,
The Netherlands. Our objective in attending this year's conference was to
increase awareness and strengthen relationships between STV and members of the
SPE/IADC while providing us with the exposure and, hence, the business
opportunities with potential customers.
The specific applications addressed with our separation technology at
the SPE/IADC Drilling Conference were the treatment of produced water and the
separation of oil and water at the various steps in the oil production process;
namely, extraction, transportation and initial refining of crude oil.
The Company believes it has received a great response from potential
clients and manufacturers representatives from the above mentioned tradeshows
and is still pursuing some of these opportunities. We anticipate presenting the
Voraxial(R) Separator at additional tradeshows in 2005.
9
Sources and availability of raw materials
The materials needed to manufacture our Voraxial(R) Separator have been
provided by Baldor Electric Co., Hughes Supply Inc. and SKF USA Inc., among
other suppliers. We do not anticipate any shortage of component parts.
Intellectual property
We currently hold several patents pertaining to the Voraxial(R)
Separator and are continually working on developing other patents. The Company
owns United States Patent #6,248,231, #5,904,840 and #5,084,189. The latest
patent, Patent #6,248,231 was registered in 2001 for Apparatus with Voraxial(R)
Separator and Analyzer. Patent #5,904,840 is for Apparatus for Accurate
Centrifugal Separation of Miscible and Immiscible Media, which is for technology
invented by our president and sole director, Alberto DiBella, and registered in
1999. The other is for the Method and Apparatus for Separating Fluids having
Different Specific Gravities. This is for technology invented by Harvey Richter
and registered in 1992 to Richter Systems, Inc. In 1996, we acquired assets,
including this patent from Richter Systems, Inc. The method and apparatus for
each of these is applied in our Voraxial(R) Separator. The Company has filed for
additional patents pertaining to the Voraxial(R) Separator. These patents are
still pending.
In addition, on December 16, 2003, we received trademark protection for
the word "Voraxial".
Governmental approvals and regulations; environmental compliance
Our operations are subject to extensive and frequently changing
federal, state and local laws and substantial regulation by government agencies,
including the United States Environmental Protection Agency (EPA), the United
States Occupational Safety and Health administration (OSHA) and the Federal
Aviation Administration (FAA). Among other matters, these agencies regulate the
operation, handling, transportation and disposal of hazardous materials used by
us during the normal course of our operations, govern the health and safety of
our employees and certain standards and licensing requirements for our aerospace
components that we contract manufacture. We are subject to significant
compliance burden from this extensive regulatory framework, which may
substantially increase our operational costs.
In addition, we may become liable for the costs of removal or
remediation of certain hazardous substances released on or in our facilities
without regard to whether or not we knew of, or caused, the release of such
substances. We believe that we are currently in material compliance with
applicable laws and regulations and are not aware of any material environmental
violations at any of our current or former facilities. We are unaware of any
handling by us of hazardous substances. There can be no assurance, however, that
our prior activities did not create a material environmental situation for which
we could be responsible or that future uses or conditions (including, without
limitation, changes in applicable environmental laws and regulation, or an
increase in the amount of hazardous substances generated or used by our
operations) will not result in any material environmental liability to us or
result in a material adverse effect to our financial condition and results of
operations.
10
We are subject to various federal, state, and local environmental
requirements, including those relating to discharges to air, water and land. We
believe that we have not previously and do not currently handle any hazardous
waste. However, in the future we may be subject to regulation involving the
handling and disposal of solid and hazardous waste, and the cleanup of
properties affected by hazardous substances. In addition, certain environmental
laws, such as The Comprehensive Response, Compensation and Liability Act
(CERCLA) and similar state laws, impose strict, retroactive, and joint and
several liability upon persons responsible for releases or potential releases of
hazardous substances. We have not incurred, nor do we expect to incur,
significant costs to address any releases or potential releases of such
substances. It is possible, however, given the retroactive nature of CERCLA
liability, that we will, from time to time, receive notices of potential
liability relating to current or former activities.
We have been and are in compliance with environmental requirements and
believe that we have no liabilities under environmental requirements. Further,
we have not spent any funds specifically on compliance with environmental laws.
However, some risk of environmental liability is inherent in the nature of our
business, and we might incur substantial costs to meet current or more stringent
compliance, cleanup or other obligations pursuant to environmental requirements
in the future. This could result in a material adverse effect to our results of
operations and financial condition.
The aerospace industry is highly regulated in the U.S. by the FAA and
is regulated in other countries by similar agencies to ensure that aviation
products and services meet stringent safety and performance standards. The FAA
prescribes standards and licensing requirements for aircraft components. Because
we assemble to meet specifications and designs created by our customers, we are
not required to obtain any licenses or approvals from the FAA.
Product liability
Our business exposes us to possible claims of personal injury, death or
property damage, which may result from the failure, or malfunction of any
component or subassembly manufactured or assembled by us. We currently do not
have product liability insurance. Any product liability claim made against us
will have a material adverse effect on our business, financial condition or
results of operations in light of our poor financial condition, losses and
limited revenues. We have plans to obtain product liability insurance in the
near future.
We obtained directors and officers, and general insurance coverage in
2004. We currently do not have product liability insurance.
Research and development
In our past two fiscal years, we have spent approximately $1,226,000 on
product research and development. The Company has finalized the development of
the Voraxial(R) Separator. Although we will continually work on advancing the
technology and applications whereby the technology can be used, we do not
anticipate devoting a significant portion of any future funds to this area of
the business.
11
Employees
We have five employees. All of these employees work full-time. We have
two administrative employees, Alberto DiBella and John A. DiBella. The balance
of our employees participate in the manufacturing and engineering of our
products. None of our employees are members of a union. We believe that our
relationship with our employees is favorable. We intend to add additional
employees in the upcoming year, including managers, sales representatives and
engineers.
Item 2. Description of Property
During September 2004, the Company entered into a three (3) year lease
for an office and manufacturing facility located at 821 NW 57th Place, Fort
Lauderdale, FL 33309. The lease is approximately $5,310 per month for the
initial two years of the lease and approximately $3,540 per month for the third
year of the lease. The Company has the option to renew the lease at the end of
the three-year term.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Over-The-Counter Bulletin
Board ("OTCBB") under the symbol EVTN. The bid quotations below, as provided by
Interactive Data, have been reported for the period ending March 31, 2003
through the period ending December 31, 2004. On April 7, 2005, the closing price
for our common stock was $0.51. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
Bid Quotations
--------------
Quarter Ended High Low
------------- ---- ---
March 31, 2003 $1.95 $1.00
June 30, 2003 $1.62 $0.96
September 30, 2003 $1.12 $0.55
December 31, 2003 $1.10 $0.61
March 31, 2004 $1.21 $0.80
June 30, 2004 $1.23 $0.79
September 30, 2004 $1.15 $0.65
December 31, 2004 $1.00 $0.60
We have been advised that seven member firms of the NASD are currently
acting as market makers for our common stock. There is no assurance that an
active trading market will develop which will provide liquidity for our existing
shareholders or for persons who may acquire common stock through the exercise of
warrants.
Holders
As of December 31, 2004, there were over 750 holders of record of our
common stock outstanding. Our transfer agent is Jersey Transfer & Trust Company,
Inc., Post Office Box 36, Verona, New Jersey 07044.
No prediction can be made as to the effect, if any, that future sales
of shares of common stock or the availability of common stock for future sale
will have on the market price of the common stock prevailing from time-to-time.
Sales of substantial amounts of common stock on the public market could
adversely affect the prevailing market price of the common stock.
Dividends
We have not paid a cash dividend on the common stock since current
management joined our company in 1996. The payment of dividends may be made at
13
the discretion of our board of directors and will depend upon, among other
things, our operations, our capital requirements and our overall financial
condition. As of the date of this report, we have no intention to declare
dividends.
Other Stockholders Matters
During the first quarter of the 2004 fiscal year, we issued options to
purchase an aggregate of 1,394,666 shares of our common stock to our chief
executive officer, an employee and a consultant in consideration for such
individuals converting accrued salaries and consulting fees in the aggregate
amount of $370,000 to equity in our Company. Options to purchase 697,333 shares
of our common stock are exercisable at $0.60 and options to purchase 697,333
shares of our common stock are exercisable at $1.00. The options are exercisable
for a period of five years commencing January 15, 2004. Options to purchase
216,666 shares of our common stock were issued to Alberto DiBella. Options to
purchase 1,033,333 shares of our common stock were issued to John A. DiBella.
Options to purchase 144,667 shares of our common stock were issued to John
Combs. The issuance of the options to our employees was exempt from registration
under Section 4(2) of the Securities Act. The employees had access to
information concerning our Company and had the opportunity to ask questions
concerning the viability of our Company. The options issued to our employees
contain legends restricting their transferability absent registration or
applicable exemption.
In January 2004, the Company issued 170,000 shares of common stock to a
consultant. The shares were valued at $138,000. This value will be amortized
over the life of the consulting agreement which is one year. The shares were
issued pursuant to the exemption from registration under Section 4(2) of the
Securities Act. The consultant received information concerning the Company and
had the opportunity to ask questions concerning the Company. The shares issued
contain a legend restricting transferability absent registration or applicable
exemption.
In January 2004, we closed a private placement which commenced in 2003.
Under the private placement we sold an aggregate of 61,666 shares of restricted
common stock at $0.60 per share and 61,666 warrants to purchase 61,666 shares of
common stock at $1.00 per share to four investors for proceeds of $37,000 during
the three months ended June 30, 2004. The warrants are exercisable for a period
of five years from the date of closing. The transactions were exempt from
registration under Section 4(2) of the Securities Act. The investors received
information concerning the Company and had the opportunity to ask questions
concerning the viability of the Company. The shares and warrants contain legends
restricting their transferability absent registration or applicable exemption.
