NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 (UNAUDITED)
NOTE
A - ORGANIZATION AND OPERATIONS
Organization
Enviro
Voraxial Technology, Inc., an Idaho corporation (the “Company”), is a provider of environmental and industrial separation
technology. The Company developed, and now manufactures and sells the Voraxial
®
Separator, a patented technology
that efficiently separates liquid/liquid, liquid/solid or liquid/liquid/solid fluid streams with distinct specific gravities.
The technology was patented by the Company and sold to Schlumberger Technology Corporation, a Texas
corporation, Schlumberger Canada Limited, a Canadian entity, and Schlumberger B.V., an entity organized under the laws of the
Netherlands (collectively, “Schlumberger”) on June 8, 2017. Current and potential commercial applications and
markets include oil exploration and production, oil refineries, oil spill, mining, sewage, manufacturing, waste-to-energy and
food processing industry.
Florida
Precision Aerospace, Inc., a Florida corporation (“FPA”), is the wholly-owned subsidiary of the Company and is used
to manufacture, assemble and test the Voraxial Separator.
NOTE
B - LIQUIDITY
While
the Company has historically experienced recurring net losses, on June 8, 2017, the Company completed a Technology Purchase Agreement
with Schlumberger for the sale of the Company’s intellectual property in consideration of up to $4,000,000, of which $3,000,000
was paid at closing and $1,000,000 is payable upon the completion of both: (i) the complete transfer of the intellectually property
to Schlumberger; and (ii) the provision to transfer information, assets and services to Schlumberger, which is estimated to be
approximately 12 months from the closing date. In addition, at closing FPA entered into a Framework Agreement (the “Supply
Agreement”) with Cameron Solutions, Inc. (“Cameron Solutions”), a Houston, Texas-based company engaged in the
development, manufacture and sale of equipment used in the oil and gas industry. Under the terms of the three-year Supply Agreement,
FPA is the exclusive supplier to Cameron Solutions of certain Voraxial series products for use in the oil and gas industry. Pursuant
to the Technology Purchase Agreement, Schlumberger also granted us a non-exclusive, worldwide, royalty-free licenses (the “Grant
Back Licenses”) for the sale of Voraxial products outside the oil and gas industry. Our management believes that the Grant
Back License will provide us the opportunity to possibly leverage future Schlumberger sales in the oil and gas market to penetrate
the sale and use of licensed Voraxial products to other industries, including, but not limited to mining, sewage and wastewater.
We believe that including our current cash resources and anticipated revenue to be generated under the Grant Back Licenses and
Supply Agreement, we will have sufficient resources to continue business operations in excess of 12 months.
NOTE
C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim
Financial Statements
The
interim financial statements presented herein have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. The interim financial statements should be read in conjunction with the company’s annual
financial statements, notes and accounting policies included in the company’s annual report on Form 10-K for the year ended
December 31, 2016, as filed with the SEC. In the opinion of management, all
ENVIRO
VORAXIAL TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 (UNAUDITED)
adjustments,
which are necessary to provide a fair presentation of financial position as of June 30, 2017, and the related operating results
and cash flows for the interim period presented, have been made. The results of operations, for the period presented are not necessarily
indicative of the results to be expected for the year.
Principles
of Consolidation
The
unaudited condensed 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 liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ. Significant estimates include allowance for doubtful accounts,
deferred tax asset, allowance for inventory obsolescence and valuation of stock-based compensation.
Revenue
Recognition
The
Company derives its revenue from the sale and short-term rental of the Voraxial Separator. The Company presents revenue in accordance
with FASB new codification of “Revenue Recognition in Financial Statements”. Under Revenue Recognition in Financial
Statements, revenue is realized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or
determinable and collectability is reasonably assured.
Revenues
that are generated from sales of equipment are typically recognized upon shipment. Our standard agreements generally do not include
customer acceptance or post shipment installation provisions. However, if such provisions have been included or there is an uncertainty
about customer order, revenue is deferred until we have evidence of customer order and all terms of the agreement have been complied
with. As of June 30, 2017 and December 31, 2016, there was $32,090 and $95,690, respectively, of deposits from customers.
The
Company recognizes revenue from the short term rental of equipment, ratably over the life of the agreement, which is usually one
to twelve months.
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 June 30, 2017 and December 31, 2016, approximate their fair value because of their relatively short-term
nature.
“Disclosures
about Fair Value of Financial Instruments,” requires disclosures of information regarding the fair value of certain financial
instruments for which it is practicable to estimate the value. For purpose of this disclosure, the fair value of a financial instrument
is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced
sale of liquidation.
