The
accompanying financial statements do not include any adjustments relating
to the
recoverability and classification of asset carrying amounts or the amount
and
classification of liabilities that might result should the Company be unable
to
continue as a going concern.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at
the date of the financial statement and the reported amounts of revenues
and
expenses during the reporting period. Estimates that are critical to
the accompanying financial statements arise from the determination of the
fair
value of the Company’s investments. Because such determination
involves subjective judgment, it is at least reasonably possible that the
Company’s estimates could change in the near term with respect to this
matter.
Earnings
(Loss) Per Share
In
accordance with the provisions of SFAS No. 128, “Earnings Per Share,” basic
earnings (loss) per share is computed by dividing net income (loss) by the
number of weighted-average common shares outstanding during the
year. Diluted earnings per share is computed by dividing net income
(loss) by the number of weighted average common shares outstanding adjusted
to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares resulting from common stock equivalents
granted had been issued. The effect of options and warrants
outstanding were not included in the computation of diluted earnings per
share
because the effect on net loss per share would have been
antidilutive. Accordingly, basic and diluted net loss per share are
identical for each of the periods in the accompanying statements of
operations.
Stock-Based
Compensation
The
Company accounts for stock compensation arrangements in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based
Payment. SFAS No. 123(R) requires all share –based payments,
including grants of employee stock options, to be recognized as compensation
expense over the service period (generally the vesting period) in the
consolidated financial statements based on their fair values. The
impact of forfeitures that may occur prior to vesting is also estimated and
considered in the amount recognized. SFAS No. 123(R) requires excess
tax benefits to be reported as a financing cash inflow rather than as a
reduction of taxes paid.
Valuation
of Investments and Revenue Recognition (After conversion to a
BDC)
As
required by the SEC's Accounting Series Release ("ASR") 118, the investment
committee of the Company is required to assign a fair value to all
investments. To comply with Section 2(a)(41) of
the Investment Company Act of 1940 (the “Act”) and Rule 2a-4 under the Act, it
is incumbent upon the board of directors to
satisfy themselves that all appropriate factors relevant to the
value of
securities for which market quotations are not
readily available have been
considered and to determine the
method of arriving at the fair value of each such security. To the extent
considered necessary, the board may appoint persons to assist them in the
determination of such value, and to make the actual calculations pursuant
to the
board's direction. The board must also, consistent with this responsibility,
continuously review the appropriateness of the methods used in valuing each
issue of security in the Company's portfolio. The directors must recognize
their
responsibilities in this matter and whenever technical assistance is requested
from individuals who are not directors, the findings of such intervals must
be
carefully reviewed by the directors in order to satisfy themselves that the
resulting valuations are fair.
Where
there is not a readily available source for determining the market
value of an investment, either because the investment is
not publicly traded, or is thinly traded, and in absence of a recent appraisal,
the value of the investment
shall be based on the following criteria:
|
|
-
|
Total
amount of the Company's actual investment ("AI"). This amount shall
include all loans, purchase price of securities, and fair value
of
securities given at the time of
exchange.
|
|
|
-
|
Total
revenues for the preceding twelve months
("R").
|
|
|
-
|
Earnings
before interest, taxes and depreciation
("EBITD")
|
|
|
-
|
Estimate
of likely sale price of investment
("ESP")
|
|
|
-
|
Net
assets of investment ("NA")
|
|
|
-
|
Likelihood
of investment generating positive returns (going
concern).
|
The
estimated value of each such investment shall be determined as
follows:
|
|
-
|
Where
no or limited revenues or earnings are present, then the value
shall be
the greater of the investment's a) net assets, b)
estimated sales price, or c)
total amount of actual investment.
|
|
|
-
|
Where revenues and/or earnings are present, then
the value shall be the greater of one time (1x) revenues or three
times
(3x) earnings, plus the greater
of the net assets of the investment or the total amount of
the actual investment.
|
|
|
-
|
Under both scenarios,
the value of the investment shall be adjusted down if
there is a reasonable expectation that
the Company will not be able to recoup its investment or if
there is reasonable doubt about the investee’s ability to
continue as a going concern.
|
Note
B – Acquisition of Portfolio Company
On
August
4, 2004 the Company acquired Arsenic Removal Technologies, Inc, a company
holding the arsenic removal technology rights developed by the University
of
Wyoming. This portfolio company was purchased using 2,823,529 shares of
restricted common stock of the Company, valued at approximately $480,000
based
on the fair market value of the shares issued on that date. We hold 100%
of the
stock in this company and plan to develop and market the technology throughout
the world. After purchase, the company was re-incorporated in North Carolina
with a change of name to Metals & Arsenic Removal Technology,
Inc.