On February 18, 2004, we issued options to purchase an aggregate of
30,000 shares of our common stock exercisable at $0.71 per share to three
individuals as consideration for joining our advisory committee. The options are
exercisable until February 18, 2006. The options were issued pursuant to the
exemption from registration under Section 4(2) of the Securities Act. The
advisors received information concerning our Company and had the opportunity to
ask questions concerning the viability of our Company. The options contain
legends restricting their transferability absent registration or applicable
exemption.
In February 2004, we extended the exercisable life of certain warrants
to purchase an aggregate of 243,200 shares of common stock issued in 2000 for a
14
period of one year. The warrants now expire in February 2006. In February 2004,
we also extended the exercisable life of certain warrants to purchase an
aggregate of 200,000 shares of common stock issued in 2001 for a period of one
year. The warrants now expire in April 2005.
During January and February 2004 we issued convertible notes to three
accredited individuals in the aggregate amount of $250,000 through a convertible
note agreement whereby the notes automatically convert into securities of the
Company pursuant to the terms of a private placement initiated in March 2004.
Effective May 5, 2004, the notes converted into 250,000 units described below.
The issuance of the notes and subsequent conversion was exempt from registration
under Section 4(2) of the Securities Act. The note holders received information
about the Company, and had opportunities to ask questions about the Company. The
securities issued to the investors contain the appropriate legend restricting
transferability absent registration or applicable exemption.
From May 2004 through August 2004, the Company sold an aggregate of
1,935,000 units of securities to 41 accredited investors for gross proceeds of
$1,451,250 under the private placement. The Company has paid Bathgate Capital, a
placement agent, a commission of 10% of the gross proceeds and a non-accountable
expense allowance of 3% of the gross proceeds and issued the placement agent
warrants to purchase six shares of common stock (three shares at $0.75 and three
shares at $1.00) for each 20 units sold in the offering. Each unit consisted of
one share of restricted common stock at $0.75 per share and one warrant to
purchase one share of common stock at $1.00 per share. The warrants are
exercisable for a period of five years from the date of closing. The
transactions were exempt from registration under Regulation D, Rule 506 of the
Securities Act. All of the investors were deemed accredited. The investors
received information concerning the Company and had the opportunity to ask
questions concerning the viability of the Company. The shares and warrants
contain legends restricting their transferability absent registration or
applicable exemption.
On June 30, 2004, we issued 7,100 shares of our common stock to an
individual in consideration for services rendered. The shares were issued
pursuant to the exemption from registration under Section 4(2) of the Securities
Act. The service provider received information concerning the Company and had
the opportunity to ask questions concerning the Company. The shares issued
contain a legend restricting transferability absent registration or applicable
exemption.
Small Business Issuer Purchase of Equity Securities
None.
Item 6. Management's Discussion and Analysis of Financial Condition and Plan of
Operations
General
Management's discussion and analysis contains various forward-looking
statements. These statements consist of any statement other than a recitation of
historical fact and can be identified by the use of forward-looking terminology
such as "may," "expect," "anticipate," "estimate" or "continue" or use of
negative or other variations or comparable terminology.
15
We caution that these statements are further qualified by important
factors that could cause actual results to differ materially from those
contained in the forward-looking statements, that these forward-looking
statements are necessarily speculative, and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements.
Critical Accounting Policies
The Securities and Exchange Commission issued Financial Reporting
Release No. 60 "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies" suggesting that companies provide additional disclosure and commentary
on their most critical accounting policies. In Financial Reporting Release No.
60, the Securities and Exchange Commission has defined the most critical
accounting policies as the ones that are most important to the portrayal of a
company's financial condition and operating results, and require management to
make its most difficult and subjective judgments, often as a result of the need
to make estimates of matters that are inherently uncertain. Based on this
definition, the Company has identified the following significant policies as
critical to the understanding of our consolidated financial statements. The
preparation of our consolidated financial statements 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 consolidated financial statements and the reported amounts of expenses
during the reporting periods. Areas where significant estimation judgments are
made and where actual results could differ materially from these estimates are:
A. The carrying amount of our inventory.
B. The assumptions used in calculating the fair value of our
stock options and warrants issued using the Black-Scholes
pricing model.
The Company believes the following is among the most critical
accounting policies that impact our consolidated financial statements. The
Company suggests that our significant accounting policies as described in our
consolidated financial statements in the Summary of Significant Accounting
Policies be read in conjunction with this Management's Discussion and Analysis
of Financial Condition or Plan of Operations:
A. The inventory of the Company is priced at the lower of cost or
market.
B. The Company accounts for its stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations, and Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
Year ended December 31, 2004 compared to year ended December 31, 2003
Revenue
We continued to focus our efforts and resources to the manufacturing,
assembling, marketing and selling of the Voraxial(R) Separator. Revenue
16
increased 533% to $19,000 for year ended December 31, 2004 as compared to $3,000
for the year ended December 31, 2003. The increase in revenues is due to $18,000
in rental revenue received during the year ended December 31, 2004. Rental
revenues are a result of in-house testing and rental shipments to customers
interested in utilizing the Voraxial(R) Separator. The increase in revenues was
partially offset by a $2,000 decrease in product sales. We believe we have
increased the exposure and awareness of the Voraxial Separator through our
rent/lease programs. We do expect to generate revenues from the sale of the
Voraxial(R) Separator in 2005.
Costs and Expenses
Costs and expenses increased by 30% or $407,000 to $1,748,000 for the
year ended December 31, 2004 as compared to $1,341,000 for the year ended
December 31, 2003. The increase is due to increases in general and
administrative expenses and research and development during the year ended
December 31, 2004.
General and administrative expenses
General and Administrative expenses increased by 48% to $1,111,000 for
the year ended December 31, 2004 from $751,000 for the year ended December 31,
2003. The increase was due principally to an increase in executive salaries and
an increase in personnel and costs related to the marketing of the Voraxial(R)
Separator. We have focused all of our efforts on the marketing of the
Voraxial(R) Separator.
Research and development expenses
Research and Development expenses increased 8% to $637,000 for the year
ended December 31, 2004 from $589,000 for the year ended December 31, 2003. This
increase was due to our continuing efforts to expand the applications of the
Voraxial(R) Separator for specific industries.
Liquidity and capital resources
The Company has experienced net losses, has negative cash flows from
operating activities, and had to raise capital to sustain operations. There is
no assurance that the Company's developmental and marketing efforts will be
successful, that the Company will ever have commercially accepted products, or
that the Company will achieve a level of revenue sufficient to provide cash
inflows to sustain operations. The Company will continue to require the infusion
of capital until operations become profitable. During 2005, the Company
anticipates seeking additional capital, increasing sales of the Voraxial(R)
Separator and continuing to restrict expenditures. As a result of the above, the
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
At December 31, 2004, we had working capital of approximately $124,000
and cash of approximately $221,000. At December 31, 2004, we had an accumulated
deficit of $4,791,000. For the year ended December 31, 2004, we had a net loss
of $1,742,000. Operating at a loss for the year negatively impacted our cash
position; however, funds received from the private placements completed during
2004 improved our working capital position.
17
During the year ended December 31, 2004, we completed two private
offerings. During January 2004 we issued 61,666 shares at $0.60 per share in
connection with a private placement transactions commenced in 2003 for gross
proceeds of $37,000. In August 2004, we sold an aggregate of 1,935,000 units of
securities to 41 investors for gross proceeds of $1,451,250 under the private
placement. Each unit consisted of one share of restricted common stock at $0.75
per share and one warrant to purchase one share of common stock at $1.00 per
share. The warrants are exercisable for a period of five years from the date of
closing.
On February 16, 2005 we reduced the exercise price of 4,514,997 of our
outstanding common stock purchase warrants to $0.40 per share for a period of
60-days. These warrants were issued from February 2000 through August 2004 to
accredited investors in private placement transactions exempt from registration
under such Section 4(2) of the Securities Act of 1933 and Regulation D of Rule
506. Each warrant is exercisable to purchase one share of our restricted common
stock at exercise prices ranging from $1.00 to $4.00 per share. Subsequent to
the 60-day period, the exercise price of the warrants will revert to the
original exercise price per share until the expiration date of the warrants. No
other terms of the warrants were modified or changed as a result of the
reduction in the exercise price. Proceeds from the exercised warrants, if any,
will be used for working capital purposes.
We believe that including our current cash resources and anticipated
revenue to be generated by our Voraxial(R) Separators, we will have sufficient
resources to continue business operations for the next twelve months. To the
extent that these resources are not sufficient to sustain current operating
activities, we may need to seek additional capital, or adjust our operating plan
accordingly.
Continuing losses
We may be unable to continue as a going concern, given our limited
operations and revenues and our significant losses to date. Consequently, our
working capital may not be sufficient and our operating costs may exceed those
experienced in our prior years. In light of these recent developments, we may be
unable to continue as a going concern.
The Company has experienced net losses, has a working capital deficit
and sustained cash outflows from operating activities and had to raise capital
to sustain operations. There is no assurance that the Company's developmental
and marketing efforts will be successful, that the Company will ever have
commercially accepted products, or that the Company will achieve significant
revenues. If the Company is unable to successfully commercialize its Voraxial
Separator, it is unlikely that the Company could continue its business. The
Company will continue to require the infusion of capital until operations become
profitable. During 2005, the Company anticipates seeking additional capital,
increasing sales of the voraxial separator and continuing to restrict expenses.
