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, 2005
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 issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. [ ]
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.[ ]
Indicate by check mark whether registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No[X]
State issuer's revenues for its most recent fiscal year. $128,070
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days ($.68 as of April 12, 2006). $6,808,886.92
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, 2005: 19,459,735 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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Page
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PART I
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Item 1. Description of Business 1
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
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Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities 9
Item 6. Management Discussion and Analysis of Financial Condition and Plan
of Operations 11
Item 7. Financial Statements 18
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 18
Item 8A. Controls and Procedures 18
Item 8B. Other Information 18
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 19
Item 10. Executive Compensation 21
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 23
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits 24
Item 14. Principal Accountant Fees and Services 25
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 oil exploration &
production, sewage, mining, pulp and paper, food processing, 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 oil-water separation,
oil exploration and production, oil refineries, marine/oil-spill clean up and
manufacturing waste treatment pre-treatment (headworks/entrance to municipal
wastewater plant) of wastewater, grit/sand separation.
We have shipped units of the Voraxial(R) Separator on a trial and
rental basis to a number of different companies that include a wide range of
industrial applications, including produced water applications for the oil
industry (both offshore oil rigs and onland production facilities),
liquid/liquid and liquid/solid applications for the food processing industry and
the uranium industry, to name a few. We have installed several Voraxial(R)
Separators to date including units to the Alaska Department of Environmental
Conservation, the US Navy and to a leading uranium producing company in Canada
for oil/water separation at a flow rate of approximately 400 gallons per minute.
In February 2005, Shell Technology Ventures ("STV"), a registered
company of Royal Dutch/Shell Group invited EVTN to showcase its Voraxial(R)
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Separators in their trade booth at the 22nd SPE/IADC Drilling Conference and
Exhibition which was held in Amsterdam, The Netherlands. Shell Technology
Ventures objective in attending the conference is to increase awareness and
strengthen relationships between STV and members of the SPE/IADC while providing
Enviro Voraxial(R) Technology with the exposure and, hence, the business
opportunities with potential customers for EVTN's commercially available line of
Voraxial(R) Separators.
The specific applications addressed at the SPE/IADC Drilling Conference
was 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.
In 2005, the Company entered into an agreement with an oil company to
manufacture, ship and deploy a Voraxial(R) Separator Skid (two Voraxial(R)
Separators affixed to a steel platform) on an offshore oil production platform
off the coast of California for a produced water (oil/water separation) trial. A
Voraxial(R) 4-2 Duplex Separator (a Voraxial(R) 4000 and connected to a
Voraxial(R) 2000) was shipped and installed. The project successfully
demonstrated the Voraxial(R) Separator's efficiency in separating oil from
produced water at high flow rates. On the platform, the skid was installed to
receive produced water from the water draw of the sour production separator. The
discharge from the skid, including clean and oily water, was directed to the
sour coalescer. The samples collected in the bottles were sent to Capco
Analytical Services, Inc. in Ventura, California for analysis. The clean water
analysis showed that the Voraxial Separator did a very good job cleaning the
produced water flow. The clean water measured less than 20 ppm oil.
In 2005, the Company entered into an agreement with China Offshore Oil
Bohai Corporation, a wholly-owned subsidiary of CNOOC (NYSE: CEO), China's third
largest oil company. We shipped and commenced testing of our Voraxial(R) 2000
Separator on an offshore oil rig in China. Additional testing for produced water
separation is scheduled for 2006.
In the fourth quarter of 2005, the Company entered into an agreement to
deploy a unit to ConocoPhillips on the North Slope of Alaska for a produced
water trial. The Voraxial Separator performed good produced water separation
during the trials conducted in January 2006. The Voraxial was able to extract a
high percentage of the oil in the produced water stream. Further, the Voraxial
was capable of separating the sand from the produced water stream.
Due to the exposure from the various petroleum industry related trade
shows and the successful produced water demonstrations conducted over the past
year, the Company is now in discussions with various oil companies to conduct
additional trials and for purchase of units.
We finalized the Voraxial(R) Grit Separator for the specific use in the
municipal wastewater industry. The Voraxial(R) generates a centrifugal that
provides for efficient separation of sand/grit and 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),
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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.
During 2003 and 2004 we tested the Voraxial Grit Separator at a
wastewater treatment facility in Tampa, Florida. 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.
Subsequent Events
In March 2006, we sold a Voraxial(R) 4000 Separator to ConocoPhillips
for produced water separation. The Voraxial will be used to enhance the handling
of large volumes of produced water and water injection at the production
facility. The sale of the Voraxial(R) 4000 Separator was predicated upon the
successful testing of EVTN's smaller Voraxial(R) 2000 Separator in January 2006.
The unit will process and separate approximately 300 gallons per minute (gpm) of
produced water, a small percentage of the full volume of the produced water flow
stream of 9000 gpm. This sale is potentially a part of a larger order to handle
the full 9000 gallons per minute produced water stream.
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
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.