On
December 8, 2004 the company signed a letter of intent with HERC Products,
Inc.,
a public company, to acquire 51% of ownership for $1,000,000 cash. The company
has patented technology that provides chemical cleaning for water pipe, waste
water systems, cooling towers, and HVAC systems, tanks and boilers and other
water-based chemical process systems. HydroFlo, Inc transferred an initial
$50,000 to HERC as a deposit until the transaction is consummated. The $50,000
deposit is secured by a non-interest bearing note due March 31, 2005 if the
transaction is not completed. On March 7, 2005, the company elected not to
invest in HERC Products, Inc. Although in default, the deposit of $50,000
is due
to be returned.
On
December 20, 2004 the company acquired 100% of Safety Scan Technology, Inc.,
a
company holding the rights to a patented process known as Swept Frequency
Acoustic Interferometry (SFAI) that is a non-invasive measurement technique
that
uses high frequency sound waves to determine the properties of fluids in
sealed
containers. The company was acquired by issuing 3,485,000 shares of restricted
common stock of the Company valued at approximately $697,000.
Note
C – Stockholders’ Equity
During
the three months ended September 30, 2005 we sold 8,048,294 shares of our
common
stock at prices ranging from $0.12 to $0.58/share. These transactions
generated gross proceeds to the Company of $1,119,237.33.
Note
D – Subsequent Events
On
July
14, 2005 HydroFlo, Inc. established a 100% owned portfolio company, Advance
Water Recycle, Inc. for the purpose of providing research and development
support for the existing portfolio companies.
On
September 5, 2005 Metals & Arsenic Removal Technology, Inc. signed a joint
venture agreement with Wright Chemical, Inc. or Wilmington, NC for the
production and development to produce ARTI-64 product.
On
September 15, 2005 Metals & Arsenic Removal Technology, Inc. signed an
agreement with All In One Global Logistics Ltd (AIO) to provide logistics
and
distribution services to ship MARTI product line
internationally.
The
note
due FreeHarbour, LLC, in the amount of $2,052,321 was cancelled in June,
2005 as
mandated by the Securities and Exchange Commission.
Item
2. MANAGEMENT'S DISCUSSION AND PLAN OF
OPERATIONS
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The
information contained in this section should be read in conjunction with
the
Selected Financial Data and our Financial Statements and notes thereto appearing
elsewhere in this 10Q. The 10Q, including the Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements that involve substantial risks and
uncertainties. These forward-looking statements are not historical
facts, but rather are based on current expectations, estimates and projections
about our industry, our beliefs, and our assumptions. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks", and
"estimates" and variations of these words and similar expressions are intended
to identify forward-looking statements. These statements are not guarantees
of
future performance and are subject to risks, uncertainties, and other factors,
some of which are beyond our control and difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in
the
forward-looking statements including without limitation (1) any future economic
downturn could impair our ability to increase our non-performing assets,
(2) a
contraction of available credit and/or an inability to access the equity
markets
could impair our investment activities, (3) the risks associated with the
possible disruption in the Company's operations due to terrorism and (4)
the
risks, uncertainties and other factors we identify from time to time in our
filings with the Securities and Exchange Commission, including our Form 10-Ks,
Form 10-Qs and Form 8-Ks. Although we believe that the assumptions on which
these forward-looking statements are based are reasonable, any of those
assumptions could prove to be inaccurate, and as a result, the forward-looking
statements based on those assumptions also could be incorrect. In light of
these
and other uncertainties, the inclusion of a projection or forward-looking
statement in this Annual Report should not be regarded as a representation
by us
that our plans and objectives will be achieved. You should not place undue
reliance on these forward-looking statements, which apply only as of the
date of
this Annual Report.