Substantial doubt exists about the ability of the Company to continue as a going
concern.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 150, "Accounting For Certain Financial Instruments with
Characteristics of both Liabilities and Equity". Statement of Financial
Accounting Standards ("SFAS") No. 150 changes the accounting for certain
18
financial instruments with characteristics of both liabilities and equity that,
under previous pronouncements, issuers could account for as equity. The new
accounting guidance contained in SFAS No. 150 requires that those instruments be
classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial statements. One type is mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets. A second type includes put options and forward purchase contracts which
involve instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments that
are liabilities under this Statement is obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of the
issuers' shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the
existing definition of liabilities in FASB Concepts Statement No. 6, "Elements
of Financial Statements". The remaining provisions of this Statement are
consistent with the FASB's proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by issuing its
own shares.
SFAS No. 150 shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of a non-public entity, as to which
the effective date is for the fiscal periods beginning after December 15, 2004.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS
No.151 amends the guidance in Accounting Research Bulletin No. 43, Chapter 4,
"Inventory Pricing" to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage). In
addition, SFAS No.151 requires the allocation of fixed production overhead to
the costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS No. 151 will be effective for the Company
beginning in 2005. In December 2004, the FASB issued SFAS No. 153, "Exchange of
Non-Monetary Assets, an Amendment of Accounting Principles Board ("APB") No.
29". SFAS No. 153 amends APB Opinion No. 29, "Accounting for Non-Monetary
Transactions". Earlier guidance had been based on the principle that exchanges
of non-monetary assets should be based on the fair value of the assets exchanged
and APB No. 29 included certain exceptions to this principle. However, FASB 153
eliminated the specific exceptions for non-monetary exchanges with a general
exception rule for all exchanges of non-monetary assets that do not have
commercial and economic substance. A non-monetary exchange has commercial
substance only if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective for
non-monetary exchanges occurring in fiscal periods beginning after June 15,
2005.
In December 2004, the FASB issued a revised SFAS No. 123, "Accounting
for Stock-Based Compensation", which supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees", and its related implementation guidance. SFAS
No. 153 (R) requires a public entity to recognize and measure the cost of the
employee services it receives in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions). These
19
costs will be recognized over the period during which an employee is required to
provide services in exchange for the award- the requisite service period
(usually the vesting period). This statement also establishes the standards for
the accounting treatment of these share-based payment transactions in which an
entity exchanges its equity instruments for goods or services. It addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This statement
shall be effective the first interim or annual reporting period that begins
after December 15, 2005 for small business public entities and nonpublic
companies.
The implementation of the above pronouncements is not expected to have
a material effect on the Company's consolidated financial statements.
Risk Factors
Our independent auditors have raised substantial doubt about our ability to
continue as a going concern.
Although we operated as a precision machine shop for a number of years,
we have only recently completed the development of the Voraxial Separator, and
we have not yet generated significant revenues from that product. As a result,
we have limited operating history in our planned business upon which you may
evaluate our business and prospects. The revenues and income potential of our
business and the markets of our separation technology are unproven. Our business
plan must be considered in light of risks, expenses, delays, problems, and
difficulties frequently encountered by development stage companies.
We have incurred operating losses since our inception, and we will
continue to incur net losses until we can produce sufficient revenues to cover
our costs. At December 31, 2004, we had an accumulated deficit of $4,971,000,
including a net loss of $1,742,000 for the year ended December 31, 2004. Even if
we achieve profitability, we may not be able to sustain or increase our
profitability on a quarterly or annual basis. Based on historic cash flow and
projected expenditures, management believes that proceeds from the sale of the
minimum number of Units could enable us to pursue our basic business plan for at
least the next twelve months.
Our ability to generate future revenues will depend on a number of
factors, many of which are beyond our control. These factors include the rate of
market acceptance of our products, competitive efforts, and general economic
trends. Due to these factors, we cannot anticipate with any degree of certainty
what our revenues will be in future periods. You have limited historical
financial data and operating results with which to evaluate our business and our
prospects. As a result, you should consider our prospects in light of the early
stage of our business in a new and rapidly evolving market.
Our independent auditors have included in their audit report an
explanatory paragraph that states that our continuing losses from operations and
negative cash flows from operations raises substantial doubt about our ability
to continue as a going concern.
20
We have been limited by insufficient capital, and we may continue to be so
limited.
In the past, we have lacked the capital to market the Voraxial
Separator as we would have liked. Our inability to raise the funding or to
otherwise finance our capital needs could adversely affect our financial
condition and our results of operations, and could prevent us from implementing
our business plan.
We may seek to raise capital through public and private equity
offerings, debt financing or collaboration, and strategic alliances. Such
financing may not be available when we need it or may not be available on terms
that are favorable to us. If we raise additional capital through the sale of our
equity securities, your ownership interest will be diluted and the terms of the
financing may adversely affect your holdings or rights as a stockholder.
Our business model is unproven.
Our business model is currently unproven and in the early stages of
development and we have not yet undertaken any substantial marketing activities.
The technological, marketing, and other aspects of our business will require
substantial resources and will undergo constant developmental change. Our
ability to develop a successful business model will be dependent upon the
relative success or failure of these respective aspects of our operations and
how effectively they work in concert with one another. If we expend significant
financial and management resources attempting to market the Voraxial Separator
to a specific industry segment, and we subsequently are unsuccessful in
generating sales from that segment, we may not have enough resources to market
to other industry segments. There are no assurances that we will successfully
develop our business model from the standpoint of successfully implementing an
efficient and effective marketing plan.
If our products do not achieve and maintain market acceptance, our business will
not be successful.
Even though our product is successfully developed, our success and
growth will depend upon its acceptance by various potential users of our
product. Acceptance will be a function of our product being more cost effective
as compared to currently existing or future technologies. If our product does
not achieve market acceptance, our business will not be successful. In addition,
even if our product achieves market acceptance, we may not be able to maintain
that market acceptance over time if new products or technologies are introduced
that are more favorably received than our product or render our products
obsolete.
If we do not develop sales and marketing capabilities or arrangements
successfully, we will not be able to commercialize our product successfully.
We have limited sales and marketing experience. We may market and sell
our product through a direct sales force or through other arrangements with
third parties, including co-promotion arrangements. Since we may market and sell
any product we successfully develop through a direct sales force, we will need
to hire and train qualified sales personnel.
21
Our market is subject to intense competition. If we are unable to compete
effectively, our product may be rendered non-competitive or obsolete.
We are engaged in a segment of the water filtration industry that is
highly competitive and rapidly changing. Many large companies, academic
institutions, governmental agencies, and other public and private research
organizations are pursuing the development of technology that can be used for
the same purposes as our product. We face, and expect to continue to face,
intense and increasing competition, as new products enter the market and
advanced technologies become available. We believe that a significant number of
products are currently under development and will become available in the future
that may address the water filtration segment of the market. If other products
are successfully developed, it may be marketed before our product.
Our competitors' products may be more effective, or more effectively
marketed and sold, than any of our products. Many of our competitors have:
o significantly greater financial, technical and human resources
than we have and may be better equipped to discover, develop,
manufacture and commercialize products; and
o more extensive experience in marketing water treatment products.
Competitive products may render our products obsolete or noncompetitive
before we can recover the expenses of developing and commercializing our
product. Furthermore, the development of new technologies and products could
render our product noncompetitive, obsolete, or uneconomical.
As we evolve from a company primarily involved in design and development to one
also involved in commercialization, we may encounter difficulties in managing
our growth and expanding our operations successfully.
We may experience a period of rapid and substantial growth that may
place a strain on our administrative and operational infrastructure, and we
anticipate that continued growth could have a similar impact. As our product
continues to enter and advance in the market, we will need to expand our
development, regulatory, manufacturing, marketing and sales capabilities or
contract with third parties to provide these capabilities for us. As our
operations expand, we expect that we will need to manage additional
relationships with various collaborative partners, suppliers, and other third
parties.
If we are unable to adequately protect our technology, or if we infringe the
rights of others, we may not be able to defend our markets or to sell our
product.
Our success may depend in part on our ability to continue and expand
our patent protection both in the United States and in other countries for our
product. Due to evolving legal standards relating to the patentability,
validity, and enforceability of patents covering our product and the scope of
claims made under these patents, our ability to obtain and enforce patents is
uncertain and involves complex legal and factual questions. Accordingly, rights
under any issued patents may not provide us with sufficient protection for our
product or provide sufficient protection to afford us a commercial advantage
against competitive products or processes.
22
Our success may also depend in part on our ability to operate without
infringing the proprietary rights of third parties. The manufacture, use, or
sale of our product may infringe on the patent rights of others. Likewise, third
parties may challenge or infringe upon our existing or future patents.
Proceedings involving our patents or patent applications or those of others
could result in adverse decisions regarding:
o the patentability of our inventions relating to our product;
and/or
o the enforceability, validity, or scope of protection offered by
our patents relating to our product.
Litigation may be necessary to enforce the patents we own and have
applied for (if they are awarded), copyrights, or other intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement. This
type of litigation could result in the expenditure of significant financial and
managerial resources and could result in injunctions preventing us from
distributing certain products. Such claims could materially adversely affect our
business, financial condition, and results of operations.
We are dependent on key personnel.
We are dependent upon the availability and the continued performance of
the services of key personnel. The loss of the services of any such personnel
could have a material adverse effect on us. In addition, the availability of
skilled personnel is extremely important to our growth strategy and our failure
to attract and retain such personnel could have a material, adverse effect on
us. We do not currently maintain any key man life insurance covering these
persons.
