United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
-----------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number : 0-30738
Environmental Oil Processing Technology Corporation
-------------------------------------------------------
(Exact name of business issuer in its charter)
Utah 82-0520055
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2801 Brandt Avenue, Nampa, Idaho 83687
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (208)-463-0063 Fax: (208) 463-7601
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Former Address)
The number of shares of common stock outstanding as of September 30, 2002, is
75,967,353.
Transitional Small Business Disclosure Format. Yes [ ], No X [ ]
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The following financial statements are filed as part of this report:
The Consolidated Financial Statements of the Company for the three and
nine months ended September 30, 2002 and 2001.
The accompanying consolidated financial statements have been prepared
by the Company without audit. In the opinion of management, all adjustments
which include only normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows at September 30, 2002
and 2001 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
2001, audited consolidated financial statements. The results of operations for
the periods ended September 30, 2002 and 2001 are not necessarily indicative of
the operating results for the full years.
Item 2. Management's Discussion and Analysis:
Results of Operations:
During the first nine months of 2002 the Company focused its activities
on developing its used oil refineries. The Company presently has two refinery
projects i.e. the pilot plant in Nampa, Idaho, and the Reno Project presently in
development which will be operated by a wholly owned subsidiary EOPT Refining of
Nevada, Inc.
The Nampa plant became operational in the second quarter of 2001 with
the production of diesel, naphtha and asphalt residuum, all of which were sold
to local wholesalers. During the last several months the plant has been under
improvement modification which includes a newly engineered and fabricated
refining column and support equipment. The modifications are on hold pending the
Company receiving the financing necessary for their completion. The Company
estimates that it needs $1,500,000 to complete the modifications. This includes
the cost of equipment to be installed, to pay off its accounts payable and to
cover the negative cash flow expected while the equipment is being installed.
Management has not identified the source of these funds and accordingly it can
not be estimated when the plant will begin operating. The modifications are
engineered to improve the quality and quantity of production of petroleum
products. When the modified plant is operating Management anticipates having a
positive cash flow from the Nampa operations.
2
The Reno Project consists of completing land development on 20 acres of
land which was originally purchased for used oil refining plants to be located
on 15 acres and a co-generation plant for electricity on the remaining 5 acres.
The site preparation is essentially completed and the engineering and design
work for two refining plants is in advanced stages and presently on hold.
Engineering for the Reno project is being completed by PC&E of St. Louis, a
subsidiary of Emerson (formerly Emerson Electric) and Redd Engineering of Salt
Lake City, Utah. Approximately $30,000,000 is needed to construct, locate and
start up the two plants which could be operating by the third quarter of 2003 if
financing is soon obtained. The remaining 5 acres of the development is "fully
permitted" for the production of electricity and is currently for sale for in
excess of $20,000,000 with several parties expressing interest.
During the second quarter of 2001 the Company acquired the assets of
Artesian Oil Recovery, Inc. in Oakland California for the sum of $485,000, to
provide oil for the Reno Project. Pending completion of the Reno refineries, the
oil is being trucked to the Nampa refinery or sold to other local users.
The settlement of the litigation involving the separation of the
subsidiary PDI was completed in March of 2002. Among other matters, the Company
recovered and canceled 4,000,000 shares of its common stock from the owners of
PDI. The canceled shares were valued based on the net assets in excess of
liabilities of PDI. The gain on the disposal of PDI of $294,746 recoups the loss
on the net assets in excess of liabilities previously recognized in the period
ending September 30, 2001. Accordingly, the financial statements have been
restated to reflect the discontinued PDI operations.
Operations in the first nine months of 2002 resulted in consolidated
revenues of $1,189,213 compared to $877,564 in the first nine months of 2001.
Consolidated revenues increased by 36% over the nine months of 2001. The Company
had costs of sales of $243,531 during the nine months ended September 30, 2002,
compared to $166,805 for the same period of 2001. These costs are for the used
oil purchased, processed and sold at the Nampa, Idaho and Artesian facilities.
EOPT's gross margin was 80% of sales in 2002 compared to 81% in 2001.
Selling, general and administrative expense for the nine months ended
September 30, 2002, was $1,828,757 compared to $1,705,838 for the same period
last year. The Company has stabilized these operating costs. The increase is due
to an expense of $260,157 which was recorded for the value of stock options
issued to non-employees. Excluding this non cash expense these operating
expenses decreased by $137,238. The Company's business is labor intensive and
its largest expense is payroll. Included in consulting expense for the nine
months ended September 30, 2001, is $9,372,000 which is the value of 1,200,000
shares of common stock issued for services to a consultant during January 2001.