ENVIRO
VORAXIAL TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 (UNAUDITED)
The
company accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based
on the extent to which inputs used in measuring fair value is observable in the market. We categorize each of our fair value
measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in
its entirety. These levels are:
Level
1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. We have no Level 1
instruments as of June 30, 2017 and December 31, 2016.
Level
2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all
significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term
of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present
value using market-based observable inputs including interest rate curves, foreign exchange rates, and forward and spot prices
for currencies and commodities. We have no Level 2 instruments as of June 30, 2017 and December 31, 2016.
Level
3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants
would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including
option pricing models and discounted cash flow models. We have no Level 3 instruments as of June 30, 2017 and December 31,
2016.
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 (“FDIC”) limits. As of June 30, 2017 the Company has a cash concentration
of $2,072,652 in excess of FDIC limits.
Inventory
Inventory
consists of components for the Voraxial Separator and is priced at lower of cost or market. Inventory may include units being
rented on a short term basis or 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.
The third parties do not have a contractual obligation to purchase the equipment. The Company maintains the title and risk of
loss. Therefore, these units are included in the inventory of the Company. As of June 30, 2017 and December 31, 2016:
|
|
June
30, 2017
|
|
December
31, 2016
|
Raw
materials
|
|
$
|
64,847
|
|
$
|
64,847
|
Work
in process
|
|
|
—
|
|
|
—
|
Finished
goods
|
|
|
8,471
|
|
|
12,050
|
Total
|
|
$
|
73,318
|
|
$
|
76,897
|
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
ENVIRO
VORAXIAL TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 (UNAUDITED)
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
INCOME (Loss) Per Share
In
accordance with the accounting guidance now codified as FASB ASC Topic 260, “
Earnings per Share”
basic earnings
(loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during
each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares
of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
Since
the Company reflected a net loss for the six months ended June 30, 2017 and 2016, the effect of 0 and 13,465,000 options, respectively,
is anti-dilutive. A separate computation of diluted earnings (loss) per share is presented using the treasury stock method.
Income
Taxes
The
Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Business
Segments
The
Company operates in one segment and therefore segment information is not presented.
Research
and Development Expenses
Research
and development costs, which includes 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.
Stock-Based
Compensation
The
Company adopted ASC Topic 718 formerly Statement of Financial Account Standard (SFAS) No. 123(R) effective January 1, 2006. This
statement requires compensation expense relating to share-based payments to be recognized in net income using a fair-value measurement
method. Under the fair value method, the estimated fair value of awards is charged to income on a straight-line basis over the
requisite service period, which is generally the vesting period.
ENVIRO
VORAXIAL TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 (UNAUDITED)
Reclassifications
Certain
amounts from prior periods have been reclassified to conform to the current period presentation. These reclassifications had no
impact on the Company’s net loss or cashflows.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize
(i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of,
a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors;
however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard
will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We
are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash
flows or financial condition.
Recent
accounting pronouncements issued by the FASB, the AICPA and the SEC, did not, or are not believed by management, to have a material
impact on the Company’s present or future financial statements, except as follows:
In
August 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-14, “
Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date”
defers the effective date ASU No. 2014-09 for all entities by one year.
Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update
2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting
period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. All other entities should apply the guidance in Update 2014-09 to annual reporting
periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December
15, 2019. All other entities may apply the guidance in ASU No. 2014-09 earlier as of an annual reporting period beginning after
December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance
in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within
annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in
ASU No. 2014-09. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results
of operations, cash flows or financial condition.
All
other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
NOTE
D - RELATED PARTY TRANSACTIONS
For
the six months ended June 30, 2017, the Company incurred salary expenses from the Chief Executive Officer of the Company of $152,500.
Of these amounts, $5,000 has been paid for the six months ended June 30, 2017. The total unpaid balance as of June 30, 2017 is
$1,612,261 and is included in accrued expenses – related party. For the six months ended June 30, 2016, the Company incurred
salary expenses from the Chief Executive Officer of the Company of $152,500. Of these amounts, $7,500 had been paid for the six
months ended June 30, 2016. The total unpaid balance as of June 30, 2016 is $1,489,186 and is included in accrued expenses –
related party.
ENVIRO
VORAXIAL TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 (UNAUDITED)
During
the six months ended June 30, 2017, the CEO advanced $46,354 to the company for working capital, of which $28,099 was repaid. This
advance is non-interest bearing and due on demand.