Our operations are subject to governmental approvals and regulations and
environmental compliance.
Our operations are subject to extensive and frequently changing
federal, state, and local laws and substantial regulation by government
agencies, including the United States Environmental Protection Agency (EPA), the
United States Occupational Safety and Health administration (OSHA) and the
Federal Aviation Administration (FAA). Among other matters, these agencies
regulate the operation, handling, transportation and disposal of hazardous
materials used by us during the normal course of our operations, govern the
health and safety of our employees and certain standards and licensing
requirements for our aerospace components that we contract manufacture. We are
subject to significant compliance burden from this extensive regulatory
framework, which may substantially increase our operational costs.
We believe that we have been and are in compliance with environmental
requirements and believe that we have no liabilities under environmental
requirements. Further, we have not spent any funds specifically on compliance
with environmental laws. However, some risk of environmental liability is
inherent in the nature of our business, and we might incur substantial costs to
meet current or more stringent compliance, cleanup, or other obligations
pursuant to environmental requirements in the future. This could result in a
material adverse effect to our results of operations and financial condition.
23
Our business has a substantial risk of product liability claims. If we are
unable to obtain appropriate levels of insurance, a product liability claim
against us could aversely affect our business.
Our business exposes us to possible claims of personal injury, death,
or property damage, which may result from the failure, or malfunction of any
component or subassembly manufactured or assembled by us. We currently do not
have product liability insurance. Any product liability claim made against us
will have a material adverse effect on our business, financial condition, or
results of operations in light of our poor financial condition, losses and
limited revenues. We have plans to obtain product liability insurance in the
near future. We do not possess third party insurance coverage and are,
therefore, effectively, self-insured with respect to product liability,
directors and officers, and general insurance coverage. We have plans to obtain
third party insurance coverage in the near future.
Item 7. Financial Statements
The financial statements required by this report are included,
commencing on F-1.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Effective March 10, 2005, Eisner LLP was dismissed as our principal
accountants to audit our financial statements. The reports of Eisner on our
financial statements for the past two fiscal years contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle; however, the reports were modified to
include an explanatory paragraph wherein Eisner expressed substantial doubt
about our ability to continue as a going concern. The dismissal of Eisner and
subsequent engagement of new independent accountants (described below) was
approved by our board of directors. In connection with its audits for the two
most recent fiscal years and including the interim period up to and including
the date of dismissal, there have been no disagreements with Eisner on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Eisner would have caused them to make reference thereto in their
report on the financial statements for such years; however, the reports were
modified to include an explanatory paragraph wherein Eisner expressed
substantial doubt about our ability to continue as a going concern. Effective
March 10, 2005, we engaged the accounting firm of Weinberg & Company, P.A. as
our new independent accountants to audit our financial statements for the fiscal
year ending December 31, 2004.
Item 8A. Controls and Procedures
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation
was done under the supervision and with the participation of our Principal
Executive Officer and Principal Financial Officer. Based upon that evaluation,
our Principal Executive Officer and Principal Financial Officer concluded that
our disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy our disclosure obligations under the
Exchange Act.
24
Changes in internal controls
There were no significant changes in our internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls.
Item 8A. Other Information
None.
25
PART III
Item 9. Directors and Executive Officers
Directors and executive officers
The following sets forth the names and ages of our officers and
directors. Our directors are elected annually by our shareholders, and the
officers are appointed annually by our board of directors.
Name Age Position
Alberto DiBella 73 President and Director
Frank J. DeMicco(1) 55 Chief Operating Officer(1)
John A. DiBella 33 Executive Vice President of
Business Development
(1) In an effort to reduce the Company's general and administrative
expenses, as of December 31, 2004 the Company and Frank J.
DeMicco mutually agreed to terminate his employment agreement
with the Company. Mr. DeMicco will remain with the Company as a
consultant to continue the sales and marketing of the
Voraxial(R) Grit Separator into the municipal wastewater
industry.
Alberto DiBella is a graduate of the Florence Technical Institute,
Italy, where he obtained a degree in mechanical engineering in 1952. After
immigrating to the United States in 1962, Mr. DiBella worked in New Jersey for a
major tool manufacturer. From 1988 to 1993, he was the President of E.T.P., Inc,
a machining business, where he was responsible for day to day operations of the
company. In 1993, he relocated to Florida and founded FPA, our wholly owned
subsidiary. Since our inception he has worked in the day to day operations of
FPA. He has been our president and chairman since June 1996 and president and
chairman of our subsidiary, FPA, since its organization in February 1993.
Frank J. DeMicco was employed by our Company from January 2003 through
December 2004. He currently serves as a consultant to our Company. He previously
served as President of United Water New Jersey and Senior Vice-President of
Operations for United Water Resources from 1996 to 2000. DeMicco, a licensed
professional engineer in New York, New Jersey, Pennsylvania, Virginia and Puerto
Rico, has over 35 years of senior executive management experience in the fields
of heavy construction, consulting engineering and utility design, construction,
and management. As the former senior technical and operations executive within
United Water executive management, DeMicco assisted that company in increasing
its market capitalization from $400 Million in 1991 to $1.8 Billion in 2000. In
July 2000, United Water was acquired by the French utility giant, Suez Lyonnaise
des Eaux (NYSE: SZE), the world's largest provider of water and wastewater
services. Prior to his tenure at United Water, DeMicco was the President and
Chief Technical Officer of Buck, Seifert & Jost, Consulting Engineers. DeMicco's
responsibilities have included responsible charge of design and/or construction
inspection for water and sewage treatment plants, pumping stations, gravity
dams, water and sewage pipelines, filter plant expansions, computerized process
control systems and control systems software development for the water treatment
industry.
26
John A. DiBella has served as an employee of our Company since January
2002. From 2000 through January 2002 Mr. DiBella provided consulting services to
our Company. Mr. DiBella currently serves as the Company's Vice President of
Business Development. Mr. DiBella co-founded and served as President of PBCM, a
financial management company located in New Jersey from 1997 to 1999. While at
PBCM, Mr. DiBella was involved in various consulting services regarding the
development of publicly traded companies, including establishing a management
team, negotiating partnerships, licensing agreements and investigating merger
and acquisition opportunities. Prior to co-founding PBCM, Mr. DiBella served as
a Securities Analyst in the Equities and Derivatives Department for Donaldson,
Lufkin and Jenrette, a NYSE member firm. Mr. DiBella holds a Bachelor of Science
Degree in Finance and Economics from Rutgers University. Mr. DiBella is the
nephew of Alberto DiBella.
Board of Directors and Committees
During the year ended December 31, 2004, our board of directors held
six meetings.
To date, we have not established an audit committee. Due to our
financial position, we have been unable to attract qualified independent
directors to serve on our board. Our board of directors, solely consisting of
Alberto DiBella, reviews the professional services provided by our independent
auditors, the independence of our auditors from our management, our annual
financial statements and our system of internal accounting controls. Mr. DiBella
is not considered a "financial expert."
We have not established a compensation committee nor nominating
committee.
Advisory Committee
As disclosed under Description of Business, we have established an
Advisory Committee. The purpose of the Advisory Committee is to provide business
advice and recommendations to management of the Company. The Advisory Committee
consists of J. John Combs, Barry Gafner, Kevin Mulshine and Henry Schlesinger.
Mr. Combs also serves as al consultant to our company. These individuals serve
for two year terms. We provide no fixed fee to advisors. The Committee does not
met on a scheduled basis.
On February 18, 2004, we issued options to purchase an aggregate of
30,000 shares of our common stock exercisable at $0.71 per share to Barry
Gafner, Kevin Mulshine and Henry Schlesinger as consideration for joining our
advisory committee. The options are exercisable until February 18, 2006.
Code of Ethics
During the year ended December 31, 2003 we adopted a code of ethics.
The code applies to our officers and directors. The code provides written
standards that are designed to deter wrong-doing and promote: (i) honest and
ethical conduct; (ii) full, fair, accurate, timely and understandable
disclosure; (iii) compliance with applicable laws and regulations; (iv) promote
reporting of internal violations o the code; and (v) accountability for the
adherence to the code.
Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own more than ten percent of
27
our outstanding common stock to file with the SEC initial reports of ownership
and reports of changes in ownership of common stock. These persons are required
by SEC regulation to furnish us with copies of these reports they file.
To our knowledge, based solely on a review of the copies of reports
furnished to us, Section 16(a) filing requirements applicable to our officers,
directors and greater than ten percent beneficial owners were not complied with
on a timely basis for the period which this report relates.
Item 10. Executive compensation
The table below sets forth compensation for the past three years
awarded to, earned by or paid to our chief executive officer and each executive
officer whose compensation exceeded $100,000 for the year ended December 31,
2004.
Summary Compensation Table
--------------------------
Long Term Compensation
----------------------
Annual Compensation Shares of Common Stock
Name and Position Year Salary Bonus Underlying Options Other
----------------- ---- ------ ----- ------------------ -----
Alberto DiBella, CEO 2004 $165,000 --- 216,666(8) --
2003 $150,000(4)(8) --- --- (1)
2002 $ 12,000(4)(8) --- --- --
Frank J. DeMicco, 2004 $128,000 --- --- --
Former COO(7) 2003 $150,000 --- 150,000(2) (2)
John A. DiBella, EVP 2004 $150,000(5)(6) --- 1,033,333(6) --
2003 $150,000(5)(6) --- --- --
2002 $ 60,000 $60,000 2,000,000(3) (3)
(1) For services rendered during 1997, Mr. DiBella was paid cash
compensation of $50,000 together with 1,000,000 voting convertible,
non-cumulative 8% preferred shares, $0.001 par value. In 1997 Mr.