Without the value of the shares issued to the consultant, consulting expense for
the first nine months of 2001 would have been $52,855 compared to $284,157 for
the same nine months of 2002. The Company has also stabilized its consulting
costs.
3
The Company's net loss from operations in the nine months ended
September 30, 2002, was $1,346,832 compared to $10,480,306 in the same period of
2001. Excluding the value of the shares issued to the consultant in January
2001, the Company's loss for the first nine months of 2001 would have been
$1,108,306. The increase of $238,526 was primarily due to the $260,157 which was
recorded as the value of the stock options issued to non employees. Excluding
the $260,157 recorded the current loss would have been $1,086,675 or a decrease
of $21,631. The Company expects its loss to decline in the fourth quarter of
2002 with the continued growth of Artesian Oil Recovery in Oakland California.
Operations in the third three months of 2002 resulted in consolidated
revenues of $460,329 compared to $427,983 in the third three months of 2001, an
increase of $32,346 or 8%. The increase was the result of the acquisition of
Artesian Oil Gathering. The Company's gross margin was 86% in 2002 compared to
88% in 2001.
Selling, general and administrative expense for the three months ended
September 30, 2002, was $343,445 compared to $456,752 for the same period of
2001. The decrease of $113,307 was the result of management's cost containment
efforts.
Liquidity and Capital Resources.
The Company entered into a funding agreement with a trust fund to
borrow $10,500,000 for the development and expansion of the Company business.
Some of these funds were used in designing and engineering the refining and
production facility in the Reno Project. Some of the loan funds have been used
to purchase the real property for the Reno Project, and the permitting of some
of the property for electrical production. Through September 30, 2002, the
Company has incurred $7,629,129 for the cost of the Reno Project including
$1,344,104 expended in the first nine months of 2002. The Company also incurred
$266,605 and $587,973, in the first nine months of 2002 and 2001, respectively
on the Nampa, Idaho facility. The terms of the funding required the Company to
repay the full amount borrowed in one year from the date funds were first
received subject to the lender's option to extend the loan. The lender extended
the loan for an additional six months to September 23, 2002. The Company is in
default on the loan and the trust fund has begun foreclosure proceedings. The
loan is secured by substantially all of the Company's assets and is guaranteed
by an officer and director of the Company. The loss of these assets in
foreclosure by the lender would significantly impare the Company's ability to
continue as a going concern. Management is currently considering its options to
resolve the foreclosure proceeding.
The Company generated cash from its operations of $436,778 during the nine
months ended September 30, 2002, compared to generating cash from operations of
$717,899 for the corresponding period in the prior year. The difference of
$281,121 was primarily due to the net cash used in the operating losses of the
Company offset by the increase in its accounts payable and accrued expenses of
$1,426,460 in 2002 compared to an increase of $1,526,773 of accounts payable and
accrued expenses in 2001.
4
The Company's accounts receivable increased by $22,141 from December
31, 2001, to September 30, 2002, compared to an increase of $388,229 for the
same period of 2001. The increase in 2001 was the result of the Company's
expanded oil gathering business with the purchase of Artesian Oil Recovery.
In 2001 the Company accumulated used oil for processing in the Nampa
facility therefore inventory levels increased by $105,718 in 2001 compared to a
decrease of $27,943 in the same period of 2002 because the Company sold some of
its used oil while the refinery is being refitted.
The Company paid $25,892 of debt to banks in 2002 compared to $533,206
in 2001. The Company also repaid related parties cash of $491,500 in 2001
compared to $6,700 in 2002. The Company borrowed $122,035 from an officer and
director and $46,068 from unrelated parties in the first nine months of 2002.
The Company borrowed $94,990 from related parties and $6,000,000 from unrelated
parties during the same periods of 2001. The Company repaid $210,000 of related
party debt in 2002 through the issuance of 2,333,333 shares of its common stock.
It also issued 535,714 shares to consultants on exercise of their options and
for conversion of accounts payable of $187,500 and an additional 178,190 shares
to collectors for used oil valued at $23,615.
The Company issued 9,600,000 shares to an officer and director upon the
exercise of his options at $0.17 per share for 3,600,000 shares and $0.085 per
share for 6,000,000 shares. The officer and director gave the Company his note
for the exercise of the options. The notes total $1,122,000, are unsecured and
bear interest at 6% per annum. The officer returned 6,000,000 shares in the
third quarter of 2002 for the cancellation of a $510,000 and $11,737 of accrued
interest.