3
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 - 5
Voraxial(R)2000 2 inches 25 - 80
Voraxial(R)4000 4 inches 250 - 600
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
2005, we have furthered tested, demonstrated and delivered on a trial and rental
basis the Voraxial(R) Separator units to companies within various industries
including energy production, wastewater, manufacturing and mining. During 2005
the Company provided Voraxial(R) Separators to several firms 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 & production,
oil remediation services, municipal wastewater treatment, bilge water
purification, 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 currently manufactured and assembled at
our Fort Lauderdale, Florida facilities.
Voraxial(R) Separator, 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
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. We believe
the Voraxial(R) Separator can result in a cost savings and other benefits to the
customer. These benefits result in and include:
4
o A reduction in water and energy usage,
o Requires no pressure drop to perform separation.
o Less space needed to implement the Voraxial(R) Separator; the
Voraxial(R) Separator weighs less than existing 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.
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 has developed a comprehensive sales and marketing
program to stimulate awareness of the Voraxial(R) Separator. 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.
Management believes that the oil industry, and more specifically the
produced water market within this industry, represents a great opportunity for
significant sales growth for the Voraxial Separator. The produced water market
is worldwide and the need for effective produced water (oil/water) separation is
a major issue for both offshore and land-based oil production facilities. The
ability to efficiently separate produced water waste streams (oil and water) has
enormous economical and environmental consequences for the oil production
industry. Produced water comprises over 98% of the total waste volume generated
by the oil and gas industry, making it the largest volume waste stream
associated with oil and gas production.
Oil reservoirs frequently contain large volumes of water and as oil
wells mature (the oil field becomes depleted), the amount of produced water
increases. In the continental US, it is estimated that 7-10 barrels of water is
produced for each barrel of recovered oil. According to American Petroleum
Institute (API), about 18 billion barrels of produced water was generated by US
onshore operations in 1995. Worldwide, the total amount of produced water
generated in 1999, according to Khatib and Verbeek, was approximately 77 billion
barrels. Produced water volumes will continue to increase as oil wells mature.
5
The necessity to process and efficiently separate high volumes of liquids
coupled with the more stringent environmental regulations worldwide is
increasing the demand for the Voraxial(R) Separator. The Voraxial(R) Separator
provides a cost effective way to separate large volumes of produced or
re-injection water for both on-land and offshore production facilities. The
Voraxial(R) provides superior separation while decreasing the amount of space,
energy and weight to conduct the separation. In addition to oil separation, the
Voraxial can also perform solid (sand and grit) extraction which prevents
production damage by increasing the life of the well.
The municipal wastewater industry is another market with substantial
growth opportunity that the Company is pursuing. 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.
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.
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.
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.
Marketing
The Company's products and services are marketed through our existing
staff and consultants. To assist the Company in developing and penetrating the
oil and municipal wastewater 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
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,
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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 several prominent trade
shows in the past fiscal year. 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 the
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 2006.
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 have no written agreements with 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".
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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 have product
liability insurance. However, any product liability claim made against us may
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 obtained directors and officers, and general insurance coverage in
2004. We obtained product liability insurance in 2005.
Research and development
In our past two fiscal years, we have spent approximately $1,246,000 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.
Employees
All of our employees work full-time. 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 $5,640 per month for the
initial two years of the lease and approximately $5,700 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.
8
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, 2004
through the period ending December 31, 2005. On April 12, 2006, the closing
price for our common stock was $0.68. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
Bid Quotations
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Quarter Ended High Low
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March 31, 2004 $1.21 $0.80
June 30, 2004 $1.23 $0.79
September 30, 2004 $1.15 $0.65
December 31, 2004 $0.99 $0.60
March 31, 2005 $0.85 $0.42
June 30, 2005 $0.60 $0.38
September 30, 2005 $0.85 $0.41
December 31, 2005 $0.70 $0.45
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, 2005, there were over 775 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
the discretion of our board of directors and will depend upon, among other
things, our operations, our capital requirements and our overall financial
9
condition. As of the date of this report, we have no intention to declare
dividends.
Other Stockholders Matters
In January 2005, the Company entered into a one-year consulting
agreement with its former Chief Operating Officer for engineering design,
marketing and sales of Company products and services. Pursuant to this
agreement, the Company granted 50,000 options to this individual exercisable at
$1.00 per share. These options vest equally in 12 traunches over a period of one
year commencing in January, 2005 and expire in January 2008. The Company
estimated the fair value of the options at the grant date by using the
Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield for all the years; expected volatility of 133%;
risk-free interest rate of 3% and an expected life of 3 years, resulting in a
fair value of approximately $21,000. The options 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 options issued contain a legend
restricting transferability absent registration or applicable exemption.
In February 2005, we extended the exercisable life of certain warrants
to purchase an aggregate of 243,200 shares of common stock issued in 2000 for a
period of one year. The options initially expired in February 2006, but were
extended on January 18, 2006 and now expire in February 2007. In January 2006,
we also extended the exercisable life of certain warrants to purchase an
aggregate of 200,000 shares of common stock issued in 2001. The warrants now
expire in April 2007.