DiBella also exchanged 5,000,000 shares of common stock for 5,000,000
shares of voting convertible, non-cumulative 8% preferred shares, $.001
par value. Effective December 31, 2003, pursuant to its terms, the
preferred stock converted into shares of common stock on a one for one
basis. Mr. DiBella had 6,000,000 shares of preferred stock at the time
of conversion.
(2) Pursuant to Mr. DeMicco's employment agreement, Mr. DeMicco received
warrants to purchase 300,000 shares of the Company's common stock
exercisable at $1.00 per share, subject to certain vesting provisions.
150,000 warrants vested prior to the Company's separation agreement
with Mr. DeMicco. The remaining warrants were terminated.
(3) Pursuant to Mr. DiBella's employment agreement, Mr. DiBella received
options to purchase 2,000,000 shares of the Company's common stock
exercisable at $.15 per share.
(4) Salary was deferred and subsequently paid during 2004.
(5) 76,000 and $133,000 has been deferred in 2004 and 2003, respectively.
(6) In an effort to save the Company money for operating expenses, Mr.
DiBella has accrued a significant percentage of his salary. Mr. DiBella
agreed to convert a portion of the accrued salary into options: 516,666
shares of common stock underlying options exercisable at $.60 per share
and 516,666 shares of common stock underlying options exercisable at
$1.00 per share.
(7) Effective December 31, 2004 Mr. DeMicco no longer serves as an
executive officer of the Company.
28
(8) In an effort to save the Company money for operating expenses, Mr.
DiBella accrued a significant percentage of his salary. Mr. DiBella
agreed to convert a portion of the accrued salary into options: 110,000
shares of common stock underlying options exercisable at $0.60 per
share and 110,000 shares of common stock underlying options exercisable
at $1.00 per share.
Options granted in the Year Ended December 31, 2004
---------------------------------------------------
Number of % of Total/
Securities Options/SARs
Underlying Granted to Exercise of
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year ($/Share) Date
---- ------- ----------- --------- ----
Alberto DiBella 108,333 7.6% $0.60 1/15/09
Alberto DiBella 108,333 7.6% $1.00 1/15/09
John DiBella 516,666 36.3% $0.60 1/15/09
John DiBella 516,666 36.3% $1.00 1/15/09
Frank DeMicco 0 -- -- --
Aggregated Fiscal Year-End Option Value Table
The following table sets forth certain information concerning
unexercised stock options as of December 31, 2004. No options were exercised
during the year ended December 31, 2004.
Number Of Value Of Unexercised
Unexercised Options In-the-Money
Held at 12/31/04(#) Options at 12/31/03 (1)
------------------- -----------------------
Shares Shares
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Alberto DiBella 216,666 0 $ 0 $0
John DiBella 3,033,333 0 $900,000 $0
Frank DeMicco 150,000 0 $ 0 $0
(1) The closing sale price of the Common Stock on December 31, 2004 as
reported by OTCBB was $0.60 per share. Value is calculated by
multiplying (a) the difference between $0.60 and the option exercisable
price by (b) the number of shares of Common Stock underlying the
options.
Employment agreements
Alberto DiBella, our chief executive officer, president and chairman
does not have an employment contract. However, the Company has recorded a charge
$12,000 to reflect the fair value of services rendered to the Company in 2002
Mr. DiBella accrued a salary of $150,000 in 2003, which was subsequently paid
during 2004.
Frank DeMicco. On January 1, 2003, we entered into a five year
employment agreement with Mr. DeMicco to serve as operating officer of our
Company. Pursuant to the agreement, Mr. DeMicco receives an annual base salary
of $150,000 per year, payable in monthly installments. In addition, Mr. DeMicco
shall receive an annual increase in base salary equal to a minimum of ten
percent of his prior base salary. Pursuant to the agreement, Mr. DeMicco also
has received warrants to purchase 150,000 shares of common stock exercisable at
$1.00 per share. In an effort to reduce the Company's general and administrative
29
expenses, as of December 31, 2004 the Company and Frank J. DeMicco mutually
agreed to terminate his employment agreement with the Company. Mr. DeMicco will
remain with the Company as a consultant to continue the sales and marketing of
the Voraxial(R) Grit Separator into the municipal wastewater industry. The
Company is receiving request for quotes and inquiries for projects by municipal
wastewater facilities and Mr. DeMicco's expertise will be utilized to respond to
these opportunities. The Company believes that the change in operations will
reduce general and administrative expenses by approximately $125,000 per year.
Mr. DeMicco had served as the Company's principal operating officer since
January 1, 2003. In January 2005 the Company entered into a one year consulting
agreement with Mr. DeMicco. Under the agreement, we issued Mr. DeMicco warrants
to purchase 50,000 shares of our common stock exercisable at $1.00 per share.
John A. DiBella. On January 17, 2002, our Company entered into a one
year employment agreement with John A. DiBella to serve as vice president and
director of business development. Pursuant to the agreement, Mr. DiBella
receives a base salary of $60,000 with a bonus provision for $60,000. Such bonus
and salary were earned and accrued in 2002. Mr. DiBella was also granted stock
options to purchase 2,000,000 shares of our common stock at an exercise price of
$.15 per share. The agreement further provides that until a new employment
agreement is negotiated, Mr. DiBella's salary shall increase to $150,000 per
year, payable monthly. In an effort to save the Company money for operating
activity, Mr. DiBella has accrued a significant percentage of his salary over
the past 5 years. Mr. DiBella agreed to convert a portion of the accrued salary
into options: 516,666 shares of common stock underlying options exercisable at
$0.60 per share and 516,666 shares of common stock underlying options
exercisable at $1.00 per share.
Director Compensation
Directors are not compensated by our Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership
The table below sets forth information with respect to the beneficial
ownership of our securities as of March 31, 2005 by:
1) each person known by us to be the beneficial owner of five percent
or more of our outstanding securities, and
2) executive officers and directors, individually and as a group.
Unless otherwise indicated, we believe that the beneficial owner has
sole voting and investment power over such shares.
30
Name and Address of Number of Shares Percentage of
Beneficial Owner Beneficially Owned Ownership
---------------- ------------------ ---------
Alberto DiBella 9,266,666(1) 51.8%
3500 Bayview Drive
Fort Lauderdale, FL 33308
John DiBella 3,033,333(2) 14.5%
821 N.W. 57th Place
Fort Lauderdale, FL 33309
All officers and directors 12,299,999 61.3%
as a group (2 persons)
(1) Alberto DiBella's beneficial share ownership includes 10,000 shares of
common stock owned by his wife. Also includes options to purchase 108,333
shares of common stock exercisable at $0.60 per share and options to
purchase 108,333 shares of common stock exercisable at $1.00 per share.
(2) Includes 2,000,000 shares of common stock underlying warrants exercisable
at $.15 per share, 516,666 shares of common stock underlying options
exercisable at $.60 per share and 516,666 shares of common stock
underlying options exercisable at $1.00 per share.
Securities Authorized for Issuance Under Equity Compensation Plans
The table below provides information pertaining to all compensation
plans under which equity securities of our company are authorized for issuance
as of the end of the most recent fiscal year.
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding securities
warrants and rights warrants and rights reflected in 1st column
------------------- ------------------- -----------------------
Equity compensation plans
approved by security holders 0 N/A 0
Equity compensation plans not
approved by security holders 3,679,666 $0.52 0
Total 3,679,666 0
Item 12. Certain Relationships and Related Transactions
None.
31
Item 13. Exhibits, Lists and Reports on Form 8-K
(a) Exhibit No. Description of Exhibit
----------- ----------------------
2 Plan of Merger*
3(i) Articles of Incorporation*
3(ii) Bylaws*
4 Share Certificate*
14 Code of Ethics (1)
21 Subsidiaries*
31.1 Rule 13a-14(a)/15d-4(a) Certification of
Principal Financial Officer
31.2 Rule 13a-14(a)/15d-4(a) Certification of
Principal Financial Officer
32.1 Section 1350 Certification of Principal
Executive Officer
32.2 Section 1350 Certification of Principal
Financial Officer
*Previously filed
(1) Previously filed on Form 10-KSB annual report for the
year ended December 31, 2003.
(b) Reports on Form 8-K
On December 30, 2004 the Company filed a report on Form 8-K to disclose
information under Item 5.02.
Item 14. Principal Accountant Fees and Services
Year ended December 31, 2004
Audit Fees: The aggregate fees, including expenses, billed by our
principal accountant in connection with the audit of our consolidated financial
statements for the most recent fiscal year and for the review of our financial
information included in our Annual Report on Form 10-KSB; and our quarterly
reports on Form 10-QSB during the fiscal year ending December 31, 2004 was
$30,000.
Audit Related Fees: The aggregate fees, including expenses, billed by
our principal accountant for services reasonably related to the audit for the
year ended December 31, 2004 were $-0-.
Tax Fees: The aggregate fees, billed by our principal accountant for
services reasonably related to tax services during the year ended December 31,
2004 were $0.
All Other Fees: The aggregate fees, including expenses, billed for all
other services rendered to us by our principal accountant during year 2004 was
$-0-.
32
Year ended December 31, 2003
Audit Fees: The aggregate fees, including expenses, billed by our
principal accountant in connection with the audit of our consolidated financial
statements for the fiscal year ended December 31, 2003 and for the review of our
financial information included in our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2003; and our quarterly reports on Form 10-QSB
during the fiscal year ending December 31, 2003 was $27,050.