The Company has recorded a gain from discontinued operations in 2002,
in the amount of $294,746 related to the PDI separation which is the value of
the Company's 4,000,000 shares of common stock recovered. The Company had a loss
of $2,579,600 for the same period of 2001 from the operations and disposal of
PDI.
The Company is seeking funding for the completion of the Reno Project
and to meet its operating costs. The Company is also investigating, reviewing
and considering additional used oil gathering facilities as well as seeking
financing to acquire the same. No financing agreements have been formalized as
of this time and there is no assurance that such funds will be available when
needed or if available will be under terms acceptable to the Company.
Forward Looking Statements.
The foregoing paragraphs in this MD&A concerning the activity,
operations and plans of the Company, and particularly the planned development of
the Reno Project and the future of the "permitted property" are forward-looking
statements as well as any other statements that are not historical in context.
The statements provided are based on information available to management as of
the date hereof, and the Company assumes no obligation to revise or update such
forward- looking statements. Readers are cautioned that such forward-looking
statements involve risk and uncertainties that may cause the Company's actual
results to differ materially from such forward- looking statements.
5
Item 3. Controls and Procedures.
(a) Under the supervision and with the participation of our management,
including our principal executive officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on this
evaluation, our principal executive officer concluded that our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to our Company (including its consolidated
subsidiaries) required to be included in our reports filed or submitted under
the Exchange Act
(b) There have been no significant changes (including corrective
actions with regard to significant deficiencies or material weaknesses) in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph (a)
above.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
EOPT v. LM Alternative: On September 24, 2001, EOPT filed a complaint
against LM Alternative, Inc. ("LMA") in the United States District Curt, Central
District of California, Eastern Division, Case No. EDCV 01-0699 VAP (SGLx). EOPT
seeks a money judgement against LMA. EOPT anticipates that in addition to filing
an Answer denying EOPT's claims, LMA will file a Counterclaim seeking money
damages against EOPT for breach of contract. The case arises as a result of
orders placed by EOPT for electrical generators, and the alleged default by LMA.
The parties have agreed on a dismissal without prejudice and a moratorium on
refiling for six months.
American Moistening Company, Inc v. EOPT: American Moistening Company,
Inc. filed a Complaint in North Carolina in the Superior court Division of
Mecklenburg County on February 25, 2002 and seeks a money judgment against EOPT
for $165,840 for services and goods performed or manufactured. EOPT timely filed
an answer asserting that EOPT canceled its purchase order and that there is no
liability. Opposing counsel is requesting a settlement proposal. Both EOPT and
AMCO are seeking attorneys' fees and costs of litigation against the other.
Lewis & Clark College v. EOPT: Lewis & Clark College filed a complaint
on October 28, 2002, in the District Court of the Third Judicial District,
Canyon County, Idaho, for the appointment of a receiver pending execution
against collateral under pending foreclosure proceedings for $10,500,000
principal plus interest and costs. EOPT was served on November 4, 2002, and
intends to timely respond to the pleadings on or before November 24, 2002,
raising available legal defenses.
6
Item 2. Changes in Securities.
(a) None
(b) None
(c) None
(d) N/A
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information.
In 2001 EOPT received the last of the required Federal and State
permits and approvals for construction and operation of an electrical production
facility on 5 acres of the Reno Project. These permits are the Federal Energy
Regulatory Commission's ("FERC") authorization to sell energy at market based
rates, the Nevada Public Utility Commission Utility Environmental Planning Act
Permit, the State of Nevada Department of Conservation and Natural Resources Air
Quality operating Permit, and the Storey County Special Use Permit. EVOP has
decided to not pursue the production of electricity at this time on the Reno
Project, and is presently negotiating for the sale of the applicable 5 acres.
The EOPT property is near the entrance to the Tahoe-Reno Industrial Center, one
of the largest industrial zoned developments in the United States.
Statements in this report that are not strictly historical are
forward-looking statements. The Company makes these statements based on
information available to it as of the date of this report and it assumes no
responsibility to update or revise such forward-looking statements. Editors and
investors are cautioned that such forward-looking statements involve risk and
uncertainties that may cause the Company's actual results to differ materially
from such forward- looking statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits.
(b) No Form 8-K filed during the third quarter of 2002.