In May 2005, the Company issued 75,000 shares of common stock to a
consultant valued at $57,000 based on the closing market price of the Company's
common stock on the date of the agreement. In addition, the Company paid $40,000
in cash to this consultant. In November 2005, this consultant received another
225,000 shares of common stock valued at $85,500 based on the closing market
price of the Company's common stock on the date of the agreement. 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.
On July 1, 2005, the Company entered into a consulting agreement and
agreed to issue 15,000 shares for services performed by a consultant, which were
valued at $7,650. 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.
10
During fiscal year 2005, the Company received capital from ten
accredited investors to purchase an aggregate of 1,468,333 shares of the
Company's restricted common stock at $0.40 per share for gross proceeds of
$587,333. The issuances were exempt from registration under Section 4(2) of the
Securities Act. Commissions paid to registered brokers and other expenses
related to the Offering were approximately $50,000. The investors received
information concerning the Company and has the opportunity to ask questions
concerning the viability of the Company. The shares 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
initially expired on February 18, 2006, but on January 18, 2006 were extended.
The options are now exercisable until February 18, 2007. 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.
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.
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.
Year ended December 31, 2005 compared to year ended December 31, 2004
Revenue
We continued to focus our efforts and resources to the manufacturing,
assembling, marketing and selling of the Voraxial(R) Separator. Revenues
increased 572% to $128,070 for year ended December 31, 2005 as compared to
$19,220 for the year ended December 31, 2004. The increase is a result of a sale
of the Voraxial Separator and in-house testing and rental shipments to customers
interested in utilizing the Voraxial Separator. Management believes the interest
for the Voraxial Separator for liquid/liquid, liquid/solid and
11
liquid/liquid/solid separation is increasing from a variety of industries. We
believe we have increased the exposure and awareness of the Voraxial Separator
through our marketing programs and expect to increase revenues from the sale and
lease of the Voraxial Separator in 2006.
Costs and expenses
Costs and expenses decreased by 32% or $561,257 to $1,186,743 for the
year ended December 31, 2005 as compared to $1,748,000 for the year ended
December 31, 2004. The decrease is due to a consolidation of activities
resulting in decreases in general and administrative expenses and increases in
research and development during the year ended December 31, 2005. Increase in
research and development was primarily due to produced water trials.
General and administrative expenses
General and Administrative expenses decreased by 59% or $655,001 to
$455,999 for the year ended December 31, 2005 from $1,111,000 for the year ended
December 31, 2004. The decrease is principally due to a non-cash equity
transaction in 2004 for services. The expense is related to the marketing of the
Voraxial(R) Separator.
Research and development expenses
Research and Development expenses increased 15% to $730,774 for the
year ended December 31, 2005 from $637,000 for the year ended December 31, 2004.
This increase was due to our continuing efforts to enter into the produced water
segment of the oil industry.
Liquidity and capital resources
At December 31, 2005, we had working capital deficit $221,978 and cash
of $76,691. At December 31, 2005, we had an accumulated deficit of $5,882,005.
For the year ended December 31, 2005, we had a net loss of $1,091,005. Operating
at a loss for the year negatively impacted our cash position; however, funds
received from the private placements completed during 2005 improved our working
capital position.
During the year ended December 31, 2005, we issued 1,468,333 shares of
the Company's restricted common stock to 10 investors at $0.40 per share for
gross proceeds of $587,333.
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.
During 2005 one customer, Cameco Corporation, accounted for
approximately 80% of the Company's revenues.
12
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 2006, the Company anticipates seeking additional capital,
increasing sales of the Voraxial Separator and continuing to restrict expenses.
However, substantial doubt exists about the ability of the Company to continue
as a going concern.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The Company's adoption of SFAS No.
146 on January 1, 2003 did not have any material effect on the financial
statements of the Company.
In December 2003, the FASB issued Interpretation No. 46R,
"Consolidation of Variable Interest Entities" in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
variable interest entities, including special-purpose entities or off-balance
sheet structures. The consolidation requirements of FIN No. 46R have a variety
of implementation dates. The Company believes the impact of FIN No. 46R on its
financial position and results of operations will not be material, but the
Company will continue to evaluate the impact of FIN No. 46R during the first
quarter of 2004.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement affects the issuer's accounting for three types of freestanding
financial statements: mandatorily redeemable shares, put and forward purchase
contracts that require the issuer to buy back some of its shares in exchange for
cash or other assets, and certain obligations that can be settled in shares.
This statement is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The impact of adopting FASB
No. 150 was not material to the Company's financial position and results of
operations.