OVERVIEW
The
following discussion should be read in conjunction with the condensed financial
statements as of and for the three months ended September 30, 2005 included
with
this Form 10Q.
Effective
March 4, 2004, we converted to a Business Development Company under the
Investment Company Act of 1940. Upon completion of this conversion, we became
an
internally managed, diversified, closed-end investment company. Prior to
the
conversion we were an operating company. Those operations were transferred
to
HydroFlo Water Treatment, Inc., a wholly owned investment of ours. HydroFlo
Water Treatment, Inc. is an international provider of wastewater pre-treatment
solutions, treating wastewater for industrial and municipal customers. HydroFlo
designs, builds, and installs water and wastewater treatment systems and
provides a full range of related services to companies and municipalities
to
treat their wastewater.
On
March
10, 2005, we sold 1,000,000 shares of our common stock to Golden Gate Investors
for $270,000. In connection with this transaction, we received a $150,000
note
receivable from Golden Gate Investors. In accordance with accounting principles
generally accepted in the United States, the unpaid balance of the note as
of
March 31, 2005 has been reflected as a deduction from stockholders'
equity.
On
April
12, 2005 HydroFlo, Inc. established a 100% owned portfolio company, Ultra
Choice
Water, Inc. (UCW) for the purpose of providing water coolers without bottles
for
offices and individual consumers. This company will provide the water treatment
systems to commercial and residential customers for a monthly fee. Ultra
Choice
Water, Inc. will use water purification media supplied by Metals and Arsenic
Removal Technology, Inc. (MARTI), another portfolio company of HydroFlo,
Inc.
On
May 11
2005, Metal and Arsenic Removal Technology, Inc. (MARTI) entered into a reseller
agreement with Essentially Yours Industries (EYI). Pursuant to this
agreement, MARTI is to manufacture and supply to EYI certain products, including
specially marked Code Blue™ pitchers and specially formulated Code Blue™
filters. EYI is the exclusive distributor, and MARTI is the exclusive
supplier, for these specially marked or formulated products.
On
July
14, 2005 HydroFlo, Inc. established a 100% owned portfolio company, Advance
Water Recycle, Inc. for the purpose of providing research and development
support for the existing portfolio companies.
On
August
3, 2005 Metals and Arsenic Removal Technology, Inc. (MARTI) amended the reseller
agreement with Essentially Yours Industries (EYI) to include additional water
filtration systems.
PORTFOLIO
COMPOSITION
Our
primary business is investing in businesses with equity-based investments.
The
total portfolio value of investments in non-publicly traded securities was
approximately $5,012,125 at fair value at September 30, 2005.
OPERATIONS
We
generated no income during the three months ended September 30,
2005. We incurred approximately $129,000 in expenses during this
period. These expenses represented management fees to our CEO, rent
and other cash expenses associated with operating the BDC and seeking additional
investments.
NET
UNREALIZED LOSS ON INVESTMENTS
During
the three months ended September 30, 2005, we recorded approximately $20,717,000
in unrealized losses on our portfolio company investments. This loss
represents the difference between the amount our Board of Directors determined
was the fair value of the portfolio companies and the amounts we have invested
in those companies, including prior adjustments for unrealized gain or
loss.
NET
LOSS
As
a
result of the foregoing, we incurred a net loss of approximately $20,892,000
for
the three months ended September 30, 2005.
PORTFOLIO
COMPOSITION
Our
primary business is investing in businesses with equity-based investments.
The
total portfolio value of investments in non-publicly traded securities was
approximately $2,620,000 at fair value at September 30, 2004.
OPERATIONS
We
generated no income during the three months ended September 30,
2004. We incurred approximately $155,000 in expenses during this
period. These expenses represented management fees to our CEO, rent
and other cash expenses associated with operating the BDC and seeking additional
investments.