7
SIGNATURES
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In accordance with requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Environmental Oil Processing Technology Corporation
(Registrant)
Date: November 13, 2002 By /s/ N. Tod Tripple
----------------------------------------
N. Tod Tripple, President and CEO
CERTIFICATION
I, N. Tod Tripple, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Environmental
Oil Processing Technology Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ N. Tod Tripple
-------------------------------------
N. Tod Tripple, President and CEO
8
ENVIRONMENTAL OIL PROCESSING
TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and December 31, 2001
9
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
September 30, December 31,
2002 2001
------------ ------------
(naudited)
CURRENT ASSETS
Cash $ 38,379 $ 1,076,799
Trade accounts receivable, less allowance for
doubtful accounts of $13,000 and $10,000, respectively 151,426 129,285
Inventories 186,615 190,943
Other current assets 131,390 48,358
------------ ------------
Total Current Assets 507,810 1,445,385
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 4,096,492 3,878,670
Less accumulated depreciation (314,493) (237,193)
------------ ------------
Property, Plant and Equipment, Net 3,781,999 3,641,477
------------ ------------
OTHER ASSETS
Construction in progress 7,629,129 6,238,550
Deposits 40 40
Intangible assets, net 347,308 394,800
Unamortized debt issue costs -- 52,500
------------ ------------
Total Other Assets 7,976,477 6,685,890
------------ ------------
TOTAL ASSETS $ 12,266,286 $ 11,772,752
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
10
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 862,032 $ 694,176
Accrued expenses 2,298,685 1,236,081
Notes payable - related parties 115,335 210,000
Notes payable 10,546,068 10,525,892
------------ ------------
Total Current Liabilities 13,822,120 12,666,149
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 200,000,000
shares authorized; 75,967,353 and 73,220,116
shares issued and outstanding, respectively 24,272,305 23,249,988
Note and interest receivable-related party (Note 3) (627,291) --
Accumulated deficit (25,200,848) (24,143,385)
------------ ------------
Total Stockholders' Equity (Deficit) (1,555,834) (893,397)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 12,266,286 $ 11,772,752
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
11
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
2002 2001 2002 2001
--------------- ---------------- --------------- ---------------
NET SALES $ 460,329 $ 427,983 $ 1,189,213 $ 877,564
COST OF GOODS SOLD 65,636 50,138 243,531 166,805
--------------- ---------------- --------------- ---------------
GROSS MARGIN 394,693 377,845 945,682 710,759
--------------- ---------------- --------------- ---------------
OPERATING EXPENSES
Amortization of debt issue cost -- -- 52,500 --
Consulting 259,657 22,306 284,157 9,424,855
Depreciation and amortization 42,367 20,124 127,100 60,372
Selling, general and administrative 343,445 456,752 1,828,757 1,705,838
--------------- ---------------- --------------- ---------------
Total Operating Expenses 645,469 499,182 2,292,514 11,191,065
--------------- ---------------- --------------- ---------------
LOSS FROM OPERATIONS (250,776) (121,337) (1,346,832) (10,480,306)
--------------- ---------------- --------------- ---------------
OTHER INCOME (EXPENSE)
Interest expense (5,283) (7,212) (7,139) (41,254)
Interest income 16 850 1,762 9,394
--------------- ---------------- --------------- ---------------
Total Other Income (Expense) (5,267) (6,362) (5,377) (31,860)
--------------- ---------------- --------------- ---------------
INCOME TAX EXPENSE -- -- -- --
--------------- ---------------- --------------- ---------------
LOSS FROM CONTINUING
OPERATIONS (256,043) (127,699) (1,352,209) (10,512,166)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (Note 4) -- (3,046,968) 294,746 (2,579,600)
--------------- ---------------- --------------- ---------------
NET LOSS $ (256,043) $ (3,174,667) $ (1,057,463) $ (13,091,766)
=============== ================ =============== ===============
BASIC INCOME (LOSS) PER
COMMON SHARE
Loss from continuing operations $ (0.00) $ (0.00) $ (0.01) $ (0.14)
Income (loss) from discontinued
operations 0.00 (0.04) 0.00 (0.04)
--------------- ---------------- --------------- ---------------
Basic income (loss) per share $ (0.00) $ (0.04) $ (0.01) $ (0.18)
=============== ================ =============== ===============
WEIGHTED AVERAGE SHARES
OUTSTANDING 81,221,434 73,520,116 77,796,509 73,404,731
=============== ================ =============== ===============
The accompanying notes are an integral part
of these consolidated financial statements.