In December 2003, the Securities and Exchange Commission (SEC),
published Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition." This
SAB updates portions of the Securities and Exchange Commission (SEC) staff's
interpretive guidance provided in SAB 101 and included in Topic 13 of the
Codification of Staff Accounting Bulletins. SAB 104 deletes interpretative
13
material no longer necessary, and conforms the interpretive material retained,
because of pronouncements issued by the FASB's Emerging Issues Task Force (EITF)
on various revenue recognition topics, including EITF 00-21, "Revenue
Arrangements with Multiple Deliverables." SAB No. 104 also incorporates into the
SAB Codification certain sections of the SEC staff's "Revenue Recognition in
Financial Statements - Frequently Asked Questions and Answers." SAB No. 104 does
not have a material impact on the Company's financial position and results of
operations since the Company's revenue recognition practices previously
conformed to the interpretations codified by SAB No. 104.
Management does not expect these statements to have a material impact
on the 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, 2005, we had an accumulated deficit of $5,882,005,
including a net loss of $1,091,005 for the year ended December 31, 2005. Even if
we achieve profitability, we may not be able to sustain or increase our
profitability on a quarterly or annual basis.
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
raises substantial doubt about our ability to continue as a going concern.
We have been limited by insufficient capital, and we may continue to be so
limited.
In the past, we have lacked the required capital to market the Voraxial
Separator. Our inability to raise the funding or to otherwise finance our
14
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.
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
15
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.
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:
16
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.
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. While we have product
17
liability insurance, any product liability claim made against us may 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.
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
None.
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.
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.
18
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
John A. DiBella 34 Executive Vice President of Business
Development
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.
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, 2005, our board of directors held 4
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."
19
We have not established a compensation committee nor nominating
committee.
Key Consultants
Frank J. DeMicco was employed by our Company from January 2003 through
December 2004. Since January 2005, he has served 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.
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.
These individuals serve for a 2 year term.
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 of the
individuals as consideration for joining our advisory committee. The options are
exercisable until February 18, 2007.
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
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,
20
directors and greater than ten percent beneficial owners were not complied with
on a timely basis for the period which this report relates. See "Item 12.
Certain Relationships and Related Transactions".
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,
2005.
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Shares of Common Stock
Name and Position Year Salary Bonus Underlying Options Other
----------------- ---- ------ ----- ------------------ -----
Alberto DiBella, CEO 2005 $165,000(1) --- --- --
2004 $165,000(1) --- 216,666(3) --
2003 $150,000(2)(3) --- --- (4)
Frank J. DeMicco, 2004 $128,000 --- --- --
Former COO 2003 $150,000 --- 200,000(5) (5)
John A. DiBella, EVP 2005 $150,000(6) --- --- --
2004 $150,000(6) --- 1,033,333(7) --
2003 $150,000(6)(7) --- --- --
(1) Of these amounts, only $43,000 and $25,000 have been paid out for the
years ended December 31, 2005 and 2004, respectively. Unpaid balance
has been included in accrued expenses.
(2) Salary was deferred and subsequently paid during 2004.
(3) 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.
(4) 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.
(5) 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. In 2005, Mr.
DeMicco earned 50,000 options as a consultant. Effective December 31,
2005 Mr. DeMicco no longer serves as an executive officer of the
Company.
(6) $145,000, $76,000 and $133,000 have been deferred in 2005, 2004 and
2003, respectively.
(7) 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 from 2001-2003 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.
21
Aggregated Fiscal Year-End Option Value Table
The following table sets forth certain information concerning
unexercised stock options as of December 31, 2005. No options were exercised
during the year ended December 31, 2005.
Number Of Value Of Unexercised
Unexercised Options In-the-Money
Held at 12/31/05(#) Options at 12/31/05 (1)
------------------- -----------------------
Shares Shares
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Alberto DiBella 216,666 0 $ 0 $0
John DiBella 3,033,333 0 $840,000 $0
(1) The closing sale price of the Common Stock on December 31, 2005 as
reported by OTCBB was $0.57 per share. Value is calculated by
multiplying (a) the difference between $0.57 and the option exercisable
price by (b) the number of shares of Common Stock underlying the
options.
Employment agreements
Neither of our executive officers has a written employment agreement
with the Company. However the Company intends to enter into an employment
agreement with John A. DiBella during 2006.
Consulting Agreements
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
expenses, as of December 31, 2005 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.
Director Compensation
Directors are not compensated by our Company.
22
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 April 13, 2006 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.
Name and Address of Number of Shares Percentage of
Beneficial Owner Beneficially Owned Ownership
---------------- ------------------ ---------
Alberto DiBella 3,266,666(1) 16.6%
3500 Bayview Drive
Fort Lauderdale, FL 33308
John DiBella 4,033,333(2) 17.9%
821 N.W. 57th Place
Fort Lauderdale, FL 33309
Robert Weinberg 2,400,000(3) 12.3%
11338 Clover Leaf Circle
Boca Raton, FL 33428
Peter Chiappetta 3,000,000(4) 15.4%
2299 NW 62nd Drive
Boca Raton, FL 33487
All officers and directors 7,299,999 34.5%
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 110,000 shares of common
stock underlying options exercisable at $.60 per share and 110,000 shares
of common stock underlying options exercisable at $1.00 per share.
(2) Includes 2,000,000 shares of common stock underlying options 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. Excludes shares which
Mr. DiBella holds voting control, but does not hold any power to dispose
of such shares. See footnote 3 and 4.