NET
UNREALIZED LOSS ON INVESTMENTS
During
the three months ended September 30, 2004, we recorded approximately $14,000
in
unrealized losses on our portfolio company investments. This loss
represents the difference between the amount our Board of Directors determined
was the fair value of the portfolio companies and the amounts we have invested
in those companies, including prior adjustments for unrealized gain or
loss.
NET
LOSS
As
a
result of the foregoing, we incurred a net loss of approximately $167,000
for
the three months ended September 30, 2004.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At
September 30, 2005 we had approximately $397,000 in cash and cash equivalents.
Our objective is to maintain a low cash balance, while keeping sufficient
cash
on hand to cover current funding requirements and operations.
For
the
next eight months, we expect our cash on hand and cash generated from operations
to be adequate to meet our cash needs, including additional advances to the
companies we invest in. Management's plans regarding continued
operations include the possibility of raising additional equity capital via
the
sale of stock, which can now be accomplished due to the filing as a Business
Development Company. Aggressive sales efforts in our portfolio
companies will likely increase sales of product by the portfolio companies
in
the coming year and may result in less funding we need to provide to them
or may
even result in a cash return on our investment.
PRIVATE
PORTFOLIO COMPANY INVESTMENTS
The
following is a list of the private companies in which we had an investment
and
the cost and fair value of such securities at September 30,
2005:
|
Name
of Company
|
|
Nature
of its Principal Business
|
|
Approximate
Cost
|
|
Fair
Value
|
| |
|
|
|
|
|
|
|
HydroFlo
Water Treatment, Inc.
|
|
Waste
water treatment solutions
|
|
$2,523,299
|
|
$1,888,000
|
| |
|
|
|
|
|
|
|
Metal
& Arsenic Removal Technology, Inc.
|
|
Arsenic
removal technology
|
|
$1,122,710
|
|
$2,349,000
|
| |
|
|
|
|
|
|
|
Safety Scan
Technologies, Inc.
|
|
High
Frequency Scanning
|
|
$752,121
|
|
$752,121
|
| |
|
|
|
|
|
|
|
Ultra
Choice Water, Inc.
|
|
POU
Water Filtration Systems
|
|
$22,692
|
|
$22,879
|
| |
|
|
|
|
|
|
|
Advance
Water Recycle, Inc
|
|
Research
and Development
|
|
$125
|
|
$125
|
ITEM
3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
Our
business activities contain elements of risk. We consider the principal types
of
risk to be portfolio valuations. We consider the management of risk essential
to
conducting our businesses. Accordingly, our risk management systems
and procedures are designed to identify and analyze our risks, to set
appropriate policies and limits and to continually monitor these risks and
limits by means of reliable administrative and information systems and other
policies and programs.
As
a
business development company, we invest in illiquid securities including
equity
securities of primarily private companies. Our investments are generally
subject
to restrictions on resale and generally have no established trading market.
We
value substantially all of our investments at fair value as determined in
good
faith by the board of directors in accordance with our valuation policy.
There
is no single standard for determining fair value in good faith. As a result,
determining fair value requires that judgment be applied to the specific
facts
and circumstances of each portfolio investment while employing a consistently
applied valuation process for the types of investments we make.
We
determine fair value to be the amount for which an investment could be exchanged
in an orderly disposition over a reasonable period of time between willing
parties other than in a forced or liquidation sale. Our valuation policy
considers the fact that no ready market exists for substantially all of the
securities in which we invest. Our valuation policy is intended to provide
a
consistent basis for determining the fair value of the portfolio. We will
record
unrealized depreciation on investments when we believe that an investment
has
become impaired, including where collection of a loan or realization of an
equity security is doubtful, or when the enterprise value of the company
does
not currently support the cost of our debt or equity investments. Conversely,
we
will record unrealized appreciation if we believe that the underlying portfolio
company has appreciated in value and, therefore, our equity security has
also
appreciated in value. The value of investments in public securities is
determined using quoted market prices discounted for restrictions on
resale. Without a readily ascertainable market value and because of
the inherent uncertainty of valuation, the fair value of our investments
determined in good faith by the board of directors may differ significantly
from
the values that would have been used had a ready market existed for the
investments, and the differences could be material. In addition, the illiquidity
of our investments may adversely affect our ability to dispose of debt and
equity securities at times when it may be otherwise advantageous for us to
liquidate such investments. In addition, if we were forced to immediately
liquidate some or all of the investments in the portfolio, the proceeds of
such
liquidation would be significantly less than the current value of such
investments.