12
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Note and
Common Stock Interest Total
---------------------------- Receivable- Accumulated Stockholders'
Shares Amount Related Party Deficit Equity (Deficit)
------------ ------------ -------------- ------------ ------------
Balance, December 31, 2000 72,020,116 $ 12,943,211 $ -- $ (9,255,116) $ 3,688,095
Common stock issued for services 1,200,000 9,372,000 -- -- 9,372,000
Stock options granted to employees
below market value -- 561,400 -- -- 561,400
Stock options granted to nonemployees
below market value -- 373,377 -- -- 373,377
Net loss for the year ended
December 31, 2001 -- -- -- (14,888,269) (14,888,269)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 73,220,116 23,249,988 -- (24,143,385) (893,397)
Common stock issued for inventory
(unaudited) 103,217 17,991 -- -- 17,991
Common stock issued for options
exercised (unaudited) 500,000 175,000 -- -- 175,000
Conversion of accounts payable to
common stock (unaudited) 35,714 12,500 -- -- 12,500
Common stock issued for conversion
of debt (unaudited) 2,333,333 210,000 -- -- 210,000
Cancellation of shares returned in
settlement agreement by Project
Development Industries (unaudited) (4,000,000) (294,746) -- -- (294,746)
Stock options granted to nonemployees
at market value (unaudited) -- 260,157 -- -- 260,157
Common stock issued for options
exercised (unaudited) 3,600,000 612,000 (612,000) -- --
Common stock issued for options
exercised (unaudited) 6,000,000 510,000 (510,000) -- --
Interest accrued on related party note (unaudited) -- 27,028 (27,028) -- --
Cancellation of shares and related party
note and accrued interest (unaudited) (6,000,000) (521,737) 521,737 -- --
Common stock issued for options exercised
(unaudited) 100,000 8,500 -- -- 8,500
Common stock issued for inventory
(unaudited) 74,973 5,624 -- -- 5,624
Net loss for the nine months ended
September 30, 2002 (unaudited) -- -- -- (1,057,463) (1,057,463)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2002 (unaudited) 75,967,353 $ 24,272,305 $ (627,291) $(25,200,848) $ (1,555,834)
============ ============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
13
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
--------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,057,463) $(13,091,766)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of debt issue costs 52,500 --
Depreciation and amortization 127,100 244,260
Common stock issued for services -- 9,477,000
Loss on impairment of goodwill -- 2,752,222
Loss on impairment of net assets in excess of
liabilities of Project Development Industries -- 294,746
Gain on disposal of subsidiary (294,746) --
Stock options granted below market value 260,157 --
Changes in operating assets and liabilities:
Accounts receivable (22,141) (388,229)
Inventories 27,943 (105,718)
Other assets (83,032) 8,611
Accounts payable and accrued expenses 1,426,460 1,526,773
------------ ------------
Net Cash Provided by Operating Activities 436,778 717,899
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Cash forfeited in disposal of subsidiary -- (37,932)
Construction in progress (1,344,104) (5,416,839)
Capital expenditures (266,605) (587,973)
------------ ------------
Net Cash Used by Investing Activities (1,610,709) (6,042,744)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from notes payable - related parties 122,035 94,990
Payments on notes payable - related parties (6,700) (491,500)
Proceeds from notes payable 46,068 6,000,000
Payments on notes payable (25,892) (533,206)
------------ ------------
Net Cash Provided by Financing Activities 135,511 5,070,284
------------ ------------
NET DECREASE IN CASH (1,038,420) (254,561)
CASH, BEGINNING OF PERIOD 1,076,799 273,215
------------ ------------
CASH, END OF PERIOD $ 38,379 $ 18,654
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
14
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Nine Months Ended
September 30,
--------------------------------------
2002 2001
------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 1,189 $ 41,254
Cash paid for taxes $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Nine Months ended September 30, 2001:
The Company issued 1,200,000 shares of its common stock for services of
$9,477,000.
The Company issued 300,000 shares of its common stock for extinguishment of
debt of $105,000.
Nine Months ended September 30, 2002:
The Company issued 2,333,333 shares of its common stock for conversion of the
$210,000 promissory note to the President of the Company.
The Company issued 35,714 shares of its common stock for conversion of
accounts payable and 500,000 shares of its common stock for accounts payable
applied to exercise of stock options to its consultants on the Reno Project.
The Company issued 103,217 shares of its common stock for used oil collected
from various companies.
The Company issued 3,600,000 shares of its common stock to the President of
the Company for options exercised at $0.17 per share and the President of the
Company gave a $612,000 promissory note as payment of the exercise price (See
Note 3).