Audit Related Fees: The aggregate fees, including expenses, billed by
our principal accountant for services reasonably related to the audit for the
year ended December 31, 2003 were $-0-.
Tax Fees: The aggregate fees, billed by our principal accountant for
services reasonably related to tax services during the year ended December 31,
2004 were $0.
All Other Fees: The aggregate fees, including expenses, billed for all
other services rendered to us by our principal accountant during year 2004 was
$-0-.
The Board of Directors has considered whether the provisions of the
services covered above under the captions "Financial Information Systems Design
and Implementation Fees" and "All Other Fees" is compatible with maintaining the
auditor's independence.
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant caused this report to be signed on its
behalf by the undersigned and duly authorized on April 14, 2005.
ENVIRO VORAXIAL TECHNOLOGY, INC.
By: /s/ Alberto DiBella
-------------------------------------
Alberto DiBella
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
34
ENVIRO VORAXIAL TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
CONTENTS
PAGE F-2 - F-3 Reports of Independent Registered Public Accounting Firms
PAGE F-4 Consolidated Balance Sheet as of December 31, 2004
PAGE F-5 Consolidated Statements of Operations for the Years Ended
December 31, 2004 and 2003
PAGE F-6 Consolidated Statements of Stockholders' Equity (Deficiency)
for the Years Ended December 31, 2004 and 2003
PAGE F-7 Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004 and 2003
PAGE F-8 Notes to Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Enviro Voraxial Technology, Inc.
We have audited the accompanying consolidated balance sheet of Enviro Voraxial
Technology, Inc. and subsidiary (the "Company") as of December 31, 2004 and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the year 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
audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Enviro
Voraxial Technology, Inc. and subsidiary as of December 31, 2004 and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has a net loss of $1,742,000 and
a negative cash flow from operations of $1,236,000 for the year ended December
31, 2004 and an accumulated deficit of $4,791,000 at December 31, 2004. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note A. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Weinberg & Company, P.A.
Boca Raton, Florida
April 11, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Enviro Voraxial Technology, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity (capital deficit) and cash flows of Enviro Voraxial
Technology, Inc. and subsidiary (the "Company") for the year ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and consolidated
cash flows of Enviro Voraxial Technology, Inc. and subsidiary for the year ended
December 31, 2003, in conformity with generally accepted accounting principles
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has experienced recurring net
losses and cash outflows from operating activities that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note A. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Eisner LLP
Florham Park, New Jersey
April 6, 2004
F-3
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
ASSETS
------
Current assets:
Cash and cash equivalents $ 221,000
Inventory 79,000
Prepaid insurance 3,000
-----------
Total Current Assets 303,000
Fixed assets, net 35,000
Deposits 10,000
-----------
TOTAL ASSETS $ 348,000
===========
LIABILITIES
-----------
Current liabilities:
Deposits from customers $ 10,000
Accounts payable and accrued expenses 169,000
-----------
Total Current Liabilities 179,000
-----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
--------------------
Capital stock $.001 par value:
Preferred stock, voting, 8% noncumulative, convertible, authorized
7,250,000 shares, issued and outstanding - none --
Common stock, authorized 42,750,000 shares, 17,676,402 shares
issued and outstanding 18,000
Additional paid-in capital 4,953,000
Deferred compensation (11,000)
Accumulated deficit (4,791,000)
-----------
Total Stockholders' Equity 169,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 348,000
===========
See accompanying notes to consolidated financial statements
F-4
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31
2004 2003
------------ ------------
Revenue:
Rental revenue $ 18,000 $ --
Product sales 1,000 3,000
------------ ------------
Total revenue 19,000 3,000
------------ ------------
Costs and expenses:
Cost of contract revenue -- --
Cost of product sales -- 1,000
General and administrative 1,111,000 751,000
Research and development 637,000 589,000
------------ ------------
Total costs and expenses 1,748,000 1,341,000
------------ ------------
Loss from operations (1,729,000) (1,338,000)
------------ ------------
Other expenses (income):
Interest expense 13,000 5,000
Other income -- (3,000)
------------ ------------
Total other expense 13,000 2,000
------------ ------------
Net loss $ (1,742,000) $ (1,340,000)
============ ============
Basic and diluted loss per common share $ (0.10) $ (0.09)
============ ============
Weighted average number of common shares
outstanding - basic & diluted 16,899,376 14,674,459
============ ============
See accompanying notes to consolidated financial statements
F-5
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
Additional
Preferred Stock Common Stock Paid-In Deferred Accumulated
Shares Par Value Shares Par Value Capital Compensation Deficit Total
------ --------- ------ --------- ------- ------------ ------- -----
Balance, December 31,
2002 -- $ -- 14,087,634 $ 14,000 $ 1,740,000 $ -- $ (1,709,000) $ 45,000
Issuance of units
consisting
of common
stock and warrants,
net of issuance costs -- -- 1,285,002 1,000 769,000 -- -- 770,000
Issuance of warrants in
accordance with
employment agreement -- -- -- -- 45,000 (45,000) -- --
Amortization of
deferred compensation -- -- -- -- 24,000 -- 24,000
Shares issued for
services -- -- 130,000 -- 171,000 -- -- 171,000
Net loss -- -- -- -- -- -- (1,340,000) (1,340,000)
------ ---------- ----------- ----------- ----------- ------------ -------------- ----------
Balance, December 31,
2003 -- -- 15,502,636 15,000 2,725,000 (21,000) (3,049,000) (330,000)
Issuance of units
consisting of
common stock
and warrants for
cash and convertible
notes conversion,
net of
issuance cost -- -- 1,935,000 2,000 1,283,000 -- -- 1,285,000
Common stock and
warrants issued in
private placement -- -- 61,666 -- 37,000 -- -- 37,000
Issuance of options
for accrued
compensation -- -- -- -- 747,000 -- -- 747,000
Issuance of options
for services -- -- -- -- 18,000 -- -- 18,000
Amortization of
deferred
compensation -- -- -- -- -- 148,000 -- 148,000
Common stock issued
for services -- -- 177,100 1,000 143,000 (138,000) -- 6,000
Net loss -- -- -- -- -- (1,742,000) (1,742,000)
------ ---------- ----------- ----------- ----------- ------------ -------------- ----------
Balance, December 31, 2004 -- $ -- 17,676,402 $ 18,000 $ 4,953,000 $ (11,000) $ (4,791,000) $ 169,000
====== ========== =========== =========== =========== ============ ============== ==========
See accompanying notes to consolidated financial statements
F-6
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
---------------------------
2004 2003
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,742,000) $(1,340,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 11,000 32,000
Additional compensation for options issued in
excess of accrued compensation 377,000 --
Common stock issued for services 6,000 171,000
Amortization of deferred compensation 148,000 24,000
Options issued for consulting services 18,000 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable 10,000
Inventory (9,000) 1,000
Prepaid insurance (3,000) --
Accounts payable and accrued expenses (52,000) 345,000
Deposits from customers 10,000 --
----------- -----------
Net cash used in operating activities (1,236,000) (757,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and units, net 1,322,000 770,000
Repayments of obligations under capital leases (15,000) (30,000)
----------- -----------
Net cash provided by financing activities 1,307,000 740,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 71,000 (17,000)
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 150,000 167,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 221,000 $ 150,000
=========== ===========
SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Cash paid for interest $ 13,000 $ 5,000
----------- -----------
Stock options issued to settle accrued compensation $ 370,000 $ --
=========== ===========
Common stock issued for deferred consulting $ 10,000 $ --
=========== ===========
Common stock issued for conversion of convertible notes payable $ 250,000 $ --
=========== ===========
See accompanying notes to consolidated financial statements
F-7
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
NOTE A - ORGANIZATION AND OPERATIONS AND GOING CONCERN
Enviro Voraxial(R) Technology, Inc. (the "Company") is a provider of
environmental and industrial separation technology. The Company has
developed and patented the Voraxial(R) Separator, which is a technology
that efficiently separates solids and liquids with distinct specific
gravities. Potential commercial applications and markets include
pre-treatment of wastewater (headworks) at municipal wastewater
facilities, oil exploration and production, oil/water separation, and
environmental cleanup.
Until 1999, the Company focused its operations on a high precision
engineering machine shop located in Florida which designs, manufactures
and assembles specialized parts and components for the aerospace and
automotive industries. The Company currently operates within two
segments: the manufacture and distribution of the Voraxial(R)
Separator; and contract manufacturing services to the aerospace and
automotive industries. All assets of the Company, except for inventory,
are associated with contract manufacturing services. Contract revenue
and cost of contract revenue are associated with manufacturing
services. Product sales and cost of sales are associated with the
Voraxial(R) Separator. All research and development expenses and
primarily all general and administrative expenses are associated with
the Voraxial(R) Separator. Since 1999, the Company has been focusing
its efforts on developing and marketing the Voraxial(R) Separator.
The Company has experienced net losses, has negative cash flows from
operating activities, and had to raise capital to sustain operations.
There is no assurance that the Company's developmental and marketing
efforts will be successful, that the Company will ever have
commercially accepted products, or that the Company will achieve a
level of revenue sufficient to provide cash inflows to sustain
operations. The Company will continue to require the infusion of
capital until operations become profitable. During 2005, the Company
anticipates seeking additional capital, increasing sales of the
Voraxial(R) Separator and continuing to restrict expenditures. As a
result of the above, the accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going
concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
parent company, Enviro Voraxial(R) Technology, Inc., and its
wholly-owned subsidiary, Florida Precision Aerospace, Inc. All
significant intercompany accounts and transactions have been
eliminated.