NOTE
E – NOTES PAYABLE
On
February 3, 2017, the Company received an advance of $150,000 from a third party investor pursuant to a $165,000 discounted promissory
note. The company shall pay interest to the noteholder on the principal face amount of $165,000 at a rate of 2.5% per month in
the event the note is not repaid on or before May 31, 2017. As additional consideration for the advance, the Company issued the
third party 50,000 shares of the Company’s common stock. As of June 30, 2017, this notes had been repaid in full. See Note
F.
On
May 15, 2017, the Company received an advance of $35,000 from two third-party investors pursuant to two $37,000 discounted promissory
notes. The Company shall pay interest to the noteholder on the principal face amount of $37,000 at a rate of 2.5% per month in
the event the note is not repaid on or before May 14, 2018. As additional consideration for the advance, the Company issued the
third parties 10,000 shares each of the Company’s common stock. As of June 30, 2017, both notes have been repaid in full.
See Note F.
NOTE
F -- CAPITAL TRANSACTIONS
As
disclosed under Note E, on February 3, 2017, the Company received an advance of $150,000 from a third party investor pursuant
to a $165,000 discounted promissory note. As additional consideration for the advance, the Company issued the third party 50,000
shares of the Company’s common stock. The shares were recorded at their fair value of $1,000 on the date of issuance.
As
disclosed under Note E, on May 15, 2017, the Company received an advance of $35,000 from two third-party investors pursuant to
a $37,000 discounted promissory note. As additional consideration for the advance, the Company issued each third party 10,000
shares of the Company’s common stock. The shares were recorded at their fair value of $500 per issuance on the date
of issuance.
Warrants
and Stock Options
The
Company follows the provisions of ASC Topic 718, “Compensation – Stock Compensation.” ASC Topic 718 establishes
standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services.
ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment
transactions.
The
Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company’s stock options and warrants have characteristics different
from those of its traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate,
in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such
stock options. The risk free interest rate is based upon quoted market yields for United States Treasury debt securities with
a term similar to the expected term. The expected dividend yield is based upon the Company’s history of having never issued
a dividend and management’s current expectation of future action surrounding dividends. Expected volatility was based on
historical data for the trading of our stock on the open market. The expected lives for such grants were based on the simplified
method for employees and officers.
ENVIRO
VORAXIAL TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 (UNAUDITED)
Information
with respect to options outstanding and exercisable at June 30, 2017 is as follows:
|
|
Number
Outstanding
|
|
Exercise
Price
|
|
Number
Exercisable
|
|
Balance,
December 31, 2016
|
|
|
13,465,000
|
|
$
|
0.01
|
|
|
13,465,000
|
|
Issued
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance,
June 30, 2017
|
|
|
13,465,000
|
|
$
|
0.01
|
|
|
13,465,000
|
Exercise
Price
|
|
Number
Outstanding at June 30, 2017
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average Exercise Price
|
|
Number
Exercisable at June 30, 2017
|
|
Weighted
Average Exercise Price
|
$
|
0.01
|
|
|
13,465,000
|
|
|
7.42
|
|
$
|
0.01
|
|
|
13,465,000
|
|
$
|
0.01
|
|
Total
|
|
|
13,465,000
|
|
|
—
|
|
|
—
|
|
|
13,465,000
|
|
|
—
|
The
following table summarizes information about the stock options outstanding at December 31, 2016:
Exercise
Price
|
|
Number
Outstanding
December 31, 2015
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable at
December 31, 2014
|
|
Weighted
Average
Exercise Price
|
$
|
0.01
|
|
|
13,465,000
|
|
|
8.0
|
|
$
|
0.01
|
|
|
13,465,000
|
|
$
|
0.01
|
|
Total
|
|
|
13,465,000
|
|
|
—
|
|
|
—
|
|
|
13,465,000
|
|
|
—
|
NOTE
G – COMMITMENTS AND CONTINGENCIES
Operating
Lease
In
October 2015, the Company entered into a three (3) year lease for an office and manufacturing facility located at 821 NW 57
th
Place, Fort Lauderdale, FL 33309. The lease is $6,100 per month, which includes common area maintenance, taxes and insurance.
The Company has the option to terminate the lease with three months’ notice.
Litigation
On
or about November 17, 2011, a claim was filed in the Broward County Circuit Court in Fort Lauderdale, Florida against the company
by Raw Energy Tech, LLC. The plaintiff alleges breach of an oral contract between the parties for the alleged design, fabrication
and construction of a prototype power pack. Amount of damages sought are approximately $58,000. We have moved to dismiss the complaint
and intend to vigorously defend this action as we believe this claim is without merit. We have accrued an amount in the financial
statements to cover our legal expenses as of June 30, 2017.