The Company issued 6,000,000 shares of its common stock to the President of
the Company for options exercised at $0.085 per share and the President of
the Company gave a $510,000 promissory note as payment of the exercise price.
During September 2002, the President of the Company returned the 6,000,000
shares of the Company's common stock and canceled the related party note
totaling $510,000 and related accrued interest of $11,737 (See Note 3).
The Company has accrued interest of $15,291 for the remaining related party
note and has recorded the amount as a reduction of stockholder's equity with
an offset to contributed capital.
The Company issued 74,973 shares of its common stock for oil collected from
various companies.
The accompanying notes are an integral part
of these consolidated financial statements.
15
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in consolidated financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
in accordance with such rules and regulations. The information
furnished in the interim condensed consolidated financial statements
include normal recurring adjustments and reflects all adjustments,
which, in the opinion of management, are necessary for a fair
presentation of such consolidated financial statements. Although
management believes the disclosures and information presented are
adequate to make the information not misleading, it is suggested that
these interim condensed consolidated financial statements be read in
conjunction with the Company's most recent audited consolidated
financial statements and notes thereto included in its December 31,
2001 Annual Report on Form 10-KSB. Operating results for the three and
nine months ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2002.
NOTE 2 - GOING CONCERN
The Company expects that waste oil collection by Artesian will continue
to grow and will thus increase its refined oil sales. The Company is
modifying its refining plant in Nampa, Idaho and adding a new column
that is expected to be completed by the end of the fourth quarter 2002.
The Company expects this to produce positive cash flows from operations
by 2002 year-end. The Company's loan in the amount of $10,500,000 was
due on March 23, 2002. However, the Company negotiated a six month
extension with the note holder and the extended due date was September
23, 2002. The Company is in default on this loan, but is in
negotiations with the note holder to extend the terms. The Company is
building two plants in Reno, Nevada. The Company is seeking financing
for the plant. If the financing does not become available soon enough
then construction will be slowed so that the Company does not become
over extended. However, there can be no assurance that the Company will
be successful in its plans. Because the Company has experienced
substantial losses from operations and has a working capital deficit of
$13,314,310, there is substantial doubt about the Company's ability to
continue as a going concern.
16
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 3 - MATERIAL EVENTS
Litigation
On March 4, 2002, the Company entered into a Separation Agreement,
Settlement Agreement and Mutual Release with Project Development
Industries, L.L.C. (PDI) and several individuals. During March 2002,
the Company has paid a $155,000 invoice previously tendered by PDI and
PDI has returned 4 million shares of common stock and cancelled the $6
million contingent promissory note. The promissory note was to be paid
based upon earnings by PDI. PDI recorded a loss for the period from
April 1, 1999 to December 31, 1999 and EOPT agreed to defer the
implementation of the contingency but the criteria for payment of the
note were never met and the Company never recorded the note as a
liability.
Truck Lease
During March 2002, the Company entered into a one-year operating lease
for two trucks and related equipment with Oil Transportation Company,
Inc. (OTC), a company owned by the President of the Company and an
unrelated individual. The monthly lease payments are based on $0.50 per
actual running mileage in a month. The Company has prepaid OTC the
amount of $20,000 that is included in other current assets as of
September 30, 2002.
Notes Payable
The Company is in default on its note payable in the amount of
$10,500,000 which was due on September 23, 2002. On October 28, 2002,
Lewis & Clark College filed a complaint, in the District Court of the
Third Judicial District, Canyon County, Idaho, for the appointment of a
receiver pending execution against collateral under pending foreclosure
proceedings for the principal amount of the note plus interest and
costs. The Company was served on November 4, 2002 and intends to timely
respond to the pleadings on or before November 24, 2002, raising
available legal defenses.
Notes and Interest Receivable - Related Party
On May 1, 2002, the President of the Company gave a $612,000 promissory
note to the Company as payment of the exercise of 3,600,000 options to
purchase the Company's common stock at $0.17 per share. The promissory
note bears interest at 6% per annum, is unsecured, and is payable on
October 1, 2006.
Also, on May 1, 2002, the President of the Company gave a $510,000
promissory note to the Company as payment of the exercise of 6,000,000
options to purchase the Company's common stock at $0.085 per share. The
promissory note bears interest at 6% per annum, is unsecured, and is
payable on May 1, 2007. During September 2002, the President of the
Company returned 6,000,000 shares of the Company's common stock and
canceled the related party note totaling $510,000 and related accrued
interest of $11,737.