Impact
of Inflation
We
do not
believe that our business is materially affected by inflation, other than
the
impact that inflation may have on the securities markets, the valuations
of
business enterprises and the relationship of such valuations to underlying
earnings, all of which will influence the value of our investments.
ITEM
4 CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
The
Corporation maintains disclosure controls and procedures designed to ensure
that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized,
accumulated and communicated to the Company’s management, including its Chief
Executive Officer (“CEO”), as appropriated, to allow timely decisions regarding
required disclosures.
As
of the
end of the period covered by this report, the Company’s management carried our
an evaluation, under the supervision and with the participation of the Company’s
Chief Executive Officer (“CEO”), of the effectiveness of the design and
operation of the Company’s system of disclosure controls and procedures pursuant
to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the
Exchange Act. Based on the material weaknesses described herein the
Company’s CEO has concluded that the Company’s disclosure controls and
procedures were not effective, as of the date of that evaluation, for the
purposes of recording, processing, summarizing and timely reporting of material
information required to be disclosed in reports filed by the Company under
the
Exchange Act.
Changes
in Internal Controls
There
have been no changes in the Corporation's internal control over financial
reporting that occurred during the Corporation's most recent fiscal quarter
that
have materially affected, or are reasonably likely to materially affect,
the
Corporation's internal control over financial reporting. However, we intend
to
continue to refine our internal controls on an ongoing basis with a view
towards
continuous improvements. Grant Thornton LLP (“GT”), our previous independent
accountants, had reported to our Board of Directors certain matters involving
internal controls that GT considered to be material weaknesses under standards
established by the American Institute of Certified Public Accountants. The
identified material weaknesses related to a lack of segregation of duties
within
our accounting and financial management functions and inadequate dedication
of
resources to the financial review and analysis functions. Due to the size
of our
organization, the early stage of our operations and significant financial
constraints, the Corporation has not been able to employ the necessary resources
for proper internal financial review and analysis.
Given
the
material weaknesses identified above, management devoted additional resources
to
resolving questions that arose during the quarterly reporting cycle. Significant
adjustments were necessary to convert management’s internal financial records to
the final reported amounts in the Form 10Q. As a result, management is confident
that its financial statements fairly present, in all material respects, the
financial condition and results of operations of the Company.
The
material weaknesses have been discussed in detail among our Board of Directors
and GT. We have assigned high priority to the correction of these material
weaknesses, and we are committed to addressing and resolving them fully.
As the
Corporation continues its growth and strives to achieve financial stability,
management intends to devote additional resources to further develop its
financial accounting, analysis and reporting functions.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Not
Applicable.
ITEM
2 CHANGES
IN SECURITIES AND USE OF PROCEEDS
During
the three months ended September 30, 2005 we sold 8,048,294 shares of our
common
stock at prices ranging from $0.12 to $0.58 per share. These
transactions generated gross proceeds to the Company of
$1,119,237.33
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
Not
Applicable.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not
Applicable.
ITEM
5. OTHER INFORMATION
Not
Applicable.
ITEM
6. EXHIBITS AND REPORTS ON FORM
8-K
(a) Exhibits
|
Exhibit
No.
|
|
Description
|
| |
|
|
|
|
|
Certification
pursuant to Rule 13a-14(a)
|
| |
|
|
|
|
|
Certification
of pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906
of the Sarbanes-Oxley Act of 2002.
|
(b) Reports
on Form 8-K.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized on November 15, 2004.
| |
HydroFlo,
Inc.
|
| |
|
| |
/s/
GEORGE A. MOORE, III
|
| |
___________________________
|
| |
George
A. Moore, III
|
| |
Chief
Executive Officer
|
14