(3) Voting rights of 2,000,000 shares are currently held by John DiBella.
(4) Voting rights of shares are currently held by John Dibella.
23
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 3,729,666 $0.52 0
Total 3,729,666 0
Item 12. Certain Relationships and Related Transactions
During the fourth quarter of 2005, Alberto DiBella transferred
1,000,000 shares of common stock to John A. DiBella.
During the fourth quarter of 2005 Alberto DiBella entered into
agreements with Robert Weinberg and Peter Chiappetta related to personal
advances made by Mr. Weinberg and Mr. Chiappetta to Mr. DiBella. Such advances
were not related to the Company. In full satisfaction of the advances, Mr.
DiBella transferred an aggregate of 5,000,000 shares of the Company's common
stock to Mr. Weinberg and Mr. Chiappetta.
Item 13. Exhibits
(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
24
*Previously filed
(1) Previously filed on Form 10-KSB annual report for the year ended
December 31, 2003.
Item 14. Principal Accountant Fees and Services
Year ended December 31, 2005
Audit Fees: The aggregate fees, including expenses, billed by our
current 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 for the
fiscal year ended December 31, 2005 was $12,000. Our current principal
accountant did not review our quarterly reports on Form 10-QSB during the fiscal
year ended December 31, 2005. Our current principal accountant also billed our
company an aggregate fee of $5000 (including expenses) in connection with the
audit of our consolidated financial statements for the fiscal year ended
December 31, 2004, as such audit is included in this Annual Report on Form
10-KSB. The aggregate fees, including expenses, billed by our former principal
accountant in connection with the review of our financial information included
in our quarterly reports on Form 10-QSB during the fiscal year ending December
31, 2005 was $15,000.
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, 2005 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,
2005 were $0.
All Other Fees: The aggregate fees, including expenses, billed for all
other services rendered to us by our principal accountant during year 2005 was
$-0-.
Year ended December 31, 2004
Audit Fees: The aggregate fees, including expenses, billed by our
former principal accountant in connection with the audit of our consolidated
financial statements for the fiscal year ended December 31, 2004 and for the
review of our financial information included in our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2004; and our quarterly reports on Form
10-QSB during the fiscal year ending December 31, 2004 was $13,587.
Audit Related Fees: The aggregate fees, including expenses, billed by
our former 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 former 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 former principal accountant during year
2004 was $-0-.
The Company's Board of Directors acts as an audit committee The Board
of Directors has considered whether the provisions of the services covered above
under the captions is compatible with maintaining the auditor's independence.
25
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 12, 2006.
ENVIRO VORAXIAL TECHNOLOGY, INC.
By: /s/ Alberto DiBella
-------------------
Alberto DiBella
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
26
ENVIRO VORAXIAL TECHNOLOGY, INC.
AND SUBSIDIARY
FINANCIAL STATEMENTS
DECEMBER 31, 2005 and 2004
Table of Contents
Report of Independent Registered Public Accounting Firm................................ F - 2
Balance Sheet ......................................................................... F - 3
Statements of Operations ............................................................ F - 4
Statements of Changes in Shareholders' Deficiency.................................... F - 5
Statements of Cash Flows ........................................................... F - 6
Notes to Financial Statements.......................................................... F - 7-16
Report of Independent Registered Public Accounting Firm
To The Shareholders and Board of Directors of
Enviro Voraxial Technology, Inc.
We have audited the accompanying consolidated balance sheet of Enviro Voraxial
Technology, Inc and Subsidiary as of December 31, 2005 and 2004 and the related
consolidated statements of operations, changes in shareholders' deficiency and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with the 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 audits provided a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enviro Voraxial Technology, Inc
and Subsidiary as of December 31, 2005 and 2004, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that Enviro Voraxial Technology, Inc and Subsidiary will continue as a going
concern. As discussed in Note B to the financial statements, Enviro Voraxial
Technology, Inc and Subsidiary has suffered recurring losses from operations,
which raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note B. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Jewett, Schwartz, & Associates
Hollywood, Florida
April 11, 2006
F-2
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31,
2005
------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 76,691
Inventory 126,034
------------------
Total current assets 202,725
FIXED ASSETS, NET 5,338
OTHER ASSETS 10,000
------------------
Total assets $ 218,063
==================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 424,703
------------------
Total current liabilities 424,703
------------------
Total liabilities 424,703
------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIENCY:
Common stock, $.001 par value, 42,750,000 shares authorized
19,459,735 shares issued and oustanding 19,459
Additional paid-in capital 5,709,343
Deferred compensation (53,437)
Accumulated deficit (5,882,005)
------------------
Total shareholders' deficiency (206,640)
------------------
Total liabilities and shareholders' deficiency $ 218,063
==================
The accompanying notes are an integral part of the
consolidated financial statements
F-3