17
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 3 - MATERIAL EVENTS (Continued)
Notes and Interest Receivable - Related Party (Continued)
As of September 30, 2002, total interest receivable from the remaining
note was $15,291. The remaining note receivable and related interest
from the related party have been shown as a reduction of stockholders'
equity and the related interest income for the period has been recorded
as contributed capital.
Common Stock
During July 2002, the Company issued 74,973 shares of its common stock
at $0.075 per share for inventory purchased during the three months
ended September 30, 2002. Also during July 2002, the Company issued
100,000 shares of its common stock for accounts payable applied to the
exercise of stock options at an exercise price of $0.085 per share to
one of its consultants. During September 2002, the President of the
Company returned 6,000,000 shares of the Company's common stock and
canceled the related party note totaling $510,000 and related accrued
interest of $11,737.
NOTE 4 - DISCONTINUED OPERATIONS
On September 14, 2001, Project Development Industries, LLC (PDI), the
Company's wholly-owned subsidiary, and several individuals filed a
complaint in a federal district court against the Company. In March
2002, the Company and PDI reached an agreement of separation,
settlement and mutual release. Both PDI and the Company agreed and
consented to separate PDI from the Company completely and to rescind
the original share purchase agreement subject to the terms and
conditions of the settlement. The Company has accounted for the
operations of PDI as discontinued and has used PDI's financial
statements as of September 30, 2001. At September 30, 2001, PDI had net
assets in excess of liabilities of $294,746. An allowance has been
established for the net assets in excess of liabilities of PDI, thus,
the value of the net assets of PDI at December 31, 2001 was $-0-.
During March 2002, PDI returned 4,000,000 shares of the Company's
common stock which was then cancelled by the Company. The cancelled
shares were valued based on the net assets in excess of liabilities of
PDI. The gain on the disposal of PDI recoups the loss on the net assets
in excess of liabilities previously recognized in the period ended
September 30, 2001. The following is a summary of loss from
discontinued operations resulting from the litigation between PDI and
the Company for the three and nine months ended September 30, 2002 and
2001. The consolidated financial statements have been retroactively
restated to reflect this event.
18
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 4 - DISCONTINUED OPERATIONS (Continued)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ -- $ .-- $ -- $ 2,026,190
COST OF SALES -- -- -- --
------------- ------------- ------------- ------------
GROSS MARGIN -- -- -- 2,026,190
OPERATING EXPENSES
Consulting -- -- -- 74,016
Depreciation and amortization -- -- -- 183,888
Selling, general and administrative -- -- -- 1,274,634
------------- ------------- ------------- ------------
Total Operating Expenses -- -- -- 1,532,538
------------- ------------- ------------- ------------
INCOME FROM OPERATIONS -- -- -- 493,652
------------- ------------- ------------- ------------
OTHER INCOME (EXPENSE)
Interest expense -- -- -- (26,287)
Interest income -- -- -- 3
Gain on disposal of subsidiary -- -- 294,746 --
Loss on impairment of goodwill -- (2,752,222) -- (2,752,222)
Loss on impairment of net assets
in excess of liabilities of Project
Development Industries -- (294,746) -- (294,746)
------------- ------------- ------------- ------------
Total Other Income (Expense) -- (3,046,968) 294,746 (3,073,252)
------------- ------------- ------------- ------------
INCOME TAX EXPENSE -- -- -- --
------------- ------------- ------------- ------------
INCOME FROM DISCONTINUED
OPERATIONS $ -- $ (3,046,968) $ 294,746 $ (2,579,600)
============= ============= ============= ============
19
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 5 - OUTSTANDING STOCK OPTIONS
The Company applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees," and related Interpretations
in accounting for all stock option plans. Under APB Opinion 25,
compensation cost is recognized for stock options granted to employees
when the option price is less than the market price of the underlying
common stock on the date of grant.
As a result of applying APB Opinion 25 to stock options granted to
employees, the Company did not incur an additional expense for the six
months ended September 30, 2002.
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), requires the Company to provide proforma information
regarding net income and net income per share as if compensation costs
for the Company's stock option plans and other stock awards had been
determined in accordance with the fair value based method prescribed in
SFAS No. 123. The Company estimates the fair value of each stock award
at the grant date by using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants,
respectively; dividend yield of zero percent for all years; expected
volatility of 155.95%; risk-free interest rates of 4.475% and expected
lives of 5.0 years.