F-8
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
(2) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
The Company maintains its cash balances with various financial
institutions. Balances at these institutions may at times exceed the
Federal Deposit Insurance Corporate limits. At December 31, 2004 the
excess was $112,000.
(3) Fixed Assets
------------
Fixed assets are stated at cost less accumulated depreciation. The cost
of maintenance and repairs is charged to operations as incurred.
Depreciation is computed by the straight-line method over the estimated
economic useful life of the assets (5-10 years). Gains and losses
recognized from the sales or disposal of assets is the difference
between the sales price and the recorded cost less accumulated
depreciation less costs of disposal.
(4) Net Loss Per Share
------------------
Basic and diluted loss per share has been computed by dividing the net
loss available to common stockholders by the weighted average number of
common shares outstanding. The warrants and stock options have been
excluded from the calculation since they would be anti-dilutive. Such
equity instruments may have a dilutive effect in the future and include
the following potential common shares:
Warrants 5,589,367
Stock options 3,679,666
------------
9,269,033
============
The number of stock options above does not include 375,000 stock
options contingently issuable upon the achievement of milestones under
a consulting agreement. The timetable to achieve the specified
milestones has been extended to June 2005.
(5) Inventory
---------
Inventory consists of components for the Voraxial(R) Separator and is
priced at lower of first-in, first-out cost or market. Inventory
includes components held by third parties in connection with pilot
programs as part of the continuing evaluation by such third parties as
to the effectiveness and usefulness of the service to be incorporated
into their respective operations.
F-9
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
(6) Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results may differ. A significant estimate involves the value of
the Company's inventory.
(7) Income Taxes
------------
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary, to reduce deferred tax assets to the
amount expected to be realized.
(8) Research and Development Expenses
---------------------------------
Research and development costs, which consist of travel expenses,
consulting fees, subcontractors and salaries are expensed as incurred.
(9) Revenue Recognition
-------------------
The Company recognizes equipment rental revenue and contract revenue
when earned. Shipments of the Voraxial(R) Separator to third parties
are recognized as revenue upon customer acceptance. Shipments to third
parties in connection with pilot programs are not recognized as revenue
and such components are included in inventory at December 31, 2004.
(10) Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, inventory, accounts payable and accrued
expenses at December 31, 2004, approximate their fair value because of
their relatively short-term nature.
(11) Advertising Costs
-----------------
Promotion costs, which amounted to $15,000 and $9,000 in 2004 and 2003,
respectively, are expensed as incurred and are included in general and
administrative expenses.
F-10
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
(12) Stock-Based Compensation
------------------------
The Company accounts for stock-based employee compensation under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. The Company
has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which was released in
December 2002 as an amendment of SFAS No. 123. The following table
illustrates the effect on net loss and loss per share if the fair value
based method had been applied to all awards.
Year Ended December 31,
------------------------------------
2004 2003
--------------- -----------------
Reported net loss $ (1,742,000) $ (1,340,000)
Stock-based employee compensation expense included in
reported net loss, net of related tax effects -- 24,000
--------------- -----------------
Stock-based employee compensation determined under the fair
value based method -- (146,000)
--------------- -----------------
Pro forma net loss $ (1,742,000) $ (1,462,000)
=============== =================
Basic and diluted loss per common share:
As reported $ (0.10) $ (0.09)
--------------- -----------------
Pro forma $ (0.10) $ (0.10)
=============== =================
The fair value of each option grant on the date of grant is estimated
using the Black-Scholes option-pricing model with a volatility of 80%
for 2004 and 68% for 2003, expected life of options ranging from 2 to 5
years, risk free interest rate of 2.9% - 4.3% in 2004 and 2003 and a
dividend yield of 0%. The weighted average fair value of options
granted during the years ended December 31, 2004 and 2003 was $0.54 and
$0.60, respectively.
(13) Accounting for the Impairment of Long-Lived Assets
--------------------------------------------------
The long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. It is reasonably
possible that these assets could become impaired as a result of
technology or other industry changes. Determination of recoverability
of assets to be held and used is by comparing the carrying amount of an
F-11
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
asset to future net undiscounted cash flows to be generated by the
assets. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
assets exceed the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less
costs to sell. There were no impairments of long-lived assets in 2004
and 2003.
(14) Recent Accounting Pronouncements
--------------------------------
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 150, "Accounting For Certain Financial Instruments
with Characteristics of both Liabilities and Equity". Statement of
Financial Accounting Standards ("SFAS") No. 150 changes the accounting
for certain financial instruments with characteristics of both
liabilities and equity that, under previous pronouncements, issuers
could account for as equity. The new accounting guidance contained in
SFAS No. 150 requires that those instruments be classified as
liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial statements. One type is mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange
for cash or other assets. A second type includes put options and
forward purchase contracts which involves instruments that do or may
require the issuer to buy back some of its shares in exchange for cash
or other assets. The third type of instruments that are liabilities
under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of
the issuers' shares. SFAS No. 150 does not apply to features embedded
in a financial instrument that is not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the
existing definition of liabilities in FASB Concepts Statement No. 6,
"Elements of Financial Statements". The remaining provisions of this
Statement are consistent with the FASB's proposal to revise that
definition to encompass certain obligations that a reporting entity can
or must settle by issuing its own shares.
SFAS No. 150 shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of a non-public
entity, as to which the effective date is for the fiscal periods
beginning after December 15, 2004.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS
No.151 amends the guidance in Accounting Research Bulletin No. 43,
Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal
amounts of idle facility expense, freight,
F-12
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
handling costs and wasted material (spoilage). In addition, SFAS No.151
requires the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production
facilities. The provisions of SFAS No. 151 will be effective for the
Company beginning in 2005. In December 2004, the FASB issued SFAS No.
153, "Exchange of Non-Monetary Assets, an Amendment of Accounting
Principles Board ("APB") No. 29". SFAS No. 153 amends APB Opinion No.
29, "Accounting for Non-Monetary Transactions". Earlier guidance had
been based on the principle that exchanges of non-monetary assets
should be based on the fair value of the assets exchanged and APB No.
29 included certain exceptions to this principle. However, FASB 153
eliminated the specific exceptions for non-monetary exchanges with a
general exception rule for all exchanges of non-monetary assets that do
not have commercial and economic substance. A non-monetary exchange has
commercial substance only if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No.
153 is effective for non-monetary exchanges occurring in fiscal periods
beginning after June 15, 2005.
In December 2004, the FASB issued a revised SFAS No. 123, "Accounting
for Stock-Based Compensation", which supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and its related
implementation guidance. SFAS No. 153 (R) requires a public entity to
recognize and measure the cost of the employee services it receives in
exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). These costs will be
recognized over the period during which an employee is required to
provide services in exchange for the award- the requisite service
period (usually the vesting period). This statement also establishes
the standards for the accounting treatment of these share-based payment
transactions in which an entity exchanges its equity instruments for
goods or services. It addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the
fair value of the entity's equity instruments or that may be settled by
the issuance of those equity instruments. This statement shall be
effective the first interim or annual reporting period that begins
after December 15, 2005 for small business public entities and
nonpublic companies.
The implementation of the above pronouncements is not expected to have
a material effect on the Company's consolidated financial statements.
(15) Reclassifications
-----------------
Certain amounts from prior years have been reclassified to conform to
current year presentations.
F-13
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
NOTE C - CONCENTRATION OF CREDIT RISK
Five customers accounted for the total revenue/other income for the
year end December 31, 2004. One customer accounted for the total
revenue/other income for the year end December 31, 2004 and 2003.
NOTE D - FIXED ASSETS
Fixed assets as of December 31, 2004 consists of:
Machinery and equipment $ 351,000
Furniture and fixtures 12,000
Auto 12,000
----------------
Total cost 375,000
Less accumulated depreciation 340,000
----------------
Fixed assets, net $ 35,000
================
Included in depreciation expense for the years ended December 31, 2004
and 2003 is depreciation of equipment under capital leases of $9,000
and $19,000, respectively. Accumulated depreciation relating to
equipment under capital leases aggregated $138,000 as of December 31,
2004. The net book value of equipment under capital leases amounted to
$0 as of December 31, 2004.
Depreciation expense for the years ended December 31, 2004 and 2003
amounted to $11,000 and $32,000, respectively.
NOTE E - RELATED PARTY TRANSACTIONS
For the year ended December 31, 2004, the Company incurred consulting
expenses from the chief executive officer and majority stockholder of
the Company of $165,000.
NOTE F - CAPITAL TRANSACTIONS
(1) Common Stock:
--------------
During 2003, the Company issued 1,285,002 shares of common stock at
$0.60 per share in connection with private placement transactions. In
connection with these transactions the Company issued warrants to
purchase 1,285,002 shares of common stock exercisable at $1.00 per
share for a period of five years from the date of each closing.
F-14
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
During 2003 the Company issued 130,000 shares of common stock for
consulting services valued at $171,000. Such amount was recorded as a
charge to operations in 2003.
On January 15, 2004, the Company issued options to purchase an
aggregate of 1,394,666 shares of common stock to the Company's chief
executive officer, one employee and one consultant, in consideration
for such individuals accrued compensation in the aggregate amount of
$370,000. Options to purchase 697,333 shares of our common stock are
exercisable at $0.60 and options to purchase 697,333 shares of our
common stock are exercisable at $1.00. The options are exercisable for
a period of five years commencing January 15, 2004. The Company
estimated the fair value of the stock options at the grant date by
using the Black-Scholes option-pricing model, with the following
weighted average assumptions: no dividend yield for all years, expected
volatility of 80%, risk-free interest rate of 4% and an expected life
of 5 years, resulting in a fair value of $747,000, and additional
compensation expense of $377,000.