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------------------------------
2005 2004
------------------------ -------------------------
Revenues, net $ 128,070 $ 19,000
Cost of goods sold 34,444 -
------------------------ -------------------------
Gross Profit 93,626 19,000
Costs and expenses:
General and administrative 455,999 1,111,000
Research and development 730,774 637,000
------------------------ -------------------------
Total costs and expenses 1,186,773 1,748,000
------------------------ -------------------------
Loss from operations (1,093,147) (1,729,000)
------------------------ -------------------------
Other expenses (income):
Interest expense - 13,000
Gain on sale of asset (2,142) -
------------------------ -------------------------
Total other expense (2,142) 13,000
------------------------ -------------------------
NET LOSS $ (1,091,005) $ (1,742,000)
======================== =========================
Weighted average number of common shares
outstanding-basic & diluted 18,257,808 16,899,376
======================== =========================
Basic and diluted loss per common share $ (0.06) $ (0.10)
======================== =========================
The accompanying notes are an integral part of the
consolidated financial statements
F-4
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
Common Stock Additional
------------------------- Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------------ ---------- ------------- ------------- ------------- -----------
Balance at 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
net of issuance costs 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 service 177,100 1,000 143,000 (138,000) 6,000
Net Loss - - - - (1,742,000) (1,742,000)
----------- ---------- ------------- ------------ ------------- -----------
Balance at December 31, 2004 17,676,402 $ 18,000 $ 4,953,000 $ (11,000) $ (4,791,000) $ 169,000
Issuance of common stock for consulting
services 300,000 300 141,519 (56,875) - 84,944
Issuance of options for services - - 21,000 - 21,000
Issuance of restricted common stock at
$.40 per share 1,468,333 1,144 586,189 - - 587,333
Issuance of common stock for consulting
services 15,000 15 7,635 - - 7,650
Amortization of deferred compensation - - - 14,438 - 14,438
Net Loss - - - - (1,091,005) (1,091,005)
----------- ---------- ------------- ------------ ------------- -----------
Balance - December 31, 2005 19,459,735 $ 19,459 $ 5,709,343 $ (53,437) $ (5,882,005) $ (206,640)
=========== ========== ============= ============ ============= ===========
The accompanying notes are an integral part of the
consolidated financial statements
F-5
ENVIRO VORAXIAL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
---------------------------------
2005 2004
-------------- --------------
Cash Flows From Operating Activities:
Net loss $ (1,091,005) $ (1,742,000)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 2,720 11,000
Additional compensation for options issued
in excess of accrued compensation - 377,000
Common stock issued for services 149,469 6,000
Amortization of deferred compensation - 148,000
Options issued for consulting services - 18,000
Deferred compensation (42,437) -
Gain on sale of equipment (2,142)
Issuance of warrants for services 21,000
Changes in assets and liabilities:
Accounts receivable - 10,000
Inventory (47,034) (9,000)
Prepaid insurance 3,000 (3,000)
Accounts payable and accrued expenses 255,617 (62,000)
Deposits from customers (10,000) 10,000
-------------- -------------
Net cash used in operating activities (760,812) (1,236,000)
-------------- -------------
Cash Flows From Investing Activities:
Purchase of equipment (5,830) -
Sale of equipment 35,000 -
-------------- -------------
Net cash provided by investing activities 29,170 -
-------------- -------------
Cash Flows From Financing Activities:
Proceeds from sales of common stock 587,333 1,322,000
Repayments of obligation under capital leases - (15,000)
-------------- -------------
Net cash provided by financing activities 587,333 1,307,000
-------------- -------------
Net increase (decrease) in cash and cash equivalents (144,309) 71,000
Cash and cash equivalents, beginning of period 221,000 150,000
-------------- -------------
Cash and cash equivalents, end of period $ 76,691 $ 221,000
============== =============
Supplemental Disclosures
Cash paid during the year for interest $ - $ 13,000
============== =============
Cash paid during the year for taxes $ - $ -
============== =============
Stock options issued to settle accrued compensation $ - $ 370,000
============== =============
Common stock issued for deferred consulting $ 53,437 $ 10,000
============== =============
Common stock issued for conversion of
convertible notes payable $ - $ 250,000
============== =============
Common stock issued for consulting services $ 146,469 $ 6,000
============== =============
The accompanying notes are an integral part of the
consolidated financial statements
F-6
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A - ORGANIZATION AND OPERATIONS
Organization
------------
Enviro Voraxial 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 oil exploration and production, pre-treatment of wastewater
at municipal wastewater (headworks) facilities, oil and water separation, and
environmental cleanup.
Since 1999, the Company has been focusing its efforts on developing and
marketing the Voraxial(R) Separator. The Company currently operates within two
segments: the sales and marketing of the Voraxial(R) Separator and the
manufacture of the Voraxial(R) Separator.
Florida Precision Aerospace, Inc. (FPA) is the wholly-owned subsidiary of the
Company and is used to do contract work with the aerospace, automotive and
defense contracting activity.
NOTE B - GOING CONCERN
The Company has experienced net losses, has negative cash flows from operating
activities, and has 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 C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the parent
company, Enviro Voraxial Technology, Inc., and its wholly-owned subsidiary,
Florida Precision Aerospace, Inc. All significant intercompany accounts and
transactions have been eliminated.