As a result of applying SFAS No. 123 to stock options granted on May 1,
2002 to nonemployees, the Company recorded an expense of $260,157 for
the nine months ended September 30, 2002. The expense is included in
the selling, general and administrative amount in the statement of
operations.
Had compensation cost for the Company's stock options granted to
employees been determined based on the fair value at the grant date
under the accounting provisions of SFAS No. 123, the Company would have
recorded an additional expense of $59,127. Also under these same
provisions, the Company's net loss would have been changed by the pro
forma amounts indicated below:
20
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 5 - OUTSTANDING STOCK OPTIONS (Continued)
For the Nine Months Ended
September 30,
---------------------------------------
2002 2001
------------------ -------------------
(Unaudited) (Unaudited)
Net loss:
As reported $ (1,057,463) $ (13,091,766)
Pro forma $ (1,116,590) $ (13,091,766)
For the Nine Months Ended
September 30,
---------------------------------------
2002 2001
------------------ -------------------
(Unaudited) (Unaudited)
Basic loss per share:
As reported $ (0.01) $ (0.18)
Pro forma $ (0.01) $ (0.18)
A summary of the status of the Company's stock option plans as of
September 30, 2002 and changes during the period is presented below:
Weighted
Average
Shares Exercise Price
------------ --------------
Outstanding, December 31, 2001 6,950,000 $ 0.190
Granted 10,050,000 0.085
Exercised (10,200,000) 0.130
Canceled -- --
----------- -----------
Outstanding, September 30, 2002 (unaudited) 6,800,000 $ 0.120
----------- -----------
Exercisable, September 30, 2002 (unaudited) 6,400,000 $ 0.120
=========== ===========
Outstanding Exercisable
-------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 09/30/02 Life Price at 09/30/02 Price
--------------- ----------- ------------ ------------ ----------- ------------
$ 0.085 3,950,000 5.00 $ 0.085 3,950,000 $ 0.085
0.170 2,670,000 3.00 0.170 2,360,000 0.170
0.350 180,000 3.00 0.350 90,000 0.350
----------- ------------ ------------ ----------- ------------
$ 0.085 - 0.350 6,800,000 4.16 $ 0.120 6,400,000 $ 0.120
============= ============ ============ ============= ===========
21
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and 15
NOTE 5 - OUTSTANDING STOCK OPTIONS (Continued)
On May 1, 2002, the Company granted 10,050,000 stock options to
officers, employees, consultants and other individuals. These options
were issued with an exercise price of $0.085 per share. All of these
options vest immediately and have a maturity of five years from the
grant date.
Also on May 1, 2002, the President of the Company exercised 3,600,000
of the options at the exercise price of $0.17 per share. As payment to
exercise these options, the President of the Company gave a $612,000
promissory note to the Company. (See Note 3).
And on May 1, 2002, the President of the Company exercised 6,000,000 of
the options at the exercise price of $0.085 per share. As payment to
exercise these options, the President of the Company gave a $510,000
promissory note to the Company. During September 2002, the President of
the Company returned the 6,000,000 shares of the Company's common stock
and canceled the related party note totaling $510,000 and related
accrued interest of $11,737 (See Note 3).
NOTE 6 - OPERATING SEGMENT INFORMATION
For the nine months ended September 30, 2002, the Company operated in
two geographic segments, (1) waste oil collection and refining at the
Company's headquarters in Nampa, Idaho, and (2) waste oil collection at
the Company's offices in Oakland, California. The results for Artesian
in 2001 are from April 1, 2001 to September 30, 2001.
For the Nine
Months Ended
September 30, ARTESIAN EOPTI Totals
------------- ------------ ------------ -------------
Net Sales 2001 $ 166,590 $ 710,974 $ 877,564
2002 262,670 926,543 1,189,213
Operating income (loss) 2001 47,782 (10,528,088) (10,480,306)
2002 42,449 (1,389,281) (1,346,832)
General corporate 2001 118,808 11,072,257 11,191,065
2002 220,221 2,072,293 2,292,514
Other Income (Expense) 2001 -- (31,860) (31,860)
2002 -- (5,377) (5,377)
Operating Assets 2001 519,319 12,299,853 12,819,172
2002 439,175 11,827,111 12,266,286
22
ENVIRONMENTAL OIL PROCESSING TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to September 30, 2002, the Company issued 203,455 shares of
its common stock at $0.03 per share for inventory purchased during the
three months ended September 30, 2002. The total value of the shares of
$6,103 was included in accounts payable at September 30, 2002.
23