In January 2004, the Company issued 170,000 shares of common stock to a
consultant valued at $138,000 based on the closing market price of the
Company's common stock on the date of the agreement. This amount is
being amortized over the life of the consulting agreement, one year
resulting in consulting expense of $127,000 in 2004. The remaining
unamortized balance of $11,000 is presented in the consolidated balance
sheet as deferred compensation as a component of stockholders' equity.
In January 2004, the Company closed a private placement which commenced
in 2003. Under the private placement the Company sold an aggregate of
61,666 shares of restricted common stock at $0.60 per share plus
warrants to purchase 61,666 shares of common stock at an exercise price
of $1.00 per share to four investors for proceeds of $37,000 during the
three months ended June 30, 2004. The warrants are exercisable for a
period of five years from the date of closing.
On February 18, 2004, the Company issued options to purchase an
aggregate of 30,000 shares of common stock exercisable at $0.71 per
share to three individuals as consideration for joining the Company's
advisory committee. The options are exercisable until February 18,
2006. The Company estimated the fair value of the stock options at the
grant date by using the Black-Scholes option-pricing model, with the
following weighted average assumptions: no dividend yield for all
years, expected volatility of 80%, risk-free interest rate of 4% and an
expected life of 2 years, resulting in a fair value of $18,000. This
amount was expensed in 2004.
In February 2004, the Company extended the exercisable life of certain
warrants issued to investors to purchase an aggregate of 243,200 shares
of common stock issued in 2000 for a period of one year. The warrants
now expire in February 2006.
F-15
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
In February 2004, the Company extended the exercisable life of certain
warrants issued to investors to purchase an aggregate of 200,000 shares
of common stock issued in 2001 for a period of one year. The warrants
now expire in April 2005.
During January and February 2004, the Company issued convertible notes
to three individuals in the aggregate amount of $250,000 through a
convertible note agreement whereby the notes automatically convert into
securities of the Company pursuant to the terms of a private placement
initiated in March 2004. Effective May 5, 2004, the notes converted
into 250,000 units described below.
From May 2004 through August 2004, the Company sold an aggregate of
1,935,000 units of securities to 41 investors for gross proceeds of
$1,451,000 under the private placement. The Company has paid a
placement agent a commission of 10% of the gross proceeds and a
non-accountable expense allowance of 3% of the gross proceeds and
issued the placement agent warrants to purchase six shares of common
stock (three shares at $0.75 and three shares at $1.00) for each 20
units sold in the offering. Each unit consisted of one share of
restricted common stock at $0.75 per share and one warrant to purchase
one share of common stock at $1.00 per share. The warrants are
exercisable for a period of five years from the date of closing.
On June 30, 2004, the Company issued 7,100 shares of our common stock
to an individual in consideration for services rendered. The number of
shares issued was based on the fair value of the consulting services.
The Company has expensed $6,000 in 2004.
In July 2004, the Company issued 100,000 shares of common stock,
pertaining to a 2001 offering that were recorded as stock to be issued
at December 31, 2003.
F-16
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
(1) Options
-------
Information with respect to employee stock options outstanding and
employee stock options exercisable at December 31, 2004 is as follows:
Weighted Average
Options Vested Exercise Price Per Exercise Price Per
Outstanding Shares Common Share Option Outstanding
------------------ ------------------- --------------------- --------------------
Balance, December 31, 2002 2,245,000 $ 1,115,000 $0.15 - $0.77 $0.21
Granted/vested during the year 10,000 1,120,000 $1.00 $1.00
------------------ ------------------- --------------------- --------------------
Balance, December 31, 2003 2,255,000 2,235,000 $0.150 - $1.00 $0.21
Granted/vested during the year 1,424,666 1,424,666 $0.15 - $1.00 $0.79
------------------ -------------------
Balance, December 31, 2004 3,679,666 3,659,666 $0.15 - $1.00 $0.52
================== ===================
The following table summarizes information about the stock options outstanding
at December 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------- ----------------------------------
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable at Average
Exercise Outstanding at Contractual Exercise December 31, Exercise
Price December 31, 2004 Life Price 2004 Price
------------------ ------------------ ---------------- ------------- --------------- -------------
$ 0.30 45,000 0.87 $ 0.30 45,000 $ 0.30
$ 0.77 200,000 3.13 $ 0.77 200,000 $ 0.77
$ 0.15 2,000,000 2.55 $ 0.15 2,000,000 $ 0.15
$ 1.00 10,000 1.00 $ 1.00 10,000 $ 1.00
$ 0.60 697,333 4.13 $ 0.60 697,333 $ 0.60
$ 1.00 697,333 4.13 $ 1.00 697,333 $ 1.00
$ 0.71 30,000 1.00 $ 0.71 30,000 $ 0.71
---------------- ---------------
3,679,666 3,679,666
================ ===============
F-17
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
(3) Warrants
--------
Number Range of Number
Outstanding Exercise Price Exercisable
------------------ ----------------------- ------------------
Balance,
December 31, 2002 $ 1,477,200 $1.00 - $9.00 1,477,200
Issued 1,585,002 $1.00 1,385,002
------------------ ------------------
Balance, December 31, 2003 3,062,202 $1.00 - $9.00 2,862,202
Issued 2,527,165 $0.75 - $1.00 2,527,165
------------------ ------------------
Balance, December 31, 2004 5,589,367 $0.75 - $9.00 5,389,367
================== ==================
NOTE G - INCOME TAXES
The significant components of the Company's deferred tax asset and
liabilities as of December 31, 2004 are as follows:
Deferred income tax assets:
Net operating losses carryforwards $ 4,572,000
Tax credits 202,000
Deferred income tax liabilities:
Depreciation (5,000)
-------------------
4,769,552
Valuation allowance (4,769,552)
-------------------
Net deferred tax asset $ --
===================
The significant components of the benefit for income taxes for the year
ended December 31, 2004 is follows:
2004
-----------------
Deferred:
Federal $ 1,750,000
State 251,000
Change in valuation allowance (2,001,000)
-----------------
Total deferred income taxes $ --
=================
F-18
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
As of December 31, 2004, the Company has net operating loss
carryforwards of approximately $4,752,000 for federal income tax
purposes, which expire 2017 through 2024. These net operating loss
carryforwards may be limited due to a change of control.
NOTE H - COMMITMENTS AND CONTINGENCIES
(1) Employment Agreements
---------------------
The Company entered into an employment agreement dated January 17, 2002
with an individual to serve as the Vice President and Director of
Business Development. The agreement provides for a contingent bonus to be
paid to this employee in the amount of $300,000 to improve the financial
condition of the Company. Such bonus is payable upon the Company
obtaining a total of $3 million of financing or when revenue exceeds $1
million. In 2002, this individual was granted stock options to purchase 2
million shares of common stock with an exercise price of $0.15 per share.
The market price at the date of grant was $0.12 per share.
The Company hired two employees under employment agreements that
commenced in January 2003. The combined salaries for 2003 are $215,000
subject to annual increases beginning in 2004. Both agreements have a
term of 5 years. One agreement provided for the granting of up to 300,000
cashless exercise warrants to purchase common stock at $1 per share which
may result in a significant charge to operations in the future. This
agreement was terminated by mutual agreement on December 31, 2004, and
only 150,000 warrants were vested and are exercisable. The Company
entered into a consultant agreement with this individual as described in
Note I (1). The other agreement provides for the granting of 10,000 stock
options to purchase common stock at $1 per share exercisable ratably over
two years from the date of grant.
(2) Operating Lease
---------------
The Company leases office and warehouse space in Ft. Lauderdale, Florida
under a business lease agreement for a three-year term ending in August
2007. Minimum future lease payments for the next three years are as
follows:
Year Ending December 31, Amount
------------------------ ---------------------
2005 $ 63,700
2006 63,700
2007 42,467
---------------------
$ 169,867
=====================
Rent expense charged to operations amounted to $62,000 and $60,000 in
2004 and 2003, respectively.
F-19
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(DOLLARS ROUNDED TO 000'S, EXCEPT PER SHARE AMOUNTS)
NOTE I - SUBSEQUENT EVENTS
(1) Stock Options
-------------
In January 2005, the Company entered into a consultant contract agreement
with its former chief operating officer, ("COO") who was terminated by
mutual agreement on December 31, 2004 (See Note H (1)). Pursant to this
agreement, the former COO will provide marketing and consulting services
for a period of one year and will receive 50,000 cashless options to
purchase common stock of an exercise price of $1.00 per share in addition
to cash compensation for his services rendered.
(2) Sale of Product
---------------
In February 2005, the Company sold a Voraxial(R) 4000 Separator to a
mining company.
(3) Exercise of Warrants
--------------------
In February 2005, the Board of Directors of Enviro offered to the holders
of an aggregate of 4,514,997 common stock purchase warrants (the
"Warrants"), which were sold by the Company under various private
placements from February 2000 through August 2004 pursuant to private
placement transactions.
o To temporarily reduce the exercise price of the Warrants to $0.40 per
share; for a period of 60 days and
o The reduction in the exercise price will commence on the date the
materials relating to the Offer are first sent to the holders, which
is February 16, 2005, through April 19, when the Offer shall be
terminated and the per share exercise price shall revert to the
original prices which range from $1 to $4.
F-20