Estimates
---------
The preparation of consolidated 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
F-7
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results may differ.
Revenue Recognition
-------------------
The Company presents revenue in accordance with Staff Accounting Bulletin (SAB)
No. 104 "Revenue Recognition in Financial Statements". Under SAB 104, revenue is
realized when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable and collectibility is reasonably
assured.
In accordance with the above, the Company recognizes revenue from rental of
equipment, based on the terms of the agreement. Revenues from contracts are
recognized upon customer acceptance of shipment.
Fair Value of Instruments
-------------------------
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, inventory, accounts payable and accrued expenses at December
31, 2005, approximate their fair value because of their relatively short-term
nature.
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.
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.
Fixed Assets
------------
Fixed assets are stated at cost less accumulated depreciation. The cost of
maintenance and repairs is expensed 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.
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.
F-8
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Such equity instruments may have a dilutive effect in the future and include the
following potential common shares:
Warrants 5,589,367
Stock options 3,729,666
----------
9,319,033
==========
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.
Research and Development Expenses
---------------------------------
Research and development costs, which consist of travel expenses, consulting
fees, subcontractors and salaries are expensed as incurred.
Advertising Costs
-----------------
Advertising costs are expensed as incurred and are included in general and
administrative expenses. Amounts incurred for advertising as of December 31,
2005 and 2004 were $10,121 and $15,000, respectively.
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 Company currently
accounts for stock-based compensation under the fair value method using the
Black-Scholes option pricing model as indicated in Note G.
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 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
F-9
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
amount of assets exceeds 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 2005 and 2004.
Recent Accounting Pronouncements
--------------------------------
Share-Based Payment
In December 2004, the FASB issued a revision of SFAS 123 (SFAS 123(R)) that
requires compensation costs related to share-based payment transactions to be
recognized in the statement of operations. With limited exceptions, the amount
of compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award. SFAS 123(R)
replaces SFAS 123 and is effective as of February 1, 2006. Based on zero shares
and awards outstanding as of January 31, 2006, the adoption of SFAS 123(R) would
have no impact on earnings for the fiscal year.
In March 2005, the U.S. Securities and Exchange Commission, or SEC, released
Staff Accounting Bulletin (SAB) 107, "Share-Based Payments". The interpretations
in SAB 107 express views of the SEC staff, or staff, regarding the interaction
between SFAS 123R and certain SEC rules and regulations, and provide the staff's
views regarding the valuation of share-based payment arrangements for public
companies. In particular, SAB 107 provides guidance related to share-based
payment transactions with non-employees, the transition from nonpublic to public
entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first-time adoption of SFAS
123R in an interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS 123R, the modification of
employee share options prior to adoption of SFAS 123R and disclosures in
Management's Discussion and Analysis subsequent to adoption of SFAS 123R. SAB
107 requires stock-based compensation be classified in the same expense lines as
cash compensation is reported for the same employees. The Company and management
is reviewing SAB 107 in conjunction with its review of SFAS 123R.
Non-monetary Exchange
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets--An Amendment of Accounting Principles Board (APB) Opinion No. 29,
Accounting for Non-monetary Transactions" ("SFAS 153"). SFAS 153 eliminates the
exception from fair measurement for non-monetary exchanges of similar productive
assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Non-monetary
Transactions," and replaces it with an exception for exchanges that do not have
F-10
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
commercial substance. SFAS 153 specifies that a non-monetary exchange has
commercial substance if the future cash flows of the entity expected to change
significantly as a result of the exchange. SFAS 153 is effective for fiscal
periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected
to have a material impact on the Company's current financial condition or
results of operations.
Conditional Asset Retirement
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47 - "Accounting
for Conditional Asset Retirement Obligations - an Interpretation of SFAS 143
(FIN No. 47). FIN No. 47 clarifies the timing of liability recognition for legal
obligations associated with the retirement of a tangible long-lived asset when
the timing and/or method of settlement are conditional on a future event. FIN
No. 47 is effective no later than December 31, 2005. FIN No. 47 did not impact
the Company for the year ended January 31, 2006.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a Replacement of APB No. 20 and FASB 3". SFAS No. 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. APB Opinion No. 20
"Accounting Changes," previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
NOTE D - CONCENTRATION OF CREDIT RISK
One customer accounted for approximately 80% of revenue for the years end
December 31, 2005 and 2004. There were no outstanding receivables from this
customer for either year.
NOTE E - FIXED ASSETS
Fixed assets as of December 31, 2005 consists of:
2005
-------------
Machinery and equipment $ 278,929
Furniture and fixtures 14,498
-------------
Total 293,427
Less: accumulated depreciation (288,089)
-------------
Fixed Assets, net $ 5,338
-------------
F-11
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Depreciation expense for the years ended December 31, 2005 and 2004 amounted to
$2,720 and $11,000 respectively.