SALE
OF INTELLECTUAL PROPERTY
On
June 8, 2017, the Company and FPA, our wholly owned subsidiary, closed the transactions
contemplated by the Technology Purchase Agreement dated March 13, 2017 with
ENVIRO
VORAXIAL TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 (UNAUDITED)
Schlumberger
Technology Corporation, a Texas corporation, Schlumberger Canada Limited, a Canadian entity, and Schlumberger B.V., an entity
organized under the laws of the Netherlands (collectively, (“Schlumberger”).
At
closing, we sold our intellectual property (the “Purchased Intellectual Property”), substantially consisting of the
Voraxial patents, marks, software and copyrights, to Schlumberger in consideration of up to $4,000,000, of which $3,000,000 was
paid to us at closing and $1,000,000 is payable upon the completion of both: (i) the complete transfer of the Purchased Intellectually
Property to Schlumberger; and (ii) the provision to transfer information, assets and services to Schlumberger, which is estimated
to be approximately 12 months from the closing date. We recognized a gain on the sale of our intellectual property of $3,000,000
less direct cost of $80,000. We incurred additional costs and expenses in connection with this transaction, including, but not
limited to legal, accounting, and professional fees, and costs associated with our special shareholders meeting. Such costs
and expenses are included in general and administrative and professional fees under our condensed consolidated statements of operations.
We
utilized a portion of the proceeds from this transaction to pay some of our outstanding debt and are using the balance for general
working capital. We are also using some of the proceeds to buy additional manufacturing equipment to meet potential future sales.
As
part of the agreement, Schlumberger granted us a non-exclusive, worldwide, royalty-free licenses (the “Grant Back Licenses”),
to make, use, sell, offer for sale, and import products and processes embodying the Purchase Intellectual Property outside the
oil and gas market. In addition to the proceeds from the sale of our intellectual property, our management believes that the Grant
Back License will provide for the potential increase of revenues through the sale of Voraxial Separators, possibly leveraging
future sales by Schlumberger in the oil and gas market to penetrate the sale and use of licensed Voraxial products to other industries,
including, but not limited to mining, sewage and wastewater.
In
addition, at closing FPA entered into a Framework Agreement (the “Supply Agreement”) with Cameron Solutions, Inc.
(“Cameron Solutions”), a Houston, Texas-based company engaged in the development, manufacture and sale of equipment
used in the oil and gas industry. Under the terms of the three-year Supply Agreement, FPA is the exclusive supplier to Cameron
Solutions of certain Voraxial series products for use in the oil and gas industry. Sales will be made from time to time in accordance
with the terms of purchase orders. The Supply Agreement is cancellable by Cameron Solutions upon 15 days’ notice if FPA
fails to meet delivery or performance schedules or breaches any of the terms of the agreement, including the warranties. It may
also cancel the Supply Agreement without notice in the event FPA becomes insolvent or commits any act of bankruptcy. The Supply
Agreement contains customary indemnification and confidentiality provisions.
For
a period of three years following the closing of the Agreement, the Company and Raynard Veldman and John Di Bella have agreed
to not participate or cause participation in the oil-and-gas market in relation to phase or constituent sensing or separation
which is defined as, liquid-liquid, liquid-solid or liquid-gas separation and gas or liquid sensing, including all product lines
and services related thereto and including the Voraxial product line and services, except to the extent necessary to: (i) repair
or service, but not remanufacture, any goods the Company sold to third persons prior to closing; (ii) fulfill, on or after closing,
any customer obligation; or (iii) comply with any term or condition of the Agreement. In addition the Company shall take all reasonable
measures to ensure the confidentiality and prevent the improper use of all trade secrets.
NOTE
H – MAJOR CUSTOMERS
During
the six months ended June 30, 2017, we recorded 77% of our revenue from one customer.
During
the six months ended June 30, 2016, we recorded 98% of our revenue from one customer.
ENVIRO
VORAXIAL TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 (UNAUDITED)
NOTE
I – SUBSEQUENT EVENTS
In
July 2017, the company entered into a financing agreement for the purchase of CNC machining equipment valued at approximately
$426,000. The machining equipment was received in July 2017 and will be used for the manufacture of additional Voraxial Separators
in preparation of potential future orders under the Supply Agreement and Grant Back Licenses.