NOTE F - RELATED PARTY TRANSACTIONS
For the years ended December 31, 2005 and 2004, the Company incurred consulting
expenses from the chief executive officer and majority stockholder of the
Company of $165,000 each year. Of these amounts, approximately $43,000 and
$25,000 have been paid out for the years ended December 31, 2005 and 2004,
respectively. The unpaid balance has been included in accrued expenses.
NOTE G - CAPITAL TRANSACTIONS
Common stock
------------
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 $370,000.
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 one year life of the consulting agreement, resulting in consulting expense
of $127,000 in 2004. The remaining unamortized balance of $11,000 has been
expensed in 2005.
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 were initially exercisable until February 18, 2006, but have been
extended to February 18, 2007. The Company calculated estimate of the fair value
F-12
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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 3 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.
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 2006.
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 shares.
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.
In January 2005, the Company entered into a one-year consulting agreement with
its former Chief Operating Officer for engineering design, marketing and sales
of Company products and services. Pursuant to this agreement, the Company
granted 50,000 warrants to this individual exercisable at $1.00 per share. These
warrants vest equally in 12 traunches over a period of one year commencing in
January, 2005 and expire in January 2008. The Company calculated the fair value
of the warrants at the grant date by using the Black-Scholes option-pricing
model with the following weighted average assumptions: no dividend yield for all
the years; expected volatility of 133%; risk-free interest rate of 3% and an
expected life of 3 years, resulting in a fair value of approximately $21,000.
F-13
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
In May 2005, the Company issued 75,000 shares of common stock to a consultant,
valued at $57,000, which is based on the closing market price of the Company's
common stock on the date of the agreement. In addition, the Company paid $40,000
in cash to the consultant, which has been amortized over the life of the
consulting agreement of four months. During November 2005, the Company issued an
additional 225,000 shares per the terms of the agreement. These shares were
valued at $85,500, which is based on the closing market price of the Company's
common stock on the date of the agreement.
During 2005, the Company issued 1,468,333 shares of restricted common stock at
$.40 per share, with total proceeds of $587,333 being received.
In July 2005, the Company entered into a consulting agreement. The terms of
agreement included issuance of 15,000 shares of common stock for services
rendered. The number of shares issued was based on the fair value of the
consulting services of $7,650.
Options
-------
Information with respect to employee stock options outstanding and employee
stock options exercisable at December 31, 2005 is as follows:
Weighted Average
Options Vested Exercise Price Per Exercise Price Per
Oustanding Shares Common Share Option Oustanding
---------- --------- ------------------ -----------------
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
Balance, December 31, 2002 2,245,000 2,235,000 $0.15-$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
Granted/vested during the year 50,000 50,000 $1.00
Balance, December 31, 2005 3,729,666 3,709,666 $0.15-$1.00 $0.52
The following table summarizes information about the stock options outstanding
at December 31, 2005
Number Weighted Weighted
Oustanding at Average Average
Exercise December 31, Remaining Exercise Number Excercisable Weighted Average
Price 2005 Contractual Life Price at December 31, 2005 Exercise Price
----- ---- ---------------- ----- -------------------- --------------
0.30 45,000 0.87 0.30 45,000 0.30
0.77 200,000 1.13 0.77 200,000 0.77
0.15 2,000,000 1.55 0.15 2,000,000 0.15
1.00 10,000 1.00 1.00 10,000 1.00
0.60 697,333 3.13 0.60 697,333 0.60
1.00 697,333 3.13 1.00 697,333 1.00
1.00 50,000 3.00 1.00 50,000 1.00
0.71 30,000 1.17 0.71 30,000 0.71
--------- ---------
3,729,666 3,729,666
F-14
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Warrants
--------
Number Range of Exercise Number
Outstanding 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
Issued
Balance, December 31, 2005 5,589,367 $0.75 - $9.00 5,389,367
--------- ---------
NOTE H - INCOME TAXES
Deferred income taxes arise from timing differences resulting from income and
expense items reported for financial accounting and tax purposes in different
periods. A deferred tax asset valuation allowance is recorded when it is more
likely than not that deferred tax assets will not be realized. There are no
deferred taxes for the year ended December 31, 2005.
There was no income tax expense for the year ended December 31, 2005 due to the
Company's net losses. Due to an estimated net operating loss carry-forward of
approximately $5,885,000 available to offset future taxable income through 2019
and recoverability is not certain, there is no expected tax benefit calculated.
NOTE I - COMMITMENTS AND CONTINGENCIES
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
F-15
ENVIRO VORAXIAL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
exercisable. 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.
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 two years are as follows:
Years ending December 31,
-------------------------
2006 $ 63,700
2007 42,467
----------
106,167
----------
Rent expense charged to operations amounted to $62,000 and $60,000 in 2005 and
2004, respectively.
NOTE J - SUBSEQUENT EVENTS
In March 2006, a Voraxial(R) 4000 Separator was sold to ConocoPhillips for
produced water separation. The machine will be used to enhance the handling of
large volumes of produced water and water injection on at a production facility.
F-16